SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
June 29, 2002 or
Commission File Number: 0-8588
Massachusetts 04-2295040
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
100 Domino Drive, Concord, MA 01742-2892
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (978) 287-5100
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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.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of Common Stock, $.10 par value, outstanding as of August 2, 2002: 1,332,953.
INDEX
Page
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PART I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets,
as of June 29, 2002 (unaudited) and
September 29, 2001 1
Condensed Consolidated Statements of Operations,
Three (3) months ended June 29, 2002 and
June 30, 2001 (unaudited), 2
Condensed Consolidated Statements of Operations,
Nine (9) months ended June 29, 2002 and
June 30, 2001 (unaudited), 3
Condensed Consolidated Statements of Cash Flows,
Nine (9) months ended June 29, 2002 and
June 30, 2001 (unaudited), 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8
PART II Other Information 12
Signatures 13
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PART I. Financial Information - Item 1. Financial Statements
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 29, 2002 September 29, 2001
------------- ------------------
(unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 648,063 $ 1,618,915
Accounts receivable - trade, less allowance for doubtful
accounts of $70,000 and $15,000, respectively 95,790 67,232
Inventories 1,264,265 1,261,608
Other current assets 275,099 355,837
----------- -----------
Total current assets 2,283,217 3,303,592
----------- -----------
Equipment and leasehold improvements 4,932,074 4,921,498
Less: accumulated depreciation and amortization 4,717,024 4,570,459
----------- -----------
215,050 351,039
$ 2,498,267 $ 3,654,631
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 176,310 $ 231,208
Accrued liabilities
Compensation and related expenses 210,763 111,381
Other 526,311 635,070
----------- -----------
Total current liabilities 913,384 977,659
----------- -----------
Stockholders' Equity:
Common stock, par value $.10 per share; authorized
3,500,000 shares; issued 1,333,185 shares
and 1,323,328 shares 133,319 132,333
Treasury stock at cost, 232 shares (1,934) (1,934)
Additional paid-in capital 1,371,706 1,365,600
Retained earnings 81,792 1,180,973
----------- -----------
Total stockholders' equity 1,584,883 2,676,972
----------- -----------
$ 2,498,267 $ 3,654,631
=========== ===========
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The accompanying notes are an integral part of these condensed consolidated financial statements.
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
---------------------------------
June 29, 2002 June 30, 2001
------------- -------------
Net sales $ 519,799 $ 254,257
Cost of sales 313,734 1,869,308
----------- -----------
Gross profit 206,065 (1,615,051)
Operating expenses:
Selling, general and
administrative expenses 597,927 903,120
Product development costs 273,310 703,209
----------- -----------
Total operating expenses 871,237 1,606,329
----------- -----------
Operating loss (665,172) (3,221,380)
----------- -----------
Other income (expense):
Interest income 1,651 7,786
Interest expense (315) (122)
Other -- 4,325
----------- -----------
Total other income 1,336 12,016
----------- -----------
Loss before income taxes (663,836) (3,209,364)
Provision for income taxes -- 157,500
----------- -----------
Net loss $ (663,836) $(3,366,864)
=========== ===========
Net loss per common share:
Basic $ (0.50) $ (2.55)
Diluted $ (0.50) $ (2.55)
Weighted average common shares outstanding used in computation:
Basic 1,332,953 1,320,481
Diluted 1,332,953 1,320,481
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The accompanying notes are an integral part of these condensed consolidated financial statements.
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Nine Months Ended
-------------------------------
June 29, 2002 June 30, 2001
------------- -------------
Net sales $ 2,552,466 $ 2,354,471
Cost of sales 1,071,337 2,701,121
----------- -----------
Gross profit 1,481,129 (346,650)
Operating expenses:
Selling, general and
administrative expenses 1,604,744 3,055,053
Product development costs 992,588 1,273,788
----------- -----------
Total operating expenses 2,597,332 4,328,841
----------- -----------
Operating loss (1,116,203) (4,675,491)
----------- -----------
Other income (expense):
Interest income 11,744 62,905
Interest expense
(1,051) (1,560)
Other 6,329 (68,544)
----------- -----------
Total other income (expense) 17,022 (7,199)
----------- -----------
Loss before income taxes (1,099,181) (4,682,690)
Provision for income taxes -- 157,500
----------- -----------
Net loss $(1,099,181) $(4,840,190)
=========== ===========
Net loss per common share:
Basic $ (0.83) $ (3.73)
Diluted $ (0.83) $ (3.73)
Weighted average common shares outstanding used in computation:
Basic 1,330,666 1,298,561
Diluted 1,330,666 1,298,561
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The accompanying notes are an integral part of these condensed consolidated financial statements.
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
---------------------------------
June 29, 2002 June 30, 2001
------------- -------------
Operating Activities:
Net loss $(1,099,181) $(4,840,190)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 146,565 369,783
Non-cash compensation -- 31,741
Deferred income taxes 157,500
Write-off of goodwill 306,687
Noncash inventory charges 1,943,587
Changes in assets and liabilities:
Accounts receivable (28,558) 207,785
Note receivable -- (659,590)
Inventories (2,657) (131,826)
Other current assets 80,738 (143,320)
Accounts payable and other accrued liabilities (64,275) 60,957
----------- -----------
Net cash used by operating activities (967,368) (2,696,886)
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Investing Activities:
Additions to equipment and leasehold improvements (10,576) (44,955)
----------- -----------
Net cash used by investing activities (10,576) (44,955)
----------- -----------
Financing Activities:
Proceeds from stock issuance 7,092 24,976
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Net cash provided by financing activities 7,092 24,976
----------- -----------
Net decrease in cash and cash equivalents (970,852) (2,716,865)
Cash and cash equivalents at beginning of the period 1,618,915 3,121,617
----------- -----------
Cash and cash equivalents at the end of the period $ 648,063 $ 404,752
=========== ===========
Supplemental Disclosures:
Interest paid $ 1,051 $ 1,191
Income taxes paid 3,975 3,256
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The accompanying notes are an integral part of these condensed consolidated financial statements.
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF FAIR PRESENTATION
Interim Financial Statements: The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for fair presentation of the results of operations for the periods presented. Interim results are not necessarily indicative of the results to be expected for a full year.
Certain disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by Form 10-QSB. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company's consolidated financial statements for the year ending September 29, 2001 as filed with the Securities and Exchange Commission on Form 10-KSB.
NOTE 1. Inventories
Inventories are carried at the lower of cost or market and consisted of the following:
June 29, 2002 September 29, 2001
------------- ------------------
Finished Goods $ 427,918 $ 140,962
Work in Process 400,723 493,947
Raw Materials 435,624 626,699
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$1,264,265 $1,261,608
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NOTE 2. Line of Credit
The Company has terminated its $1 million asset-based credit facility with Coast Business Credit ("Coast"). The line carried an interest rate of prime plus 1/2% (5.25% at June 29, 2002). This revolving line of credit was collateralized by substantially all the assets of the Company and required no compensating balances. There were no outstanding borrowings during the quarter.
The Company has received a preliminary commitment from the Small Business Administration under their Export Working Capital Program for up $1,111,111. The Company is currently negotiating with a bank to implement this working capital line.
NOTE 3. Liquidity Matters
The Company's revenues have historically included significant transactions with foreign governments and other organizations. The Company expects this trend to continue. The timing of these transactions has in the past and will in the future have a significant impact on the cash flow of the Company. Delays in the timing of significant expected sales transactions would cause a significant negative effect on the Company's operations, however the Company has some ability to mitigate this effect through further cost cutting measures.
The Company has incurred losses year to date as well as in recent years. Recent revenue levels have been lower than management's expectation, which has resulted in a reduction in liquidity at June 29, 2002.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
NOTE 3. Liquidity Matters (cont'd)
As a result, the Company has used, and expects to continue to use, cash and cash equivalents to fund its operations. The Company believes there is currently sufficient cash and cash equivalents to meet its working capital needs for at least the remainder of the fiscal year. The recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to increase sales, to succeed in its future operations and to obtain new financing with a lender. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, and classification and amounts of liabilities that might be necessary should Company be unable to continue funding its operations.
Management has taken significant steps to streamline its operations and will continue to do so as the situation warrants. These steps have included reducing headcount, and other expenses and limiting capital expenditures. But, in order to achieve and sustain profitability and to get to positive cash flow from operations, the Company must grow its revenue. It is uncertain as to whether or when this will occur. Management believes, based on its understanding of the marketplace, that future sales will occur in a sufficient manner to allow the Company to continue as a viable business. However, if there are no improvements in the business or the economy worsens, the Company may need to take further actions, including further reductions of headcount, curtailing employee benefits and/or downsizing its facilities in order to reduce its working capital requirements.
If business continues at the same level and we do not secure a new credit facility or no further actions are taken, the Company could run out of cash in early fiscal 2003.
NOTE 4. Major Customers and Export Sales
During the nine months ended June 30, 2002, the Company had two customers, representing 30% (18% and 12%) of net sales. During the nine months ended June 30, 2001, the Company had three customers, representing 50% (29%, 11% and 10%) of net sales.
A breakdown of net sales is as follows:
June 29, 2002 June 30, 2001
3 Months 9 Months 3 Months 9 Months
-------- ---------- -------- ----------
Domestic $347,730 793,241 $222,154 $ 501,878
Foreign 172,069 1,759,225 32,103 1,852,593
-------- ---------- -------- ----------
Total sales $519,799 $2,552,466 $254,257 $2,354,471
======== ========== ======== ==========
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A summary of foreign sales by geographic area follows:
June 29, 2002 June 30, 2001
3 Months 9 Months 3 Months 9 Months
-------- -------- -------- --------
North America
(excluding the U.S.) 0.1% 1.1% 0.0% 10.7%
Central and South America 33.5% 15.5% 0.0% 37.7%
Europe 15.3% 9.6% 13.5% 2.1%
Mid-East and Africa 5.7% 52.4% 20.5% 44.6%
Far East 45.4% 21.4% 66.0% 4.9%
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
NOTE 5. Loss Per Share
Outstanding potentially dilutive stock options which were not included in the loss per share calculations at June 29, 2002 and June 30, 2001, as their inclusion would have been anti-dilutive, were as follows: 355,369 and 267,869, respectively.
FORWARD-LOOKING STATEMENTS
NOTE: THE DISCUSSIONS IN THIS FORM 10-Q, INCLUDING ANY DISCUSSION OF OR IMPACT, EXPRESSED OR IMPLIED, ON TECHNICAL COMMUNICATIONS CORPORATION'S (THE COMPANY) ANTICIPATED OPERATING RESULTS AND FUTURE EARNINGS, INCLUDING STATEMENTS ABOUT THE COMPANY'S ABILITY TO ACHIEVE GROWTH AND PROFITABILITY, CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED. THE COMPANY'S OPERATING RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S OPERATING RESULTS MAY BE AFFECTED BY MANY FACTORS, INCLUDING BUT NOT LIMITED TO FUTURE CHANGES IN EXPORT LAWS OR REGULATIONS, CHANGES IN TECHNOLOGY, THE EFFECT OF FOREIGN POLITICAL UNREST, THE ABILITY TO HIRE, RETAIN AND MOTIVATE TECHNICAL, MANAGEMENT AND SALES PERSONNEL, THE RISKS ASSOCIATED WITH THE TECHNICAL FEASIBILITY AND MARKET ACCEPTANCE OF NEW PRODUCTS, CHANGES IN TELECOMMUNICATIONS PROTOCOLS, THE EFFECTS OF CHANGING COSTS, EXCHANGE RATES AND INTEREST RATES AND THE COMPANY'S ABILITY TO NEGOTIATE A LINE OF CREDIT WITH A BANK. THESE AND OTHER RISKS ARE DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2001, THE FORM 10-Q FOR THE QUARTER ENDED DECEMBER 29, 2001 AND THIS FORM 10-Q FOR THE QUARTER ENDED MARCH 30, 2002.
PART I, Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Policies: The preparation of financial statements prepared in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods. The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.
Inventory: The Company evaluates the carrying value of inventory on a quarterly basis to determine if the carrying value is recoverable at estimated selling prices. To the extent that estimated selling prices do not exceed the associated carrying values, inventory carrying values are written down. In addition, the Company makes judgments as to the future demand requirements and compares that with the current or committed inventory levels. Reserves are established for inventory levels that exceed future demand. It is possible that reserves over and above those already established may be required in the future if market conditions for our products should deteriorate.
Results of Operations
The Company is in the business of designing, manufacturing and marketing communications security equipment. The Company receives orders for equipment from customers, which may take several months or longer to manufacture and ship. With the exception of long-term contracts where revenue is recognized under the percentage of completion method, the Company generally recognizes income on a unit-of-delivery basis. This latter method can cause revenues to vary widely from quarter to quarter and therefore quarterly comparisons of revenue may not be indicative of any trend.
Three Months ended June 29, 2002 as compared to the Three Months ended June 30, 2001
During the quarter ended June 30, 2001, the Company recorded certain special charges, which included a $1,604,000 write-off of excess inventory, a write-off of work in process inventory of $340,000, a write-off of goodwill of $307,000 and a write-off of a deferred tax asset of $158,000. Excess inventory charges were the result of weakening demand for certain product lines. Correspondingly, goodwill associated with these product lines was also written off. Work in process inventory was written off as a result of delayed or lost development contracts bids.
The Company showed a net loss of $664,000 for the third quarter of fiscal 2002 as compared to a net loss of $958,000, before excess inventory and other special charges for the same period in fiscal 2001. This increase in profitability is primarily attributable to a higher sales volume and the decrease product development expenses.
Net sales for the quarter ended June 29, 2002 and June 30, 2001, were $520,000 and $254,000, respectively. Gross profit for the third quarter of fiscal 2002 was $206,000 as compared to gross loss of $11,000, before excess inventory charges, for the same period of fiscal 2001. This resulted in a significant increase in gross profit for the quarter. Gross profit expressed as a percentage of sales was 40% in 2002 as compared to loss for the same period in fiscal 2001. These increases were primarily attributable to higher sales volume and higher margin sales in the current quarter as compared to a year ago.
Selling, general and administrative expenses for the third quarter of fiscal 2002 were $598,000 and $596,000, before the write-off of goodwill for the same quarter in fiscal 2001. This decrease was primarily attributable to a $3,000 reduction in general and administrative expenses and a reduction of $7,000 in selling and marketing costs.
The decrease in general and administrative costs was substantially attributable to a write-off of amortizable assets in fiscal 2001, which has resulted in a reduction of $58,000 in amortization expense in the current fiscal quarter. Also, general and administrative efforts on bid & proposal work also contributed to the decrease by approximately $17,000. These decreases were offset by the write-off of prepaid finance costs of approximately $78,000 associated with the terminated revolving line of credit.
The decrease in selling costs was primarily attributable to decreased commissions, product evaluation and demonstration costs totaling $40,000. This decrease was offset by an increase in bid and proposal work of approximately $36,000.
Product development costs for the quarter ended June 29, 2002 were $273,000 compared to $363,000, before the write-off of canceled and delayed contracts in process for the same period in fiscal 2001. This decrease of 25% was attributable to a decrease associated with a reduced headcount and consultants of approximately $57,000. In addition, a shift from product development work to bid & proposal work also contributed to the decrease by approximately $25,000.
Nine Months ended June 29, 2002 as compared to the Nine Months ended June 30, 2001
During the quarter ended June 30, 2001, the Company recorded certain special charges, which included a $1,604,000 write-off of excess inventory, a write-off of work in process inventory of $340,000, a write-off of goodwill of $307,000 and a write-off of a deferred tax asset of $158,000. Excess inventory charges were the result of weakening demand for certain product lines. Correspondingly, goodwill associated with these product lines was also written off. Work in process inventory was written off as a result of delayed or lost development contracts bids.
The Company showed a net loss of $1,099,000 for the nine months ended June 29, 2002 as compared to a net loss of $2,431,000, before all special charges, for the same period in fiscal 2001. This increase in profitability is primarily attributable to the decrease in selling, general and administrative expenses.
Net sales for the nine months ended June 29, 2002 and June 30, 2001, were $2,552,000 and $2,354,000, respectively. Gross profit for the nine months ended June 29, 2002 was $1,481,000 as compared to gross profit of $1,257,000, before excess inventory charges for the same period of fiscal 2001. Gross profit
expressed as a percentage of sales was 58% and 53%, before excess inventory charges for fiscal 2002 and 2001, respectively. The increase in gross profit was primarily attributable to slightly higher margin sales in fiscal 2002.
Selling, general and administrative expenses for the nine months ended June 29, 2002 were $1,605,000 and $2,748,000, before the write-off of goodwill, for the same period in fiscal 2001. This decrease of 42% was primarily attributable to $400,000 reduction in general and administrative expenses and a reduction of $743,000 in selling and marketing costs.
The decrease in general and administrative costs were attributable to a $42,000 decrease in personnel related costs associated with a reduced headcount and overall cost reductions of approximately $184,000 associated with a restructuring program. In addition, the write-off of amortizable assets in fiscal 2001 has resulted in a reduction of approximately $175,000 in amortization expense in the current period. These decreases were offset by the write-off of prepaid finance costs of approximately $78,000 associated with the terminated revolving line of credit.
The decrease in selling costs was primarily attributable to decreased third party sales commissions and marketing contracts totaling $243,000. The decrease also included a reduction in product evaluation and demonstration costs, travel, payroll and benefit related costs associated with the lower sales volume, of approximately $194,000. During fiscal 2001 the Company developed a major proposal, conducted a marketing study and a market research project. These efforts were not repeated in fiscal 2002 and resulted in lower expenditures of approximately $268,000 in the current fiscal quarter.
Product development costs for the nine months ended June 29, 2002 were $993,000 compared to $934,000, before the write-off of canceled and delayed contracts in process for the same period in fiscal 2001. This increase of 6% was primarily attributable to an increase in engineering efforts to develop bids and proposals of approximately $156,000, which is classified as a selling expense and a shift away from billable product development in fiscal 2002, which increased product development cost in fiscal 2002 by approximately $206,000. This was offset by a decrease associated with a reduced headcount and consultants of approximately $291,000.
Recent Accounting Pronouncement
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company is required to apply the new rules on accounting for goodwill and other intangible assets by fiscal year 2003. The Company currently does not have any goodwill or intangible assets and does not expect a material impact from the adoption of these standards.
In August 2001, the Financial Accounting Standards Board issued SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and amends the accounting and reporting provisions of APB Opinion No. 30. Reporting the Results of Operations -- Reporting the Effect of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. The provisions of FAS 144 will be effective for fiscal years beginning after December 15, 2001.
In June 2002, the Financial Accounting Standards Board issued SFAS 146 Accounting for Costs Associated with Exit or Disposal Activities" ("FAS 146"). This Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinuing operation, plant closing or other exit or disposal activity. FAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company has not assessed the impact of the adoption of FAS 146 on its financial position or results of operations.
Liquidity and Capital Resources
Cash and cash equivalents decreased by $971,000 or 60% to $648,000 as of June 29, 2002, from a balance of $1,619,000 at September 29, 2001. This decrease was primarily due to the Company's net loss for the period.
The Company has terminated its $1 million asset-based credit facility with Coast Business Credit ("Coast"). The line carried an interest rate of prime plus 1/2% (5.25% at June 29, 2002). This revolving line of credit was collateralized by substantially all the assets of the Company and required no compensating balances. There were no outstanding borrowings during the quarter.
The Company has received a preliminary commitment from the Small Business Administration under their Export Working Capital Program for up $1,111,111. The Company is currently negotiating with a bank to implement this working capital line.
As of June 29, 2002, the Company has two outstanding standby letters of credit amounting to $45,400, which are secured by compensating cash collateral.
The Company's revenues have historically included significant transactions with foreign governments and other organizations. The Company expects this trend to continue. The timing of these transactions has in the past and will in the future have a significant impact on the cash flow of the Company. Delays in the timing of significant expected sales transactions would cause a significant negative effect on the Company's operations, however the Company has some ability to mitigate this effect through further cost cutting measures. The Company believes there is currently sufficient cash and cash equivalents to meet its working capital needs for at least the remainder of the year.
The Company has incurred losses year to date as well as in recent years. This, accompanied by the recent economic downturn and the slowdown of capital spending, has resulted in lower sales volume, which has required the Company to continue utilizing significant amounts of cash and cash equivalents to fund operations.
The Company has reduced our workforce and overhead expenses as described above and curtailed capital spending and other uses of cash. But, in order to achieve and sustain profitability and to get to positive cash flow from operations, the Company must grow its revenue. It is uncertain as to whether or when this will occur.
Assuming that the Company can execute on its current plans to grow revenue, and the business climate for spending does not worsen, management believes that with the cash generated from operations and the current cash and cash equivalents, that the Company will have sufficient resources to meet its working capital requirements for at least the next twelve months. However, if there are no recoveries or improvements in the business or the economy worsens, we may need to take other actions in order to fund our working capital resource requirements.
If business continues at the same rate as in the current quarter and we do not secure a new credit facility or no further actions are taken, the Company could run out of cash in early fiscal 2003.
Additionally, the financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, and classification and amounts of liabilities that might be necessary should the Company be unable to continue funding its operations.
To date, inflation has not had a material impact on our financial results.
PART II. Other Information
Item 1. Legal Proceedings:
There are no current matters pending.
Item 2. Changes in Securities and Use of Proceeds:
Not applicable.
Item 3. Defaults Upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other Information:
Certification Under Sarbanes-Oxley Act
Our chief executive officer and chief financial officer have furnished to the SEC the certification with respect to this Report that is required by Section 906 of the Sarbanes-Oxley Act of 2002.
NASDAQ Delisting Notification
The Company has been notified by The NASDAQ Stock Market that its common stock has failed to comply with the continued listing requirement of having a market value of public float greater than or equal to $1,000,000 and the requirement of having a minimum share price of $1.00. In accordance with the notification received from NASDAQ if the Company is unable to demonstrate compliance for ten consecutive days the Company maybe delisted from the NASDAQ SmallCap Market. The deadlines for achieving compliance are October 7, 2002 regarding the minimum $1,000,000 market value of public float and December 23, 2002 regarding the minimum share price of $1.00.
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits:
10.9 First Amendment to Employment Agreement between the Company and Carl H. Guild Jr.
b. Reports on Form 8-K:
None.
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.
August 12, 2002 By: /s/ Carl H. Guild, Jr.
--------------- --------------------------------
Date Carl H. Guild, Jr., President and
Chief Executive Officer
August 12, 2002 By: /s/ Michael P. Malone
--------------- --------------------------------
Date Michael P. Malone,
Chief Financial Officer
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EXHIBIT 10.9
TECHNICAL COMMUNICATIONS CORPORATION
FIRST AMENDMENT TO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
OF
CARL H. GUILD, JR.
This Amendment to the Amended and Restated Employment Agreement is entered into on November 8, 2001 by and between Technical Communications Corporation, a Massachusetts corporation (the "Company"), with a principal place of business at 100 Domino Drive, Concord, Massachusetts 01742, and Carl H. Guild, Jr., the Company's Chief Executive Officer.
The Company and Executive entered into an Amended and Restated Employment Agreement effective as of November 19, 1998 (the "Employment Agreement"). The parties to the Employment Agreement have agreed to certain modifications to the terms and provisions of the Employment Agreement and desire to amend the Employment Agreement to reflect those modifications.
NOW, THEREFORE, in consideration of the premises and mutual promises made herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned hereby agree as follows:
1. Amendment to Employment Agreement. The Employment Agreement is hereby amended, effective as of the date hereof, by adding Sections 2.6 and 2.7 as follows:
"2.6 In the event of a Change in Control (as hereinafter defined) of the Company where you (i) resign within Twenty four (24) months after such an event, or (ii) are terminated without Cause by the Company within twenty four (24) months after such an event, any unvested option shares held by you shall automatically vest and become immediately exercisable, and you shall be entitled to receive Severance Pay in an amount, payable in a lump sum within thirty (30) days after the effective date of such resignation or termination equal to twenty four (24) months' Base Salary at the then current level (as set forth on Exhibit A attached hereto), less applicable taxes, other required withholdings, and any amounts you may owe the Company, plus all accrued but unpaid expenses and vacation time (the "Change in Control Payment"). In the event that any payment to be received by you pursuant to this Section 2.6 or the value of any acceleration right in any Company stock options you may hold in connection with the Change in Control of the Company would be subject to an excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), whether in whole or in part as a result of being an "excess parachute payment" within the meaning of such terms in Section 280G (b) of the Code, the amount payable under this Section 2.6 shall be increased (grossed up) to cover the excise tax liability due under the Section 4999 of the Code. Notwithstanding the preceding sentence, (a) no portion of such Change in Control Payment or any acceleration right which tax counsel, selected by the Company's independent auditors and
acceptable to you, determines not to constitute a "parachute payment" within meaning of Section 280G(b) (2) of the Code will be taken into account and (b) no portion of the Change in Control Payment which tax counsel, selected by the Company's independent auditors and acceptable to you, determined to be reasonable compensation for services rendered within the meaning of Section 280G9b) (4) of the Code will taken into account.
2.7 For purposes of Section 2.6 the term "Change in Control" shall mean the occurrence of any of the following:
(a) any person or entity, including a "group" as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended, other than the Company, a wholly owned subsidiary of the Company, or any employee benefit plan of the Company or its subsidiaries, becomes the beneficial owner of the Company's securities having fifty-one percent (51%) or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election for directors of the Company; or
(b) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Company or any successor corporation or entity entitled to vote generally in the election of directors of the Company or such other corporation or entity after such transaction, are held in the aggregate by holders of the Company's securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; or
(c) the approval of the stockholders of the Company of a plan of liquidation."
2. Entire Agreement. Except for the provisions added hereby, the remainder of the terms and provisions of the Employment Agreement shall remain in full force and effect. The Employment Agreement and this Amendment, together with the documents referred to therein and herein, constitute the entire agreement between the parties hereto pertaining to the subject matter thereof and hereof.
3. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument.
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IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company, by its duly authorized representative, and by Carl H. Guild, Jr., as of the date first above written.
TECHNICAL COMMUNICATIONS CORPORATION
By: /s/ Robert T. Lessard May 13, 2002
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Robert T. Lessard, Director, duly authorized
/s/ Carl H. Guild Jr. May 13, 2002
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Carl H. Guild, Jr.
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