Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
|
|
|
þ |
|
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 29, 2008
|
|
|
o |
|
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)
|
|
|
Massachusetts
|
|
04-2295040 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer Identification No.) |
|
|
|
100 Domino Drive, Concord, MA
|
|
01742-2892 |
|
|
|
(Address of principal executive offices)
|
|
(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. 1,433,535 shares of Common Stock, $.10 par value,
outstanding as of May 9, 2008.
Transitional Small Business Disclosure Format (check one): Yes o No þ
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
March 29, 2008 |
|
|
September 29, 2007 |
|
|
|
(Unaudited) |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,105,560 |
|
|
$ |
2,622,288 |
|
Accounts receivable trade, less allowance of $25,000
at March 29, 2008 and $35,000 at September 29, 2007 |
|
|
1,029,795 |
|
|
|
420,527 |
|
Inventories |
|
|
1,856,560 |
|
|
|
1,908,157 |
|
Other current assets |
|
|
72,660 |
|
|
|
96,051 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
6,064,575 |
|
|
|
5,047,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements |
|
|
3,000,948 |
|
|
|
2,961,268 |
|
Less: accumulated depreciation and amortization |
|
|
(2,874,778 |
) |
|
|
(2,853,906 |
) |
|
|
|
|
|
|
|
Equipment and leasehold improvements, net |
|
|
126,170 |
|
|
|
107,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
6,190,745 |
|
|
$ |
5,154,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
116,315 |
|
|
$ |
253,683 |
|
Accrued liabilities |
|
|
|
|
|
|
|
|
Accrued compensation and related expenses |
|
|
342,861 |
|
|
|
449,111 |
|
Accrued expenses |
|
|
191,070 |
|
|
|
263,235 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
650,246 |
|
|
|
966,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, par value $.10 per share;
7,000,000 shares authorized; 1,433,767 shares issued
and outstanding at March 29, 2008 and 1,382,767 at
September 29, 2007 |
|
|
143,377 |
|
|
|
138,277 |
|
Additional paid-in capital |
|
|
1,902,814 |
|
|
|
1,517,599 |
|
Retained earnings |
|
|
3,494,308 |
|
|
|
2,532,480 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
5,540,499 |
|
|
|
4,188,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
6,190,745 |
|
|
$ |
5,154,385 |
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 29, 2008 |
|
|
March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,659,012 |
|
|
$ |
1,288,150 |
|
Cost of sales |
|
|
555,275 |
|
|
|
319,015 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,103,737 |
|
|
|
969,135 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses |
|
|
614,910 |
|
|
|
408,337 |
|
Product development costs |
|
|
306,445 |
|
|
|
268,153 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
921,355 |
|
|
|
676,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
182,382 |
|
|
|
292,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
27,172 |
|
|
|
19,801 |
|
Interest expense |
|
|
|
|
|
|
(312 |
) |
|
|
|
|
|
|
|
Total other income: |
|
|
27,172 |
|
|
|
19,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before provision for income taxes |
|
|
209,554 |
|
|
|
312,134 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
209,554 |
|
|
$ |
312,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.15 |
|
|
$ |
0.23 |
|
Diluted |
|
$ |
0.13 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
1,406,799 |
|
|
|
1,375,505 |
|
Diluted |
|
|
1,683,153 |
|
|
|
1,534,338 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
March 29, 2008 |
|
|
March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,948,112 |
|
|
$ |
2,049,810 |
|
Cost of sales |
|
|
1,404,704 |
|
|
|
547,847 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,543,408 |
|
|
|
1,501,963 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses |
|
|
1,050,341 |
|
|
|
860,173 |
|
Product development costs |
|
|
587,281 |
|
|
|
486,945 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,637,622 |
|
|
|
1,347,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
905,786 |
|
|
|
154,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
56,042 |
|
|
|
40,863 |
|
Interest expense |
|
|
|
|
|
|
(624 |
) |
|
|
|
|
|
|
|
Total other income: |
|
|
56,042 |
|
|
|
140,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before provision for income taxes |
|
|
961,828 |
|
|
|
195,084 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
961,828 |
|
|
$ |
195,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.69 |
|
|
$ |
0.14 |
|
Diluted |
|
$ |
0.59 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
1,394,667 |
|
|
|
1,373,828 |
|
Diluted |
|
|
1,631,731 |
|
|
|
1,527,610 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
March 29, 2008 |
|
|
March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
961,828 |
|
|
$ |
195,084 |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
20,872 |
|
|
|
14,994 |
|
Stock-based compensation |
|
|
107,455 |
|
|
|
49,763 |
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(609,268 |
) |
|
|
(41,362 |
) |
Inventories |
|
|
51,597 |
|
|
|
(165,817 |
) |
Other current assets |
|
|
23,391 |
|
|
|
29,057 |
|
Accounts payable and other accrued liabilities |
|
|
(315,783 |
) |
|
|
52,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
240,092 |
|
|
|
133,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Additions to equipment and leasehold improvements |
|
|
(39,680 |
) |
|
|
(30,732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(39,680 |
) |
|
|
(30,732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Proceeds from stock issuance |
|
|
282,860 |
|
|
|
6,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
282,860 |
|
|
|
6,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
483,272 |
|
|
|
109,683 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the period |
|
|
2,622,288 |
|
|
|
1,870,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period |
|
$ |
3,105,560 |
|
|
$ |
1,980,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
|
$ |
416 |
|
Income taxes paid |
|
|
9,000 |
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5
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 condensed 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 condensed
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 6
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 7
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 March 29, 2008 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 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 March 29, 2008.
The Company files federal and state income tax returns. The Company has had 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 8
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 of stock awards. The Black-Scholes method of valuation
requires several assumptions: (1) the expected term of the stock award, (2) the expected future
stock price 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. The Company also assumes the dividend yield will be
zero. The fair value of options at date of grant was estimated with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 29, |
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Assumptions: |
|
|
|
|
|
|
|
|
Option life |
|
5 years |
|
|
5 years |
|
Risk-free interest rate |
|
|
2.71 |
% |
|
|
4.625 |
% |
Stock volatility |
|
|
97 |
% |
|
|
150 |
% |
Dividend yield |
|
|
-0- |
|
|
|
-0- |
|
There were 34,000 options granted during the six months ended March 29, 2008 and 10,000
options granted during the six months ended March 31, 2007. The following table summarizes
share-based compensation costs included in the Companys consolidated statement of operations
for the three and six months ended March 29, 2008 and March 31, 2007 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2008 |
|
|
March 31, 2007 |
|
|
|
3 months |
|
|
6 months |
|
|
3 months |
|
|
6 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
1,942 |
|
|
$ |
3,895 |
|
|
$ |
1,675 |
|
|
$ |
3,390 |
|
Selling, general and administrative |
|
|
79,848 |
|
|
|
83,040 |
|
|
|
14,416 |
|
|
|
31,669 |
|
Product development costs |
|
|
11,790 |
|
|
|
20,520 |
|
|
|
7,277 |
|
|
|
14,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
before taxes |
|
$ |
93,580 |
|
|
$ |
107,455 |
|
|
$ |
23,368 |
|
|
$ |
49,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 29, 2008 and March 31, 2007, there was $233,824 and $162,454, 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 March 29, 2008: 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 850,000 shares authorized
under these plans, of which 595,034 and 632,234 were outstanding at March 29, 2008 and March
31, 2007, 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 March 29, 2008, there were no shares
available for new option grants under the 1991 Stock Option Plan or the 2001 Stock Option
Plan, and there were 22,500 shares available for grant under the 2005 Non-Statutory Stock
Option Plan.
Page 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
The following tables summarize stock option activity during the first six months 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 |
|
|
34,000 |
|
|
|
|
|
|
|
|
|
Exercises |
|
|
51,000 |
|
|
|
|
|
|
|
|
|
Cancellations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 29, 2008 |
|
|
595,034 |
|
|
$ |
3.13 |
|
|
4.75 years |
|
|
|
|
|
|
|
|
|
|
|
|
Information related to the stock options outstanding as of March 29, 2008 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 |
|
|
160,334 |
|
|
|
4.56 |
|
|
$ |
0.96 |
|
|
|
160,334 |
|
|
$ |
0.96 |
|
$1.01 - $2.00 |
|
|
1,200 |
|
|
|
3.81 |
|
|
$ |
1.27 |
|
|
|
1,200 |
|
|
$ |
1.27 |
|
$2.01 - $3.00 |
|
|
68,200 |
|
|
|
4.86 |
|
|
$ |
2.56 |
|
|
|
58,260 |
|
|
$ |
2.49 |
|
$3.01 - $4.00 |
|
|
302,800 |
|
|
|
4.49 |
|
|
$ |
3.73 |
|
|
|
268,000 |
|
|
$ |
3.75 |
|
$4.01 - $5.00 |
|
|
3,500 |
|
|
|
5.22 |
|
|
$ |
4.71 |
|
|
|
2,000 |
|
|
$ |
4.50 |
|
$5.01 - $10.00 |
|
|
59,000 |
|
|
|
6.46 |
|
|
$ |
6.58 |
|
|
|
34,000 |
|
|
$ |
6.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595,034 |
|
|
|
4.75 |
|
|
$ |
3.13 |
|
|
|
523,794 |
|
|
$ |
2.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the Companys in-the-money outstanding and exercisable
options as of March 29, 2008 was $1,308,497. 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.
Page 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
NOTE 2. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 29, 2008 |
|
|
September 29, 2007 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Finished goods |
|
$ |
213,078 |
|
|
$ |
408,995 |
|
Work in process |
|
|
670,327 |
|
|
|
478,883 |
|
Raw materials |
|
|
973,155 |
|
|
|
1,020,279 |
|
|
|
|
|
|
|
|
|
|
$ |
1,856,560 |
|
|
$ |
1,908,157 |
|
|
|
|
|
|
|
|
NOTE 3. Income Taxes
For the six months ended March 29, 2008 the Company used available tax loss carryforwards
against pre-tax income of $961,828 such that there is no tax provision recognized in the
income statement.
The valuation allowance relates to uncertainty with respect to the Companys ability to
realize its deferred tax assets. As of March 29, 2008, the Company had available tax loss
carryforwards for federal income tax purposes of approximately $4,370,000, expiring through
2026.
NOTE 4. Earnings Per Share
In accordance with SFAS No. 128, Earnings Per Share, basic and diluted earnings per share
were calculated as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2008 |
|
|
March 31, 2007 |
|
|
|
3 months |
|
|
6 months |
|
|
3 months |
|
|
6 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
209,554 |
|
|
$ |
961,828 |
|
|
$ |
312,134 |
|
|
$ |
195,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
1,406,799 |
|
|
|
1,394,667 |
|
|
|
1,375,505 |
|
|
|
1,373,828 |
|
Dilutive effect of stock options |
|
|
276,354 |
|
|
|
237,064 |
|
|
|
158,833 |
|
|
|
153,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted |
|
|
1,683,153 |
|
|
|
1,631,731 |
|
|
|
1,534,338 |
|
|
|
1,527,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.15 |
|
|
$ |
0.69 |
|
|
$ |
0.23 |
|
|
$ |
0.14 |
|
Diluted income per share |
|
$ |
0.13 |
|
|
$ |
0.59 |
|
|
$ |
0.20 |
|
|
$ |
0.13 |
|
Outstanding potentially dilutive stock options, which were not included in the earnings per
share calculations, as their inclusion would have been anti-dilutive, were 54,000 at March
29, 2008 and 327,036 at March 31, 2007.
NOTE 5. Major Customers and Export Sales
During the quarter ended March 29, 2008, the Company had two customers that represented 83%
(50% and 33%, respectively) of net sales as compared to the same period in fiscal 2007 where
three customers represented 98% (48%, 26% and 24%, respectively) of net sales. During the six
months ended March 29, 2008, the Company had two customers that represented 82% (57% and 25%,
respectively) of net sales as compared to the same period in fiscal 2007 where three
customers represented 77% (40%, 22% and 15%, respectively) of net sales.
Page 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
A breakdown of foreign and domestic net sales is as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2008 |
|
|
March 31, 2007 |
|
|
|
3 months |
|
|
6 months |
|
|
3 months |
|
|
6 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
1,563,932 |
|
|
$ |
3,598,231 |
|
|
$ |
1,272,410 |
|
|
$ |
1,649,581 |
|
Foreign |
|
|
95,080 |
|
|
|
349,881 |
|
|
|
15,740 |
|
|
|
400,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
1,659,012 |
|
|
$ |
3,948,112 |
|
|
$ |
1,288,150 |
|
|
$ |
2,049,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company sold products into nine countries during the six months ended March 29, 2008 and
13 countries during the six months ended March 31, 2007. 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2008 |
|
|
March 31, 2007 |
|
|
|
3 months |
|
|
6 months |
|
|
3 months |
|
|
6 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sri Lanka |
|
|
61.8 |
% |
|
|
16.8 |
% |
|
|
|
|
|
|
3.5 |
% |
Lebanon |
|
|
37.4 |
% |
|
|
10.2 |
% |
|
|
|
|
|
|
|
|
Saudi Arabia |
|
|
|
|
|
|
27.0 |
% |
|
|
|
|
|
|
1.3 |
% |
United Kingdom |
|
|
|
|
|
|
25.4 |
% |
|
|
|
|
|
|
|
|
Colombia |
|
|
|
|
|
|
11.3 |
% |
|
|
|
|
|
|
0.2 |
% |
Morocco |
|
|
|
|
|
|
|
|
|
|
44.2 |
% |
|
|
2.8 |
% |
Tunisia |
|
|
|
|
|
|
|
|
|
|
29.8 |
% |
|
|
1.2 |
% |
Slovakia |
|
|
|
|
|
|
1.8 |
% |
|
|
26.3 |
% |
|
|
4.7 |
% |
Austria |
|
|
|
|
|
|
|
|
|
|
10.2 |
% |
|
|
0.4 |
% |
Indonesia |
|
|
|
|
|
|
|
|
|
|
(19.1 |
)% |
|
|
29.1 |
% |
Sweden |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.6 |
% |
Bahrain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.7 |
% |
Italy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.0 |
% |
Other |
|
|
0.8 |
% |
|
|
7.5 |
% |
|
|
8.6 |
% |
|
|
0.5 |
% |
A summary of foreign revenue, as a percentage of total foreign revenue by geographic area, is
as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2008 |
|
|
March 31, 2007 |
|
|
|
3 months |
|
|
6 months |
|
|
3 months |
|
|
6 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
(excluding the U.S.) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central and South America |
|
|
|
|
|
|
11.3 |
% |
|
|
|
|
|
|
0.2 |
% |
Europe |
|
|
|
|
|
|
27.2 |
% |
|
|
36.4 |
% |
|
|
43.7 |
% |
Mid-East and Africa |
|
|
100.0 |
% |
|
|
54.2 |
% |
|
|
82.6 |
% |
|
|
27.0 |
% |
Far East |
|
|
|
|
|
|
7.3 |
% |
|
|
(19.0 |
)% |
|
|
29.1 |
% |
Page 12
Item 2. Managements Discussion and Analysis or Plan of Operation
Forward-Looking Statements
Certain statements contained herein or as may otherwise be incorporated by reference herein
that are not purely historical 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 the Companys Quarterly Report on Form
10-QSB for the fiscal quarter ended December 29, 2007 and the Companys 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 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 generate additional 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 the Companys 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 13
Results of Operations
Three Months ended March 29, 2008 as compared to Three Months ended March 31, 2007
Net Sales
Net sales for the quarter ended March 29, 2008 were $1,659,000, as compared to $1,288,000 for
the quarter ended March 31, 2007, an increase of 29%. Sales for the second quarter of fiscal
2008 consisted of $1,564,000, or 94%, from domestic sources and $95,000, or 6%, from
international customers as compared to the same period in fiscal 2007, during which sales
consisted of $1,272,000, or 99%, from domestic sources and $16,000, or 1%, from international
customers.
Foreign sales consisted of shipments to three different countries during the quarter ended
March 29, 2008 and five different countries during the quarter ended March 31, 2007. 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 second fiscal quarters of 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Sri Lanka |
|
$ |
59,000 |
|
|
|
|
|
Lebanon |
|
|
36,000 |
|
|
|
|
|
Morocco |
|
|
|
|
|
$ |
7,000 |
|
Other |
|
|
|
|
|
|
9,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
95,000 |
|
|
$ |
16,000 |
|
|
|
|
|
|
|
|
Revenue for the second quarter of fiscal 2008 was primarily derived from the sale of the
Companys narrowband radio encryptors to a U. S. radio manufacturer amounting to $822,000.
There were also sales of the Companys narrowband radio encryptors to three (two domestic and
one foreign) additional customers amounting to $223,000. Foreign sales included sales of the
Companys secure telephone, fax, and data encryptors to the United Nations in Lebanon
amounting to $36,000. In addition, the Company had billings under a program with the U.S.
government for engineering services work amounting to $544,000.
Revenue for the second quarter of fiscal 2007 was primarily derived from the sale of our
narrowband radio encryptors to two U. S. customers amounting to $613,000 and $308,000,
respectively. We also generated $337,500 in revenue as a result of a license agreement with a
large domestic radio manufacturer.
Gross Profit
Gross profit for the second quarter of fiscal 2008 was $1,104,000 as compared to gross profit
of $969,000 for the same period of fiscal 2007, an increase of 14%. Gross profit expressed
as a percentage of sales was 67% for the second quarter of fiscal 2008 as compared to 75% for
the same period in fiscal 2007. The decrease in gross profit as a percentage of sales was
primarily associated with revenue generated from a license agreement with a domestic radio
manufacturer in the second quarter of fiscal 2007, which revenue did not recur during the
same period in 2008.
Page 14
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the second quarter of fiscal 2008 were
$615,000, as compared to $408,000 for the same quarter in fiscal 2007. This increase of 51%
was primarily attributable to an increase in general and administrative expenses of $167,000
and an increase in selling and marketing expenses of $40,000 during the second quarter of the
2008 fiscal year.
The increase in general and administrative costs during the second quarter of 2008 was
primarily attributable to an increase in personnel related costs of $106,000 and an increase
in the recognition of stock based compensation expense of $65,000.
The increase in selling costs was primarily attributable to an increase in third party sales
and marketing activities of $85,000, partially offset by a decrease in bid and proposal
efforts of $45,000 as compared to the same period in fiscal 2007.
Product Development Costs
Product development costs for the quarter ended March 29, 2008 were $306,000, compared to
$268,000 for the quarter ended March 31, 2007, an increase of $38,000 or 14%. This increase
was primarily attributable to an increase in personnel-related costs of $101,000 and an
increase in outside consulting, training and recruiting costs of $67,000 during the quarter
ended March 29, 2008. There was also an increase in materials utilized on internal product
development projects of approximately $23,000. The increase was partially offset by an
increase in engineering manufacturing and sales support and an increase in billable contract
engineering, both of which decreased product development costs by approximately $70,000 and
$94,000, respectively, as personnel were redeployed from internal product development efforts
to support efforts and billable contract work.
Engineering 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 $544,000 of billable engineering services revenue generated during the
second quarter of fiscal 2008 and $13,000 generated during the same period of fiscal 2007.
Net Income
The Companys net income was $210,000 for the second quarter of fiscal 2008, as compared to
$312,000 for the same period of fiscal 2007. This 33% decrease in income is primarily
attributable to a 36% increase in operating expenses partially offset by a 14% increase in
gross profit. For the three months ended March 29, 2008 the Company used available tax loss
carryforwards against pre-tax income of $209,554 such that there is no tax provision
recognized in the income statement. 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.
Page 15
Six Months ended March 29, 2008 as compared to Six Months ended March 31, 2007
Net Sales
Net sales for the six months ended March 29, 2008 were $3,948,000, as compared to $2,050,000
for the six months ended March 31, 2007, an increase of 93%. Sales for the first six months
of fiscal 2008 consisted of $3,598,000, or 91%, from domestic sources and $350,000, or 9%,
from international customers as compared to the same period in fiscal 2007, during which
sales consisted of $1,650,000, or 80%, from domestic sources and $400,000, or 20%, from
international customers.
Foreign sales consisted of shipments to nine different countries during the six months ended
March 29, 2008 and 13 different countries during the six months ended March 31, 2007. 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 six months of 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Saudi Arabia |
|
$ |
94,000 |
|
|
$ |
5,000 |
|
United Kingdom |
|
|
89,000 |
|
|
|
|
|
Sri Lanka |
|
|
59,000 |
|
|
|
14,000 |
|
Colombia |
|
|
40,000 |
|
|
|
1,000 |
|
Lebanon |
|
|
36,000 |
|
|
|
|
|
Indonesia |
|
|
|
|
|
|
117,000 |
|
Sweden |
|
|
|
|
|
|
99,000 |
|
Bahrain |
|
|
|
|
|
|
71,000 |
|
Italy |
|
|
|
|
|
|
56,000 |
|
Morocco |
|
|
|
|
|
|
11,000 |
|
Other |
|
|
32,000 |
|
|
|
26,000 |
|
|
|
|
|
|
|
|
|
|
$ |
350,000 |
|
|
$ |
400,000 |
|
|
|
|
|
|
|
|
Revenue for the first six months of fiscal 2008 was primarily derived from the sale of our
narrowband radio encryptors to a U. S. radio manufacturer amounting to $2,247,000. There were
additional sales of our narrowband radio encryptors to three (two domestic and one foreign)
customers amounting to $223,000. We also sold our data link encryptors to two domestic
customers amounting to $157,000. Foreign sales included a sale of our secure telephone, fax,
and data encryptors to the United Nations in Lebanon amounting to $36,000 and a sale of our
frame relay and internet protocol encryptor product line 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 $967,000.
Revenue for the first six months of fiscal 2007 was primarily derived from the sale of our
narrowband radio encryptors to two U. S. customers amounting to $820,000 and $308,000,
respectively, and a sale of our secure telephone, fax, and data encryptors to a customer in
Indonesia amounting to $120,000. Additional sales included an order from a customer in
Bahrain for our fax encryptors amounting to $71,000 and an order for $99,000 worth of
encryption equipment used in missile testing systems by a customer in Sweden. We also
generated $337,500 in revenue as a result of a license agreement with a large domestic radio
manufacturer. This customer also purchased $112,000 worth of integrated circuit chips.
Gross Profit
Gross profit for the first six months of fiscal 2008 was $2,543,000 as compared to gross
profit of $1,502,000 for the same period of fiscal 2007, an increase of 69%. Gross profit
expressed as a percentage of sales was 64% for the first six months of fiscal 2008 as
compared to 73% for the same period in fiscal 2007. The decrease in gross profit as a
percentage of sales was primarily associated with revenue generated from a license agreement
with a domestic radio manufacturer in the first six months of fiscal 2007, which revenue did
not recur during the same period in 2008.
Page 16
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first six months of fiscal 2008 were
$1,050,000, as compared to $860,000 for the same six months in fiscal 2007. This increase of
22% was primarily attributable to an increase in general and administrative expenses of
$175,000 and an increase in selling and marketing expenses of $15,000 during the first six
months of the 2008 fiscal year.
The increase in general and administrative costs during the first six months of 2008 was
primarily attributable to an increase in personnel related costs of approximately $110,000
and an increase in the recognition of stock based compensation expense of $51,000. There was
also an increase in fees for professional services of approximately $14,000 during the first
six months of the 2008 fiscal year.
The increase in selling costs was primarily attributable to an increase in third party sales
and marketing activities of $163,000, partially offset by a decrease in bid and proposal
efforts of $126,000 as compared to the same period in fiscal 2007.
Product Development Costs
Product development costs for the six months ended March 29, 2008 were $587,000, compared to
$487,000 for the six months ended March 31, 2007, an increase of $100,000 or 21%. This
increase was primarily attributable to an increase in personnel-related costs of $201,000 and
an increase in outside consulting, training and recruiting costs of $95,000 during the six
months ended March 29, 2008. There was also an increase in materials utilized on internal
product development projects of approximately $19,000. The increase was partially offset by
an increase in billable contract engineering, which decreased product development costs by
approximately $225,000, as personnel were redeployed from internal product development
efforts to support billable contract work.
Engineering 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 $967,000 of billable engineering services revenue generated during the
first six months of fiscal 2008 and $13,000 during the same period of fiscal 2007.
Net Income
The Companys net income was $962,000 for the first six months of fiscal 2008, as compared to
$195,000 for the same period of fiscal 2007. This 393% increase in income is primarily
attributable to a 69% increase in gross profit partially offset by a 22% increase in
operating expenses. For the six months ended March 29, 2008 the Company used available tax
loss carryforwards against pre-tax income of $961,828 such that there is no tax provision
recognized in the income statement. 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 March 29, 2008, 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 17
Liquidity and Capital Resources
Cash and cash equivalents increased by $483,000, or 18%, to $3,106,000 as of March 29, 2008,
from a balance of $2,622,000 at September 29, 2007. This increase was primarily attributable
to cash generated from net income of $962,000, proceeds from stock issuance of $283,000 and
stock based compensation of $107,000 during the period. This increase was partially offset by
an increase in accounts receivable and a decrease in accounts payable and other accrued
expenses of $609,000 and $316,000, respectively, during the first six months of fiscal 2008.
Our results during the first six months of fiscal 2008 met our expectations. We 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
$822,000 in orders shipped to this customer during the second 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. We billed $967,000 during the first six months of 2008 under
these programs. 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. The results of this effort were realized
in April 2008 with the award of a contract from the U.S. Army, Communications and Electronics
Command (CECOM) for upgrades and supplies to be shipped to Egypt amounting to $5.75 million.
This order is expected to ship over the next 18 months.
Backlog at March 29, 2008 amounted to approximately $2.2 million. The orders in backlog are
expected to ship during fiscal 2008 and the first quarter of fiscal 2009 depending on
customer requirements and product availability. Following receipt of the CECOM order
referenced above the Companys backlog at April 23, 2008 was $7.5 million.
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 six months 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 March 29, 2008 and March 31, 2007 there were no
outstanding standby letters of credit. When necessary the Company secures its outstanding
standby letters of credit with its line of credit facility with the Bank.
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 six months ended March 29, 2008 and March 31, 2007 was $80,000 and
$74,000, respectively.
Page 18
The Company does not anticipate any significant capital expenditures during the remainder of
fiscal 2008.
During the remainder of 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 2009. As a result of our
profitability during fiscal 2007 and the first six months of fiscal 2008, the backlog at
March 29, 2008 of $2.2 million and the contract award from the U.S. Army, 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 March 29,
2008 that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
Page 19
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
On February 11, 2008, the Company held its Annual Meeting of Stockholders at the
Companys corporate headquarters in Concord, Massachusetts. At that meeting, one
director was elected to serve on the Board of Directors as the Class II director for a
term of three years expiring at the 2011 Annual Meeting of Stockholders. Robert T.
Lessard received 1,287,455 votes, and 19,926 votes were withheld. Robert T. Lessard is
joined by Carl H. Guild, Jr., Thomas E. Peoples and Mitchell B. Briskin on the Board of
Directors of the Company. Also at the meeting, stockholders voted to ratify the
appointment of Vitale, Caturano & Company, Ltd. as the independent registered public
accounting firm for the Company for the fiscal year ending September 27, 2008. Vitale,
Caturano & Company, Ltd. received 1,305,452 votes in favor of its appointment, 51 votes
against and 1,877 shares were not voted.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
|
|
|
|
|
|
31.1 |
|
|
Certification of principal executive officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
31.2 |
|
|
Certification of principal financial officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.1 |
|
|
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 20
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.
|
|
|
|
|
|
TECHNICAL COMMUNICATIONS CORPORATION
(Registrant)
|
|
Date May 12, 2008 |
By: |
/s/ Carl H. Guild, Jr.
|
|
|
|
Date Carl H. Guild, Jr., President and |
|
|
|
Chief Executive Officer |
|
|
|
|
|
Date May 12, 2008 |
By: |
/s/ Michael P. Malone
|
|
|
|
Michael P. Malone, Chief Financial Officer |
|
|
|
|
|
Page 21
EXHIBIT INDEX
|
|
|
|
|
|
31.1 |
|
|
Certification of principal executive officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
31.2 |
|
|
Certification of principal financial officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
32.1 |
|
|
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 22