10-K 1 0001.txt FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission File Number September 30, 2000 0-8588 ------------------ ------ or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________TO_______________. Technical Communications Corporation ------------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 04-2295040 --------------------------------------------- ----------------------------------- (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization)
100 Domino Drive, Concord, MA 01742-2892 ---------------------------------------- --------------------------- (Address of principal executive offices) (Zip code) (978) 287-5100 ------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: None None ------------------------------- ---------------------------- (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.10 Par Value ---------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Based on the closing price of the stock as of December 15, 2000, the aggregate market value of the registrant's Common Stock, par value $ .10 per share, held by non-affiliates of the registrant as of December 15, 2000, was approximately $2,451,352. The number of shares of the registrant's Common Stock, par value $ .10 per share, outstanding as of December 15, 2000, was 1,308,291. 2 FORWARD-LOOKING STATEMENTS -------------------------- NOTE: THE DISCUSSIONS IN THIS FORM 10-K, 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. THESE AND OTHER RISKS ARE DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THIS FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000. PART I Item 1. BUSINESS (a) General ------- The Company was organized in 1961 as a Massachusetts corporation to engage primarily in consulting activities. However, since the late 1960s its business has consisted entirely of the design, development, manufacture, distribution, marketing and sale of communications security devices and systems. (b) Information as to Industry Segments ----------------------------------- The Company's business consists of only one industry segment, which is the design, development, manufacture, distribution, marketing and sale of communications security devices and systems. (c) Description of Business ----------------------- The Company's products consist of sophisticated electronic devices which enable users to transmit information in an encrypted format and permit receivers to reconstitute the information in a deciphered format. The Company's products can be used to protect confidentiality in communications between radios, telephones, facsimile machines and data processing equipment over wires, fiber optic cables, radio waves and microwave and satellite links. A customer may order and receive equipment, which is specially programmed to scramble transmissions in accordance with a code to which only the customer has access. The principal markets for the Company's products are financial institutions, foreign and domestic governmental agencies, law enforcement agencies and multinational companies requiring protection of mission-critical information. (d) Products -------- Products currently available or under development provide communications security solutions for mission-critical networks, voice and facsimile, centralized key and device management, and military ciphering applications. Government Systems The DSD 72A-SP High Speed Data Encryptor is a rugged military bulk ciphering system that provides a maximum level of cryptographic security for synchronous data networks operating at up to 34 Mbps. The product supports a wide variety of interfaces and easily integrates into existing networks. Reliable secure communication is ensured with crypto synchronization methods built to maintain connections in error and jamming environments such as radio relay networks, missile systems and microwave systems. The DSP 9000 Narrowband Radio Security family of products provide strategic security for voice and data communications sent over HF, VHF and UHF channels in full and half-duplex modes. Designed for rugged military environments, the DSP 9000 provides exceptional voice quality over poor line connections making it an ideal security solution for military aircraft, naval, base station and manpack radio 3 applications. The product provides automated key management for optimum security and ease of use. It is also radio independent because software programmable interfaces allow radio interface levels to be changed without configuring the hardware. Base station, handset and implant board configurations are available options with the DSP 9000. Additionally, the DSP 9000 is compatible with the Company's CSD 3324E secure telephone to enable "office-to-field" communications. The CSD 3324, Secure Fax and Data system protects telephone, fax and data communications even over degraded line conditions. This product is designed to be a perfect solution for government or military officials based in remote locations. Secure Office Systems The CSD 3600 Secure Portable Telephone Attachment may be placed between any telephone and handset worldwide to provide high-end digital security. Small and portable, the CSD 3600 operates over both digital and analog telephone lines, and is designed to ensure protection through new and unique random keys negotiated with each communication session. The CSD 3700 Fax Security System is a highly secure, automatic transmission fax system that connects to any Group 3-fax machine via a 2-wire interface. Security protection is achieved with Diffie-Hellman negotiated key technology and randomly generated keys that are unique to each communication session. Open and closed networks are supported by the CSD 3700 to enable an open exchange of secure documents in the industrial marketplace or restrict secure communications to only authorized parties in highly confidential or government applications. The 4100 Executive Secure Telephone offers strategic level voice and data security in a full-featured executive telephone package. Exceptional voice quality is achieved with three different voice-coding algorithms. The product supports multiple security layers such as automated key management, authentication, certification and access control. Video and telephone conferencing options are also available. Network Security Systems The CipherONE(TM) family of Network Security Systems is a family of high- speed, high-performance hardware/software-based encryption products for LAN/WAN and Internet applications and includes Network Security Management. All of the systems have been designed for complete node-to-node protection and therefore provide node authentication and access control, as well as data integrity. This family of products also utilizes a modular architecture that permits the software to be updated as networks migrate to emerging protocols, thereby protecting the user's investment. Network transparent, the products support U.S. Government-backed Triple DES and proprietary encryption algorithms as well as ANSI X9.52 and public key management. Specific products within this family support Frame Relay, Internet (IP) and X.25 protocols. The Cipher x 7100 Frame Relay Network Encryptor is a high-speed end to end frame relay encryption system and is easily configured locally with Cipher Site Manager or remotely with KEYNET. The Cipher x 7200 IP Network Encryptor provides encryption security at the Internet Protocol (IP) layer and is easily configured locally with Cipher Site Manager or remotely with KEYNET. The Cipher x 7200 has been awarded Federal Information Processing Standard (FIPS 140-1) Level 3 certification, which allows the product to compete for US and Canadian federal security acquisition, which require FIPS 140-1 Compliance. KEYNET Network Security Management is a Windows NT-based key and security device management system that can centrally and simultaneously manage an entire CipherONE Security Systems Network, including those on mixed networks such as Frame Relay and IP. KEYNET has an intuitive graphical user interface (GUI), making it very easy to use. The system securely generates, distributes and exchanges keys, sets address tables, provides diagnostics and performs automatic polling and alarms from a central and remote location. KEYNET also operates with SNMP-based management systems for ease-of-use and provides instant alarm notification. These high security measures facilitate central management while maintaining optimum security for mission-critical networks worldwide. (e) Competition ----------- The Company has several competitors, including foreign-based companies, in the communications security device field. Few of these competitors offer products that compete across all of the Company's product offerings and none are believed to have a dominant share of the market. Many of these competitors, however, are companies, which have greater financial and other resources than the Company. The Company believes its principal competitors include Crypto AG, Racal Electronics Plc, Cylink Corporation, Motorola Inc., Omnisec AG, Cisco Systems, SafeNet, Inc. and TimeStep Corporation. 4 The Company competes based on its service, the operational and technical features of its products, its sales expertise and pricing. The Company sells directly to customers, original equipment manufacturers and value-added resellers, using its in-house sales force as well as domestic and international representatives and distributors. (f) Sales and Backlog ----------------- In fiscal 2000, the Company had two customers, representing 41% (21% and 20%) of net sales. In fiscal 1999, the Company had three customers, representing 60% (32%, 17% and 11%) of net sales. In fiscal 1998, the Company had two customers representing 71% (54% and 17%) of net sales. The Company expects that sales to relatively few customers will continue to account for a high percentage of the Company's revenues in any accounting period in the foreseeable future. A reduction in orders from any such customer, or the cancellation of any significant order and failure to replace such order with orders from other customers, would have a material adverse effect on the Company's business, financial condition, and results of operations. The Company's backlog of firm orders as of September 30, 2000 was approximately $400,000, compared to approximately, $2,000,000 as of October 2, 1999. The Company expects to deliver substantially its entire backlog in fiscal year 2001. (g) Regulatory Matters ------------------ As a party to a number of contracts with the U.S. Government and its agencies, the Company must comply with extensive regulations with respect to bid proposals and billing practices. Should the U.S. government or its agencies conclude that the Company has not adhered to federal regulations, any contracts to which the Company is a party could be canceled and the Company could be prohibited from bidding on future contracts. Such a prohibition would have a material adverse effect on the Company. All payments to the Company for work performed on contracts with agencies of the U.S. government are subject to adjustment upon audit by the U.S. Government Defense Contract Audit Agency, the General Accounting Office, and other agencies. The Company could be required to return any payments received from U.S. government agencies if it is found to have violated federal regulations. In addition, U.S. government contracts may be canceled at any time by the government with limited or no penalty. Contract awards are also subject to funding approval from the U.S. government, which involves political, budgetary and other considerations over which the Company has no control. The Company's security products are subject to export restrictions administered by the U.S. Department of Commerce, which licenses the export of encryption products, subject to certain technical restrictions. In addition, U.S. export laws prohibit the export of encryption products to a number of hostile countries. Although to date the Company has been able to secure U.S. export licenses, there can be no assurance that the Company will continue to be able to secure such licenses in a timely manner in the future, or at all. (h) Manufacturing and Technical Expertise ------------------------------------- The Company subcontracts a large portion of its manufacturing operations. Many of the components used in the Company's products are standard components available from more than one supplier. The Company has, or believes that it could develop without significant delay, alternative sources for almost all materials and components used in the manufacture of its products. The Company's internal manufacturing process consists primarily of adding critical components, final assembly, quality control, testing and burn-in. Delivery time varies depending on the products and options ordered. The Company's technological expertise and experience, including certain proprietary rights, which it has developed and maintains as trade secrets, are crucial to the conduct of the Company's business. Management is of the opinion that, while patent protection is desirable with respect to certain of its products, none of the Company's patents are material to the conduct of its business. Eight patents have been issued to the Company. The Company has a number of trademarks for various products, including TCC, CipherONE and CIPHER X. The Company does not deem any of its trademarks to be material to the conduct of its business. 5 (i) Research and Development ------------------------ Research and development is undertaken by the Company on its own initiative. In order to develop the technology needed to compete successfully, the Company must attract and retain qualified personnel, improve existing products and develop new products. No assurances can be given that the Company will be able to hire and train such technical management and sales personnel. During the twelve-month periods ended September 30, 2000, October 2, 1999 and October 3, 1998, the Company spent $1,156,692, $1,935,859 and $1,414,746, respectively, on product development. In addition, product development is also, undertaken by the Company on a contract specific basis; the development costs associated with these contracts are included in cost of sales. (j) Employees --------- As of September 30, 2000, the Company employed, approximately 50 persons. The Company believes that its relationship with its employees is good. (k) Foreign Operations ------------------ The Company is dependent upon its foreign sales. Although foreign sales were more profitable than domestic sales during fiscal years 2000 and 1999 because the mix of products sold abroad included more products with higher profit margins than the mix of products sold domestically, this does not represent a predictable trend. For example, during fiscal year 1996 foreign and domestic sales were equally profitable. Sales to foreign markets have been and will continue to be affected by the stability of foreign governments, economic conditions, export and other governmental regulations, and changes in technology. The Company attempts to minimize the financial risks normally associated with foreign sales by utilizing letters of credit confirmed by U.S. banks and by using foreign credit insurance. Foreign sales contracts are usually in U.S. dollars. When there is a tax advantage to the Company, export sales are conducted through its wholly owned subsidiary, TCC Foreign Sales Corporation (TCC FSC). TCC FSC is organized and incorporated in the U.S. Virgin Islands. As a qualified Foreign Sales Corporation under the Internal Revenue Code, TCC FSC is able to take advantage of tax incentives enacted by Congress to encourage export sales. Information regarding the Company's revenue from export sales for the past five years is set forth in Item 6, "SELECTED FINANCIAL DATA". Item 2. PROPERTIES The Company leases its headquarters located in Concord, Massachusetts, under an operating lease. The premises are used for manufacturing and house the Company's executive offices. On October 16, 1992, the Company signed its current lease on its headquarters. The Company has renewed the lease on its headquarters located in Concord, Massachusetts through December 31, 2002. Future minimum lease payments amount to $171,216 in fiscal 2001, $171,216 in fiscal 2002 and $42,804 in fiscal 2003. The Company also retains an option to purchase the building at fair market value, but not to exceed $2,262,000, exercisable at the end of the lease term, if elected. Management believes the current facility is capable of meeting the Company's anticipated needs for the foreseeable future. Item 3. LEGAL PROCEEDINGS On November 19, 1998, the Company settled the shareholder litigation initiated by Philip Phalon and Dr. Mahmud Awan, which had been pending in Middlesex County, Massachusetts Superior Court since February 1998. Pursuant to such settlement, the Company, Arnold McCalmont, Herbert A. Lerner, Robert T. Lessard, Carl H. Guild, Jr., Mitchell B. Briskin, Donald Lake and Thomas E. Peoples entered into a settlement agreement with M. Mahmud Awan and Philip A. Phalon. The settlement agreement and standstill agreement set forth mutual full releases as to the litigation and also include provisions requiring, among other things, (i) the Company to reimburse the former proxy contestants' expenses in payments aggregating $395,000, (ii) the dissolution of the Awan/ Phalon group created to facilitate the proxy contest and (iii) the former proxy contestants to abide by certain standstill provisions until October 1, 2000. 6 The Company was the defendant in GERARD v. TECHNICAL COMMUNICATIONS CORPORATION, ET AL., filed in the Superior Court of the Commonwealth of Massachusetts in 1999. This case arose from disputes concerning the hiring and termination of Roland Gerard, former president of the Company. The Complaint alleges state law claims for breach of contract, wrongful termination, and civil conspiracy. During the fiscal year 2000 the Company settled this lawsuit. An earlier complaint brought by Mr. Gerard in the Federal court, which included the state claims, and a federal securities claim was dismissed in July 1999; the securities claims were dismissed with prejudice. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held on February 7, 2000. The meeting was conducted for the purpose of (i) electing two Class II Directors, each to serve for a term of three years and (ii) ratifying the election of the Company's independent auditors. The ratification of the election of the Class II Directors was approved with 1,174,858 votes in favor, 45,777 votes against and -0- votes abstaining. The ratification of the Company's auditors was approved with 1,164,186 votes in favor, 7,942 votes against and 1,700 votes abstaining. PART II Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, $ .10 par value, is traded on the over-the-counter market, on the NASDAQ SmallCap Market System, under the symbol "TCCO". The following table presents low and high bid information for the time periods specified. The over-the-counter market quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions. The over-the-counter market quotations have been furnished by The NASDAQ Stock Market, Inc. Price ----- Title of Class Quarter Ending Low High -------------- -------------- ----- ------ Common Stock, $.10 par value 1/1/2000 2.563 7.500 4/1/2000 5.188 10.813 7/1/2000 2.375 6.125 9/30/2000 2.531 3.969 01/02/99 3.375 6.000 04/03/99 2.375 4.500 07/03/99 1.625 3.375 10/02/99 2.250 3.125 The Company has paid no cash dividends in the past and has no plans to pay cash dividends in the forseeable future. As of December 15, 2000, there were approximately 1,200 record holders of Common Stock, $ .10 par value. On December 15, 2000, the closing price of the Common Stock was $2.00. 7 Item 6. SELECTED FINANCIAL DATA
Selected Financial Data: Fiscal Years Ended: September 30, October 2, October 3, September 27, September 28, 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------------------------------- Net Sales: Domestic $ 2,446,083 $ 1,239,275 $ 1,631,459 $ 2,734,690 $ 3,633,425 Foreign (Note A) 3,128,025 5,194,408 12,224,322 9,523,948 10,379,377 -------------------------------------------------------------------------------------------------------------------- Total net sales $ 5,574,108 6,433,683 13,855,781 12,258,638 14,012,802 Gross profit 3,197,675 3,305,192 8,393,173 7,104,975 8,231,388 Net income (loss) (1,740,314) (1,218,542) 481,603 (1,243,501) 532,147 Net income (loss) per share of common stock Basic $ (1.35) $ (.96) $ .38 $ (.98) $ .42 Diluted $ (1.35) $ (.96) $ .37 $ (.98) $ .41 Weighted average shares outstanding Basic 1,289,523 1,264,626 1,281,924 1,270,625 1,257,384 Diluted 1,289,523 1,264,626 1,288,007 1,270,625 1,298,387
As of: September 30, October 2, October 3, September 27, September 28, 2000 1999 1998 1997 1996 --------------------------------------------------------------------------------------------------------------------------------- Assets $ 8,402,717 $10,660,915 $16,172,729 $12,892,899 $16,000,033 Line of credit/current portion, long-term debt (B) - - 2,250,000 - 1,145,175 Long-term obligations - - - - 1,200,000 ---------------------------------------------------------------------------------------------------------------------------------
Notes to Selected Financial Data (A) A summary of foreign sales by geographic area may be found in Note 15 of the Notes to Consolidated Financial Statements. (B) At October 3, 1998, amount represents outstanding borrowings against line of credit. ================================================================================ 8 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and the results of operations should be read in conjunction with the Company's audited consolidated financial statements and notes thereto appearing elsewhere herein. Certain Factors Affecting Future Operating Results -------------------------------------------------- The discussions in this Form 10-K, including any discussion of or impact, expressed or implied, on the Company's anticipated operating results and future earnings, including statements about the Company's ability to achieve growth and profitability, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. The Company's operating results may differ significantly from the results indicated by such forward-looking statements. The Company's operating results may be affected by many factors, including but not limited to future changes in export laws or regulations, changes in technology, the effect of foreign political unrest, the ability to hire, retain and motivate technical, management and sales personnel, the risks associated with the technical feasibility and market acceptance of new products, changes in telecommunications protocols, the effects of changing costs, exchange rates and interest. These and other risks are detailed from time to time in the Company's filings with the Securities and Exchange Commission, including this Form 10-K for the fiscal year ended September 30, 2000. Year 2000 Compliance Update --------------------------- Technical Communications Corporation has been actively addressing the Year 2000 (Y2K) problem since April 1998. Generally speaking, the Y2K problem results from the use of two-digit, rather than four-digit, date years in computer systems and software applications. As a result of these efforts, the Company believes that all of its material information technology systems and critical non-information technology systems are year 2000 compliant. The Company believes that all of the material products that it currently manufactures and sells are year 2000 compliant or are not date sensitive. In addition, the Company is not aware of any significant vendor that has experienced material disruption due to year 2000 issues. We will continue to monitor our systems and vendors to ensure that issues do not arise in the coming months. Although we do not anticipate any future significant business interruption, we can give no assurance that such interruption will not occur. Results of Operations --------------------- FISCAL 2000 COMPARED TO FISCAL 1999 ----------------------------------- Consolidated net sales for the year ended September 30, 2000, were $5,574,000 compared with sales of $6,434,000 for the prior fiscal year. This decrease of $860,000, or 13%, is mainly attributed to a delay in the receipt of anticipated orders. Gross profit for fiscal year 2000 was $3,198,000, compared to $3,305,000 in fiscal 1999, a decrease of 3%. Gross profit expressed as a percentage of sales was 57% in fiscal 2000 compared to 51% in the prior year, which was primarily due to the lower sales volume, improved product mix and tighter cost controls. Selling, general and administrative expenses decreased 10% from $4,312,000 in fiscal 1999 to $3,874,000 for the year just ended, primarily attributable to approximately $475,000 in costs associated with the settlement of litigation in fiscal 1999 and was offset by $147,000 in costs associated with the settlement of litigation discussed in Note 16 to the financial statements. In addition payroll and other administrative costs have decreased due to the continued emphasis on expense controls. Product development costs in fiscal 2000 were $1,157,000, compared to $1,936,000 in fiscal 1999. The $779,000, or 40%, decrease was primarily attributable to a shift in development work from internal product development to billable product development. Investment income earned during fiscal 2000 was $267,000, compared to $1,318,000 in fiscal 1999. Included in investment income for fiscal 1999 is a one-time gain on the sale of an investment of $1,151,000. The Company showed a net loss of $1,740,000 for fiscal 2000 as compared to a net loss of $1,219,000 for the same period in fiscal 1999. The decrease in profitability is primarily attributable to the decreased sales, which was partially offset by the decrease in operating spending as described above. However, the current year did not recognize any income tax benefit associated with the current year loss and in addition included a write down of the previous years net deferred tax asset by $173,000 due to continued losses affecting the Company's ability to recognize future benefit from the carryforward of net operating losses. The 1999 income tax benefit amounted to $406,000. The effects of inflation and changing costs have not had a significant impact on sales or earnings in recent years. As of September 30, 2000, none of the Company's monetary assets or liabilities were subject to foreign exchange risks. The Company usually includes an inflation factor in its pricing when negotiating multi-year contracts with customers. FISCAL 1999 COMPARED TO FISCAL 1998 ----------------------------------- Net sales for the years ended October 2, 1999 and October 3, 1998, were $6,434,000 and $13,856,000, respectively. This decrease of 54% in net sales is attributed to variability in revenue recognition as a result of the timing of shipments as well as delays in the receipt of some anticipated orders. More specifically, weakened economic conditions in many countries resulted in reduced order flow from our traditional international government markets. Gross profit for the year ended October 2, 1999 was $3,305,000, as compared to gross profit of $8,393,000 for the same period of fiscal year 1998. This represented a 61% decrease in gross profit for the period. Gross profit expressed as a percentage of sales was 51% in 1999 as compared to 61% for the same period in fiscal year 1998. The disparity between the two fiscal years is attributed to the negative impact of a higher percentage of fixed costs due to the lower sales volume and the sale of a less favorable mix of lower margin products during 1999. Selling, general and administrative expenses were $4,312,000 for the year ended October 2, 1999 and were $6,221,000 for fiscal year 1998. This decrease of 31% was primarily attributable to a decrease of $1,506,000 in payroll and travel related costs and contract services support, associated with the lower sales volume and the continued emphasis on expense controls. In addition, there was a decrease in legal fees of $222,000 attributed to the settlement of most litigation in early 1999 and a reduction in bad debt expense of $187,000 due to the completion of a major contract in 1998, which required substantial coverage. These decreased costs were offset by an increase in product demonstration costs of $99,000 and commissions to third party representatives of $125,000. Product development costs for the year ended October 2, 1999 were $1,936,000 compared to $1,415,000 for the same period in fiscal 1998. This increase of 37% was attributable to the continued commitment to new product development, particularly the Cipher X 7000 series product line, and lower volume of billable development contracts. As a result of the Company's increase in cash available for investment and no borrowings on its line of credit, net interest income increased from a net expense of $118,000 during fiscal 1998 to a net income position of $143,000 for fiscal 1999. The Company incurred a net loss of $1,219,000 for the year ended October 2, 1999 as compared to net income of $482,000 for the same period in fiscal 1998. Included in the net loss for fiscal 1999 is a one-time gain on the sale of an investment of $1,151,000 and a loss from operations of $2,943,000. The decrease in profitability is primarily attributable to the decrease in gross profit as described above. The effects of inflation and changing costs have not had a significant impact on sales or earnings in recent years. As of October 2, 1999, none of the Company's monetary assets or liabilities were subject to foreign exchange risks. The Company usually includes an inflation factor in its pricing when negotiating multi-year contracts with customers. Recent Accounting Pronouncements --------------------------------- In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition, presentation and disclosure in financial statements. Subsequently, the SEC has amended the implementation dates so that the Company is required to adopt the provisions of SAB No. 101 in the fourth quarter of 2001. We are currently reviewing the impact of SAB No. 101, but we believe that it will not materially affect the Company's results of operations or financial position. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities". The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. In June 1999, FASB issued Statement of Financial Accounting Standards No. 137 (SFAS 137), "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133--an amendment of FASB Statement No. 133". This Statement has delayed the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. In June 2000, SFAS No. 133 was amended by Statement of Financial Accounting Standards No. 138 (SFAS 138), "Accounting for Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. Management does not expect the adoption of these statements to have a material impact on its financial position or results of operations. Liquidity and Capital Resources ------------------------------- Cash and cash equivalents increased by $783,000 or 33% to $3,122,000 as of September 30, 2000, from a balance of $2,339,000 at October 2, 1999. This increase was primarily due to the reduction of accounts receivable, which were partially offset by operating losses and a reduction in current liabilities. The current ratio remained substantially the same at 6.6:1 at September 30, 2000 compared to 6.7:1 as of October 2, 1999. In August 2000, the Company successfully negotiated a new $5 million asset-based credit facility with Coast Business Credit ("Coast"). The line carries an interest rate of prime plus 1/2% (10.0% at September 30, 2000). This revolving line of credit is collateralized by substantially all the assets of the Company and requires no compensating balances. There is one financial covenant associated with the line, which calls for a minimum net tangible worth starting at $6,250,000 and increasing over time based on certain criteria. The amount of borrowings is limited to a percentage of certain accounts receivable and inventory balances. At September 30, 2000 the Company was in default of the net worth covenant. Subsequently, Coast waived the default and modified the agreement to reduce the minimum net worth requirement for the future and added an interest coverage ratio requirement. In addition, Coast has suspended the Company's ability to request loans, of up to $500,000, against inventory balances. The line matures in August 2003. The Company believes this new credit facility, as amended will meet its current credit needs and its need for the foreseeable future. Previously the Company had a $5,000,000 revolving line of credit with Wainwright Bank and Trust Company at an interest rate of the bank's base rate plus 1/2 of 1%. This line of credit was secured by a pledge of substantially all the assets of the Company. This line matured on May 1, 2000 and was not renewed. As of September 30, 2000, the Company has outstanding standby letters of credit, which were supported by the line of credit amounting to $20,879. Wainwright Bank has agreed to honor these standby letters of credit until they mature on December 31, 2000. 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 impact the cash flow of the Company. Although the Company believes there are currently sufficient cash and available funds under the line of credit to meet its working capital needs, delays in the timing of significant transactions may cause the Company to reevaluate and adjust its operations. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure is in the area of interest rate risk. The Company's investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments. The Company may face exposure to movements in foreign currency exchange rates. Currently, all of the Company's business outside the United States is conducted in U.S. dollar-denominated transactions. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the index to the Financial Statements and Schedules under Part IV, Item 14, in this report. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Part III Item 10. DIRECTORS AND EXECUTIVE OFFICERS (a) Identification of Directors --------------------------- The following table sets forth the year each director first became a director, the position currently held by each director with the Company, their principal occupation during the past five years, any other directorships held by such person in any company subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or in any company registered as an investment company under the Investment Company Act of 1940, as amended, and their age. The terms of the Class I Directors expire at the 2001 Annual Meeting of Stockholders; the terms of the Class II Directors expire at the 2002 Annual Meeting of Stockholders and the terms of the Class III Directors expire at the 2003 Annual Meeting of Stockholders.
Name and Year First Positions and Offices Became a Director with the Company ----------------- ---------------- Dr. Mahmud Awan (1) (8) 1998 Director, Chairman of the Board 49 Class I Director David A. B. Brown (2) (8) 1998 Director 57 Class II Director Mitchell B. Briskin (3) 1998 Director 41 Class I Director Carl H. Guild, Jr. (4) 1997 Director, Vice Chairman of the 56 Class III Director Board, Chief Executive Officer and President Donald Lake (5) 1998 Director 56 Class III Director Robert T. Lessard (6) 1997 Director 60 Class II Director Thomas E. Peoples (7) 1998 Director 52 Class III Director
(1) Dr. Awan joined the Board of Directors and became Chairman of the Board on November 19, 1998. Dr. Awan has served as Chairman and Chief Executive Officer of TechMan International Corporation, a privately held manufacturer of fiber optic medical devices and communication systems, since 1982. Dr. Awan is also President/CEO of Sturbridge Finance limited, a venture capital firm based in Sturbridge, Massachusetts. (2) Mr. Brown joined the Board of Directors on November 19, 1998, filling a vacancy created by the resignation of Herbert A. Lerner. Since 1984, Mr. Brown has been the president of The Windsor Group, Inc., a business consulting firm focused on the oil industry and international operations. (3) Mr. Briskin, a Principal at Stonebridge Associates LLP, where he has worked since 1999, was re-elected to the Board of Directors in August 1998 in accordance with the terms of the settlement of litigation. From 1997 to 1999 Mr. Briskin was a principal at Concord Investment Partners. From 1996 to 1997 Mr. Briskin was attending Harvard Business School. From 1990 to 1995, Mr. Briskin was General Manager at General Chemical Corporation; previously, he was a lawyer with Patterson, Belknap, Webb & Tyler in New York City. (4) In conjunction with the legal settlements reached by the Company on November 19, 1998 and the appointment of Dr. Awan as Chairman of the Board, Mr. Guild was named to the new position of Vice Chairman of the Board on the same date. Mr. Guild had served as Chairman of the Board and Chief Executive Officer of the Company from February 13, 1998 until November 19, 1998; he continues to serve as Chief Executive Officer and President. Mr.Guild was elected to the Board on May 1, 1997 and had been an independent consultant to the Company from that time until February 13, 1998. From 1993 to 1997, he was a Senior Vice President with Raytheon Engineers and Constructors, Inc., a unit of Raytheon Company. (5) Mr. Lake has been a financial consultant to various government agencies since 1991. Before initiating his consulting practice, Mr. Lake served as Director of the International Banking Services Division of the American Security Bank in Washington, D.C. (6) Mr. Lessard was employed in a variety of management positions from 1966 through December 1995 at the U.S. National Security Agency ("NSA"), Department of Defense. During his final two years at NSA, Mr. Lessard was the Group Chief in the Operations Directorate responsible for communications and cryptographic technology. Since his retirement in December 1995, he has represented the Director of the National Security Agency on several special projects. (7) Mr. Peoples is a Senior Vice President of Gencorp, a publicly held manufacturer of automotive, polymer, aerospace and defense products, and has been employed by that Company since 1992. Previously, Mr. Peoples served as Manager of Business Development for Smart Munitions Programs at Raytheon Company. (8) Dr. Awan and Mr. Brown were elected pursuant to the settlement agreement set forth in Item 3. (b) Identification of Executive Officers ------------------------------------ The following table sets forth the names of all executive officers of the Company, excluding those who are also directors, the year each first became an executive officer, the position currently held by each officer of the Company, the principal occupation of each officer during the past five years, and the age of each officer. Name and Year Positions and Offices with First Became an Officer the Company Age ----------------------- ----------- --- John I. Gill (1) 1985 Executive Vice President 60 Michael P. Malone (2) 1998 Chief Financial Officer/ 41 Treasurer/Assistant secretary (1) Mr. Gill has been employed by the Company since August 1983. (2) Mr. Malone has been employed by the Company since November 1998. (c) Family Relationships -------------------- No director or executive officer is related to any other director or executive officer by blood or marriage. (d) Section 16(a) Beneficial Ownership Reporting Compliance ------------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers and directors, and persons who beneficially own more than ten percent (10%) of the Company's stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten percent (10%) beneficial owners are required by regulation to furnish the Company with copies of all Section 16(a) reports they file. Based solely on a review of the copies of such forms furnished to the Company and written representations from the executive officers and directors that no other reports were required, the Company believes that, during fiscal 2000, its executive officers, directors and greater than ten percent (10%) beneficial owners complied with all applicable Section 16(a) filing requirements, with the exception of the late filing of a Form 4 by the Company's Chairman, Dr. M. Mahmud Awan. Item 11. EXECUTIVE COMPENSATION (a) Summary Compensation Table -------------------------- The following tables set forth certain summary information concerning compensation paid or accrued by the Company during the past three fiscal years to its Chief Executive Officer and the other executive officers of the Company whose annual compensation during Fiscal Year 2000 exceeded $100,000 (hereafter referred to as the "named executive officers"):
Fiscal All Other Name and Principal Position Year Salary Bonus Compensation --------------------------- ---- ------ ----- ------------ Carl H. Guild, Jr. (4) 2000 $195,720 - $ 9,198(5) Chief Executive Officer and President 1999 $199,680 - $ 4,814(6) 1998 $126,548 - $125,502(7) John I. Gill 2000 $126,583 - $ 1,133(1) Executive Vice President 1999 $119,745 $19,700(3) $ 1,797(1) 1998 $118,591 - $ 1,493(1) Michael P. Malone (8) 2000 $106,734 - $ 1,601(2) Chief Financial Officer 1999 $ 84,349 - $ 1,118(2)
(1) Represents the Company's 25% match on the first 6% of Mr. Gill's fiscal year 401(k) contribution. (2) Represents the Company's 25% match on the first 6% of Mr. Malone's fiscal year 401(k) contribution. (3) This amount of $19,700 was paid to Mr. Gill for services rendered in fiscal year 1998. (4) Prior to his employment as Chief Executive Officer of the Company and his election as Chairman of the Board on February 13, 1998, Mr. Guild had been an independent consultant to the Company and a Director since May 1, 1997. (5) Includes income realized upon receipt of Company stock of $6,800 as a result of grants on November 18, 1999, February 7, 2000 and August 3, 2000 by the Company's Board of Directors and $2,398 representing the Company's 25% match on the first 6% of Mr. Guild's 2000 fiscal year 401(k) contribution. (6) Includes income realized upon receipt of Company stock of $2,000 as a result of a February 8, 1999 grant by the Company's Board of Directors and $2,814 representing the Company's 25% match on the first 6% of Mr. Guild's 1999 fiscal year 401(k) contribution. (7) Includes consultant's fees and expenses of $109,689 related to work performed in fiscal year 1997 and paid in fiscal 1998, as well as work performed prior to February 13, 1998 and paid in fiscal 1998. The total also includes Director's fees of $11,300 from the beginning of fiscal 1998 until February 13, 1998, income realized upon receipt of company stock of $3,015 as a result of the Company's August 14, 1998 grant of stock to members of its Board of Directors and $1,498 for the Company's 25% match on the first 6% of Mr. Guild's fiscal 1998 401(k) contribution. (8) Mr. Malone joined the Company during fiscal year 1999. (b) Stock Options ------------- Set forth below is an Option/SAR Grants table concerning individual grants of stock options and SARs made during fiscal 2000 to each of the named executive officers. Options/SAR Grants in Fiscal Year 2000
Number of Percent of Total Securities Options/SARs Exercise Underlying Options/ Granted to Employees of Base Expiration SARs Granted (1) Price ($/sh) Date ------------ --- ------------ ---- Carl H. Guild, Jr. 1,000 (2) 3.7% 5.100 2/7/2005 John I. Gill 5,000 (3) 18.5% 7.125 1/24/2010
(1) Options to purchase a total of 27,000 shares of the Company's Common Stock were granted to employees of the Company. (2) Common Stock options, which were granted to Mr. Guild under the 1991 Plan on February 7, 2000 are exercisable immediately. (3) Common Stock options, which were granted to Mr. Gill under the 1991 Plan on January 24, 2000 are exercisable 20% per year over five years. Set forth below is a table concerning each exercise of stock options (or tandem SARs) and freestanding SARs during fiscal 2000 by each of the named executive officers and the value at September 30, 2000 of unexercised options and SARs. Aggregated Option/SAR Exercises for Fiscal Year Ended September 30, 2000 and Fiscal Year Option/SAR Values
Value of Unexercised Number of Unexercised In-the-Money Options Shares Options at Fiscal Year-End at Fiscal Year End(1) -------------------------- --------------------- Acquired on Value Name Exercise Realized Exercisable Not Exercisable Exercisable Not Exercisable ---- -------- -------- ----------- --------------- ----------- --------------- Carl H. Guild, Jr. - - 154,945 (2) 18,000 (3) - - John I. Gill - - 1,000 (4) 4,000 (6) - - Michael P. Malone - - 2,000 (5) 3,000 (7) - -
-------------------------------------------------------------------------------- (1) Value is based on the difference between the option exercise price and the fair market value at September 30, 2000 ($2.75 per share) multiplied by the number of shares underlying the in-the-money portion of the option. In the money options are those options for which the fair market value of the underlying common stock is greater than the exercise price of the option. (2) This represents exercisable grants of options under the 1991 Plan to buy 12,000 shares granted on May 1, 1997 at the following exercise dates and prices: (i) 4,000 shares on May 1, 1998 at an exercise price of $8.875 per share (ii) 4,000 shares on May 1, 1999 at an exercise price of $9.76 per share (iii) 4,000 shares on May 1, 2000 at an exercise price of $10.74 per share; 40,000 shares granted on February 16, 1998 at the following exercise dates and prices: (i) 20,000 shares on February 16, 1998 at an exercise price of $5.000 per share: (ii) 10,000 shares on February 16, 1999 at $6.05 per share; and (iii) 10,000 shares on February 16, 2000 at an exercise price of $5.50; 945 shares granted on August 14, 1998 at an exercise price of $5.42 per share; 100,000 shares granted on November 18, 1998 at an exercise price of $4.00 per share; 1,000 shares granted on February 8, 1999 at an exercise price of $3.40 per share and 1,000 shares granted on February 7, 2000 at an exercise price of $5.10 per share. (3) This represents unexercisable grants of options under the 1991 Plan to buy 8,000 shares granted on May 1, 1997 at the following exercise dates and prices (i) 4,000 shares on May 1, 2001 at an exercise price of $11.81 per share and (ii) 4,000 shares on May 1, 2002 at an exercise price of $12.99 per share. This also represents unexercisable grants of options under the 1991 Plan to buy 10,000 shares granted on February 16, 1998, which vest on February 16, 2001 at $6.66 per share. (4) This represents exercisable grants of options under the 1991 Plan to buy 1,000 shares granted on January 24, 2000 at an exercise price of $7.125 per share. (5) This represents exercisable grants of options under the 1991 Plan to buy 2,000 shares granted on November 30, 1998 at an exercise price of $4.00 per share. (6) This represents unexercisable grants of options under the 1991 Plan to buy 4,000 shares granted on January 24, 2000 at 1,000 shares each on January 24, 2002, January 24, 2003, January 24, 2004 and January 24, 2005, respectively at an exercise price of $7.125 per share. (7) This represents unexercisable grants of options under the 1991 Plan to buy 3,000 shares granted on November 30, 1998 at 1,000 shares each on November 30, 2001, November 30, 2002, and November 30, 2003, respectively at an exercise price of 4.00 per share. Compensation of Directors ------------------------- Directors who were not regular employees of the Company received a fee of $1,200 for attendance at all meetings attended during fiscal years 2000 and 1999. In addition, each outside director is the recipient of an annual retainer of $2,800 paid in arrears in quarterly increments of $700. During fiscal years 2000 and 1999, outside directors also received a fee of $500 for each meeting of a committee of the Board of Directors they attended. At the 2000 Annual Meeting of the Board of Directors on February 7, 2000, the Company granted 1,000 immediately exercisable stock options to each of the seven directors, with a term of five years from the date of grant at an exercise price of $5.10, 85% of fair market value. In addition, a total of 3,500 shares of TCC common stock were granted to the seven directors at a price per share of $6.00, which was equal to fair market value on February 7, 2000. The directors also elected to receive Company stock in lieu of cash for their director's fees on November 18, 1999 and August 3, 2000. They were granted 585 shares each on November 18, 1999 at the fair market price on that day of $3.25 and 633 shares each on August 3, 2000 at the fair market price on that day of $3.00. At the 1999 Annual Meeting of the Board of Directors on February 8, 1999 1,000 immediately exercisable stock options were granted to each of the seven directors, with a term of five years from the date of grant at an exercise price of $3.40, 85% of fair market value. In addition, a total of 3,500 shares of TCC common stock were granted to the seven directors at a price per share of $4.00, which was equal to fair market value on February 8, 1999. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners ----------------------------------------------- The following table shows, as of December 15, 2000, the ownership of common stock of the Company by any person or group who is known to the Company to be the beneficial owner of more than 5% of the Company's common stock outstanding and entitled to vote as of such date. Beneficial Ownership Percent of Name and Address (Number of Shares) (1) Class (1) ---------------- ---------------------- --------- Royce & Associates, Inc. 106,700 (2) 8.2% (2) c/o Charles M. Royce 1414 Avenue of the Americas New York, NY 10019 (1) Unless otherwise indicated, each of the persons named in the table has sole voting and investment power with respect to the shares set forth opposite such person's name. Information with respect to beneficial ownership is based upon information furnished by each stockholder to the Company directly or to the Securities and Exchange Commission ("SEC"). (2) The nature of ownership of Royce & Associates, Inc. (Royce) as set forth herein is based upon their Schedule 13G filed February 1, 2000 with the SEC. Royce in its capacity as investment advisor may be deemed the beneficial owner of the 106,700 shares indicated in the above table, which shares are owned by numerous clients of Royce. Mr. Royce disclaims beneficial ownership of the 106,700 shares owned by Royce. Security Ownership of Management -------------------------------- The following table sets forth the number of shares and percentage of common stock of the Company outstanding and entitled to vote beneficially owned by each director and named executive officer as well as all directors and officers as a group as of December 15, 2000:
Amount and Nature of Name and Year First Became a Positions and Offices Beneficial Ownership (# of Percent of Director (1) with the Company Age shares)(1) Class (1) -------- ---------------- --- ---------- --------- M. Mahmud Awan (2) Director, 49 45,341 (3) 3.0% 1998 - Class I Director Chairman of the Board Mitchell B. Briskin (4) Director 41 4,635 (5) * 1998 - Class I Director David A. B. Brown (6) Director 57 5,718 (7) * 1998 - Class II Director Robert T. Lessard (8) Director 60 6,136 (9) * 1997 - Class II Director Carl H. Guild, Jr. (10) Director, 56 163,886 (11) 11.0% 1997 - Class III Director Vice Chairman of the Board, Chief Executive Officer and President Donald Lake (12) Director 56 4,635 (13) * 1998 - Class III Director Thomas E. Peoples (14) Director 52 5,185 (15) * 1998 - Class III Director Non-Director Officers: John I. Gill (16) Executive Vice President 61 23,051 (17) 1.5% Michael P. Malone (18) Chief Financial Officer, 41 7,002 (19) * Treasurer and Asst. Clerk All directors, director nominees 265,589 (20) 17.8% and officers as a group (9 persons)
*represents less than one (1) percent of the outstanding common stock (1) Unless otherwise indicated, each of the persons named in the table has sole voting and investment powers with respect to the shares set forth opposite such person's name. With respect to each person or group, percentages are calculated based on the number of shares beneficially owned plus shares that may be acquired by such person or group within sixty days of December 15, 2000, upon the exercise of stock options. Unless otherwise indicated herein, none of the persons named in this table is, or was within the past year, a party to any contract, arrangement or understanding with any person with respect to any securities of the Company, including, but not limited to, joint ventures, loan or option arrangements, puts or calls, guarantees against loss or guarantees of profit, division of losses or profits or the giving or withholding of proxies. None of the persons named in the table, nor any of their respective associates have any arrangement or understanding with any person with respect to any future employment by the Company or its affiliates, or with respect to any future transactions to which the Company or any of its affiliates will or may be a party. Except as otherwise described herein, none of the persons named in this table own any security of the Company of record but not beneficially. The address of Messrs. Awan, Briskin, Brown, Lessard, Guild, Lake, Peoples, Gill and Malone is c/o Technical Communications Corporation, 100 Domino Drive, Concord, Massachusetts 01742. (2) Dr. Awan joined the Board of Directors and became Chairman of the Board on November 19, 1998, following settlement of shareholder litigation (the "Litigation") initiated by Dr. Awan and Philip A. Phalon, a former director of the Company, which had been pending in Middlesex County, Massachusetts Superior Court since February, 1998. Dr. Awan has served as Chairman and Chief Executive Officer of TechMan International Corporation ("Techman"), a privately held manufacturer of fiber optic medical devices and communication systems, since 1982. Dr. Awan is also President/CEO of Sturbridge Finance limited, a venture capital firm based in Sturbridge, Massachusetts. (3) Includes 37,278 shares owned by TechMan, which is wholly owned by Dr. Awan, and 2,000 shares issuable upon the exercise of stock options. (4) Mr. Briskin, is a Principal at Stonebridge Associates, an investment bank, where he has worked since 1999. Mr. Briskin was formerly a principal at Concord Investment Partners from 1997 to 1999. From 1996 to 1997 Mr. Briskin was attending Harvard Business School. From 1990 to 1995, Mr. Briskin was General Manager at General Chemical Corporation; previously, he was a lawyer with Patterson, Belknap, Webb & Tyler in New York City. (5) Includes an aggregate of 2,278 shares issuable upon the exercise of various stock options. (6) Mr. Brown joined the Board of Directors on November 19, 1998, filling a vacancy created by the resignation of Herbert A. Lerner. Since 1984, Mr. Brown has been the President of The Windsor Group, Inc., a business consulting firm focused on the oil industry and international operations. (7) Includes an aggregate of 2,000 shares issuable upon the exercise of a stock option. (8) Mr. Lessard was employed in a variety of management positions from 1966 through December 1995 at the U.S. National Security Agency ("NSA"), Department of Defense. During his final two years at NSA, Mr. Lessard was the Group Chief in the Operations Directorate responsible for communications and cryptographic technology. Since his retirement in December 1995, he has represented the Director of the National Security Agency on several special projects. (9) Includes an aggregate of 2,945 shares issuable upon the exercise of stock options. (10) In conjunction with the settlement of the Litigation reached by the Company on November 19, 1998 and the appointment of Dr. Awan as Chairman of the Board, Mr. Guild was named to the new position of Vice Chairman of the Board on the same date. Mr. Guild had served as Chairman of the Board and Chief Executive Officer of the Company from February 13, 1998 until November 19, 1998; he continues to serve as Chief Executive Officer and President. Mr. Guild was elected to the Board on May 1, 1997 and had been an independent consultant to the Company from that time until February 13, 1998. From 1993 to 1997, he was a Senior Vice President with Raytheon Engineers and Constructors, Inc., a unit of Raytheon Company. Mr. Guild serves as President and Chief Executive Officer of the Company pursuant to an Employment Agreement with Company previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ending October 3, 1998. (11) Includes an aggregate of 161,215 shares issuable upon the exercise of various stock options that have vested. (12) Mr. Lake has been a financial consultant focusing on international financial operations related to intelligence and law enforcement activities to various government agencies since 1991. Before initiating his consulting practice, Mr. Lake served as Director of the International Banking Services Division of the American Security Bank in Washington, D.C. (13) Includes an aggregate of 2,278 shares issuable upon the exercise of stock options. (14) Since October 1, 1999, Mr. Peoples has been a Senior Vice President of Gencorp, Inc., a publicly held manufacturer of automotive, polymer, aerospace and defense products. From 1992 to September 30, 1999, Mr. Peoples was the Vice President for International and Washington Operations of Aerojet, a privately held aerospace and defense contractor. Prior to 1992, Mr. Peoples served as Manager of Business Development for Smart Munitions Programs at Raytheon Company. (15) Includes an aggregate of 2,278 shares issuable upon exercise of stock options. (16) Mr. Gill, Executive Vice President since 1995, has been employed by the Company since August 1983. He was Vice President, Manufacturing and Technical Operations from 1989 to 1995. (17) Includes an aggregate of 3,500 shares issuable upon the exercise of a stock option. (18) Mr. Malone, Chief Financial Officer, joined the Company in 1998 as Principal Financial Officer and Treasurer. From 1997 to 1998 he was the Controller at Vasca, Inc., a privately held medical device company. Prior to 1997, Mr. Malone was with Zoll Medical Corporation, a publicly traded medical device company for five years as its Controller and Treasurer. (19) Includes an aggregate of 4,500 shares issuable upon the exercise of a stock option. (20) Includes an aggregate of 182,994 shares of common stock issuable upon the exercise of vested stock options. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Edward E. Hicks, Esq., the Company's Secretary and Clerk, is a member of a law firm that provides legal services to the Company. On November 19, 1998, the Company settled the Litigation described in Item 3. Pursuant to such settlement, the Company, Arnold McCalmont, Herbert A. Lerner, Robert T. Lessard, Carl H. Guild, Jr., Mitchell B. Briskin, Donald Lake and Thomas E. Peoples entered into a settlement agreement with M. Mahmud Awan and Philip A. Phalon. The settlement agreement and standstill agreement set forth mutual full releases as to the litigation and also include provisions requiring, among other things, (i) the Company to reimburse the former proxy contestants' expenses in payments aggregating $395,000, (ii) the dissolution of the Awan/ Phalon group created to facilitate the proxy contest and (iii) the former proxy contestants to abide by certain standstill provisions until October 1, 2000. On June 27, 1995, the Company invested $250,800 for a minority interest in Series B Preferred Stock of Net2Net Corporation, then a privately held company that developed high performance management and analysis systems for Asynchronous Transfer Mode ("ATM") networks. On May 15, 1998, Visual Networks, Inc. ("Visual"), a public company, merged with and into Net2Net. Under the terms of the merger, all outstanding shares of Net2Net were exchanged for an aggregate of 2,250,000 shares of Visual common stock. During fiscal 1999, the Company sold its holdings in Visual for the aggregate sum of $1,401,972, excluding expenses. Net2Net's President was Stephen McCalmont, son of Arnold M. McCalmont, a former director and former Chairman of Technical Communications Corporation, and brother of James A. McCalmont, another former director of the Company. Both of these gentlemen, in addition to Herbert A. Lerner, a former director, Chief Financial Officer and Treasurer of the Company, were also investors in Net2Net Corporation. No director or executive officer is related to any other director or executive officer by blood marriage. PART IV Item 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K [a] (1) The following Consolidated Financial Statements, Notes thereto and Independent Auditors' Report of the Company are filed on the pages listed below, as part of Part II, Item 8 of this report:
Page ---- Consolidated Balance Sheets as of September 30, 2000 and October 2, 1999 F-1 Consolidated Statements of Operations for the Years Ended September 30, 2000, October 2, 1999 and October 3,1998 F-2 Consolidated Statements of Cash Flows for the Years Ended September 30, 2000, October 2, 1999 and October 3,1998 F-3 Consolidated Statements of Comprehensive Income (Loss) and Stockholders' Equity for the Years Ended September 30, 2000, October 2, 1999 and October 3,1998 F-4 Notes to Consolidated Financial Statements F-5-F-14 Report of Independent Public Accountants F-15 Report of Independent Public Accountants F-16 [a] (2) The following Consolidated Financial Statement Schedule is included herein: Schedule II - Valuation and Qualifying Accounts S-1 Reports of Independent Public Accountants S-1
(a) 3 List of Exhibits ----- ---------------- 3.1* Articles of Organization of the Company 3.2 ** By-laws of the Company 10.1*** Employment Agreement for Carl H. Guild, Jr. 10.2*** Standstill Agreement 10.3 Loan and security agreement, dated July 31, 2000 between the Company and Coast Business Credit, a division of Southern Pacific Bank 10.4 Amendment to Loan and security agreement, dated December 28, 2000 between the Company and Coast Business Credit, a division of Southern Pacific Bank 21 List of Subsidiaries of the Company 23.1 Consent of Grant Thornton LLP 23.2 Consent of Arthur Andersen LLP 27 Financial Data Schedule ________________________________________________________________________________ * Incorporated by reference to previous filings with the Commission. ** Incorporated by reference to the Company's 8-K filed on May 5, 1998. *** Incorporated by reference to the Company's Annual Report for 1998 Form 10-K, as amended, filed with the Securities and Exchange (b) Reports on Form 8-K ------------------- During the third quarter of fiscal 2000 the registrant filed one (1) Form 8-K on June 16, 2000, with respect to a change of auditors. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15 (d) 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 on December 28, 2000. TECHNICAL COMMUNICATIONS CORPORATION By: /s/ Carl H. Guild, Jr. ----------------------- Carl H. Guild, Jr. Chief Executive Officer and President Vice Chairman of the Board, Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Carl H. Guild, Jr. Chief Executive Officer and President December 28, 2000 ------------------ Carl H. Guild, Jr. Vice Chairman of the Board, Director (Principal Executive Officer) /s/ Michael P. Malone Treasurer and Chief Financial Officer December 28, 2000 --------------------- Michael P. Malone (Principal Financial and Accounting Officer) /s/ Dr. Mahmud Awan Chairman of the Board, Director December 28, 2000 ------------------- Dr. Mahmud Awan /s/ Mitchell B. Briskin Director December 28, 2000 ----------------------- Mitchell B. Briskin /s/ David A. B. Brown Director December 28, 2000 --------------------- David A. B. Brown /s/ Donald Lake Director December 28, 2000 --------------- Donald Lake /s/ Robert T. Lessard Director December 28, 2000 --------------------- Robert T. Lessard /s/ Thomas E. Peoples Director December 28, 2000 --------------------- Thomas E. Peoples
F-1 Technical Communications Corporation Consolidated Balance Sheets September 30, 2000 and October 2, 1999
ASSETS 2000 1999 Current assets: Cash and cash equivalents $ 3,121,617 $ 2,338,935 Accounts receivable - trade, less allowance for doubtful accounts of $70,000 363,742 2,603,401 Inventories 3,452,403 3,035,937 Refundable income taxes - 276,960 Deferred income taxes 157,500 809,555 Other current assets 269,980 84,065 ---------------------------------- Total current assets 7,365,242 9,148,853 ---------------------------------- Equipment and leasehold improvements 4,899,615 4,640,222 Less accumulated depreciation (4,330,749) (3,960,614) ---------------------------------- Equipment and leasehold improvements, net 568,866 679,608 ---------------------------------- Goodwill 1,614,131 1,614,131 Less accumulated amortization (1,146,262) (931,352) ---------------------------------- Goodwill, net 467,869 682,779 ---------------------------------- Other assets 740 149,675 ---------------------------------- $ 8,402,717 $10,660,915 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 524,231 $ 258,067 Accrued liabilities: Compensation and related expenses 162,420 230,654 Other 435,602 870,936 ---------------------------------- Total current liabilities 1,122,253 1,359,657 ---------------------------------- Other long-term liabilities - 365,721 Commitments and contingencies Stockholders' equity Common stock - par value $.10 per share; 131,215 129,454 authorized 3,500,000 shares, issued 1,312,153 and 1,294,541 shares Treasury stock at cost, 15,037 and 27,063 shares (118,610) (213,375) Additional paid-in capital 1,294,579 1,305,870 Accumulated other comprehensive items - - Retained earnings 5,973,280 7,713,588 ---------------------------------- Total stockholders' equity 7,280,464 8,935,537 ---------------------------------- $ 8,402,717 $10,660,915 ==================================
The accompanying notes are an integral part of these consolidated financial statements. F-2 Technical Communications Corporation Consolidated Statements of Operations Years Ended September 30, 2000 and October 2, 1999 and October 3, 1998
2000 1999 1998 Net sales $ 5,574,108 $ 6,433,683 $13,855,781 Cost of sales 2,376,433 3,128,491 5,462,608 ------------------------------------------------ Gross profit 3,197,675 3,305,192 8,393,173 ------------------------------------------------ Operating expenses: Selling, general and administrative expenses 3,874,424 4,312,162 6,220,992 Product development costs 1,156,692 1,935,859 1,414,746 ------------------------------------------------ Total operating expenses 5,031,116 6,248,021 7,635,738 ------------------------------------------------ Operating profit (loss) (1,833,441) (2,942,829) 757,435 Other income (expense) Gain on sale of investment - 1,151,172 - Investment income 210,939 147,860 24,068 Interest expense (2,305) (4,641) (142,056) Other 57,869 23,717 2,690 ------------------------------------------------ Total other income (expense) 266,503 1,318,108 (115,298) ------------------------------------------------ Income (loss) before income taxes (1,566,938) (1,624,721) 642,137 Provision (benefit) for income taxes 173,376 (406,179) 160,534 ------------------------------------------------ Net income (loss) $(1,740,314) $(1,218,542) $ 481,603 =========== =========== =========== Net income (loss) per common share Basic (1.35) (0.96) 0.38 Diluted (1.35) (0.96) 0.37 Weighted average common shares outstanding Basic 1,289,523 1,264,626 1,281,924 Diluted 1,289,523 1,264,626 1,288,007
The accompanying notes are an integral part of these consolidated financial statements. F-3 Technical Communications Corporation Consolidated Statements of Cash Flows Years Ended September 30, 2000 and October 2, 1999 and October 3, 1998
2000 1999 1998 Operating activities: Net income (loss) ($1,740,314) ($1,218,542) 481,603 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization 733,980 896,965 873,642 Loss on disposal of fixed assets - 28,697 20,000 Non-cash compensation 47,602 14,675 18,263 Deferred income taxes 292,478 (167,341) 9,907 Gain on sale of investment - (1,151,168) - Changes in current assets and current liabilities: Accounts receivable 2,239,659 5,592,895 (4,936,747) Unbilled revenue - - 198,038 Inventories (416,466) 83,354 304,688 Refundable income taxes 276,960 84,572 (68,903) Other current assets (185,915) 4,418 29,464 Accounts payable and accrued liabilities (236,423) (1,586,926) 114,723 -------------------------------------------------- Cash provided by (used for) operating activities 1,011,561 2,581,599 (2,955,322) -------------------------------------------------- Investing activities: Additions to equipment and leasehold improvements (259,393) (166,581) (511,423) Cancellation of life insurance policies - 5,437 152,787 Long term receivable - (9,824) 114,665 Proceeds from sale of investment - 1,401,968 - Investment in capitalized software - - (275,101) Other assets - - 1,500 -------------------------------------------------- Cash provided by (used for) investing activities (259,393) 1,231,000 (517,572) -------------------------------------------------- Financing activities: Exercise of stock options, including income tax benefits - - 88,689 Proceeds from stock issuance 37,633 40,803 - Borrowings under line of credit - - 4,500,000 Payment of line of credit - (2,250,000) (2,250,000) Payment of long-term debt (7,119) (4,516) (2,494) -------------------------------------------------- Cash provided by (used for) financing activities 30,514 (2,213,713) 2,336,195 -------------------------------------------------- Net increase (decrease) in cash and cash equivalents 782,682 1,598,886 (1,136,699) Cash and cash equivalents at beginning of year 2,338,935 740,049 1,876,748 -------------------------------------------------- Cash and cash equivalents at end of year $3,121,617 $2,338,935 $ 740,049 ================================================== Supplemental disclosures: Interest paid $ 4,305 $ 7,123 $ 139,063 Income taxes paid (net of refunds received) (394,430) (36,366) 108,765
The accompanying notes are an integral part of these consolidated financial statements. F-4 Technical Communications Corporation Consolidated Statements of Comprehensive Income (Loss) and Stockholders' Equity Years Ended September 30, 2000 and October 2, 1999 and October 3, 1998
2000 1999 1998 Comprehensive Income (Loss) Net income (loss) $ (1,740,314) $ (1,218,542) $ 481,603 Other comprehensive items: Unrealized gain on available for sale investment - 326,262 422,000 Less: reclassification adjustment for gains included in net loss, net of income taxes - (748,262) - -------------------------------------------------- Total comprehensive income (loss) $ (1,740,314) $ (1,640,542) $ 903,603 ================================================== Stockholders' Equity Shares of common stock: Beginning balance 1,294,541 1,283,238 1,273,703 Exercise of stock options - - 9,535 Issuance of shares to ESPP participants 17,612 11,303 - -------------------------------------------------- Ending balance 1,312,153 1,294,541 1,283,238 ================================================== Common stock at par value: Beginning balance $ 129,454 $ 128,324 $ 127,370 Exercise of stock options - - 954 Issuance of shares to ESPP participants 1,761 1,130 - -------------------------------------------------- Ending balance 131,215 129,454 128,324 -------------------------------------------------- Additional paid-in capital: Beginning balance 1,305,870 1,266,197 1,526,110 Exercise of stock options - - 87,735 Issuance of shares to ESPP participants 35,872 39,673 - Termination of ESOP - - (347,648) -------------------------------------------------- Ending balance 1,341,742 1,305,870 1,266,197 -------------------------------------------------- ESOP deferred compensation: Beginning balance - - (527,772) Principal payments on ESOP debt - - - Termination of ESOP - - 527,772 -------------------------------------------------- Ending balance - - - -------------------------------------------------- Accumulated other comprehensive items: Beginning balance - 422,000 - Available for sale investment, net - (422,000) 422,000 -------------------------------------------------- Ending balance - - 422,000 -------------------------------------------------- Retained earnings: Beginning balance 7,713,588 8,945,941 8,464,338 Issuance of stock grants (47,163) (13,811) - Net income (loss) (1,740,314) (1,218,542) 481,603 -------------------------------------------------- Ending balance 5,926,111 7,713,588 8,945,941 -------------------------------------------------- Treasury stock: Beginning balance (213,375) (241,861) (80,000) Termination of ESOP - - (180,124) Issuance of stock grants 94,765 28,486 18,263 -------------------------------------------------- Ending balance (118,610) (213,375) (241,861) -------------------------------------------------- Total stockholders' equity $ 7,280,458 $ 8,935,537 $10,520,601 ==================================================
The accompanying notes are an integral part of these consolidated financial statements. F-5 Notes to Consolidated Financial Statements (1) Company Operations Technical Communications Corporation incorporated in 1961 in Massachusetts, and its wholly-owned subsidiaries (the Company) operate in one industry segment: the design, development, manufacture, distribution and sale of communications security devices and systems worldwide. (2) Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, TCC Foreign Sales Corporation (FSC), a qualified foreign sales corporation, and TCC Investment Corporation, a Massachusetts Security Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. 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 impact the cash flow of the Company. Although the Company believes there are currently sufficient cash and available funds under the line of credit to meet its working capital needs, delays in the timing of significant transactions may cause the Company to reevaluate and adjust its operations. Use of Estimates The preparation of financial statements in conformity 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include demand deposits at banks, and certificates of deposit and other investments (including mutual funds) readily convertible into cash. Cash equivalents are stated at cost, which approximates market value. Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful life of the asset. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in operations for the period. The cost of maintenance and repairs is charged to operations as incurred; significant renewals and betterments are capitalized. Capitalized Software Costs The Company sells software as a component of its communications systems. Certain computer software costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," and are reported at the lower of unamortized cost or net realizable value. Upon initial product release, these costs are amortized based upon the straight-line method, over three years. As of September 30, 2000, the Company had fully amortized its investments in capitalized software totaling $357,445. F-6 Notes to Consolidated Financial Statements (continued) Goodwill The Company acquired substantially all of the assets of Datotek, Inc. in May 1995. The excess purchase cost over net assets acquired is being amortized on a straight-line basis over 7 1/2 years. The Company assesses the future useful life of this asset whenever events or changes in circumstances indicate that the current useful life has diminished. The Company considers the future undiscounted cash flows of the acquired company in assessing the recoverability of this asset. If impairment has occurred the excess of carrying value over fair value is recorded as a loss. Recognition of Revenue The Company generally recognizes revenue upon shipment of products, except in the case of long-term contracts for which the revenue is recognized using the percentage-of-completion method. In 1998, the Company recorded a significant amount of deferred revenue due to customer billings in excess of the revenue recognized under the percentage of completion accounting method. The deferred revenue from 1998 was recognized in 1999. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based employee compensation using the intrinsic value method prescribed in Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Reclassification Certain reclassifications have been made to the prior years' consolidated financial statements to conform with the fiscal year 2000 presentation. Income Taxes The Company records income tax expense (benefit) in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," which requires the use of the asset/liability method in accounting for income taxes. 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. Warranty Costs The Company provides for warranty costs at the time of sale based upon historical experience. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. a)Cash and Cash Equivalents, Accounts Receivable and Accounts Payable - the carrying amount of these assets and liabilities on the Company's consolidated balance sheet approximates their fair value because of the short term nature of these instruments. b)Available for Sale Investment- the carrying amount of this asset on the Company's consolidated balance sheets equals the fair market value based on the market valuation with the difference between cost and market value, net of related tax effects, recorded in stockholders' equity as an unrealized gain on available for sale investment, which is included in "Accumulated Other Comprehensive Items". c)Line of Credit- the carrying amount of this liability on the Company's consolidated balance sheets approximates its fair value because of the short term nature of this instrument. F-7 Notes to Consolidated Financial Statements (continued) Earnings (Loss) per Share("EPS") In accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share," the Company presents both a "Basic" and a "Diluted" EPS. Basic EPS has been computed by dividing net income by a weighted average number of shares of common stock outstanding during the period. In computing diluted EPS, only stock options that are dilutive (those that reduce earnings per share) have been included in the calculation of EPS using the Treasury Stock Method. Exercise of outstanding stock options is not assumed if the result would be antidilutive, such as when a net loss is reported for the period or the option exercise price is greater than the average market price for the period presented. Fiscal Year-End Policy The Company by-laws call for its fiscal year to end on the Saturday closest to the last day of September, unless otherwise decided by its Board of Directors. The years 2000 and 1999 ended on September 30, 2000 and October 2, 1999 and each included 52 weeks, while the year ended October 3, 1998, included 53 weeks. Comprehensive Income During fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income". SFAS 130 established standards for the reporting and display of comprehensive income and its components. In general, comprehensive income combines net income and "other comprehensive income". Operating Segments During fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related Information". SFAS 131 establishes standards for the way that public companies report information about operating segments and geographic distribution of sales in financial statements. This Statement supercedes Statement of Financial Accounting Standards No. 14, " Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers. The Statement is effective for fiscal years beginning after December 15, 1997. The adoption of this Statement did not have a material effect on the Company's financial statements, as the Company has only one operating segment. Newly Issued Pronouncements In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition, presentation and disclosure in financial statements. Subsequently, the SEC has amended the implementation dates so that the Company is required to adopt the provisions of SAB No. 101 in the fourth quarter of 2001. We are currently reviewing the impact of SAB No. 101, but we believe that it will not materially affect the Company's results of operations or financial position. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities". The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. In June 1999, FASB issued Statement of Financial Accounting Standards No. 137 (SFAS 137), "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133--an amendment of FASB Statement No. 133". This Statement has delayed the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. In June 2000, SFAS No. 133 was amended by Statement of Financial Accounting Standards No. 138 (SFAS 138), "Accounting for Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. Management does not expect the adoption of these statements to have a material impact on its financial position or results of operations. F-8 Notes to Consolidated Financial Statements (continued) (3) Earnings (Loss) Per Share In accordance with SFAS No. 128, "Earnings Per Share", basic and diluted EPS were calculated as follows:
September 30, October 2, October 3, 2000 1999 1998 ---- ---- ---- Basic Net Income (Loss) $ (1,740,314) $ (1,218,542) $ 481,603 ------------------------------------------------ Weighted Average Shares Outstanding 1,289,523 1,264,626 1,281,924 Outstanding dilutive stock options with option price less than average market price - - 6,083 ------------------------------------------------ Adjusted Weighted Average Shares 1,289,523 1,264,626 1,288,007 ------------------------------------------------ Basic Earnings (Loss) Per Share $ (1.35) $ (0.96) $ 0.38 ------------------------------------------------ Diluted Earnings (Loss) Per Share $ (1.35) $ (0.96) $ 0.37 ------------------------------------------------
Outstanding potentially dilutive stock options which were not included in the above calculations for the respective fiscal years were as follows: 217,669 in 2000; 180,169 in 1999 and 138,316 in 1998. (4) Treasury Stock Transactions During fiscal years 2000, 1999 and 1998, 12,026, 3,500 and 2,865 shares, respectively, of Technical Communications Corporation Common Stock were granted to members of the Company's Board of Directors. The prices of shares issued in 2000 ranged from $3.00 to $6.00 per share. The price of shares issued in 1999 and 1998 were at a price per share of $4.00 and $6.38, respectively. All grants were made at the current market value on the date of grant and were issued from the Company's Treasury Stock. The Company terminated its ESOP on October 1, 1997, and accounted for this termination in the manner specified in AICPA Statement of Position (SOP) 93-6, Employers' Accounting for Employee Stock Ownership Plans. Specifically, the Company transferred the remaining 23,543 shares that had not been allocated to participants to Treasury Stock and valued the transaction at the fair market value of the shares at the October 1, 1997 reacquisition date. (5) Stock Options At the February 1992 Annual Meeting of Stockholders, the Company adopted the Technical Communications Corporation 1991 Stock Option Plan (the SOP Plan) to replace a previous, expired plan. The Company reserved 250,000 shares of common stock for issuance to employees at prices not less than the fair market value on the date of grant. At the February 1997 Annual Meeting of Stockholders, the Company increased the reserve for shares under the SOP Plan to 350,000. Options under this plan generally expire ten years from the date of grant and are exercisable in cumulative annual increments commencing one year after the date of grant. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which sets forth a fair-value based method of recognizing stock- based compensation expense. As permitted by SFAS 123, the Company has elected to continue to apply Accounting Principles Board Opinion No. 25 to account for its stock-based employee compensation plans. Had compensation for awards in fiscal years 1998 through 2000 under the Company's stock-based compensation been determined based on the fair value at the grant dates consistent with the method set forth under SFAS 123, the effect on the Company's net income (loss) and earnings (loss) per share would have been as follows:
September 30, October 2, October 3, 2000 1999 1998 Net income (loss) As reported $(1,740,314) $(1,218,542) $ 481,603 Pro forma $(1,887,120) $(1,549,036) $ 296,646 Basic earnings (loss) per common share As reported $ (1.35) $ (0.96) $ 0.38 Pro forma $ (1.46) $ (1.22) $ 0.26
F-9 Notes to Consolidated Financial Statements (continued) Because the method prescribed by SFAS 123 has not been applied to options granted prior to September 1, 1994, the resulting pro forma compensation expense may not be representative of the amount to be expensed in future years. Pro forma compensation expense for options granted is reflected over the vesting period; future pro forma compensation expense may be greater as additional options are granted. The fair value of each option granted was estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 6.31%, 4.86%, and 4.08% for 2000, 1999, and 1998, respectively, expected life equal to 5 years, expected volatility of 122%, 85% and 100% in 2000, 1999 and 1998, respectively, and an expected dividend yield of 0%. A summary of the Company's stock option activity is as follows:
September 30. October 2, October 3, 2000 1999 1998 -------------------- ----------------------- ----------------------- Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Options outstanding, beginning of year 256,074 $5.91 144,399 $7.79 261,155 $10.14 Options granted Option Price = Fair Market Value 19,000 $6.53 114,000 $3.91 106,369 $6.58 Option Price * Fair Market Value - - - Option Price ** Fair Market Value 8,000 $5.10 7,000 $3.40 - Options exercised - - (3,100) $4.00 Options forfeited (28,000) $8.43 (9,325) $8.61 (220,025) $9.57 ------- ------ -------- Options outstanding, end of year 255,074 $5.65 256,074 $5.91 144,399 $7.79 Options exercisable 209,149 $5.40 193,924 $5.45 69,029 $8.12 Weighted average fair value per share of options granted during the year $5.44 $2.73 $4.65
The following summarizes certain data for options outstanding at September 30, 2000:
Weighted Weighted Average Average Remaining Range of Number of Exercise Contractual Exercise Prices Shares Price Life --------------- ------ ----- ---- Options outstanding, end of year: $ 1.68- $ 5.00 142,000 $ 4.06 7.9 $ 5.01- $10.00 91,294 $ 6.56 7.0 $10.01- $15.00 20,160 $12.04 5.1 $15.01- $16.75 1,620 $15.80 2.4 ------- 255,074 $ 5.66 7.3 Options exercisable: $ 1.68- $ 5.00 129,000 $ 4.11 $ 5.01- $10.00 66,069 $ 6.52 $10.01- $15.00 11,860 $11.81 $15.01- $16.75 1,620 $15.80 ------- 209,149 $ 5.40
(6) Inventories
Inventories consist of the following: September 30, October 2, 2000 1999 Finished goods $ 622,003 $ 655,167 Work in process 1,181,510 216,072 Raw materials and supplies 1,648,891 2,164,698 --------------- ---------------- Total inventories $ 3,452,404 $ 3,035,937 --------------- ----------------
F-10 Notes to Consolidated Financial Statements (continued) (7) Equipment and Leasehold Improvements Equipment and leasehold improvements consist of the following:
September 30, October 2, Estimated 2000 1999 Useful Life Engineering and manufacturing equipment $2,489,172 $2,330,876 3-8 years Demonstration equipment 842,568 779,732 3 years Furniture and fixtures 1,127,373 1,089,112 3-8 years Automobiles 24,385 24,385 3 years Remaining term Leasehold improvements 416,117 416,117 of lease ------------------------------------------- Total equipment and leasehold improvements $4,899,615 $4,640,222 3-8 years -------------------------------------------
(8) Other Accrued Liabilities Other accrued liabilities consist of the following:
September 30, October 2, 2000 1999 Reserve for product warranty $ 92,996 $ 240,462 Professional service fees 95,008 176,803 Sales representative commissions 38,595 131,075 Customer support agreements 44,000 147,700 Income taxes payable - 3,735 Other 165,003 171,161 ---------------------------------- Total other accrued liabilities $ 435,602 $ 870,936 ----------------------------------
(9) Debt In August 2000, the Company successfully negotiated a new $5 million asset-based credit facility with Coast Business Credit ("Coast"). The line carries an interest rate of prime plus 1/2% (10.0% at September 30, 2000). This revolving line of credit is collateralized by substantially all the assets of the Company and requires no compensating balances. There is one financial covenant associated with the line, which calls for a minimum net tangible worth starting at $6,250,000 and increasing over time based on certain criteria. The amount of borrowings is limited to a percentage of certain accounts receivable and inventory balances. At September 30, 2000 the Company was in default of the net worth covenant. Subsequently, Coast waived the default and modified the agreement to reduce the minimum net worth requirement for the future and added an interest coverage ratio requirement. In addition, Coast has suspended the Company's ability to request loans, of up to $500,000, against inventory balances. The line matures in August 2003. The Company believes this new credit facility, as amended will meet its current credit needs and its need for the foreseeable future. Previously the Company had a $5,000,000 revolving line of credit with Wainwright Bank and Trust Company at an interest rate of the bank's base rate plus 1/2 of 1%. This line of credit was secured by a pledge of substantially all the assets of the Company. This line matured on May 1, 2000 and was not renewed. As of September 30, 2000, the Company has outstanding standby letters of credit, which were supported by the line of credit amounting to $20,879. Wainwright Bank has agreed to honor these standby letters of credit until they mature on December 31, 2000. (10)Leases The Company leases its headquarters under an operating lease. The Company has renewed the lease on its headquarters located in Concord, Massachusetts through December 31, 2002. Future minimum lease payments amount to $171,216 in fiscal 2001, $171,216 in fiscal 2002 and $42,804 in fiscal 2003. The Company also retains an option to purchase the building at fair market value, but not to exceed $2,262,000, exercisable at the end of the lease term, if elected. Annual rental expense amounted to $161,492 in fiscal year 2000, $157,182 in fiscal year 1999 and $155,300 in fiscal year 1998. F-11 Notes to Consolidated Financial Statements (continued) During 1998, the Company entered into a capital lease for computer equipment in the amount of $20,370, an additional $3,850 was added to the lease in fiscal 1999 (accumulated depreciation amounted to $19,542 at September 30, 2000). This asset is included in the Engineering and Manufacturing Equipment category of the Company's equipment and leasehold improvements. The lease term is for three years and contains a bargain purchase option, which may be exercised upon lease expiration. Minimum annual principal payments amount to $6,241 in 2001. (11) Income Taxes
The provision (benefit) for income taxes consists of the following: September 30, October 2, October 3, 2000 1999 1998 Current: Federal $(117,470) $ (109,625) $ 29,629 State 3,235 (213,184) 26,706 ------------------- ------------------ ------------------- Total current taxes (114,235) (322,809) 56,335 ------------------- ------------------ ------------------- Deferred: Federal 231,446 (46,142) 111,641 State 56,165 (37,228) (7,442) ------------------- ------------------ ------------------- Total deferred taxes 287,611 (83,370) 104,199 ------------------- ------------------ ------------------- Total provision (benefit) $ 173,376 $ (406,179) $ 160,534 ------------------- ------------------ -------------------
The provisions for income taxes are different from those that would be obtained by applying the statutory federal income tax rate to earnings before income taxes due to the following:
September 30, October 2, October 3, 2000 1999 1998 Tax at U.S. statutory rate $ (532,759) $ (552,405) $ 220,210 Benefit of Foreign Sales Corp. - - (74,269) State income taxes, net of Federal benefit 39,204 (165,272) 12,714 Other (147,352) (665) 32,933 Prior year under accrual (156,765) - - Transfer of long-term liability to deferred tax asset (359,229) - - Increase (reduction) in valuation allowance 1,330,277 312,163 (31,054) ------------------ ------------------- ------------------- Total provision (benefit) $ 173,376 $ (406,179) $ 160,534 ------------------ ------------------- -------------------
Deferred income taxes consist of the following:
September 30, October 2, 2000 1999 NOL Carryforward $ 1,532,480 $ 639,884 Goodwill 73,211 35,890 Inventory reserve 422,716 588,479 Warranty reserve 29,218 96,834 Payroll related accruals 25,875 42,529 Tax credits 181,232 179,489 Other 129,074 132,479 ------------------- ------------------- Total 2,393,806 1,715,584 Less: valuation allowance (2,236,306) (906,029) ------------------- ------------------- Total $ 157,500 $ 809,555 ------------------- -------------------
F-12 Notes to Consolidated Financial Statements (continued) The valuation allowance relates to uncertainty with respect to the Company's ability to realize its deferred tax assets. Refundable income taxes represent estimated refunds from the Federal government from carryback claims. All refunds from 1999 were received in fiscal 2000. Additionally the Company received a refund in fiscal 2000 related to prior years which is recorded as a current benefit. As of September 30, 2000 the Company has available tax loss carryforwards for federal income tax purposes of $3,000,000, which expire in 2019. The Company also has available tax loss carryfowards for state income tax purposes of $5,100,000, which expire in 2004. (12) Employee Benefit Plans The Company has a qualified, contributory, trusteed profit sharing plan covering substantially all employees. The Company's policy is to fund contributions as they are accrued. The contributions are allocated based on the employee's proportionate share of total compensation. The Company's contributions to the plan are determined by the Board of Directors and are subject to other specified limitations. There were no Company profit sharing contributions during fiscal 2000, 1999 or 1998. However, the Board of Directors approved a corporate match of 25 cents per dollar of the first 6% of each participant's contributions to the plan. The Company's matching contributions were $36,091, $39,094 and $37,700 in 2000, 1999 and 1998, respectively. The Company has an Executive Incentive Bonus Plan for the benefit of key management employees. The bonus pool is determined based on the Company's performance as defined by the plan. No bonuses were earned and accrued under the plan in 2000, 1999 or 1998. On November 17, 1989, the Company established the Technical Communications Corporation Employees' Stock Ownership Trust (the "Trust") for the benefit of its employees. At its August 27, 1997 meeting, the Board of Directors voted to terminate the Employee Stock Ownership Plan effective October 1, 1997. Actual termination of the Company's ESOP was effected in fiscal 1998 by transferring all remaining shares that had not been allocated to participants to Treasury Stock. (13) Business, Credit and Off-Balance Sheet Risks The Company is exposed to a number of business risks. These include, but are not limited to, concentration of its business among a relatively small number of customers, technological change (which can cause obsolescence of the Company's products and inventories), actions of competitors (some of whom have access to considerably greater financial resources than the Company), cancellation of major contracts (either before or after award), variations in market demand, the loss of key personnel, etc. The Company attempts to protect itself in various ways against such risks, but its success cannot be guaranteed. At September 30, 2000 and October 2, 1999, the Company was contingently liable under open standby letters of credit totaling $20,879 and $67,476, respectively. These letters of credit were issued in the ordinary course of business to secure the Company's performance under contracts with its customers. These letters of credit expire as provided for in the contracts, unless exercised or renewed. To date, no letters of credit have been exercised. The Company does not expect to incur any loss associated with these letters of credit. As of September 30, 2000, management believes it has no significant concentrations of credit risk due to placement of its cash equivalents with high-credit-quality financial institutions, and the fact that the majority of its foreign trade receivables are secured by letters of credit or foreign credit insurance. (14) Related Party Transactions On November 19, 1998, the Company reached agreement on the settlement of shareholder litigation initiated by Philip Phalon and Dr. Mahmud Awan, which had been pending in Middlesex County, Massachusetts Superior Court since February 1998. The settlement agreement and standstill agreement executed by the Company and members of the opposition group that had filed a Form 13D (the 13D Group) in the settlement of the above described litigation set forth mutual full releases as to the litigation and also include provisions requiring (i) the Company to reimburse the 13D Group's expenses in payments aggregating $395,000, all of which has been paid as of September 30, 2000, (ii) the dissolution of the 13D Group (Note: members of the 13D Group filed an amendment to their Form 13D dissolving the 13D Group in January 1999) and (iii) the former proxy contestants to abide by certain standstill provisions until October 1, 2000. F-13 Notes to Consolidated Financial Statements (continued) (15) Major Customers and Export Sales In fiscal 2000, the Company had two customers, representing 41% (21% and 20%) of net sales. In fiscal 1999, the Company had three customers, representing 60% (32%, 17% and 11%) of net sales. In fiscal 1998, the Company had two customers representing 71% (54% and 17%) of net sales. A breakdown of net sales is as follows:
September 30, October 2, October 3, 2000 1999 1998 Domestic $ 2,446,083 $1,239,275 $ 1,631,459 Foreign 3,128,025 5,194,408 12,224,322 ------------ -------------- -------------- Total Sales $5,574,108 $6,433,683 $13,855,781 -----------------------------------------------------------------------------------------------------
A summary of foreign sales by geographic area follows:
September 30, October 2, October 3, 2000 1999 1998 North America (excluding the U.S.) 3.9% 1.0% 0.1% Central and South America 8.3% 1.0% 5.0% Europe 22.0% 14.2% 4.2% Mid-East and Africa 55.1% 82.6% 84.4% Far East 10.7% 1.2% 6.3%
(16) Legal Matters The Company was the defendant in GERARD v. TECHNICAL COMMUNICATIONS CORPORATION, ET AL., filed in the Superior Court of the Commonwealth of Massachusetts in 1999. This case arose from disputes concerning the hiring and termination of Roland Gerard, former president of the Company. The Complaint alleges state law claims for breach of contract, wrongful termination, and civil conspiracy. During the fiscal year 2000 the Company settled this lawsuit. An earlier complaint brought by Mr. Gerard in the Federal court, which included the state claims, and a federal securities claim was dismissed in July 1999; the securities claims were dismissed with prejudice. (17) Sale of Investment in Visual Network, Inc. Common Stock During 1999, the Company sold its investment in Visual Network, Inc. common stock. The Company recognized a gain on the sale of $1,151,172 on a cost basis of $250,800. The Company's investment in Visual Network's Common Stock followed the merger of Net2Net into Visual Networks, Inc. on May 15, 1998. This investment was carried as an available-for-sale investment in the October 3, 1998 balance sheet, at market value. At October 3, 1998, the market value of the investment was $900,800, giving rise to an unrealized gain of $650,000 ($422,000 net of tax effects) when compared to the $250,800 cost. Net2Net's President was Stephen McCalmont, son of Arnold McCalmont, a former director and former Chairman of Technical Communications Corporation, and brother of James McCalmont, another former Director of the Company. Both of these gentlemen, in addition to Herbert A. Lerner, a former director and former Treasurer of the Company, were also investors in Net2Net Corporation. F-14
___________________________________________________________________________________________________________ Selected Quarterly Financial Data (Unaudited) For the years ended September 30, 2000 and October 2, 1999: First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal 2000 January 1, 2000 April 1, 2000 July 1, 2000 September 30, 2000 ---------------------------------------------------------------------------------------------------------- Net sales $ 2,253,403 $ 1,381,050 $ 744,010 $ 1,195,645 Gross profit 1,443,068 678,906 310,449 765,252 Net (loss) income 106,687 (418,109) (703,517) (725,375) Net (loss) income per share Basic $ .08 $ (.32) $ (.54) $ (.57) Diluted $ .08 $ (.32) $ (.54) $ (.57) First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal 1999 January 2, 1999 April 3, 1999 July 3, 1999 October 2, 1999 --------------------------------------------------------------------------------------------------------- Net sales $ 1,071,356 $ 1,247,336 $ 1,361,671 $ 2,753,320 Gross profit 689,806 714,414 670,818 1,230,154 Net income (loss) (988,388) 147,100 (593,927) 216,673 Net income (loss) per share/(1)/ Basic $ (.79) $ .12 $ (.47) $ .17 Diluted $ (.79) $ .12 $ (.47) $ .17 -------------------------------------------------------------------------------------------------------------------
(1) As a result of a miscalculation of weighted average shares during each of the first three quarters of 1999, net income (loss) per share was misstated in the 10Q filings. Quarterly earnings (loss) amounts were understated in amounts ranging from $.01 to $.04 and year to date amounts from $.04 to $.07. The corrected amounts are reflected in the table above. F-15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Technical Communications Corporation: We have audited the accompanying consolidated balance sheet of Technical Communications Corporation and subsidiaries as of September 30, 2000, and the related consolidated statements of operations, cash flows, and comprehensive income (loss) and stockholders' equity for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated balance sheet of Technical Communications Corporation and subsidiaries, as of October 2, 1999, and the related consolidated statements of operations, cash flows, and comprehensive income (loss) and stockholders' equity as of and for the years ended October 2, 1999 and October 3, 1998, were audited by other auditors whose report dated November 5, 1999, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2000 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Technical Communications Corporation and subsidiaries, as of September 30, 2000, and the consolidated results of their operations and their consolidated cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. /s/ Grant Thornton LLP Boston, Massachusetts November 7, 2000 F-16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Technical Communications Corporation: We have audited the accompanying consolidated balance sheets of Technical Communications Corporation (a Massachusetts corporation) and subsidiaries as of October 2, 1999 and the related consolidated statements of operations, cash flows, and comprehensive income (loss) and stockholders' equity for the years ended October 2, 1999 and October 3, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Technical Communications Corporation and subsidiaries as of October 2, 1999 and the results of their operations and their cash flows for the years ended October 2, 1999 and October 3, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Boston, Massachusetts November 5, 1999 S-1 Technical Communications Corporation Schedule II
Valuation and Qualifying Accounts Balance at Additions Deductions Balance at Beginning Charged to from End of year Expense Reserves of year Allowance for doubtful accounts: Year Ended September 30, 2000 $ 70,000 -- -- $ 70,000 Year Ended October 2, 1999 70,000 -- -- 70,000 Year Ended October 3, 1998 25,000 $ 187,075 $ 142,075 70,000
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE TO THE CONSOLIDATED FINANCIAL STATEMENTS To the Shareholders and Board of Directors of Technical Communications Corporation: Board of Directors Technical Communications Corporation In connection with our audit of the consolidated financial statements of Technical Communications Corporation referred to in our report dated November 7, 2000, which is included in the annual report to security holders and incorporated by reference in Part II of this form, we have also audited Schedule II as it relates to the year ended September 30, 2000. In our opinion, this schedule presents fairly, in all material respects, the 2000 information required to be set forth therein. /s/ Grant Thornton LLP Boston, Massachusetts November 7, 2000 To the Shareholders and Board of Directors of Technical Communications Corporation: We have audited, in accordance with generally accepted auditing standards, the supplemental schedule of Valuation and Qualifying Accounts as of and for the years ended October 2, 1999 and October 3, 1998, listed as Schedule II above, and have issued our report thereon dated November 5, 1999. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements as of and for the years ended October 2, 1999 and October 3, 1998, taken as a whole. The supplemental schedule to the consolidated financial statements listed as Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This supplemental schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data as of and for the years ended October 2, 1999 and October 3, 1998, required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP Boston, Massachusetts November 5, 1999