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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-QSB (Mark One)x
    
    Quarterly report under
Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 26, 2004o
    
    Transition report under
Section 13 or 15(d) of the Exchange Act
for the transition period
____________ to  ____________Commission File Number: 0-8588
 TECHNICAL COMMUNICATIONS CORPORATION(Exact
name of small business issuer as specified in its charter)
 Massachusetts
    
    04-2295040(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)100 Domino Drive, Concord, MA
    
    01742-2892(Address
of principal executive offices)
    
    (Zip Code)
 Issuers telephone number, including area code:
    
    (978) 287-5100
 N/A(Former name, former address and former fiscal year,
if changed since last report)
 Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x    No
o State the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Number of shares of Common
Stock, $.10 par value, outstanding as of August 6, 2004: 1,347,994




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INDEX  
 PagePART I
    
    Financial InformationItem 1.
    
    Financial
Statements:Condensed
Consolidated Balance Sheets as of
June 26, 2004 (unaudited) and September 27, 2003
    
    
    2Condensed
Consolidated Statements of Operations for the
Three (3) months ended June 26, 2004 and June 28, 2003 (unaudited)
    
    
    3Condensed
Consolidated Statements of Operations for the
Nine (9) months ended June 26, 2004 and June 28, 2003 (unaudited)
    
    
    4Condensed
Consolidated Statements of Cash Flows for the
Nine (9) months ended June 26, 2004 and June 28, 2003 (unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis or Plan of Operations
    
    
    12Item 3.
    
    Controls and Procedures
    
    
    17PART II
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    18Item 2.
    
    Changes in Securities and Small Business Issuer Purchases of Equity Securities
    
    
    18Item 3.
    
    Defaults Upon Senior Securities
    
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18Item 5.
    
    Other Information
    
    
    18Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    18Signatures
    
    
    19EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION
 Page 1




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Item 1. Financial Statements TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated
Balance Sheets
 June 26, 2004
    
    September 27, 2003(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    2,321,990
    
    
    $
    1,097,847Accounts receivable  trade, less allowance for doubtful
accounts of $70,000
    
    
    216,862
    
    
    
    269,892Inventories
    
    
    1,122,230
    
    
    
    1,189,284Other current assets
    
    
    196,143
    
    
    
    101,031Total current assets
    
    
    3,857,225
    
    
    
    2,658,054Equipment and leasehold improvements
    
    
    4,993,358
    
    
    
    4,971,395Less: accumulated depreciation and amortization
    
    
    4,906,106
    
    
    
    4,862,24187,252
    
    
    
    109,154Total Assets
    
    $
    3,944,477
    
    
    $
    2,767,208Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    124,569
    
    
    $
    105,821Accrued liabilitiesAccrued payroll
    
    
    190,661
    
    
    
    61,390Accrued expenses
    
    
    478,192
    
    
    
    416,562Total current liabilities
    
    
    793,422
    
    
    
    583,773Stockholders Equity:Common stock, par value $.10 per share;
3,500,000 shares authorized; 1,348,226 shares issued
and outstanding at June 26, 2004 and 1,337,627
shares issued and outstanding at September 27, 2003
    
    
    134,823
    
    
    
    133,763Treasury stock at cost, 232 shares
    
    
    (1,934
    )
    
    
    (1,934
    )Additional paid-in capital
    
    
    1,380,511
    
    
    
    1,376,088Retained earnings
    
    
    1,637,655
    
    
    
    675,518Total stockholders equity
    
    
    3,151,055
    
    
    
    2,183,435Total Liabilities and Stockholders Equity
    
    $
    3,944,477
    
    
    $
    2,767,208
 The accompanying notes are an integral part of these condensed consolidated financial statements. Page 2




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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited) Three Months EndedJune 26, 2004
    
    June 28, 2003Net sales
    
    $
    1,413,385
    
    
    $
    985,994Cost of sales
    
    
    347,319
    
    
    
    433,997Gross profit
    
    
    1,066,066
    
    
    
    551,997Operating expenses:Selling, general and
administrative expenses
    
    
    368,537
    
    
    
    370,610Product development costs
    
    
    95,612
    
    
    
    57,453Total operating expenses
    
    
    464,149
    
    
    
    428,063Operating income
    
    
    601,917
    
    
    
    123,934Other income (expense):Interest income
    
    
    4,192
    
    
    
    1,837Interest expense
    
    
    (456
    )
    
    
    (621
    )Other
    
    
    450
    
    
    
    (629
    )Total other income:
    
    
    4,186
    
    
    
    587Income before income taxes
    
    
    606,103
    
    
    
    124,521Provision for income taxes
    
    
    
    
    
    
    Net income
    
    $
    606,103
    
    
    $
    124,521Net income per common share:Basic
    
    $
    0.45
    
    
    $
    0.09Diluted
    
    $
    0.39
    
    
    $
    0.09Weighted average shares:Basic
    
    
    1,346,963
    
    
    
    1,337,395Diluted
    
    
    1,574,429
    
    
    
    1,343,948
 The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3




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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited) Nine Months EndedJune 26, 2004
    
    June 28, 2003Net sales
    
    $
    3,573,185
    
    
    $
    3,136,143Cost of sales
    
    
    1,349,024
    
    
    
    1,130,826Gross profit
    
    
    2,224,161
    
    
    
    2,005,317Operating expenses:Selling, general and
administrative expenses
    
    
    1,052,133
    
    
    
    1,243,684Product development costs
    
    
    250,218
    
    
    
    496,391Total operating expenses
    
    
    1,302,351
    
    
    
    1,740,075Operating income
    
    
    921,810
    
    
    
    265,242Other income (expense):Interest income
    
    
    9,222
    
    
    
    4,656Interest expense
    
    
    (1,183
    )
    
    
    (1,252
    )Other
    
    
    32,288
    
    
    
    2,540Total other income:
    
    
    40,327
    
    
    
    5,944Income before income taxes
    
    
    962,137
    
    
    
    271,186Provision for income taxes
    
    
    
    
    
    
    Net income
    
    $
    962,137
    
    
    $
    271,186Net income per common share:Basic
    
    $
    0.72
    
    
    $
    0.20Diluted
    
    $
    0.62
    
    
    $
    0.20Weighted average shares:Basic
    
    
    1,339,947
    
    
    
    1,335,746Diluted
    
    
    1,549,293
    
    
    
    1,340,141
 The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4




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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited) Nine Months EndedJune 26, 2004
    
    June 28, 2003Operating Activities:Net income
    
    $
    962,137
    
    
    $
    271,186Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    43,865
    
    
    
    91,877Gain on sale of trading securities
    
    
    (30,838
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    53,030
    
    
    
    (5,966
    )Inventories
    
    
    67,054
    
    
    
    193,720Other current assets
    
    
    (95,112
    )
    
    
    58,920Accounts payable and other accrued liabilities
    
    
    209,649
    
    
    
    132,683Net cash provided by operating activities
    
    
    1,209,785
    
    
    
    742,420Investing Activities:Additions to equipment and leasehold improvements
    
    
    (21,963
    )
    
    
    (23,905
    )Proceeds from sale of trading securities
    
    
    30,838
    
    
    
    Net cash provided by (used in) investing activities
    
    
    8,875
    
    
    
    (23,905
    )Financing Activities:Proceeds from stock issuance
    
    
    5,483
    
    
    
    685Net cash provided by financing activities
    
    
    5,483
    
    
    
    685Net increase in cash and cash equivalents
    
    
    1,224,143
    
    
    
    719,200Cash and cash equivalents at beginning of the period
    
    
    1,097,847
    
    
    
    437,693Cash and cash equivalents at the end of the period
    
    $
    2,321,990
    
    
    $
    1,156,893Supplemental Disclosures:Interest paid
    
    $
    1,183
    
    
    $
    1,252Income taxes paid
    
    
    11,100
    
    
    
    3,456
 The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5




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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS STATEMENT OF FAIR PRESENTATION Interim Financial Statements. The accompanying unaudited condensed
consolidated financial statements of Technical Communications Corporation (the
Company or TCC) and its subsidiary include all adjustments which are, in
the opinion of management, necessary for a fair presentation of the results of
operations for the periods presented and in order to make the financial
statements not misleading. All such adjustments are of a normal recurring
nature. Interim results are not necessarily indicative of the results to be
expected for the fiscal year ending September 25, 2004. Certain footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted as allowed by Securities and Exchange Commission rules and
regulations. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the Companys audited
consolidated financial statements and the notes thereto in the Companys Annual
Report on Form 10-KSB for the fiscal year ended September 27, 2003. Basis of Presentation The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation. NOTE 1:       Summary of Significant Accounting Policies and Significant Judgments and Estimates The discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported revenues
and expenses during the reported periods. On an ongoing basis, management evaluates its estimates and judgments,
including but not limited to those related to revenue recognition, receivable
reserves, inventory reserves and income taxes. Management bases its estimates
on historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The accounting policies that management believes are most critical to aid in
fully understanding and evaluating our reported financial results include the
following: Revenue Recognition  Revenue is recognized from product sales in accordance with SEC Staff
Accounting Bulletin No.101, Revenue Recognition, as updated by Staff
Accounting Bulletin No. 104 and Emerging Issues Task Force Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables (EITF 00-21). Product
revenue is recognized when there is persuasive evidence of an arrangement,
the fee is fixed or determinable, delivery of the product to the customer
has occurred and we have determined that collection of the fee is probable.
Title to the product generally passes upon shipment of the product, as the
products are shipped FOB shipping point, except for certain foreign
shipments. If the product requires installation to be performed by TCC,
all revenue related to the product is deferred and Page 6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)  recognized upon the completion of the installation. We provide for a
warranty reserve at the time the product revenue is recognized.If a contract involves the provision of multiple elements and the elements
qualify for separation under EITF 00-21, total estimated contract revenue
is allocated to each element based on the relative fair value of each
element provided. The amount of revenue allocated to each element is
limited to the amount that is not contingent upon the delivery of another
element in the future. Revenue is then recognized for each element as
described above for product revenue.We perform funded research and development and product development for
commercial companies and government agencies under both cost reimbursement
and fixed-price contracts. Cost reimbursement contracts provide for the
reimbursement of allowable costs and, in some situations, the payment of a
fee. These contracts may contain incentive clauses providing for
increases or decreases of the fee depending on how costs compare with a
budget. Revenue from reimbursement contracts is recognized as services are
performed. On fixed-price contracts, revenue is generally recognized
pursuant to the percentage of completion method based upon the proportion
of costs incurred to the total estimated costs for the contract. In each
type of contract, we receive periodic progress payments or payment upon
reaching interim milestones. Further, we retain the rights to the
intellectual property developed in government contracts. All payments to
TCC for work performed on contracts with agencies of the U.S. government
are subject to audit and adjustment by the Defense Contract Audit Agency.
Adjustments are recognized in the period made. When current estimates of
total contract revenue and cost for commercial product development
contracts indicate a loss, a provision for the entire loss on the contract
is recorded. Any losses incurred in performing funded research and
development projects are recognized as funded research and development
expenses as incurred.Cost of product revenue includes material, labor and overhead. Costs
incurred in connection with funded research and development and other
revenue arrangements are included in cost of sales. Inventory  Inventory is valued at the lower of actual cost to purchase and/or
manufacture or the current estimated market value of the inventory using
the first-in-first-out method. We periodically review inventory quantities
on hand and record a provision for excess and/or obsolete inventory based
primarily on our estimated forecast of product demand, as well as
historical usage. Due to the custom and specific nature of certain of our
products, demand and usage for products and materials can fluctuate
significantly. A significant decrease in demand for our products could
result in a short-term increase in the cost of inventory purchases and an
increase of excess inventory quantities on hand. In addition, our industry
is characterized by rapid technological change, frequent new product
development and rapid product obsolescence, any of which could result in an
increase in the amount of obsolete inventory quantities on hand.
Therefore, although we make every effort to ensure the accuracy of our
forecasts of future product demand, any significant unanticipated changes
in demand or technological developments could have a significant impact on
the value of our inventory and our reported operating results. Accounts Receivable  Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. The estimated allowance for uncollectible
amounts is based primarily on a specific analysis of accounts in the
receivable portfolio and historical write-off experience. While management
believes the allowance to be adequate, if the financial condition of our
customers were to deteriorate, resulting in impairment of their ability to
make payments, additional allowances may be required. Page 7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd) Stock-Based Compensation  Statement of Financial Accounting Standards No. 123 Accounting for Stock
Based Compensation (SFAS No. 123) and No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure (SFAS No. 148) encourage, but 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, under which no compensation expense for stock
options is recognized for stock option awards granted to employees at or
above fair market value.The Company has adopted the disclosure-only provisions of SFAS No. 123 and
SFAS No. 148. Had stock compensation expense been determined based on the
fair value at the grant dates for awards granted under the Companys stock
option plans, consistent with the provisions of SFAS No. 123, the Companys
net income and income per share for the three and nine month periods ended
June 26, 2004 and June 28, 2003 would have been as follows: June 26, 2004
    
    June 28, 20033 months
    
    9 months
    
    3 months
    
    9 months(unaudited)
    
    (unaudited)Net income, as reported
    
    $
    606,103
    
    
    $
    962,137
    
    
    $
    124,521
    
    
    $
    271,186Pro forma impact of expensing stock options
    
    
    52,689
    
    
    
    293,377
    
    
    
    59,568
    
    
    
    68,302Pro forma net income
    
    $
    553,414
    
    
    $
    668,760
    
    
    $
    64,953
    
    
    $
    202,884Basic income per common share, as reported
    
    $
    0.45
    
    
    $
    0.72
    
    
    $
    0.09
    
    
    $
    0.20Pro forma impact of expensing stock options
    
    
    0.04
    
    
    
    0.22
    
    
    
    0.04
    
    
    
    0.05Pro forma net income per share
    
    $
    0.41
    
    
    $
    0.50
    
    
    $
    0.05
    
    
    $
    0.15Diluted income per common share, as reported
    
    $
    0.39
    
    
    $
    0.62
    
    
    $
    0.09
    
    
    $
    0.20Pro forma impact of expensing stock options
    
    
    0.03
    
    
    
    0.19
    
    
    
    0.04
    
    
    
    0.05Pro forma net income per share
    
    $
    0.36
    
    
    $
    0.43
    
    
    $
    0.05
    
    
    $
    0.15
  Because the method prescribed by SFAS No. 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 3.66% and 2.625% for 2004 and
2003, respectively; expected life equal to 5.48 years and 9.45 years for
2004 and 2003, respectively; expected volatility of 189% and 176% in 2004
and 2003, respectively; and an expected dividend yield of 0% for both 2003
and 2004. Accounting for Income Taxes  The preparation of consolidated financial statements requires an estimate
of income taxes in each of the jurisdictions in which we operate, including
those outside the United States, which may be subject to certain risks that
ordinarily would not be expected in the United States. The income tax
accounting Page 8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)  process involves estimating our actual current exposure together with
assessing temporary differences resulting from differing treatments of
items, such as deferred revenue, for tax and accounting purposes. These
differences result in the recognition of deferred tax assets and
liabilities. We must then record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not to be
realized.Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities, and any
valuation allowance recorded against deferred tax assets. We have recorded
a full valuation allowance against our deferred tax assets of $4.3 million
as of June 26, 2004 and September 27, 2003, due to uncertainties related to
our ability to utilize these assets. The valuation allowance is based on
our estimates of taxable income by jurisdiction in which we operate and the
period over which our deferred tax assets will be recoverable. In the
event that actual results differ from these estimates or we adjust these
estimates in future periods, we may need to adjust our valuation allowance,
which could materially impact our financial position and results of
operation.Because we sell products into foreign countries with the assistance of
local representatives, the Company has not been subject to any foreign
taxes in recent years. Also, it is not anticipated that we will be subject
to foreign taxes in the near future. Newly Issued Pronouncements  In January 2003, Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 (FIN No. 46), which
addressed accounting for special-purpose and variable interest entities.
This interpretation was effective for financial statements issued after
December 31, 2002. In December 2003, the FASB issued FIN No. 46R
Consolidation of Variable Interest Entities, which addressed accounting
for special-purpose and variable interest entities and which supersedes FIN
No. 46. The Company adopted the provisions of FIN No. 46R during the
quarter ended March 27, 2004 and it had no effect on the Companys
financial statements and related disclosures. NOTE 2.       Inventories Inventories consisted of the following: June 26, 2004
    
    September 27, 2003(unaudited)Finished Goods
    
    $
    74,287
    
    
    $
    280,959Work in Process
    
    
    373,789
    
    
    
    222,588Raw Materials
    
    
    674,154
    
    
    
    685,737$
    1,122,230
    
    
    $
    1,189,284
 NOTE 3.       Income taxes Although the Company recorded net income for the nine months ended June 26,
2004, the Company had no income tax expense due to the reversal of the
valuation allowance on net operating loss carryforwards to offset current
earnings. The Company has recorded a valuation allowance for the full amount
of its net deferred tax assets since it cannot currently predict the
realization of these assets. Page 9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd) NOTE 4.       Earnings Per Share In accordance with SFAS No. 128, Earnings Per Share, basic and diluted
earnings per share were calculated as follows: June 26, 2004
    
    June 28, 20033 months
    
    9 months
    
    3 months
    
    9 months(unaudited)
    
    (unaudited)Net income
    
    $
    606,103
    
    
    $
    962,137
    
    
    $
    124,521
    
    
    $
    271,186Average shares outstanding  basic
    
    
    1,346,963
    
    
    
    1,339,947
    
    
    
    1,337,395
    
    
    
    1,335,746Dilutive effect of stock options
    
    
    227,466
    
    
    
    209,346
    
    
    
    6,553
    
    
    
    4,395Weighted average shares  diluted
    
    
    1,574,429
    
    
    
    1,549,293
    
    
    
    1,343,948
    
    
    
    1,340,141Basic income per share
    
    $
    0.45
    
    
    $
    0.72
    
    
    $
    0.09
    
    
    $
    0.20Diluted income per share
    
    $
    0.39
    
    
    $
    0.62
    
    
    $
    0.09
    
    
    $
    0.20
 Outstanding potentially dilutive stock options, which were not included in the
earnings per share calculations, as their inclusion would have been
anti-dilutive at June 26, 2004, were 225,099 for the three month period and
376,044 for the nine month period and at June 28, 2003, were 531,499 for both
the three month and the nine month period. NOTE 5.       Major Customers and Export Sales During the quarter ended June 28, 2004, the Company had three customers that
represented 79% (42%, 24% and 13%, respectively) of net sales as compared to
the same period in fiscal 2003 where two customers represented 41% (29% and
12%) of net sales. During the nine months ended June 26, 2004, the Company had
four customers that represented 71% (27%, 21%, 12% and 11%, respectively) of
net sales as compared to the same period in fiscal 2003 where three customers
represented 52% (22%, 16% and 14%, respectively) of net sales. A breakdown of foreign and domestic net sales is as follows: June 26, 2004
    
    June 28, 20033 months
    
    9 months
    
    3 months
    
    9 months(unaudited)
    
    (unaudited)Domestic
    
    $
    751,469
    
    
    $
    1,784,118
    
    
    $
    639,688
    
    
    $
    1,056,240Foreign
    
    
    661,916
    
    
    
    1,789,067
    
    
    
    346,306
    
    
    
    2,079,903Total sales
    
    $
    1,413,385
    
    
    $
    3,573,185
    
    
    $
    985,994
    
    
    $
    3,136,143
 Page 10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd) The Company sold products into thirteen countries during the quarter ended June
26, 2004 and nineteen countries during the quarter ended June 28, 2003. A sale
is attributed to a foreign country based on the location of the contracting
party. The table below summarizes our foreign revenues by country as a
percentage of total foreign revenue. June 26, 2004
    
    June 28, 20033 months
    
    9 months
    
    3 months
    
    9 months(unaudited)
    
    (unaudited)Egypt
    
    
    90.6
    %
    
    
    41.4
    %
    
    
    
    
    
    
    4.4
    %Indonesia
    
    
    
    
    
    
    24.6
    %
    
    
    
    
    
    
    Colombia
    
    
    3.0
    %
    
    
    21.0
    %
    
    
    
    
    
    
    24.6
    %Italy
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31.2
    %Mauritania
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.7
    %Saudi Arabia
    
    
    
    
    
    
    
    
    
    
    24.7
    %
    
    
    4.2
    %Bahrain
    
    
    
    
    
    
    
    
    
    
    23.0
    %
    
    
    4.3
    %Thailand
    
    
    0.2
    %
    
    
    0.1
    %
    
    
    23.2
    %
    
    
    3.9
    %Canada
    
    
    
    
    
    
    
    
    
    
    10.5
    %
    
    
    1.7
    %Other
    
    
    6.2
    %
    
    
    12.9
    %
    
    
    18.6
    %
    
    
    13.0
    %
 A summary of foreign revenue, as a percentage of total foreign revenue by geographic area, is as follows: June 26, 2004
    
    June 28, 20033 months
    
    9 months
    
    3 months
    
    9 months(unaudited)
    
    (unaudited)North America
(excluding the U.S.)
    
    
    
    
    
    
    1.6
    %
    
    
    3.6
    %
    
    
    0.6
    %Central and South America
    
    
    3.0
    %
    
    
    21.3
    %
    
    
    
    
    
    
    26.3
    %Europe
    
    
    5.9
    %
    
    
    10.1
    %
    
    
    13.9
    %
    
    
    38.4
    %Mid-East and Africa
    
    
    90.6
    %
    
    
    42.1
    %
    
    
    47.6
    %
    
    
    27.9
    %Far East
    
    
    0.5
    %
    
    
    24.9
    %
    
    
    34.9
    %
    
    
    6.8
    %
 NOTE 6.       Subsequent event On August 5, 2004 the Companys Board of Directors adopted a Stockholder Rights
Plan (Rights Plan) designed to enhance the Boards ability to protect the
Corporations stockholders in the event of takeover activity that could deny
them the full value of their investment or is otherwise not in the best
interests of the corporation or its stockholders. In adopting the Rights Plan,
the Board declared a dividend distribution of one common stock purchase right
for each outstanding share of common stock of the Corporation, payable to
stockholders of record at the close of business on August 13, 2004. Until the
rights become exercisable, they will trade automatically with the Corporations
common stock and separate rights certificates will not be issued. The rights
will become exercisable only in the event, with certain exceptions, that a
person or group of affiliated or associated persons acquires 15% or more of the
Corporations voting stock, or a person or group of affiliated or associated
persons commences a tender or exchange offer which, if successfully
consummated, would result in such person or group owning 15% or more of the
Corporations voting stock. For more detailed information see the Companys
Form 8-K filing dated August 6, 2004. Page 11




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##### Table of Contents



Item 2. Managements Discussion and Analysis or Plan of Operation Forward-looking statements The following discussion in this Form 10-QSB may contain statements that are
not purely historical. Certain statements contained herein or as may otherwise
be incorporated by reference herein constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include but are not limited to statements regarding
anticipated operating results, future earnings, and the ability of the Company
to achieve growth and profitability. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors, including but not
limited to future changes in export laws or regulations; changes in technology;
the effect of foreign political unrest; the ability to hire, retain and
motivate technical, management and sales personnel; the risks associated with
the technical feasibility and market acceptance of new products; changes in
telecommunications protocols; the effects of changing costs, exchange rates and
interest rates; and the companys ability to secure adequate capital resources.
Such risks, uncertainties and other factors could cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. For a more detailed
discussion of the risks facing the Company, see the Companys filings with the
Securities and Exchange Commission, including the Form 10-KSB for the fiscal
year ended September 27, 2003, the Form 10-QSB for the quarter ended December
27, 2003 and the Form 10-QSB for the quarter ended March 27, 2004. All forward-looking statements contained in this document are based on the
information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward-looking statements, except as
specifically required by law. Accordingly, past results and trends should not
be used to predict future results or trends. Overview The Company is in the business of designing, manufacturing, marketing and
selling communications security equipment that utilizes various methods of
encryption to protect the information being transmitted. Encryption is a
technique for rendering information unintelligible, which information can then
be reconstituted if the recipient possesses the right decryption key. The
Company manufactures several standard secure communications products and also
provides custom-designed, special-purpose secure communications products for
both domestic and international customers. The Companys products consist
primarily of voice, data and facsimile encryptors and revenue is generated
primarily from the sale of these products. The sales of these products have
traditionally been to foreign governments. However, we have also sold these
products to commercial entities and U.S. government agencies. We also generate
revenues from contract engineering services performed for both domestic and
foreign government agencies. The Company needs to achieve quarterly revenue of approximately $1 million
in order to reach a breakeven cash run rate based on current product cost
structure and operating expenses. We have been able to achieve this goal for
the past eight consecutive quarters, during which period TCC generated net
income of $1,556,000 and positive cash flow of $1,674,000. Although we do not
believe it will be necessary, further reductions of operating expenses can be
made in fiscal 2004 to achieve cost savings if revenue targets are not
achieved. Page 12




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Results of Operations Quarter ended
June 26, 2004 as compared to the Quarter ended June 28,
2003 Net sales for the quarter ended June 26, 2004 were $1,413,000, as compared to
$986,000 for the quarter ended June 28, 2003, a 43% increase. Revenue for the
quarter was derived in part from our on-going efforts to provide engineering
services to the U.S. government. Revenue recorded under this program amounted
to $340,000 for the quarter. In addition, the Company achieved the first
milestone of a $1 million international upgrade program received in October
2003 resulting in the recognition of $600,000 of revenue ($400,000 of which was
previously deferred). Additional revenue for the quarter consisted of three
domestic orders amounting to $388,000 for our narrowband radio encryptors. This compares to the third quarter of the previous fiscal year where revenue
was primarily derived from our engineering services efforts for the U.S.
government amounting to $276,000 and additional revenue consisting of a
domestic order for narrowband radio encryptors amounting to $121,000. Gross profit for the third quarter of fiscal 2004 was $1,066,000 as compared to
gross profit of $552,000 for the same period of fiscal 2003. This represented
an increase in gross profit of 93% for the quarter. Gross profit expressed as
a percentage of sales was 75% for the third quarter of fiscal 2004 as compared
to 56% for the same period in fiscal 2003. The increase in gross profit was
primarily attributable to the first milestone completion under the $1 million
international upgrade program referenced above, which generated a higher than
normal gross profit. Selling, general and administrative expenses for the third quarter of fiscal
2004 were $369,000, as compared to $371,000 for the same quarter in fiscal
2003. This decrease of 1% was primarily attributable to a decrease of $21,000
in selling and marketing costs, offset by an increase of $19,000 in general and
administrative expenses. The increase in general and administrative costs was primarily attributable to
a $48,000 increase in personnel-related costs as a result of increased work
schedules and bonuses as all employees have been brought back to their full
salaries. This increase was partially offset by a decrease in audit and other
professional fees of approximately $26,000. All general and administrative
employees had been returned to full salary as of June 26, 2004. The decrease in selling costs was primarily attributable to a reduction in
third-party sales commissions and marketing contracts totaling $24,000 and a
decrease in bid and proposal efforts of $25,000. This decrease was partially
offset by an increase in personnel-related costs of $9,000 and an increase in
product demonstration costs of $11,000. All sales employees had been returned
to full salary as of December 31, 2003. Product development costs for the quarter ended June 26, 2004 were $96,000
compared to $57,000 for the same period in fiscal 2003. This increase of 68%
was primarily attributable to an increase in personnel-related costs and
consulting services of $58,000 and a decrease in engineering costs allocated to
bid and proposal selling efforts of $25,000. This increase was partially offset
by an increase in engineering costs allocated to billable engineering services
work of $68,000. Engineering costs are allocated among billable engineering services, bid and
proposal efforts and product development. Engineering costs allocated to
billable projects are charged to cost of sales and engineering costs allocated
to bid and proposal efforts are charged to selling expenses. All product development employees had been returned to full salary as of
January 2004. The Company believes that the current mix of employees and
billable versus non-billable production efforts is sufficient to accomplish its
near-term goals. Page 13




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The Company actively sells its engineering services in support of funded
research and development. The receipt of these orders is sporadic, although
such programs can span over several months. In addition to these programs, the
Company also invests in research and development to enhance its existing
products and to develop new products, as it deems appropriate. During the third
quarter of fiscal year 2004, the majority of product development efforts was
focused on billable work. Engineering services work accounted for approximately
$345,000 of revenue during this quarter. This revenue was primarily generated
under a program with the U.S. government, which is expected to be completed in
fiscal year 2004. The Companys net income was $606,000 for the third quarter of fiscal 2004, as
compared to $125,000 for the same period of fiscal 2003. This increase in
profitability is attributable to an 8% decrease in operating expenses and an
increase in gross profit of $514,000. This trend in net income is encouraging.
However, due to the uncertainty of the timing of customer orders, future
results remain difficult to predict. Receiving orders and contracts in a timely
manner is essential to the Companys ability to sustain operations. The effects of inflation and changing costs have not had a significant impact
on sales or earnings in recent years. As of June 26, 2004, none of the
Companys monetary assets or liabilities was subject to foreign exchange risks.
The Company usually includes an inflation factor in its pricing when
negotiating multi-year contracts with customers. Nine months ended June 26, 2004 as compared to the Nine months ended June 28, 2003 Net sales for the nine months ended June 26, 2004 were $3,573,000, 14% more
than net sales for the nine months ended June 28, 2003 of $3,136,000. Revenue
for the period was derived in part from our on-going efforts to provide
engineering services to the U.S. government. Revenue recorded under this
program amounted to $977,000 for the period. In addition, the Company achieved
the first milestone of a $1 million international upgrade program received in
October 2003 resulting in the recognition of $600,000 of revenue. Additional
revenue for the period consisted of four domestic orders amounting to $520,000
and a foreign order sold into South America amounting to $293,000 for our
narrowband radio encryptors and a foreign order sold into the Middle East
amounting to $139,000 for our fax encryptors. We also shipped two orders to a
Southeast Asian country for our secure telephones amounting to $438,000. This compares to the same period of the previous fiscal year where revenue was
primarily derived from three foreign orders; a single order, representing 22%
of sales, shipped to a customer in Italy for our 72ASP high-speed bulk
encryptors amounting to $686,000; two orders for our secure telephones sold
into South America totaling $637,000; and a single order of $264,000 of various
data, voice and radio encryptors shipped to an African nation. Revenue
recorded under our engineering services efforts with the US government during
the first nine months of fiscal 2003 amounted to $276,000. Gross profit for the first nine months of fiscal 2004 was $2,224,000 as
compared to gross profit of $2,005,000 for the same period of fiscal 2003.
This represented an increase in gross profit of 11% for the period. Gross
profit expressed as a percentage of sales was 62% for the first nine months of
fiscal 2004 as compared to 64% for the same period in fiscal 2003. The
increase in gross profit was primarily attributable to a large engineering
services contract with a high gross profit margin in the third quarter of
fiscal 2004, offset by recurring engineering services work that typically has a
lower gross profit. Selling, general and administrative expenses for the first nine months of
fiscal 2004 were $1,052,000, as compared to $1,244,000 for the same period in
fiscal 2003. This decrease of 15% was primarily attributable to a decrease of
$194,000 in selling and marketing costs, offset by a slight increase of $2,000
in general and administrative expenses. The increase in general and administrative costs was primarily attributable to
a $75,000 increase in personnel-related costs as a result of increased work
schedules and bonuses as all employees have been Page 14




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##### Table of Contents



brought back to their full
salaries. This increase was partially offset by decrease in audit and other
professional fees of approximately $76,000. The decrease in selling costs was primarily attributable to a reduction in
internal and third party sales commissions and marketing contracts totaling
$258,000. This decrease was partially offset by an increase in
personnel-related costs of $27,000 and an increase in travel expenses and
product demonstration costs of $24,000. All sales employees had been returned
to full salary as of December 31, 2003. Product development costs for the nine months ended June 26, 2004 were $250,000
compared to $496,000 for the same period in fiscal 2003. This decrease of 50%
was primarily attributable to an increase in engineering costs allocated to
billable engineering services work in the first nine months of fiscal 2004,
which decreased product development cost in such quarter as compared to the
same period in fiscal 2003 by approximately $378,000. We expect this trend to
continue for the remainder of the fiscal year. The cost of engineers working on
billable projects is charged to cost of sales. This decrease was partially
offset by an increase in personnel-related costs of $124,000. All product
development employees had been returned to full salary as of January 2004. The
Company believes that the current mix of employees and billable versus
non-billable production efforts is sufficient to accomplish its near-term
goals. The Company actively sells its engineering services in support of funded
research and development. The receipt of these orders is sporadic, although
such programs can span several months. In addition to these programs, the
Company also invests in research and development to enhance its existing
products or to develop new products, as it deems appropriate. During the first
nine months of fiscal year 2004, the majority of product development efforts
was focused on billable work. Engineering services work accounted for
approximately $1,010,000 of revenue during this period. This revenue was
primarily generated under a program with the U.S. government, which is expected
to be completed in fiscal year 2004. The Companys net income was $962,000 for the first nine months of fiscal 2004,
as compared to $271,000 for the same period of fiscal 2003. This increase in
profitability is attributable to a 25% decrease in operating expenses, a gain
on the sale of an investment of $31,000 and an 11% increase in gross profit.
This trend in net income is encouraging. However, due to the uncertainty of the
timing of customer orders, future results remain difficult to predict.
Receiving orders and contracts in a timely manner is essential to the Companys
ability to sustain operations. The effects of inflation and changing costs have not had a significant impact
on sales or earnings in recent years. As of June 26, 2004, none of the
Companys monetary assets or liabilities was subject to foreign exchange risks.
The Company usually includes an inflation factor in its pricing when
negotiating multi-year contracts with customers. Liquidity and Capital Resources Cash and cash equivalents increased by $1,224,000, or 112%, to $2,322,000 as of
June 26, 2004, from a balance of $1,098,000 at September 27, 2003. This
increase was attributable in part to a decrease in inventory of $67,000 as a
result of product shipments of production runs begun in the fourth quarter of
fiscal 2003, a decrease in accounts receivable of $53,000 and an increase in
accounts payable and accrued expenses of $210,000. Also contributing to the
increase in cash was income from operations of $962,000 for the nine months
ended June 26, 2004. These increases were partially offset by an increase in
other current assets primarily as a result of new customer performance
guarantees that required cash deposits as collateral of $95,000. The $1 million engineering services order received in March of 2003 was
increased to $1.8 million in March 2004 and has generated approximately
$977,000 of revenue during the first nine months of this fiscal year. This
consistent source of cash flow is expected to continue during the remainder of
fiscal 2004 as we complete this project. Page 15




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In addition, work has begun on a new upgrade program received from a foreign
customer in October 2003, which is expected to be completed in early fiscal
2005. Backlog at June 26, 2004 amounted to approximately $1,390,000. This amount
consists, in part, the remainder of the international upgrade program received
in October 2003 amounting to approximately $400,000 and the remainder of the
U.S. government engineering services contract received in March 2003 amounting
to $173,000. The backlog is expected to ship over the next twelve months
depending on customer requirements and product availability. For the last several years the Companys primary source of cash has been from
operations. The Company needs to achieve quarterly revenue of approximately $1
million in order to reach a breakeven cash run rate based on current product
cost structure and operating expenses. We have been able to achieve this goal
for the past eight consecutive quarters, during which period TCC generated net
income of $1,556,000 and positive cash flow of $1,674,000. As a result, based
on todays product cost structure and operating expenses, we believe that
current cash and accounts receivable balances along with the current backlog
are sufficient to provide resources to operate the Company through the end of
fiscal year 2004. Further, based on our progress during the past eight
quarters, we are optimistic about future sales growth and other possible
sources of financing, including a bank line of credit. However, there is no
assurance that these goals can be achieved. Although we do not believe it will
be necessary, further reductions of operating expenses can be made in fiscal
year 2004 to achieve cost savings if revenue targets are not achieved. We believe that, based on current billable activities and the recent
improvement in business prospects, cash from operations will be sufficient to
meet the development goals of the Company, although we can give no assurances.
A significant increase in activities, whether billable work or work related to
new product development, will require additional resources, which we may not be
able to fund through cash from operations. In circumstances where resources
will be insufficient, the Company will look to other sources of financing,
including debt and/or equity investments. Certain foreign customers require the Company to guarantee performance of
products sold. These guaranties typically take the form of standby letters of
credit. Guaranties are generally required in amounts of 5% to 10% of the
purchase price and last in duration from three months to one year. As of June
26, 2004, the Company had two outstanding standby letters of credit amounting
to an aggregate $114,000, expiring through January 2005. The standby letters of
credit are secured by compensating cash collateral, which is classified as
other current assets on our balance sheet. The majority of our product manufacturing is outsourced with essentially only
final assembly and final testing procedures performed at the Companys
facilities. As a result, the Company does not require extensive machinery and
equipment. The Company does not anticipate any significant capital expenditures
during the remainder of fiscal 2004. On January 1, 2003, the Company entered into an operating lease for its current
facilities. This lease is for 22,800 square feet, which is a reduction of 34%
from the previous lease and which will reduce cash requirements going forward
by approximately $30,000 per year. This is the companys only facility and
houses all manufacturing, research and development, and corporate operations.
The lease is for a three-year period with rents payable at an annual rate of
$142,169 through December 31, 2005. At its option the Company may extend the
lease for two more years at an annual rate of $147,855. Stockholder Rights Plan On August 5, 2004 the Companys Board of Directors adopted a Stockholder Rights
Plan (Rights Plan) designed to enhance the Boards ability to protect the
Corporations stockholders in the event of takeover activity that could deny
them the full value of their investment or is otherwise not in the best
interests of the corporation or its stockholders. In adopting the Rights Plan,
the Board declared a dividend distribution of one common stock purchase right
for each outstanding share of common stock of the Corporation, payable Page 16




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##### Table of Contents



to
stockholders of record at the close of business on August 13, 2004. Until the
rights become exercisable, they will trade automatically with the Corporations
common stock and separate rights certificates will not be issued. The rights
will become exercisable only in the event, with certain exceptions, that a
person or group of affiliated or associated persons acquires 15% or more of the
Corporations voting stock, or a person or group of affiliated or associated
persons commences a tender or exchange offer which, if successfully
consummated, would result in such person or group owning 15% or more of the
Corporations voting stock. For more detailed information see the Companys
Form 8-K filing dated August 6, 2004. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements with any party. Critical Accounting Estimates There have been no material changes in our critical accounting policies or
critical accounting estimates since September 27, 2003 nor have we adopted an
accounting policy that has or will have a material impact on our consolidated
financial statements. For further discussion of our accounting policies see
Footnote 1 Summary of Significant Accounting Policiesin this Quarterly
Report on Form 10-QSB and the Notes to Consolidated Financial Statements in our
Annual Report on Form 10-KSB for the fiscal year ended September 27, 2003. 
 Item 3.    Controls and Procedures Evaluation of disclosure and controls and procedure:With the participation of
management, the Companys chief executive officer and chief financial officer
have reviewed and evaluated the effectiveness of the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the period
covered by this quarterly report. Based on that evaluation, the chief executive
officer and chief financial officer have concluded that the Companys
disclosure controls and procedures, as designed and implemented, are reasonably
adequate to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms, and are operating in an effective manner. Changes in internal controls: During the period covered by this quarterly
report, there were no changes in the Companys internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting. Page 17




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##### Table of Contents



PART II.
    
    Other Information

Item 1.
    
    Legal ProceedingsThere are no current legal proceedings pending against or involving the Company.

Item 2.
    
    Changes in Securities and Small
Business Issuer Purchases of Equity SecuritiesNot applicable.

Item 3.
    
    Defaults Upon Senior
SecuritiesNot applicable.

Item 4.
    
    Submission of Matters to a Vote of
Security HoldersNone.

Item 5.
    
    Other InformationNone.

Item 6.
    
    Exhibits and Reports on
Form 8-K
 a.
    
    Exhibits


10.1
    
    Rights Agreement (incorporated by
reference to the 
Companys 8-K filed with the Securities and
Exchange Commission on August 6, 2004).31.1
    
    Certification of principal
executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of principal
financial officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certifications of Chief Executive
and Chief Financial
Officers pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.


b.
    
    Reports on Form 8-KOn August 6, 2004, the registrant filed a Form 8-K, with respect to
a Rights Agreement dated August 6, 2004.


Page 18



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SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized. TECHNICAL
COMMUNICATIONS CORPORATION
(Registrant)August 9, 2004
Date
    
    By:
    
    /s/ Carl H. Guild, Jr.
Carl H. Guild, Jr., President and Chief
   Executive OfficerAugust 9, 2004
Date
    
    By:
    
    /s/ Michael P. Malone
Michael P. Malone, Chief Financial Officer
 Page 19