TECHNICAL COMMUNICATIONS CORP - Annual Report: 2009 (Form 10-K)
Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 26, 2009
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-8588
Technical Communications Corporation
(Exact name of registrant as specified in its charter)
| Massachusetts | 04-2295040 | |
| (State or other jurisdiction of incorporation | (I.R.S. Employer Identification No.) | |
| or organization) | ||
| 100 Domino Drive, Concord, MA | 01742-2892 | |
| (Address of principal executive offices) | (Zip code) |
(978) 287-5100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| None | None | |
| (Title of each class) | (Name of each exchange | |
| on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
(Title of Class)
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act. YES o NO þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). YES o NO o (not
required)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). YES o NO þ
Based on the closing price as of March 28, 2009, the aggregate market value of the
registrant’s Common Stock held by non-affiliates of the registrant was approximately $6,333,626.
The number of shares of the registrant’s Common Stock, par value $ 0.10 per share, outstanding
as of December 11, 2009 was 1,451,967.
Portions of the Company’s Definitive Proxy Statement to be delivered to shareholders in
connection with the Company’s 2010 Annual Meeting of Shareholders to be held February 8, 2010 are
incorporated by reference into Part III of this Form 10-K.
TECHNICAL COMMUNICATIONS CORPORATION
Annual Report on Form 10-K
For the Year Ended September 26, 2009
For the Year Ended September 26, 2009
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Table of Contents
PART I
Item 1. BUSINESS
Technical Communications Corporation (“TCC” or the “Company”) was organized in 1961 as a
Massachusetts corporation to engage primarily in consulting activities. Since the late 1960s, the
business has consisted entirely of the design, development, manufacture, distribution, marketing
and sale of communications security devices and systems. The secure communications solutions
provided by TCC protect vital information transmitted over a wide range of data, fax and voice
networks. TCC’s products have been sold into over 110 countries and are in service with
governments, military agencies, telecommunications carriers, financial institutions and
multinational corporations. The Company’s business consists of one industry segment, which is the
design, development, manufacture, distribution, marketing and sale of communications security
devices and systems.
Overview
The Company’s products consist of sophisticated electronic devices that enable users to
transmit information in an encrypted format and permit receivers to reconstitute the information in
a deciphered format if the recipient possesses the right decryption “key”. The Company’s products
can be used to protect confidentiality in communications between radios, telephones, facsimile
machines and data processing equipment over wires, fiber optic cables, radio waves and microwave
and satellite links. A customer may order equipment that is specially programmed to scramble
transmissions in accordance with a code to which only the customer has access. The principal
markets for the Company’s products are foreign and domestic governmental agencies, law enforcement
agencies, financial institutions, and multinational companies requiring protection of
mission-critical information.
TCC historically and presently designs and develops its own equipment and software to meet the
requirements of general secure communications applications, as well as the custom-tailored
requirements of specific users. Management believes the coordinated development of cryptographic
software and associated hardware allows TCC to provide high-strength encryption security products
with efficient processing and transmission. Both criteria, the Company believes, are essential to
customer satisfaction.
TCC manufactures most of its products using third-party vendors for the supply of components
and selected processing. Final assembly, software loading, testing and quality assurance are
performed by TCC at its factory. This manufacturing approach allows TCC to competitively procure
the components from multiple suppliers while maintaining control of the manufacture and performance
of the final product.
TCC’s products are sold worldwide through a variety of channels depending on the country and
the customer. Generally, TCC does not use stocking distributors because the Company’s products are
required to be sold under an applicable U.S. government license, which generally requires end-user
information. Rather, the Company sells directly to customers, original equipment manufacturers and
value-added resellers using its in-house sales force as well as domestic and international
representatives, consultants and distributors. The marketing and selling approach varies with each
country and often involves extensive test and demonstration activity prior to the consummation of a
sale. TCC has a network of in-country representatives and consultants who conduct performance
demonstrations, market the products and close the sale, and who handle on behalf of TCC many of
the ancillary requirements pertaining to importation duties, taxes, registration fees, and product
receipt and acceptance. After-sale, in-country support by the representatives maintains customer
satisfaction and provides a liaison for the Company’s customer support services.
The worldwide market for our Government Systems products remains a principal focus for TCC, as
the Company believes increasing concerns with security will sustain demand for increased protection
of both voice and data networks. Management plans selected, evolutionary upgrades to our
government/military products both to meet new requirements of the market and to provide entry into
new markets. We believe the ability of TCC to custom-tailor cryptographic functions and control
systems to meet unique customer requirements will meet a growing demand as governments become more
sophisticated in defining their communications security needs.
The U.S. government controls, through a licensing process, the distribution of encryption
technology and the sale of encryption products. The procedure for obtaining the applicable license,
from either the U.S. Department of Commerce or Department of State, is relatively straightforward.
Many of TCC’s products can be sold under existing “blanket” licenses, while some products and
end-users must be submitted for specific approval. A more detailed discussion of the licensing
process is included below in the “Regulatory Matters” section.
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2009 Highlights and Recent Events
Fiscal 2009 continued to produce positive financial results with improvement in revenues and
maintenance of strong profitability. TCC secured significant sales in several product areas:
military network security, HF and VHF radio encryptors, IP security for private satellite-based
systems, and secure telephony systems. Several of the major 2009 projects were expansions of the
TCC installed encryption base in Egypt, Colombia, and Afghanistan. TCC also made progress in
establishing new international projects in Mexico and Saudi Arabia and continued to expand its
technology base through its development of new derivative products to meet specific customer
applications.
Revenues in fiscal 2009 increased to $7,752,000, a 13% increase over fiscal 2008 revenues, and
we produced a profit of $943,000 for the period. These results are largely due to continuing strong
sales of encryption products for foreign military networks and radio applications. TCC’s backlog at
the end of the year was $7,778,000, a 9% increase from the fiscal 2008 year-end position. Orders
received subsequent to the end of the 2009 fiscal year have increased the backlog as of
mid-December 2009 to approximately $9.4 million. We believe this backlog provides a solid
opportunity for revenue generation in 2010 and 2011. For the fiscal year ended September 26, 2009,
the Company reported revenues of $7,752,000 as compared to $6,852,000 for the previous year.
Income for fiscal year 2009 was $943,000 or $0.65 per share, as compared to a net income of
$1,061,000 or $0.75 per share in fiscal 2008.
During fiscal 2009, TCC delivered over $2.1 million of network encryptors to the Government of
Egypt under a Foreign Military Sales or “FMS” contract received in April 2008. This equipment is
from our DSD72A-SP product line of high performance encryptors used world-wide in tactical and
strategic networks requiring strong encryption security and high reliability. The equipment
delivered to Egypt in 2009 will provide logistics support as well as expand the fielded systems.
TCC expects that additional equipment ordered under this contract will be delivered in fiscal 2010.
We also expect that the evolution of this customer’s radio systems will provide opportunities for
upgrades and adaptations of the deployed bulk encryptors in the future. Accordingly, TCC continues
to develop new DSD72A-SP equipment which allows customers to use new radios, multiplexers and
switches. Under the final stages of development testing is a new multi-interface system which will
give users the capability of matching a single encryptor to a multiple interface radio. TCC
maintains a strong record of being supportive of its customers’ requirements and providing unique
customized solutions to maintain a high security level as transmission systems change.
In fiscal 2009, TCC also continued to deliver significant quantities of the DSP9000 Universal
Radio Encryption System to Afghanistan for use by both the coalition and indigenous forces. TCC’s
DSP9000 family of radio encryption products is a large success in many countries where the need for
high quality, ruggedized encryption is required for secure communication over the HF, UHF and VHF
radio bands. The DSP9000 products have the very attractive feature of mating to a wide variety of
radios, providing end-to-end security between differing regions, vehicles and forces which may be
using radios produced by different manufacturers. We believe that the DSP9000 provides a universal
encryption solution that is readily deployable, cost effective and adaptable to meet unique user
requirements. Also in 2009, TCC delivered DSP9000 systems under FMS cases for the shipboard
communications systems used in offshore and inland patrol craft for a variety of countries. The
rugged design of the DSP9000 system and its integration flexibility offer an ideal solution for
many policing applications on land, water and air.
Satellite-based communications often require unique encryption solutions in order to
accommodate the variety of equipment being integrated. TCC specializes in providing such unique
solutions and in fiscal 2009 provided a major system upgrade to a Mideast customer. The upgrade
included a conversion of existing crypto processors and a major upgrade of the customer’s existing
key and device management system.
In the area of internal product development, TCC continues to invest in the development of new
products that expand the application and roles of our product lines. We expect that future network
encryption needs in the international government markets will be met with a new generation of very
high speed encryptors currently under development. These encryptors are capable of providing high
speed, fiber optic connectivity combined with rugged field environment reliability for the most
demanding industrial and military applications.
TCC’s other product lines — secure telephony, custom network encryption and military data
encryption — are all performing as expected and continue to provide a solid business base for the
company. With these products and those highlighted above, TCC continues to provide a broad range of
high quality encryption equipment that meets the demanding requirements of a growing worldwide
market.
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Products and Services
The products described below are currently available and provide communications security
solutions for mission-critical networks, voice and facsimile, centralized key and device
management, and military ciphering applications.
The Government Systems product line has traditionally been the Company’s core product base and
has generated the majority of revenue for the Company in recent years. These products have proven
to be highly durable, which has led to significant repeat business from our customers. The Company
believes that these products and their derivatives will continue to be the Company’s most
significant source of future revenues.
The Company’s Secure Office Systems product line primarily consists of products that were
originally acquired through an asset and rights purchase from a subsidiary of AT&T in 1995. These
products have produced modest revenues since their acquisition. Although these products are readily
available and remain profitable, demand for them has diminished in recent years. We will continue
to offer our Secure Office Systems products from existing inventory, which we anticipate will be
sufficient for several more years. In 2005, we introduced the first in a new line of secure
wireless products as part of our Secure Office Systems product line. During 2007 we introduced a
new flip phone model for this product line. During 2009 we introduced a new keyboard/PDA secure
wireless phone and a new desktop encryptor for this product line. The market for this product
continues to develop modestly and we expect it will take the greater part of fiscal 2010 before
this product line generates consistent revenue.
Although we believe our Network Security Systems products are competitive, the demand for the
products comprising this product line has been difficult to establish. Strong competition in this
market coupled with weak overall demand for network security products both domestically and
overseas have hampered the Company’s efforts to develop an active and consistent market. These
products are currently available and we believe we will be able to fulfill any customer
requirements for the foreseeable future.
The Company also provides customization to its products upon a customer request. In addition
the Company actively sells its engineering services in support of funded research and development.
These services are typically billed to a customer on a time and materials basis and can run for
several months to several years depending on the scope of the project. Revenue from these services
has steadily increased over the past four years.
Government Systems
The Company’s High Speed Data Encryptor is a rugged military system that provides a high level
of cryptographic security for data networks operating at up to 34 million bits per second. The
product supports a wide variety of interfaces and integrates into existing networks. Reliable
secure communication is achieved with communication synchronization methods built to maintain
connections in error and jamming environments such as radio relay networks, missile systems and
microwave systems.
The Company’s Narrowband Radio Security family of products provides strategic security for
voice and data communications sent over HF, VHF and UHF channels. Designed for military
environments, we believe these products provide high voice quality over poor line connections,
making them an attractive security solution for military aircraft, naval, base station and manpack
radio applications. These products provide automated key distribution for security and ease of
use. They are also radio independent because software programmable interfaces allow radio
interface levels to be changed without configuring the hardware. Base station, handset and implant
board configurations are available options and the products are compatible with the Company’s
secure telephone systems to enable “office-to-field” communications.
The Company’s Secure Telephone, Fax and Data system is a comprehensive office communications
security system that provides voice, fax and data encryption in a telephone package. The product
has a fallback mode, which was originally developed for poor HF channels. As a result, secure
communications are possible even over poor line conditions. TCC’s high-level encryption and
automated key distribution system protect sensitive information, and internal storage of 400 keys
provides hands-off security.
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Secure Office Systems
The Company’s Secure Portable Telephone Attachment may be placed between any telephone and
handset worldwide to provide digital security. The attachment is small and portable, operates over
both digital and analog telephone lines, and is designed to ensure protection through new and
unique random keys negotiated with each communication session.
The Company’s Fax Security System is a secure, automatic transmission fax system that connects
to any standard facsimile machine. Security protection is achieved using key technology, which
provides randomly generated keys that are unique to each communication session. Open and closed
networks are supported by the device to enable an open exchange of secure documents in the
industrial marketplace or to restrict secure communications to only authorized parties in highly
confidential or government applications.
The Company’s Executive Secure Telephone offers strategic-level voice and data security in a
full-featured executive telephone package. Exceptional voice quality can be achieved with three
different voice-coding algorithms. The product provides ease-of-use security features such as
automated key management, authentication, certification and access control.
The CipherTalk®
8000 and CipherSMS® secure wireless products are designed to provide encrypted
mobile communications anywhere in the world. With multi-band radio interface, these products
operate in the North American, Latin American, and European regions, as well as the Asian and
Australian regions. Integrated on leading mobile device platforms, they contain the latest in
mobile productivity functionality as well as standard cell phone operation. The CipherTalk-8000 is
the first product in what the Company expects to be a new line of secure wireless products.
Network Security Systems
The CipherONE® family of Network Security Systems consists of high-performance
hardware and software-based encryption products for local area network, wide area network and
Internet applications and includes a network security management system.
All of the CipherONE systems have been designed for node-to-node protection and therefore
provide node authentication and access control, as well as data integrity. This family of products
also utilizes a modular architecture that permits the software to be updated as networks migrate to
emerging protocols, thereby protecting the user’s investment. Network transparent, the products
support U.S. government-backed and proprietary encryption algorithms as well as industry-standard
specifications for security key management.
The Company’s Frame Relay Network Encryptor is an end-to-end frame relay encryption system and
is configured locally with Cipher Site Manager, its accompanying software configuration tool, or
remotely with KEYNETTM (discussed below).
The Company’s IP Network Encryptor provides encryption security at the Internet protocol layer
and is configured locally with Cipher Site Manager or remotely with KEYNET.
The Company’s KEYNET Network Security Management System is a Windows NT-based key and security
device management system that can centrally and simultaneously manage an entire CipherONE Security
Systems Network, including those on mixed networks. KEYNET has an intuitive graphical user
interface, making it easy to use. The system securely generates, distributes and exchanges keys,
sets address tables, provides diagnostics and performs automatic polling and alarms from central
and remote locations. KEYNET also provides instant alarm notification. These high security
measures facilitate central management while maintaining security for mission-critical networks
worldwide.
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Competition
The market for communications security devices and systems is highly competitive and
characterized by rapid technological change. The Company has several competitors, including
foreign-based companies, in the communications security device field. The Company believes its
principal competitors
include Crypto AG, Thales Plc, Motorola Inc., General Dynamics Corporation, Omnisec AG, Cisco
Systems, Inc., SafeNet, Inc. and Alcatel-Lucent.
The Company competes based on its service, the operational and technical features of its
products, its sales expertise and pricing. Many of TCC’s competitors have substantially greater
financial, technical, sales and marketing, distribution and other resources, greater name
recognition and longer standing relationships with customers. Competitors with greater financial
resources can be more aggressive in marketing campaigns, can survive sustained price reductions in
order to gain market share and can devote greater resources to support existing products and
develop new competing products.
Our competitive position also depends on our ability to attract and retain qualified
personnel, obtain and maintain intellectual property protection or otherwise develop proprietary
products or processes, and secure sufficient capital resources for product, research and
development efforts.
Sales and Backlog
In fiscal year 2009, the Company had three customers representing 76% of total net sales.
These consisted of fees generated by our engineering services efforts representing 33% of sales and
sales under a contract with U.S. Army, Communications and Electronics Command (“CECOM”) for bulk
encryptors representing 28% of sales. Also, we had sales of radio encryptors to one customer for
deployment in Afghanistan representing 15% of sales. In fiscal year 2008, the Company had two
customers representing 78% of total net sales. These consisted of sales of radio encryptors to one
customer for deployment in Afghanistan amounting to 51% of sales and fees generated by our
engineering services efforts for one customer representing 27% of sales.
The Company sells directly to customers, original equipment manufacturers and value-added
resellers using its in-house sales force as well as domestic and international representatives,
consultants and distributors. International sales are made primarily through our main office. We
seldom have long-term contractual relationships with our customers and, therefore, generally have
no assurance of a continuing relationship within a given market.
Orders for our products are usually placed by customers on an as-needed basis and we typically
ship products within 30 to 120 days of receipt of a customer’s firm purchase order. Our backlog
consists of all orders received where the anticipated shipping date is within 12 months. Because
of the possibility of customer changes in delivery schedules or cancellation of orders, our backlog
as of any particular date may not be indicative of sales in any future period. Our backlog as of
September 26, 2009 and September 27, 2008 was approximately $7,778,000 and $7,146,000,
respectively.
The Company expects that sales to relatively few customers will continue to account for a high
percentage of the Company’s revenues in any accounting period for the foreseeable future. A
reduction in orders from any such customer, or the cancellation of any significant order and
failure to replace such order with orders from other customers, would have a material adverse
effect on the Company’s financial condition and results of operations.
Regulatory Matters
As a party to a number of contracts with the U.S. government and its agencies, the Company
must comply with extensive regulations with respect to bid proposals and billing practices. Should
the U.S. government or its agencies conclude that the Company has not adhered to federal
regulations, any contracts to which the Company is a party could be canceled and the Company could
be prohibited from bidding on future contracts. Such a prohibition would have a material adverse
effect on the Company.
All payments to the Company for work performed on contracts with agencies of the U.S.
government are subject to adjustment upon audit by the U.S. Defense Contract Audit Agency, the U.S.
Government Accountability Office, and other agencies. The Company could be required to return any
payments received from U.S. government agencies if it is found to have violated federal
regulations. In addition, U.S. government contracts may be canceled at any time by the government
with limited or no notice or penalty. Contract awards are also subject to funding approval from
the U.S. government, which involves political, budgetary and other considerations over which the
Company has no control.
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The Company’s security products are subject to export restrictions administered by the U.S.
Department of Commerce and Department of State, which license the export of encryption products,
subject to certain technical restrictions. In addition, U.S. export laws prohibit the export of
encryption products to a number of hostile countries. Although to date the Company has been able
to secure necessary U.S. government export licenses, there can be no assurance that the Company
will continue to be able to secure such licenses in a timely manner in the future, or at all.
The U.S. government controls, through a licensing process, the distribution of encryption
technology and the sale of encryption products. The procedure for obtaining the applicable license
from either the Department of Commerce or the Department of State (depending on the U.S.
government’s determination of jurisdiction) is well documented. The Company submits a license
request application, which contains information pertaining to: the type of equipment being sold;
detailed technical description (if required); the buyer; the end-user and use; quantity; and
destination location. The appropriate departments of the U.S. government review the application and
a licensing decision is provided to the Company. Pursuant to the receipt of the license, the
Company may ship the product.
Many of TCC’s products can be sold under existing “blanket” licenses which have been obtained
through a variant of the licensing process that approves products for sale to certain classes of
customers (e.g. financial institutions, civilian government entities, commercial users). The
Company has obtained “blanket” licenses for its secure telephone and office system products and its
family of network encryptors. Licenses for sales of certain other products and/or to certain end
users must be submitted for specific approval as described above. Although the U.S. government
retains the right and ability to restrict product exports, the Company does not believe that U.S.
government licensing will become more restrictive or an impediment to its business. The trend,
since the mid-nineties, has been for the U.S. government to reduce the restrictions on the foreign
sale of cryptographic equipment. TCC believes this trend is driven by the U.S. government’s
recognition of the technology available from foreign sources and the need to allow U.S.
corporations to compete in foreign markets. However, should the regulations become more
restrictive, it would have a negative impact on the Company’s international business, which impact
could be material.
Manufacturing
TCC has several manufacturing subcontractors and suppliers that provide outside processing of
electronic circuit boards, fabrication of metal components, and supply of electronic components.
For the majority of purchased materials and services, TCC has multiple suppliers that are able to
deliver materials and services under short-term delivery purchase orders. Payment is typically made
after delivery, based upon standard credit arrangements. For a small minority of parts, there are
limited sources of supply. In such cases, TCC monitors source availability and usually stocks for
anticipated long-term requirements to assure manufacturing continuity. Notwithstanding the
Company’s efforts to maintain material supplies, shortages can and do develop, necessitating delays
in production, significant engineering development effort to find alternative solutions and, if
production cannot be maintained, the discontinuation of the affected product design.
The Company subcontracts a large portion of its manufacturing operations. Many of the
components used in the Company’s products are standard components available from more than one
supplier. The Company has, or believes that it could develop without significant delay,
alternative sources for almost all materials and components used in the manufacture of its
products. The Company’s internal manufacturing process consists primarily of adding critical
components, final assembly, quality control, testing and system burn-in. Delivery time varies
depending on the products and options ordered.
Technological Expertise
The Company’s technological expertise and experience, including certain proprietary rights
which it has developed and maintains as trade secrets, are crucial to the conduct of the Company’s
business. Management is of the opinion that, while patent protection is desirable with respect to
certain of its products, none of the Company’s patents are material to the conduct of its business.
Eight patents have been issued to the Company. The Company also has a number of registered and
unregistered trademarks for various products, none of which are material to the conduct of TCC’s
business.
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TCC has an on-going technology license for communications protocol software used in the
CipherONE family of Network Security System products. The license is royalty-based and runs without
a specified termination date. The marginal cost of this license is immaterial.
TCC has been designing and producing secure, cryptography-based communications systems for
over 40 years, during which time the Company has developed many technology techniques and
practices. This expertise and experience is in the areas of cryptographic algorithm design and
implementation, key distribution and management systems, cryptographic processors, voice and fax
encryption and electronic hardware design. TCC relies on its internal technical expertise and
experience, which TCC considers to be proprietary. These proprietary technologies are owned by
TCC, are under TCC’s control, and have been documented consistent with standard engineering
practices. It is estimated that the majority of sales during the past two years and during the next
two years will be of products that are based upon TCC-proprietary designs.
Such technological experience and expertise are important as they enable an efficient design
and development process. Loss of this experience and expertise would have an adverse impact on the
Company. However, TCC’s practices governing the internal documentation of design data mitigate some
of the risk associated with the loss of personnel who are skilled in the core competencies
described above.
With the exception of the technology license referred to above, TCC has no material third
party rights upon which the Company relies. Sales of the products associated with this license have
not been and are not anticipated to be significant to the Company’s revenues.
Research and Development
Research and development efforts are undertaken by the Company primarily on its own
initiative. In order to compete successfully, the Company must attract and retain qualified
personnel, improve existing products and develop new products. No assurances can be given that the
Company will be able to hire and train such technical management and sales personnel or
successfully improve and develop its products. During the years ended September 26, 2009 and
September 27, 2008, the Company spent $1,889,000 and $942,000, respectively, on product
development.
In fiscal 2010, the Company expects to maintain its investment in internal product development
at 2009 levels. Our plan is to evaluate several technical options for enhancing the radio
encryption product line, which may include cryptography modifications, hardware and software
changes and partnering with radio manufacturers to incorporate imbedded solutions. The products
comprising the CT8000 secure wireless product line will likely continue to evolve and respond to
new customer requirements. It is also expected that CiperTalk Secure Voice encryption and CipherSMS
Secure Text Messaging will be applied to additional mobile platforms and that customer-specific
features will be developed. Depending on customer demand, TCC may also proceed with the development
of variants of its DSD72A-SP Military Bulk Encryptor, which would address higher speeds and
additional interfaces. On-going research and development in support of product improvements and
application variants also is expected to continue. Should the Company choose to embark on a major
development program in addition to its traditional research and development activities, engineering
staff will have to be added. The Company has sufficient physical resources to support the added
staff and believes that adequate technical resources exist in the Boston area to meet potential
needs; however we may need financial resources, in addition to cash from operations, to fund a
major new development program.
Other than those stated above, there are no plans for significant internal product development
in fiscal 2010.
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Foreign Operations
The Company is dependent upon its foreign sales. Although foreign sales were more profitable
than domestic sales during fiscal years 2009 and 2008 because the mix of products sold abroad
included more
products with higher profit margins, this does not represent a predictable trend. Sales to
foreign markets have been and will continue to be affected by, among other things, the stability of
foreign governments, economic conditions, export and other governmental regulations, and changes in
technology. The Company attempts to minimize the financial risks normally associated with foreign
sales by utilizing letters of credit confirmed by U.S. banks and by using foreign credit insurance.
Foreign sales contracts are usually denominated in U.S. dollars.
The Company utilizes the services of sales representatives, consultants and distributors in
connection with foreign sales. Typically, representatives are paid commissions and consultants are
paid fixed amounts on a stipulated schedule in return for services rendered. Distributors are
granted discounted pricing.
The export from the United States of many of the Company’s products may require the issuance
of a license by the Department of State under the Arms Export Control Act of 1976, as amended, or
by the Department of Commerce under the Export Administration Act as kept in force by the
International Emergency Economic Powers Act of 1977, as amended. The licensing process is discussed
in more detail under the “Regulatory Matters” section above.
In fiscal years 2009 and 2008, sales directly to international customers accounted for
approximately 7% and 14%, respectively, of our net sales. In fiscal 2009 and 2008 a significant
portion of domestic sales (59% and 15%, respectively) were made to a domestic radio manufacturer
that shipped our radio encryption products overseas for use in Afghanistan. In addition, we began
shipments representing 28% of sales under a contract with the U.S. Army CECOM of products delivered
to the Government of Egypt. Based on our historical results we expect that international sales will
continue to account for a significant portion of our revenues for the foreseeable future. As a
result, we are subject to the risks of doing business internationally, including:
| • | changes in regulatory requirements, |
||
| • | domestic and foreign government policies, including requirements to expend a
portion of program funds locally and governmental industrial cooperation requirements, |
||
| • | fluctuations in foreign currency exchange rates, |
||
| • | delays in placing orders, |
||
| • | the complexity and necessity of using foreign representatives, consultants and distributors, |
||
| • | the uncertainty of the ability of foreign customers to finance purchases, |
||
| • | uncertainties and restrictions concerning the availability of funding credit or guarantees, |
||
| • | imposition of tariffs or embargoes, export controls and other trade restrictions, |
||
| • | the difficulty of managing and operating an enterprise spanning several countries, |
||
| • | compliance with a variety of foreign laws, as well as U.S. laws affecting the
activities of U.S. companies abroad, and |
||
| • | economic and geopolitical developments and conditions, including
international hostilities, acts of terrorism and governmental reactions, inflation,
trade relationships and military and political alliances. |
While these factors and their impact are difficult to predict, any one or more of these
factors could adversely affect our operations in the future.
We also may not be successful in obtaining the necessary licenses to conduct operations
abroad, and the U.S. government may prevent proposed sales to foreign governments or other
end-users.
Employees
As of September 26, 2009, the Company employed 32 full-time persons and two part-time
employees, as well as several full and part-time consultants. The Company believes that its
relationships with its employees is good.
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Item 1A. RISK FACTORS
You should carefully consider the following risk factors that affect our business. Such risk
factors could cause our actual results to differ materially from those that are expressed or
implied by forward-looking statements contained herein. The risks and uncertainties described below
are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that
we currently deem immaterial, also may become important factors that affect us. If any of the
following risks occur, our business, financial condition or results of operations could be
materially and adversely affected. You should also consider the other information included in this
Annual Report on Form 10-K for the fiscal year ended September 26, 2009 and subsequent quarterly
reports filed with the SEC.
Our quarterly operating results may fluctuate and our future revenues and profitability are
uncertain.
We have experienced significant fluctuations in our quarterly operating results during the
last five years and anticipate continued substantial fluctuations in our future operating results.
A number of factors have contributed to these quarterly fluctuations including, but not limited to:
| • | introduction and market acceptance of new products and product enhancements
by us and our competitors; |
| • | budgeting cycles of customers, including the U.S. government; |
| • | timing and execution of individual contracts; |
| • | competitive conditions in the information security industry; |
| • | changes in general economic conditions; and |
| • | shortfall of revenues in relation to expectations that formed the basis for
the calculation of fixed expenses. |
Our future success will depend on our ability to respond to rapid technological changes in the
markets in which we compete.
The markets for TCC’s products and services are characterized by rapid technological
developments, changing customer technological requirements and preferences, frequent new product
introductions, enhancements and modifications and evolving industry standards. Our success will
depend in large part on our ability to correctly identify emerging technological trends, enhance
capabilities, and develop and manufacture new technologies and products quickly, in a
cost-effective manner, and at competitive prices. The development of new and enhanced products is
a complex and costly process. We may need to make substantial capital expenditures and incur
significant research and development costs to develop and introduce such new products and
enhancements. Our choices for developing technologies may prove incorrect if customers do not
adopt the products we develop or if the technologies ultimately prove to be technically or
commercially unviable. Development schedules also may be adversely affected as the result of the
discovery of performance problems. If we fail to timely develop and introduce competitive new
technologies, our business, financial condition and results of operations would be adversely
affected.
Existing or new competitors may develop competing or superior technologies.
The industry in which the Company competes is highly competitive, and the Company has several
domestic and foreign competitors. Many of these competitors have substantially greater financial,
technical, sales and marketing, distribution and other resources, greater name recognition and
longer standing relationships with customers. Competitors with greater financial resources can be
more aggressive in marketing campaigns, can survive sustained price reductions in order to gain
market share, and can devote greater resources to support existing products and develop new
competing products. Any period of sustained price reductions for our products would have a material
adverse effect on the Company’s financial condition and results of operations. TCC may not be able
to compete successfully in the future and competitive pressures may result in price reductions,
loss of market share or otherwise have a material adverse effect on the Company’s financial
condition and results of operations. It is also possible that competing products will emerge that
may be superior in quality and performance and/or less expensive than those of the Company, or that
similar technologies may render TCC’s products obsolete or uncompetitive and prevent the Company
from achieving or sustaining profitable operations.
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The operating performance of our products is critical to our business and reputation.
The sale and use of our products entail a risk of product failure, product liability or other
claims. Occasionally, some of our products have quality issues resulting from the design or
manufacture of the product or the software used in the product. Often these issues are discovered
prior to shipment and may result in shipping delays or even cancellation of orders by customers.
Other times problems are discovered after the products have shipped, requiring us to resolve issues
in a manner that is timely and least disruptive to our customers. Such pre-shipment and
post-shipment problems have ramifications for TCC, including cancellation of orders, product
returns, increased costs associated with product repair or replacement, and a negative impact on
our goodwill and reputation.
Once our products are in use, any product failure, including software or hardware failure,
which causes a breach of security with respect to our customer’s confidential communications could
have a material adverse effect on TCC. There is no guarantee of product performance or that our
products are adequate to protect against all security breaches. While we attempt to mitigate such
risks by maintaining insurance and including warranty disclaimers and liability limitation clauses
in our agreements with customers, such mitigation devices may not protect us against liability in
all instances. If our products failed for any reason, our clients could experience data loss,
financial loss, personal and property losses, harm to reputation, and significant business
interruption. Such events may expose us to substantial liability, increased regulation and/or
penalties, as well as loss of customer business and a diminished reputation. Any product liability
claims and related litigation would likely be time-consuming and expensive, may not be adequately
covered by insurance, and may delay or terminate research and development efforts, regulatory
approvals and commercialization activities.
If our products and services do not interoperate with our end-users’ products, orders could be
delayed or cancelled, which could significantly reduce our revenues.
Our products are designed to interface with our end-users’ existing products, each
of which has different specifications and utilizes multiple protocol standards. Many of our
end-users’ systems contain multiple generations of products that have been added over time as these
systems have grown and evolved. Our products and services must interoperate with all of these
products and services as well as with future products and services that might be added to meet our
end-users’ requirements. If our products do not interface with those within our end-users’ products
and systems, orders for our products could be delayed or cancelled, which could significantly
reduce our revenues.
Government regulation and legal uncertainties could harm our business.
As a party to a number of contracts with the U.S. government and its agencies, the Company
must comply with extensive regulations with respect to bid proposals and billing practices. Should
the U.S. government or its agencies conclude that the Company has not adhered to federal
regulations, any contracts to which the Company is a party could be canceled and the Company could
be prohibited from bidding on future contracts. Moreover, payments to the Company for work
performed on contracts with agencies of the U.S. government are subject to audit and adjustment.
The Company could be required to return any payments received from U.S. government agencies if it
is found to have violated federal regulations. In addition, U.S. government contracts may be
canceled at any time by the government with limited or no notice or penalty. Contract awards are
also subject to funding approval from the U.S. government, which involves political, budgetary and
other considerations over which the Company has no control.
The Company’s security products are subject to export restrictions administered by the U.S.
Department of Commerce and Department of State, which license the export of encryption products,
subject to certain technical restrictions. In addition, U.S. export laws prohibit the export of
encryption products to a number of hostile countries and some end-users. Although to date the
Company has been able to secure necessary U.S. government export licenses, there can be no
assurance that the Company will continue to be able to secure such licenses in a timely manner in
the future, or at all. Delays in obtaining necessary approvals could be costly in terms of lost
sales opportunities and compliance costs. Should export restrictions and regulations become more
restrictive, or should new laws be enacted, it could have a negative impact on the Company’s
international business, which impact could be material.
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Contracts with the U.S. government may not be fully funded at inception and are subject to
termination.
A portion of our revenues has historically been generated under agreements with the U.S.
government. Any changes or delays in the budget of the U.S. government, and in particular defense
spending, could affect our business, and funding levels are difficult to predict with any
certainty. Moreover, certain multi-year contracts are conditioned on the continuing availability
of appropriations. However, funds are typically appropriated on a fiscal-year basis, even though
contract performance may extend over many years, making future sales and revenues under multi-year
contracts uncertain. Changes in appropriations and budgets as well as economic conditions
generally in subsequent years may impact the funding for these contracts. In addition, changes in
funding and other factors may lead to the termination of such contracts. The U.S. government
typically has the right to terminate agreements for convenience with little or no penalty. Adverse
changes in funding and the termination of government contracts could have a material adverse impact
on the Company’s financial condition and results of operations.
Our international operations expose us to additional risks.
The Company is dependent upon its foreign sales and we expect that international sales will
continue to account for a significant portion of our revenues for the foreseeable future. As a
result, we are subject to the risks of doing business internationally, including imposition of
tariffs or embargoes, export controls, trade barriers and trade disputes, regulations related to
customs and export/import matters, fluctuations in foreign economies and currency exchange rates,
longer payment cycles and difficulties in collecting accounts receivable, the complexity and
necessity of using foreign representatives, consultants and distributors, tax uncertainties and
unanticipated tax costs due to foreign taxing regimes, the difficulty of managing and operating an
enterprise spanning several countries, the uncertainty of protection for intellectual property
rights and differing legal systems generally, compliance with a variety of laws and economic and
geopolitical developments and conditions, including international hostilities, armed conflicts,
acts of terrorism and governmental reactions, inflation, trade relationships and military and
political alliances.
We also may not be successful in obtaining the necessary licenses to conduct operations
abroad, including the export of many of the Company’s products, and the U.S. government may prevent
proposed sales to foreign governments or certain international end-users. Export restrictions,
compliance with which imposes additional burdens on the Company, may further provide a competitive
advantage to foreign competitors facing less stringent controls on their products and services.
Finally, an increasing focus of our business is in emerging markets, including South America
and Southwest Asia. In many of these emerging markets, we may be faced with risks that are more
significant than if we were to do business in developed countries, including undeveloped legal
systems, unstable governments and economies, and potential governmental actions affecting the flow
of goods and currency.
If the protection of our intellectual property is inadequate, our competitors may gain access to
our technologies.
The Company’s technological expertise and experience, including certain proprietary rights
that it has developed and maintains as trade secrets, are crucial to the conduct of the Company’s
business and its ability to compete in the marketplace. Such technological expertise and
experience are important as they enable an efficient design and development process. Loss of this
experience and expertise would have an adverse impact on the Company. To protect our proprietary
information, we rely primarily on a combination of internal procedures, contractual provisions, and
patent, copyright, trademark and trade secret laws. Such internal procedures and contractual
provisions may not prove sufficient to maintain the confidentiality and proprietary nature of such
information and may not provide meaningful protection in the event of any unauthorized use or
disclosure. Trade secret and copyright laws afford only limited protection. Current and potential
patents and trademarks may not provide us with any competitive advantage and patents and trademarks
must be enforced and maintained to provide protection, which may prove costly and time-consuming.
Despite our efforts to safeguard and maintain our proprietary rights, we may not be successful
in doing so or the steps taken by us may be inadequate to deter unauthorized parties from
misappropriating our technologies or prevent them from obtaining and using our proprietary
information, products and technologies. Moreover, our competitors may independently develop
similar technologies or design around patents issued to us.
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Other parties may have patent rights relating to the same subject matter covered by our
products or technologies, enabling them to prevent us from operating without obtaining a license
and paying royalties. Third parties also may challenge our patents or proprietary rights or claim
we are infringing on their rights. Any claims of infringement or misappropriation, with or without
merit, would likely be time-consuming, result in costly litigation and diversion of resources, and
cause delays in the development and commercialization of our products. We may be required to
expend significant resources to develop non-infringing intellectual property, pay royalties or
obtain licenses to the intellectual property that is the subject of such litigation. Royalties may
be costly and licenses, if required, may not be available on terms acceptable to us, the absence of
which could seriously harm our business.
In addition, the laws and enforcement mechanisms of some foreign countries may not offer the
same level of protection as do the laws of the United States. Legal protections of our rights may
be ineffective in such countries, and technologies developed in such countries may not be protected
in jurisdictions where protection is ordinarily available. Our inability to protect our
intellectual property both in the United States and abroad would have a material adverse effect on
our financial condition and results of operations.
The Company relies on a small number of customers for a large percentage of its revenues.
We will be successful only if a significant number of customers adopt our secure
communications products. Historically the Company has had a small number of customers representing
a large percentage of its total sales. Although the Company endeavors to expand its customer base,
we expect that sales to a limited number of customers will continue to account for a high
percentage of our revenues in any given period for the foreseeable future. This reliance makes us
particularly susceptible to factors affecting those customers. If such customers’ business
declines and as a result our sales to such customers decline without corresponding sales orders
from other customers, our financial condition and results of operations could be adversely
affected. It is difficult to predict the rate at which customers will use our products, even in
the case of repeat customers, and we do not typically have long-term contractual arrangements.
We may not be able to maintain effective product distribution channels.
We rely on an in-house sales force as well as domestic and international representatives,
consultants and distributors for the sale and distribution of our products. Our sales and
marketing organization may be unable to successfully compete against more extensive and well-funded
operations of certain of our competitors. In addition, we must manage sales and marketing
personnel in numerous countries around the world with the concomitant difficulties in maintaining
effective communications due to distance, language and cultural barriers. Further, certain of our
distributors may carry competing products lines, which may negatively impact our sales revenues.
We rely on single or limited sources for the manufacture and supply of certain product components.
For a small percentage of parts, we rely upon a single or a limited number of
manufacturers and suppliers. Moreover, because we depend on third party manufacturers and
suppliers, we do not directly control product delivery schedules or product quality. In addition,
we may not be able to maintain satisfactory contractual relations with our manufacturers and
suppliers. A significant delay in delivering products to our customers, whether from unforeseen
events such as natural disasters or otherwise, could have a material adverse effect on our results
of operations and financial condition. If we lose any of our manufacturers or suppliers, we expect
that it would take from three to six months for a new manufacturer or supplier to begin full-scale
production of one of our products. The delay and expense associated with qualifying a new
manufacturer or supplier and commencing production could result in a material loss of revenue and
reduced operating margins and harm our relationships with customers. While we have not experienced
any significant supply problems or problems with the quality of the manufacturing process of our
suppliers and there have been no materially late deliveries of components or parts to date, it is
possible that in the future we may encounter problems in the manufacturing process or shortages in
parts, components or other elements vital to the manufacture, production and sale of our products.
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The loss of existing key management and technical personnel and the inability to attract new hires
could have a detrimental effect on the Company.
Our success depends on identifying, hiring, training, and retaining qualified professionals.
Competition for qualified employees in our industry is intense and we expect this to remain so for
the foreseeable future. If we were unable to attract and hire a sufficient number of employees, or
if a significant number of our current employees or any of our senior managers resign, we may be
unable to complete or maintain existing projects or bid for new projects of similar scope and
revenue. The Company’s success is particularly dependent on the retention of existing management
and technical personnel, including Carl H. Guild, Jr., the Company’s President and Chief Executive
Officer. Although the Company has entered into an employment agreement with Mr. Guild, the loss or
unavailability of his services could impede our ability to effectively manage our operations.
We may need to expand our operations and we may not effectively manage any future growth.
As of December 11, 2009, we employed 32 full-time and two part-time people as well as several
full-time and part-time consultants. In the event our products and services obtain greater market
acceptance, we may be required to expand our management team and hire and train additional
technical and skilled personnel. We may need to scale up our operations in order to service our
customers, which may strain our resources, and we may be unable to manage our growth effectively.
If our systems, procedures, and controls are inadequate to support our operations, growth could be
delayed or halted, and we could lose our opportunity to gain significant market share. In order to
achieve and manage growth effectively, we must continue to improve and expand our operational and
financial management capabilities. Any inability to manage growth effectively could have a
material adverse effect on our business, results of operations, and financial condition.
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
Item 2. PROPERTIES
In April 2007, the Company entered into a new lease for its current facilities. This lease is
for 22,800 square feet located at 100 Domino Drive, Concord, MA. The Company has been a tenant in
this space since 1983 and believes its condition is good. This is the Company’s only facility and
houses all manufacturing, research and development, and corporate operations. The term of the
lease is for five years through March 31, 2012 at an annual rate of $159,000. In addition the lease
contains options to extend the lease for two and one half years through September 30, 2014 and
another two and one half years through March 31, 2017, at an annual rate of $171,000. Rent expense
for each of the years ended September 26, 2009 and September 27, 2008 was $159,000.
Item 3. LEGAL PROCEEDINGS
There are no current legal proceedings as to which TCC or its subsidiary is a party.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to security holders for a vote during the fourth quarter of
the Company’s 2009 fiscal year.
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PART II
| Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
The Company’s Common Stock, par value $0.10 per share, is traded on the Over-The-Counter
Bulletin Board, under the symbol “TCCO.OB”. The following table presents low and high bid
information for the time periods specified. The over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions. The NASDAQ Stock Market, Inc. has furnished the over-the-counter
market quotations.
| Price | ||||||||||||
| Title of Class | Quarter Ending | Low | High | |||||||||
Common Stock,
$0.10 par value |
9/26/2009 | $ | 3.70 | $ | 5.25 | |||||||
| 6/27/2009 | 3.75 | 5.00 | ||||||||||
| 3/28/2009 | 3.00 | 5.57 | ||||||||||
| 12/27/2008 | 3.35 | 5.60 | ||||||||||
| 9/27/2008 | $ | 4.51 | $ | 6.40 | ||||||||
| 6/28/2008 | 5.00 | 7.30 | ||||||||||
| 3/29/2008 | 4.40 | 7.49 | ||||||||||
| 12/29/2007 | 4.05 | 5.95 | ||||||||||
The Company has paid no cash dividends in the past on any class of its common equity. In
addition, pursuant to the loan agreement entered into on November 5, 2004 with Bank of America, the
Company is prohibited from paying dividends.
As of December 11, 2009, there were approximately 670 record holders of our Common Stock.
On December 11, 2009, the closing price of the Common Stock was $3.80.
Equity Compensation Plan Information
The following table presents information about the Technical Communications Corporation 2005
Non-Statutory Stock Option Plan, the Technical Communications Corporation 2001 Stock Option Plan
and the Technical Communications Corporation 1991 Stock Option Plan (which plan has expired but
under which there are still options outstanding) as of the fiscal year ended September 26, 2009.
For more information on these plans, see the discussion of the Company’s stock option plans and
stock-based compensation plans included in Note 2 to the Company’s financial statements as of and
for the year ended September 26, 2009, included herewith.
| Number of | ||||||||||||
| Number of securities to | Weighted average | securities | ||||||||||
| be issued upon exercise | exercise price of | remaining | ||||||||||
| of outstanding options, | outstanding options, | available for | ||||||||||
| Plan category | warrants and rights | warrants and rights | future issuance | |||||||||
Equity compensation
plans approved by
stockholders |
336,200 | (1) | $ | 2.18 | — | |||||||
Equity compensation
plans not approved
by stockholders |
156,500 | (2) | $ | 4.61 | 43,500 | |||||||
Total |
492,700 | $ | 3.05 | 43,500 | ||||||||
| (1) | Of the 336,200 options outstanding as of September 26, 2009, 334,200 were exercisable as of
such date at an average exercise price of $2.17 per share. |
|
| (2) | Of the 156,500 options outstanding as of September 26, 2009, 103,300 were exercisable as of
such date at an average exercise price of $4.38 per share. |
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Sales of Unregistered Securities and Repurchases by the Issuer and Affiliated Purchasers
There were no sales by the Company of unregistered shares of the Company’s common stock during
the 2009 fiscal year and no repurchases of TCC stock by or on behalf of the Company or any
affiliated purchaser during the fourth fiscal quarter of the 2009 fiscal year.
During fiscal 2009 the Company’s Chief Executive Officer and other directors exercised stock
options for an aggregate 106,500 shares and subsequently tendered back to TCC 90,402 of those
shares in payment of the exercise price of the options and associated withholding taxes. The
tendered shares were immediately retired by the Company.
Item 6. SELECTED FINANCIAL DATA
Not applicable.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion of the Company’s financial condition and results of operations should
be read in conjunction with the Company’s audited consolidated financial statements and notes
thereto appearing elsewhere herein.
Forward-Looking Statements
The following discussion may contain statements that are not purely historical. Such
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 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 this Form 10-K for the fiscal year ended September
26, 2009 and the “Risk Factors” section included herein.
Overview
TCC designs, manufactures, markets and sells 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. Revenue is generated primarily from the
sale of these products, which 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 certain government agencies, both domestic and
foreign.
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Critical 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 amounts of revenues and expenses during the reporting
periods.
On an ongoing basis, management evaluates its estimates and judgments, including those related
to revenue recognition, receivable reserves, inventory reserves, income taxes and stock-based
compensation. 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. By their nature estimates are subject to an inherent degree of uncertainty.
Actual results may differ from these estimates under different assumptions or conditions and such
differences may be material.
The accounting policies that management believes are most critical to aid in fully
understanding and evaluating our reported financial results include those listed below. For a more
detailed discussion, see Note 2 in the Notes to Consolidated Financial Statements included
herewith.
Revenue Recognition
Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is
fixed or determinable, delivery of the product to the customer has occurred and we have determined
that collection of the fee is probable. Title to the product generally passes upon shipment of the
product, as the products are shipped FOB shipping point, except for certain foreign shipments. If
the product requires installation to be performed by TCC, all revenue related to the product is
deferred and recognized upon completion of the installation. We provide for a warranty reserve at
the time the product revenue is recognized.
We perform funded research and development and technology development for commercial companies
and government agencies under both cost reimbursement and fixed-price contracts. Cost
reimbursement contracts provide for the reimbursement of allowable costs and, in some situations,
the payment of a fee. These contracts may contain incentive clauses providing for increases or
decreases in the fee depending on how costs compare with a budget. Revenue from reimbursement
contracts is recognized as services are performed. On fixed-price contracts that are expected to
exceed one year in duration, revenue is recognized pursuant to the percentage of completion method
based upon the proportion of costs incurred to the total estimated costs for the contract. In each
type of contract, we receive periodic progress payments or payments upon reaching interim
milestones, and 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 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.
Cost of product revenue includes material, labor and overhead. Costs incurred in connection
with funded research and development are included in cost of sales.
Inventory
We value our inventory at the lower of actual cost to purchase and/or manufacture or the
current estimated market value (based on the estimated selling prices, less the cost to sell) of
the inventory. 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 in 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 negative impact on the value of our inventory and would reduce our reported operating
results.
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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 an impairment of their ability to make payments, additional allowances
may be required, which would reduce net income.
Accounting for Income Taxes
The preparation of our consolidated financial statements requires us to estimate our income
taxes in each of the jurisdictions in which we operate, including those outside the United States,
which may subject the Company to certain risks that ordinarily would not be expected in the United
States. The income tax accounting 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 valuation allowance against our deferred tax assets of $2.5 million as
of September 26, 2009, due to uncertainties related to our ability to utilize these assets. The
valuation allowance is based on our estimates of taxable income by jurisdiction 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.
Due to the nature of our current operations in foreign countries (selling products into these
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.
Stock Based Compensation
We record compensation cost for all share-based payments granted based on the grant date fair
value. We expense share-based compensation over the employee’s requisite service period, generally
the vesting period of the award.
The choice of a valuation technique, and the approach utilized to develop the underlying
assumptions for that technique, involve significant judgments. These judgments reflect management’s
assessment of the most accurate method of valuing the stock options we issue, based on our
historical experience, knowledge of current conditions and beliefs of what could occur in the
future given available information. Our judgments could change over time as additional information
becomes available to us, or the facts underlying our assumptions change. Any change in our
judgments could have a material effect on our financial statements. We believe that our estimates
incorporate all relevant information available at the time made and represent a reasonable
approximation in light of the difficulties involved in valuing non-traded stock options.
Results of Operations
Year ended September 26, 2009 as compared to year ended September 27, 2008
Net Sales
Net sales for the years ended September 26, 2009 and September 27, 2008 were $7,752,000 and
$6,852,000, respectively, an increase of $900,000 or 13%. Sales for fiscal 2009 consisted of
$7,227,000, or 93%, from domestic sources and $525,000, or 7%, from international customers as
compared to fiscal 2008, in which sales consisted of $5,865,000, or 86%, from domestic sources and
$987,000, or 14%, from international customers.
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Table of Contents
Foreign sales consisted of shipments to 12 different countries during the year ended September
26, 2009 and 13 different countries during the year ended September 27, 2008. A sale is attributed
to a foreign country based on the location of the contracting party. Domestic revenue may include
the sale of products shipped through domestic resellers or manufacturers to international
destinations. The table below summarizes our principal foreign sales by country:
| 2009 | 2008 | |||||||
Saudi Arabia |
$ | 276,000 | $ | 94,000 | ||||
Columbia |
32,000 | 639,000 | ||||||
Mexico |
82,000 | — | ||||||
Thailand |
96,000 | 53,000 | ||||||
Other |
39,000 | 201,000 | ||||||
| $ | 525,000 | $ | 987,000 | |||||
Revenue for fiscal 2009 was derived from the sale of the Company’s narrowband radio encryptors
to a U.S. radio manufacturer amounting to $1,133,000 and additional sales to two domestic customers
amounting to $175,000. Billings under programs for engineering services work amounting to
$3,271,000 also were recognized during the period. In addition, we began shipping products under a
contract with CECOM amounting to $2,159,000 during fiscal 2009. We also sold our data link
encryptors to one domestic customer and one foreign customer amounting to $198,000 and generated
$269,000 in royalty revenue under an existing license and royalty agreement with a large domestic
radio manufacturer.
Revenue for fiscal 2008 was primarily derived from the sale of our narrowband radio encryptors
to a U.S. radio manufacturer amounting to $3,486,000. There were additional sales of our narrowband
radio encryptors to five (two domestic and three foreign) customers amounting to $461,000. We also
sold our data link encryptors to two domestic customers amounting to $157,000 during the 2008
fiscal year. Foreign sales for fiscal 2008 included a sale of our secure telephone, fax, and data
encryptors to a South American customer amounting to $400,000 and a sale of our frame relay and
internet protocol encryptor products to two customers amounting to $183,000. In addition, we had
billings under two programs with the U.S. government for engineering services work amounting to
$1,887,000.
Gross Profit
Gross profit for fiscal year 2009 was $4,846,000, an increase of $657,000 or 16%, compared to
gross profit of $4,189,000 for fiscal year 2008. Gross profit expressed as a percentage of sales
was 63% in fiscal year 2009 compared to 61% in the prior year. The increase in gross profit as a
percentage of sales was primarily associated with revenue generated from the sale of higher margin
products in fiscal 2009.
Operating Costs and Expenses
Selling, General and Administrative
Selling, general and administrative expenses for fiscal 2009 were $2,534,000, as compared to
$2,335,000 for fiscal 2008. This increase of 9% was attributable to an increase in general and
administrative expenses of $65,000 and an increase in selling and marketing expenses of $134,000
during the 2009 fiscal year.
The increase in general and administrative costs during 2009 was primarily attributable to an
increase in bad debt expense of $218,000 related to a South American distributor experiencing
financial difficulty. This increase was offset by a decrease in personnel-related costs of
approximately $72,000 and a decrease in consulting and professional fees of approximately $79,000
during the 2009 fiscal year.
The increase in selling and marketing costs was primarily attributable to increases in
personnel-related costs of $68,000, consulting costs of $147,000, engineering sales support
activities of $50,000, new product evaluation activities of $47,000 and travel costs of $35,000.
These increases were partially offset by a decrease in bid and proposal activity of $221,000.
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Product Development
Product development costs for the year ended September 26, 2009 were $1,889,000, compared to
$942,000 for the year ended September 27, 2008, an increase of $947,000 or 101%. This increase was
primarily attributable to an increase in personnel-related costs of $523,000 and an increase in
outside consulting costs of $473,000 during the year ended September 26, 2009. There was also an
increase in materials utilized on internal product development projects of approximately $35,000
and an increase in recruiting costs of approximately $28,000. These increases were the result of
planned development efforts undertaken this year. These efforts, which will meet current and future
customers’ requirements, include new network interface options and a new automated test system
designed to work with new and existing products. In addition there was an increase in billable
engineering services work performed and an increase in bid and proposal and product evaluation
work, which decreased product development costs by approximately $105,000, as personnel were
redeployed from internal product development efforts to support these other efforts.
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 invests in research and development to enhance
its existing products or to develop new products, as it deems appropriate. There was $3,271,000 of
billable engineering services revenue generated during fiscal 2009 and $1,887,000 generated during
fiscal 2008.
It is anticipated that cash from operations will fund our near-term research and development
and marketing activities. However, any increase in activities — either billable or new product
related — will require additional resources, which we may not be able to fund through cash from
operations. We believe that, in the long term, based on current billable activities and the
improvement in business prospects, cash from operations will be sufficient to meet the development
goals of the Company, although we can give no assurances. In circumstances where resources will be
insufficient, the Company will look to other sources of financing including debt and/or equity
investments.
Net Income
The Company generated net income of $943,000 for fiscal year 2009 as compared to net income of
$1,061,000 for fiscal year 2008, an $118,000 decrease. This 11% decrease in income is primarily
attributable to a substantial increase in internal product development costs.
During fiscal 2009, $491,000 of the deferred tax valuation allowance, related primarily to
net operating loss carryforwards, was reversed. This future realization of the Company’s deferred
tax assets depends upon the availability of sufficient future taxable income. The Company
determined that the benefits of these assets will more likely than not be utilized against taxable
income through fiscal 2010.
The effects of inflation and changing costs have not had a significant impact on sales or
earnings in recent years. As of September 26, 2009, 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 $1,796,000, or 50%, to $5,418,000 as of September 26,
2009, from a balance of $3,623,000 at September 27, 2008. This increase was primarily attributable
to cash generated from operations of $1,985,000, which includes net income of $943,000 and cash
from customer deposits of $1,714,000, and was offset by an increase in inventory of $494,000 and an
increase in deferred tax assets of $491,000. Fixed asset additions of $192,000 during the period
also offset the increases.
Our results during fiscal 2009 met our expectations. We are currently performing under
engineering services programs valued at $4.78 million. These programs are billed monthly for time
and materials incurred and are expected to be completed in fiscal 2010. We billed $3,271,000
during 2009 under these programs. In addition, in April 2008 we were awarded a contract from the
U.S. Army, CECOM for upgrades and supplies to be shipped to Egypt amounting to $5.75 million, with
a subsequent amendment adding an additional $610,000 of funding. We began shipping products under
this contract during the fiscal
quarter ended December 27, 2008, and shipped an aggregate $2,159,000 during fiscal 2009. We
expect to continue shipping under this contract over the next 15 months.
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Backlog at September 26, 2009 amounted to $7,778,000. The orders in backlog are expected to
ship during fiscal 2010 and 2011 depending on customer requirements and product availability.
The Company has a line of credit agreement with Bank of America (the “Bank”) for a line of
credit not to exceed the principal amount of $600,000. The line is supported by a financing
promissory note. The loan is a demand loan with interest payable at the Bank’s prime rate plus 1%
on all outstanding balances. The loan is secured by all assets of the Company (excluding consumer
goods) and requires the Company to maintain its deposit accounts with the Bank, as well as comply
with certain other covenants. The Company believes this line of credit agreement provides it with
an important external source of liquidity, if necessary. There were no cash borrowings against the
line during fiscal years 2009 and 2008.
Certain foreign customers require the Company to guarantee bid bonds and performance of
products sold. These guaranties typically take the form of standby letters of credit. Guaranties
are generally required in amounts of 5% to 10% of the purchase price and last in duration from
three months to one year. At September 26, 2009 and September 27, 2008 there were no outstanding
standby letters of credit. The Company secures its outstanding standby letters of credit with the
line of credit facility with the Bank.
In April 2007, the Company entered into a new lease for its current facilities. This lease is
for 22,800 square feet located at 100 Domino Drive, Concord, MA. The Company has been a tenant in
this space since 1983. This is the Company’s only facility and houses all manufacturing, research
and development, and corporate operations. The term of the lease is for five years through March
31, 2012 at an annual rate of $159,000. In addition the lease contains options to extend the lease
for two and one half years through September 30, 2014 and another two and one half years through
March 31, 2017, at an annual rate of $171,000. Rent expense for each of the years ended September
26, 2009 and September 27, 2008 was $159,000.
The Company does not anticipate any significant capital expenditures during fiscal 2010.
In fiscal 2010, the Company expects to maintain its investment in internal product development
at fiscal 2009 levels. Our plan is to evaluate several technical options for enhancing the radio
encryption product line, which may include cryptography modifications, hardware and software
changes and partnering with radio manufacturers to incorporate imbedded solutions. The products
comprising the CT8000 secure wireless product line will likely continue to evolve and respond to
new customer requirements. It is also expected that CiperTalk Secure Voice encryption and CipherSMS
Secure Text Messaging will be applied to additional mobile platforms and that customer-specific
features will be developed. Depending on customer demand, TCC may also proceed with the development
of variants of its DSD72A-SP Military Bulk Encryptor, which would address higher speeds and
additional interfaces. On-going research and development in support of product improvements and
application variants also is expected to continue. Should the Company choose to embark on a major
development program in addition to its traditional research and development activities, engineering
staff will have to be added. The Company has sufficient physical resources to support the added
staff and believes that adequate technical resources exist in the Boston area to meet potential
needs; however we may need financial resources, in addition to cash from operations, to fund a
major new development program.
Other than those stated above, there are no plans for significant internal product development
in fiscal 2010.
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 2010. As a result of our profitability during
the past three fiscal years and the backlog at September 26, 2009, we are optimistic about future
sales growth and other possible sources of financing, including private equity funding or future
public stock offerings. However, there is no assurance that any of these goals can be achieved. 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.
20
Table of Contents
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board (“FASB”) issued a pronouncement on
subsequent event accounting. The pronouncement identifies the following: the period after the
balance sheet date during which management shall evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; the circumstances under which an
entity shall recognize events or transactions occurring after the balance sheet date in its
financial statements; and the disclosures that an entity shall make about events or transactions
that occurred after the balance sheet date. The pronouncement was effective for the Company’s
second quarter of fiscal 2009, and there was no effect as a result of its adoption by TCC.
In June 2009, the FASB issued guidance on the FASB Accounting Standards Codification and the
hierarchy of generally accepted accounting principles. The FASB Accounting Standards Codification,
referred to as the Codification, is the single source of authoritative nongovernmental generally
accepted accounting principles in the United States. The Codification was effective for interim and
annual periods ending after September 15, 2009. The adoption of the Codification had no impact on
the Company’s financial position or results of operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto listed in the accompanying index to financial
statements (Item 15) are filed as part of this Annual Report on Form 10-K and are incorporated
herein by reference.
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and
Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period
covered by this Annual Report on Form 10-K. Based on that review and evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure
controls and procedures, as designed and implemented, are effective to ensure that such officers
are provided with information relating to the Company required to be disclosed in the reports the
Company files or submits under the Exchange Act and that such information is recorded, processed,
summarized and reported within the specified time periods.
Management’s annual report on internal control over financial reporting. Our management is
responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rule 13a-15(f) promulgated under the Exchange Act. Under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial
Officer, we conducted an assessment of the effectiveness of our internal control over financial
reporting as of September 26, 2009. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated Framework.
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Table of Contents
A goal of the assessment was to determine whether any material weaknesses or significant
deficiencies existed with respect to the Company’s internal control over financial reporting. A
“material weakness” is defined as a significant deficiency, or a combination of significant
deficiencies, that results in
more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. A “significant deficiency” is a control deficiency,
or a combination of control deficiencies, that adversely affects a company’s ability to initiate,
authorize, record, process or report external financial data reliably in accordance with generally
accepted accounting principles such that there is more than a remote likelihood that a misstatement
of the annual or interim financial statements that is more than inconsequential will not be
prevented or detected.
In the course of its assessment this year, management identified a control deficiency that was
also identified during its assessment for the fiscal year ended September 27, 2008. During the
course of the fiscal 2008 evaluation, and again during the evaluation for the 2009 fiscal year,
management determined that the Company lacked sufficient staff to segregate accounting duties.
Management believes this control deficiency is primarily the result of the Company employing, due
to its limited size, the equivalent of only one and one-half persons performing all
accounting-related on-site duties. As a result, TCC does not maintain adequate segregation of
duties within its critical financial reporting applications, the related modules and financial
reporting processes. This control deficiency could result in a misstatement of balance sheet and
income statement accounts in our interim or annual consolidated financial statements that would not
be detected. Accordingly, management has determined that this control deficiency constituted a
material weakness, and that the Company’s internal control over financial reporting was not
effective, as of September 26, 2009.
Management has discussed the material weakness and related corrective actions with the Audit
Committee and Board of Directors of the Company and TCC’s independent registered public accounting
firm. As part of our 2010 assessment of internal control over financial reporting, our management
will test and evaluate additional controls implemented, if any, to assess whether they are
operating effectively. Our goal is to take all actions possible given our financial condition to
remediate any material weaknesses and enhance our internal controls, but cannot guarantee that our
efforts will result in remediation of our material weakness or that new issues will not be exposed
in the process. In designing and evaluating our internal control over financial reporting,
management recognizes that any controls, no matter how well designed and operated, can provide only
reasonable, but not absolute, assurance that misstatements due to error or fraud will not occur or
that all control issues and instances of fraud, if any, with the Company will be detected.
This annual report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by our independent registered public accounting firm pursuant to the
temporary rules of the Securities and Exchange Commission that permit us to provide only
management’s report in this annual report.
Changes in internal control over financial reporting. There were no changes in the Company’s
internal control over financial reporting that occurred during its fourth quarter of fiscal 2009
that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Item 9B. OTHER INFORMATION
Not applicable.
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PART III
| Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this Item 10 is incorporated herein by reference to our Definitive
Proxy Statement, under the captions “Members of the Board of Directors, Nominees and Executive
Officers,” “Certain Relationships and Related Person Transactions,” “Corporate Governance,” and
“Section 16(a) Beneficial Ownership Reporting Compliance,” with respect to our 2010 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days
after the end of the Company’s 2009 fiscal year.
The Company has adopted a Code of Business Conduct and Ethics, which applies to all of its
employees, officers and directors. A copy of this code can be found on the Company’s website at
www.tccsecure.com.
| Item 11. | EXECUTIVE COMPENSATION |
The information required by this Item 11 is incorporated herein by reference to our Definitive
Proxy Statement, under the captions “Compensation” and “Compensation Discussion and Analysis” with
respect to our 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the Company’s 2009 fiscal year.
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
The information required by this Item 12 is incorporated herein by reference to Part II, Item
5 herein under the caption “Equity Compensation Plan Information” and by reference to our
Definitive Proxy Statement, under the caption “Security Ownership of Certain Beneficial Owners and
Management,” with respect to our 2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission not later than 120 days after the end of the Company’s 2009
fiscal year.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this Item 13 is incorporated herein by reference to our Definitive
Proxy Statement, under the captions “Certain Relationships and Related Person Transactions” and
“Corporate Governance” with respect to our 2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission not later than 120 days after the end of the Company’s 2009
fiscal year.
| Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item 14 is incorporated herein by reference to our Definitive
Proxy Statement, under the captions “Fees,” and “Pre-Approval Policies” in Proposal II with respect
to our 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission
not later than 120 days after the end of the Company’s 2009 fiscal year.
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Table of Contents
PART IV
| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| (1) | Financial Statements The following Consolidated Financial Statements, Notes
thereto and Report of Independent Registered Public Accounting Firm of the Company are filed
as part of Part II, Item 8 of this report: |
| Page | ||||
| 27 | ||||
| 28 | ||||
| 29 | ||||
| 30 | ||||
| 31-41 | ||||
| 42 | ||||
| (2) | List of Exhibits |
| 3.1 | Articles of Organization of the Company (incorporated by reference to the Company’s
Annual Report for 2005 on Form 10-KSB, filed with the Securities and Exchange Commission
on December 21, 2005) |
|||
| 3.2 | By-laws of the Company (incorporated by reference to the Company’s 8-K filed with the
Securities and Exchange Commission on May 5, 1998) |
|||
| 4 | Rights Agreement, dated as of August 6, 2004, by and between the Company and American
Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to the
Company’s 8-K filed with the Securities and Exchange Commission on August 5, 2004) |
|||
| 10.1 | + | Employment Agreement, effective November 19, 1998, with Carl H. Guild, Jr.
(incorporated by reference to the Company’s Annual Report for 1998 on Form 10-K, as
amended, filed with the Securities and Exchange Commission on December 21, 1998) |
||
| 10.2 | + | Employment Agreement, effective February 12, 2001, with Michael P. Malone
(incorporated by reference to the Company’s Form 10-QSB filed with the Securities and
Exchange Commission on May 15, 2001) |
||
| 10.3 | + | Amendment to Employment Agreement between the Company and Carl H. Guild Jr.,
as of November 8, 2001 (incorporated by reference to the Company’s Form 10-QSB filed with
the Securities and Exchange Commission on August 13, 2002) |
||
| 10.4 | + | 1995 Employee Stock Purchase Plan (incorporated by reference to the Company’s
Registration Statement on Form S-8, filed with the Securities and Exchange Commission on
May 23, 1996) |
||
| 10.5 | + | 2001 Stock Option Plan (incorporated by reference to the Company’s
Registration Statement on Form S-8, filed with the Securities and Exchange Commission on
December 28, 2001) |
||
| 10.6 | Standard Form Commercial Lease, dated April 4, 2007, between the Company and Batstone
LLC (incorporated by reference to the Company’s 8-K filed with the Securities and Exchange
Commission on April 6, 2007) |
|||
| 10.7 | Line of Credit Agreement with Letter of Credit and/or Acceptance Financing Agreement,
dated November 5, 2004, between the Company and Fleet National Bank, a Bank of America
Company (incorporated by reference to the Company’s 8-K filed with the Securities and
Exchange Commission on November 11, 2004) |
|||
| 10.8 | Line of Credit with Letter of Credit and/or Acceptance Financing Promissory Note,
dated November 5, 2004, between the Company and Fleet National Bank, a Bank of America
Company (incorporated by reference to the Company’s 8-K filed with the Securities and
Exchange Commission on November 11, 2004) |
|||
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Table of Contents
| (2) | List of Exhibits (cont’d) |
| 10.9 | + | 2005 Non-Statutory Stock Option Plan (incorporated by reference to the
Company’s Form 10-QSB filed with the Securities and Exchange Commission on May 10, 2005) |
||
| 10.10 | Contract with US Army CECOM Acquisitions Center dated April 18, 2008 (incorporated
by reference to Exhibit 10.1 to the Company’s Form 10-QSB filed with the Securities and
Exchange Commission on August 13, 2008) |
|||
| 14 | Code of Business Conduct and Ethics (incorporated by reference to the Company’s
Annual Report for 2003 on Form 10-KSB, filed with the Securities and Exchange Commission
on December 22, 2004) |
|||
| 21 | * | List of Subsidiaries of the Company |
||
| 23 | * | Consent of Caturano and Company, P.C. |
||
| 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 | * | Certifications of Chief Executive and Chief Financial Officers pursuant to 18 U.S.C.
Section 1350 |
||
Footnotes:
| * | Attached to this filing |
|
| + | Denotes a management contract or compensatory plan or arrangement |
25
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| TECHNICAL COMMUNICATIONS CORPORATION |
||||
| By: | /s/ Carl H. Guild, Jr. | |||
| Carl H. Guild, Jr. | ||||
| Chief Executive Officer and President Chairman of the Board, Director |
||||
| Date: December 18, 2009 | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Title | Date | ||
| /s/ Carl H. Guild, Jr. |
Chief Executive Officer and President Chairman of the Board, Director (Principal Executive Officer) |
December 18, 2009 | ||
| /s/ Michael P. Malone |
Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) |
December 18, 2009 | ||
| /s/ Mitchell B. Briskin |
Director | December 18, 2009 | ||
| /s/ Robert T. Lessard |
Director | December 18, 2009 | ||
| /s/ Thomas E. Peoples |
Director | December 18, 2009 |
26
Table of Contents
Technical Communications Corporation
Consolidated Balance Sheets
September 26, 2009 and September 27, 2008
| 2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 5,418,419 | $ | 3,622,903 | ||||
Accounts receivable — trade, less allowance of
$233,000 and $25,000 at September 26, 2009
and September 27, 2008, respectively |
402,841 | 722,261 | ||||||
Inventories |
2,415,054 | 1,920,724 | ||||||
Deferred income taxes |
566,294 | 75,000 | ||||||
Other current assets |
180,161 | 105,666 | ||||||
Total current assets |
8,982,769 | 6,446,554 | ||||||
Equipment and leasehold improvements |
3,369,214 | 3,182,522 | ||||||
Less accumulated depreciation and amortization |
(3,029,707 | ) | (2,915,050 | ) | ||||
Equipment and leasehold improvements, net |
339,507 | 267,472 | ||||||
| $ | 9,322,276 | $ | 6,714,026 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 250,129 | $ | 173,070 | ||||
Accrued liabilities: |
||||||||
Compensation and related expenses |
280,651 | 448,179 | ||||||
Customer deposits |
1,964,262 | 246,184 | ||||||
Other |
114,576 | 168,906 | ||||||
Total current liabilities |
2,609,618 | 1,036,339 | ||||||
Stockholders’ equity |
||||||||
Common stock — par value $0.10 per share; authorized
7,000,000 shares, issued and outstanding 1,452,199
and 1,433,767 shares at September 26, 2009
and September 27, 2008, respectively |
145,220 | 143,377 | ||||||
Additional paid-in capital |
2,031,340 | 1,941,020 | ||||||
Retained earnings |
4,536,098 | 3,593,290 | ||||||
Total stockholders’ equity |
6,712,658 | 5,677,687 | ||||||
| $ | 9,322,276 | $ | 6,714,026 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
27
Table of Contents
Technical Communications Corporation
Consolidated Statements of Operations
Years Ended September 26, 2009 and September 27, 2008
| 2009 | 2008 | |||||||
Net sales |
$ | 7,751,858 | $ | 6,852,313 | ||||
Cost of sales |
2,906,110 | 2,663,218 | ||||||
Gross profit |
4,845,748 | 4,189,095 | ||||||
Operating expenses: |
||||||||
Selling, general and administrative |
2,533,658 | 2,334,911 | ||||||
Product development |
1,888,953 | 942,041 | ||||||
Total operating expenses |
4,422,611 | 3,276,952 | ||||||
Operating income |
423,137 | 912,143 | ||||||
Other income (expense) |
||||||||
Investment income |
39,762 | 90,047 | ||||||
Income before income taxes |
462,899 | 1,002,190 | ||||||
Provision (benefit) for income taxes |
(479,909 | ) | (58,620 | ) | ||||
Net income |
$ | 942,808 | $ | 1,060,810 | ||||
Net income per common share |
||||||||
Basic |
$ | 0.65 | $ | 0.75 | ||||
Diluted |
$ | 0.58 | $ | 0.63 | ||||
Weighted average shares |
||||||||
Basic |
1,444,427 | 1,414,101 | ||||||
Diluted |
1,632,883 | 1,679,531 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
28
Table of Contents
Technical Communications Corporation
Consolidated Statements of Cash Flows
Years Ended September 26, 2009 and September 27, 2008
| 2009 | 2008 | |||||||
Operating activities: |
||||||||
Net income |
$ | 942,808 | $ | 1,060,810 | ||||
Adjustments to reconcile net income
to cash provided by operating activities: |
||||||||
Depreciation and amortization |
119,530 | 61,144 | ||||||
Bad debt expense |
207,748 | — | ||||||
Stock-based compensation |
116,363 | 145,661 | ||||||
Deferred income taxes |
(491,294 | ) | (75,000 | ) | ||||
Changes in current assets and current liabilities: |
||||||||
Accounts receivable |
111,672 | (301,734 | ) | |||||
Inventories |
(494,330 | ) | (12,567 | ) | ||||
Other current assets |
(74,495 | ) | (9,615 | ) | ||||
Customer deposits |
1,713,788 | 112,584 | ||||||
Accounts payable and accrued liabilities |
(167,020 | ) | (42,274 | ) | ||||
Cash provided by operating activities |
1,984,770 | 939,009 | ||||||
Investing activities: |
||||||||
Additions to equipment and leasehold improvements |
(191,565 | ) | (221,254 | ) | ||||
Cash used for investing activities |
(191,565 | ) | (221,254 | ) | ||||
Financing activities: |
||||||||
Proceeds from stock issuance |
2,311 | 282,860 | ||||||
Cash provided by financing activities |
2,311 | 282,860 | ||||||
Net increase in cash and cash equivalents |
1,795,516 | 1,000,615 | ||||||
Cash and cash equivalents at beginning of year |
3,622,903 | 2,622,288 | ||||||
Cash and cash equivalents at end of year |
$ | 5,418,419 | $ | 3,622,903 | ||||
Supplemental disclosures: |
||||||||
Interest paid |
$ | — | $ | — | ||||
Income taxes paid |
18,795 | 24,000 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
29
Table of Contents
Technical Communications Corporation
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended September 26, 2009 and September 27, 2008
| 2009 | 2008 | |||||||
Stockholders’ Equity |
||||||||
Shares of common stock: |
||||||||
Beginning balance |
1,433,767 | 1,382,767 | ||||||
Exercise of stock options |
2,334 | 51,000 | ||||||
Cashless exercise of stock options |
16,098 | — | ||||||
Ending balance |
1,452,199 | 1,433,767 | ||||||
Common stock at par value: |
||||||||
Beginning balance |
$ | 143,377 | $ | 138,277 | ||||
Exercise of stock options |
1,843 | 5,100 | ||||||
Ending balance |
145,220 | 143,377 | ||||||
Additional paid-in capital: |
||||||||
Beginning balance |
1,941,020 | 1,517,599 | ||||||
Exercise of stock options |
3,687 | 277,760 | ||||||
Cashless exercise of stock options |
(29,730 | ) | — | |||||
Stock-based compensation |
116,363 | 145,661 | ||||||
Ending balance |
2,031,340 | 1,941,020 | ||||||
Retained earnings: |
||||||||
Beginning balance |
3,593,290 | 2,532,480 | ||||||
Net income |
942,808 | 1,060,810 | ||||||
Ending balance |
4,536,098 | 3,593,290 | ||||||
Total stockholders’ equity |
$ | 6,712,658 | $ | 5,677,687 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
30
Table of Contents
Notes to Consolidated Financial Statements
(1) Company Operations
Technical Communications Corporation was incorporated in Massachusetts in 1961; its
subsidiary, TCC Investment Corp., was organized in that jurisdiction in 1982. The Company’s
business consists of only one industry segment, which is the design, development,
manufacture, distribution, marketing and sale of communications security devices and systems.
The secure communications solutions provided by TCC protect vital information transmitted
over a wide range of data, fax and voice networks. TCC’s products have been sold into over
110 countries and are in service with governments, military agencies, telecommunications
carriers, financial institutions and multinational corporations.
The Company’s revenues have historically included significant transactions with foreign
governments, U.S. government agencies and other organizations. The Company expects this to
continue. The timing of these transactions has in the past and will in the future have a
significant impact on the cash flow of the Company. Delays in the timing of significant
expected sales transactions would have a significant negative effect on the Company’s
operations. The Company has some ability to mitigate this effect through cost-cutting
measures.
(2) Summary of Significant Accounting Policies
We follow accounting standards set by the Financial Accounting Standards Board, commonly
referred to as the FASB. The FASB sets generally accepted accounting principles (GAAP) that
we follow to ensure we consistently report our financial condition, results of operations,
and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB
Accounting Standards CodificationTM sometimes referred to as the Codification or
ASC. The FASB finalized the Codification effective for periods ending on or after September
15, 2009.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, TCC Investment Corp., a Massachusetts corporation. All
significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits at banks and other investments (including
mutual funds) readily convertible into cash. Cash equivalents are stated at cost, which
approximates market value.
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 an impairment of their ability
to make payments, additional allowances may be required, which would reduce net income.
31
Table of Contents
Notes to Consolidated Financial Statements (continued)
Inventories
The Company values its inventory at the lower of actual cost to purchase and/or manufacture
or the current estimated market value (based on estimated selling prices, less the cost to
sell) of the inventory. The Company periodically reviews inventory quantities on hand and
records a provision for excess and/or obsolete inventory based primarily on our estimated
forecast of product demand, as well as historical usage. The Company evaluates the carrying
value of inventory on a quarterly basis to determine if the carrying value is recoverable at
estimated selling prices. To the extent that estimated selling prices do not exceed the
associated carrying values, inventory carrying values are written down. In addition, the
Company makes judgments as to future demand requirements and compares those with the current
or committed inventory levels. Reserves are established for inventory levels that exceed
future demand. It is possible that additional reserves above those already established may be
required in the future if market conditions for our products should deteriorate.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful life of the asset. When
assets are retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is recognized in operations for
the period. The costs of maintenance and repairs are charged to operations as incurred;
significant renewals and betterments are capitalized.
Long-lived Assets
The Company’s only long-lived assets are equipment and leasehold improvements. Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of the asset to the estimated
undiscounted future cash flows expected to be generated by such asset. If the carrying amount
of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of such asset exceeds the fair value of
the asset.
Recognition of Revenue
The Company recognizes product revenue when there is persuasive evidence of an arrangement,
the fee is fixed or determinable, delivery of the product to the customer has occurred and
the Company has determined that collection of the fee is probable. Title to the product
generally passes upon shipment of the product, as the products are shipped FOB shipping
point, except for certain foreign shipments. If the product requires installation to be
performed by TCC, all revenue related to the product is deferred and recognized upon
completion of the installation. The Company provides for a warranty reserve at the time the
product revenue is recognized.
The Company performs funded research and development and technology development for
commercial companies and government agencies under both cost reimbursement and fixed-price
contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs
and, in some situations, the payment of a fee. These contracts may contain incentive clauses
providing for increases or decreases in the fee depending on how costs compare with a budget.
Revenue from reimbursement contracts is recognized as services are performed. On fixed-price
contracts that are expected to exceed one year in duration, revenue is recognized pursuant to
the percentage of completion method based upon the proportion of costs incurred to the total
estimated costs for the contract. In each type of contract, the Company receives periodic
progress payments or payments upon reaching interim milestones. All payments to the Company
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. If the current estimates of total contract revenue and contract costs for 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.
32
Table of Contents
Notes to Consolidated Financial Statements (continued)
Cost of product revenue includes material, labor and overhead. Costs incurred in connection
with funded research and development are included in cost of
sales.
Share-Based Compensation
Share-based compensation cost is measured at the grant date based on the calculated fair
value of the award. The expense is recognized over the employee’s requisite service period,
generally the vesting period of the award. The related excess tax benefit received upon
exercise of stock options, if any, is reflected in the Company’s statement of cash flows as
a financing activity rather than an operating activity. These amounts were immaterial for the
years ended September 26, 2009 and September 27, 2008.
The Company selected the Black-Scholes option pricing model as the method for determining the
estimated fair value for its stock awards. The Black-Scholes method of valuation requires
several assumptions: (1) the expected term of the stock award, (2) the expected future stock
price volatility over the expected term and (3) risk-free interest rate. The expected term
represents the expected period of time the Company believes the options will be outstanding
based on historical information. Estimates of expected future stock price volatility are
based on the historic volatility of the Company’s common stock and the risk free interest
rate is based on the U.S. Treasury Note rate. The Company utilizes a forfeiture rate based on
an analysis of its actual experience. The forfeiture rate is not material to the calculation
of share-based compensation. The fair value of options at date of grant was estimated with
the following assumptions:
| September 26, | September 27, | |||
| 2009 | 2008 | |||
Assumptions: |
||||
Option life |
5 years | 5 years | ||
Risk-free interest rate |
1.8% to 2.8% | 2.71% to 3.8% | ||
Stock volatility |
77% to 80% | 81% to 110% | ||
Dividend yield |
-0- | -0- |
There were 25,500 options granted during the year ended September 26, 2009 and 41,000 options
granted during the year ended September 27, 2008. The following table summarizes share-based
compensation costs included in the Company’s consolidated statements of operations for the
years ended September 26, 2009 and September 27, 2008:
| 2009 | 2008 | |||||||
Cost of sales |
$ | 6,700 | $ | 6,809 | ||||
Selling, general and administrative |
51,319 | 89,869 | ||||||
Product development |
58,344 | 48,983 | ||||||
Total share-based compensation expense before taxes |
$ | 116,363 | $ | 145,661 | ||||
As of September 26, 2009, there was $188,731 of unrecognized compensation cost related to
options granted. The unrecognized compensation cost will be recognized as the option grants
vest. The weighted average period over which the compensation cost is expected to be
recognized is 3.21 years.
The Company had the following stock option plans outstanding as of September 26, 2009: the
Technical Communications Corporation 1991 Stock Option Plan, the 2001 Stock Option Plan and
the 2005 Non-Statutory Stock Option Plan. There were an aggregate of 900,000 shares
originally authorized under these plans, of which 492,700 were outstanding at September 26,
2009. Vesting periods are at the discretion of the Board of Directors and typically range
between one and five years. Options under these plans are granted with an exercise price
equal to fair market value at time of grant and have a term of five or ten years from the
date of grant. As of September 26, 2009, there were no
shares available for new option grants under the 1991 Stock Option Plan or the 2001 Stock
Option Plan, and there were 43,500 shares available for grant under the 2005 Non-Statutory
Stock Option Plan. During fiscal 2009 the Company’s Chief Executive Officer and other
directors exercised stock options for an aggregate 106,500 shares and subsequently tendered
back to TCC 90,402 of those shares in payment of the exercise price of the options and
associated withholding taxes. The tendered shares were immediately retired by the Company.
33
Table of Contents
Notes to Consolidated Financial Statements (continued)
The following tables summarize stock option activity during fiscal years 2008 and 2009:
| Options Outstanding | ||||||||||||
| Number of | Weighted Average | Weighted Average | ||||||||||
| Shares | Exercise Price | Contractual Life | ||||||||||
Outstanding at September 29, 2007 |
612,034 | $ | 3.12 | 4.55 years |
||||||||
Grants |
41,000 | 6.77 | ||||||||||
Exercises |
(51,000 | ) | 5.55 | |||||||||
Cancellations |
(21,000 | ) | 6.44 | |||||||||
Outstanding at September 27, 2008 |
581,034 | $ | 3.05 | 4.46 years |
||||||||
Grants |
25,500 | 4.80 | ||||||||||
Exercises |
(108,834 | ) | 3.88 | |||||||||
Cancellations |
(5,000 | ) | 4.00 | |||||||||
Outstanding at September 26, 2009 |
492,700 | $ | 2.95 | 4.72 years |
||||||||
Information related to the stock options vested or expected to vest as of September 26, 2009
is as follows:
| Weighted- | ||||||||||||||||||||
| Average | Exercisable | |||||||||||||||||||
| Remaining | Weighted- | Exercisable | Weighted- | |||||||||||||||||
| Range of | Number of | Contractual | Average | Number of | Average | |||||||||||||||
| Exercise Prices | Shares | Life (years) | Exercise Price | Shares | Exercise Price | |||||||||||||||
$0.01 – $1.00 |
158,000 | 3.05 | $ | 0.96 | 158,000 | $ | 0.96 | |||||||||||||
$1.01 – $2.00 |
1,200 | 2.31 | 1.27 | 1,200 | 1.27 | |||||||||||||||
$2.01 – $3.00 |
65,700 | 3.28 | 2.54 | 63,100 | 2.52 | |||||||||||||||
$3.01 – $4.00 |
193,800 | 5.14 | 3.59 | 177,600 | 3.60 | |||||||||||||||
$4.01 – $5.00 |
29,000 | 8.69 | 4.79 | 16,600 | 4.86 | |||||||||||||||
$5.01 – $10.00 |
45,000 | 8.37 | 6.62 | 21,000 | 6.98 | |||||||||||||||
| 492,700 | 4.72 | 2.95 | 437,500 | 2.69 | ||||||||||||||||
The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable
options as of September 26, 2009 was $783,813. The intrinsic value of the options exercised
during the year ended September 26, 2009 was $267,266. Nonvested common stock options are
subject to the risk of forfeiture until the fulfillment of specified conditions.
Income Taxes
The Company accounts for income taxes using the asset/liability method. Under the
asset/liability method, deferred income taxes are recognized at current income tax rates to
reflect the tax effect of temporary differences between the consolidated financial reporting
basis and tax basis of assets and liabilities. The Company provides a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated realizable value.
In June 2006, the FASB issued a new standard related to uncertain tax positions effective for
the Company for fiscal 2008. This standard provides detailed guidance for the financial
statement
recognition, measurement and disclosure of uncertain tax positions recognized in the
financial statements. Uncertain tax positions must meet a recognition threshold of
more-likely-than-not in order for those tax positions to be recognized in the financial
statements. For fiscal years 2009 and 2008, the Company had no uncertain tax positions or
unrecognized tax benefits. The Company expects no material changes to unrecognized tax
positions within the next twelve months.
34
Table of Contents
Notes to Consolidated Financial Statements (continued)
The Company’s policy is to record estimated interest and penalties related to the
underpayment of income taxes as a component of its income tax provision. As of September 26,
2009 and September 27, 2008, the Company had no accrued interest or tax penalties recorded.
Warranty Costs
The Company provides for warranty costs at the time product revenue is recognized based in
part upon historical experience.
Fair Value of Financial Instruments
The Company adopted the provisions of new guidance in the area of Fair Value Measurements and
Disclosures, effective for fiscal year 2009. This guidance defines fair value, establishes a
framework for measuring fair value under GAAP and enhances disclosures about fair value
measurements. Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Valuation techniques used to measure fair value, as required by the
guidance, must maximize the use of observable inputs and minimize the use of unobservable
inputs.
The standard describes a fair value hierarchy based on three levels of inputs, of which the
first two are considered observable and the last unobservable, that may be used to measure
fair value. The Company’s assessment of the significance of a particular input to the fair
value measurements requires judgment, and may affect the valuation of the assets and
liabilities being measured and their placement within the fair value hierarchy. The adoption
of this new guidance had no impact on TCC’s financial position or results of operations.
Earnings per Share (EPS)
The Company presents both a “basic” and a “diluted” EPS. Basic EPS is computed by dividing
net income by a weighted average number of shares of common stock outstanding during the
period. In computing diluted EPS, stock options that are dilutive (those that reduce
earnings per share) are included in the calculation of EPS using the treasury stock method.
Exercise of outstanding stock options is not assumed if the result would be antidilutive,
such as when a net loss is reported for the period or the option exercise price is greater
than the average market price for the period presented.
Fiscal Year-End Policy
The Company’s by-laws call for its fiscal year to end on the Saturday closest to the last day
of September, unless otherwise decided by its Board of Directors. The fiscal year 2009 ended
on September 26, 2009 and included 52 weeks. The fiscal year 2008 ended on September 27, 2008
and included 52 weeks.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owners sources.
The Company’s comprehensive income for the years ended September 26, 2009 and September 27,
2008 was equal to its net income for those periods.
35
Table of Contents
Notes to Consolidated Financial Statements (continued)
Operating Segments
The
Company reports on operating segments in accordance with standards for public companies to
report information about operating segments and geographic distribution of sales in financial
statements. The Company currently has only one operating segment, which is the design,
development, manufacture, distribution, marketing and sale of communications security devices
and systems.
Newly Issued Pronouncements
In May 2009, the FASB issued a pronouncement on
subsequent event accounting. The pronouncement identifies the following: the period after the
balance sheet date during which management shall evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements; the circumstances
under which an entity shall recognize events or transactions occurring after the balance
sheet date in its financial statements; and the disclosures that an entity shall make about
events or transactions that occurred after the balance sheet date. The pronouncement was
effective for the Company’s second quarter of fiscal 2009, and there was no effect as a
result of its adoption by TCC.
In June 2009, the FASB issued guidance on the FASB Accounting Standards Codification and the
hierarchy of generally accepted accounting principles. The FASB Accounting Standards
Codification, referred to as the Codification, is the single source of authoritative
nongovernmental generally accepted accounting principles in the United States. The
Codification was effective for interim and annual periods ending after September 15, 2009.
The adoption of the Codification had no impact on the Company’s financial position or results
of operations.
(3) Income Per Share
Basic and diluted EPS were calculated as follows:
| September 26, | September 27, | |||||||
| 2009 | 2008 | |||||||
Net Income |
$ | 942,808 | $ | 1,060,810 | ||||
Weighted Average Shares Outstanding — Basic |
1,444,427 | 1,414,101 | ||||||
Dilutive effect of stock options |
188,456 | 265,430 | ||||||
Weighted Average Shares Outstanding — Diluted |
1,632,883 | 1,679,531 | ||||||
Basic Net Income Per Share |
$ | 0.65 | $ | 0.75 | ||||
Diluted Net Income Per Share |
$ | 0.58 | $ | 0.63 | ||||
Outstanding potentially dilutive stock options, which were not included in the above
calculations for the respective fiscal years because their effect would have been
anti-dilutive, were as follows: 70,000 in fiscal year 2009 and 41,000 in fiscal year 2008.
(4) Inventories
Inventories consist of the following:
| September 26, | September 27, | |||||||
| 2009 | 2008 | |||||||
Finished goods |
$ | 5,829 | $ | 77,444 | ||||
Work in process |
511,514 | 589,700 | ||||||
Raw materials and supplies |
1,897,711 | 1,253,580 | ||||||
Total inventories |
$ | 2,415,054 | $ | 1,920,724 | ||||
36
Table of Contents
Notes to Consolidated Financial Statements (continued)
(5) Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
| September 26, | September 27, | Estimated | ||||||||||
| 2009 | 2008 | Useful Life | ||||||||||
Engineering and manufacturing equipment |
$ | 1,477,156 | $ | 1,416,678 | 3-8 years | |||||||
Demonstration equipment |
665,916 | 635,932 | 3 years | |||||||||
Furniture and fixtures |
741,846 | 654,711 | 3-8 years | |||||||||
Leasehold improvements |
484,296 | 475,201 | Lesser of useful life or term of lease |
|||||||||
Total equipment and
leasehold improvements |
3,369,214 | 3,182,522 | ||||||||||
Less accumulated depreciation
and amortization |
(3,029,707 | ) | (2,915,050 | ) | ||||||||
Equipment and leasehold improvements, net |
$ | 339,507 | $ | 267,472 | ||||||||
Depreciation expense was $119,530 and $61,144 for the fiscal years ended September 26, 2009 and
September 27, 2008, respectively.
(6) Other Accrued Liabilities
| September 26, | September 27, | |||||||
| 2009 | 2008 | |||||||
Product warranty costs |
$ | 46,675 | $ | 61,708 | ||||
Professional service fees |
49,229 | 37,514 | ||||||
Annual report and investor relations fees |
13,638 | 19,526 | ||||||
Customer support agreements and commissions |
5,034 | 50,158 | ||||||
Total other accrued liabilities |
$ | 114,576 | $ | 168,906 | ||||
(7) Leases
In April 2007, the Company entered into a new lease for its current facilities. This lease is
for 22,800 square feet located at 100 Domino Drive, Concord, MA. The Company has been a
tenant in this space since 1983. This is the Company’s only facility and houses all
manufacturing, research and development, and corporate operations. The term of the lease is
for five years through March 31, 2012 at an annual rate of $159,000. In addition the lease
contains options to extend the lease for two and one half years through September 30, 2014
and another two and one half years through March 31, 2017, at an annual rate of $171,000.
Rent expense for each of the years ended September 26, 2009 and September 27, 2008 was
$159,000.
37
Table of Contents
Notes to Consolidated Financial Statements (continued)
(8) Guarantees
The Company’s products generally carry a standard 15 month warranty. The Company sets aside a
reserve based on anticipated warranty claims at the time product revenue is recognized.
Factors that affect the Company’s product warranty liability include the number of installed
units, the anticipated cost of warranty repairs and historical and anticipated rates of
warranty claims.
The following table reflects changes in the Company’s accrued warranty account:
| September 26, | September 27, | |||||||
| 2009 | 2008 | |||||||
Beginning Balance |
$ | 61,708 | $ | 49,121 | ||||
Plus: accruals related to new sales |
39,852 | 49,433 | ||||||
Less: payments and adjustments to prior period accruals |
(54,885 | ) | (36,846 | ) | ||||
Ending Balance |
$ | 46,675 | $ | 61,708 | ||||
(9) Income Taxes
The provision (benefit) for income taxes consists of the following:
| September 26, | September 27, | |||||||
| 2009 | 2008 | |||||||
Current: |
||||||||
Federal |
$ | 3,264 | $ | 8,275 | ||||
State |
8,121 | 8,105 | ||||||
Total current taxes |
11,385 | 16,380 | ||||||
Deferred: |
||||||||
Federal |
(491,294 | ) | (75,000 | ) | ||||
State |
— | — | ||||||
Total deferred taxes |
(491,294 | ) | (75,000 | ) | ||||
Total (benefit) provision |
$ | (479,909 | ) | $ | (58,620 | ) | ||
The provisions for income taxes are different from those that would be obtained by applying the
statutory federal income tax rate to income before income taxes due to the following:
| September 26, | September 27, | |||||||
| 2009 | 2008 | |||||||
Tax provision at U.S. statutory rate |
$ | 157,386 | $ | 340,745 | ||||
State income tax provision, net of federal benefit |
5,360 | 5,349 | ||||||
Other |
4,062 | (394 | ) | |||||
Valuation allowance |
(646,717 | ) | (404,320 | ) | ||||
Total (benefit) provision |
$ | (479,909 | ) | $ | (58,620 | ) | ||
38
Table of Contents
Notes to Consolidated Financial Statements (continued)
Deferred income taxes consist of the following:
| September 26, | September 27, | |||||||
| 2009 | 2008 | |||||||
NOL carryforward |
$ | 1,285,289 | $ | 1,489,057 | ||||
Inventory differences |
1,135,742 | 1,121,516 | ||||||
Goodwill |
13,699 | 34,241 | ||||||
Warranty accruals |
18,796 | 24,850 | ||||||
Payroll related accruals |
12,111 | 14,308 | ||||||
Tax credits |
384,553 | 169,916 | ||||||
Other |
259,064 | 197,064 | ||||||
Total |
3,109,254 | 3,050,951 | ||||||
Less: valuation allowance |
(2,542,960 | ) | (2,975,951 | ) | ||||
Total |
$ | 566,294 | $ | 75,000 | ||||
During fiscal 2009, $491,294 of the deferred tax valuation allowance, related primarily to
net operating loss carryforwards, was reversed, due to the determination by the Company that
the benefits of the deferred tax asset will more likely than not be realized in future years.
The valuation allowance relates to uncertainty with respect to the Company’s ability to
realize its deferred tax assets. The change in the valuation allowance was $432,991 and
$487,295 in fiscal years 2009 and 2008, respectively, and related primarily to the reversal
of the valuation allowance and the utilization of net operating loss carryforwards against
taxable income.
As of September 26, 2009, the Company had available tax loss carryforwards for federal income
tax purposes of approximately $3,780,000, expiring through 2026. In addition, the Company had
available research credits for federal income tax purposes of approximately $262,000,
expiring through 2029.
Due to the nature of the Company’s current operations in foreign countries (selling products
into these 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 the Company
will be subject to foreign taxes in the near future.
The Company files income tax returns in the U.S. federal jurisdiction and in the state of
Massachusetts. For U.S. federal and state tax purposes, the tax years 2005 through 2008
remain open to examination. In addition, the amount of the Company’s federal and state net
operating loss carryforwards may be subject to examination and adjustment.
(10) Employee Benefit Plans
The Company has a qualified, contributory, profit sharing plan covering substantially all
employees. The Company’s policy is to fund contributions as they are accrued. The
contributions are allocated based on the employee’s proportionate share of total
compensation. The Company’s contributions to the plan are determined by the Board of
Directors and are subject to other specified limitations. There were no Company profit
sharing contributions during fiscal years 2009 or 2008. However, the Board of Directors
approved a corporate match of $0.25 per $1.00 of the first 6% of each participant’s
contributions to the plan. The Company’s matching contributions were $39,386 and $29,632 in
fiscal years 2009 and 2008, respectively.
The Company has an Executive Incentive Bonus Plan for the benefit of key management
employees. The bonus pool is determined based on the Company’s performance as defined by the
plan. Under the plan, bonuses totaling $49,500 were accrued for executives at September 26,
2009 and $110,000 at September 27, 2008.
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Table of Contents
Notes to Consolidated Financial Statements (continued)
(11) Commitments and contingencies
The Company has a line of credit agreement with Bank of America (the “Bank”) for a line of
credit not to exceed the principal amount of $600,000. The line is supported by a financing
promissory note. The loan is a demand loan with interest payable at the Bank’s prime rate
plus 1% on all outstanding balances. The loan is secured by all assets of the Company
(excluding consumer goods) and requires the Company to maintain its deposit accounts with the
Bank, as well as comply with certain other covenants. The Company believes this line of
credit agreement provides it with an important external source of liquidity, if necessary.
There were no cash borrowings against the line during fiscal years 2009 and 2008.
The Company did not have any open standby letters of credit at September 26, 2009 or
September 27, 2008.
The Company maintains its cash and cash equivalents in bank deposit accounts and money market
mutual funds that, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company believes it is not exposed to any
significant credit risk on its cash and cash equivalents.
(12) Major Customers and Export Sales
In fiscal year 2009, the Company had three customers representing 76% (33%, 28% and 15%) of
total net sales and at September 26, 2009 had two customers representing 87% (48% and 39%) of
accounts receivable. In fiscal year 2008, the Company had two customers representing 78% (51%
and 27%) of total net sales and at September 27, 2008 had two customers representing 95% (54%
and 41%) of accounts receivable.
A breakdown of net sales is as follows:
| September 26, | September 27, | |||||||
| 2009 | 2008 | |||||||
Domestic |
$ | 7,226,969 | $ | 5,864,789 | ||||
Foreign |
524,889 | 987,524 | ||||||
Total Sales |
$ | 7,751,858 | $ | 6,852,313 | ||||
A summary of foreign sales, as a percentage of total foreign revenue by geographic area, is
as follows:
| September 26, | September 27, | |||||||
| 2009 | 2008 | |||||||
North America, excluding the U.S. |
15.6 | % | 0.8 | % | ||||
Central and South America |
7.2 | % | 64.7 | % | ||||
Europe |
3.1 | % | 9.6 | % | ||||
Mid-East and Africa |
55.2 | % | 19.5 | % | ||||
Far East |
18.9 | % | 5.4 | % | ||||
The Company sold products to 12 different countries during the year ended September 26, 2009
and 13 different countries during the year ended September 27, 2008. A sale is attributed to
a foreign country based on the location of the contracting party. Domestic revenue may
include the sale of products shipped through domestic resellers or manufacturers to
international destinations. The table below summarizes our foreign revenues by country as a
percentage of total foreign revenue.
| September 26, | September 27, | |||||||
| 2009 | 2008 | |||||||
Colombia |
6.0 | % | 64.7 | % | ||||
Saudi Arabia |
52.6 | % | 9.6 | % | ||||
Thailand |
18.3 | % | 5.3 | % | ||||
Mexico |
15.6 | % | — | |||||
Other |
7.5 | % | 20.4 | % | ||||
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Table of Contents
Notes to Consolidated Financial Statements (continued)
(13) Shareholder Rights Plan
The Company has adopted a Shareholder Rights Plan and declared a dividend distribution of one
common stock purchase right for each outstanding share of Common Stock of the Company,
payable to stockholders of record at the close of business on August 13, 2004, and for each
share of Common Stock issued thereafter. Until the rights become exercisable, they will
trade automatically with the Company’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
Company’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 Company’s voting stock.
Each right, once exercisable, will entitle the holder (other than an acquiring person or
group) to buy one share of the Company’s Common Stock at a price of $25 per share, subject to
certain adjustments. In addition, upon the occurrence of specified events, holders of the
rights (other than rights owned by an acquiring person or group) would be entitled to
purchase either the Company’s Common Stock or shares in an “acquiring entity” at
approximately half of market value. Further, at any time after a person or group acquires
15% or more (but less than 50%) of the Company’s outstanding voting stock, subject to certain
exceptions, the Board of Directors may, at its option, exchange part or all of the rights
(other than rights held by an acquiring person or group) for shares of the Company’s Common
Stock having a fair market value on the date of such acquisition equal to the excess of (i)
the fair market value of Common Stock issuable upon exercise of the rights over (ii) the
exercise price of the rights.
The Company generally will be entitled to redeem the rights at $.001 per right at any time
prior to the close of business on the tenth business day after there has been a public
announcement of the beneficial ownership by any person or group of 15% or more of the
Company’s voting stock, subject to certain exceptions. The rights will expire on August 5,
2014 unless earlier redeemed.
(14) Subsequent Events
The Company has evaluated subsequent events through December 18, 2009, the date which the
consolidated financial statements were available to be issued.
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Technical Communications Corporation:
Technical Communications Corporation:
We have audited the accompanying consolidated balance sheets of Technical Communications
Corporation and subsidiaries as of September 26, 2009 and September 27, 2008 and the related
consolidated statements of operations, changes in stockholders’ equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal controls
over financial reporting. Our audits included consideration of internal controls over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Technical Communications Corporation and
subsidiaries at September 26, 2009 and September 27, 2008 and the consolidated results of its
operations and its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Caturano and Company, P.C.
|
Boston, Massachusetts
December 18, 2009
December 18, 2009
42