-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E0YLwXw5n8V/So0jnBCGAI1Qp7OKQVfdS2p+iMCkg704tuKIKxd2dRZFxXL3d1jc XFOHJHjCO1ROmRsZygarNg== 0001047469-99-032214.txt : 19990817 0001047469-99-032214.hdr.sgml : 19990817 ACCESSION NUMBER: 0001047469-99-032214 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECHNICAL COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000096699 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 042295040 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08588 FILM NUMBER: 99690680 BUSINESS ADDRESS: STREET 1: 100 DOMINO DR CITY: CONCORD STATE: MA ZIP: 01742 BUSINESS PHONE: 9782875100 MAIL ADDRESS: STREET 1: 100 DOMINO DRIVE CITY: CONCORD STATE: MA ZIP: 01742-2892 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities - ------- Exchange Act of 1934 for the quarterly period ended July 3, 1999 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 ---------------------------------------------------- (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 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 August 6, 1999: 1,376,951 INDEX
PAGE PART I FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets, as of July 3, 1999 (unaudited) and October 3, 1998 1 Condensed Consolidated Statements of Operations, Quarter ended July 3, 1999 and June 27, 1998 (unaudited), 2 Nine (9) months ended July 3, 1999 and June 27, 1998 (unaudited), 3 Condensed Consolidated Statements of Cash Flows, Nine (9) months ended July 3, 1999 and June 27, 1998 (unaudited) 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 7 Item 3. Quantitative and Qualitative Disclosures about Market Risk 10 PART II OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Changes in securities 11 Item 3. Defaults upon Senior Securities 11 Item 4. Submission of matters to a Vote of Security Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12
PART I. Financial Information - Item 1. Financial Statements TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets
July 3, 1999 October 3, 1998 (Unaudited) ----------- ----------- ASSETS Current Assets: Cash and cash equivalents $ 3,262,138 $ 740,049 Accounts receivable - trade, less allowance for doubtful accounts of $70,000 494,795 8,196,296 Inventories 3,908,002 3,119,291 Other current assets 911,643 949,536 ----------- ----------- Total current assets 8,576,578 13,005,172 Equipment and leasehold improvements 4,833,634 4,818,515 Less: accumulated depreciation and amortization 4,084,129 3,773,457 ----------- ----------- 749,505 1,045,058 Goodwill 1,614,131 1,614,131 Less: accumulated amortization 877,625 716,443 ----------- ----------- 736,506 897,688 Other assets 282,716 1,224,811 $ 10,345,305 $ 16,172,729 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 388,999 $ 302,742 Revolving line of credit -- 2,250,000 Accrued liabilities Compensation and related expenses 463,472 401,596 Other 478,045 2,241,434 ----------- ----------- Total current liabilities 1,330,516 5,195,772 ----------- ----------- Other long-term liabilities 249,513 456,356 Commitments and contingencies Stockholders' Equity: Common stock, par value $.10 per share; authorized 3,500,000 shares; issued and outstanding 1,376,951 shares at 7/3/99 and 1,283,238 shares at 10/3/98 129,454 128,324 Treasury stock at cost, 27,063 shares at 7/3/99 and 30,678 shares at 10/3/98 (213,375) (241,861) Additional paid-in capital 1,305,870 1,266,197 Unrealized gain on investment, net 46,412 422,000 Retained earnings 7,496,915 8,945,941 ----------- ----------- Total stockholders' equity 8,765,276 10,520,601 ----------- ---------- $ 10,345,305 $ 16,172,729 ----------- ---------- ----------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. Page 1 TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited)
Quarters Ended -------------- July 3, 1999 June 27, 1998 ------------- ------------- Net sales $ 1,361,671 $ 3,281,399 Cost of sales 690,853 1,157,505 ------------- --------- Gross profit 670,818 2,123,894 Operating expenses: Selling, general and administrative expenses 1,043,694 1,385,374 Product development costs 453,850 378,347 ------------- ----------- Total operating expenses 1,497,544 1,763,721 ------------- ----------- Operating income (loss) (826,726) 360,173 ------------- ----------- Other income (expense): Interest income 38,208 3,396 Interest expense (426) (65,587) Other (2,959) (1,429) ------------- ----------- Total other income (expense): 34,823 (63,620) ------------- ----------- Income (loss) before income taxes (791,903) 296,553 Provision (benefit) for income taxes (197,976) 74,138 ------------- ----------- Net income (loss) $ (593,927) $ 222,415 -------------- ----------- -------------- ----------- Net income (loss) per common share: Basic $ (0.43) $ 0.17 Diluted $ (0.43) $ 0.17 Weighted average common shares outstanding used in computation: Basic 1,376,951 1,283,238 Diluted 1,376,951 1,287,729
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. Page 2 TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited)
Nine Months Ended July 3, 1999 June 27, 1998 ------------- ------------- Net sales $ 3,680,363 $ 9,621,904 Cost of sales 1,598,165 4,023,464 ------------- ------------- Gross profit 2,082,198 5,598,440 Operating expenses: Selling, general and administrative expenses 3,605,168 4,256,810 Product development costs 1,546,118 911,703 ------------- ------------- Total operating expenses 5,151,286 5,168,513 ------------- ------------- Operating income (loss) (3,069,088) 429,927 ------------- ------------- Other income (expense): Gain on sale of investment 1,056,638 -- Interest income 114,350 20,789 Interest expense (4,074) (96,714) Other (11,447) 8,449 ------------- ------------- Total other income (expense): 1,155,467 (67,476) ------------- ------------- Income (loss) before income taxes (1,913,621) 362,451 Provision (benefit) for income taxes (478,405) 90,613 ------------- ------------- Net income (loss) $ (1,435,216) $ 271,838 ------------- ------------- Net income (loss) per common share: Basic $ (1.07) $ 0.21 Diluted $ (1.07) $ 0.21 Weighted average common shares outstanding used in computation: Basic 1,344,063 1,281,452 Diluted 1,344,426 1,288,620
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. Page 3 TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended July 3, 1999 June 27, 1998 ------------- ------------- Operating Activities: Net income (loss) $(1,435,216) $ 271,838 Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 605,896 605,611 Non-cash compensation 14,677 -- Gain on sale of investment (1,056,638) -- Changes in assets and liabilities: Accounts receivable 7,701,501 (143,074) Unbilled revenue - (3,582,716) Inventories (788,711) (313,946) Refundable income taxes 75,840 233,426 Other current assets ( 37,947) 202 Accounts payable and other accrued liabilities (1,619,090) (594,610) ------------ ----------- Net cash (used) provided by operating activities 3,460,312 (3,523,269) ------------ ----------- Investing Activities: Additions to equipment and leasehold improvements (15,119) (318,084) Proceeds from sale of investment 1,288,633 - Investment in capitalized software - (263,217) Cancellation of life insurance policies - 158,224 Other (2,540) (16,264) ------------- ----------- Net cash (used) provided by investing activities 1,270,974 (439,341) ------------- ----------- Financing Activities: Proceeds from stock issuance 40,803 50,689 Borrowings under line of credit - 3,250,000 Payment of line of credit (2,250,000) (500,000) ------------ ----------- Net cash (used) provided by financing activities (2,209,197) 2,800,689 Net increase (decrease) in cash and cash equivalents 2,522,089 (1,161,921) Cash and cash equivalents at beginning of the period 740,049 1,876,748 ------------ ---------- Cash and cash equivalents at the end of the period $ 3,262,138 $ 714,827 ------------ ---------- ------------ ---------- SUPPLEMENTAL DISCLOSURES: Interest paid $ 20,256 $ 96,714 Income taxes paid (refunds received), net 64,051 (221,072)
NON-CASH TRANSACTIONS: During the nine months ended June 27, 1998, the Company incurred a capital lease obligation of $20,370 in connection with a lease agreement to acquire computer equipment. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. Page 4 TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FORWARD-LOOKING STATEMENTS Note: The discussions in this Form 10-Q, 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 rates. Although the Company's securities trade on the NASDAQ National Market System, no assurances can be given that the Company will continue to be in compliance with all listing requirements or that the Company's securities will continue to be listed on NASDAQ National Market or on NASDAQ SmallCap market. The delisting of the Company's securities from the NASDAQ could have a material adverse effect on the market price of the Company's securities. These and other risks are detailed from time to time in the Company's filings with the Securities and Exchange Commission, including Form 10-K for the fiscal year ended October 3, 1998, Form 10-Q for the quarter ended January 2, 1999, April 3, 1999 and this Form 10-Q for the quarter ended July 3, 1999. 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-Q. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company's consolidated financial statements for the year ending October 3, 1998 as filed with the Securities and Exchange Commission on Form 10-K. NOTE 1. INVENTORIES Inventories consisted of the following:
July 3, 1999 October 3, 1998 ------------ --------------- Finished Goods $ 181,070 $ 173,141 Work in Process 882,406 776,047 Raw Materials 2,844,526 2,170,103 ------------ --------------- $ 3,908,002 $ 3,119,291 ------------ --------------- ------------ ---------------
Page 5 NOTE 2. DEBT As of July 3, 1999, the Company has a $5,000,000 revolving line of credit at a rate of prime plus 1/2 of 1% with Wainwright Bank and Trust Company. This line of credit is secured by a pledge of substantially all the assets of the Company, requires no compensating balances, and matures on May 1, 2000. Under the terms of the line of credit agreement, the Company is required to comply with certain loan covenants. As of July 3, 1999, the Company is compliant with these covenants. Availability under the line of credit has been reduced by approximately $100,000, as of July 3, 1999, as a result of standby letters of credit. No other borrowings are outstanding against the line. In the prior year during the nine months ended June 27, 1998, the Company borrowed $2,750,000 under its line of credit. On April 30, 1999, the above mentioned line of credit was renewed. An additional covenant was added, which restricts the amount of borrowings to a percentage of certain accounts receivable and inventory balances. Management believes this arrangement, in combination with its existing cash balances and cash generated from operations, will be adequate to meet its liquidity and capital requirements for the foreseeable future. NOTE 3. COMMITMENTS AND CONTINGENCIES The Company is the defendant in GERARD v. TECHNICAL COMMUNICATIONS CORPORATION, ET AL., filed in the Superior Court of the Commonwealth of Massachusetts in 1999. This case arises from disputes concerning the hiring and termination of Roland Gerard, former president of the Company. The Complaint alleges state law claims for breach of contract, wrongful termination, and civil conspiracy. The Company intends to file a motion to dismiss in the near future. Because of the early stage of the litigation, it is impossible to determine the ultimate outcome. The Company is determined to contest this suit vigorously. 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. NOTE 4. COMPREHENSIVE INCOME During the first quarter of fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income". SFAS 130 established standards for the reporting and display of comprehensive income and its components. In general, comprehensive income combines net income and "other comprehensive income", which represents unrealized gain on securities available for sale. During the nine months and quarter ended July 3, 1999 the Company's comprehensive loss totaled $1,810,804 and $602,085, respectively. NOTE 5. SALE OF INVESTMENT IN VISUAL NETWORK, INC. COMMON STOCK On April 1, 1999 the Company sold the majority of shares of its investment in Visual Network, Inc. common stock. The Company recognized a gain on the sale of $1,056,638 on a cost basis of $231,995. On July 9, 1999 and July 16, 1999, the Company sold the remaining shares of its investment in Visual Network, Inc. common stock. The Company will recognize a gain on the sale of $94,534 on a cost basis of $18,801, during the fourth quarter of 1999. Page 6 PART I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The Company is in the business of designing, manufacturing and marketing communications security equipment. The Company receives orders for equipment from customers, which may take several months or longer to manufacture and ship. With the exception of long-term contracts where revenue is recognized under the percentage of completion method, the Company generally recognizes income on a unit-of-delivery basis. This latter method can cause revenues to vary widely from quarter to quarter and therefore quarterly comparisons of revenue may not be indicative of any trend. QUARTER ENDED JULY 3, 1999 AS COMPARED TO QUARTER ENDED JUNE 27, 1998 Net sales for the quarters ended July 3, 1999 and June 27, 1998, were $1,362,000 and $3,281,000, respectively. This decrease of 59% is attributed to variability in revenue recognition as a result of the timing of shipments as well as delays in the receipt of anticipated orders. Gross profit for the third quarter of fiscal 1999 was $671,000 as compared to gross profit of $2,124,000 for the same period of fiscal year 1998. This represented a 68% decrease in gross profit for the quarter. Gross profit expressed as a percentage of sales was 49% in 1999 as compared to 65% for the same period in fiscal year 1998. The disparity between the two fiscal years is attributed to the sale of a less favorable mix of lower margin products during 1999. Selling, general and administrative expenses for the third quarter of fiscal 1999 and 1998 were $1,044,000 and $1,385,0000, respectively. This decrease of 25% was primarily attributable to a decrease of $253,000 in payroll and travel related costs and commissions and contract services support, associated with the lower sales volume and the continued emphasis on expense controls. In addition, there was a decrease in professional service fees of $147,000. These decreased costs were partially offset by an increase of $89,000 in product demonstration costs. Product development costs for the quarter ended July 3, 1999 were $454,000 compared to $378,000 for the same period in fiscal 1998. This increase of 20% was attributable to the continued commitment to new product development, particularly the Cipher X 7000 series product line. As a result of the Company's increase in cash available for investment and no borrowings on its line of credit, net interest income increased from a net expense of $62,000 during the third quarter of fiscal 1998 to a net income position of $38,000 for the same period in the current year. The Company incurred a net loss of $594,000 for the third quarter of fiscal 1999 as compared to net income of $222,000 for the same period in fiscal 1998. Included in the net loss for the third quarter of fiscal 1999 is a loss from operations of $827,000. The decrease in operating profitability is primarily attributable to the decrease in gross profit as described above. NINE MONTHS ENDED JULY 3, 1999 AS COMPARED TO NINE MONTHS ENDED JUNE 27, 1998 Net sales for the nine months ended July 3, 1999 and June 27, 1998, were $3,680,000 and $9,622,000, respectively. This decrease of 62% in net sales is attributed to variability in revenue recognition as a result of the timing of shipments as well as delays in the receipt of some anticipated orders. Gross profit for the nine months ended July 3, 1999 was $2,082,000, as compared to gross profit of $5,598,000 for the same period of fiscal year 1998. This represented a 63% decrease in gross profit for the period. Gross profit expressed as a percentage of sales was 57% in 1999 as compared to 58% for the same Page 7 period in fiscal year 1998. The disparity between the two fiscal years is attributed to the sale of a less favorable mix of lower margin products during 1999. Operating expenses for the first nine months of fiscal 1999 were $3,605,000 and the first nine months of fiscal 1998 operating expenses were $4,257,000. This decrease of 15% was primarily attributable to a decrease of $952,000 in payroll and travel related costs and commissions and contract services support, associated with the lower sales volume and the continued emphasis on expense controls. In addition, there was a decrease in professional services fees of $421,000. These decreased costs were offset by $475,000 in costs associated with the settlement of litigation and an increase in promotional and advertising expenses associated with new product introductions of $84,000 and $89,000 in product demonstration costs. Product development costs for the nine months ended July 3, 1999 were $1,546,000 compared to $912,000 for the same period in fiscal 1998. This increase of 70% was attributable to the continued commitment to new product development, particularly the Cipher X 7000 series product line. As a result of the Company's increase in cash available for investment and no borrowings on its line of credit, net interest income increased from a net expense of $76,000 during the first nine months of fiscal 1998 to a net income position of $110,000 for the same period in the current year. The Company incurred a net loss of $1,435,000 for the first nine months of fiscal 1999 as compared to net income of $272,000 for the same period in fiscal 1998. Included in the net loss for the first nine months of fiscal 1999 is a one-time gain on the sale of an investment of $1,057,000 and a loss from operations of $3,069,000. The decrease in profitability is primarily attributable to the decrease in gross profit as described above. YEAR 2000 COMPLIANCE UPDATE Technical Communications Corporation has been actively addressing the Year 2000 (Y2K) problem since April 1998. Generally speaking, the Y2K problem results from the use of two-digit, rather than four-digit, date years in computer systems and software applications. Today, many systems rely on two (or one) digits to represent the year portion of a date. For example, 1997 is usually stored as 97 (or 7). As a result, the year 2000, represented by 00 (or 0), could be interpreted as 1900. This type of error could cause problems when systems display, calculate, store and print dates. The Company understands the importance of identifying and solving the Y2K problem. As a supplier of mission-critical encryption products, the Company is committed to providing products that will function, without interruption, into the year 2000. In addition, Technical Communications Corporation is taking proactive steps to ensure that all critical systems, from both an internal and external perspective, are reviewed and, if necessary, corrected. COMPANY'S STATE OF READINESS Technical Communications Corporation has divided its Y2K efforts into three major areas: (i) products and customers, (ii) enterprise business systems and information technology and (iii) external systems and suppliers. The review of each area will consist of an inventory of potentially affected systems, an assessment of Y2K readiness and corrective action deployment. As indicated, the Company has been actively working on Y2K related issues for fifteen months. As of July 3, 1999, the Company has completed all of its Y2K efforts in the areas described above with two minor exceptions involving our internal systems. Technical Communications Corporation has tested all of its current products for Y2K problems. A product is deemed Y2K compliant if the product, when used in accordance with its associated documentation, is capable of processing, receiving, and/ or providing data within or between the 20(th) and 21(st) centuries, provided that all other products used in conjunction with the product in question properly exchange date data with that product. It should be noted that certain TCC products deemed to be Y2K compliant might require a service update in order to achieve Y2K compliant status. Page 8 Although no assurances can be given, the Company believes that all current products are either Y2K compliant, or can be made Y2K compliant with minor adjustments or software upgrades. This product assessment has identified date-related issues with certain older products that the Company no longer manufactures or sells. It is the Company's intent to offer upgrades or alternative products where reasonably practicable. In some cases, the Company sells encryption systems that interact with third party products or operate with computer systems not under the Company's control. There can be no assurances that such third party equipment will function correctly into the year 2000. The Company's internal Y2K initiative includes a review of all computer hardware and software related systems including; internal LAN, product development tools, facility operations, interfaces with third parties via EDI links and desktop systems. As of July 3, 1999 all internal systems have been reviewed and evaluated. Except for the two minor items noted above, all internal systems are now Y2K compliant. The remaining items will be upgraded within the next 60 days. The Company's enterprise information system, which includes manufacturing, financial accounting and sales administration, is year 2000 compliant. At this time, the Company does not anticipate that any internal system will create a substantive disruption in the Company's operation into the year 2000. The Y2K external systems review process consists of identifying and contacting suppliers and service providers that are believed to be significant to the Company's business operations. The Company has reviewed each key supplier and service provider's Y2K readiness based on its formal response to a TCC Y2K status request. As a result the Company does not foresee any disruption in the flow of goods and services. This process is ongoing and is expected to continue into the year 2000. COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES As of July 3, 1999, the Company has incurred expenses related to the year 2000 problem of approximately $58,000. The main portion of these costs relates to the evaluation and testing of products for Y2K compliance. The Company anticipates additional costs of approximately $5,000 in order to complete the Y2K process. There can be no assurances that the Company will not encounter unexpected costs or delays in achieving year 2000 compliance. RISKS OF THE COMPANY'S YEAR 2000 ISSUES Based on current information, the Company believes that the year 2000 problem will not have a material adverse effect on the Company's overall business and financial condition. Since all current products are either Y2K compliant or can be made Y2K compliant, future sales of all such products do not represent a Y2K risk to the Company. Even though TCC is adopting a proactive strategy, there can be no assurances that year 2000 problems will not have any impact on the business. Despite efforts to ensure that products will function correctly into the year 2000, The Company may see an increase in warranty and other claims, especially those related to older products or products that incorporate third party software or hardware. If any of the Company's material suppliers or service providers experience unforeseen Y2K issues, the Company's production, product development, and operations may also be materially adversely effected. COMPANY'S CONTINGENCY PLAN TCC is working diligently to minimize the risks associated with Y2K issues. The Company plans to dedicate appropriate resources to address all known Y2K related issues, including potential catastrophic failures due to loss of electricity, security systems, heating systems, etc. Such action may include the use of alternative sources of supply to support manufacturing and product development. RECENT ACCOUNTING PRONOUNCEMENT 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. FAS No. 133 is effective for fiscal years beginning after June 15, 1999. Management does not expect the adoption of this statement to have a material impact Page 9 on its financial condition or results of operations. In June 1999 FASB issued Statement of Financial Accounting Standards No. 137 (SFAS 137), "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133--an amendment of FASB Statement No. 133". This Statement has delayed the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. During the first quarter of fiscal 1999, the company adopted 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 in financial statements. This Statement supercedes Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers. SFAS 131 is a disclosure related statement and has no financial impact on the company. The Company currently has only one segment and no additional disclosures are required. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by $2,522,000 or 341% to $3,262,000 as of July 3, 1999, from a balance of $740,000 at October 3, 1998. This increase was primarily due to the proceeds from the sale of the investment in Visual Networks, Inc. and the reduction of accounts receivable, which were partially offset by operating losses, an increase in inventory, paying down the line of credit and a reduction in current liabilities. The current ratio increased to 6.5:1 at July 3, 1999 compared to 2.5:1 as of October 3, 1998, primarily as a result of the cash received on accounts receivable during the period. As of July 3, 1999, the Company has a $5,000,000 revolving line of credit at a rate of prime plus 1/2 of 1% with Wainwright Bank and Trust Company. This line of credit is secured by a pledge of substantially all the assets of the Company, requires no compensating balances, and matures on May 1, 2000. Under the terms of the line of credit agreement, the Company is required to comply with certain loan covenants. As of July 3, 1999, the Company is compliant with these covenants. Availability under the line of credit has been reduced by approximately $100,000, as of July 3, 1999, as a result of standby letters of credit. No other borrowings are outstanding against the line. In the prior year during the nine months ended June 27, 1998, the Company borrowed $2,750,000 under its line of credit. On April 30, 1999, the above mentioned line of credit was renewed. An additional covenant was added, which restricts the amount of borrowings to a percentage of certain accounts receivable and inventory balances. Management believes this arrangement, in combination with its existing cash balances and cash generated from operations, will be adequate to meet its liquidity and capital requirements for the foreseeable future. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risk from changes in equity prices, which could affect its future results of operations and financial condition. The Company's long-term available-for-sale investment, in Visual Networks, Inc., represents a publicly traded equity security that is sensitive to fluctuations in price. Changes in equity prices would result in changes in the fair value of the Company's long-term available-for-sale investment due to the difference between the current market price and the market price at the last balance sheet date. Market risk has been significantly reduced by the sale of most of the Company's investment in the security. A 10% decrease in the market equity prices of July 3, 1999 would not have a material impact on the book value of the Company's stockholders' equity. Page 10 PART II. Other Information Item 1. Legal Proceedings: The Company is the defendant in GERARD v. TECHNICAL COMMUNICATIONS CORPORATION, ET AL., filed in the Superior Court of the Commonwealth of Massachusetts in 1999. This case arises from disputes concerning the hiring and termination of Roland Gerard, former president of the Company. The Complaint alleges state law claims for breach of contract, wrongful termination, and civil conspiracy. The Company intends to file a motion to dismiss in the near future. Because of the early stage of the litigation, it is impossible to determine the ultimate outcome. The Company is determined to contest this suit vigorously. 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. Item 2. Changes in Securities: 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: Exhibit 27: Financial Data Schedule b. Reports on Form 8-K: None. Page 11 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) August 13, 1999 By: /S/ CARL H. GUILD, JR. - --------------- -------------------------------- Date Carl H. Guild, Jr., President and Chief Executive Officer August 13, 1999 By: /S/ MICHAEL P. MALONE - --------------- -------------------------------- Date Michael P. Malone, Director of Finance and Principal Financial Officer EX-27 2 EX-27
5 9-MOS OCT-02-1999 APR-04-1999 JUL-03-1999 3,262,138 0 564,795 70,000 3,908,002 8,576,578 4,833,634 4,084,129 10,345,305 1,330,516 0 0 0 129,454 8,635,822 10,345,305 3,680,363 4,851,351 1,598,165 6,749,451 11,447 0 4,074 (1,913,621) (478,405) (1,435,216) 0 0 0 (1,435,216) (1.07) (1.07)
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