SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 for the quarterly period ended December 28, 2002 or
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period __________to__________
Commission File Number: 0-8588
TECHNICAL COMMUNICATIONS CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2295040
---------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
100 Domino Drive, Concord, MA 01742-2892
---------------------------------------- ---------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (978) 287-5100
--------------
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Number of shares of Common
Stock, $.10 par value, outstanding as of January 31, 2003: 1,335,127.
INDEX
Page
----
PART I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets,
as of December 28, 2002 (unaudited) and September 28, 2002 1
Condensed Consolidated Statements of Earnings,
Three (3) months ended December 28, 2002 and December 29, 2001 (unaudited), 2
Condensed Consolidated Statements of Cash Flows,
Three (3) months ended December 28, 2002 and December 29, 2001 (unaudited), 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8
Item 3. Controls and Procedures 12
PART II Other Information 13
Signatures 14
PART I. Financial Information - Item 1. Financial Statements
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 28, 2002 September 29, 2002
----------------- ------------------
(unaudited)
Assets
------
Current Assets:
Cash and cash equivalents $ 654,883 $ 437,693
Accounts receivable - trade, less allowance for doubtful
accounts of $70,000 and $70,000, respectively 383,032 271,959
Inventories 1,287,785 1,371,365
Other current assets 108,927 154,733
------------- ------------
Total current assets 2,434,627 2,235,750
------------- ------------
Equipment and leasehold improvements 4,949,988 4,939,762
Less: accumulated depreciation and amortization 4,793,314 4,755,262
------------- ------------
156,674 184,500
------------- ------------
$ 2,591,301 $ 2,420,250
============= ============
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts payable $ 164,967 $ 189,446
Accrued liabilities
Compensation and related expenses 96,402 55,208
Other 540,072 449,359
------------- ------------
Total current liabilities 801,441 694,013
------------- ------------
Stockholders' Equity:
Common stock, par value $.10 per share; authorized
3,500,000 shares; issued 1,335,127 shares
and 1,333,185 shares 133,513 133,319
Treasury stock at cost, 232 shares (1,934) (1,934)
Additional paid-in capital 1,376,313 1,375,847
Retained earnings 281,968 219,005
------------- ------------
Total stockholders' equity 1,789,860 1,726,237
------------- ------------
$ 2,591,301 $ 2,420,250
============= ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 1
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
Three Months Ended
------------------
December 28, 2002 December 29, 2001
----------------- -----------------
Net sales $ 1,135,459 $ 1,318,357
Cost of sales 376,463 501,524
------------ -------------
Gross profit 758,996 816,833
Operating expenses:
Selling, general and
administrative expenses 438,711 496,638
Product development costs 260,733 309,889
------------ -------------
Total operating expenses 699,444 806,527
------------ -------------
Operating income 59,552 10,306
------------ -------------
Other income (expense):
Interest income 1,725 7,224
Interest expense (315) (369)
Other 2,001 6,419
------------ -------------
Total other income (expense): 3,411 13,274
------------ -------------
Income before income taxes 62,963 23,580
Provision for income taxes - -
------------ -------------
Net income $ 62,963 $ 23,580
============ =============
Net income per common share:
Basic $ .05 $ .02
Diluted $ .05 $ .02
Weighted average shares:
Basic 1,333,657 1,327,542
Diluted 1,333,657 1,335,110
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 2
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
December 28, 2002 December 29, 2001
----------------- -----------------
Operating Activities:
Net income $ 62,963 $ 23,580
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 38,052 56,421
Changes in assets and liabilities:
Accounts receivable (111,073) (717,939)
Inventories 83,580 63,035
Other current assets 45,806 10,179
Accounts payable and other accrued liabilities 107,428 (129,582)
----------- ------------
Net cash provided (used) by operating activities 226,756 (694,306)
----------- ------------
Investing Activities:
Additions to equipment and leasehold improvements (10,226) (13,445)
----------- ------------
Net cash used by investing activities (10,226) (13,445)
----------- ------------
Financing Activities:
Proceeds from stock issuance 660 7,062
----------- ------------
Net cash provided by financing activities 660 7,062
----------- ------------
Net increase (decrease) in cash and cash equivalents 217,190 (700,689)
Cash and cash equivalents at beginning of the period 437,693 1,618,915
----------- ------------
Cash and cash equivalents at the end of the period $ 654,883 $ 918,226
=========== ============
Supplemental Disclosures:
Interest paid $ 315 $ 246
Income taxes paid 2,556 2,975
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF FAIR PRESENTATION
Interim Financial Statements. The accompanying unaudited condensed consolidated
financial statements include all adjustments (consisting only of normal
recurring accruals), which are, in the opinion of management, necessary for fair
presentation of the results of operations for the periods presented. Interim
results are not necessarily indicative of the results to be expected for a full
year.
Certain disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted as allowed by Form 10-QSB. The accompanying unaudited consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements for the year ending September 28, 2002 as
filed with the Securities and Exchange Commission on Form 10-KSB.
Note 1: Significant Accounting Policies:
The preparation of financial statements prepared in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates, and such differences
could affect the results of operations reported in future periods. The Company
believes the following critical accounting policies affect the more significant
judgments and estimates used in the preparation of the Company's consolidated
financial statements.
Inventory: The Company values its inventory at the lower of actual cost to
purchase and/or manufacture the inventory or the current market value
(based on estimated selling prices) of the inventory. The Company
periodically reviews inventory quantities on hand and records a provision
for excess and/or obsolete inventory based primarily on our estimated
forecast of product demand, as well as based on historical usage. The
Company evaluates the carrying value of inventory on a quarterly basis to
determine if the carrying value is recoverable at estimated selling prices.
To the extent that estimated selling prices do not exceed the associated
carrying values, inventory carrying values are written down. In addition,
the Company makes judgments as to the future demand requirements and
compares that with the current or committed inventory levels. Reserves are
established for inventory levels that exceed future demand. It is possible
that reserves over and above those already established may be required in
the future if market conditions for our products should deteriorate.
Impairment of long-lived assets: On October 1, 2002 the Company adopted the
provision of SFAS 144 Accounting for the Impairment or Disposal of
Long-Lived Assets" ("FAS 144"). This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. The Company's only long-lived assets are equipment and leasehold
improvements. Based on the provisions of FAS 144 no impairment was
recognized as a result of the implementation.
Recent Accounting Pronouncement
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", which becomes effective January 2003. SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of commitment. Adoption of
SFAS No. 146 is not expected to have a material impact on the Company's
financial statements.
Page 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34. FIN 45 clarifies the requirements of FASB Statement No. 5,
Accounting for Contingencies (SFAS 5), relating to the guarantor's
accounting for, and disclosure of, the issuance of certain types of
guarantees. FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation
it assumes under that guarantee. FIN 45 covers guarantee contracts that
have one of four certain characteristics. FIN 45 specifically excludes
certain guarantee contracts from its scope. Additionally, certain
guarantees are not subject to FIN 45's provisions for initial recognition
and measurement but are subject to its disclosure requirements. The initial
recognition and measurement provisions are effective for guarantees issued
or modified after December 31, 2002. The disclosure requirements are
effective for our annual financial statements for the year ended September
27, 2003. The Company is currently evaluating the impact of FIN 45 on our
financial statements and related disclosures but do not expect that there
will be any material impact.
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", which becomes effective January
2003. SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. Adoption of SFAS No. 148 is not expected
to have a material impact on the Company's financial statements.
In January 2003 FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both.
FIN 46 also requires disclosures about variable interest entities that a
company is not required to consolidate but in which it has a significant
variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to existing entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The Company is currently evaluating the impact of FIN 46 on
our financial statements and related disclosures but do not expect that
there will be any material impact.
NOTE 2. Realization of Assets and Liquidity
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. However,
the Company has sustained substantial losses aggregating $8,574,000 in the
last four fiscal years. In addition, the Company has used, rather than
provided, cash in its operations. Further, the Company's entire back-log
($825,000) of orders is expected to be shipped in the second quarter of
fiscal 2003.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which
in turn is dependent upon the Company's ability to meet its financing
requirements on a continuing basis, and to succeed in its future
operations. These factors, among others raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and
classification of recorded
Page 5
asset amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Management believes the steps it has taken to revise its operating and
financial requirements are sufficient to provide the company with the
ability to continue in existence. The plans it established in fiscal 2002
remain on target and the Company is starting to see some results from this
plan. The cost cutting program begun in fiscal 2002 is now contributing to
increased profitability. New product development is moving forward and we
anticipate having a more competitive product line-up later this fiscal year
with an increased emphasis on emerging markets such as Homeland Security.
We also continue too work with our new and existing customers and are
hopeful on several new opportunities.
Management believes the steps taken and the results achieved will be
sufficient for the Company to continue in existence, however there can be
no assurance these activities will be successful.
NOTE 3. Inventories
Inventories consisted of the following:
December 28, 2002 September 28, 2002
----------------- ------------------
Finished Goods $ 349,098 $ 355,098
Work in Process 376,032 497,774
Raw Materials 562,655 518,493
----------- -------------
$ 1,287,785 $ 1,371,365
=========== =============
NOTE 4. Income taxes
Although the Company recorded net income for the three months ended
December 28, 2002, the Company had no income tax expense due to the
reversal of the valuation allowance on net operating loss carryforwards to
offset current earnings. The Company has recorded a valuation allowance for
the full amount of the net deferred tax assets since it cannot currently
predict the realization of these assets.
NOTE 5. Loss Per Share
Outstanding potentially dilutive stock options, which were not included in
the loss per share calculations at December 28, 2002, as their inclusion
would have been anti-dilutive were 389,799.
NOTE 6. Major Customers and Export Sales
During the quarter ended December 28, 2002, the Company had three
customers, representing 79% (45%, 23% and 11%) of net sales. During the
quarter ended December 29, 2001, the Company had four customers,
representing 80% (16%, 15%, 15% and 11%) of net sales.
A breakdown of foreign and domestic net sales is as follows:
December 28, December 29,
2002 2001
---- ----
Domestic $ 219,882 $ 379,258
Foreign 915,577 939,099
----------- -----------
Total sales $ 1,135,459 $ 1,318,357
=========== ===========
Page 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
The Company sold products into nine different countries during the quarter
ended December 28, 2002 and ten different countries during the quarter
ended December 29, 2001. A sale is attributed to a foreign country based on
the location of the contracting party. The table below summarizes our
foreign revenues by country.
December 28, December 29,
2002 2001
---- ----
Columbia 55.9% 22.1%
Mauritania 28.9% -
Jordan - 32.8%
Taiwan - 20.3%
Saudi Arabia - 11.2%
Thailand - 10.1%
Other 15.2% 3.5%
A summary of foreign sales by geographic area follows:
December 28, December 29,
2002 2001
---- ----
North America
(excluding the U.S.) 0% 2.1%
Central and South America 55.9% 22.1%
Europe 3.0% 1.0%
Mid-East and Africa 41.1% 44.2%
Far East 0% 30.6%
Page 7
FORWARD-LOOKING STATEMENTS
The discussions in this Form 10-QSB, including any discussion of or impact,
expressed or implied, on Technical Communications Corporation's (the Company)
anticipated operating results and future earnings, including statements about
the Company's ability to achieve growth and profitability, contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended. The Company's operating results may differ
significantly from the results indicated by such forward-looking statements. The
Company's operating results may be affected by many factors, including but not
limited to future changes in export laws or regulations, changes in technology,
the effect of foreign political unrest, the ability to hire, retain and motivate
technical, management and sales personnel, the risks associated with the
technical feasibility and market acceptance of new products, changes in
telecommunications protocols, the effects of changing costs, exchange rates and
interest rates and the Company's ability to secure adequate capital resources.
These and other risks are detailed from time to time in the Company's filings
with the Securities and Exchange Commission, including the Form 10-KSB for the
fiscal year ended September 28, 2002 and this Form 10-QSB for the quarter ended
December 28, 2002.
PART I, Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
The Company is in the business of designing, manufacturing, marketing and
selling communications security equipment, which utilizes various methods of
encryption to protect the information being transmitted. Encryption is a
technique for rendering information unintelligible, which can then,
subsequently, be reconstituted if the recipient possesses the right decryption
"key". The Company produces various standard secure communications products and
also provides custom designed, special purpose secure communications products.
The company sells its products to various U.S. Government agencies, foreign
governments as well as commercial customers both domestic and foreign.
As a result of sustaining substantial losses aggregating $8,574,000 in the last
four fiscal years, the continued use of cash in our operations and the
significant decline in our sales volume in recent years, the Company received a
going concern qualification on its financial statements for the year ended
September 28, 2002. In addition, the Company's dependence on cash flow from
operations is in turn dependent on the Company's ability to bring in new orders
on a continuing basis.
Management believes the steps it has taken to revise its operating and financial
requirements are sufficient to provide the company with the ability to continue
in existence; however there can be no assurance these activities will be
successful. The plans it established in fiscal 2002 remain on target and the
Company is starting to see some results from this plan. The cost cutting program
begun in fiscal 2002 is now contributing to increased profitability. New product
development is moving forward and we anticipate having a more competitive
product line later this fiscal year with an increased emphasis on emerging
markets such as Homeland Security. We also continue to work with our new and
existing customers on several new opportunities.
The Company manufactures various standard secure communications products and
also provides custom designed, special purpose secure communications products
for both domestic and international customers. The Company's products consist
primarily of voice, data and facsimile encryptors. Revenue is generated
primarily from the sale of these products. The sales of these products have
traditionally been to foreign governments. However, we have also sold these
products to commercial entities and U.S. Government agencies. We also generate
revenues from contract engineering services performed for certain government
agencies both domestic and foreign.
Page 8
Results of Operations
Three Months ended December 28, 2002 as compared to the Three Months ended
December 29, 2001
Net sales for the quarter ended December 28, 2002 and December 29, 2001, were
$1,135,000 and $1,318,000, respectively. Revenue for the quarter primarily
consisted of foreign orders; two for our CSD3324SE secure telephone sold into
South America totaling $637,000 and a single order of $262,000 of various data,
voice and radio encryptors shipped into Africa. This compares to the first
quarter of the previous fiscal year where the Company sold $608,000 of
CSD3324SE's to four different foreign customers. The Company also sold $252,000
of DSP9000 radio encryptors of which $244,000 was for domestic use by two
different customers. In addition, a sale of CSD 3600's into the Far East
amounted to $191,000.
Gross profit for the first quarter of fiscal 2003 was $759,000 as compared to
gross profit of $817,000 for the same period of fiscal 2002. This represented a
decrease in gross profit of 7% for the quarter. Gross profit expressed as a
percentage of sales was 67% in fiscal 2003 as compared to 62% for the same
period in fiscal 2002. The decrease in gross profit was primarily attributable
to lower sales volume, which was partially offset by reductions in manufacturing
overhead expenses and a mix of sales with higher gross margins in the first
quarter of fiscal 2003. Slightly higher gross margins on sales of CSD3324SE
secure telephones and DSP9000 radio encryptors were primarily responsible for
the improved gross margin percentage. Approximately 35% of the increase in gross
margin expressed as a percentage of sales was attributable to the cost cutting
measures instituted in fiscal 2002. The measures have proven effective and we
anticipate they will continue to contribute to increased profitability in the
future.
Selling, general and administrative expenses for the first quarter of fiscal
2003 were $439,000 and $497,000 for the same quarter in fiscal 2002. This
decrease of 12% was primarily attributable to $70,000 reduction in general and
administrative expenses and an increase of $12,000 in selling and marketing
costs.
The decrease in general and administrative costs were attributable to a $99,000
decrease in personnel related costs associated with a reduced headcount and a
thirty percent salary reduction for most employees. In addition, there was
$34,000 of costs in the first quarter of fiscal 2002 associated with the line of
credit, which the Company terminated in fiscal 2002. There were no corresponding
costs in fiscal 2003. These decreases were partially offset by an increase in
general and administrative expenses of $40,000 as a result of less billable work
being performed by the program management department in the first quarter of
fiscal 2003 as compared to the same period in fiscal 2002.
The increase in selling costs was primarily attributable to increased third
party sales commissions and marketing contracts totaling $60,000. This increase
was partially offset by a reduction in travel, payroll and benefit related costs
associated with the lower sales volume, of approximately $38,000.
Product development costs for the quarter ended December 28, 2002 were $261,000
compared to $310,000 for the same period in fiscal 2002. This decrease of 16%
was attributable to a decrease associated with a reduced headcount and a thirty
percent salary reduction for most employees of approximately $106,000. This was
partially offset by a decrease in billable contract engineering in fiscal 2003,
which increased product development cost in fiscal 2003 by approximately
$75,000. The Company actively sells its contract engineering services in support
of funded research and development. The receipt of these contracts is sporadic,
however these contracts can span over several months. In addition to these
contracts the Company also invests in research and development to enhance its
existing products or to develop new products, as it feels appropriate. Current
projects include major enhancements to the 3324SE secure telephone and other
more modest enhancements of existing products. It is anticipated that cash from
operations will fund these research and development activities.
The Company showed net income of $63,000 for the first quarter of fiscal 2003 as
compared to $24,000 for the same period in fiscal 2002. This increase in
profitability is primarily attributable to a decrease in
Page 9
operating expenses, which offset a 14% decline in revenues. This trend in net
income is encouraging however, due to the uncertainty of the timing of customer
orders future results remain difficult to predict. Receiving orders/ contracts
in a timely manner is essential to the Company's ability to sustain operations.
The effects of inflation and changing costs have not had a significant impact on
sales or earnings in recent years. As of December 28, 2002, none of the
Company's monetary assets or liabilities was subject to foreign exchange risks.
The Company usually includes an inflation factor in its pricing when negotiating
multi-year contracts with customers.
Recent Accounting Pronouncement
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities", which
becomes effective January 2003. SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of commitment. Adoption of SFAS No. 146 is not expected to have
a material impact on the Company's financial statements.
In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements
No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN 45
clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies
(SFAS 5), relating to the guarantor's accounting for, and disclosure of, the
issuance of certain types of guarantees. FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee. FIN 45 covers guarantee contracts
that have one of four certain characteristics. FIN 45 specifically excludes
certain guarantee contracts from its scope. Additionally, certain guarantees are
not subject to FIN 45's provisions for initial recognition and measurement but
are subject to its disclosure requirements. The initial recognition and
measurement provisions are effective for guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for our annual
financial statements for the year ended September 27, 2003. The Company is
currently evaluating the impact of FIN 45 on our financial statements and
related disclosures but do not expect that there will be any material impact.
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", which becomes effective January
2003. SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. Adoption of
SFAS No. 148 is not expected to have a material impact on the Company's
financial statements.
In January 2003 FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN 46 also requires
disclosures about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company is currently evaluating the impact
of FIN 46 on our financial statements and related disclosures but do not expect
that there will be any material impact.
Page 10
Liquidity and Capital Resources
Cash and cash equivalents increased by $217,000 or 50% to $655,000 as of
December 28, 2002, from a balance of $438,000 at September 28, 2002. This
increase was primarily due to a combination of income from operations, a
reduction of inventories and an increase in accounts payable partially offset by
an increase in accounts receivable.
As a result of sustaining substantial losses aggregating $8,574,000 in the last
four fiscal years, the continued use of cash in our operations and the
significant decline in our sales volume in recent years, the Company received a
going concern qualification on its financial statements for the year ended
September 28, 2002. In addition, the Company's dependence on cash flow from
operations is in turn dependent on the Company's ability to bring in new orders
on a continuing basis. The Company's revenues have historically been dependent
on significant individual transactions with its customers, which include foreign
governments and other organizations. The Company expects this trend to continue.
The timing of these transactions has in the past and will in the future have a
significant impact on the cash flow of the Company. Delays in the timing of
significant expected sales transactions would have a negative effect on the
Company's operations. The Company believes it has some ability to mitigate this
effect through further cost cutting measures.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its financing requirements on a
continuing basis, and to succeed in its future operations. These factors, among
others raise substantial doubt the Company's ability to continue as a going
concern. The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
The Company is currently dependent on cash flows from operations. We do not
anticipate any significant cash flows from investing or financing activities
this fiscal year. If revenues were to continue to decline and we are unable to
secure any outside financing we will be forced to furlough or permanently lay
off a significant portion of our work force. This will have a material adverse
effect on us. Under these circumstances we may not be able to keep all or
significant portions of our operations going for a sufficient period of time to
enable us to sell all or portions of our assets or operations at other than
distressed sale prices. In the unlikely event that the Company received no
additional orders our existing cash and cash resources will enable us to fund
our operations (at current operating expense levels) through approximately June
15, 2003.
The Company needs to achieve quarterly revenue of approximately $1 million in
order to reach a breakeven cash run rate based on today's product cost structure
and operating expenses. We were able to achieve this target in only two of the
four quarters in fiscal 2002. We were also able to achieve this target in the
current quarter ended December 28, 2002. Current projections suggest we will be
able to achieve this goal in the remaining three quarters of fiscal 2003,
however these projections require several large orders from customers to be
received, which can not be assured. Backlog at December 28, 2002 amounted to
$825,000. Substantially all of this backlog is expected to be shipped in the
second quarter of fiscal 2003.
In addition, the receipt of the going concern qualification may adversely affect
our ability to manage our accounts payable and cause some of our suppliers to
deal with us on a cash-on-delivery basis only. If this were to occur, this would
adversely affect our operations by increasing our immediate need for additional
capital.
Certain foreign customers require the Company to guarantee performance of
products sold. These guaranties typically take the form of standby letters of
credit. Guaranties are generally required in amounts of 5% to 10% of the
purchase price and last in duration from three months to one year. As of
December 28, 2002, the Company has three outstanding standby letters of credit
amounting to $34,000, expiring through December 31, 2003. The standby letters of
credit are secured by compensating cash collateral, which is classified as other
current assets on the balance sheet.
Page 11
The Company does not anticipate any significant capital acquisitions this fiscal
year.
On January 1, 2003 the Company entered into a new operating lease for its
current facilities. This lease is for 22,800 square feet, which is a reduction
of 34% from the previous lease and will reduce cash requirements going forward
by approximately $30,000 per year. This is the company's only facility and
houses all manufacturing, research and development and corporate operations. The
lease is for a three year period with rents payable at an annual rate of
$142,169 through December 31, 2005. At its option the Company may extend the
lease for two more years at an annual rate of $147,855.
Item 3. Controls and Procedures
[a] Evaluation of disclosure and controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing of this quarterly report on Form 10-QSB the
Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and are
operating in an effective manner.
[b] Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
Page 12
PART II. Other Information
Item 1. Legal Proceedings:
There are no current matters pending.
Item 2. Changes in Securities and Use of Proceeds:
Not applicable.
Item 3. Defaults Upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits:
99.1 Certification of Principal Executive and Financial Officers
b. Reports on Form 8-K:
None.
Page 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNICAL COMMUNICATIONS CORPORATION
------------------------------------
(Registrant)
February 14, 2003 By: /s/ Carl H. Guild, Jr.
----------------- ------------------------------------------
Date Carl H. Guild, Jr., President and Chief
Executive Officer
February 14, 2003 By: /s/ Michael P. Malone
----------------- ------------------------------------------
Date Michael P. Malone, Chief Financial Officer
Page 14
CERTIFICATIONS
I Carl H. Guild, Jr., certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of Technical
Communications Corporation;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
(4) The registrants other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared; and
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weakness in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls;
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Carl H. Guild, Jr.
----------------------------------------------
Carl H. Guild, Jr.
President and Chief Executive Officer
Dated: Dated: February 14, 2003
Page 15
CERTIFICATIONS
I Michael P. Malone, certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of Technical
Communications Corporation;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
(4) The registrants other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared; and
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
(5) The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weakness in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls;
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Michael P. Malone
----------------------------------------
Michael P. Malone
Treasurer and Chief Financial Officer
Dated: February 14, 2003
Page 16