U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 25, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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Commission File Number
0-8588
Technical Communications Corporation
(Exact name of registrant as specified in its charter)
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Massachusetts
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04-2295040
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(State or other jurisdiction of incorporation
or organization)
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(I.R.S. Employer Identification No.)
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100 Domino Drive, Concord, MA
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01742-2892
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(Address of principal executive offices)
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(Zip code)
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(978) 287-5100
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, $0.10 par value
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NASDAQ Capital Market
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(Title of each class)
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(Name of each exchange
on which registered)
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Securities registered pursuant to Section 12(g) of the Act:
Not applicable
(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
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NO
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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
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES
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NO
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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
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NO
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(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 registrants 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.
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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):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). YES
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NO
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Based on the closing price as of March 27, 2010, the aggregate market value of the
registrants Common Stock held by non-affiliates of the registrant was approximately $12,236,814.
The number of shares of the registrants Common Stock, par value $0.10 per share,
outstanding as of December 17, 2010 was 1,826,087.
Portions of the Companys Definitive Proxy Statement to be delivered to shareholders in
connection with the Companys 2011 Annual Meeting of Shareholders to be held February 7, 2011 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 25, 2010
Table of Contents
PART I
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. TCCs products have been sold into over 115 countries and are in service with
governments, military agencies, telecommunications carriers, financial institutions and
multinational corporations. The Companys business consists of one industry segment, which is the
design, development, manufacture, distribution, marketing and sale of communications security
devices and systems.
Overview
The Companys products consist of sophisticated electronic devices that enable users to
transmit information in an encrypted format and permit recipients to reconstitute the information
in a deciphered format if the recipient possesses the right decryption key. The Companys
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 Companys 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.
TCCs 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 Companys 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 Companys 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.
1
2010 Highlights and Recent Events
The Company continued to produce positive financial results in fiscal 2010 with significant
improvement in revenues and maintenance of strong profitability. TCC secured significant sales in
several product areas, including military network security, HF radio encryptors, IP security for
private satellite-based systems, and secure telephony systems. Several of the major 2010 projects
were expansions of the TCC installed encryption bases in Egypt, Taiwan, Thailand, and Afghanistan.
TCC also continued to expand its technology base through its development of new derivative products
to meet specific customer applications.
Revenues in fiscal 2010 increased to $21,551,000, a 178% increase over fiscal 2009 revenues of
$7,752,000, and we produced a profit of $7,868,000, or $4.68 per share, for the period. These
results are largely due to continuing strong sales of encryption products for foreign military
networks and radio applications, especially for deployment into Afghanistan. TCCs backlog at the
end of the year was $3,398,000. Although year-end backlog decreased 56% from the fiscal 2009
year-end position, orders received subsequent to the end of the 2010 fiscal year increased the
backlog as of mid-December 2010 to approximately $6.8 million.
During fiscal 2010, TCC delivered over $3.6 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 DSD 72A-SP product line of high performance encryptors used worldwide in tactical and
strategic networks requiring strong encryption security and high reliability. The equipment
delivered to Egypt in fiscal 2010 will provide logistics support as well as expand the fielded
systems. TCC expects that the evolution of this customers radio systems will provide opportunities
for upgrades and adaptations of the deployed bulk encryptors in the future. Accordingly, TCC
continues to develop new DSD 72A-SP equipment which allows customers to use new radios,
multiplexers and switches. In 2010, development was completed on a new multi-interface system that
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 2010, TCC also received an order valued at $9.7 million to deliver significant
quantities of the Companys DSP 9000 Universal Radio Encryption System to Afghanistan for use by
both the coalition and indigenous forces. TCCs DSP 9000 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 DSP 9000 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 DSP 9000 system provides a universal encryption solution that is
readily deployable, cost effective and adaptable to meet unique user requirements. Also in fiscal
2010, TCC delivered DSP 9000 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 DSP 9000
system and its integration flexibility offer an ideal solution for many policing applications on
land, water and air.
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.
TCCs 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 believes it can continue 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 Companys 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 Companys most
significant source of future revenues.
The Companys 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 a new secure wireless mobile phone, 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 and during 2009 we introduced a new keyboard/PDA
secure wireless phone and a new desktop encryptor for this product line. The market for the secure
wireless mobile phones continues to develop modestly and we expect it will take the greater part of
fiscal 2011 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 has hampered the Companys 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 of its products upon a customers 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 Companys 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. In October 2010, TCC announced the introduction of a new family of high speed
SONET/SDH encryptors capable of operating on fiber optic networks. These encryptors have been
designed to meet a wide range of environmental and operational requirements and provide a high
level of security in a wide range of deployment conditions.
The Companys 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 Companys
secure telephone systems to enable office-to-field communications.
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The Companys 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. TCCs high-level encryption and automated key
distribution system protect sensitive information, and internal storage of 400 keys provides
hands-off security.
Secure Office Systems
The Companys 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 Companys 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 Companys 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
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secure wireless products are designed to provide encrypted
mobile communications anywhere in the world. With multi-band radio interfaces, 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 the Companys new line of secure wireless products first introduced in 2005.
Network Security Systems
The CipherONE
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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 users 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 Companys 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 KEYNET
TM
(discussed below).
The Companys IP Network Encryptor provides encryption security at the Internet protocol layer
and is configured locally with Cipher Site Manager or remotely with KEYNET.
The Companys 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.
4
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 Group, 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 TCCs 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 2010, the Company had three customers representing 86% of total net sales. These
consisted of fees generated by our engineering services efforts representing 10% of sales and sales
under a contract with U.S. Army, Communications and Electronics Command (CECOM) for bulk
encryptors representing 17% of sales. Also, we had sales of radio encryptors to one customer for
deployment in Afghanistan representing 59% of sales. In fiscal year 2009, the Company had three
customers representing 76% of total net sales. These consisted of sales of radio encryptors to one
customer for deployment in Afghanistan amounting to 15% of sales, fees generated by our engineering
services efforts for one customer representing 33% of sales and sales under the CECOM contract for
bulk encryptors representing 28% 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 customers firm purchase order. Our backlog
consists of all orders received where the anticipated shipping date is within 12 months of the
order date. Because of the possibility of customer changes in delivery schedules or the
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 25, 2010 and September 26, 2009 was approximately
$3,398,000 and $7,778,000, respectively. Orders received subsequent to September 25, 2010 have
increased backlog as of mid-December to approximately $6.8 million.
The Company expects that sales to relatively few customers will continue to account for a high
percentage of the Companys 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 Companys financial condition and results of operations.
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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.
The Companys 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.
governments 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 TCCs 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 and 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 governments recognition
of the technology available from foreign sources and the need to allow domestic corporations to
compete in foreign markets. However, should the regulations become more restrictive, it would have
a negative impact on the Companys international business, which impact could be material.
The costs and effects of compliance by the Company with applicable environmental laws during
fiscal 2010 and historically are immaterial. In the event the Companys sales to Europe increase,
the Company may have to incur additional costs to provide for the disposal of its products in
compliance with applicable laws.
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
Companys 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.
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The Companys 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 Companys technological expertise and experience, including certain proprietary rights
which it has developed and maintains as trade secrets, are crucial to the conduct of the Companys
business. Management is of the opinion that, while patent protection is desirable with respect to
certain of its products, none of the Companys 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 TCCs
business.
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 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 TCCs 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, TCCs 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 Companys 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 25, 2010 and
September 26, 2009, the Company spent $2,608,000 and $1,889,000, respectively, on product
development.
In fiscal 2011, the Company expects to increase its investment in internal product development
by approximately 15%. Our plan is to continue to evaluate several technical options for enhancing
the DSP 9000 radio encryption product line, which may include cryptography modifications, hardware
and software changes and partnering with radio manufacturers to incorporate imbedded solutions. TCC
also expects to complete systems testing in early 2011 of a high speed, SONET/SDH optical encryptor
called the 72B, which we expect will provide full-rate encryption capability at 155mbs and 622mbs
speeds. This encryptor is designed to be compliant with the Federal Information Processing Standard
(FIPS) level 140-2 and is being offered in three configurations covering applications for
commercial telecommunications providers through highly ruggedized military and government
requirements. TCC expects that the 72B encryptor family will provide fully interoperable operations
between office and harsh field environments.
7
On-going research and development in support of product improvements and application variants
also is expected to continue. In 2011 TCC plans to begin development of an advanced, 100mbs through
1gbs family of IP encryptors which will service private network markets for government, military
and satellite users. This initiative is planned to have a product introduction in 2012. 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.
Foreign Operations
The Company is dependent upon its foreign sales. Although foreign sales were more profitable
than domestic sales during fiscal years 2010 and 2009 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, foreign and domestic 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 Companys 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 2010 and 2009, sales directly to international customers accounted for
approximately 4% and 7%, respectively, of our net sales. During those periods 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
substantially completed shipments of products delivered to the Government of Egypt representing 16%
of sales under a contract with the U.S. Army CECOM. Based on our historical results we expect that
international sales, including sales to domestic customers that ship to foreign end-users, 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:
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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,
|
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|
|
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.
8
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 25, 2010, the Company employed 33 full-time employees and two part-time
employees, as well as several full and part-time consultants. The Company believes that its
relationship with employees is good.
You should carefully consider the following risk factors that affect our business. Such risks 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 25, 2010 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;
|
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|
|
timing and execution of individual contracts;
|
|
|
|
competitive conditions in the communications security industry;
|
|
|
|
changes in general economic conditions; and
|
|
|
|
shortfalls 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 TCCs 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 Companys 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 Companys 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 TCCs products obsolete or uncompetitive and prevent the Company
from achieving or sustaining profitable operations.
9
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 customers 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 arrangements 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 Companys 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 Companys
international business, which impact could be material.
10
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 Companys 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 sales to foreign end-users
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 Companys 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 Companys technological expertise and experience, including certain proprietary rights
that it has developed and maintains as trade secrets, are crucial to the conduct of the Companys
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.
11
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.
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.
Our management has determined that the Companys internal control over financial reporting is
currently not effective.
Our management team, under the supervision and with the participation of our Chief Executive
Officer and our Chief Financial Officer, conducted an assessment of the effectiveness of the
Companys internal control over financial reporting as of the end of the Companys 2010 fiscal
year. In the course of that assessment, management identified a control deficiency that was also
identified in the course of its assessments for fiscal years 2009 and 2008. Specifically,
management determined that TCC lacked sufficient staff to segregate accounting duties, which could
result in a misstatement of balance sheet and income statement items that would not be detected.
Management concluded that such control deficiency constituted a material weakness and that our
internal control over financial reporting was not effective as of September 25, 2010.
12
Until we are able to remediate the material weakness identified, such material weakness may
materially and adversely affect our ability to report accurately our financial condition and
results of operations in the future in a timely and reliable manner. In addition, although we
review and evaluate our internal control systems to allow management to report on the sufficiency
of our internal control over financial reporting, we cannot assure you that we will not discover
additional weaknesses in the future or that
any corrective actions taken to remediate issues identified during the course of an assessment
will be effective. Any such additional weakness or failure to remediate any existing weakness
could materially adversely affect our financial condition or ability to comply with applicable
financial reporting requirements.
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 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.
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 Companys success is particularly dependent on the retention of existing management
and technical personnel, including Carl H. Guild, Jr., the Companys 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 17, 2010, we employed 32 full-time and two part-time employees 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.
13
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 Companys 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 25, 2010 and September 26, 2009 was $159,000.
|
|
|
Item 3.
|
|
LEGAL PROCEEDINGS
|
There are no current legal proceedings as to which TCC or its subsidiary is a party or as to
which any of their property is subject.
PART II
|
|
|
Item 5.
|
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
|
Market Information
The Companys common stock, $0.10 par value, began trading on the NASDAQ Capital Market on
July 14, 2010 under the symbol TCCO. Prior to such date, the common stock was traded on the
Over-the-Counter Bulletin Board under the symbol TCCO.OB. The following table presents,
commencing July 14, 2010, low and high sales prices for the common stock and, prior to such date,
low and high bid information for the time periods specified. All 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
sales price information and over-the-counter quotations.
|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
Price
|
|
Title of Class
|
|
Quarter Ending
|
|
|
Low
|
|
|
High
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock,
$0.10 par value
|
|
|
9/25/2010
|
|
|
$
|
8.45
|
|
|
$
|
13.00
|
|
|
|
|
6/26/2010
|
|
|
|
8.75
|
|
|
|
14.68
|
|
|
|
|
3/27/2010
|
|
|
|
4.00
|
|
|
|
13.15
|
|
|
|
|
12/26/2009
|
|
|
|
3.60
|
|
|
|
4.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Dividends
The Company paid cash dividends on its class of common equity during fiscal year 2010 as
follows:
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|
|
|
|
|
|
Payment Date
|
|
Aggregate
|
|
|
Per Share
|
|
March 22, 2010
|
|
$
|
3,640,876
|
|
|
$
|
2.00
|
|
June 15, 2010
|
|
|
182,044
|
|
|
|
0.10
|
|
September 9, 2010
|
|
|
182,559
|
|
|
|
0.10
|
|
On December 9, 2010, the Companys Board of Directors declared a dividend of $0.10 per share of
common stock outstanding. The dividend is payable in cash on December 27, 2010 to all shareholders
of record on December 20, 2010 and is expected to be approximately $182,609. It is not the
Companys intention to pay dividends on a regular basis unless future profits warrant such actions.
14
Holders
As of December 17, 2010, there were approximately 800 record holders of our Common Stock.
Recent Price
On December 17, 2010, the closing price of the Common Stock was $13.38.
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 25, 2010.
For more information on these plans, see the discussion of the Companys stock option plans and
stock-based compensation plans included in Note 2 to the Companys financial statements as of and
for the year ended September 25, 2010, included herewith.
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|
|
|
|
|
|
|
|
|
Number of
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|
|
Number of securities to
|
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|
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
|
|
|
3,400
|
(1)
|
|
$
|
2.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by stockholders
|
|
|
111,888
|
(2)
|
|
$
|
5.30
|
|
|
|
43,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
115,288
|
|
|
$
|
5.23
|
|
|
|
43,059
|
|
|
|
|
(1)
|
|
Of the 3,400 options outstanding as of September 25, 2010, 2,500 were exercisable as of
such date at an average exercise price of $2.54 per share.
|
|
(2)
|
|
Of the 111,888 options outstanding as of September 25, 2010, 74,388 were exercisable as of such
date at an average exercise price of $5.10 per share.
|
The Board of Directors has also approved the 2010 Equity Incentive Plan, as amended and restated.
This plan is subject to the approval of shareholders at the Companys 2011 Annual Stockholder
meeting to be held on February 7, 2011. The Company is seeking approval for 200,000 shares to be
available for grant under the plan. Of these 200,000 shares the Company granted options to purchase
145,815 shares during fiscal 2010, of which 142,665 remained outstanding on December 17, 2010. The
plan and such options will terminate and be of no further force and effect if the plan is not
approved by shareholders.
15
Sales of Unregistered Securities and Repurchases by the Issuer and Affiliated Purchasers
There were no sales by the Company of unregistered shares of the Companys common stock during
the 2010 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 2010 fiscal year.
During fiscal 2010 the Companys Chief Financial Officer exercised stock options for an
aggregate 62,500 shares and subsequently tendered 5,985 of those shares back to the Company in
payment of the exercise price of the options and associated withholding taxes. The tendered shares
were immediately retired by the Company.
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|
|
Item 6.
|
|
SELECTED FINANCIAL DATA
|
16
|
|
|
Item 7.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion of the Companys financial condition and results of operations should
be read in conjunction with the Companys 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 Companys 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 Companys filings with the
Securities and Exchange Commission, including this Form 10-K for the fiscal year ended September
25, 2010 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 Companys 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 either through direct
sale, pursuant to a U.S. government contract or made as a sub-contractor to domestic corporations
under contract with the U.S. government. 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 and commercial entities.
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, inventory reserves, receivable 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.
17
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 where
title passes upon entry of the product into the first port in the buyers country. 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 actual 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 actual 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.
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.
18
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 $1.1 million as
of September 25, 2010, 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 the compensation expense for all share-based payments based on the grant date fair
value. We expense share-based compensation over the employees 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 managements
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 25, 2010 as compared to year ended September 26, 2009
Net Sales
Net sales for the years ended September 25, 2010 and September 26, 2009 were $21,551,000 and
$7,752,000, respectively, an increase of $13,799,000 or 178%. Sales for fiscal 2010 consisted of
$20,771,000, or 96%, from domestic sources and $780,000, or 4%, from international customers as
compared to fiscal 2009, in which sales consisted of $7,227,000, or 93%, from domestic sources and
$525,000, or 7%, from international customers.
Foreign sales consisted of shipments to five different countries during the year ended
September 25, 2010 and 12 different countries during the year ended September 26, 2009. A sale is
attributed to a foreign country based on the location of the contracting party. Domestic revenue
may include the sale of products shipped through domestic resellers or manufacturers to
international destinations. The table below summarizes our principal foreign sales by country:
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2010
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2009
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Thailand
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$
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648,000
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$
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96,000
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Saudi Arabia
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28,000
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276,000
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Slovakia
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87,000
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16,000
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Mexico
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82,000
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Other
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17,000
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55,000
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$
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780,000
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$
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525,000
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Revenue for fiscal 2010 was derived from the sale of the Companys narrowband radio encryptors
to a U.S. radio manufacturer amounting to $12,863,000 and to an additional domestic customer
amounting to $474,000. Billings under programs for engineering services work amounting to
$2,562,000 also were recognized during the period. In addition, we continued shipping products
under a contract with CECOM amounting to $3,591,000 during fiscal 2010. We also sold our secure
telephone, fax, and data encryptors to a
foreign customer amounting to $592,000 and we began shipping our high speed bulk encryptors
amounting to $1,196,000 under a contract with a domestic customer.
19
Revenue for fiscal 2009 was derived from the sale of the Companys 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
the contract with CECOM amounting to $2,159,000 in 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.
Gross Profit
Gross profit for fiscal year 2010 was $16,144,000, an increase of $11,298,000 or 233%,
compared to gross profit of $4,846,000 for fiscal year 2009. Gross profit expressed as a percentage
of sales was 75% in fiscal year 2010 compared to 63% in the prior year. The increase in gross
profit as a percentage of sales was primarily associated with higher margin products being sold in
fiscal 2010, including products sold under the CECOM contract.
Operating Costs and Expenses
Selling, General and Administrative
Selling, general and administrative expenses for fiscal 2010 were $2,808,000, compared to
$2,534,000 for fiscal 2009. This increase of $274,000 or 11% was attributable to an increase in
general and administrative expenses of $313,000, offset by a decrease in selling and marketing
expenses of $39,000 during the 2010 fiscal year.
The increase in general and administrative costs during fiscal 2010 was primarily attributable
to increases in personnel-related costs of $259,000, professional and director fees of $56,000,
charitable contributions of $15,000 and NASDAQ listing fees of $64,000, which were partially offset
by a decrease in bad debt expense of $108,000.
The decrease in selling and marketing costs during fiscal 2010 was attributable to decreases
in third party sales and marketing agreements of $125,000 and personnel-related costs of $16,000.
These decreases were partially offset by increases in outside sales commissions of $51,000,
customer support expenses of $24,000 and bid and proposal activities of $24,000.
Product Development
Product development costs for fiscal 2010 were $2,608,000, compared to $1,889,000 for fiscal
2009, an increase of $719,000 or 38%. This increase was primarily attributable to an increase in
personnel-related costs of $492,000, a decrease in billable engineering services work performed,
which increased product development costs by approximately $592,000, and an increase in costs for
materials and supplies of $91,000. The increase was offset by a decrease in outside consulting fees
of $332,000 and a decrease in recruiting costs of $47,000.
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 $2,562,000 of
billable engineering services revenue generated during fiscal 2010 and $3,271,000 generated during
fiscal 2009.
It is anticipated that cash from operations will fund our near-term research and development
and marketing activities. We also 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. 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. In circumstances where resources will be
insufficient, the Company will look to other sources of financing, including debt and/or equity
investments.
20
Net Income
The Company generated net income of $7,868,000 for fiscal year 2010 as compared to net income
of $943,000 for fiscal year 2009, a $6,925,000 increase. This 734% increase in net income is
primarily attributable to a substantial increase in gross profit on revenue from orders of our
radio encryptors for deployment into Afghanistan amounting to $12,863,000. This increase in income
generated a $3,345,000 increase in income taxes.
The effects of inflation and changing costs have not had a significant impact on sales or
earnings in recent years. As of September 25, 2010, none of the Companys 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 $5,615,000, or 104%, to $11,033,000 as of September 25,
2010, from a balance of $5,418,000 at September 26, 2009. This increase was primarily attributable
to cash generated from operations of $8,970,000, which includes net income of $7,868,000, an
increase in accrued income taxes payable of $1,635,000 and proceeds from the exercise of stock
options of $804,000, and was offset by the payout of dividends of $4,005,000, a decrease in cash
from customer deposits of $1,758,000 and an increase in inventory of $198,000. Fixed asset
additions of $257,000 during the period also offset the increases.
During fiscal 2010 the Company paid special cash dividends totaling $4,005,000. The payment of
these dividends was based on the profits incurred by the Company during that timeframe. In
addition, the Companys Board of Directors declared a dividend of $0.10 per share of common stock
outstanding in recognition of the positive financial performance of fiscal 2010. The dividend is
payable in cash on December 27, 2010 to all shareholders of record on December 20, 2010. It is not
the Companys intention to pay dividends on a regular basis unless future profits warrant such
actions.
During fiscal 2010 we substantially completed work on engineering services programs valued at
$4.78 million. We billed $2,562,000 during fiscal 2010 under these programs and there is
approximately $100,000 remaining in backlog. 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 $5,750,000,
with a subsequent amendment adding $610,000 of funding. The balance of the original order amounting
to $3,591,000 was shipped during fiscal 2010 and we expect to ship the additional $610,000 during
the first fiscal quarter of 2011. We have also received orders for our radio encryptors for use in
Afghanistan amounting to $9,692,000, substantially all of which was shipped in fiscal 2010, and
orders for our high speed encryptors to support a Patriot Missile upgrade program from Raytheon
amounting to $2,674,000, of which $1,094,000 shipped in fiscal 2010. The balance of these orders of
approximately $1,561,000 is expected to ship over the next 12 months. In addition, during the first
fiscal quarter of 2011 we received orders for additional radio encryptors for use in Afghanistan
amounting to $5.2 million. These orders are expected to ship during fiscal 2011.
It is anticipated that cash from operations will fund our near-term research and development
and marketing activities. We also 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. 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. In circumstances where resources will be
insufficient, the Company will look to other sources of financing, including debt and/or equity
investments.
The Company has paid $1,000,000 and accrued an additional $1,635,000 at September 25, 2010 for
income taxes based on current tax estimates of the income tax liability related to fiscal year
2010. The Company expects to pay down the income tax liability during the quarter ended December
25, 2010.
The Companys backlog as of mid-December has increased to approximately $6.8 million. The
orders in backlog are expected to ship during fiscal 2011 depending on customer requirements and
product availability.
21
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 Banks 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 2010 and 2009.
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 25, 2010 and September 26, 2009 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 Companys 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
25, 2010 and September 26, 2009 was $159,000.
In fiscal 2011, the Company expects to increase its investment in internal product development
by approximately 15%. Our plan is to continue to evaluate several technical options for enhancing
the DSP 9000 radio encryption product line, which may include cryptography modifications, hardware
and software changes and partnering with radio manufacturers to incorporate imbedded solutions. TCC
also expects to complete systems testing in early 2011 of a high speed, SONET/SDH optical encryptor
called the 72B, which we expect will provide full-rate encryption capability at 155mbs and 622mbs
speeds. This encryptor is designed to be compliant with FIPS level 140-2 and is being offered in
three configurations covering applications for commercial telecommunications providers through
highly ruggedized military and government requirements. TCC expects that the 72B encryptor family
will provide fully interoperable operations between office and harsh field environments.
On-going research and development in support of product improvements and application variants
also is expected to continue. In 2011 TCC plans to begin development of an advanced, 100mbs through
1gbs family of IP encryptors which will service private network markets for government, military
and satellite users. This initiative is planned to have a product introduction in 2012. 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 2011 and the Company does not anticipate any significant capital expenditures during the
year.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
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Item 7A.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not applicable.
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Item 8.
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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.
22
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Item 9.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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Not applicable.
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Item 9A.
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CONTROLS AND PROCEDURES
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Evaluation of disclosure controls and procedures.
The Companys Chief Executive Officer and
Chief Financial Officer have reviewed and evaluated the effectiveness of the Companys 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 Companys 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.
Managements 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 25, 2010. 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.
A goal of the assessment was to determine whether any material weaknesses or significant
deficiencies existed with respect to the Companys 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 companys 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 for fiscal year 2010, management identified a control
deficiency that was also identified during its assessment for the fiscal years ended September 26,
2009 and September 27, 2008. During the course of the fiscal 2009 and 2008 evaluations, and again
during the evaluation for the 2010 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 Companys internal control over
financial reporting was not effective, as of September 25, 2010.
Management has discussed the material weakness and related potential corrective actions with
the Audit Committee and Board of Directors of the Company and TCCs independent registered public
accounting firm. As part of our 2011 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 we cannot guarantee
that our efforts, if any, 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.
23
Changes in internal control over financial reporting
. There were no changes in the Companys
internal control over financial reporting that occurred during its fourth quarter of fiscal 2010
that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
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Item 9B.
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OTHER INFORMATION
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Not applicable.
Part III
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Item 10.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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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; Legal Proceedings, Corporate
Governance, and
Section 16(a) Beneficial Ownership Reporting Compliance, with respect to our
2011 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not
later than 120 days after the end of the Companys 2010 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 Companys website at
www.tccsecure.com.
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Item 11.
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EXECUTIVE COMPENSATION
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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 2011 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the Companys 2010 fiscal year.
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Item 12.
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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 2011 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission not later than 120 days after the end of the Companys 2010
fiscal year.
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Item 13.
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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
;
Legal
Proceedings
and Corporate Governance with respect to our 2011 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission not later than 120 days after the end of the
Companys 2010 fiscal year.
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Item 14.
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The information required by this Item 14 is incorporated herein by reference to our Definitive
Proxy Statement, under the caption Proposal V Ratification of Selection of Independent
Registered Public Accounting Firm with respect to our 2011 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission not later than 120 days after the end of the
Companys 2010 fiscal year.
24
PART IV
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Item 15.
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EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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(1)
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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:
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Page
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28
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29
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30
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31
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32-42
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43-44
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3.1
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Articles of Organization of the Company (incorporated by reference to the Companys
Annual Report for 2005 on Form 10-KSB, filed with the Securities and Exchange Commission
on December 21, 2005)
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3.2
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By-laws of the Company (incorporated by reference to the Companys 8-K filed with the
Securities and Exchange Commission on May 5, 1998)
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4
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|
|
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
Companys 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 Companys 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 Companys 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 Companys 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
Companys 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 Companys
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 Companys 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 Companys 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 Companys 8-K filed with the Securities and
Exchange Commission on November 11, 2004)
|
25
|
|
|
|
|
|
10.9
|
+
|
|
2005 Non-Statutory Stock Option Plan (incorporated by reference to
the Companys 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 Companys Form 10-QSB filed with the Securities and
Exchange Commission on August 13, 2008.)
|
|
10.11
|
|
|
Purchase Order from Datron World Communications dated April 16, 2010 (Confidential
portions of this exhibit have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment) (incorporated by
reference to Exhibit 10.1 to the Companys Form 10-QSB filed with the Securities and
Exchange Commission on May 11, 2010.)
|
|
10.12
|
|
|
Purchase Order from Datron World Communications dated April 16, 2010 (Confidential
portions of this exhibit have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment) (incorporated by
reference to Exhibit 10.2 to the Companys Form 10-QSB filed with the Securities and
Exchange Commission on May 11, 2010.)
|
|
10.13
|
|
|
Purchase Order from Datron World Communications dated April 21, 2010 (Confidential
portions of this exhibit have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment) (incorporated by
reference to Exhibit 10.3 to the Companys Form 10-QSB filed with the Securities and
Exchange Commission on May 11, 2010.)
|
|
10.14
|
*
|
|
Purchase Order from Datron World Communications dated October 15, 2010 (Confidential
portions of this exhibit have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.)
|
|
10.15
|
*
|
|
Purchase Order from Datron World Communications dated November 29, 2010 (Confidential
portions of this exhibit have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.)
|
|
10.16
|
*
|
|
Purchase Order from Datron World Communications dated November 30, 2010 (Confidential
portions of this exhibit have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.)
|
|
10.17
|
+
*
|
|
2010 Equity Incentive Plan
|
|
14
|
|
|
Code of Business Conduct and Ethics (incorporated by reference to the Companys
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
|
|
23.1
|
*
|
|
Consent of McGladrey & Pullen, LLP
|
|
23.2
|
*
|
|
Consent of Caturano and Company, Inc.
|
|
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
|
26
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 22, 2010
|
|
|
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.
Carl H. Guild, Jr.
|
|
Chief Executive Officer and President
Chairman
of the Board, Director
(Principal Executive Officer)
|
|
December 22, 2010
|
|
|
|
|
|
/s/ Michael P. Malone
Michael P. Malone
|
|
Treasurer and Chief Financial Officer
(Principal
Financial
and Accounting Officer)
|
|
December 22, 2010
|
|
|
|
|
|
/s/ Mitchell B. Briskin
Mitchell B. Briskin
|
|
Director
|
|
December 22, 2010
|
|
|
|
|
|
/s/ Robert T. Lessard
Robert T. Lessard
|
|
Director
|
|
December 22, 2010
|
|
|
|
|
|
/s/ Thomas E. Peoples
Thomas E. Peoples
|
|
Director
|
|
December 22, 2010
|
27
Technical Communications Corporation
Consolidated Balance Sheets
September 25, 2010 and September 26, 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,033,542
|
|
|
$
|
5,418,419
|
|
Accounts receivable trade, less allowance of
$333,000 and $233,000 at September 25, 2010
and September 26, 2009, respectively
|
|
|
131,043
|
|
|
|
402,841
|
|
Inventories
|
|
|
2,613,286
|
|
|
|
2,415,054
|
|
Deferred income taxes
|
|
|
468,501
|
|
|
|
566,294
|
|
Other current assets
|
|
|
154,133
|
|
|
|
180,161
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
14,400,505
|
|
|
|
8,982,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements
|
|
|
3,626,493
|
|
|
|
3,369,214
|
|
Less accumulated depreciation and amortization
|
|
|
(3,201,056
|
)
|
|
|
(3,029,707
|
)
|
|
|
|
|
|
|
|
Equipment and leasehold improvements, net
|
|
|
425,437
|
|
|
|
339,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,825,942
|
|
|
$
|
9,322,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
313,932
|
|
|
$
|
250,129
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Compensation and related expenses
|
|
|
801,198
|
|
|
|
280,651
|
|
Customer deposits
|
|
|
206,114
|
|
|
|
1,964,262
|
|
Accrued income taxes
|
|
|
1,634,880
|
|
|
|
|
|
Other
|
|
|
284,773
|
|
|
|
114,576
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,240,897
|
|
|
|
2,609,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Common stock par value $0.10 per share;
7,000,000 shares authorized, 1,826,217 and
1,452,119 shares issued and outstanding at
September 25, 2010 and September 26, 2009,
respectively
|
|
|
182,622
|
|
|
|
145,220
|
|
Additional paid-in capital
|
|
|
3,003,509
|
|
|
|
2,031,340
|
|
Retained earnings
|
|
|
8,398,914
|
|
|
|
4,536,098
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
11,585,045
|
|
|
|
6,712,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,825,942
|
|
|
$
|
9,322,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
28
Technical Communications Corporation
Consolidated Statements of Income
Years Ended September 25, 2010 and September 26, 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
21,551,148
|
|
|
$
|
7,751,858
|
|
Cost of sales
|
|
|
5,406,761
|
|
|
|
2,906,110
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,144,387
|
|
|
|
4,845,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and
administrative
|
|
|
2,807,688
|
|
|
|
2,533,658
|
|
Product development
|
|
|
2,607,919
|
|
|
|
1,888,953
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,415,607
|
|
|
|
4,422,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
10,728,780
|
|
|
|
423,137
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
4,255
|
|
|
|
39,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
10,733,035
|
|
|
|
462,899
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
2,864,741
|
|
|
|
(479,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,868,294
|
|
|
$
|
942,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.68
|
|
|
$
|
0.65
|
|
Diluted
|
|
$
|
4.33
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,679,755
|
|
|
|
1,444,427
|
|
Diluted
|
|
|
1,816,300
|
|
|
|
1,632,883
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per common share
|
|
$
|
2.20
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
29
Technical Communications Corporation
Consolidated Statements of Cash Flows
Years Ended September 25, 2010 and September 26, 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,868,294
|
|
|
$
|
942,808
|
|
Adjustments to reconcile net income
to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
171,349
|
|
|
|
119,530
|
|
Bad debt expense
|
|
|
100,000
|
|
|
|
207,748
|
|
Stock-based compensation
|
|
|
133,585
|
|
|
|
116,363
|
|
Deferred income taxes
|
|
|
97,793
|
|
|
|
(491,294
|
)
|
|
|
|
|
|
|
|
|
|
Changes in current assets and current liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
171,798
|
|
|
|
111,672
|
|
Inventories
|
|
|
(198,232
|
)
|
|
|
(494,330
|
)
|
Other current assets
|
|
|
26,028
|
|
|
|
(74,495
|
)
|
Customer deposits
|
|
|
(1,758,148
|
)
|
|
|
1,713,788
|
|
Accounts payable and accrued liabilities
|
|
|
2,357,778
|
|
|
|
(167,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
8,970,245
|
|
|
|
1,984,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Additions to equipment and leasehold improvements
|
|
|
(257,279
|
)
|
|
|
(191,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities
|
|
|
(257,279
|
)
|
|
|
(191,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from stock issuance
|
|
|
803,522
|
|
|
|
2,311
|
|
Excess tax benefits from
exercise of stock options
|
|
|
104,113
|
|
|
|
|
|
Dividends paid
|
|
|
(4,005,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(3,097,843
|
)
|
|
|
2,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
5,615,123
|
|
|
|
1,795,516
|
|
Cash and cash equivalents at beginning of year
|
|
|
5,418,419
|
|
|
|
3,622,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
11,033,542
|
|
|
$
|
5,418,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
|
|
|
$
|
|
|
Income taxes paid
|
|
|
1,000,000
|
|
|
|
18,795
|
|
The accompanying notes are an integral part of these consolidated financial statements.
30
Technical Communications Corporation
Consolidated Statements of Changes in Stockholders Equity
Years Ended September 25, 2010 and September 26, 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
1,452,199
|
|
|
|
1,433,767
|
|
Exercise of stock options
|
|
|
304,412
|
|
|
|
2,334
|
|
Cashless exercise of stock options
|
|
|
69,606
|
|
|
|
16,098
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
1,826,217
|
|
|
|
1,452,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock at par value:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
145,220
|
|
|
$
|
143,377
|
|
Exercise of stock options
|
|
|
37,402
|
|
|
|
1,843
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
182,622
|
|
|
|
145,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,031,340
|
|
|
$
|
1,941,020
|
|
Exercise of stock options
|
|
|
766,120
|
|
|
|
3,687
|
|
Cashless exercise of stock options
|
|
|
(31,649
|
)
|
|
|
(29,730
|
)
|
Excess tax benefits from exercise of stock options
|
|
|
104,113
|
|
|
|
|
|
Stock-based compensation
|
|
|
133,585
|
|
|
|
116,363
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
3,003,509
|
|
|
|
2,031,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
4,536,098
|
|
|
$
|
3,593,290
|
|
Dividends paid
|
|
|
(4,005,478
|
)
|
|
|
|
|
Net income
|
|
|
7,868,294
|
|
|
|
942,808
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
8,398,914
|
|
|
|
4,536,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
11,585,045
|
|
|
$
|
6,712,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
31
Notes to Consolidated Financial Statements
|
|
Technical Communications Corporation was incorporated in Massachusetts in 1961; its
subsidiary, TCC Investment Corp., was organized in that jurisdiction in 1982. The Companys
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. TCCs products have been sold into over
115 countries and are in service with governments, military agencies, telecommunications
carriers, financial institutions and multinational corporations.
|
|
|
The Companys 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 Companys
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 Codification
TM
, sometimes referred to as the
Codification or ASC. The Codification is 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. Significant judgments and estimates include those
related to revenue, receivable reserves, inventory reserves, income taxes and stock-based
compensation. 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.
|
32
Notes to Consolidated Financial Statements (continued)
|
|
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 Companys 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 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 where title passes upon entry of the product into
the first port in the buyers country. 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 actual 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 actual 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.
|
33
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
|
|
|
S
hare-based compensation cost is measured at the grant date based on the calculated fair
value of the award. The expense is recognized over the employees requisite service period,
generally the vesting period of the award. The related excess tax benefit received upon the
exercise of stock options, if any, is reflected in the Companys statement of cash flows as a
financing activity rather than an operating activity. Excess tax benefits for the year ended
September 25, 2010 amounted to $104,113. There were no excess tax benefits for the year ended
September 26, 2009.
|
|
|
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 Companys 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 25,
|
|
September 26,
|
|
|
2010
|
|
2009
|
Assumptions:
|
|
|
|
|
Option life
|
|
5 years
|
|
5 years
|
Risk-free interest rate
|
|
1.5% to 2.4%
|
|
1.8% to 2.8%
|
Stock volatility
|
|
75% to 77%
|
|
77% to 80%
|
Dividend yield
|
|
-0-
|
|
-0-
|
|
|
There were 16,500 options granted during the year ended September 25, 2010 and 25,500
options granted during the year ended September 26, 2009. The following table summarizes
share-based compensation costs included in the Companys consolidated statements of
operations for the years ended September 25, 2010 and September 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
4,375
|
|
|
$
|
6,700
|
|
Selling, general and administrative
|
|
|
69,010
|
|
|
|
51,319
|
|
Product development
|
|
|
60,200
|
|
|
|
58,344
|
|
|
|
|
|
|
|
|
Total share-based compensation expense before taxes
|
|
$
|
133,585
|
|
|
$
|
116,363
|
|
|
|
|
|
|
|
|
|
|
As of September 25, 2010, there was $130,734 of unrecognized compensation cost related to
options granted. The unrecognized compensation cost will be recognized as the options vest.
The weighted average period over which the compensation cost is expected to be recognized is
2.77 years.
|
|
|
The Company had the following stock option plans outstanding as of September 25, 2010: 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 options to
acquire shares authorized under these plans, of which 115,288 options were outstanding at
September 25, 2010. 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 25, 2010, there
were no shares available for new option grants under the 1991 Stock Option Plan or the 2001
Stock Option Plan; there were 43,059 shares available for grant under the 2005 Non-Statutory
Stock Option Plan. During fiscal 2010 the Companys Chief Financial Officer exercised stock
options for an aggregate 62,500 shares and subsequently tendered back 5,985 of those shares
to the Company in payment of the exercise price of the options and associated withholding
taxes. The tendered shares were immediately retired by the Company.
|
34
Notes to Consolidated Financial Statements (continued)
|
|
The following tables summarize stock option activity during fiscal years 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Grants
|
|
|
16,500
|
|
|
|
7.70
|
|
|
|
Exercises
|
|
|
(391,912
|
)
|
|
|
2.47
|
|
|
|
Cancellations
|
|
|
(2,000
|
)
|
|
|
4.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 25, 2010
|
|
|
115,288
|
|
|
$
|
5.23
|
|
|
7.14 years
|
|
|
|
|
|
|
|
|
|
|
|
|
Information related to the stock options vested or expected to vest as of September 25, 2010
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
|
|
|
600
|
|
|
|
2.63
|
|
|
$
|
0.99
|
|
|
|
600
|
|
|
$
|
0.99
|
|
$1.01 $2.00
|
|
|
200
|
|
|
|
0.18
|
|
|
|
1.88
|
|
|
|
200
|
|
|
|
1.88
|
|
$2.01 $3.00
|
|
|
15,488
|
|
|
|
4.95
|
|
|
|
3.00
|
|
|
|
15,288
|
|
|
|
3.00
|
|
$3.01 $4.00
|
|
|
26,400
|
|
|
|
5.85
|
|
|
|
3.69
|
|
|
|
18,300
|
|
|
|
3.76
|
|
$4.01 $5.00
|
|
|
22,400
|
|
|
|
8.31
|
|
|
|
4.79
|
|
|
|
12,600
|
|
|
|
4.86
|
|
$5.01 $10.00
|
|
|
47,700
|
|
|
|
7.96
|
|
|
|
6.74
|
|
|
|
29,900
|
|
|
|
6.99
|
|
$10.01 $15.00
|
|
|
2,500
|
|
|
|
9.85
|
|
|
|
11.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,288
|
|
|
|
7.14
|
|
|
$
|
5.23
|
|
|
|
76,888
|
|
|
$
|
5.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the Companys in-the-money outstanding and
exercisable options as of September 25, 2010 was $336,868. The intrinsic value of the options
exercised during the year ended September 25, 2010 was $2,039,099. Nonvested common stock
options are subject to the risk of forfeiture until the fulfillment of specified conditions.
|
35
Notes to Consolidated Financial Statements (continued)
|
|
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 2010 and 2009, 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.
|
|
|
The Companys 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 and for the
years ended September 25, 2010 and September 26, 2009, the Company had no interest or tax
penalties.
|
|
|
|
Warranty Costs
|
|
|
The Company provides for estimated 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 Companys 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 Company
does not have any assets or liabilities measured at fair value.
|
|
|
The Company presents both a basic and a diluted EPS. Basic EPS is computed by dividing
net income by the 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 Companys 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 2010 ended
on September 25, 2010 and included 52 weeks. The fiscal year 2009 ended on September 26, 2009
and included 52 weeks.
|
36
Notes to Consolidated Financial Statements (continued)
|
|
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-owner sources.
|
|
|
The Companys comprehensive income for the years ended September 25, 2010 and September 26,
2009 was equal to its net income for those periods.
|
|
|
|
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.
|
|
|
Basic and diluted EPS were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
7,868,294
|
|
|
$
|
942,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding Basic
|
|
|
1,679,755
|
|
|
|
1,444,427
|
|
Dilutive effect of stock options
|
|
|
136,545
|
|
|
|
188,456
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding Diluted
|
|
|
1,816,300
|
|
|
|
1,632,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income Per Share
|
|
$
|
4.68
|
|
|
$
|
0.65
|
|
Diluted Net Income Per Share
|
|
$
|
4.33
|
|
|
$
|
0.58
|
|
|
|
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: 2,500 in fiscal year 2010 and 70,000 in fiscal year 2009.
|
|
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
Finished goods
|
|
$
|
297,636
|
|
|
$
|
5,829
|
|
Work in process
|
|
|
282,996
|
|
|
|
511,514
|
|
Raw materials and supplies
|
|
|
2,032,654
|
|
|
|
1,897,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
2,613,286
|
|
|
$
|
2,415,054
|
|
|
|
|
|
|
|
|
37
Notes to Consolidated Financial Statements (continued)
(5)
|
|
Equipment and Leasehold Improvements
|
|
|
Equipment and leasehold improvements consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
Estimated
|
|
|
|
2010
|
|
|
2009
|
|
|
Useful Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and manufacturing equipment
|
|
$
|
1,678,902
|
|
|
$
|
1,477,156
|
|
|
3-8 years
|
Demonstration equipment
|
|
|
714,141
|
|
|
|
665,916
|
|
|
3 years
|
Furniture and fixtures
|
|
|
749,154
|
|
|
|
741,846
|
|
|
3-8 years
|
Leasehold improvements
|
|
|
484,296
|
|
|
|
484,296
|
|
|
Lesser of useful life
or term of lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equipment and
leasehold improvements
|
|
|
3,626,493
|
|
|
|
3,369,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(3,201,056
|
)
|
|
|
(3,029,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements, net
|
|
$
|
425,437
|
|
|
$
|
339,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $171,349 and $119,530 for the fiscal years ended September 25, 2010
and September 26, 2009, respectively.
(6)
|
|
Other Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Product warranty costs
|
|
$
|
198,433
|
|
|
$
|
46,675
|
|
Professional service fees
|
|
|
53,400
|
|
|
|
49,229
|
|
Annual report and investor relations fees
|
|
|
8,820
|
|
|
|
13,638
|
|
Customer support agreements and commissions
|
|
|
24,120
|
|
|
|
5,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other accrued liabilities
|
|
$
|
284,773
|
|
|
$
|
114,576
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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 25, 2010 and September 26, 2009 was
$159,000.
|
38
Notes to Consolidated Financial Statements (continued)
|
|
The Companys 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 Companys 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 Companys accrued warranty account:
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
Beginning balance
|
|
$
|
46,675
|
|
|
$
|
61,708
|
|
Plus: accruals related to new sales
|
|
|
190,100
|
|
|
|
39,852
|
|
Less: payments and adjustments to prior period accruals
|
|
|
(38,342
|
)
|
|
|
(54,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
198,433
|
|
|
$
|
46,675
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,871,057
|
|
|
$
|
3,264
|
|
State
|
|
|
895,891
|
|
|
|
8,121
|
|
|
|
|
|
|
|
|
Total current taxes
|
|
|
2,766,948
|
|
|
|
11,385
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
198,330
|
|
|
|
(491,294
|
)
|
State
|
|
|
(100,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred taxes
|
|
|
97,793
|
|
|
|
(491,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
for income taxes
|
|
$
|
2,864,741
|
|
|
$
|
(479,909
|
)
|
|
|
|
|
|
|
|
|
|
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 25,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Tax provision at U.S. statutory rate
|
|
$
|
3,649,232
|
|
|
$
|
157,386
|
|
State income tax provision, net of federal benefit
|
|
|
601,854
|
|
|
|
5,360
|
|
Other
|
|
|
37,582
|
|
|
|
(209,664
|
)
|
Valuation allowance
|
|
|
(1,423,927
|
)
|
|
|
(432,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
$
|
2,864,741
|
|
|
$
|
(479,909
|
)
|
|
|
|
|
|
|
|
39
Notes to Consolidated Financial Statements (continued)
Deferred income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Inventory differences
|
|
$
|
1,119,033
|
|
|
$
|
1,135,742
|
|
NOL carryforward
|
|
|
|
|
|
|
1,285,289
|
|
Payroll related accruals
|
|
|
224,252
|
|
|
|
12,111
|
|
Warranty accruals
|
|
|
78,599
|
|
|
|
18,796
|
|
Tax credits
|
|
|
|
|
|
|
384,553
|
|
Goodwill
|
|
|
|
|
|
|
13,699
|
|
Other
|
|
|
165,650
|
|
|
|
259,064
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,587,534
|
|
|
|
3,109,254
|
|
Less: valuation allowance
|
|
|
(1,119,033
|
)
|
|
|
(2,542,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
468,501
|
|
|
$
|
566,294
|
|
|
|
|
|
|
|
|
|
|
The valuation allowance relates to uncertainty with respect to the Companys ability to
realize its deferred tax assets. The change in the valuation allowance was $1,423,927 and
$432,991 in fiscal years 2010 and 2009, respectively, and related primarily to the reversal
of the valuation allowance primarily resulting from the utilization of net operating loss
carryforwards against taxable income.
|
|
|
The Company has determined that the tax benefit related to the obsolete inventory is not more
likely than not to be realized, therefore, has provided a full valuation allowance against
the related deferred tax asset. It is the Companys intention to maintain the related
inventory items for the foreseeable future to support equipment in the field, therefore,
cannot determine when that the tax benefit, if any, will be realized.
|
|
|
Due to the nature of the Companys 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 2006 through 2009
remain open to examination. In addition, the amount of the Companys federal and state net
operating loss carryforwards utilized 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 Companys policy is to fund contributions as they are accrued. The
contributions are allocated based on the employees proportionate share of total
compensation. The Companys 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 2010 or 2009. However, the Board of Directors
approved a corporate match of $0.25 per $1.00 of the first 6% of each participants
contributions to the plan. The Companys matching contributions were $41,922 and $39,386 in
fiscal years 2010 and 2009, respectively.
|
|
|
The Company has an Executive Incentive Bonus Plan for the benefit of key management
employees. The bonus pool is determined based on the Companys performance as defined by the
plan. Under the plan, bonuses totaling $180,000 were accrued for executives at September 25,
2010 and $49,500 at September 26, 2009.
|
40
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 Banks 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. There were no cash borrowings against
the line during fiscal years 2010 and 2009.
|
|
|
The Company did not have any open standby letters of credit at September 25, 2010 or
September 26, 2009.
|
|
|
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 2010, the Company had three customers representing 86% (59%, 17% and 10%) of
total net sales and at September 25, 2010 had one customer representing 98% of accounts
receivable. 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.
|
|
|
|
A breakdown of net sales is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
20,771,088
|
|
|
$
|
7,226,969
|
|
Foreign
|
|
|
780,060
|
|
|
|
524,889
|
|
|
|
|
|
|
|
|
Total Sales
|
|
$
|
21,551,148
|
|
|
$
|
7,751,858
|
|
|
|
|
|
|
|
|
|
|
A summary of foreign sales, as a percentage of total foreign revenue by geographic area, is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
North America, excluding the U.S.
|
|
|
|
|
|
|
15.6
|
%
|
Central and South America
|
|
|
|
|
|
|
7.2
|
%
|
Europe
|
|
|
12.0
|
%
|
|
|
3.1
|
%
|
Mid-East and Africa
|
|
|
6.5
|
%
|
|
|
55.2
|
%
|
Far East
|
|
|
81.5
|
%
|
|
|
18.9
|
%
|
|
|
The Company sold products to five different countries during the year ended September 25,
2010 and 12 different countries during the year ended September 26, 2009. 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 25,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
Saudi Arabia
|
|
|
3.6
|
%
|
|
|
52.6
|
%
|
Thailand
|
|
|
83.1
|
%
|
|
|
18.3
|
%
|
Slovakia
|
|
|
11.2
|
%
|
|
|
3.0
|
%
|
Mexico
|
|
|
|
|
|
|
15.6
|
%
|
Other
|
|
|
2.1
|
%
|
|
|
10.5
|
%
|
41
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 Companys 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
Companys 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 Companys voting stock.
|
|
|
Each right, once exercisable, will entitle the holder (other than an acquiring person or
group) to buy one share of the Companys 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 Companys 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 Companys 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 Companys 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
Companys voting stock, subject to certain exceptions. The rights will expire on August 5,
2014 unless earlier redeemed.
|
|
|
On December 9, 2010, the Companys Board of Directors declared a dividend of $0.10 per share
of common stock outstanding. The dividend is payable in cash on December 27, 2010 to all
shareholders of record on December 20, 2010 and is expected to be approximately $182,609.
|
|
|
The Company has evaluated subsequent events through the date which the consolidated financial
statements were available to be issued.
|
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Technical Communications Corporation:
We have audited the accompanying consolidated balance sheet of Technical Communications Corporation
and subsidiaries as of September 25, 2010, and the related consolidated statements of operations,
changes in stockholders equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control 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 Companys 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 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 audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Technical Communications Corporation and subsidiaries
as of September 25, 2010, and the results of its operations and its cash flows for the year then
ended in conformity with U.S. generally accepted accounting principles.
|
|
|
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
|
|
|
Boston, Massachusetts
December 22, 2010
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Technical Communications Corporation:
We have audited the accompanying consolidated balance sheet of Technical Communications Corporation
and subsidiaries as of September 26, 2009 and the related consolidated statements of operations,
changes in stockholders equity and cash flows for the year then ended. These financial statements
are the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal controls
over financial reporting. Our audit 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 Companys 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 audit provides 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 the consolidated results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally accepted in the
United States of America.
|
|
|
/s/ Caturano and Company, Inc.
Caturano and Company, Inc. (formerly Caturano and Company, P.C.)
|
|
|
Boston, Massachusetts
December 18, 2009
44
Exhibit 10.17
TECHNICAL COMMUNICATIONS CORPORATION
2010 EQUITY INCENTIVE PLAN
(as amended and restated)
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page
|
|
|
ARTICLE 1. ESTABLISHMENT, PURPOSE AND DURATION
|
|
|
1
|
|
ARTICLE 2. DEFINITIONS
|
|
|
1
|
|
ARTICLE 3. ADMINISTRATION
|
|
|
4
|
|
ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS
|
|
|
5
|
|
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
|
|
|
6
|
|
ARTICLE 6. STOCK OPTIONS
|
|
|
6
|
|
ARTICLE 7. STOCK APPRECIATION RIGHTS
|
|
|
9
|
|
ARTICLE 8. RESTRICTED STOCK
|
|
|
11
|
|
ARTICLE 9. PERFORMANCE MEASURES
|
|
|
12
|
|
ARTICLE 10. BENEFICIARY DESIGNATION
|
|
|
13
|
|
ARTICLE 11. DEFERRALS
|
|
|
13
|
|
ARTICLE 12. RETENTION RIGHTS; TERMINATION FOR CAUSE
|
|
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ARTICLE 13. AMENDMENT, MODIFICATION, TERMINATION AND
ADJUSTMENTS
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ARTICLE 14. PARACHUTE LIMITATIONS
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ARTICLE 15. CHANGE IN CONTROL
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ARTICLE 16. WITHHOLDING
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ARTICLE 17. INDEMNIFICATION
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ARTICLE 18. SUCCESSORS
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ARTICLE 19. LEGAL CONSTRUCTION
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ARTICLE 1. ESTABLISHMENT, PURPOSE AND DURATION
1.1.
Establishment of the Plan; Effective Date
. Technical Communications Corporation,
a Massachusetts corporation (the
Company
), hereby establishes an incentive compensation
plan to be known as the Technical Communications Corporation 2010 Equity Incentive Plan (the
Plan
), as set forth in this document. The Plan permits the grant of Nonqualified Stock
Options, Incentive Stock Options, Stock Appreciation Rights, and Restricted Stock. The Plan was
originally adopted by the Board of Directors on July 29, 2010, subject to stockholder approval (the
Effective Date
), and shall remain in effect as provided in Section 1.3 hereof.
1.2.
Purpose of the Plan
. The purpose of the Plan is to promote the success and
interests of the Company and its stockholders by permitting and encouraging Participants to obtain
a proprietary interest in the Company and its Subsidiaries through the grant of Awards that are
consistent with the Companys goals and that link the personal interests of Participants to those
of the Companys stockholders. The Plan is further intended to enable the Company to attract,
retain and motivate Participants whose services are critical to the success of the Company and
align the interests of such individuals with those of the Company.
1.3.
Duration of the Plan
. The Plan shall commence on the Effective Date, as
described in Section 1.1 hereof, and shall remain in effect, subject to the right of the Board of
Directors of the Company to amend or terminate the Plan at any time pursuant to Article 13 hereof,
until all Shares subject to the Plan shall have been purchased or acquired according to the Plans
provisions. However, in no event may an Award be granted under the Plan on or after July 29, 2020.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set forth below, and
when that meaning is intended, the initial letter of the word shall be capitalized:
2.1.
Affiliate
shall have the meaning ascribed to such term in Rule 12b-2 of the
General Rules and Regulations promulgated under the Exchange Act.
2.2.
Award
means, individually or collectively, a grant under the Plan of
Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights or Restricted Stock.
2.3.
Award Agreement
means an agreement entered into by the Company and a
Participant setting forth the terms and provisions applicable to an Award granted to the
Participant under this Plan.
2.4.
Beneficial Owner
or
Beneficial Ownership
shall have the meaning
ascribed to such terms in Rule 13d-3 of the General Rules and Regulations promulgated under the
Exchange Act.
2.5.
Benefit Arrangement
shall have the meaning set forth in Article 14 hereof.
2.6.
Board
or Board of Directors means the Board of Directors of the Company.
2.7.
Cause
shall have the meaning set forth in Section 12.3 hereof.
2.8.
Change in Control
shall have the meaning set forth in Section 15.1 hereof.
2.9.
Code
means the Internal Revenue Code of 1986, as amended from time to time, or
any successor thereto.
2.10.
Committee
means any committee appointed by the Board to administer the Plan in
accordance with and as specified in Article 3 hereof.
2.11.
Common Stock
means the common stock, $0.10 par value per share, of the
Company.
2.12.
Company
shall have the meaning ascribed to such term in Section 1.1 hereof,
and shall include any and all Subsidiaries and Affiliates, and any successor thereto as provided in
Article 15 hereof.
2.13.
Consultant
means any person who is engaged by the Company or any Subsidiary as
a consultant or advisor who provides bona fide services to the Company or any Subsidiary as an
independent contractor. Service as a Consultant shall be considered employment for all purposes of
the Plan, except for purposes of an ISO grant under Article 6 hereof.
2.14.
Covered Employee
means a Participant who, as of the date of vesting and/or
payout of an Award, as applicable, is one of the group of covered employees, as such term is
defined in the regulations promulgated under Code Section 162(m), or any successor statute.
2.15.
Director
means any individual who is a member of the Board of Directors of the
Company or any Subsidiary or Affiliate.
2.16.
Disability
shall have the meaning ascribed to such term in the Participants
governing long-term disability plan, or if no such plan exists, shall mean a disability described
in Section 422(c)(6) of the Code, the existence of which is determined at the discretion of the
Committee.
2.17.
Effective Date
shall have the meaning ascribed to such term in Section 1.1
hereof.
2.18.
Employee
means any full-time, active employee of the Company or its
Subsidiaries or Affiliates, including officers and Directors.
2.19.
Exchange Act
means the Securities Exchange Act of 1934, as amended from time
to time, or any successor thereto.
2
2.20.
Fair Market Value
of a share of Common Stock means, as of any given date, (a)
the closing sales price of a share of Common Stock on the Composite Tape, as reported by
The
Wall Street Journal,
on such date on the principal national securities exchange on which the
Common Stock is then traded or, (b) if the Common Stock is not then traded on a national securities
exchange, the average of the closing bid and asked prices of the Common Stock on such date as
furnished by the Over-the-Counter Bulletin Board (
OTCBB
) or Pink Sheets, LLC (the
Pink Sheets
);
provided
,
however
, that if there are no sales reported on
such date, fair market value shall be computed as of the last trading date preceding such date on
which a sale was reported;
provided
,
further
, that if any such exchange or
quotation system is closed on the date of determination, fair market value shall be determined as
of the first day immediately preceding such date on which such exchange or quotation system was
open for trading. If the Common Stock is not admitted to trade on a securities exchange or quoted
on the OTCBB or Pink Sheets, the fair market value shall be as determined in good faith by the
Committee, taking into account such facts and circumstances deemed to be material to the value of
the Common Stock.
2.21.
Freestanding SAR
means an SAR that is granted independently of any options, as
described in Article 7 hereof.
2.22.
Incentive Stock Option
or
ISO
means an option to purchase Shares
granted under Article 6 hereof that is designated as an Incentive Stock Option and that is intended
to meet the requirements of Code Section 422.
2.23.
Non-Employee Director
shall mean a Director who is not also an Employee.
Service as a Non-Employee Director shall be considered employment for all purposes of the Plan,
except for purposes of an ISO grant under Article 6 hereof.
2.24.
Non-Qualified Stock Option
or
NQSO
means an option to purchase
Shares granted under Article 6 hereof that is not intended to meet the requirements of Code Section
422 or otherwise qualify as an Incentive Stock Option.
2.25.
Option
means an Incentive Stock Option or a Nonqualified Stock Option, as
described in Article 6 hereof.
2.26.
Option Price
means the price at which a Share may be purchased by a
Participant pursuant to an Option.
2.27.
OTCBB
shall have the meaning set forth in the definition of Fair Market Value
in Section 2.20 herein.
2.28.
Other Agreement
shall have the meaning set forth in Article 14 hereof.
2.29.
Parachute Payment
shall have the meaning set forth in Article 14 hereof.
2.30.
Participant
means an Employee, Non-Employee Director or Consultant who has
been selected to receive an Award or who has outstanding an Award granted under the Plan.
2.31.
Performance-Based Exception
means the performance-based exception from the tax
deductibility limitations of Code Section 162(m).
3
2.32.
Period of Restriction
means the period during which the transfer of Shares of
Restricted Stock is limited in some way (based on the passage of time, the achievement of
performance goals or upon the occurrence of other events as determined by the Committee, at its
discretion), and the Shares are subject to a substantial risk of forfeiture, as provided in Article
8 hereof.
2.33.
Person
shall have the meaning ascribed to such term in Section 3(a)(9) of the
Exchange Act and used in Sections 13(d) and 14(d) thereof, including a group as defined in
Section 13(d) thereof.
2.34.
Pink Sheets
shall have the meaning set forth in the definition of Fair Market
Value in Section 2.20 herein.
2.35.
Plan
shall have the meaning ascribed to such term in Section 1.1 hereof, as
the same is amended from time to time.
2.36.
Restricted Stock
means an Award granted to a Participant pursuant to Article 8
hereof.
2.37.
Securities Act
means the Securities Act of 1933, as amended from time to time,
or any successor thereto.
2.38.
Shares
means the shares of the Common Stock of the Company, as the same may be
adjusted in accordance with Section 4.3 herein.
2.39.
Stock Appreciation Right
or
SAR
means an Award designated as an SAR
pursuant to the terms of Article 7 hereof.
2.40.
Subsidiary
shall have the meaning given to the term subsidiary corporation
in Section 424(f) of the Code.
ARTICLE 3. ADMINISTRATION
3.1.
The Committee
. The Plan shall be administered by the Compensation, Nominating
and Governance Committee of the Board (or any successor thereto) consisting of not less than two
(2) members who meet the non-employee director requirements of Rule 16b-3 promulgated under the
Exchange Act and the outside director requirements of Code Section 162(m); by any other committee
appointed by the Board,
provided
the members of such committee meet such requirements; or
by the full Board acting as the Committee with the powers and duties set forth herein. No member
of the Committee shall be liable for any action or determination made in good faith with respect to
the Plan or any Awards granted under the Plan. A majority of the members of the Committee shall
constitute a quorum, and all determinations of the Committee under the Plan may be made at a
meeting at which a quorum is present by the vote of a majority of the members of the Committee or
by a writing in lieu of a meeting signed by all members of the Committee. Meetings may be held by
telephone conference or similar communication equipment by means of which all persons participating
can hear each other.
4
3.2.
Authority of the Committee
. Except as limited by law or by the Articles of
Organization or Bylaws of the Company, and subject to the provisions hereof, the Committee shall
have full power to (a) determine the Participants to whom Awards shall be granted under the Plan;
(b) determine the timing, size and type of Awards; (c) determine the terms, conditions and
restrictions applicable to Awards in a manner consistent with the Plan, including but not limited
to price, method of payment, vesting, exercisability and termination; (d) establish the Fair Market
Value of a Share in accordance with the Plan; (e) establish one or more form agreements to evidence
and memorialize the grant of an Award; (f) construe and interpret the Plan and any agreement or
instrument entered into under the Plan; (g) establish, amend or waive rules and regulations for the
Plans administration; and, (f) subject to the provisions of Article 13 and Section 19.6 hereof,
amend, modify or adjust the terms and conditions of any outstanding Award, including acceleration
of vesting and extension of exercise terms, to the extent such terms and conditions are within the
discretion of the Committee as provided in the Plan. Further, the Committee shall make all other
determinations that may be necessary or advisable for the administration of the Plan. As permitted
by law, the Committee may delegate its authority as identified herein.
3.3.
Decisions Binding
. All determinations, decisions and interpretations made by the
Committee pursuant to the provisions of the Plan and all related orders and resolutions of the
Board and the Committee shall be final, conclusive and binding on all persons, including the
Company, its stockholders, Employees, Participants and their estates and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS
4.1.
Number of Shares Available For Grant
. Subject to Sections 4.2 and 4.3 hereof,
the maximum number of Shares that may be issued in the aggregate pursuant to Awards granted to
Participants under the Plan shall be Two Hundred Thousand (200,000) Shares. Shares issued under the Plan
shall be authorized but unissued Common Stock. Unless the Committee determines that an Award to a
Covered Employee shall not be designed to comply with the Performance-Based Exception, the
following rules shall apply to all grants of such Awards under the Plan, subject to Sections 4.2
and 4.3 hereof:
(a)
Stock Options and SARS
: The maximum aggregate number of Shares that may be issued
pursuant to Stock Options, with or without Freestanding SARs, granted in any one fiscal year to any
one Participant shall be Forty Thousand (40,000).
(b)
Restricted Stock
: The maximum aggregate grant with respect to Awards of
Restricted Stock that are intended to qualify for the Performance-Based Exception, and that are
granted in any one fiscal year to any one Participant shall be Forty Thousand (40,000) Shares.
4.2.
Lapsed Awards
. If any Award granted under this Plan is canceled, terminates,
expires or lapses for any reason without having been exercised in full, any Shares subject to such
Award that remain unpurchased shall be available for the future grant of an Award under the Plan.
In addition, any Shares retained by the Company upon exercise of an Award in order to satisfy the
exercise price of such Award, or any withholding taxes due with respect to such exercise, shall be
treated as not issued and shall continue to be available under the Plan.
Notwithstanding any other provision of the Plan, shares issued and later repurchased by the
Company shall not become available for future grant or sale under the Plan.
5
4.3.
Adjustments to Common Stock
. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination of shares, exchange of shares,
liquidation, spin-off, split-up, or other similar change in capitalization or event, (a) the number
and class of securities available for Awards under the Plan and the per Participant share limit,
(b) the number and class of securities, vesting schedule and exercise price per share subject to
each outstanding Award, (iii) the repurchase price per security subject to repurchase, and (iv) the
terms of each other outstanding stock-based Award shall be adjusted (or substituted Awards may be
made) to the extent the Committee shall determine, in good faith, that such an adjustment (or
substitution) is appropriate. Notwithstanding the foregoing, such adjustments shall be made to the
extent necessary and in such a manner as to avoid any Award granted hereunder being classified as a
deferral of compensation within the meaning of Code Section 409A, and the regulations and/or
guidance issued thereunder.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1.
Eligibility
. Persons eligible to participate in this Plan include Consultants,
Non-Employee Directors and Employees of the Company with the potential to contribute to the success
of the Company or its Subsidiaries, including Employees who are members of the Board.
5.2.
Actual Participation
. Subject to the provisions of the Plan, the Committee may,
from time to time, select from all eligible Participants those to whom Awards shall be granted, and
shall determine the nature and amount of each Award. The Committee shall consider such factors as
it deems relevant in selecting Participants to receive Awards and the terms, provisions and
restrictions with respect thereto. The grant of an Award in one year or at any particular time
shall not require the grant of an Award in any other year or at any other time. Notwithstanding
the foregoing, Options that the Committee intends to be ISOs shall be granted only to Employees of
the Company or any Subsidiary. Any Option or portion thereof that does not qualify as an ISO shall
be and shall be treated as a NQSO.
ARTICLE 6. STOCK OPTIONS
6.1.
Grant of Options; Timing
. Subject to the terms and provisions of the Plan,
Options may be granted at any time and from time to time to Participants in such number, at such
Option Price, and upon such terms and conditions as shall be determined by the Committee. The date
of grant of an Option shall, for all purposes, be the date on which the Board makes the
determination to grant such Option. Notice of the determination shall be given to the Participant
within a reasonable time after the date of grant.
6.2.
Option Award Agreement
. Each Option grant shall be evidenced by an Award
Agreement in such form or forms as the Committee shall approve, which shall specify the Option
Price, the duration of the option, the number of Shares to which the option pertains, and such
other provisions as the Committee shall determine, including but not limited to vesting periods,
performance targets and restrictions on transfer. The Award Agreement shall also specify whether
the option is intended to be an ISO within the meaning of Code Section 422, or an
NQSO, whose grant is intended not to fall under the provisions of Code Section 422. In the
event of a conflict between any Option Award Agreement and the Plan, the Plan shall control, and in
no event shall the Committee have the power to grant an Option or execute an Option Award Agreement
that is contrary to the provisions of the Plan.
6
6.3.
Option Price
. The Option Price for each grant of an Option under this Plan shall
be at least equal to one hundred percent (100%) of the Fair Market Value of a Share on the date the
Option is granted. If any Participant to whom an Incentive Stock Option is to be granted under the
Plan is, at the time of the grant of such Incentive Stock Option, the owner of stock possessing
more than ten percent (10%) of the total combined voting power of all classes of stock of the
Company (after taking into account the attribution of stock ownership rules of Section 424(d) of
the Code), then the Option Price per Share subject to such ISO shall not be less than one hundred
ten percent (110%) of the Fair Market Value of a share of Common Stock at the time of grant.
6.4.
Duration of Options
. Each Option granted to a Participant shall expire at such
time as the Committee shall determine at the time of grant;
provided
,
however
, that
no Option shall have a term greater than, or be exercisable after, the tenth anniversary date of
its grant and
provided
further
that no Option shall be exercisable later than the
fifth anniversary date of its date of grant for an ISO granted to a Participant who at the time of
such grant owns stock possessing more than ten percent (10%) or more of the total combined voting
power of all classes of stock of the Company.
6.5.
Exercise of Options
. Options granted under this Article 6 shall be exercisable
in whole or in part at such times and be subject to such restrictions and conditions as the
Committee shall in each instance approve, subject to Section 6.10 herein, which restrictions and
conditions need not be the same for each grant or for each Participant. Options granted under this
Article 6 shall be deemed to be exercised when written notice of such exercise has been given to
the Company at its principal office (Attention: Chief Financial Officer) in accordance with the
terms of the Option Award Agreement by the person entitled to exercise the Option, setting forth
the number of Shares with respect to which the Option is to be exercised, full payment for such
Shares in accordance with Section 6.6 herein has been received by the Company, and all conditions
to exercise have been satisfied or waived.
6.6.
Payment
.
(a) The Option Price upon exercise of any Option shall be payable to the Company in full in a
form as determined by the Committee either: (i) in cash (or its equivalent) or bank or cashiers
check made payable to the Company; (ii) by tendering previously acquired Shares having an aggregate
Fair Market Value at the time of exercise equal to the total Option Price (
provided
that,
under certain circumstances, the Shares that are tendered must have been held by the Participant
for at least six (6) months prior to their tender); (iii) by withholding Shares that otherwise
would be acquired on exercise having an aggregate Fair Market Value at the time of exercise equal
to the total Option Price; or (iv) by any combination of the foregoing methods of payment. If the
Company is then allowing the exercise of Options pursuant to a same-day sale/cashless exercise
program, the consideration received by the Company from a broker pursuant to such program
(
provided
that such program shall not involve the Companys
extending or arranging for the extension of credit to a Participant) may also be acceptable
consideration hereunder. In no circumstance shall a Participant be entitled to pay the Option
Price with a promissory note.
7
(b) Subject to any governing laws, rules or regulations, as soon as practicable after receipt
of a written notification of exercise and full payment, the Company shall deliver to the
Participant, in the Participants name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s). Until the issuance (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the Company) of the
stock certificate or certificates representing such Shares, no right to vote or receive dividends
or any other right of a shareholder shall exist with respect to the Shares, notwithstanding the
exercise of the Option. No adjustment shall be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued, except as otherwise provided in
this Plan.
6.7.
Restrictions on Share Transferability
. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an Option granted under this
Article 6 as it may deem advisable, including, without limitation, restrictions under applicable
federal securities laws, under the requirements of any stock exchange or market upon which such
Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to
such Shares.
6.8.
Termination of Employment or Consulting Arrangement
. Subject to Sections 6.10
below with respect to ISOs and Section 12.3 generally, each Option Award Agreement shall set forth
the extent to which the Participant shall have the right to exercise the Option following
termination of the Participants employment or consulting arrangement with the Company. Such
provisions shall be determined in the sole discretion of the Committee, shall be included in the
Award Agreement entered into with each Participant, need not be uniform among all Options issued
pursuant to this Article 6, and may reflect distinctions based on the reasons for termination of
employment.
6.9.
Non-transferability of Options
.
(a)
Incentive Stock Options
. No ISO granted under the Plan may be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of
descent and distribution. Further, all ISOs granted to a Participant under the Plan shall be
exercisable during his or her lifetime only by such Participant or the Participants legal
representative (to the extent permitted under Code Section 422).
(b)
Nonqualified Stock Options
. No NQSO granted under this Article 6 may be sold,
transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, all NQSOs granted to a Participant under this Article 6
shall be exercisable during his or her lifetime only by such Participant or the Participants legal
representative. Notwithstanding the foregoing, the Committee may in its sole discretion permit a
Participant to transfer all or some of such Participants NQSOs to such Participants immediate
family members or a trust or trusts for the benefit of such immediate
family members. For purposes hereof, immediate family members means a Participants spouse,
children and grandchildren.
8
6.10.
Incentive Stock Options
.
(a)
Limitations
. For as long as the Code shall so provide, Options granted to any
Participant under the Plan which are intended to constitute Incentive Stock Options shall not
constitute Incentive Stock Options to the extent that such Options, in the aggregate, become
exercisable for the first time in any one (1) calendar year for shares of Common Stock with an
aggregate Fair Market Value (determined as of the respective date or dates of grant) of more than
$100,000 (or such other maximum limit imposed from time to time under Code Section 422), but rather
Options in excess of such limit shall be treated as NQSOs. In such an event, the determination of
which Options shall remain ISOs and which shall be treated as NQSOs shall be based on the order in
which such Options were granted. All other terms and conditions of such Options that are deemed to
be NQSOs shall remain unchanged.
(b)
Employment Rules
. No Incentive Stock Option may be exercised unless, at the time
of such exercise, the Participant is, and has been continuously since the date of grant of his or
her Option, an Employee of the Company, except that:
(i) an Incentive Stock Option may be exercised within the period of three (3) months after the
date the Participant ceases to be an Employee of the Company (or within such lesser period as may
be specified in the applicable Award Agreement) if and only to the extent that the Incentive Stock
Option was exercisable at the date of employment termination,
provided
that the Option
Award Agreement with respect to such Option may designate a longer exercise period, and any
exercise after such three-month period shall be treated as the exercise of a NQSO under the Plan;
(ii) if the Participant dies while an Employee of the Company, or within three (3) months
after the Participant ceases to be an Employee, the Incentive Stock Option may be exercised by the
person to whom it is transferred by will or the laws of descent and distribution within the period
of one year after the date of death (or within such lesser period as may be specified in the
applicable Option Award Agreement) if and only to the extent that the ISO was exercisable at the
date of death; and
(iii) if the Participant becomes disabled (within the meaning of Section 22(e)(3) or any
successor section of the Code) while an Employee of the Company, the Incentive Stock Option may be
exercised within the period of one (1) year after the date the Participant ceases to be an Employee
because of such Disability (or within such lesser period as may be specified in the applicable
Option Award Agreement) if and only to the extent that the ISO was exercisable at the date of
employment termination.
ARTICLE 7. STOCK APPRECIATION RIGHTS
7.1.
Grant of SARS
. Subject to the terms and conditions of the Plan, SARs may be
granted to Participants at any time and from time to time as shall be determined by the Committee.
The Committee shall have complete discretion in determining the number of SARs granted to each
Participant (subject to Article 4 hereof) and, consistent with the provisions of the
Plan, in determining the terms and conditions pertaining to such SARs. The grant price of a
Freestanding SAR shall equal the Fair Market Value of a Share on the date of grant of the SAR.
9
7.2.
Exercise of SARS
. Freestanding SARs may be exercised upon whatever terms and
conditions the Committee, in its sole discretion, imposes upon them. SARS shall be deemed to be
exercised when written notice of such exercise has been given to the Company at its principal
office (Attention: Chief Financial Officer) in accordance with the terms of the SAR Award Agreement
by the person entitled to exercise the SAR, setting forth the number of Shares with respect to
which the SAR is to be exercised, and the other provisions of this Article 7 with respect to
exercise have been satisfied or waived.
7.3.
SAR Agreements
. Each SAR grant shall be evidenced by an Award Agreement in such
form or forms as the Committee shall approve, which shall specify the grant price, the term of the
SAR, and such other provisions as the Committee shall determine. In the event of a conflict
between any SAR Award Agreement and the Plan, the Plan shall control, and in no event shall the
Committee have the power to grant a SAR or execute a SAR Award Agreement that is contrary to the
provisions of the Plan.
7.4.
Term of SARS
. The term of an SAR granted under the Plan shall be determined by
the Committee, in its sole discretion;
provided
,
however
, that such term shall not
exceed ten (10) years from the date of grant.
7.5.
Payment of SAR Amount
. Upon exercise of an SAR, a Participant shall be entitled
to receive payment from the Company in an amount determined by multiplying:
(a) the difference between the Fair Market Value of a Share on the date of exercise and the
grant price; by
(b) the number of Shares with respect to which the SAR is exercised.
At the discretion of the Committee, the payment upon SAR exercise may be in cash, in Shares of
equivalent value or in some combination thereof. The Committees determination regarding the form
of SAR payout shall be set forth in the Award Agreement pertaining to the grant of the SAR.
7.6.
Termination of Employment or Consulting Arrangement
. Each SAR Award Agreement
shall set forth the extent to which the Participant shall have the right to exercise the SAR
following termination of the Participants employment or consulting arrangement with the Company
and/or its Subsidiaries. Subject to Section 12.3 herein, such provisions shall be determined in
the sole discretion of the Committee, shall be included in the Award Agreement entered into with
Participants, need not be uniform among all SARs issued pursuant to the Plan and may reflect
distinctions based on the reasons for termination of employment.
7.7.
Non-transferability of SARS
. No SAR granted under the Plan may be sold,
transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, all SARs granted to a Participant under the Plan shall
be exercisable during his or her lifetime only by such Participant or the Participants legal
representative. Notwithstanding the foregoing, the Committee may in its sole discretion permit a
Participant to transfer all or some of such Participants SARs to such Participants immediate
family members or a trust or trusts for the benefit of such immediate family members. Following
any such transfer, any transferred SARs shall continue to be subject to the same terms and
conditions as were applicable immediately prior to the transfer.
10
ARTICLE 8. RESTRICTED STOCK
8.1.
Grant of Restricted Stock
. Subject to the terms and provisions of the Plan, the
Committee, at any time and from time to time, may grant Shares of Restricted Stock to Participants
in such amounts, at such prices and upon such terms and conditions as the Committee shall
determine.
8.2.
Restricted Stock Agreement
. Each Restricted Stock grant shall be evidenced by a
Restricted Stock Award Agreement in such form or forms as the Committee shall approve, which shall
specify the Period(s) of Restriction, the number of Shares of Restricted Stock granted and such
other provisions as the Committee shall determine. In the event of a conflict between any
Restricted Stock Award Agreement and the Plan, the Plan shall control, and in no event shall the
Committee have the power to grant Shares of Restricted Stock or execute a Restricted Stock Award
Agreement that is contrary to the provisions of the Plan.
8.3.
Transferability
. The Shares of Restricted Stock granted under the Plan may not
be sold, transferred, pledged, assigned or otherwise alienated or hypothecated until the end of the
applicable Period of Restriction established by the Committee and specified in the Restricted Stock
Award Agreement, or upon earlier satisfaction of any other conditions, as specified by the
Committee in its sole discretion and set forth in the Restricted Stock Award Agreement. All rights
with respect to the Restricted Stock granted to a Participant under the Plan shall be available
during his or her lifetime only to such Participant or the Participants legal representatives.
8.4.
Other Restrictions
. Subject to Article 9 hereof, the Committee shall impose such
other conditions and/or restrictions on any Shares of Restricted Stock granted pursuant to the Plan
as it may deem advisable including, without limitation, a requirement that Participants pay a
stipulated purchase price for each share of Restricted Stock, restrictions based upon the
achievement of specific performance goals (Company-wide, divisional and/or individual), time-based
restrictions on vesting following the attainment of the performance goals and/or restrictions under
applicable federal or state securities laws. The Company may retain the certificates representing
Shares of Restricted Stock in the Companys possession, along with a stock power endorsed in blank,
until such time as all conditions and/or restrictions applicable to such Shares have been satisfied
and may imprint on such certificates appropriate legends referring to the term, conditions and
restrictions applicable to such Shares. Except as otherwise provided in this Article 8, Shares of
Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely
transferable by the Participant after the last day of the applicable Period of Restriction. Upon
the expiration of the Period of Restriction or other lapse or waiver of any restrictions relating
to Shares of Restricted Stock, the Company shall deliver certificates without legends (other than
those required by applicable securities laws) to the Participant.
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8.5.
Voting Rights; Dividends and other Distributions
. The Participant shall have the
right to vote all Shares of Restricted Stock during the Period of Restriction. During the Period
of Restriction, Participants holding Shares of Restricted Stock granted hereunder may be credited
with dividends and distributions paid with respect to the underlying Shares while they are so held.
The Committee may apply any restrictions to the dividends and distributions that the Committee
deems appropriate. Without limiting the generality of the preceding sentence, if the grant or
vesting of Restricted Shares granted to a Covered Employee is designed to comply with the
requirements of the Performance-Based Exception, the Committee may apply any restrictions it deems
appropriate to the payment of dividends declared with respect to such Restricted Shares, such that
the dividends and/or the Restricted Shares maintain eligibility for the Performance-Based
Exception.
8.6.
Termination of Employment or Consulting Arrangement
. Each Restricted Stock Award
Agreement shall set forth the extent to which the Participant shall have the right to receive
unvested Restricted Shares following termination of the Participants employment or consulting
arrangement with the Company. Subject to Section 12.3 herein, such provisions shall be determined
in the sole discretion of the Committee, shall be included in the Award Agreement entered into with
each Participant, need not be uniform among all Shares of Restricted Stock issued pursuant to the
Plan and may reflect distinctions based on the reasons for termination of employment;
provided
,
however
, that except in the cases of terminations by reason of death or
Disability, the vesting of Shares of Restricted Stock that qualify for the Performance-Based
Exception and that are held by Covered Employees shall occur at the time they otherwise would have,
but for the employment termination.
ARTICLE 9. PERFORMANCE MEASURES
Unless and until the Committee proposes for stockholder vote and stockholders approve a change
in the general performance measures set forth in this Article 9, the attainment of which may
determine the degree of payout and/or vesting with respect to Awards to Covered Employees that are
designed to qualify for the Performance-Based Exception, the performance measure(s) to be used for
purposes of such grants shall be chosen from among net income either before or after taxes, market
share, customer satisfaction, profits, share price, earnings per share, total stockholder return,
return on assets, return on equity, operating income, return on capital or investments, or economic
value added (including, but not limited to, any or all of such measures in comparison to the
Companys competitors, the industry or some other comparable group).
The Committee shall have the discretion to adjust the determinations of the degree of
attainment of the pre-established performance goals;
provided
,
however
, that Awards
that are designed to qualify for the Performance-Based Exception, and that are held by Covered
Employees, may not be adjusted upward (the Committee shall retain the discretion to adjust such
Awards downward, however).
In the event that applicable tax and/or securities laws change to permit Committee discretion
to alter the governing performance measures without obtaining stockholder approval of such changes,
the Committee shall have sole discretion to make such changes without obtaining stockholder
approval. In addition, in the event that the Committee determines that it is
advisable to grant Awards that shall not qualify for the Performance-Based Exception, the
Committee may make such grants without satisfying the requirements of Code Section 162(m).
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ARTICLE 10. BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, designate any beneficiary or
beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is
to be paid in case of his or her death before he or she receives any or all of such benefit. Each
such designation shall revoke all prior designations by the same Participant, shall be in a form
prescribed by the Company, and will be effective only when filed by the Participant in writing with
the Company during the Participants lifetime. In the absence of any such designation, the
Participants benefits shall be paid to the Participants estate.
ARTICLE 11. DEFERRALS
The Committee may permit or require a Participant to defer such Participants receipt of the
payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue
of the exercise of an Option or SAR, or the lapse or waiver of restrictions with respect to
Restricted Stock. If any such deferral election is required or permitted, the Committee shall, in
its sole discretion, establish rules and procedures for such payment deferrals. Any such deferrals
shall be made in a manner that complies with Code Section 409A.
ARTICLE 12. RETENTION RIGHTS; TERMINATION FOR CAUSE
12.1.
Employment
. Neither the Plan nor any Award granted hereunder shall confer upon
any Participant any right with respect to continuation of employment, consulting or advisory
relationship or directorship with the Company, nor shall it interfere in any way with his or her
right or the Companys right to terminate his or her employment, consulting or advisory
relationship or directorship at any time.
12.2.
Participation
. No Participant shall have the right, in and of itself, to be
selected to receive an Award under this Plan or, having been so selected, to be selected to receive
a future Award.
12.3.
Terminations for Cause
. Notwithstanding anything herein to the contrary, in the
event of the termination of a Participants employment or consulting arrangement with the Company
for Cause (as defined herein), then such Participants rights under any then-outstanding Awards
shall immediately terminate as of the time of such termination. Termination for
Cause
shall mean any termination for Cause as defined in any employment or similar agreement by and
between the Company and the Participant and, if no such agreement is then in effect, shall include
but not be limited to Participants (a) commission of an act of fraud, embezzlement,
misappropriation or theft or a felony, (b) gross negligence, willful misconduct, insubordination or
habitual neglect of duty in carrying out his or her duties as a Employee, Consultant or
Non-Employee Director; (c) non-compliance with any policy of the Company or the Companys Code of
Business Conduct and Ethics and failure to cure such noncompliance within 15 days of notice thereof
from the Company, or (d) breach of any material term of any agreement, contract or other
arrangement between the Participant and the Company regarding Participants employment by or
engagement with the Company, or breach of any duty owed by
the Participant to the Company and/or its stockholders, in each case as determined by the
Board. In addition to and not in lieu of the foregoing, if the Board reasonably believes that a
Participant has engaged in any of the activities described in clauses (a) (d) of this Section
12.3, the Board may suspend the Participants right to exercise or receive any Award pending a
determination by the Board.
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ARTICLE 13. AMENDMENT, MODIFICATION, TERMINATION AND ADJUSTMENTS
13.1.
Amendment, Modification and Termination
. Subject to the terms of the Plan, the
Board, upon recommendation of the Committee, may at any time and from time to time, alter, amend,
suspend or terminate the Plan in whole or in part;
provided
, that the Board shall not amend
the Plan in any manner that requires stockholder, regulatory or other approval(s) under applicable
law, rule or regulation without obtaining such approval(s).
13.2.
Adjustment of Awards Upon the Occurrence of Certain Unusual or Non-recurring
Events.
The Committee may make adjustments in the terms and conditions of, and the criteria
included in, Awards in recognition of unusual or non-recurring events (including, without
limitation, the events described in Section 4.3 hereof) affecting the Company or the financial
statements of the Company or of changes in applicable laws, rules, regulations or accounting
principles, whenever the Committee determines that such adjustments are appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended to be made available
under the Plan;
provided
that unless the Committee determines otherwise, no such adjustment
shall be authorized to the extent that such authority would be inconsistent with the Plan or Awards
meeting the requirements of Code Section 162(m), as from time to time amended.
13.3.
Awards Previously Granted
. Notwithstanding any other provision of the Plan to
the contrary (but subject to Section 13.2 hereof), no termination, amendment or modification of the
Plan shall adversely affect or impair in any material way any Award previously granted under the
Plan without the written consent of the Participant holding such Award, except that the Plan may be
amended in a manner that does not affect Awards granted prior to the date of amendment or
termination if such amendment is necessary to retain the benefits of Rule 16b-3 or Section 162(m)
of the Code or to otherwise comply with applicable law, or such amendment does not adversely affect
the rights of the Participant.
13.4.
Compliance with Code Section 162(m)
. At all times when Code Section 162(m) is
applicable, all Awards granted under this Plan shall comply with the requirements of Code Section
162(m);
provided
,
however
, that in the event the Committee determines that such
compliance is not desired with respect to any Award or Awards available for grant under the Plan,
then compliance with Code Section 162(m) will not be required. In addition, in the event that
changes are made to Code Section 162(m) to permit greater flexibility with respect to any Award or
Awards available under the Plan, or in the event that modifications are necessary to the Plan or
any Awards to comply with Section 162(m), the Committee may, subject to this Article 13, make any
adjustments and amendments to the Plan and any Awards that the Committee deems appropriate. If any
provision of the Plan would be in violation of Section 162(m) if applied as written, such provision
shall not have effect as written and shall be given effect so as to comply with Section 162(m) as
determined by the Committee in its discretion.
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ARTICLE 14. PARACHUTE LIMITATIONS
Notwithstanding any other provision of this Plan or of any other agreement, contract or
understanding heretofore or hereafter entered into by a Participant with the Company or any
Subsidiary or Affiliate, except an agreement, contract or understanding hereafter entered into that
expressly modifies or excludes application of this Article 14 (hereinafter referred to as an
Other Agreement
), and notwithstanding any formal or informal plan or other arrangement
for the direct or indirect provision of compensation to the Participant (including groups or
classes of Participants or beneficiaries of which the Participant is a member), whether or not such
compensation is deferred, is in cash or is in the form of a benefit to or for the Participant
(hereinafter referred to as a
Benefit Arrangement
), if the Participant is a disqualified
individual, as defined in Code Section 280G(c), any Option or Restricted Stock held by the
Participant and any right to receive any payment or other benefit under this Plan shall not become
exercisable or vested (i) to the extent that such right to exercise, vesting, payment or benefit,
taking into account all other rights, payments or benefits to or for the Participant under this
Plan, all Other Agreements and all Benefit Arrangements, would cause any payment or benefit to the
Participant under this Plan to be considered a parachute payment within the meaning of Code
Section 280G(b) as then in effect (a
Parachute Payment
), and (ii) if, as a result of
receiving a Parachute Payment, the aggregate after-tax amounts received by the Participant from the
Company under this Plan, all Other Agreements and all Benefit Arrangements would be less than the
maximum after-tax amount that could be received by the Participant without causing any such payment
or benefit to be considered a Parachute Payment. In the event that the receipt of any such right
to exercise, vesting, payment or benefit under this Plan, in conjunction with all other rights,
payments or benefits to or for the Participant under any Other Agreements or any Benefit
Arrangement would cause the Participant to be considered to have received a Parachute Payment under
this Plan that would have the effect of decreasing the after-tax amount received by the Participant
as described in clause (ii) of the preceding sentence, then the Participant shall have the right,
in the Participants sole discretion, to designate those rights, payments or benefits under this
Plan, any Other Agreements and any Benefit Arrangements that should be reduced or eliminated so as
to avoid having the payment or benefit to the Participant under this Plan be deemed to be a
Parachute Payment.
ARTICLE 15. CHANGE IN CONTROL
15.1.
Definition
. For purposes of this Plan, a
Change in Control
of the
Company shall mean any of the following:
(a) the Beneficial Ownership of securities representing more than thirty-three percent (33%)
of the combined voting power of the Company is acquired by any person or group, as such terms
are defined in Section 13(d) and 14(d) of the Exchange Act, other than the Company, any trustee or
other fiduciary holding securities under an employee benefit plan of the Company, or any
corporation owned, directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company; or
(b) the stockholders of the Company approve a definitive agreement to merge or consolidate the
Company with or into another entity (other than a merger or consolidation which would result in the
voting securities of the Company immediately prior to such transaction
continuing to represent 50% or more of the combined voting power of the surviving entity
immediately after such transaction), or to sell, exchange, transfer or otherwise dispose of all or
substantially all of the Companys assets, or adopt a plan of liquidation; or
15
(c) during any period of three (3) consecutive years, individuals who at the beginning of such
period were members of the Board cease for any reason to constitute at least a majority thereof
(unless the election, or the nomination for election by the Companys stockholders, of each new
director was approved by a vote of at least a majority of the directors then still in office who
were directors at the beginning of such period or whose election or nomination was previously so
approved).
15.2.
Treatment of Outstanding Awards
. Subject to Section 15.3 hereof, upon the
occurrence of a Change in Control, the Committee may:
(a) provide for the assumption of all outstanding Awards, or the substitution of outstanding
Awards for new Awards, for equity securities of the surviving, successor or purchasing Person, or a
parent or Subsidiary thereof, with appropriate adjustments as to the number, kind and prices of
Shares subject to such Awards as determined in good faith by the Board;
(b) provide that the vesting of any and all Options and SARs granted hereunder that remain
outstanding shall be accelerated that such Awards shall become fully and immediately exercisable;
(c) provide that any restrictions and deferral limitations applicable to any Restricted Stock
shall lapse and all such shares shall be deemed fully vested and free of all restrictions;
(d) in the case of the proposed liquidation of the Company, provide that each outstanding
Award shall terminate immediately prior to the consummation of such action or such other date as
fixed by the Board and provide Participants the right to exercise such Award prior to such date;
and/or
(e) make any and all other adjustments and/or settlements of outstanding Awards as it deems
appropriate and consistent with the Plans purposes.
15.3.
Termination, Amendment and Modifications of Change-in-Control Provisions
.
Notwithstanding any other provision of the Plan or any Award Agreement provision, the provisions of
this Article 15 may not be terminated, amended or modified on or after the date of an event that is
likely to give rise to a Change in Control to affect adversely any Award theretofore granted under
the Plan without the prior written consent of the Participant with respect to said Participants
outstanding Awards.
ARTICLE 16. WITHHOLDING
16.1.
Tax Withholding
. The Company shall have the power and the right to deduct or
withhold, or require a Participant to remit to the Company in lieu of withholding, an amount
sufficient to satisfy federal, state and local taxes, domestic or foreign, required by law or
regulation to be withheld or paid with respect to any taxable event arising as a result of this
Plan,
and the Company may defer issuance of Common Stock upon the grant or exercise of an Award
unless indemnified to its satisfaction against any liability for any such tax.
16
16.2.
Share Withholding
. With respect to withholding required upon the exercise of
Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon any other taxable
event arising as a result of Awards granted hereunder, Participants may elect, subject to the
approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having
the Company withhold Shares having a Fair Market Value on the date the tax is to be determined
equal to the total tax that could be imposed with respect to said transaction. All such elections
shall be irrevocable, made in writing, and signed by the Participant, and shall be subject to any
restrictions or limitations that the Committee, in its sole discretion, deems appropriate.
16.3.
Determinations; Procedure
. The amount of withholding or tax payment shall be
determined by the Committee or its delegate and shall be payable by the Participant at such time or
times as the Board determines. An Participant shall be permitted to satisfy his or her tax or
withholding obligation by (a) having cash withheld from the Participants salary or other
compensation payable by the Company or a Subsidiary, (b) the payment of cash by the Participant to
the Company, (c) the payment in shares of Common Stock already owned by the Participant valued at
Fair Market Value, and/or (d) the withholding from the Award, at the appropriate time, of a number
of shares of Common Stock sufficient, based upon the Fair Market Value of such Common Stock, to
satisfy such tax or withholding requirements as set forth in Section 16.2 above. The Committee
shall be authorized, in its sole and absolute discretion, to establish rules and procedures
relating to any such withholding methods it deems necessary or appropriate (including, without
limitation, rules and procedures relating to elections by Participants who are subject to the
provisions of Section 16 of the Exchange Act to have shares of Common Stock withheld from an award
to meet those withholding obligations).
ARTICLE 17. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or of the Board, shall be
indemnified and held harmless by the Company against and from any loss, cost, liability or expense
(including attorneys fees) that may be imposed upon or reasonably incurred by him or her in
connection with or resulting from any claim, action, suit or proceeding to which he or she may be a
party or in which he or she may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him or her in settlement thereof, with
the Companys approval, or paid by him or her in satisfaction of any judgment in any such action,
suit or proceeding against him or her,
provided
he or she shall give the Company an
opportunity, at its own expense, to handle and defend the same before he or she undertakes to
handle and defend it on his or her own behalf and
provided
further
that
indemnification shall not be available for any action taken or failure to act by such person in bad
faith or any fraud on the part of such person. The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to which such persons may be entitled under the
Companys Articles of Organization or Bylaws, as a matter of law or otherwise, or any power that
the Company may have to indemnify them or hold them harmless.
17
ARTICLE 18. SUCCESSORS
All obligations of the Company under the Plan with respect to Awards granted hereunder shall
be binding on any successor to the Company, whether the existence of such successor is the result
of a direct or indirect acquisition by purchase, merger, consolidation or otherwise, of the Company
or all or substantially all of its business or assets.
ARTICLE 19. LEGAL CONSTRUCTION
19.1.
Reservation of Shares.
The Company, during the term of the Plan, will at all
times reserve and keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan and outstanding Awards granted under the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed
by the Companys counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or sell such Shares
as to which such requisite authority shall not have been obtained.
19.2.
Gender and Number
. Except where otherwise indicated by the context, any
masculine term used herein also shall include the feminine, the plural shall include the singular,
and the singular shall include the plural.
19.3.
Severability
. In the event any provision of the Plan shall be held illegal or
invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the
Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not
been included.
19.4.
Requirements of Law
.
(a) The granting of Awards and the issuance of Shares under the Plan shall be subject to all
applicable laws, rules and regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required. Shares shall not be issued pursuant to the
exercise or receipt of an Award unless the exercise or receipt of such Award and the issuance and
delivery of such Shares pursuant thereto shall comply with all relevant provisions of applicable
law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations
promulgated thereunder, the so-called state blue sky or securities laws, and the requirements of
any stock exchange upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance. As a condition to the exercise
or receipt of an Award, the Company may require the person exercising or receiving such Award to
represent and warrant at the time of any such exercise or receipt that the Shares are being
purchased only for investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
(b) In addition to and not in lieu of subsection (a) above, each Award shall be subject to the
requirement that if at any time the Committee shall determine, in its discretion, that the listing,
registration or qualification of the Shares subject to the Award upon any securities exchange or
under any federal, state or foreign securities or other law or regulation, or the consent or
approval of any governmental regulatory body, is necessary or desirable as a condition to or in
connection with the granting of such Award or the issue or purchase of shares thereunder, no such
Award may be exercised or paid in shares of Common Stock in whole or in
part unless such listing, registration, qualification, consent or approval shall have been
effected or obtained, and the holder of each such Award will supply the Company with such
certificates, representations and information as the Company shall request which are reasonably
necessary or desirable in order for the Company to obtain such required listing, and shall
otherwise cooperate with the Company in obtaining such required listing.
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19.5.
Limitations Applicable to Section 16 Persons
. Notwithstanding any other
provision of the Plan, the Plan, and any Award granted or awarded to any Participant who is then
subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth
in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to
Rule 16b-3 under the Exchange Act) that are requirements for the application of such exemptive
rule. To the extent permitted by applicable law, the Plan and Awards granted or awarded hereunder
shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.
19.6.
Code Section 409A Compliance
. The Company, acting through the Board or the
Committee, intends to comply with Code Section 409A, or an exemption to Code Section 409A, with
regard to Awards hereunder that constitute nonqualified deferred compensation within the meaning of
Code Section 409A, and any ambiguities in construction shall be interpreted in order to effectuate
such intent. To the extent that the Board or Committee determines that a Participant would be
subject to the additional tax imposed on certain nonqualified deferred compensation plans pursuant
to Code Section 409A as a result of any provision of any Award granted under this Plan, such
provision shall be deemed amended to the minimum extent necessary to avoid application of such
additional tax. The nature of any such amendment shall be determined by the Board or the
Committee. Notwithstanding the foregoing, neither the Company nor any Affiliate makes any
representation with respect to the application of Code Section 409A to any Award hereunder and, by
acceptance of any such Award, the Participant agrees to accept the potential application of Code
Section 409A to the Award and any tax consequences associated therewith. In the event that, after
the issuance of an Award under the Plan, Section 409A of the Code or the regulations thereunder are
amended, or the Internal Revenue Service or Treasury Department issues additional guidance
interpreting Section 409A of the Code, the Committee (or, in the absence of the Committee, the
Board) may modify the terms of any such previously issued Award to the extent the Committee (or, in
the absence of the Committee, the Board) determines that such modification is necessary to comply
with the requirements of Section 409A of the Code. The Committee shall also have the authority to
amend and administer the Plan and amend any Award issued hereunder in order to assure that such
Awards do not provide a deferral of compensation that would be subject to Code Section 409A.
19.7.
Governing Law
. To the extent not preempted by federal law, the Plan, and all
agreements entered into, actions taken and determinations made hereunder, shall be construed in
accordance with and governed by the laws of the Commonwealth of Massachusetts, without regard to
such jurisdictions conflicts of laws principles.
19.8.
Stockholder Approval
. The Plan shall have been approved by the stockholders of
the Company within twelve (12) months of the Effective Date. Awards may be granted under the Plan
at any time prior to the receipt of such stockholder approval,
provided
that each such
grant shall be subject to such approval. Without limitation of the foregoing, no Award may be
exercised by a Participant, and no share certificates shall be issued by the Company, prior to
the receipt of such approval. If the Plan is not approved by July 29, 2011, then the Plan and all
Awards then outstanding shall automatically terminate and be of no force or effect.
19