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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 FORM 10-QSB (Mark One) þ
    
    Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the quarterly period ended March 27, 2004
 o
    
    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 
 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 
 Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.  
Yes  þ
  No   o 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 May 7, 2004: 1,346,093




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INDEX PagePART I
    
    Financial InformationItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets as of
March 27, 2004 (unaudited) and September 27, 2003
    
    
    2Condensed Consolidated Statements of Operations for the
Three (3) months ended March 27, 2004 and March 29, 2003 (unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the
Six (6) months ended March 27, 2004 and March 29, 2003 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Six (6) months ended March 27, 2004 and March 29, 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 CERTIFICATION OF CEOEX-31.2 CERTIFICATION OF CFOEX-32.1 CERTIFICATIONS PURSUANT TO SECTION 906
 Page 1




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Item 1.   Financial Statements 
 TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets March 27, 2004
    
    September 27, 2003(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    1,914,218
    
    
    $
    1,097,847Accounts receivable  trade, less allowance for
doubtful accounts of $70,000
    
    
    413,637
    
    
    
    269,892Inventories
    
    
    1,043,481
    
    
    
    1,189,284Other current assets
    
    
    169,059
    
    
    
    101,031Total current assets
    
    
    3,540,395
    
    
    
    2,658,054Equipment and leasehold improvements
    
    
    4,993,358
    
    
    
    4,971,395Less: accumulated depreciation and amortization
    
    
    4,893,518
    
    
    
    4,862,24199,840
    
    
    
    109,154Total Assets
    
    $
    3,640,235
    
    
    $
    2,767,208Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    105,328
    
    
    $
    105,821Accrued liabilitiesAccrued payroll
    
    
    108,611
    
    
    
    61,390Accrued expenses
    
    
    484,082
    
    
    
    416,562Deferred revenue
    
    
    400,000
    
    
    
    Total current liabilities
    
    
    1,098,021
    
    
    
    583,773Stockholders Equity:Common stock, par value $.10 per share;
3,500,000 shares authorized; 1,345,460 shares issued
and outstanding at March 27, 2004 and 1,337,627
shares issued and outstanding at September 27, 2003
    
    
    134,546
    
    
    
    133,763Treasury stock at cost, 232 shares
    
    
    (1,934
    )
    
    
    (1,934
    )Additional paid-in capital
    
    
    1,378,049
    
    
    
    1,376,088Retained earnings
    
    
    1,031,553
    
    
    
    675,518Total stockholders equity
    
    
    2,542,214
    
    
    
    2,183,435Total Liabilities and Stockholders Equity
    
    $
    3,640,235
    
    
    $
    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 EndedMarch 27, 2004
    
    March 29, 2003Net sales
    
    $
    1,105,908
    
    
    $
    1,014,691Cost of sales
    
    
    449,056
    
    
    
    320,370Gross profit
    
    
    656,852
    
    
    
    694,321Operating expenses:Selling, general and
administrative expenses
    
    
    319,724
    
    
    
    421,689Product development costs
    
    
    105,882
    
    
    
    190,878Total operating expenses
    
    
    425,606
    
    
    
    612,567Operating income
    
    
    231,246
    
    
    
    81,754Other income (expense):Interest income
    
    
    2,921
    
    
    
    1,094Interest expense
    
    
    (363
    )
    
    
    (315
    )Other
    
    
    31,388
    
    
    
    1,167Total other income:
    
    
    33,946
    
    
    
    1,946Income before income taxes
    
    
    265,192
    
    
    
    83,700Provision for income taxes
    
    
    
    
    
    
    Net income
    
    $
    265,192
    
    
    $
    83,700Net income per common share:Basic
    
    $
    0.20
    
    
    $
    0.06Diluted
    
    $
    0.17
    
    
    $
    0.06Weighted average shares:Basic
    
    
    1,343,298
    
    
    
    1,336,186Diluted
    
    
    1,561,331
    
    
    
    1,340,720
 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) Six Months EndedMarch 27, 2004
    
    March 29, 2003Net sales
    
    $
    2,159,801
    
    
    $
    2,150,150Cost of sales
    
    
    1,001,705
    
    
    
    696,830Gross profit
    
    
    1,158,096
    
    
    
    1,453,320Operating expenses:Selling, general and
administrative expenses
    
    
    683,598
    
    
    
    873,076Product development costs
    
    
    154,606
    
    
    
    438,938Total operating expenses
    
    
    838,204
    
    
    
    1,312,014Operating income
    
    
    319,892
    
    
    
    141,306Other income (expense):Interest income
    
    
    5,031
    
    
    
    2,819Interest expense
    
    
    (726
    )
    
    
    (631
    )Other
    
    
    31,838
    
    
    
    3,169Total other income:
    
    
    36,143
    
    
    
    5,357Income before income taxes
    
    
    356,035
    
    
    
    146,663Provision for income taxes
    
    
    
    
    
    
    Net income
    
    $
    356,035
    
    
    $
    146,663Net income per common share:Basic
    
    $
    0.27
    
    
    $
    0.11Diluted
    
    $
    0.22
    
    
    $
    0.11Weighted average shares:Basic
    
    
    1,340,355
    
    
    
    1,333,956Diluted
    
    
    1,630,156
    
    
    
    1,336,905
 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) Six Months EndedMarch 27, 2004
    
    March 29, 2003Operating Activities:Net income
    
    $
    356,035
    
    
    $
    146,663Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    31,277
    
    
    
    76,909Gain on sale of trading securities
    
    
    (30,838
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (143,745
    )
    
    
    (474,892
    )Inventories
    
    
    145,803
    
    
    
    155,423Other current assets
    
    
    (68,028
    )
    
    
    67,893Accounts payable and other accrued liabilities
    
    
    114,248
    
    
    
    (6,889
    )Deferred revenue
    
    
    400,000
    
    
    
    Net cash provided by (used in) operating activities
    
    
    804,752
    
    
    
    (34,893
    )Investing Activities:Additions to equipment and leasehold improvements
    
    
    (21,963
    )
    
    
    (16,065
    )Proceeds from sale of trading securities
    
    
    30,838
    
    
    
    Net cash provided by (used in) investing activities
    
    
    8,875
    
    
    
    (16,065
    )Financing Activities:Proceeds from stock issuance
    
    
    2,744
    
    
    
    685Net cash provided by financing activities
    
    
    2,744
    
    
    
    685Net increase (decrease) in cash and cash equivalents
    
    
    816,371
    
    
    
    (50,273
    )Cash and cash equivalents at beginning of the period
    
    
    1,097,847
    
    
    
    437,693Cash and cash equivalents at the end of the period
    
    $
    1,914,218
    
    
    $
    387,420Supplemental Disclosures:Interest paid
    
    $
    726
    
    
    $
    631Income taxes paid
    
    
    11,100
    
    
    
    2,556
 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 SEC rules and regulations. The accompanying unaudited
condensed consolidated financial statements should be read in conjunction with
the Companys 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 the current estimates
of total contract revenue and contract costs for commercial product
development contracts indicate a loss, a provision for the entire loss on
the contract is recorded. Any losses incurred in performing funded
research and development projects are recognized as funded research and
development expenses as incurred. Cost of product revenue includes material, labor and overhead. Costs
incurred in connection with funded research and development and other
revenue arrangements are included in cost of sales. During the six months
ended March 27, 2004, the Company billed approximately $400,000 to a
customer in advance of revenue recognition. This amount is classified as
deferred revenue at March 27, 2004. 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 In December 2002, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure (SFAS No. 148) which 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, 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. 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. 148, the Companys net income
and income per share for the periods ended March 27, 2004 and March 29,
2003 would have been as follows: March 27, 2004
    
    March 29, 20033 months
    
    6 months
    
    3 months
    
    6 months(unaudited)
    
    (unaudited)Net income, as reported
    
    $
    265,192
    
    
    $
    356,035
    
    
    $
    83,700
    
    
    $
    146,663Pro forma impact of expensing stock options
    
    
    224,075
    
    
    
    240,687
    
    
    
    15,814
    
    
    
    25,661Pro forma net income
    
    $
    41,117
    
    
    $
    115,348
    
    
    $
    67,886
    
    
    $
    121,002Basic income per common share, as reported
    
    $
    0.20
    
    
    $
    0.27
    
    
    $
    0.06
    
    
    $
    0.11Pro forma impact of expensing stock options
    
    
    0.17
    
    
    
    0.18
    
    
    
    0.01
    
    
    
    0.02Pro forma net income per share
    
    
    0.03
    
    
    $
    0.09
    
    
    $
    0.05
    
    
    $
    0.09Diluted income per common share, as reported
    
    $
    0.17
    
    
    $
    0.22
    
    
    $
    0.06
    
    
    $
    0.11Pro forma impact of expensing stock options
    
    
    0.14
    
    
    
    0.15
    
    
    
    0.01
    
    
    
    0.02Pro forma net income per share
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.09
 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% for 2004 and 2003; expected
life equal to 5 years and 2.5 years for 2004 and 2003, respectively;
expected volatility of 191% and 172% in 2004 and 2003, respectively; and an
expected dividend yield of 0%. 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 March 27, 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, FASB issued FASB Interpretation No. 46 Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research
Bulletin No. 51 (FIN 46). FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 became effective immediately
for all new variable interest entities created or acquired after January
31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. On October 9, 2003,
FASB released FASB Staff Position 46-6, which deferred the effective date
for the consolidation guidance of FIN 46 from July 1, 2003 to December 31,
2003 for variable interest entities existing prior to February 1, 2003. The
Company adopted the provisions of FIN 46 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: March 27,
    
    September 27,2004
    
    2003Finished Goods
    
    $
    187,181
    
    
    $
    280,959Work in Process
    
    
    282,018
    
    
    
    222,588Raw Materials
    
    
    574,282
    
    
    
    685,737$
    1,043,481
    
    
    $
    1,189,284
 NOTE 3.    Income Taxes Although the Company recorded net income for the six months ended March 27,
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 the 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: March 27, 2004
    
    March 29, 20033 months
    
    6 months
    
    3 months
    
    6 months(unaudited)
    
    (unaudited)Net income
    
    $
    265,192
    
    
    $
    356,035
    
    
    $
    83,700
    
    
    $
    146,662Average shares outstanding  basic
    
    
    1,343,298
    
    
    
    1,340,355
    
    
    
    1,336,186
    
    
    
    1,333,956Dilutive effect of stock options
    
    
    218,033
    
    
    
    289,801
    
    
    
    4,534
    
    
    
    2,949Weighted average shares  diluted
    
    
    1,561,331
    
    
    
    1,630,156
    
    
    
    1,340,720
    
    
    
    1,336,905Basic income per share
    
    $
    0.20
    
    
    $
    0.27
    
    
    $
    0.06
    
    
    $
    0.11Diluted income per share
    
    $
    0.17
    
    
    $
    0.22
    
    
    $
    0.06
    
    
    $
    0.11
 Outstanding potentially dilutive stock options, which were not included in the
earnings per share calculations, as their inclusion would have been
anti-dilutive at March 27, 2004, were 225,099 for the three month period and
383,044 for the six month period and at March 29, 2003, were 379,799 for both
the three month and the six month period. NOTE 5.  Major Customers and Export Sales During the quarter ended March 27, 2004, the Company had three customers that
represented 62% (28%, 21% and 13%, respectively) of net sales as compared to
the same period in fiscal 2003 where one customer represented 64% of net sales.
During the six months ended March 27, 2004, the Company had three customers
that represented 66% (29%, 20% and 17%, respectively) of net sales as compared
to the same period in fiscal 2003 where three customers represented 66% (30%,
24% and 12%, respectively) of net sales. A breakdown of foreign and domestic net sales is as follows: March 27, 2004
    
    March 29, 20033 months
    
    6 months
    
    3 months
    
    6 months(unaudited)
    
    (unaudited)Domestic
    
    $
    549,646
    
    
    $
    1,021,799
    
    
    $
    196,672
    
    
    $
    416,553Foreign
    
    
    556,262
    
    
    
    1,138,002
    
    
    
    818,019
    
    
    
    1,733,597Total sales
    
    $
    1,105,908
    
    
    $
    2,159,801
    
    
    $
    1,014,691
    
    
    $
    2,150,150
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd) The Company sold products into thirteen countries during the quarter ended
March 27, 2004 and nineteen countries during the quarter ended March 29, 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. March 27, 2004
    
    March 29, 20033 months
    
    6 months
    
    3 months
    
    6 months(unaudited)
    
    (unaudited)Indonesia
    
    
    43.7
    %
    
    
    39.1
    %
    
    
    0.7
    %
    
    
    0.3
    %Egypt
    
    
    25.6
    %
    
    
    12.4
    %
    
    
    
    
    
    
    5.2
    %Slovakia
    
    
    19.8
    %
    
    
    9.7
    %
    
    
    
    
    
    
    0.1
    %Colombia
    
    
    
    
    
    
    31.6
    %
    
    
    
    
    
    
    29.5
    %Italy
    
    
    
    
    
    
    
    
    
    
    79.4
    %
    
    
    37.5
    %Mauritania
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.3
    %Other
    
    
    10.9
    %
    
    
    7.2
    %
    
    
    19.9
    %
    
    
    12.1
    %
 A summary of foreign revenue, as a percentage of total foreign revenue by geographic area, is as follows: March 27, 2004
    
    March 29, 20033 months
    
    6 months
    
    3 months
    
    6 monthsNorth America
(excluding the U.S.)
    
    
    1.7
    %
    
    
    2.6
    %
    
    
    
    
    
    
    Central and South America
    
    
    8.3
    %
    
    
    32.0
    %
    
    
    4.3
    %
    
    
    31.5
    %Europe
    
    
    19.8
    %
    
    
    12.5
    %
    
    
    88.3
    %
    
    
    43.3
    %Mid-East and Africa
    
    
    26.5
    %
    
    
    13.7
    %
    
    
    4.8
    %
    
    
    24.0
    %Far East
    
    
    43.7
    %
    
    
    39.2
    %
    
    
    2.6
    %
    
    
    1.2
    %
 Page 11




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FORWARD-LOOKING STATEMENTS The following discussion in this Form 10-QSB may contain statements that are
not 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 this 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. 
 Item 2. Managements Discussion and Analysis or Plan of Operation 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 seven consecutive quarters, during which period TCC generated net
income of $950,000 and positive cash flow of $1,266,000. 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 March 27, 2004 as compared to the Quarter ended March 29, 2003 Net sales for the quarter ended March 27, 2004 were $1,106,000, as compared to
$1,015,000 for the quarter ended March 29, 2003, a 9% 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 $308,000 for the quarter. Additional revenue for the quarter
consisted of a foreign order sold into the Middle East amounting to $140,000
for our fax encryptors and an order to a Southeast Asian country for our secure
telephone, fax and data encryptors amounting to $238,000. This compares to the
second quarter of the previous fiscal year where revenue primarily consisted of
a foreign order to a customer in Italy for our 72ASP high-speed bulk encryptors
amounting to $650,000. Gross profit for the second quarter of fiscal 2004 was $657,000 as compared to
gross profit of $694,000 for the same period of fiscal 2003. This represented
a decrease in gross profit of 5% for the quarter. Gross profit expressed as a
percentage of sales was 59% for the second quarter of fiscal 2004 as compared
to 68% for the same period in fiscal 2003. The decrease in gross profit was
primarily attributable to a higher percentage of sales associated with
engineering services work and an increase in manufacturing overhead variances.
Similarly, the decrease in gross profit as a percentage of sales was primarily
associated with the increase in engineering services revenue and the increase
in manufacturing overhead variances. Selling, general and administrative expenses for the second quarter of fiscal
2004 were $320,000, as compared to $422,000 for the same quarter in fiscal
2003. This decrease of 24% was primarily attributable to a decrease of $84,000
in selling and marketing costs and a decrease of $18,000 in general and
administrative expenses. The decrease in general and administrative costs was primarily attributable to
a decrease in audit and other professional fees of approximately $26,000. This
decrease was partially offset by a $14,000 increase in personnel-related costs
as a result of increased work schedules and bonuses as most employees have been
brought back to their full salaries. The Company will incur an additional
$5,000 per quarter if all general and administrative employees are returned to
full-time status. The decrease in selling costs was primarily attributable to a reduction in
third-party sales commissions and marketing contracts totaling $106,000. This
decrease was partially offset by an increase in personnel-related costs, as
discussed above, of $6,000 and an increase in bid and proposal selling efforts
of $8,000. All sales employees had been returned to full salary as of December
31, 2003. Product development costs for the quarter ended March 27, 2004 were $106,000
compared to $191,000 for the same period in fiscal 2003. This decrease of 45%
was primarily attributable to an increase in billable contract engineering work
in the second quarter of fiscal 2004, which decreased product development costs
in such quarter as compared to the same period in fiscal 2003 by approximately
$103,000. 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. Product development costs were further reduced by an increase in bid and
proposal selling efforts of $5,000 for the quarter ended March 27, 2004. This
decrease was partially offset by an increase in personnel-related costs of
$54,000 and an increase in engineering consulting services of $23,000. 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 second
quarter of fiscal year 2004, the majority of product development efforts was
focused on billable work. Engineering services work Page 13




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##### Table of Contents



accounted for approximately $335,000 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 $265,000 for the second quarter of fiscal 2004, as
compared to $84,000 for the same period of fiscal 2003. This increase in
profitability is attributable to a 31% decrease in operating expenses and a
gain on the sale of an investment of $31,000 and was slightly offset by a
reduction 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 March 27, 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. Six months ended March 27, 2004 as compared to the six months ended March 29, 2003 Net sales for the six months ended March 27, 2004 were $2,160,000 slightly more
than net sales for the six months ended March 29, 2003 of $2,150,000. 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 $637,000 for the period. Additional revenue for the period
consisted of a domestic order amounting to $132,000 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 telephone, fax and data encryptors amounting to $438,000. This compares to the same period of the previous fiscal year where revenue
primarily consisted of a foreign order to a customer in Italy for our 72ASP
high-speed bulk encryptors amounting to $650,000 and two orders for our secure
telephone, fax and data encryptors sold into South America totaling $637,000
and a single order of $264,000 for various data, voice and radio encryptors
shipped to an African nation. Gross profit for the first six months of fiscal 2004 was $1,158,000 as compared
to gross profit of $1,453,000 for the same period of fiscal 2004. This
represented a decrease in gross profit of 20% for the period. Gross profit
expressed as a percentage of sales was 54% for the first six months of fiscal
2004 as compared to 68% for the same period in fiscal 2003. The decrease in
gross profit was primarily attributable to a higher percentage of sales
associated with engineering services work and an increase in manufacturing
overhead variances. The decrease in gross profit as a percentage of sales was
primarily associated with the increase in engineering services revenue, the
increase in manufacturing overhead variances and a sale in the first quarter of
fiscal 2004 of our narrowband radio encryptors at a lower than normal profit
percentage. Selling, general and administrative expenses for the first six months of fiscal
2004 were $684,000, as compared to $873,000 for the same quarter in fiscal
2003. This decrease of 22% was primarily attributable to a decrease of
$173,000 in selling and marketing costs and a decrease of $16,000 in general
and administrative expenses. The decrease in general and administrative costs was primarily attributable to
a decrease in audit and other professional fees of approximately $51,000. This
decrease was partially offset by a $28,000 increase in personnel-related costs
as a result of increased work schedules and bonuses as most employees have been
brought back to their full salaries. The Company will incur an additional
$5,000 per quarter if all general and administrative employees are returned to
full-time status. The decrease in selling costs was primarily attributable to a reduction in
third-party sales commissions and marketing contracts totaling $216,000. This
decrease was partially offset by an increase in personnel-related costs, as
discussed above, of $6,000 and an increase in bid and proposal selling efforts
of $26,000. All sales employees had been returned to full salary as of
December 31, 2003. Page 14




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Product development costs for the six months ended March 27, 2004 were $155,000
compared to $439,000 for the same period in fiscal 2003. This decrease of 65%
was primarily attributable to an increase in billable contract engineering work
in the first six months of fiscal 2004, which decreased product development
cost in such quarter as compared to the same period in fiscal 2003 by
approximately $255,000. 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. Product development costs were further reduced by an increase
in bid and proposal selling efforts of $19,000 for the six months ended March
27, 2004. This decrease was partially offset by an increase in
personnel-related costs of $59,000. 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
six months of fiscal year 2004, the majority of product development efforts was
focused on billable work. Engineering services work accounted for approximately
$665,000 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 $356,000 for the first six months of fiscal 2004,
as compared to $147,000 for the same period of fiscal 2003. This increase in
profitability is attributable to a 36% decrease in operating expenses and a
gain on the sale of an investment of $31,000, offset by a 20% decrease 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 March 27, 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 $816,000, or 74%, to $1,914,000 as of
March 27, 2004, from a balance of $1,098,000 at September 27, 2003. This
increase was attributable in part to a decrease in inventory of $146,000 as a
result of product shipments of production runs begun in the fourth quarter of
fiscal 2003. Also contributing to the increase in cash was income from
operations of $356,000. These increases were partially offset by an increase
in accounts receivable of $144,000 and an increase in other current assets
primarily as a result of new customer performance guarantees that required cash
deposits as collateral of $68,000. The $1 million engineering services order received in March of 2003 generated
approximately $637,000 of revenue during the first six months of this fiscal
year and has also contributed to earnings by reducing product development
expenses by $255,000, as these expenses were charged to cost of goods sold.
This consistent source of cash flow is expected to continue during fiscal 2004
as we complete this project and at the same time begin work on a new
development order received from a foreign customer in October 2003. The work on
these two programs is expected to be completed in fiscal 2004 with billings and
cash collections expected to occur on a regular basis. Backlog at March 27, 2004 amounted to approximately $2,204,000. This amount
consists primarily of an engineering services contract received in October 2003
amounting to approximately $1,000,000 and the remainder of the engineering
services contract received in March 2003 amounting to $512,000. The Page 15




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##### Table of Contents



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 seven consecutive quarters, during which period TCC generated net
income of $950,000 and positive cash flow of $1,266,000. 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 seven
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,
either 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 March
27, 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 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. 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. Page 16




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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 evaluated the effectiveness of the design and operation 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 are designed 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: 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 HoldersThe Annual Meeting of Stockholders of the Company was held on February
9, 2004. The meeting was conducted for the purpose of (i) electing one
Class I Director to serve for a term of three years; and (ii) ratifying
the election of the Companys independent auditors.The election of Mitchell B. Briskin as the Companys only Class I
Director was approved with 1,244,430 votes in favor and 9,365 votes
withheld. Robert T. Lessard is a Class II Director of the Company with
a term set to expire at the 2005 Annual Meeting of Stockholders.
Messrs. Carl H. Guild, Jr. and Thomas E. Peoples are Class III
Directors of the Company with terms set to expire at the 2006 Annual
Meeting of Stockholders.The ratification of the Companys auditors Vitale Caturano & Company
PC., was approved with 1,252,294 votes in favor, 1 vote against and
1,500 votes abstaining.
 
 Item 5.
    
    Other InformationNone.
 
 Item 6.
    
    Exhibits and Reports on Form 8-K
 a.
    
    Exhibits31.1
    
    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-KNone.
 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)Date: May 10, 2004
    By:
    /s/ Carl H. Guild, Jr.Carl H. Guild, Jr., President and ChiefExecutive Officer Date: May 10, 2004
    By:
    /s/ Michael P. MaloneMichael P. Malone, Chief Financial Officer Page 19