Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
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þ |
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Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended December 29, 2007
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o |
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Transition report under Section 13 or 15(d) of the Exchange Act |
For the transition period from to
Commission File Number: 0-8588
TECHNICAL COMMUNICATIONS CORPORATION
(Exact name of small business issuer as specified in its charter)
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Massachusetts
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04-2295040 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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100 Domino Drive, Concord, MA
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01742-2892 |
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(Address of principal executive offices)
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(Zip Code) |
Issuers telephone number, including area code: (978) 287-5100
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 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 þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
State the number of shares outstanding of each of the issuers classes of common equity, as
of the latest practicable date. 1,383,535 shares of Common Stock, $.10 par value,
outstanding as of February 8, 2008.
Transitional Small Business Disclosure Format (check one): Yes o No þ
Item 1. Financial Statements
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
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December 29, |
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September 29, |
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2007 |
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2007 |
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(Unaudited) |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
2,348,921 |
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$ |
2,622,288 |
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Accounts receivable trade, less allowance of $35,000
at December 29, 2007 and September 29, 2007 |
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1,155,937 |
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420,527 |
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Inventories |
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1,703,829 |
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1,908,157 |
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Other current assets |
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84,157 |
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96,051 |
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Total current assets |
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5,292,844 |
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5,047,023 |
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Equipment and leasehold improvements |
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2,991,287 |
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2,961,268 |
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Less: accumulated depreciation and amortization |
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(2,864,643 |
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(2,853,906 |
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Equipment and leasehold improvements, net |
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126,644 |
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107,362 |
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Total Assets |
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$ |
5,419,488 |
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$ |
5,154,385 |
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Liabilities and Stockholders Equity |
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Current Liabilities: |
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Accounts payable |
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$ |
128,907 |
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$ |
253,683 |
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Accrued liabilities
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Accrued compensation and related expenses |
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151,355 |
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449,111 |
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Accrued expenses |
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184,721 |
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263,235 |
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Total current liabilities |
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464,983 |
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966,029 |
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Stockholders Equity: |
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Common stock, par value $.10 per share; |
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7,000,000 shares authorized; 1,382,767 shares issued
and outstanding at December 29, 2007 and
September 29, 2007 |
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138,277 |
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138,277 |
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Additional paid-in capital |
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1,531,474 |
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1,517,599 |
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Retained earnings |
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3,284,754 |
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2,532,480 |
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Total stockholders equity |
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4,954,505 |
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4,188,356 |
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Total Liabilities and Stockholders Equity |
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$ |
5,419,488 |
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$ |
5,154,385 |
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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)
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Quarter Ended |
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December 29, |
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December 30, |
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2007 |
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2006 |
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Net sales |
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$ |
2,289,100 |
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$ |
761,660 |
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Cost of sales |
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849,429 |
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228,832 |
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Gross profit |
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1,439,671 |
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532,828 |
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Operating expenses: |
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Selling, general and
administrative expenses |
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435,431 |
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451,836 |
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Product development costs |
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280,836 |
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218,792 |
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Total operating expenses |
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716,267 |
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670,628 |
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Operating income (loss) |
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723,404 |
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(137,800 |
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Other income (expense): |
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Interest income |
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28,870 |
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21,062 |
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Interest expense |
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(312 |
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Total other income: |
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28,870 |
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20,750 |
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Net income (loss) before provision for income taxes |
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752,274 |
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(117,050 |
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Provision for income taxes |
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Net income (loss) |
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$ |
752,274 |
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$ |
(117,050 |
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Net income (loss) per common share: |
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Basic |
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$ |
0.54 |
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$ |
(0.09 |
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Diluted |
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$ |
0.48 |
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$ |
(0.09 |
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Weighted average shares: |
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Basic |
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1,382,535 |
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1,372,151 |
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Diluted |
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1,572,243 |
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1,372,151 |
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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)
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Quarter Ended |
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December 29, |
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December 30, |
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2007 |
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2006 |
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Operating Activities: |
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Net income (loss) |
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$ |
752,274 |
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$ |
(117,050 |
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Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
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Depreciation and amortization |
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10,737 |
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7,194 |
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Stock-based compensation |
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13,875 |
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26,394 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(735,410 |
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(65,926 |
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Inventories |
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204,328 |
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(104,793 |
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Other current assets |
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11,894 |
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6,766 |
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Accounts payable and other accrued liabilities |
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(501,046 |
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23,871 |
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Net cash used in operating activities |
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(243,348 |
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(223,544 |
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Investing Activities: |
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Additions to equipment and leasehold improvements |
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(30,019 |
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(25,054 |
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Net cash used in investing activities |
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(30,019 |
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(25,054 |
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Financing Activities: |
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Proceeds from stock issuance |
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2,238 |
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Net cash provided by financing activities |
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2,238 |
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Net decrease in cash and cash equivalents |
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(273,367 |
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(246,360 |
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Cash and cash equivalents at beginning of the period |
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2,622,288 |
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1,870,713 |
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Cash and cash equivalents at the end of the period |
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$ |
2,348,921 |
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$ |
1,624,353 |
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Supplemental Disclosures: |
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Interest paid |
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$ |
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$ |
312 |
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Income taxes paid |
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1,500 |
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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
STATEMENT OF FAIR PRESENTATION
Interim Financial Statements. The accompanying interim unaudited condensed
consolidated financial statements of Technical Communications Corporation (the Company or
TCC) and its wholly-owned subsidiary include all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results of operations for the periods
presented and in order to make the financial statements not misleading. All such adjustments
are of a normal recurring nature. Interim results are not necessarily indicative of the
results to be expected for the fiscal year ending September 27, 2008.
Certain footnote disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted as allowed by
Securities and Exchange Commission rules and regulations. The accompanying unaudited
condensed consolidated financial statements should be read in conjunction with the Companys
audited consolidated financial statements and the notes thereto in the Companys Annual
Report on Form 10-KSB for the fiscal year ended September 29, 2007.
Basis of Presentation. The accompanying consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
NOTE 1. Summary of Significant Accounting Policies and Significant Judgments and
Estimates
The discussion and analysis of our financial condition and results of operations are based on
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these consolidated
financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported revenues and expenses
during the reported periods.
On an ongoing basis, management evaluates its estimates and judgments, including but not
limited to those related to revenue recognition, receivable reserves, inventory reserves and
income taxes. Management bases its estimates on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
The accounting policies that management believes are most critical to aid in fully
understanding and evaluating our reported financial results include the following:
Revenue Recognition
The Company recognizes revenue from product sales in accordance with Staff Accounting
Bulletin No. 101, Revenue Recognition, as updated by Staff Accounting Bulletin No. 104.
Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is
fixed or determinable, delivery of the product to the customer has occurred and we have
determined that collection of the fee is probable. Title to the product generally passes
upon shipment of the product, as the products are shipped FOB shipping point, except for
certain foreign shipments. If the product requires installation to be performed by TCC, all
revenue related to the product is deferred and recognized upon the completion of the
installation. The Company provides for a warranty reserve at the time the product revenue is
recognized.
Page 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
The Company performs funded research and development and product development for commercial
companies and government agencies under both cost reimbursement and fixed-price contracts.
Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some
situations, the payment of a fee. These contracts may contain incentive clauses providing
for increases or decreases in the fee depending on how actual costs compare with a budget.
Revenue from reimbursement contracts is recognized as services are performed. On fixed-price
contracts that are expected to exceed one year in duration, revenue is recognized pursuant to
the percentage of completion method based upon the proportion of costs incurred to the total
estimated costs for the contract. In each type of contract, the Company receives periodic
progress payments or payment upon reaching interim milestones. All payments to TCC for work
performed on contracts with agencies of the U.S. government are subject to audit and
adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period
made. When the current estimates of total contract revenue and contract costs for commercial
product development contracts indicate a loss, a provision for the entire loss on the
contract is recorded. Any losses incurred in performing funded research and development
projects are recognized as funded research and development expenses as incurred.
Cost of product revenue includes material, labor and overhead. Costs incurred in connection
with funded research and development and other revenue arrangements are included in cost of
sales.
Inventory
The Company values inventory at the lower of actual cost to purchase and/or manufacture or
the current estimated market value of the inventory. A review is periodically performed of
inventory quantities on hand and the Company records a provision for excess and/or obsolete
inventory based primarily on the estimated forecast of product demand, as well as historical
usage. Due to the custom and specific nature of certain products, demand and usage for these
products and materials can fluctuate significantly. A significant decrease in demand for
these products could result in a short-term increase in the cost of inventory purchases and
an increase of excess inventory quantities on hand. In addition, the Companys industry is
characterized by rapid technological change, frequent new product development and rapid
product obsolescence, any of which could result in an increase in the amount of obsolete
inventory quantities on hand. Therefore, although the Company makes every effort to ensure
the accuracy of its forecasts of future product demand, any significant unanticipated change
in demand or technological developments could have a significant negative impact on the value
of inventory and would reduce our reported operating results.
Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in
the future. The estimated allowance for uncollectible amounts is based primarily on a
specific analysis of accounts in the receivable portfolio and historical write-off
experience. While management believes the allowance to be adequate, if the financial
condition of our customers were to deteriorate, resulting in any impairment of their ability
to make payments, additional allowances may be required, which would reduce our net income.
Accounting for Income Taxes
The preparation of our consolidated financial statements requires us to estimate our income
taxes in each of the jurisdictions in which we operate, including those outside the United
States, which may subject the Company to certain risks that ordinarily would not be expected
in the United States. The income tax accounting process involves estimating our actual
current exposure together with assessing temporary differences resulting from differing
treatments of items, such as depreciation, for tax and
accounting purposes. These differences result in the recognition of deferred tax assets and
liabilities. We must then record a valuation allowance to reduce our deferred tax assets to
the amount that is more likely than not to be realized.
Page 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
Significant management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities, and any valuation allowance recorded against
deferred tax assets. We have recorded a full valuation allowance against our deferred tax
assets as of December 29, 2007 and September 29, 2007, due to uncertainties related to our
ability to utilize these assets. Realization of the deferred tax assets is dependent upon the
Companys ability to generate sufficient future taxable income and, if necessary, execution
of tax planning strategies. The valuation allowance is based on our estimates of taxable
income by jurisdiction and the period over which our deferred tax assets will be recoverable.
In the event that actual results differ from these estimates or we adjust these estimates in
future periods, we may need to adjust our valuation allowance, which could materially impact
our financial position and results of operation.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial statements
in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company has adopted FIN 48
as of September 30, 2007.
FIN 48 requires that an enterprise determine whether it is more-likely-than-not that a tax
position will be sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. A tax position that
meets the more-likely-than-not threshold is then measured to determine the amount of benefit
to recognize in the financial statements. Based on its assessment, the Company has concluded
that there are no significant uncertain tax positions that require recognition in the
financial statements as of December 29, 2007.
The Company files federal and state income tax returns. The Company has accumulated losses,
which are still available to offset future income, since fiscal year 2000. Since the net
operating losses may potentially be utilized in future years to reduce taxable income, the
Companys tax years since fiscal 2000 remain open to examination by the major taxing
jurisdictions to which the Company is subject.
With respect to any future uncertain tax positions, the Company intends to record interest
and penalties, if any, as a component of income tax expense.
Stock-Based Compensation
Effective October 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment and related interpretations (SFAS
No. 123R) using the modified prospective method and accordingly has not restated prior
period results. SFAS No. 123R establishes the method for accounting for equity instruments
issued in exchange for employee services. Under SFAS No. 123R, share-based compensation cost
is measured at the grant date based on the calculated fair value of the award. The expense is
recognized over the employees requisite service period, generally the vesting period of the
award. SFAS No. 123R also requires the related excess tax benefit received upon exercise of
stock options, if any, to be reflected in the statement of cash flows as a financing activity
rather than an operating activity.
Page 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
In accordance with SFAS No. 123R and Staff Accounting Bulletin No. 107, Share-based Payment,
the Company selected the Black-Scholes option pricing model as the most appropriate method
for determining the estimated fair value for the stock awards. The Black-Scholes method of
valuation requires several assumptions: (1) the expected term of the stock award, (2) the
expected future stock volatility over the expected term and (3) a risk-free interest rate.
The expected term represents the expected period of time the Company believes the options
will be outstanding based on historical information. Estimates of expected future stock price
volatility are based on the historic volatility of the Companys common stock and the risk
free interest rate is based on the U.S. Treasury Note rate. The Company utilizes a forfeiture
rate based on an analysis of its actual experience. The forfeiture rate is not material to
the calculation of share-based compensation.
There were no options granted during the quarters ended December 29, 2007 and December 30,
2006. The following table summarizes share-based compensation costs included in the Companys
consolidated statement of operations for the quarters ended December 29, 2007 and December
30, 2006:
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Cost of sales |
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$ |
1,953 |
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$ |
1,715 |
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Selling, general and administrative |
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3,192 |
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17,252 |
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Product development costs |
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8,730 |
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7,427 |
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Total share-based compensation expense before tax |
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$ |
13,875 |
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$ |
26,394 |
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As of December 29, 2007 and December 30, 2006, there was $153,028 and $180,576, respectively,
of unrecognized compensation costs related to options granted. The unrecognized compensation
will be recognized over a period of approximately five years.
The Company had the following stock option plans outstanding as of December 29, 2007: the
Technical Communications Corporation 1991 Stock Option Plan, the 2001 Stock Option Plan and
the 2005 Non-Statutory Stock Option Plan. There are an aggregate of 850,000 shares authorized
under these plans, of which 612,034 and 626,234 were outstanding at December 29, 2007 and
December 30, 2006, respectively. Vesting periods are at the discretion of the Board of
Directors and typically range between one and five years. Options under these plans are
granted with an exercise price equal to at least the fair market value at time of grant and
have a term of five or ten years from the date of grant. As of December 29, 2007, there were
no shares available for new option grants under the 1991 Stock Option Plan or the 2001 Stock
Option Plan, and there were 56,500 shares available for grant under the 2005 Non-Statutory
Stock Option Plan.
The following tables summarize stock option activity during the first fiscal quarter of 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
Number of |
|
|
Weighted Average |
|
|
Weighted Average |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
Outstanding at September 29, 2007 |
|
|
612,034 |
|
|
$ |
3.12 |
|
|
|
|
|
Grants |
|
|
|
|
|
|
|
|
|
|
|
|
Exercises |
|
|
|
|
|
|
|
|
|
|
|
|
Cancellations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2007 |
|
|
612,034 |
|
|
$ |
3.12 |
|
|
4.3 years |
|
|
|
|
|
|
|
|
|
|
|
|
Page 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
Information related to the stock options outstanding as of December 29, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
Exercisable |
|
|
Weighted- |
|
Range of |
|
Number of |
|
|
Contractual |
|
|
Average |
|
|
Number of |
|
|
Average |
|
Exercise Prices |
|
Shares |
|
|
Life (years) |
|
|
Exercise Price |
|
|
Shares |
|
|
Exercise Price |
|
$0.01 - $1.00 |
|
|
161,334 |
|
|
|
4.78 |
|
|
$ |
0.96 |
|
|
|
161,334 |
|
|
$ |
0.96 |
|
$1.01 - $2.00 |
|
|
1,200 |
|
|
|
4.05 |
|
|
$ |
1.27 |
|
|
|
1,200 |
|
|
$ |
1.27 |
|
$2.01 - $3.00 |
|
|
68,200 |
|
|
|
5.11 |
|
|
$ |
2.56 |
|
|
|
58,260 |
|
|
$ |
2.49 |
|
$3.01 - $4.00 |
|
|
302,800 |
|
|
|
4.74 |
|
|
$ |
3.73 |
|
|
|
266,000 |
|
|
$ |
3.75 |
|
$4.01 - $5.00 |
|
|
23,500 |
|
|
|
0.93 |
|
|
$ |
4.96 |
|
|
|
22,000 |
|
|
$ |
4.95 |
|
$5.01 - $10.00 |
|
|
55,000 |
|
|
|
0.99 |
|
|
$ |
6.12 |
|
|
|
50,000 |
|
|
$ |
6.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
612,034 |
|
|
|
4.30 |
|
|
$ |
3.12 |
|
|
|
558,794 |
|
|
$ |
3.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the Companys in-the-money outstanding and exercisable
options as of December 29, 2007 was $942,825. Nonvested common stock options are subject to
the risk of forfeiture until the fulfillment of specified conditions.
Newly Issued Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value, and expands disclosure requirements regarding fair value
measurement. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.
In November 2007, the FASB deferred the effective date of SFAS No. 157 until November 15,
2008 for all non-financial assets and liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis. The Company is
currently reviewing the statement to determine the impact and materiality of its adoption by
the Company, if any.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of
Statement of Financial Accounting Standards No. 115 (SFAS No. 159), which permits companies
to choose to measure many financial instruments and certain other items at fair value. SFAS
No. 159 is effective for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years.
The Company is currently reviewing the statement to determine the impact and materiality of
its adoption by the Company, if any.
NOTE 2. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 29, 2007 |
|
|
September 29, 2007 |
|
|
|
(unaudited) |
|
|
|
|
|
|
Finished Goods |
|
$ |
62,630 |
|
|
$ |
408,995 |
|
Work in Process |
|
|
532,303 |
|
|
|
478,883 |
|
Raw Materials |
|
|
1,108,896 |
|
|
|
1,020,279 |
|
|
|
|
|
|
|
|
|
|
$ |
1,703,829 |
|
|
$ |
1,908,157 |
|
|
|
|
|
|
|
|
Page 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
NOTE 3. Earnings (Loss) Per Share
In accordance with SFAS No. 128, Earnings Per Share, basic and diluted earnings (loss) per
share were calculated as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
December 29, 2007 |
|
|
December 30, 2006 |
|
|
Net income (loss) |
|
$ |
752,274 |
|
|
$ |
(117,050 |
) |
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
1,382,535 |
|
|
|
1,372,151 |
|
Dilutive effect of stock options |
|
|
189,708 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted |
|
|
1,572,243 |
|
|
|
1,372,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share |
|
$ |
0.54 |
|
|
$ |
(0.09 |
) |
Diluted income (loss) per share |
|
$ |
0.48 |
|
|
$ |
(0.09 |
) |
Outstanding potentially dilutive stock options, which were not included in the earnings
(loss) per share calculations, as their inclusion would have been anti-dilutive, were 76,500
at December 29, 2007 and 626,234 at December 30, 2006.
NOTE 4. Major Customers and Export Sales
During the quarter ended December 29, 2007, the Company had two customers that represented
81% (62% and 19%, respectively) of net sales as compared to the same period in fiscal 2006
where four customers represented 71% (27%, 16%, 15% and 13%, respectively) of net sales.
A breakdown of foreign and domestic net sales is as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
December 29, 2007 |
|
|
December 30, 2006 |
|
|
Domestic |
|
$ |
2,034,299 |
|
|
$ |
377,171 |
|
Foreign |
|
|
254,801 |
|
|
|
384,489 |
|
|
|
|
|
|
|
|
Total sales |
|
$ |
2,289,100 |
|
|
$ |
761,660 |
|
|
|
|
|
|
|
|
The Company sold products into six countries during the quarter ended December 29, 2007 and
11 countries during the quarter ended December 30, 2006. A sale is attributed to a foreign
country based on the location of the contracting party. Domestic revenue may include the sale
of products shipped through domestic resellers or manufacturers to international
destinations. The table below summarizes our foreign revenues by country as a percentage of
total foreign revenue (unaudited).
|
|
|
|
|
|
|
|
|
|
|
December 29, 2007 |
|
|
December 30, 2006 |
|
|
Saudi Arabia |
|
|
37.0 |
% |
|
|
1.4 |
% |
United Kingdom |
|
|
34.9 |
% |
|
|
|
|
Colombia |
|
|
15.5 |
% |
|
|
0.2 |
% |
Thailand |
|
|
10.0 |
% |
|
|
|
|
Indonesia |
|
|
|
|
|
|
31.1 |
% |
Sweden |
|
|
|
|
|
|
25.6 |
% |
Bahrain |
|
|
|
|
|
|
18.5 |
% |
Italy |
|
|
|
|
|
|
14.5 |
% |
Other |
|
|
2.6 |
% |
|
|
8.7 |
% |
Page 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
A summary of foreign revenue, as a percentage of total foreign revenue by geographic area, is
as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
December 29, 2007 |
|
|
December 30, 2006 |
|
|
North America
(excluding the U.S.) |
|
|
|
|
|
|
|
|
Central and South America |
|
|
15.5 |
% |
|
|
0.2 |
% |
Europe |
|
|
37.4 |
% |
|
|
44.0 |
% |
Mid-East and Africa |
|
|
37.0 |
% |
|
|
24.7 |
% |
Far East |
|
|
10.1 |
% |
|
|
31.1 |
% |
Page 11
Item 2. Managements Discussion and Analysis or Plan of Operation
Forward-Looking Statements
The following discussion in this Quarterly Report on Form 10-QSB may contain statements that
are not purely historical. Certain statements contained herein or as may otherwise be
incorporated by reference herein constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include
but are not limited to statements regarding anticipated operating results, future earnings,
and the Companys ability to achieve growth and profitability. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors, including but
not limited to future changes in export laws or regulations; changes in technology; the
effect of foreign political unrest; the ability to hire, retain and motivate technical,
management and sales personnel; the risks associated with the technical feasibility and
market acceptance of new products; changes in telecommunications protocols; the effects of
changing costs, exchange rates and interest rates; and the Companys ability to secure
adequate capital resources. Such risks, uncertainties and other factors could cause the
actual results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements expressed or
implied by such forward-looking statements. For a more detailed discussion of the risks
facing the Company, see the Companys filings with the Securities and Exchange Commission,
including its Annual Report on Form 10-KSB for the fiscal year ended September 29, 2007.
Overview
The Company is in the business of designing, developing, manufacturing, distributing,
marketing and selling communications security devices and equipment that utilize various
methods of encryption to protect the information being transmitted. Encryption is a technique
for rendering information unintelligible, which information can then be reconstituted if the
recipient possesses the right decryption key. The Company manufactures several standard
secure communications products and also provides custom-designed, special-purpose secure
communications products for both domestic and international customers. The Companys products
consist primarily of voice, data and facsimile encryptors, and revenue is generated primarily
from the sale of these products, which have traditionally been made directly or indirectly to
foreign governments. Certain sales of our products are purchased by domestic customers who in
turn sell to foreign governments. We have also sold these products to commercial entities and
U.S. government agencies. We also generate revenues from contract engineering services
performed for certain government agencies, both domestic and foreign.
Critical Accounting and Significant Judgments and Estimates
There have been no material changes in our critical accounting policies or critical
accounting estimates since September 29, 2007 nor have we adopted any accounting policy that
has or will have a material impact on our consolidated financial statements. For further
discussion of our accounting policies see Note 1, Summary of Significant Accounting Policies
and Significant Judgments and Estimates in the Notes to Condensed Consolidated Financial
Statements in this Quarterly Report on Form 10-QSB and the Notes to Consolidated Financial
Statements in our Annual Report on Form 10-KSB for the fiscal year ended September 29, 2007.
Page 12
Results of Operations
Quarter ended December 29, 2007 as compared to the Quarter ended December 30, 2006
Net Sales
Net sales for the quarter ended December 29, 2007 were $2,289,000, as compared to $762,000
for the quarter ended December 30, 2006, an increase of 200%. Sales for the first quarter of
fiscal 2008 consisted of $2,034,000, or 89%, from domestic sources and $255,000, or 11%, from
international customers as compared to the same period in fiscal 2007, during which sales
consisted of $377,000, or 49%, from domestic sources and $385,000, or 51%, from international
customers.
Foreign sales consisted of shipments to six different countries during the quarter ended
December 29, 2007 and 11 different countries during the quarter ended December 30, 2006. A
sale is attributed to a foreign country based on the location of the contracting party.
Domestic revenue may include the sale of products shipped through domestic resellers or
manufacturers to international destinations. The table below summarizes our principal foreign
sales by country, during the first fiscal quarters of 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Saudi Arabia |
|
$ |
94,000 |
|
|
$ |
5,000 |
|
United Kingdom |
|
|
89,000 |
|
|
|
|
|
Colombia |
|
|
40,000 |
|
|
|
1,000 |
|
Thailand |
|
|
25,000 |
|
|
|
|
|
Indonesia |
|
|
|
|
|
|
120,000 |
|
Sweden |
|
|
|
|
|
|
99,000 |
|
Bahrain |
|
|
|
|
|
|
71,000 |
|
Italy |
|
|
|
|
|
|
56,000 |
|
Other |
|
|
7,000 |
|
|
|
33,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
255,000 |
|
|
$ |
385,000 |
|
|
|
|
|
|
|
|
Revenue for the first quarter of fiscal 2008 was primarily derived from the sale of our
narrowband radio encryptors to a U. S. radio manufacturer amounting to $1,424,000. We also
sold our data link encryptors to two domestic customers amounting to $157,000. Foreign sales
included our frame relay and internet protocol encryptor product line sold to two customers
amounting to $183,000. In addition, we had billings under a program with the U.S. government
for engineering services work amounting to $423,000.
Revenue for the first quarter of fiscal 2007 was primarily derived from the sale of our
narrowband radio encryptors to a U. S. customer amounting to $207,000 and a sale of our
secure telephone, fax, and data encryptors to a customer in Indonesia amounting to $120,000.
We also sold $112,000 worth of integrated circuit chips to a domestic customer and $99,000
worth of encryption equipment used in missile testing systems to a customer in Sweden.
Additional sales included an order from a customer in Bahrain for our fax encryptors
amounting to $71,000.
Gross Profit
Gross profit for the first quarter of fiscal 2008 was $1,440,000 as compared to gross profit
of $533,000 for the same period of fiscal 2007, an increase of 170%. Gross profit expressed
as a percentage of sales was 63% for the first quarter of fiscal 2008 as compared to 70% for
the same period in fiscal 2007. The decrease in gross profit as a percentage of sales was
primarily associated with revenue generated from the sale of higher margin spare parts sold
in the first quarter of fiscal 2007.
Page 13
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of fiscal 2008 were
$435,000, as compared to $452,000 for the same quarter in fiscal 2007. This decrease of 4%
was primarily attributable to a decrease in selling and marketing expenses of $24,000, offset
by an increase in general and administrative expenses of $7,000 during the first quarter of
the 2008 fiscal year.
The increase in general and administrative costs during the first quarter of 2008 was
primarily attributable to an increase in the recognition of stock based compensation expense
of $14,000, offset by a decrease in personnel related costs of $5,000.
The decrease in selling costs was primarily attributable to a decrease in bid and proposal
efforts of $81,000 and a decrease in sales support efforts of $12,000. These decreases were
partially offset by an increase in third party sales and marketing activities of $75,000 as
compared to the same period in fiscal 2007.
Product Development Costs
Product development costs for the quarter ended December 29, 2007 were $281,000, compared to
$219,000 for the quarter ended December 30, 2006, an increase of $62,000 or 28%. This
increase was primarily attributable to an increase in personnel-related costs of $99,000 and
an increase in outside consulting costs of $32,000 during the quarter ended December 29,
2007. The increase was also attributable to a decrease in engineering manufacturing and sales
support of approximately $66,000, partially offset by an increase in billable contract
engineering, which decreased product development costs by approximately $130,000 as personnel
were redeployed from internal product development efforts to billable contract work.
Product development costs are charged to billable engineering services, bid and proposal
efforts or product development. Engineering costs charged to billable projects are recorded
as cost of sales and engineering costs charged to bid and proposal efforts are recorded as
selling expenses.
The Company actively sells its engineering services in support of funded research and
development. The receipt of these orders is sporadic, although such programs can span over
several months. In addition to these programs, the Company also invests in research and
development to enhance its existing products or to develop new products, as it deems
appropriate. There was $423,000 of billable engineering services revenue generated during the
first quarter of fiscal 2008 and none during the same period of fiscal 2007.
Net Income
The Companys net income was $752,000 for the first quarter of fiscal 2008, as compared to a
net loss of $117,000 for the same period of fiscal 2007. This increase in income is primarily
attributable to a 170% increase in gross profit partially offset by a 7% increase in
operating expenses. The uncertainty of the timing of customer orders can result in periods
with losses, sometimes significant. This uncertainty will continue to make future results
difficult to predict. Receiving orders and contracts in a timely manner is essential to the
Companys ability to sustain operations.
The effects of inflation and changing costs have not had a significant impact on sales or
earnings in recent years. As of December 29, 2007, none of the Companys monetary assets or
liabilities was subject to foreign exchange risks. The Company usually includes an inflation
factor in its pricing when negotiating multi-year contracts with customers.
Page 14
Liquidity and Capital Resources
Cash and cash equivalents decreased by $273,000, or 10%, to $2,349,000 as of December 29,
2007, from a balance of $2,622,000 at September 29, 2007. This decrease was primarily
attributable to an increase in accounts receivable and a decrease in accounts payable and
other accrued expenses of $735,000 and $501,000, respectively, during the first quarter of
fiscal 2008. This decrease was partially offset by cash generated from net income of $752,000
and a decrease in inventory of $204,000 during the period.
Our results during the first quarter of fiscal 2008 met our expectations. Having worked
diligently since fiscal 2002 to develop a track record of profits, losses during fiscal years
2006 and 2005 were unexpected. During the third and fourth quarter of fiscal 2006 we saw a
return to profitability and we were able to maintain that profitability through fiscal 2007
and into the first quarter of fiscal 2008. We also have been able to secure several large
orders for our radio encryption products which are being deployed in Afghanistan by our
customer, a domestic radio manufacturer. Approximately $1.4 million in orders shipped to
this customer during the first quarter of fiscal 2008. In fiscal 2007 we secured two new
programs for our engineering services work amounting to $2.4 million. These programs are
billed monthly for time and materials incurred and are expected to be completed in fiscal
2008. Previously we completed the development of a major upgrade program for our customer in
Egypt, which is important to the Company because it opened the door for future hardware
procurements of the upgraded product line. This customer is expected to begin new
procurements during the later part of fiscal 2008.
Backlog at December 29, 2007 amounted to approximately $3.2 million. The orders in backlog
are expected to ship during fiscal 2008 and the early part of fiscal 2009 depending on
customer requirements and product availability.
The Company has a line of credit agreement with Bank of America (the Bank) not to exceed
the principal amount of $600,000. The line is supported by a financing promissory note. The
loan is a demand loan with interest payable at the Banks prime rate plus 1% on all
outstanding balances. The loan is secured by all assets of the Company (excluding consumer
goods) and requires the Company to maintain its deposit accounts with the Bank, as well as
comply with certain other covenants. The Company believes this line of credit agreement
provides it with an important external source of liquidity, if necessary. There were no cash
borrowings against the line during the first quarter of fiscal 2008 or at any time during
fiscal year 2007.
Certain foreign customers require the Company to guarantee bid bonds and performance of
products sold. These guaranties typically take the form of standby letters of credit.
Guaranties are generally required in amounts of 5% to 10% of the purchase price and last in
duration from three months to one year. At December 29, 2007 and December 30, 2006 there
were no outstanding standby letters of credit. The Company secures its outstanding standby
letters of credit with the above line of credit facility.
In April 2007, the Company entered into a new lease for its current facilities. This lease is
for 22,800 square feet located at 100 Domino Drive, Concord, MA. The Company has been a
tenant in this space since 1983. This is the Companys only facility and houses all
manufacturing, research and development, and corporate operations. The term of the lease is
for five years through March 31, 2012 at an annual rate of $159,000. In addition the lease
contains options to extend the lease for two and one half years through September 30, 2014
and another two and one half years through March 31, 2017, at an annual rate of $171,000.
Rent expense for the quarters ended December 29, 2007 and December 30, 2006 was $40,000 and
$37,000, respectively.
The Company does not anticipate any significant capital expenditures during the remainder of
fiscal 2008.
Page 15
In fiscal 2008, the Company expects to maintain and possibly increase its investment in
internal product development. We expect that the products comprising the Secure Wireless
product line will continue to evolve and respond to new customer requirements. It is also
expected that CipherTalk
Secure Voice encryption and CipherSMS Secure Text Messaging will be applied to additional
mobile platforms and that customer-specific features will be developed. TCC will also
continue its work evaluating new product options in the high-speed bulk encryption markets
for military applications. Depending on customer demand, TCC may also proceed with the
development of variants of its DSD72A-SP Military Bulk Encryptor, which would address higher
speeds and additional interfaces. On-going research and development in support of product
improvements and application variants also is expected to continue. Should the Company choose
to embark on a major development program in addition to its traditional research and
development activities, engineering staff will have to be added. The Company has sufficient
physical resources to support the added staff and believes that adequate technical resources
exist in the Boston area to meet potential needs; however we may need financial resources, in
addition to cash from operations, to fund a major new development program.
Based on todays product cost structure and operating expenses, we believe that current cash
and accounts receivable balances along with the current backlog are sufficient to provide
resources to operate the Company through the end of fiscal year 2008. As a result of our
profitability during fiscal 2007, the first quarter of fiscal 2008 and the backlog at
December 29, 2007 of $3.2 million, we are optimistic about future sales growth and other
possible sources of financing, including private equity funding or future public stock
offerings. However, there is no assurance that any of these goals can be achieved. Due to the
uncertainty of the timing of customer orders, future results remain difficult to predict.
Receiving orders and contracts in a timely manner is essential to the Companys ability to
sustain operations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Item 3. Controls and Procedures
Evaluation of disclosure controls and procedures. The Companys chief executive officer and
chief financial officer have reviewed and evaluated the effectiveness of the Companys
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated
under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of
the period covered by this quarterly report on Form 10-QSB. Based on that review and
evaluation, the chief executive officer and chief financial officer have concluded that the
Companys current disclosure controls and procedures, as designed and implemented, are
effective to ensure that such officers are provided with information relating to the Company
required to be disclosed in the reports the Company files or submits under the Exchange Act
and that such information is recorded, processed, summarized and reported within the
specified time periods.
Changes in internal control over financial reporting. There were no changes in the Companys
internal control over financial reporting that occurred during the quarter ended December 29,
2007 that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
Page 16
PART II. Other Information
Item 1. Legal Proceedings
There were no legal proceedings pending against or involving the Company during the
period covered by this quarterly report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
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31.1
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Certification of principal executive officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of principal financial officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certifications of Chief Executive and Chief
Financial Officers pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
Page 17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
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TECHNICAL COMMUNICATIONS CORPORATION |
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(Registrant) |
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February 12, 2008
Date
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By:
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/s/ Carl H. Guild, Jr.
Carl H. Guild, Jr., President and Chief
Executive Officer
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February 12, 2008
Date
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By:
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/s/ Michael P. Malone
Michael P. Malone, Chief Financial Officer
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Page 18
EXHIBIT INDEX
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Exhibit |
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No. |
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Description |
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31.1
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Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certifications of Chief Executive and Chief Financial Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Page 19