SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
September 29, 2001 0-8588
------------------- ------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_______________TO_______________.
Technical Communications Corporation
------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2295040
------------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
100 Domino Drive, Concord, MA 01742-2892
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(Address of principal executive offices) (Zip code)
(978) 287-5100
--------------
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None None
---- ----
(Title of each class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.10 Par Value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Based on the closing price of the stock as of December 14, 2001, the
aggregate market value of the registrant's Common Stock, par value $ .10 per
share, held by non-affiliates of the registrant as of December 14, 2001, was
approximately $1,162,172.
The number of shares of the registrant's Common Stock, par value $ .10
per share, outstanding as of December 14, 2001, was 1,330,185.
1
FORWARD-LOOKING STATEMENTS
--------------------------
NOTE: THE DISCUSSIONS IN THIS FORM 10-K, 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 AND THE
COMPANY'S ABILITY TO RENEGOTIATE ITS LINE OF CREDIT WITH ITS BANK. THESE AND
OTHER RISKS ARE DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION, INCLUDING THIS FORM 10-K FOR THE FISCAL YEAR
ENDED SEPTEMBER 29, 2001.
PART I
Item 1. BUSINESS
(a) General
-------
The Company was organized in 1961 as a Massachusetts corporation to
engage primarily in consulting activities. However, since the late 1960s its
business has consisted entirely of the design, development, manufacture,
distribution, marketing and sale of communications security devices and systems.
(b) Information as to Industry Segments
-----------------------------------
The Company's business consists of only one industry segment, which is
the design, development, manufacture, distribution, marketing and sale of
communications security devices and systems.
(c) Description of Business
-----------------------
The Company's products consist of sophisticated electronic devices, which
enable users to transmit information in an encrypted format and permit receivers
to reconstitute the information in a deciphered format. The Company's products
can be used to protect confidentiality in communications between radios,
telephones, facsimile machines and data processing equipment over wires, fiber
optic cables, radio waves and microwave and satellite links. A customer may
order and receive equipment, which is specially programmed to scramble
transmissions in accordance with a code to which only the customer has access.
The principal markets for the Company's products are foreign and domestic
governmental agencies, law enforcement agencies, financial institutions, and
multinational companies requiring protection of mission-critical information.
(d) Products
--------
Products currently available or under development provide communications
security solutions for mission-critical networks, voice and facsimile,
centralized key and device management, and military ciphering applications.
GOVERNMENT SYSTEMS
The DSD 72A-SP High Speed Data Encryptor is a rugged military bulk
ciphering system that provides a maximum level of cryptographic security for
synchronous data networks operating at up to 34 Mbps. The product supports a
wide variety of interfaces and easily integrates into existing networks.
Reliable secure communication is ensured with crypto synchronization methods
built to maintain connections in error and jamming environments such as radio
relay networks, missile systems and microwave systems.
2
The DSP 9000 Narrowband Radio Security family of products provide
strategic security for voice and data communications sent over HF, VHF and UHF
channels in full and half-duplex modes. Designed for rugged military
environments, the DSP 9000 provides exceptional voice quality over poor line
connections making it an ideal security solution for military aircraft, naval,
base station and manpack radio applications. The product provides automated key
management for optimum security and ease of use. It is also radio independent
because software programmable interfaces allow radio interface levels to be
changed without configuring the hardware. Base station, handset and implant
board configurations are available options with the DSP 9000. Additionally, the
DSP 9000 is compatible with the Company's CSD 3324E secure telephone to enable
"office-to-field" communications.
The CSD 3324E, Secure Fax and Data system is a comprehensive office
communications security system that provides voice, fax and data encryption in a
telephone package. The CSD 3324E has a fallback mode, which was originally
developed for poor HF channels. As a result, secure communications is always
possible with the CSD 3324E, even over the poorest line conditions. TCC's high
level encryption and automated key management system protects the most sensitive
information. Internal storage of 400 keys coupled with automatic key changes
provide complete hands-off security.
SECURE OFFICE SYSTEMS
The CSD 3600 Secure Portable Telephone Attachment may be placed between
any telephone and handset worldwide to provide high-end digital security. Small
and portable, the CSD 3600 operates over both digital and analog telephone
lines, and is designed to ensure protection through new and unique random keys
negotiated with each communication session.
The CSD 3700 Fax Security System is a highly secure, automatic
transmission fax system that connects to any Group 3-fax machine via a 2-wire
interface. Security protection is achieved with Diffie-Hellman negotiated key
technology and randomly generated keys that are unique to each communication
session. Open and closed networks are supported by the CSD 3700 to enable an
open exchange of secure documents in the industrial marketplace or restrict
secure communications to only authorized parties in highly confidential or
government applications.
The 4100 Executive Secure Telephone offers strategic level voice and data
security in a full-featured executive telephone package. Exceptional voice
quality is achieved with three different voice-coding algorithms. The product
supports multiple security layers such as automated key management,
authentication, certification and access control. Video and telephone
conferencing options are also available.
NETWORK SECURITY SYSTEMS
The CipherONETM family of Network Security Systems is a family of high-
speed, high-performance hardware/software-based encryption products for LAN/WAN
and Internet applications and includes Network Security Management.
All of the systems have been designed for complete node-to-node
protection and therefore provide node authentication and access control, as well
as data integrity. This family of products also utilizes a modular architecture
that permits the software to be updated as networks migrate to emerging
protocols, thereby protecting the user's investment. Network transparent, the
products support U.S. Government-backed Triple DES and proprietary encryption
algorithms as well as ANSI X9.52 and public key management. Specific products
within this family support Frame Relay, Internet (IP) and X.25 protocols.
The Cipher CX 7100 Frame Relay Network Encryptor is a high-speed end to
end frame relay encryption system and is easily configured locally with Cipher
Site Manager or remotely with KEYNET.
The Cipher CX 7200 IP Network Encryptor provides encryption security at
the Internet Protocol (IP) layer and is easily configured locally with Cipher
Site Manager or remotely with KEYNET.
KEYNET Network Security Management is a Windows NT-based key and security
device management system that can centrally and simultaneously manage an entire
CipherONE Security Systems Network, including those on mixed networks such as
Frame Relay and IP. KEYNET has an intuitive graphical user interface (GUI),
making it very easy to use. The system securely generates, distributes and
exchanges keys, sets address tables, provides diagnostics and performs automatic
polling and alarms from a central and remote location. KEYNET also operates with
SNMP-based management systems for ease-of-use and provides instant alarm
notification. These high security measures facilitate central management while
maintaining optimum security for mission-critical networks worldwide.
3
(e) Competition
-----------
The Company has several competitors, including foreign-based companies,
in the communications security device field. Few of these competitors offer
products that compete across all of the Company's product offerings and none are
believed to have a dominant share of the market. Many of these competitors,
however, are companies that have greater financial and other resources than the
Company. The Company believes its principal competitors include Crypto AG,
Racal Electronics Plc, Cylink Corporation, Motorola Inc., Omnisec AG, Cisco
Systems, SafeNet, Inc. and TimeStep Corporation.
The Company competes based on its service, the operational and technical
features of its products, its sales expertise and pricing. The Company sells
directly to customers, original equipment manufacturers and value-added
resellers, using its in-house sales force as well as domestic and international
representatives and distributors.
(f) Sales and Backlog
-----------------
In fiscal year 2001, the Company had two customers, representing 48% (32%
and 16%) of net sales. In fiscal year 2000, the Company had two customers,
representing 41% (21% and 20%) of net sales.
The Company expects that sales to relatively few customers will continue
to account for a high percentage of the Company's revenues in any accounting
period in the foreseeable future. A reduction in orders from any such customer,
or the cancellation of any significant order and failure to replace such order
with orders from other customers, would have a material adverse effect on the
Company's business, financial condition, and results of operations.
The Company's backlog of firm orders as of September 29, 2001 and
September 30, 2000 was approximately $400,000. The Company expects to deliver
its entire backlog in fiscal year 2002.
(g) Regulatory Matters
------------------
As a party to a number of contracts with the U.S. Government and its
agencies, the Company must comply with extensive regulations with respect to bid
proposals and billing practices. Should the U.S. government or its agencies
conclude that the Company has not adhered to federal regulations, any contracts
to which the Company is a party could be canceled and the Company could be
prohibited from bidding on future contracts. Such a prohibition would have a
material adverse effect on the Company. All payments to the Company for work
performed on contracts with agencies of the U.S. government are subject to
adjustment upon audit by the U.S. Government Defense Contract Audit Agency, the
General Accounting Office, and other agencies. The Company could be required to
return any payments received from U.S. government agencies if it is found to
have violated federal regulations. In addition, U.S. government contracts may
be canceled at any time by the government with limited or no penalty. Contract
awards are also subject to funding approval from the U.S. government, which
involves political, budgetary and other considerations over which the Company
has no control.
The Company's security products are subject to export restrictions
administered by the U.S. Department of Commerce, which licenses the export of
encryption products, subject to certain technical restrictions. In addition,
U.S. export laws prohibit the export of encryption products to a number of
hostile countries. Although to date the Company has been able to secure U.S.
export licenses, there can be no assurance that the Company will continue to be
able to secure such licenses in a timely manner in the future, or at all.
(h) Manufacturing and Technical Expertise
-------------------------------------
The Company subcontracts a large portion of its manufacturing operations.
Many of the components used in the Company's products are standard components
available from more than one supplier. The Company has, or believes that it
could develop without significant delay, alternative sources for almost all
materials and components used in the manufacture of its products. The Company's
internal manufacturing process consists primarily of adding critical components,
final assembly, quality control, testing and burn-in. Delivery time varies
depending on the products and options ordered.
The Company's technological expertise and experience, including certain
proprietary rights, which it has developed and maintains as trade secrets, are
crucial to the conduct of the Company's business.
4
Management is of the opinion that, while patent protection is desirable with
respect to certain of its products, none of the Company's patents are material
to the conduct of its business. Eight patents have been issued to the Company.
The Company has a number of trademarks for various products, including TCC,
CipherONE and CIPHER X. The Company does not deem any of its trademarks to be
material to the conduct of its business.
(i) Research and Development
------------------------
Research and development is undertaken by the Company on its own
initiative. In order to develop the technology needed to compete successfully,
the Company must attract and retain qualified personnel, improve existing
products and develop new products. No assurances can be given that the Company
will be able to hire and train such technical management and sales personnel.
During the twelve-month periods ended September 29, 2001 and September 30, 2000,
the Company spent $1,633,224 and $1,156,692, respectively, on product
development. In addition, product development is also, undertaken by the
Company on a contract specific basis; the development costs associated with
these contracts are included in cost of sales.
(j) Employees
---------
As of September 29, 2001, the Company employed, approximately 32 persons.
The Company believes that its relationship with its employees is good.
(k) Foreign Operations
------------------
The Company is dependent upon its foreign sales. Although foreign sales
were more profitable than domestic sales during fiscal years 2001 and 2000
because the mix of products sold abroad included more products with higher
profit margins than the mix of products sold domestically, this does not
represent a predictable trend. For example, during fiscal year 1996 foreign and
domestic sales were equally profitable. Sales to foreign markets have been and
will continue to be affected by the stability of foreign governments, economic
conditions, export and other governmental regulations, and changes in
technology. The Company attempts to minimize the financial risks normally
associated with foreign sales by utilizing letters of credit confirmed by U.S.
banks and by using foreign credit insurance. Foreign sales contracts are
usually in U.S. dollars.
When there is a tax advantage to the Company, export sales are conducted
through its wholly owned subsidiary, TCC Foreign Sales Corporation (TCC FSC).
TCC FSC is organized and incorporated in the U.S. Virgin Islands. As a
qualified Foreign Sales Corporation under the Internal Revenue Code, TCC FSC is
able to take advantage of tax incentives enacted by Congress to encourage export
sales.
Information regarding the Company's revenue from export sales for the
past five years is set forth in Item 6, "SELECTED FINANCIAL DATA".
Item 2. PROPERTIES
On October 16, 1992, the Company signed its current lease on its
headquarters and manufacturing facility. The Company has a lease on this
property located in Concord, Massachusetts through December 31, 2002. Future
minimum lease payments amount to $171,216 in fiscal year 2002 and $42,804 in
fiscal year 2003. The Company also retains an option to purchase the building
at fair market value, but not to exceed $2,262,000, exercisable at the end of
the lease term, if elected. Management believes the current facility is
capable of meeting the Company's anticipated needs through the current lease
term. The Company will evaluate its future space requirements in fiscal year
2002.
Item 3. LEGAL PROCEEDINGS
The Company was the defendant in GERARD v. TECHNICAL COMMUNICATIONS
CORPORATION, ET AL., filed in the Superior Court of the Commonwealth of
Massachusetts in 1999. This case arose from disputes concerning the hiring and
termination of Roland Gerard, former president of the Company. The Complaint
alleged state law claims for breach of contract, wrongful termination, and civil
conspiracy. During the fiscal year 2000 the Company settled this lawsuit. An
earlier complaint brought by Mr. Gerard in the Federal court, which included the
state claims, and a federal securities claim was dismissed in July 1999; the
securities claims were dismissed with prejudice.
5
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on February 12,
2001. The meeting was conducted for the purpose of (i) electing one Class
I Director, to serve for a term of three years and (ii) ratifying the
election of the Company's independent auditors.
The ratification of the election of the Class I Director was approved
with 1,145,244 votes in favor, 51,302 votes withheld.
The ratification of the Company's auditors was approved with 1,182,066
votes in favor, 11,500 votes against and 2,980 votes abstaining.
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $ .10 par value, is traded on the over-the-
counter market, on the NASDAQ SmallCap Market System, under the symbol "TCCO".
The following table presents low and high bid information for the time periods
specified. The over-the-counter market quotations reflect inter-dealer prices,
without retail markup, markdown or commission and may not necessarily represent
actual transactions. The over-the-counter market quotations have been furnished
by The NASDAQ Stock Market, Inc.
Price
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TITLE OF CLASS QUARTER ENDING LOW HIGH
---------------- -------------- ----- ----
Common Stock,
$.10 par value
12/30/2000 1.250 2.969
3/31/2001 1.625 3.188
6/30/2001 1.500 2.770
9/29/2001 0.800 2.210
1/1/2000 2.563 7.500
4/1/2000 5.188 10.813
7/1/2000 2.375 6.125
9/30/2000 2.531 3.969
The Company has paid no cash dividends in the past and has no plans to
pay cash dividends in the forseeable future.
As of December 14, 2001, there were approximately 1,200 record holders of
Common Stock, $ .10 par value. On December 14, 2001, the closing price of the
Common Stock was $1.00.
6
Item 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA:
FISCAL YEARS ENDED:
SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
2001 2000 1999 1998 1997
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Net Sales:
Domestic $ 715,385 $ 2,446,083 $ 1,239,275 $ 1,631,459 $ 2,734,690
Foreign (Note A) 3,549,204 3,128,025 5,194,408 12,224,322 9,523,948
Total net sales 4,264,589 5,574,108 6,433,683 13,855,781 12,258,638
Gross profit 828,920 3,197,675 3,305,192 8,393,173 7,104,975
Net income (loss) (4,662,610) (1,740,314) (1,218,542) 481,603 (1,243,501)
Net income (loss) per share
of common stock
Basic $ (3.54) $ (1.35) $ (.96) $ .38 $ (.98)
Diluted $ (3.54) $ (1.35) $ (.96) $ .37 $ (.98)
Weighted average
shares outstanding
Basic 1,315,440 1,289,523 1,264,626 1,281,924 1,270,625
Diluted 1,315,440 1,289,523 1,264,626 1,288,007 1,270,625
AS OF:
SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
2001 2000 1999 1998 1997
---------------------------------------------------------------------------------
Assets $ 3,654,631 $ 8,402,717 $10,660,915 $16,172,729 $12,892,899
Line of credit/current portion,
long-term debt (B) - - - 2,250,000 -
Long-term obligations - - - - -
--------------------------------------------------------------------------------
Notes to Selected Financial Data
(A) A summary of foreign sales by geographic area may be found in Note 14 of
the Notes to Consolidated Financial Statements.
(B) At October 3, 1998, amount represents outstanding borrowings against line
of credit.
7
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and the results of
operations should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto appearing elsewhere herein.
Certain Factors Affecting Future Operating Results
--------------------------------------------------
The discussions in this Form 10-K, including any discussion of or impact,
expressed or implied, on the Company's 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 and the Company's ability to renegotiate its line of credit
with its banks. These and other risks are detailed from time to time in the
Company's filings with the Securities and Exchange Commission, including this
Form 10-K for the fiscal year ended September 29, 2001.
RESULTS OF OPERATIONS
---------------------
FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000
---------------------------------------------
During the quarter ended June 30, 2001, the Company recorded certain
special charges, which included a $1,604,000 write-off of excess inventory, a
write-off of work in process inventory of $340,000, a write-off of goodwill of
$307,000 and a write-off of a deferred tax asset of $158,000. Excess inventory
charges were the result of weakening demand for certain product lines.
Correspondingly, goodwill associated with these product lines was also written
off. Work in process inventory was written off as a result of lost development
contracts bids. The write-off of the deferred tax asset was the result of
continued losses affecting the Company's ability to recognize future benefit
from the carryforward of net operating losses.
Consolidated net sales for the year ended September 29, 2001, were $4,265,000
compared with sales of $5,574,000 for the prior fiscal year. This decrease of
$1,309,000, or 23%, is mainly attributed to significant delays in the receipt of
anticipated orders.
Gross profit for fiscal year 2001 was $2,433,000, before excess inventory
charges, as compared to $3,198,000 in fiscal year 2000, a decrease of 24%.
Gross profit expressed as a percentage of sales, before excess inventory charges
was 57% in fiscal year 2001 compared to 57% in the prior year.
Selling, general and administrative expenses for fiscal year 2001 were
$3,393,000, before the write-off of goodwill, as compared to $3,874,000 in
fiscal year 2000, a decrease of 12%. This decrease was attributable to a
decrease in selling costs of approximately $163,000 and a decrease in general &
administrative costs of approximately $318,000.
The decrease in selling costs was primarily attributable to reductions in
travel, payroll, internal commissions and benefit related costs associated with
the lower sales volume, of approximately $348,000. These decreases were offset
by increased third party sales commissions and marketing contracts totaling
$118,000, increased bidding and proposal activity of $68,000 and marketing
studies and product evaluation amounting to $59,000.
The decrease in general and administrative expenses were primarily attributable
to $144,000 in costs associated with the settlement of litigation during fiscal
year 2000, a decrease in payroll, recruiting and
8
benefit related costs associated with a reduced headcount of approximately
$196,000 and a general reduction in general and administrative expense of
approximately $150,000. These decreases were partially offset by an increase in
fees associated with the Company's line of credit of $145,000 and a charge of
approximately $47,000 associated with restructuring charges and related
workforce reductions.
Product development costs for the year ended September 29, 2001 were $1,293,000,
before the write-off of canceled contracts in process, as compared to $1,157,000
for the same period in fiscal year 2000. This increase of 12% was attributable
to a shift away from billable product development in fiscal year 2001, which
increased product development cost in fiscal year 2001 by approximately
$478,000. This increase was offset by a decrease in payroll, recruiting and
benefit related costs associated with a reduced headcount of approximately
$274,000
The Company showed a net loss of $2,254,000, before all special charges, for
fiscal year 2001 as compared to a net loss of $1,740,000 in fiscal year 2000.
This decrease in profitability is primarily attributable to the significant
decrease in revenue. The increases in product development expenses and other
costs and the reduction in interest income were more than offset by the
reduction in selling, general and administrative expenses, as described above.
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
---------------------------------------------
Consolidated net sales for the year ended September 30, 2000, were $5,574,000
compared with sales of $6,434,000 for the prior fiscal year. This decrease of
$860,000, or 13%, is mainly attributed to a delay in the receipt of anticipated
orders.
Gross profit for fiscal year 2000 was $3,198,000, compared to $3,305,000 in
fiscal year 1999, a decrease of 3%. Gross profit expressed as a percentage of
sales was 57% in fiscal year 2000 compared to 51% in the prior year, which was
primarily due to the lower sales volume, and partially offset by improved
product mix and tighter cost controls.
Selling, general and administrative expenses decreased 10% from $4,312,000 in
fiscal year 1999 to $3,874,000 for the year just ended, primarily attributable
to approximately $475,000 in costs associated with the settlement of litigation
in fiscal year 1999 and was offset by $147,000 in costs associated with the
settlement of litigation discussed in Note 16 to the financial statements. In
addition payroll and other administrative costs have decreased due to the
continued emphasis on expense controls.
Product development costs in fiscal year 2000 were $1,157,000, compared to
$1,936,000 in fiscal year 1999. The $779,000, or 40%, decrease was primarily
attributable to a shift in development work from internal product development to
billable product development.
Investment income earned during fiscal year 2000 was $267,000, compared to
$1,318,000 in fiscal year 1999. Included in investment income for fiscal year
1999 is a one-time gain on the sale of an investment of $1,151,000.
The Company showed a net loss of $1,740,000 for fiscal year 2000 as compared to
a net loss of $1,219,000 for the same period in fiscal year 1999. The decrease
in profitability is primarily attributable to the decreased sales, which was
partially offset by the decrease in operating spending as described above.
However, the current year did not recognize any income tax benefit associated
with the current year loss and in addition included a write down of the previous
years net deferred tax asset by $173,000 due to continued losses affecting the
Company's ability to recognize future benefit from the carryforward of net
operating losses. The 1999 income tax benefit amounted to $406,000.
The effects of inflation and changing costs have not had a significant impact on
sales or earnings in recent years. As of September 30, 2000, none of the
Company's monetary assets or liabilities were subject to foreign exchange risks.
The Company usually includes an inflation factor in its pricing when negotiating
multi-year contracts with customers.
9
RECENT ACCOUNTING PRONOUNCEMENTS
---------------------------------
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company is required to
apply the new rules on accounting for goodwill and other intangible assets by
fiscal year 2003. The Company currently does not have any goodwill or intangible
assets and does not expect a material impact from the adoption of these
standards.
In August 2001, the Financial Accounting Standards Board issued 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. This Statement supersedes FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and amends the accounting and reporting provisions of
APB Opinion No. 30. Reporting the Results of Operations -- Reporting the Effect
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business. The provisions of FAS 144 will be effective for fiscal years
beginning after December 15, 2001. The Company is currently evaluating the
implications of adoption of FAS 144 and anticipates adopting its provisions in
fiscal year 2003.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash and cash equivalents decreased by $1,503,000 or 48% to $1,619,000 as of
September 29, 2001, from a balance of $3,122,000 at September 30, 2000. This
decrease was primarily due to operating losses, which were partially offset by
non-cash adjustments and reductions in accounts receivable, inventories and
refundable income taxes.
The Company has a $5 million asset-based credit facility with Coast Business
Credit ("Coast"). The line carries an interest rate of prime plus 1/2% (7% at
September 29, 2001). This revolving line of credit is collateralized by
substantially all the assets of the Company and requires no compensating
balances. There are financial covenants associated with the line, which call for
a minimum net tangible worth of $5,969,000 at September 29, 2001 and increasing
over time based on certain criteria and an interest coverage ratio requirement.
The amount of borrowings is limited to a percentage of certain accounts
receivable balances. There were no outstanding borrowings during fiscal years
2001 and 2000.
At September 29, 2001 the Company was in violation of its minimum net tangible
worth covenant. On December 27, 2001 Coast amended the agreement to reduce the
minimum net worth requirement for the future and added a requirement to maintain
minimum earnings before interest and taxes. The maximum borrowing under the line
has also been reduced to $1 million and the line of credit matures in December
2002.
As of September 29, 2001, the Company has two outstanding standby letters of
credit amounting to $137,000, which are secured by compensating cash collateral.
The Company's revenues have historically included significant transactions with
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 cause a significant
negative effect on the Company's operations, however the Company has some
ability to mitigate this effect through further cost cutting measures. The
Company believes there are currently sufficient cash and available funds under
the line of credit to meet its working capital needs.
10
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is in the area of interest rate risk.
The Company's investment portfolio of cash equivalents is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments. The Company may face exposure to
movements in foreign currency exchange rates. Currently, all of the Company's
business outside the United States is conducted in U.S. dollar-denominated
transactions.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index to the Financial Statements and Schedules under Part IV,
Item 14, in this report.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item 10 is incorporated herein by reference to
our Definitive Proxy Statement with respect to our 2001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference to
our Definitive Proxy Statement with respect to our 2001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by reference to
our Definitive Proxy Statement with respect to our 2001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by reference to
our Definitive Proxy Statement with respect to our 2001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year.
11
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
[a] (1) The following Consolidated Financial Statements, Notes thereto and
Independent Auditors' Report of the Company are filed on the pages
listed below, as part of Part II, Item 8 of this report:
Page
-------
Consolidated Balance Sheets as of
September 29, 2001 and September 30, 2000 14
Consolidated Statements of
Operations for the Years Ended
September 29, 2001 and September 30, 2000 15
Consolidated Statements of Cash
Flows for the Years Ended
September 29, 2001 and September 30, 2000 16
Consolidated Statements of
Stockholders' Equity for the
Years Ended September 29, 2001 and
September 30, 2000 17
Notes to Consolidated Financial Statements 18 - 28
Report of Independent Certified Public Accountants 29
[a] (2) The following Consolidated Financial Statement Schedule is included
herein:
Schedule II - Valuation and Qualifying Accounts 30
Reports of Independent Certified Public Accountants
[a] (3) List of Exhibits
----------------
3.1 Articles of Organization of the Company *
3.2 By-laws of the Company **
10.1 Employment Agreement for Carl H. Guild, Jr. ***
10.2 Standstill Agreement ***
10.3 Loan and security agreement, dated July 31, 2000 between the Company
and Coast Business Credit, a division of Southern Pacific Bank ****
10.4 Amendment to Loan and Security Agreement, dated December 28, 2000
between the Company and Coast Business Credit, a division of Southern
Pacific Bank ****
10.5 Employment Agreement for Michael P. Malone *****
10.6 Employment Agreement for John I. Gill *****
10.7 Second Amendment to Loan and Security Agreement, dated August 13, 2001
between the Company and Coast Business Credit, a division of Southern
Pacific Bank
10.8 Third Amendment to Loan and Security Agreement, dated December 27, 2001
between the Company and Coast Business Credit, a division of Southern
Pacific Bank
21 List of Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
* Incorporated by reference to previous filings with the Commission.
** Incorporated by reference to the Company's 8-K filed on May 5, 1998.
*** Incorporated by reference to the Company's Annual Report for 1998
Form 10-K, as amended, filed with the Securities and Exchange
Commission on March 26, 1998.
**** Incorporated by reference to the Company's Annual Report for 2000
Form 10-K, filed with the Securities and Exchange Commission on
December 29, 2000.
***** Incorporated by reference to the Company's Form 10-QSB filed on May
15, 2001.
(a) Reports on Form 8-K
-----------------------
None
12
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) 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 on December 27, 2001.
TECHNICAL COMMUNICATIONS CORPORATION
By: /s/ Carl H. Guild, Jr.
-----------------------
Carl H. Guild, Jr.
Chief Executive Officer and President
Chairman of the Board, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Carl H. Guild, Jr. Chief Executive Officer and December 27, 2001
---------------------- President Chairman of the Board,
Carl H. Guild, Jr. Director (Principal Executive
Officer)
/s/ Michael P. Malone Treasurer and Chief Financial December 27, 2001
--------------------- Officer (Principal Financial
Michael P. Malone and Accounting Officer)
/s/ Mitchell B. Briskin Director December 27, 2001
-----------------------
Mitchell B. Briskin
/s/ David A. B. Brown Director December 27, 2001
---------------------
David A. B. Brown
/s/ Donald Lake Director December 27, 2001
---------------
Donald Lake
/s/ Robert T. Lessard Director December 27, 2001
---------------------
Robert T. Lessard
/s/ Thomas E. Peoples Director December 27, 2001
---------------------
Thomas E. Peoples
13
Technical Communications Corporation
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000
ASSETS 2001 2000
Current assets:
Cash and cash equivalents $ 1,618,915 $ 3,121,617
Accounts receivable - trade, less
allowance
for doubtful accounts of $15,000 and 67,232 363,742
$70,000
Inventories 1,261,608 3,452,403
Deferred income taxes - 157,500
Other current assets 355,837 270,720
--------------------------------------------
Total current assets 3,303,592 7,365,982
--------------------------------------------
Equipment and leasehold improvements 4,921,498 4,899,615
Less accumulated depreciation (4,570,459) (4,330,749)
--------------------------------------------
Equipment and leasehold improvements, net 351,039 568,866
--------------------------------------------
Goodwill - 1,614,131
Less accumulated amortization - (1,146,262)
--------------------------------------------
Goodwill, net - 467,869
--------------------------------------------
$ 3,654,631 $ 8,402,717
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 231,208 $ 524,231
Accrued liabilities:
Compensation and related expenses 111,381 162,420
Other 635,070 435,602
--------------------------------------------
Total current liabilities 977,659 1,122,253
--------------------------------------------
Stockholders' equity
Common stock - par value $.10 per share;
authorized 3,500,000 shares, issued 1,323,328
and 1,312,153 shares 132,333 131,215
Treasury stock at cost, 232 and 15,037 shares (1,934) (118,610)
Additional paid-in capital 1,365,600 1,341,742
Retained earnings 1,180,973 5,926,117
--------------------------------------------
Total stockholders' equity 2,676,972 7,280,464
--------------------------------------------
$ 3,654,631 $ 8,402,717
============================================
The accompanying notes are an integral part of these consolidated financial statements.
14
Technical Communications Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000
2001 2000
Net sales $ 4,264,589 $ 5,574,108
Cost of sales 3,435,669 2,376,433
------------------------------------------
Gross profit 828,920 3,197,675
------------------------------------------
Operating expenses:
Selling, general and
administrative expenses 3,699,924 3,874,424
Product development costs 1,633,224 1,156,692
------------------------------------------
Total operating expenses 5,333,148 5,031,116
------------------------------------------
Operating loss (4,504,228) (1,833,441)
Other income (expense)
Investment income 65,334 210,939
Interest expense (1,557) (2,305)
Other (64,659) 57,869
------------------------------------------
Total other income (expense) (882) 266,503
------------------------------------------
Loss before income taxes (4,505,110) (1,566,938)
Provision for income taxes ( 157,500) ( 173,376)
------------------------------------------
Net loss $(4,662,610) $(1,740,314)
=========== ===========
Net loss per common share
Basic $(3.54) $(1.35)
Diluted $(3.54) $(1.35)
Basic 1,315,440 1,289,523
Diluted 1,315,440 1,289,523
The accompanying notes are an integral part of these consolidated financial
statements.
15
TECHNICAL COMMUNICATIONS CORPORATION
Consolidated Statements of Cash Flows
YEARS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000
2001 2000
Operating activities:
Net loss $(4,662,610) $(1,740,314)
Adjustments to reconcile net loss
to cash provided by (used for) operating
activities:
Depreciation and amortization 425,277 733,980
Non-cash compensation 34,142 47,602
Deferred income taxes 157,500 292,478
Write-off of goodwill 306,687 -
Non-cash inventory charges 1,943,587 -
Changes in current assets and current
liabilities:
Accounts receivable 296,510 2,239,659
Inventories 247,208 (416,466)
Refundable income taxes - 276,960
Other current assets (85,117) (185,915)
Accounts payable and accrued liabilities (144,594) (236,423)
--------------------------------
Cash (used for) provided by operating (1,481,410) 1,011,561
activities
--------------------------------
INVESTING ACTIVITIES:
Additions to equipment and leasehold (46,268) (259,393)
improvements
---------------------------------
Cash used for investing activities (46,268) (259,393)
----------------------------------
FINANCING ACTIVITIES:
Proceeds from stock issuance 24,976 37,633
Payment of long-term debt - (7,119)
--------------------------------
Cash provided by financing activities 24,976 30,514
---------------------------------
Net increase (decrease) in cash and cash (1,502,702) 782,682
equivalents
Cash and cash equivalents at beginning 3,121,617 2,338,935
of year
--------------------------------
Cash and cash equivalents at end of year $ 1,618,915 $ 3,121,617
================================
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 1,801 $ 4,305
Income taxes paid (net of refunds 7,848 (394,430)
received)
The accompanying notes are an integral part of these consolidated financial
statements.
16
TECHNICAL COMMUNICATIONS CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended September 29, 2001 and September 30, 2000
2001 2000
STOCKHOLDERS' EQUITY
Shares of common stock:
Beginning balance 1,312,153 1,294,541
Issuance of shares to ESPP participants 11,175 17,612
-----------------------------------------
Ending balance 1,323,328 1,312,153
=========================================
Common stock at par value:
Beginning balance $ 131,215 $ 129,454
Issuance of shares to ESPP participants 1,118 1,761
-----------------------------------------
Ending balance 132,333 131,215
-----------------------------------------
Additional paid-in capital:
Beginning balance 1,341,742 1,305,870
Issuance of shares to ESPP participants 23,858 35,872
-----------------------------------------
Ending balance 1,365,600 1,341,742
-----------------------------------------
Retained earnings:
Beginning balance 5,926,117 7,713,594
Issuance of stock grants (82,534) (47,163)
Net loss (4,662,610) (1,740,314)
-----------------------------------------
Ending balance 1,180,973 5,926,117
-----------------------------------------
Treasury stock:
Beginning balance (118,610) (213,375)
Issuance of stock grants 116,676 94,765
-----------------------------------------
Ending balance (1,934) (118,610)
-----------------------------------------
Total stockholders' equity $ 2,676,972 $ 7,280,464
=========================================
The accompanying notes are an integral part of these consolidated financial
statements.
17
Notes to Consolidated Financial Statements
(1) COMPANY OPERATIONS
Technical Communications Corporation incorporated in 1961 in Massachusetts,
and its wholly-owned subsidiaries (the Company) operate in one industry
segment: the design, development, manufacture, distribution and sale of
communications security devices and systems worldwide.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, TCC Foreign Sales Corporation (FSC), a
qualified foreign sales corporation, and TCC Investment Corporation, a
Massachusetts Security Corporation. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Liquidity Matters
The Company's revenues have historically included significant transactions
with 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 cause a
significant negative effect on the Company's operations, however the Company
has some ability to mitigate this effect through further cost cutting
measures. The Company believes there are currently sufficient cash and
available funds under the line of credit to meet its working capital needs.
Use of Estimates
The preparation of financial statements in conformity 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 revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits at banks and other
investments (including mutual funds) readily convertible into cash. Cash
equivalents are stated at cost, which approximates market value.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful life of the asset. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is recognized in operations for the period.
The cost of maintenance and repairs is charged to operations as incurred;
significant renewals and betterments are capitalized.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Capitalized Software Costs
The Company sells software as a component of its communications systems.
Certain computer software costs are capitalized in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed," and are
reported at the lower of unamortized cost or net realizable value. Upon
initial product release, these costs are amortized based upon the straight-
line method, over three years. As of September 30, 2000, the Company had
fully amortized its investments in capitalized software.
Goodwill
The Company acquired substantially all of the assets of Datotek, Inc. in May
1995. The excess purchase cost over net assets acquired has been amortized on
a straight-line basis over 7 1/2 years. The Company assesses the future
useful life of this asset whenever events or changes in circumstances
indicate that the current useful life has diminished. The Company considers
the future undiscounted cash flows of the acquired company in assessing the
recoverability of this asset. The Company determined in 2001 that there was
no longer any value to this asset and the remaining balance was written off.
Recognition of Revenue
The Company generally recognizes revenue upon shipment of products, except in
the case of long-term contracts for which the revenue is recognized using the
percentage-of-completion method.
During fiscal year 2001 the Company adopted SEC Staff Accounting Bulletin No.
101 ("SAB No. 101"), "Revenue Recognition in Financial Statements." SAB No.
101 provides guidance on applying generally accepted accounting principles to
revenue recognition, presentation and disclosure in financial statements.
The adoption of this bulletin did not materially affect the Company's results
of operations or financial position.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based employee
compensation using the intrinsic value method prescribed in Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations.
Reclassification
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the fiscal year 2001 presentation.
Income Taxes
The Company records income tax expense (benefit) in accordance with Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes,"
which requires the use of the asset/liability method in accounting for income
taxes. Under the asset/liability method, deferred income taxes are
recognized at current income tax rates to reflect the tax effect of temporary
differences between the consolidated financial reporting basis and tax basis
of assets and liabilities.
Warranty Costs
The Company provides for warranty costs at the time of sale based upon
historical experience.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate
that value.
Cash and Cash Equivalents, Accounts Receivable and Accounts Payable - the
carrying amount of these assets and liabilities on the Company's
consolidated balance sheet approximates their fair value because of the
short term nature of these instruments.
Earnings (Loss) per Share("EPS")
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share," the Company presents both a "Basic" and a "Diluted"
EPS. Basic EPS has been computed by dividing net income by a weighted average
number of shares of common stock outstanding during the period. In
computing diluted EPS, only stock options that are dilutive (those that
reduce earnings per share) have been included in the calculation of EPS using
the Treasury Stock Method. Exercise of outstanding stock options is not
assumed if the result would be antidilutive, such as when a net loss is
reported for the period or the option exercise price is greater than the
average market price for the period presented.
Fiscal Year-End Policy
The Company by-laws call for its fiscal year to end on the Saturday closest
to the last day of September, unless otherwise decided by its Board of
Directors. The years 2001 and 2000 ended on September 29, 2001 and September
30, 2000, respectively and each included 52 weeks.
Comprehensive Income
In accordance with Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income" the Company reports and displays
comprehensive income and its components. In general, comprehensive income
combines net income and "other comprehensive income". There were no "other
comprehensive income" items during fiscal year 2001 and 2000.
Operating Segments
The Company reports on operating segments in accordance with Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures About
Segments of an Enterprise and Related Information". SFAS 131 established
standards for the way that public companies report information about
operating segments and geographic distribution of sales in financial
statements. The Company currently has only one operating segement.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting
for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. In June 2000, SFAS No. 133 was amended
by Statement of Financial Accounting Standards No. 138 (SFAS 138),
"Accounting for Derivative Instruments and Hedging Activities - an amendment
of FASB Statement No. 133". The Company has adopted this Statement during the
current fiscal year. There was no material impact on the Company's financial
position or results of operations as a result of the adoption.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Newly Issued Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives. The
Company is required to apply the new rules on accounting for goodwill and
other intangible assets by fiscal year 2003. The Company currently does not
have any goodwill or intangible assets and does not expect a material impact
from the adoption of these standards.
In August 2001, the Financial Accounting Standards Board issued 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. This Statement supersedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and amends the accounting and reporting
provisions of APB Opinion No. 30. Reporting the Results of Operations --
Reporting the Effect of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
for the disposal of a segment of a business. The provisions of FAS 144 will
be effective for fiscal years beginning after December 15, 2001. The Company
is currently evaluating the implications of adoption of FAS 144 and
anticipates adopting its provisions in fiscal year 2003.
(3) LOSS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share", basic and diluted EPS
were calculated as follows:
SEPTEMBER 29, SEPTEMBER 30
2001 2000
----------- -----------
Net Loss $(4,662,610) $(1,740,314)
----------- -----------
Average Shares Outstanding - Basic 1,315,440 1,289,523
Dilutive effect of stock options - -
----------- -----------
Weighted Average Shares - Diluted 1,315,440 1,289,523
----------- -----------
Basic Earnings (Loss) Per Share $ (3.54) $ (1.35)
Diluted Earnings (Loss) Per Share $ (3.54) $ (1.35)
Outstanding potentially dilutive stock options which were not included in the
above calculations for the respective fiscal years were as follows: 265,869
in 2001 and 217,669 in 2000.
(4) Treasury Stock Transactions
During fiscal years 2001 and 2000, 14,805 and 12,026 shares, respectively, of
Technical Communications Corporation Common Stock were granted to members of
the Company's Board of Directors and certain employees. The prices of shares
issued in 2001 ranged from $1.51 to $3.09 per share. The prices of shares
issued in 2000 ranged from $3.00 to $6.00 per share. All grants were made at
the current market value on the date of grant and were issued from the
Company's Treasury Stock.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Stock Options
At the August 2001 Board of Directors Meeting, the Company adopted the
Technical Communications Corporation 2001 Stock Option Plan to replace the
1991 Stock Option Plan, which expired. The Company reserved 350,000 shares
of common stock for issuance to employees at prices not less than the fair
market value on the date of grant. Options under this plan generally expire
ten years from the date of grant and are exercisable in cumulative annual
increments commencing one year after the date of grant. No grants were issued
under this plan in fiscal year 2001. The plan will be submitted to
shareholders for approval at the next Annual Meeting of Stockholders.
In 1992 the Company adopted the Technical Communications Corporation 1991
Stock Option Plan (the SOP Plan). The Company allocated 250,000 shares of
common stock for issuance to employees at prices not less than the fair
market value on the date of grant. In 1997 the Company increased the
allocated for shares under the SOP Plan to 350,000. Options under this plan
generally expire ten years from the date of grant and are exercisable in
cumulative annual increments commencing one year after the date of grant.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation," which sets forth a fair-value based method of
recognizing stock- based compensation expense. As permitted by SFAS 123, the
Company has elected to continue to apply Accounting Principles Board Opinion
No. 25 to account for its stock-based employee compensation plans. Had
compensation for awards in fiscal years 2000 and 2001 under the Company's
stock-based compensation been determined based on the fair value at the grant
dates consistent with the method set forth under SFAS 123, the effect on the
Company's net loss and loss per share would have been as follows:
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
Net loss
As reported $(4,662,610) $(1,740,314)
Pro forma $(4,763,005) $(1,887,120)
Basic loss per common share
As reported $ (3.54) $ (1.35)
Pro forma $ (3.62) $ (1.46)
Because the method prescribed by SFAS 123 has not been applied to options
granted prior to September 1, 1994, the resulting pro forma compensation
expense may not be representative of the amount to be expensed in future
years. Pro forma compensation expense for options granted is reflected over
the vesting period; future pro forma compensation expense may be greater as
additional options are granted.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of each option granted was estimated on the grant date using
the Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 4.625%, and 6.31% for 2001 and
2000, respectively, expected life equal to 5 years, expected volatility of
125% and 122% in 2001 and 2000, respectively, and an expected dividend yield
of 0%.
A summary of the Company's stock option activity is as follows:
September 29, September 30,
2001 2000
------------------- ---------------
Average AVERAGE
Number of EXERCISE Number of Exercise
Shares PRICE Shares PRICE
------------ ---------- ------------ ------------
Options outstanding, beginning of year 255,074 $5.65 256,074 $5.91
Options granted:
Option Price Fair Market Value 50,400 $2.11 19,000 $6.53
Option Price Fair Market Value 7,000 $1.97 8,000 $5.10
Options exercised - -
Options forfeited (8,805) $4.68 (28,000) $8.43
------- -------
Options outstanding, end of year 303,669 $5.01 255,074 $5.65
Options exercisable 246,619 $5.31 209,149 $5.40
Weighted average fair value per share
of options granted during the year $1.75 $5.44
The following summarizes certain data for options outstanding at September 29,
2001:
WEIGHTED Weighted Average
AVERAGE Remaining
Range of Number of EXERCISE Contractual
Exercise Prices Shares Price Life
-------------------- -------------- -------------- ----------------------
Options outstanding, end of year: $1.16 - $ 5.00 195,200 $ 3.51 7.3
$ 5.01 - $10.00 87,169 $ 6.61 5.7
$10.01 - $15.00 19,840 $12.02 4.0
$15.01 - $16.75 1,460 $15.84 1.1
-------
303,669 $ 5.01 6.6
Options exercisable: $1.16 - $ 5.00 149,500 $ 3.86
$ 5.01 - $10.00 79,969 $ 6.56
$10.01 - $15.00 15,690 $11.77
$15.01 - $16.75 1,460 $15.84
-------
246,619 $ 5.31
(6) INVENTORIES
Inventories consist of the following: SEPTEMBER 29, SEPTEMBER 30,
2001 2000
Finished goods $ 140,962 $ 622,003
Work in process 493,947 1,181,510
Raw materials and supplies 626,699 1,648,890
---------- ----------
Total inventories $1,261,608 $3,452,403
========== ==========
23
Notes to Consolidated Financial Statements (continued)
(7) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
SEPTEMBER 29, SEPTEMBER 30, Estimated
2001 2000 Useful Life
Engineering and manufacturing equipment $2,534,128 $2,489,172 3-8 years
Demonstration equipment 842,568 842,568 3 years
Furniture and fixtures 1,128,685 1,127,373 3-8 years
Automobiles - 24,385 3 years
Remaining term
Leasehold improvements 416,117 416,117 of lease
---------- ----------
Total equipment and
leasehold improvements $4,921,498 $4,899,615 3-8 years
========== ==========
(8) OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
Product warranty costs $109,266 $ 92,996
Professional service fees 107,455 95,008
Annual report and investor relation fees 118,394 103,707
Customer support agreements 160,000 44,000
Other 139,955 99,891
-------- --------
Total other accrued liabilities $635,070 $435,602
======== ========
(9) DEBT
The Company has a $5 million asset-based credit facility with Coast Business
Credit ("Coast"). The line carries an interest rate of prime plus 1/2% (7%
at September 29, 2001). This revolving line of credit is collateralized by
substantially all the assets of the Company and requires no compensating
balances. There are financial covenants associated with the line, which call
for a minimum net tangible worth of $5,969,000 at September 29, 2001 and
increasing over time based on certain criteria and an interest coverage ratio
requirement. The amount of borrowings is limited to a percentage of certain
accounts receivable balances. There were no outstanding borrowings during
fiscal years 2001 and 2000.
At September 29, 2001 the Company was in violation of its minimum net
tangible worth covenant. On December 27, 2001 Coast amended the agreement to
reduce the minimum net worth requirement for the future and added a
requirement to maintain minimum earnings before interest and taxes. The
maximum borrowing under the line has also been reduced to $1 million and the
line of credit matures in December 2002.
24
Notes to Consolidated Financial Statements (continued)
(10) LEASES
The Company leases its headquarters located in, Concord, Massachusetts, under
an operating lease, which expires in December 2002. Future minimum lease
payments amount to $171,216 in fiscal year 2002 and $42,804 in fiscal year
2003. The Company also retains an option to purchase the building at fair
market value, but not to exceed $2,262,000, exercisable at the end of the
lease term, if elected. Annual rental expense amounted to $171,216 in fiscal
year 2001 and $161,492 in fiscal year 2000.
During 1998, the Company entered into a capital lease for computer equipment
in the amount of $20,370, an additional $3,850 was added to the lease in
fiscal year 1999. This asset was fully depreciated at September 29, 2001 and
is included in the Engineering and Manufacturing Equipment category of the
Company's equipment and leasehold improvements. The lease term ended in
fiscal year 2001 and the Company exercised a bargain purchase option to
acquire the asset.
(11) Income Taxes
The provision (benefit) for income taxes consists of the following:
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
Current:
Federal $ - $(117,470)
State - 3,235
-------- ---------
Total current taxes - (114,235)
-------- ---------
Deferred:
Federal 176,178 231,446
State (18,678) 56,165
-------- ---------
Total deferred taxes 157,500 287,611
-------- ---------
Total provision (benefit) $157,500 $ 173,376
======== =========
The provisions (benefit) for income taxes are different from those that
would be obtained by applying the statutory federal income tax rate to
losses before income taxes due to the following:
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
Tax benefit at U.S. statutory rate $(1,532,243) $ (532,759)
State income taxes,
net of federal benefit (10,350) 39,204
Other (120,822) (147,352)
Prior year under accrual - (156,765)
Transfer of long-term liability to deferred tax - (359,229)
asset
Increase in valuation allowance 1,820,915 1,330,277
----------- ----------
Total provision $ 157,500 $ 173,376
=========== ==========
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes consist of the following:
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
NOL Carryforward $ 2,628,496 $ 1,532,480
Goodwill 178,041 73,211
Inventory differences 981,866 422,716
Warranty accruals 22,405 29,218
Payroll related accruals 11,963 25,875
Tax credits 61,805 181,232
Other 172,645 129,074
----------- -----------
Total 4,057,221 2,393,806
Less: valuation allowance (4,057,221) (2,236,306)
----------- -----------
Total $ - $ 157,500
=========== ===========
The valuation allowance relates to uncertainty with respect to the Company's
ability to realize its deferred tax assets. The change in the valuation
allowance was $1,820,915 and $1,330,277 in fiscal years 2001 and 2000,
respectively.
Refundable income taxes represent estimated refunds from the Federal
government from carryback claims. All refunds from 1999 were received in
fiscal year 2000. Additionally the Company received a refund in fiscal year
2000 related to prior years, which was recorded as a current benefit.
As of September 29, 2001 the Company has available tax loss carryforwards for
federal income tax purposes of approximately $6,200,000, which expire in
2020. The Company also has available tax loss carryfowards for state income
tax purposes of approximately $8,100,000, which expire in 2005.
(12) Employee Benefit Plans
The Company has a qualified, contributory, trusteed profit sharing plan
covering substantially all employees. The Company's policy is to fund
contributions as they are accrued. The contributions are allocated based on
the employee's proportionate share of total compensation. The Company's
contributions to the plan are determined by the Board of Directors and are
subject to other specified limitations. There were no Company profit sharing
contributions during fiscal years 2001 and 2000. However, the Board of
Directors approved a corporate match of 25 cents per dollar of the first 6%
of each participant's contributions to the plan. The Company's matching
contributions were $31,375 and $36,091 in 2001 and 2000, respectively.
The Company has an Executive Incentive Bonus Plan for the benefit of key
management employees. The bonus pool is determined based on the Company's
performance as defined by the plan. No bonuses were earned and accrued under
the plan in 2001 or 2000.
26
Notes to Consolidated Financial Statements (continued)
(13) BUSINESS, CREDIT AND OFF-BALANCE SHEET RISKS
The Company is exposed to a number of business risks. These include, but are
not limited to, concentration of its business among a relatively small number
of customers, technological change (which can cause obsolescence of the
Company's products and inventories), actions of competitors (some of whom
have access to considerably greater financial resources than the Company),
cancellation of major contracts (either before or after award), variations in
market demand, the loss of key personnel, etc. The Company attempts to
protect itself in various ways against such risks, but its success cannot be
guaranteed.
At September 29, 2001 and September 30, 2000, the Company was contingently
liable under open standby letters of credit totaling $137,000 and $20,879,
respectively. These letters of credit were issued in the ordinary course of
business to secure the Company's performance under contracts with its
customers. A cash collateral deposit held by the Company's lender secures
the letters of credit outstanding at September 29, 2001. These letters of
credit expire as provided for in the contracts, unless exercised or renewed.
To date, no letters of credit have been exercised. The Company does not
expect to incur any loss associated with these letters of credit.
As of September 29, 2001, management believes it has no significant
concentrations of credit risk due to placement of its cash equivalents with
high-credit-quality financial institutions, and the fact that the majority of
its foreign trade receivables are secured by letters of credit or foreign
credit insurance.
(14) MAJOR CUSTOMERS AND EXPORT SALES
In fiscal year 2001, the Company had two customers, representing 48% (32% and
16%) of net sales. In fiscal year 2000, the Company had two customers,
representing 41% (21% and 20%) of net sales.
A breakdown of net sales is as follows:
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
Domestic $ 715,385 $2,446,083
Foreign 3,549,204 3,128,025
---------- ----------
Total Sales $4,264,589 $5,574,108
========== ==========
A summary of foreign sales by geographic area follows:
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
North America
(excluding the U.S.) 5.7% 3.9%
Central and South America 20.0% 8.3%
Europe 5.9% 22.0%
Mid-East and Africa 65.8% 55.1%
Far East 2.6% 10.7%
27
Selected Quarterly Financial Data (Unaudited)
For the years ended September 29, 2001 and September 30, 2000:
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
Fiscal Year 2001 December 30, 2000 MARCH 31, 2001 JUNE 30, 2001 SEPTEMBER 29, 2001
----------------------------- ------------------ --------------- -------------- -------------------
Net sales $1,320,917 $ 779,297 $ 254,257 $1,910,118
Gross profit 897,279 371,038 (1,615,051) 1,175,654
Net (loss) income (602,684) (870,646) (3,366,864) 177,584
Net (loss) income per share
Basic $ (0.46) $ (0.66) $ (2.55) $ 0.13
Diluted $ (0.46) $ (0.66) $ (2.55) $ 0.13
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
Fiscal Year 2000 January 1, 2000 APRIL 1, 2000 JULY 1, 2000 SEPTEMBER 30, 2000
----------------------------- ----------------- -------------- ------------- ------------------
Net sales $2,253,403 $1,381,050 $ 744,010 $1,195,645
Gross profit 1,443,068 678,906 310,449 765,252
Net (loss) income 106,687 (418,109) (703,517) (725,375)
Net (loss) income per share
Basic $ .08 $ (.32) $ (.54) $ (.57)
Diluted $ .08 $ (.32) $ (.54) $ (.57)
28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Technical Communications
Corporation:
We have audited the accompanying consolidated balance sheets of Technical
Communications Corporation and subsidiaries as of September 29, 2001 and
September 30, 2000, and the related consolidated statements of operations, cash
flows and stockholders' equity for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Technical Communications Corporation and subsidiaries, as of September 29, 2001
and September 30, 2000, and the consolidated results of their operations and
their consolidated cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Boston, Massachusetts
November 1, 2001 (except for the second paragraph of
Note 9, as to which the date is December 27, 2001)
29
TECHNICAL COMMUNICATIONS CORPORATION SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Deductions Balance at
BEGINNING CHARGED TO FROM END
OF YEAR EXPENSE RESERVES OF YEAR
Allowance for doubtful accounts:
Year Ended September 29, 2001 $70,000 -- 55,000 $15,000
Year Ended September 30, 2000 $70,000 -- -- $70,000
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE TO
THE CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors
Technical Communications Corporation
In connection with our audits of the consolidated financial statements of
Technical Communications Corporation referred to in our report dated November 1,
2001, (except for the second paragraph of Note 9, as to which the date is
December 27, 2001), which is included in the annual report to security holders
and incorporated by reference in Part II of this form, we have also audited
Schedule II as it relates to the years ended September 29, 2001 and September
30, 2000. In our opinion, this schedule presents fairly, in all material
respects, the financial data as of and for the years ended September 29, 2001
and September 30, 2000, required to be set forth therein.
/s/ Grant Thornton LLP
Boston, Massachusetts
November 1, 2001
30