Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
| |
|
|
| þ |
|
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 26, 2010
| |
|
|
| o |
|
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 001-34816
TECHNICAL COMMUNICATIONS CORPORATION
(Exact name of registrant 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) |
Registrant’s telephone number, including area code: (978) 287-5100
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o (not required)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
| |
|
|
|
|
|
|
| Large accelerated filer o
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company þ |
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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date. 1,820,670 shares of Common Stock, $0.10 par value, outstanding as of
August 6, 2010.
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
| |
|
|
|
|
|
|
|
|
| |
|
June 26, 2010 |
|
|
September 26, 2009 |
|
| |
|
(Unaudited) |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,547,500 |
|
|
$ |
5,418,419 |
|
Accounts receivable — trade, less allowance of $332,748 at
June 26, 2010 and $232,748 at September 26, 2009 |
|
|
2,388,394 |
|
|
|
402,841 |
|
Inventories, net |
|
|
2,438,719 |
|
|
|
2,415,054 |
|
Deferred income taxes |
|
|
546,384 |
|
|
|
566,294 |
|
Other current assets |
|
|
257,105 |
|
|
|
180,161 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
11,178,102 |
|
|
|
8,982,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements |
|
|
3,493,070 |
|
|
|
3,369,214 |
|
Less: accumulated depreciation and amortization |
|
|
(3,146,420 |
) |
|
|
(3,029,707 |
) |
|
|
|
|
|
|
|
Equipment and leasehold improvements, net |
|
|
346,650 |
|
|
|
339,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
11,524,752 |
|
|
$ |
9,322,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
447,141 |
|
|
$ |
250,129 |
|
Customer deposits |
|
|
32,431 |
|
|
|
1,964,262 |
|
Deferred revenue |
|
|
53,892 |
|
|
|
— |
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
Accrued compensation and related expenses |
|
|
730,987 |
|
|
|
280,651 |
|
Accrued income taxes |
|
|
1,488,910 |
|
|
|
— |
|
Accrued expenses |
|
|
292,204 |
|
|
|
114,576 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
3,045,565 |
|
|
|
2,609,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
Common stock, par value $0.10 per share;
7,000,000 shares authorized; 1,820,670 and 1,452,199
shares issued and outstanding at June 26, 2010 and
September 26, 2009, respectively |
|
|
182,067 |
|
|
|
145,220 |
|
Additional paid-in capital |
|
|
2,892,094 |
|
|
|
2,031,340 |
|
Retained earnings |
|
|
5,405,026 |
|
|
|
4,536,098 |
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
8,479,187 |
|
|
|
6,712,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity |
|
$ |
11,524,752 |
|
|
$ |
9,322,276 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Income Statements
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
June 26, 2010 |
|
|
June 27, 2009 |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
6,350,133 |
|
|
$ |
2,087,083 |
|
Cost of sales |
|
|
1,860,961 |
|
|
|
803,714 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
4,489,172 |
|
|
|
1,283,369 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
695,868 |
|
|
|
526,524 |
|
Product development |
|
|
780,848 |
|
|
|
485,679 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,476,716 |
|
|
|
1,012,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
3,012,456 |
|
|
|
271,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income: |
|
|
|
|
|
|
|
|
Interest income |
|
|
1,043 |
|
|
|
5.808 |
|
|
|
|
|
|
|
|
Total other income |
|
|
1,043 |
|
|
|
5,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
3,013,499 |
|
|
|
276,974 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
590,214 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,423,285 |
|
|
$ |
276,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.33 |
|
|
$ |
0.19 |
|
Diluted |
|
$ |
1.29 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
1,820,438 |
|
|
|
1,451,967 |
|
Diluted |
|
|
1,874,960 |
|
|
|
1,621,671 |
|
|
|
|
|
|
|
|
|
|
Dividends paid per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.10 |
|
|
|
— |
|
Diluted |
|
$ |
0.10 |
|
|
|
— |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Income Statements
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
June 26, 2010 |
|
|
June 27, 2009 |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
14,690,013 |
|
|
$ |
5,987,130 |
|
Cost of sales |
|
|
4,498,059 |
|
|
|
2,255,033 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
10,191,954 |
|
|
|
3,732,097 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
2,327,286 |
|
|
|
1,783,726 |
|
Product development |
|
|
1,639,126 |
|
|
|
1,277,488 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,966,412 |
|
|
|
3,061,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
6,225,542 |
|
|
|
670,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income: |
|
|
|
|
|
|
|
|
Interest income |
|
|
3,081 |
|
|
|
36,972 |
|
|
|
|
|
|
|
|
Total other income |
|
|
3,081 |
|
|
|
36,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
6,228,623 |
|
|
|
707,855 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
1,536,775 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,691,848 |
|
|
$ |
707,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.87 |
|
|
$ |
0.49 |
|
Diluted |
|
$ |
2.72 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
1,633,401 |
|
|
|
1,455,319 |
|
Diluted |
|
|
1,726,070 |
|
|
|
1,642,188 |
|
|
|
|
|
|
|
|
|
|
Dividends paid per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.34 |
|
|
|
— |
|
Diluted |
|
$ |
2.21 |
|
|
|
— |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
June 26, 2010 |
|
|
June 27, 2009 |
|
|
|
|
|
|
|
|
|
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,691,848 |
|
|
$ |
707,855 |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
116,713 |
|
|
|
78,268 |
|
Share-based compensation |
|
|
116,618 |
|
|
|
98,795 |
|
Deferred income taxes |
|
|
19,910 |
|
|
|
— |
|
Bad debt expense |
|
|
100,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(2,085,553 |
) |
|
|
(393,529 |
) |
Inventories |
|
|
(23,665 |
) |
|
|
(440,106 |
) |
Other current assets |
|
|
(76,944 |
) |
|
|
(41,859 |
) |
Customer deposits |
|
|
(1,931,831 |
) |
|
|
(623,371 |
) |
Accounts payable and other accrued liabilities |
|
|
2,339,194 |
|
|
|
1,112,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
3,266,290 |
|
|
|
498,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Additions to equipment and leasehold improvements |
|
|
(123,856 |
) |
|
|
(157,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(123,856 |
) |
|
|
(157,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
809,567 |
|
|
|
2,311 |
|
Dividends paid |
|
|
(3,822,920 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(3,013,353 |
) |
|
|
2,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
129,081 |
|
|
|
343,193 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the period |
|
|
5,418,419 |
|
|
|
3,622,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period |
|
$ |
5,547,500 |
|
|
$ |
3,966,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
— |
|
|
$ |
— |
|
Income taxes paid |
|
|
— |
|
|
|
16,200 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
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 25, 2010.
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 Company’s audited consolidated
financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the
fiscal year ended September 26, 2009 as filed with the SEC.
We follow accounting standards set by the Financial Accounting Standards Board, commonly referred
to as the FASB. The FASB sets generally accepted accounting principles (“GAAP”) that we follow to
ensure we consistently report our financial condition, results of operations, and cash flows.
References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards
CodificationTM — sometimes referred to as the Codification or ASC. The FASB finalized
the Codification effective for periods ending on or after September 15, 2009.
NOTE 1. Summary of Significant Accounting Policies and Significant Judgments and
Estimates
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.
The discussion and analysis of our financial condition and results of operations are based on our
condensed consolidated financial statements, which have been prepared in accordance with GAAP. 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 reporting 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.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
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
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.
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 current estimates of total contract
revenue and 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 sales includes material, labor and overhead. Costs incurred in connection with funded
research and development 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 in excess inventory
quantities on hand. In addition, the Company’s 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 or unfavorable changes 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.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Accounting for Income Taxes
The Company accounts for income taxes using the asset/liability method. Under the asset/liability
method, deferred income taxes are recognized at current income tax rates to reflect the tax effect
of temporary differences between the consolidated financial reporting basis and tax basis of assets
and liabilities. The Company provides a valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
In June 2006, the FASB issued a new standard related to uncertain tax positions effective for the
Company for fiscal 2008. This standard provides detailed guidance for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in the financial
statements. Uncertain tax positions must meet a recognition threshold of more-likely-than-not in
order for those tax positions to be recognized in the financial statements. For the three and nine
months ended June 26, 2010 and June 27, 2009, the Company had no uncertain tax positions or
unrecognized tax benefits. The Company expects no material changes to unrecognized tax positions
within the next twelve months.
The Company’s policy is to record estimated interest and penalties related to the underpayment of
income taxes as a component of its income tax provision. As of June 26, 2010 and September 26,
2009, the Company had no accrued interest or tax penalties recorded.
Share-Based Compensation
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 employee’s requisite service period, generally the
vesting period of the award. The related excess tax benefit received upon exercise of stock
options, if any, is reflected in the Company’s statement of cash flows as a financing activity
rather than an operating activity.
The Company selected the Black-Scholes option pricing model as the method for determining the
estimated fair value of its 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) 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 price of the Company’s 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 fair value of options at date of grant was estimated with the following
assumptions:
| |
|
|
|
|
|
|
|
|
| |
|
Three and Nine Months Ended |
|
| |
|
June 26, 2010 |
|
|
June 27, 2009 |
|
Assumptions: |
|
|
|
|
|
|
|
|
Option life |
|
5 years |
|
|
5 years |
|
Risk-free interest rate |
|
|
2.44 |
% |
|
1.8% to 2.8 |
% |
Stock volatility |
|
|
77 |
% |
|
77% to 80 |
% |
Dividend yield |
|
|
-0- |
|
|
|
-0- |
|
There were 14,000 options granted during the nine months ended June 26, 2010 and 25,500 options
granted during the nine months ended June 27, 2009. There were no options granted during the three
month periods ended June 26, 2010 and June 27, 2009.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
The following table summarizes share-based compensation costs included in the Company’s condensed
consolidated income statements for the three and nine months ended June 26, 2010 and June 27, 2009
(unaudited):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 26, 2010 |
|
|
June 27, 2009 |
|
| |
|
3 months |
|
|
9 months |
|
|
3 months |
|
|
9 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
739 |
|
|
$ |
4,226 |
|
|
$ |
1,692 |
|
|
$ |
5,062 |
|
Selling, general and administrative |
|
|
1,562 |
|
|
|
67,365 |
|
|
|
1,558 |
|
|
|
49,870 |
|
Product development costs |
|
|
14,748 |
|
|
|
45,027 |
|
|
|
14,474 |
|
|
|
43,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
before taxes |
|
$ |
17,049 |
|
|
$ |
116,618 |
|
|
$ |
17,724 |
|
|
$ |
98,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 26, 2010 and June 27, 2009, there was $134,892 and $200,767, 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 June 26, 2010: 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 900,000 shares authorized under these
plans, of which 125,188 and 492,700 were outstanding at June 26, 2010 and June 27, 2009,
respectively. Vesting periods are at the discretion of the Board of Directors and typically range
between zero 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 June 26, 2010, there were no shares available for new option grants under the 1991
Stock Option Plan or the 2001 Stock Option Plan, and there were 33,500 shares available for grant
under the 2005 Non-Statutory Stock Option Plan.
During the nine months ended June 26, 2010 the Company’s Chief Financial Officer exercised
incentive stock options for an aggregate 62,500 shares and subsequently tendered back to the
Company 5,985 of those shares in payment for the exercise price of the options. The tendered shares
were immediately retired by the Company.
The following table summarizes stock option activity during the first nine months of fiscal 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
| |
|
Number of |
|
|
Weighted Average |
|
|
Weighted Average |
|
| |
|
Shares |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 26, 2009 |
|
|
492,700 |
|
|
$ |
2.95 |
|
|
4.72 years |
Grants |
|
|
14,000 |
|
|
|
|
|
|
|
|
|
Exercises |
|
|
(381,512 |
) |
|
|
|
|
|
|
|
|
Cancellations |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 26, 2010 |
|
|
125,188 |
|
|
$ |
4.96 |
|
|
7.12 years |
|
|
|
|
|
|
|
|
|
|
|
|
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Information related to the stock options vested and expected to vest as of June 26, 2010 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 |
|
|
600 |
|
|
|
3.13 |
|
|
$ |
0.99 |
|
|
|
600 |
|
|
$ |
0.99 |
|
$1.01 - $2.00 |
|
|
200 |
|
|
|
0.67 |
|
|
$ |
1.88 |
|
|
|
200 |
|
|
$ |
1.88 |
|
$2.01 - $3.00 |
|
|
15,488 |
|
|
|
5.45 |
|
|
$ |
3.00 |
|
|
|
15,288 |
|
|
$ |
3.00 |
|
$3.01 - $4.00 |
|
|
36,400 |
|
|
|
6.34 |
|
|
$ |
3.65 |
|
|
|
20,900 |
|
|
$ |
3.74 |
|
$4.01 - $5.00 |
|
|
24,400 |
|
|
|
8.11 |
|
|
$ |
4.76 |
|
|
|
14,600 |
|
|
$ |
4.81 |
|
$5.01 - $10.00 |
|
|
48,100 |
|
|
|
8.46 |
|
|
$ |
6.74 |
|
|
|
28,900 |
|
|
$ |
7.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,188 |
|
|
|
7.36 |
|
|
$ |
4.96 |
|
|
|
80,488 |
|
|
$ |
4.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable options
as of June 26, 2010 and June 27, 2009 was $580,689 and $778,020, respectively. Nonvested common
stock options are subject to the risk of forfeiture until the fulfillment of specified conditions.
NOTE 2. Inventories
Inventories consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
June 26, 2010 |
|
|
September 26, 2009 |
|
| |
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Finished goods |
|
$ |
10,138 |
|
|
$ |
5,829 |
|
Work in process |
|
|
890,850 |
|
|
|
511,514 |
|
Raw materials |
|
|
1,537,731 |
|
|
|
1,897,711 |
|
|
|
|
|
|
|
|
|
|
$ |
2,438,719 |
|
|
$ |
2,415,054 |
|
|
|
|
|
|
|
|
NOTE 3. Income Taxes
During the three and nine months ended June 26, 2010 the Company recorded an income tax provision
based on its expected effective tax rate for the year. The Company revised its effective tax rate
to 25% during the three months ended June 26, 2010 based on a revision of the full year pre-tax
forecast in the third quarter of fiscal 2010 as well as the reversal of the remaining portion of
the valuation allowance not associated with inventory. In addition, during the quarter ended
December 26, 2009, the valuation allowance against deferred tax assets related to the remaining net
operating loss carryforwards and tax credit carryforwards was reversed due to the determination by
the Company that the benefits of these deferred tax assets will more likely than not be realized in
future years, which contributed to the effective tax rate for the first fiscal quarter of 2010.
Deferred tax assets consist of net operating loss carryforwards, tax credits, inventory differences
and other temporary differences. The valuation allowance is related to the temporary differences
associated with inventory.
The Company’s estimated effective tax rate differs from the expected tax rate due to the reversal
of the valuation allowance that occurred in the first and third quarters of fiscal 2010 and the
expected utilization of net operating losses and tax credits against taxable income. This effective
tax rate resulted in a provision of $590,214 and $1,536,775 for the three and nine months ended
June 26, 2010.
As of June 26, 2010 and September 26, 2009, the Company had available tax loss carryforwards for
federal income tax purposes of approximately $3,780,000, expiring through 2026. In addition, the
Company had available research credits for federal income tax purposes of approximately $262,000,
expiring through 2029.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
NOTE 4. Earnings Per Share
Basic and diluted earnings per share were calculated as follows (unaudited):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 26, 2010 |
|
|
June 27, 2009 |
|
| |
|
3 months |
|
|
9 months |
|
|
3 months |
|
|
9 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,423,285 |
|
|
$ |
4,691,848 |
|
|
$ |
276,974 |
|
|
$ |
707,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic |
|
|
1,820,438 |
|
|
|
1,633,401 |
|
|
|
1,451,967 |
|
|
|
1,455,319 |
|
Dilutive effect of stock options |
|
|
54,522 |
|
|
|
92,669 |
|
|
|
169,704 |
|
|
|
186,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — diluted |
|
|
1,874,960 |
|
|
|
1,726,070 |
|
|
|
1,621,671 |
|
|
|
1,642,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
1.33 |
|
|
$ |
2.87 |
|
|
$ |
0.19 |
|
|
$ |
0.49 |
|
Diluted net income per share |
|
$ |
1.29 |
|
|
$ |
2.72 |
|
|
$ |
0.17 |
|
|
$ |
0.43 |
|
Outstanding potentially dilutive stock options, which were not included in the earnings per share
calculations, as their inclusion would have been anti-dilutive, were 70,000 at June 27, 2009. There
were no anti-dilutive stock options as of June 26, 2010.
NOTE 5. Major Customers and Export Sales
During the quarter ended June 26, 2010, the Company had one customer that represented 89% of net
sales as compared to the quarter ended June 27, 2009 where two customers represented 78% (47% and
31%, respectively) of net sales. During the nine months ended June 26, 2010, the Company had three
customers that represented 88% (49%, 24% and 15%, respectively) of net sales as compared to the
nine months ended June 27, 2009 where four customers represented 84% (28%, 26%, 19% and 11%,
respectively) of net sales.
A breakdown of foreign and domestic net sales is as follows (unaudited):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 26, 2010 |
|
|
June 27, 2009 |
|
| |
|
3 months |
|
|
9 months |
|
|
3 months |
|
|
9 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
6,346,794 |
|
|
$ |
13,966,171 |
|
|
$ |
1,926,608 |
|
|
$ |
5,649,269 |
|
Foreign |
|
|
3,339 |
|
|
|
723,842 |
|
|
|
160,475 |
|
|
|
337,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
6,350,133 |
|
|
$ |
14,690,013 |
|
|
$ |
2,087,083 |
|
|
$ |
5,987,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company sold products into five countries during the nine months ended June 26, 2010 and 11
countries during the nine months ended June 27, 2009. 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).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 26, 2010 |
|
|
June 27, 2009 |
|
| |
|
3 months |
|
|
9 months |
|
|
3 months |
|
|
9 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thailand |
|
|
— |
|
|
|
81.8 |
% |
|
|
47.6 |
% |
|
|
22.6 |
% |
Saudi Arabia |
|
|
88.8 |
% |
|
|
3.8 |
% |
|
|
35.8 |
% |
|
|
56.4 |
% |
Slovakia |
|
|
— |
|
|
|
12.1 |
% |
|
|
1.6 |
% |
|
|
4.6 |
% |
Colombia |
|
|
— |
|
|
|
— |
|
|
|
13.4 |
% |
|
|
9.4 |
% |
Other |
|
|
11.2 |
% |
|
|
2.3 |
% |
|
|
1.6 |
% |
|
|
7.0 |
% |
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
A summary of foreign revenue, as a percentage of total foreign revenue by geographic area, is as
follows (unaudited):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 26, 2010 |
|
|
June 27, 2009 |
|
| |
|
3 months |
|
|
9 months |
|
|
3 months |
|
|
9 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
(excluding the U.S.) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Central and South America |
|
|
— |
|
|
|
— |
|
|
|
13.4 |
% |
|
|
11.2 |
% |
Europe |
|
|
— |
|
|
|
12.1 |
% |
|
|
1.7 |
% |
|
|
4.8 |
% |
Mid-East and Africa |
|
|
94.9 |
% |
|
|
6.1 |
% |
|
|
37.3 |
% |
|
|
60.5 |
% |
Far East |
|
|
5.1 |
% |
|
|
81.8 |
% |
|
|
47.6 |
% |
|
|
23.5 |
% |
13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
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 Company’s 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 Company’s
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 Company’s filings with the Securities and Exchange Commission, including its Quarterly
Reports on Form 10-Q for the quarters ended March 27, 2010 and December 26, 2009 and its Annual
Report on Form 10-K for the fiscal year ended September 26, 2009.
Overview
The Company designs, develops, manufactures, markets and sells communications security devices and
systems 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 Company’s
products consist primarily of voice, data and facsimile encryptors. Revenue is generated primarily
from the sale of these products, which have traditionally been made directly or indirectly to
foreign governments, but which also include purchases 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 Company’s critical accounting policies or critical
accounting estimates since September 26, 2009, 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-Q and the Notes to Consolidated Financial Statements in our Annual
Report on Form 10-K for the fiscal year ended September 26, 2009 as filed with the SEC.
14
Results of Operations
Three Months ended June 26, 2010 as compared to Three Months ended June 27, 2009
Net Sales
Net sales for the quarter ended June 26, 2010 were $6,350,000, as compared to $2,087,000 for the
quarter ended June 27 2009, an increase of 204%. Sales for the third quarter of fiscal 2010
consisted of $6,347,000, or 99.9%, from domestic sources and $3,000, or 0.1%, from international
customers as compared to the same period in fiscal 2009, during which sales consisted of
$1,927,000, or 92%, from domestic sources and $160,000, or 8%, from international customers.
Foreign sales consisted of shipments to four countries during the quarter ended June 26, 2010 and
six countries during the quarter ended June 27, 2009. 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 third fiscal quarters of 2010 and
2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Saudi Arabia |
|
$ |
3,000 |
|
|
$ |
57,000 |
|
Thailand |
|
|
— |
|
|
|
76,000 |
|
Colombia |
|
|
— |
|
|
|
22,000 |
|
Other |
|
|
— |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,000 |
|
|
$ |
160,000 |
|
|
|
|
|
|
|
|
Revenue for the third quarter of fiscal 2010 was primarily derived from the sale of the Company’s
narrowband radio encryptors to a U.S. radio manufacturer amounting to $5,638,000 and to a domestic
company amounting to $218,000. We also had billings under programs for engineering services work
amounting to $316,000.
Revenue for the third quarter of fiscal 2009 was derived from the sale of the Company’s narrowband
radio encryptors to a domestic customer amounting to $127,000 and billings under programs for
engineering services work amounting to $988,000. In addition, we continued shipping products under
a $5.75 million contract with the U.S. Army, Communications and Electronics Command (“CECOM”)
during the quarter amounting to $650,000. We also generated $38,000 in royalty revenue from a
license and royalty agreement with a large domestic radio manufacturer and several orders for spare
parts amounting to $80,000 during the quarter.
Gross Profit
Gross profit for the third quarter of fiscal 2010 was $4,489,000 as compared to gross profit of
$1,283,000 for the same period of fiscal 2009, an increase of 250%. Gross profit expressed as a
percentage of sales was 71% for the third quarter of fiscal 2010 as compared to 61% for the same
period in fiscal 2009. The increase in gross profit was a direct result of the higher sales volume
and the mix of higher margin products sold during the quarter ended June 26, 2010.
15
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the third quarter of fiscal 2010 were $696,000, as
compared to $527,000 for the same quarter in fiscal 2009. This increase of 32% was attributable to
an increase in general and administrative expenses of $151,000 and an increase in selling and
marketing expenses of $18,000 during the third quarter of the 2010 fiscal year.
The increase in general and administrative costs during the third quarter of 2010 was primarily
attributable to an increase in personnel related costs of $128,000 and an increase in professional
fees of $8,000.
The increase in selling and marketing costs was attributable to increases in bid and proposal
efforts of $36,000 and outside sales commissions of $8,000, as compared to the same period in
fiscal 2009. These increases were partially offset by a decrease in consulting costs of $14,000 and
a decrease in product development costs of $10,000 during the current period.
Product Development Costs
Product development costs for the quarter ended June 26, 2010 were $781,000, compared to $486,000
for the quarter ended June 27, 2009, an increase of $295,000 or 61%. The increase was primarily
attributable to decreases in billable engineering services work and bid and proposal and product
evaluation work, which increased product development costs by approximately $323,000 during the
third quarter of fiscal 2010. The increase was also attributable to an increase in
personnel-related costs of $93,000 and recruiting costs of $28,000. These increases were partially
offset by a decrease in outside consulting fees of $140,000.
Product development costs are charged to billable engineering services, bid and proposal efforts or
product development as appropriate. 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 $316,000 of
billable engineering services revenue generated during the third quarter of fiscal 2010 and
$988,000 generated during the same period of fiscal 2009.
Net Income
The Company generated net income of $2,423,000 for the third quarter of fiscal 2010, as compared to
net income of $277,000 for the same period of fiscal 2009. This significant increase was primarily
attributable to a 204% increase in sales and was partially offset by a 46% increase in operating
expenses and the recognition of a tax provision of $590,000 for the three month period ended June
26, 2010. The Company recorded an income tax provision during the period based on its expected
effective tax rate for the year.
16
Nine Months ended June 26, 2010 as compared to Nine Months ended June 27, 2009
Net Sales
Net sales for the nine months ended June 26, 2010 were $14,690,000, as compared to $5,987,000 for
the nine months ended June 27, 2009, an increase of 145%. Sales for the first nine months of
fiscal 2010 consisted of $13,966,000, or 95%, from domestic sources and $724,000, or 5%, from
international customers as compared to the same period in fiscal 2009, during which sales consisted
of $5,649,000, or 94%, from domestic sources and $338,000, or 6%, from international customers.
Foreign sales consisted of shipments to five countries during the nine months ended June 26, 2010
and 11 countries during the nine months ended June 27, 2009. 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 nine months of
fiscal 2010 and 2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Thailand |
|
$ |
592,000 |
|
|
$ |
76,000 |
|
Slovakia |
|
|
88,000 |
|
|
|
16,000 |
|
Saudi Arabia |
|
|
28,000 |
|
|
|
190,000 |
|
Other |
|
|
16,000 |
|
|
|
56,000 |
|
|
|
|
|
|
|
|
|
|
$ |
724,000 |
|
|
$ |
338,000 |
|
|
|
|
|
|
|
|
Revenue for the first nine months of fiscal 2010 was derived in part from the final shipment of
products under the original $5.75 million contract with CECOM during the period amounting to
$3,591,000. In addition, the Company had billings under programs for engineering services work
amounting to $2,849,000 for the nine month period ended June 26, 2010. Revenue was also derived
from the sale of the Company’s narrowband radio encryptors to a U.S. radio manufacturer amounting
to $7,202,000 and to a domestic company amounting to $474,000. We also shipped our secure
telephone, fax, and data encryptors to a customer in Thailand during the period amounting to
$592,000.
Revenue for the first nine months of fiscal 2009 was derived from the sale of the Company’s
narrowband radio encryptors to a U.S. radio manufacturer amounting to $1,132,000 and additional
sales to two domestic customers amounting to $149,000. Billings under programs for engineering
services work amounting to $2,371,000 also was recognized during the period. In addition, we began
shipping products under the CECOM contract amounting to $1,549,000 for the first nine months of
fiscal 2009. We also sold our data link encryptors to a domestic customer amounting to $116,000 and
generated $237,000 in royalty revenue from a license and royalty agreement with a large domestic
radio manufacturer.
Gross Profit
Gross profit for the first nine months of fiscal 2010 was $10,192,000 as compared to gross profit
of $3,732,000 for the same period of fiscal 2009, an increase of 173%. Gross profit expressed as a
percentage of sales was 69% for the nine months ended June 26, 2010 as compared to 62% for the nine
months ended June 27, 2009. The increase in gross profit as a percentage of sales was primarily
associated with the higher margin sales of products sold, including under the CECOM contract,
during the nine months ended June 26, 2010.
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended June 26, 2010 were
$2,327,000, as compared to $1,784,000 for the nine months ended June 27, 2009. This increase of 30%
was attributable to
an increase in general and administrative expenses of $432,000 and an increase in selling and
marketing expenses of $111,000 during the first nine months of the 2010 fiscal year.
17
The increase in general and administrative costs during the first nine months of 2010 was primarily
attributable to increases in personnel related costs of $270,000 and professional fees of $28,000
and to an increase in bad debt expense of $100,000 related to a South American distributor
experiencing financial difficulty.
The increase in selling and marketing costs during the first nine months of 2010 was attributable
to increases in outside sales commissions of $67,000, engineering sales support of $40,000, new
product evaluation and bid and proposal activities of $17,000 and outside consulting fees of
$5,000. These increases were partially offset by a decrease in personnel related costs of $23,000.
Product Development Costs
Product development costs for the nine months ended June 26, 2010 were $1,639,000, compared to
$1,277,000 for the nine months ended June 27, 2009, an increase of $362,000 or 28%. This increase
was primarily attributable to an increase in personnel-related costs of $381,000, a decrease in
billable engineering services work performed, which increased product development costs by
approximately $118,000, and an increase in materials and supplies of $34,000. The increase was
offset by a decrease in outside consulting fees of $110,000 and a decrease in recruiting costs of
$69,000.
Product development costs are charged to billable engineering services, bid and proposal efforts or
product development as appropriate. 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 $2,849,000 of
billable engineering services revenue generated during the first nine months of fiscal 2010 and
$2,371,000 generated during the same period of fiscal 2009.
Net Income
The Company’s net income was $4,692,000 for the first nine months of fiscal 2010, as compared to
$708,000 for the same period of fiscal 2009. This substantial increase in net income is primarily
attributable to a 145% increase in sales and was partially offset by a 30% increase in operating
expenses and the recognition of a tax provision of $1,537,000 for the nine month period ended June
26, 2010. The company recorded an income tax provision during the period based on its expected
effective tax rate for the year.
The effects of inflation and changing costs have not had a significant impact on sales or earnings
in recent years. As of June 26, 2010, none of the Company’s monetary assets or liabilities was
subject to foreign exchange risks. The Company usually includes an inflation factor in its pricing
when negotiating multi-year contracts with customers.
Liquidity and Capital Resources
Cash and cash equivalents increased by $129,000 to $5,548,000 as of June 26, 2010, from a balance
of $5,418,000 at September 26, 2009. This increase was primarily attributable to cash generated
from net income of $4,692,000, an increase in accounts payable and other accrued expenses of
$2,300,000 and proceeds from the exercise of stock options of $810,000 during the first nine months
of fiscal 2010. These
increases in cash were partially offset by the payment of cash dividends of $3,823,000, a decrease
in customer deposits of $1,932,000, and an increase in accounts receivable of $1,985,000.
18
The Company has accrued $1,488,910 for income taxes which is based on current tax estimates
including the utilization of net operating loss carryforwards. The Company expects to make these
tax payments during the quarters ended September 25, 2010 and December 25, 2010.
We are currently performing under engineering services programs valued at $4.78 million. These
programs are billed monthly for time and materials incurred and are expected to be completed
in fiscal 2010. We billed $2,849,000 during the first nine months of 2010 under these
programs and there is $100,000 remaining in backlog. In addition, in April 2008 we were
awarded a contract from the U.S. Army, CECOM for upgrades and supplies to be shipped to Egypt
amounting to $5,750,000, with a subsequent amendment adding an additional $610,000 of funding.
The balance of the original order was shipped during the quarter ended December 26, 2009 and
we expect to ship the additional $610,000 into fiscal year 2011. We have also received orders
for our radio encryptors for use in Afghanistan amounting to $9,692,000 and our high speed
encryptors to support a Patriot Missile upgrade program from Raytheon amounting to $2,488,000.
These orders are expected to ship over the next 12 months.
Backlog at June 26, 2010 amounted to $10,060,000. The orders in backlog are expected to ship during
the 2010 and 2011 fiscal years depending on customer requirements and product availability.
The Company has a line of credit agreement with Bank of America (the “Bank”) for a line of credit
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 Bank’s 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 nine months ended June 26, 2010.
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 June 26, 2010 and September 26, 2009 there were no outstanding
standby letters of credit. The Company secures its outstanding standby letters of credit with
the 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 Company’s 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 each of
the nine month periods ended June 26, 2010 and June 27, 2009 was $120,000.
The Company does not anticipate any significant capital expenditures during the remainder of
fiscal 2010.
19
For the remainder of fiscal 2010, the Company expects to maintain its increased investment in
internal product development and conclude the year at approximately 20% above fiscal 2009
levels. We are evaluating several technical options for enhancing our radio encryption product
line, which may include cryptography modifications, hardware and software changes and
partnering with radio manufacturers to incorporate imbedded solutions. The products comprising
the CT8000 secure wireless product line will likely 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. Driven by customer demand, TCC has proceeded
with the development of variants of its DSD72A-SP Military Bulk Encryptor, which would provide
higher speeds and additional interfaces. A new multi-mode interface for the DSD72A and a new
family of high performance path sensitive encryptors are in development. The CX7000 family of IP
and frame sensitive encryptors is expected to be expanded to provide high speed solutions for
enterprise networks and satellite communications systems. 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.
Other than those stated above, there are no plans for significant internal product development
during the remainder of fiscal 2010.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. The Company’s chief executive officer and chief
financial officer have reviewed and evaluated the effectiveness of the Company’s 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. Based on that review and evaluation, the chief executive officer
and chief financial officer have concluded that the Company’s 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 Company’s
internal control over financial reporting that occurred during the quarter ended June 26, 2010 that
have materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
20
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 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Reserved
Item 5. Other Information
Not applicable.
Item 6. Exhibits
| |
|
|
|
|
| |
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 |
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
|
|
|
|
|
|
| |
|
TECHNICAL COMMUNICATIONS CORPORATION |
|
|
| |
|
(Registrant) |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Carl H. Guild, Jr.
Carl H. Guild, Jr., President and Chief
|
|
|
|
|
|
|
Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Michael P. Malone
Michael P. Malone, Chief Financial Officer
|
|
|
22