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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
October 3, 1998 0-8588
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO .
TECHNICAL COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS 04-2295040
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
100 DOMINO DRIVE, CONCORD, MA 01742-2892
(Address of principal executive offices) (Zip code)
(978) 287-5100
(Registrant's telephone number, including
area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NONE NONE
- --------------------------------------------- ---------------------------------------------
(Title of each class) (Name of each exchange on which registered)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO
__
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
Based on the closing price of the stock as of December 11, 1998, the
aggregate market value of the registrant's Common Stock, par value $.10 per
share, held by non-affiliates of the registrant as of December 11, 1998, was
approximately $7,000,000.
The number of shares of the registrant's Common Stock, par value $.10 per
share, outstanding as of December 11, 1998, was 1,294,541.
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FORWARD-LOOKING STATEMENTS
NOTE: THE DISCUSSIONS IN THIS FORM 10-K, INCLUDING ANY DISCUSSION OF OR
IMPACT, EXPRESSED OR IMPLIED, ON TECHNICAL COMMUNICATIONS CORPORATION'S (THE
"COMPANY") ANTICIPATED OPERATING RESULTS AND FUTURE EARNINGS CONTAIN FORWARD
LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF
1933, AS AMENDED. THE COMPANY'S RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S OPERATING
RESULTS MAY BE AFFECTED BY MANY FACTORS, INCLUDING BUT NOT LIMITED TO THE
FOLLOWING: 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, THE COMPANY'S ABILITY TO RENEGOTIATE ITS LINE OF CREDIT WITH ITS
BANKS, THE CORRECTNESS OF MANAGEMENT JUDGMENT THAT CERTAIN EXPENDITURES WILL
BENEFIT THE COMPANY IN THE FUTURE, AND THE ACCURACY OF MANAGEMENT'S ESTIMATES OF
THE VALUE OF THE COMPANY'S ASSETS AND OF THE ADEQUACY OF ITS RESERVES. THESE AND
OTHER RISKS ARE DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE
SECURITIES & EXCHANGE COMMISSION, INCLUDING THIS FORM 10-K FOR FISCAL YEAR ENDED
OCTOBER 3, 1998.
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PART I
ITEM 1. BUSINESS
(a) GENERAL
The Company was organized in 1961 as a Massachusetts corporation to engage
primarily in consulting activities. However, since the late 1960s its business
has consisted entirely of the design, development, manufacture, distribution,
marketing, and sale of communications security devices and systems.
(b) INFORMATION AS TO INDUSTRY SEGMENTS
The Company's business consists of only one industry segment, which is the
design, development, manufacture, distribution, marketing, and sale of
communications security devices and systems.
(c) DESCRIPTION OF BUSINESS
The Company's products consist of sophisticated electronic devices which
enable users to transmit information in an encrypted format and permit receivers
to reconstitute the information in a deciphered format. The Company's products
can be used to protect confidentiality in communications between radios,
telephones, facsimile machines and data processing equipment over wires, fiber
optic cables, radio waves and microwave and satellite links. A customer may
order and receive equipment which is specially programmed to scramble
transmissions in accordance with a code to which only the customer has access.
The principal markets for the Company's products are financial institutions,
foreign and domestic governmental agencies, law enforcement agencies, and
multinational companies requiring protection of mission-critical information.
(d) PRODUCTS
Products currently available or under development provide "best in market"
communications security solutions within mission-critical networks, voice and
facsimile, centralized key and device management, and military ciphering
applications.
NETWORK SECURITY
The Cipher X-Registered Trademark- 7000-Registered Trademark- Series is a
family of high-speed, high-performance hardware/software-based encryptors for
LAN/WAN and internet applications. All of the systems have been designed for
complete node-to-node protection and therefore provide node authentication and
access control, as well as data integrity. This family of products also utilizes
a modular architecture that permits the software to be updated as networks
migrate to emerging protocols, therefore protecting the users' investment.
Network transparent, the products support U.S. Government-backed DES, Triple DES
and proprietary encryption algorithms as well as ANSI X9.17 and public key
management. Specific products within this family support Frame Relay, Internet
(IP), and X.25 protocols.
VOICE AND FACSIMILE SECURITY
The CSD 3600 Secure Portable Telephone Attachment may be placed between any
telephone and handset worldwide to provide high-end digital security. Small and
portable, the CSD 3600 operates over both digital and analog telephone lines,
and is designed to ensure protection through new and unique random keys
negotiated with each communication session.
The CSD 9300 Secure Cellular Telephone is a high level secure system that
combines the ease of use of the CSD 3600 with a full-featured AMP-compatible
cellular telephone. Protection is designed to be ensured by randomly generated
keys, unique to each communication session.
The 4100 Executive Secure Telephone offers strategic level voice and data
security in a full featured executive telephone package. Exceptional voice
quality is achieved with three different voice coding
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algorithms. The product supports multiple security layers such as automated key
management, authentication, certification, and access control. Video and
telephone conferencing options are also available.
The CSD 3700 Fax Security System is a highly secure, automatic transmission
fax system that connects to any Group 3 fax machine via a 2-wire interface.
Security protection is achieved with Diffie-Hellman negotiated key technology
and randomly generated keys that are unique to each communication session. Open
and closed networks are supported by the CSD 3700 to enable an open exchange of
secure documents in the industrial marketplace, or restrict secure
communications to only authorized parties in highly confidential or government
applications.
The CSD 3224E Secure Telephone, Fax and Data is a desktop office system that
provides protection for telephone, fax and data communications. The product was
designed to guarantee secure voice communications over extremely degraded line
conditions, while achieving exceptional voice quality with speaker recognition.
The CSD 3324E connects to any Group 3 compatible fax machine, and to a computer
via an RS-232 interface.
CENTRALIZED SECURITY MANAGEMENT
The Company's KEYNET Key and Device Management System is a Windows NT-based
key and security device management system that can centrally and simultaneously
manage an entire Cipher X 7000 network, including those on mixed networks such
as high-speed X.25, Frame Relay and IP. KEYNET has an intuitive graphical user
interface (GUI), making it very easy to use. All key management messages are
secured using the ANSI X9.17 banking security standard that defines "Prudent
Business Practice' for the banking community. The system securely generates,
distributes and exchanges keys, sets address tables, provides diagnostics, and
performs automatic polling and alarms from a central and remote location. KEYNET
2.0 also operates with SNMP-based management systems for ease-of-use, and
provides instant alarm notification via a tone, pager or SNMP trap. These high
security measures facilitate central management while maintaining optimum
security for mission-critical networks worldwide.
MILITARY CIPHERING SYSTEMS
The DSP 9000 Narrowband Radio Security family of products provide strategic
security for voice and data communications sent over HF, VHF and UHF channels in
full and half-duplex modes. Designed for rugged military environments, the DSP
9000 provides exceptional voice quality over poor line connections making it an
ideal security solution for military aircraft, naval, base station and manpack
radio applications. The product provides automated key management for optimum
security and ease of use. It is also radio independent because software
programmable interfaces allow radio interface levels to be changed without
configuring the hardware. Base station, handset and implant board configurations
are available options with the DSP 9000. Additionally, the DSP 9000 is
compatible with the Company's CSD 3324E secure telephone to enable
"office-to-field" communications.
The DSD 72A-SP High Speed Data Encryptor is a rugged military bulk ciphering
system that provides a maximum level of cryptographic security for synchronous
data networks operating at up to 8 Mbps. The product supports a wide variety of
interfaces and easily integrates into existing networks. Reliable secure
communication is ensured with crypto synchronization methods built to maintain
connections in error and jamming environments such as radio relay networks,
missile systems, and microwave systems.
(e) COMPETITION
The Company has several competitors, including foreign-based companies, in
the communications security devices field. Few of these competitors offer
products that compete across all of the Company's product offerings and none are
believed to have a dominant share of the market. Many of these competitors,
however, are companies which may have greater financial and other resources than
the Company. The Company believes its principal competitors include Crypto AG,
Racal Datacom Inc., Cylink
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Corporation, Motorola Inc., Omnisec AG, Cisco Systems, Information Resource
Engineering Inc., and TimeStep Corporation.
The Company competes based on its service, the operational and technical
features of its products, its sales expertise and pricing. The Company sells
directly to customers, original equipment manufacturers, and value-added
resellers using its in-house sales force as well as domestic and international
representatives and distributors.
(f) SALES AND BACKLOG
In fiscal 1998, the Company had two customers representing 71% (54%, and
17%) of net sales. In fiscal 1997, the Company had three customers representing
51% (25%, 13%, and 13%) of net sales. In fiscal 1996, the Company had three
customers, including the U.S. Government as one customer, representing 54% (26%,
16% and 12%) of net sales.
The Company expects that sales to relatively few customers will continue to
account for a high percentage of the Company's revenues in any accounting period
in the foreseeable future. A reduction in orders from any such customer, or the
cancellation of any significant order and failure to replace such order with
orders from other customers, would have a material adverse effect on the
Company's business, financial condition, and results of operations.
The Company's backlog of firm orders as of October 3, 1998 was $732,228,
compared to $10,640,689 as of September 27, 1997. The Company expects to deliver
substantially all of its backlog in fiscal year 1999.
(g) REGULATORY MATTERS
As a party to a number of contracts with the U.S. Government and its
agencies, the Company must comply with extensive regulations with respect to bid
proposals and billing practices. Should the U.S. Government or its agencies
conclude that the Company has not adhered to federal regulations, any contracts
to which the Company is a party could be canceled and the Company could be
prohibited from bidding on future contracts. Such a prohibition would have a
material adverse effect on the Company. All payments to the Company for work
performed on contracts with agencies of the U.S. Government are subject to
adjustment upon audit by the U.S. Government Defense Contract Audit Agency, the
General Accounting Office, and other agencies. The Company could be required to
return any payments received from U.S. Government agencies if it is found to
have violated federal regulations. In addition, U.S. Government contracts may be
canceled at any time by the government with limited or no penalty. Contract
awards are also subject to funding approval from the U.S. Government which
involves political, budgetary, and other considerations over which the Company
has no control.
The Company's security products are subject to export restrictions
administered by the U.S. Department of Commerce, which licenses the export of
encryption products subject to certain technical restrictions. In addition, U.S.
export laws prohibit the export of encryption products to a number of hostile
countries. Although to date the Company has been able to secure U.S. export
licenses, there can be no assurance that the Company will continue to be able to
secure such licenses in a timely manner in the future, or at all.
(h) MANUFACTURING AND TECHNICAL EXPERTISE
The Company subcontracts a large portion of its manufacturing operations.
Many of the components used in the Company's products are standard components
available from more than one supplier. The Company has, or believes that it
could develop without significant delay, alternative sources for almost all
materials and components used in the manufacture of its products. The Company's
internal manufacturing process consists primarily of adding critical components,
final assembly, quality control, testing and burn-in. Delivery time varies
depending on the products and options ordered.
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The Company's technological expertise and experience, including certain
proprietary rights which it has developed and maintains as trade secrets, are
crucial to the conduct of the Company's business. Management is of the opinion
that, while patent protection is desirable with respect to certain of its
products, none of the Company's patents are material to the conduct of its
business. Eight patents have been issued to the Company. The Company has a
number of trademarks for various products, including TCC, KEYNET and CIPHER X.
The Company does not deem any of its trademarks to be material to the conduct of
its business.
(i) RESEARCH AND DEVELOPMENT
Research and development is undertaken by the Company on its own initiative.
In order to develop the technology needed to compete successfully, the Company
must attract and retain qualified personnel, improve existing products and
develop new products. No assurances can be given that the Company will be able
to hire, train, and motivate such technical management and sales personnel.
During the twelve-month periods ended October 3, 1998, September 27, 1997, and
September 28, 1996, the Company spent $1,414,746, $2,378,564, and $1,955,852,
respectively, on product development. In addition, product development is
undertaken by the Company on a contract specific basis; the development costs
associated with these contracts are included in cost of sales.
(j) EMPLOYEES
As of October 3, 1998, the Company employed 60 persons. The Company believes
that its relationship with its employees is good.
(k) FOREIGN OPERATIONS
The Company is dependent upon its foreign sales. Although foreign sales were
more profitable than domestic sales during fiscal years 1998 and 1997 because
the mix of products sold abroad included more products with higher profit
margins than the mix of products sold domestically, this does not represent a
predictable trend. For example, during fiscal year 1996 foreign and domestic
sales were equally profitable. Sales to foreign markets have been and will
continue to be affected by the stability of foreign governments, economic
conditions, export and other governmental regulations, and changes in
technology. The Company attempts to minimize the financial risks normally
associated with foreign sales by utilizing letters of credit confirmed by U.S.
banks and by using foreign credit insurance. Foreign sales contracts are usually
in U.S. dollars.
The Company's export sales are conducted through its wholly-owned
subsidiary, TCC Foreign Sales Corporation ("TCC FSC") which is organized and
incorporated in the U.S. Virgin Islands. As a qualified Foreign Sales
Corporation under the Internal Revenue Code, TCC FSC is able to take advantage
of tax incentives enacted by Congress to encourage export sales.
Information regarding the Company's revenue from export sales for the past
five years is set forth in Item 6, "SELECTED FINANCIAL DATA".
ITEM 2. PROPERTIES
The Company leases its headquarters located in Concord, Massachusetts, under
an operating lease. The premises are used for manufacturing and house the
Company's executive offices.
On October 16, 1992, the Company signed its current lease on its
headquarters. The Company has exercised its option to extend this lease for the
first of two additional two and one-half year terms ending June 30, 2000 and
December 31, 2002. The future minimum lease payments under this first option
term depend on the Consumer Price Index at December 31, 1998, but are estimated
at $158,700 in fiscal 1999 and $119,000 for the first nine months of fiscal
2000. The Company also retains an option to purchase the building at fair market
value, but not to exceed $2,262,000, exercisable at the end of the current
renewal term, and of the additional renewal term, if elected. Management
believes the current facility is capable of meeting the Company's anticipated
needs for the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
On November 20, 1998, the Company announced the settlement of shareholder
litigation initiated by Philip Phalon and Dr. Mahmud Awan, which had been
pending in Middlesex County, Massachusetts Superior Court since February 1998.
The Company also announced the simultaneous settlement of litigation regarding
the tabulation of voting results of the Company's 1998 annual stockholders
meeting held August 14, 1998 (the "1998 Stockholders Meeting"). In connection
with the settlement of these matters, Dr. Awan and Mr. Mitchell Briskin were
deemed elected at the 1998 Stockholders Meeting. Additionally, Mr. David Brown
was appointed to the Company's Board of Directors, filling the Board seat held
by Mr. Herbert Lerner, who, along with Mr. Philip Phalon, resigned from the
Board. Dr. Awan is serving as Chairman of the Board and Carl H. Guild, Jr., the
Company's Chief Executive Officer and President, is serving as Vice-Chairman of
the Board, each to serve under the terms of the settlement agreement until the
later of October 1, 2000 or such date as their respective successors are elected
and qualified. The Board now consists of Mr. Guild, Mitchell Briskin, Donald
Lake, Robert Lessard, Thomas Peoples, David Brown and Dr. Awan. The Company's
Board will remain classified, with each director serving staggered terms as set
forth in Item 10.
The settlement agreement and standstill agreement executed by the Company
and members of the opposition group that had filed a Form 13D (the "13D Group")
in the settlement of the above described litigation set forth mutual full
releases as to the litigation and also include provisions requiring (i) the
Company to reimburse the 13D Group's expenses in payments aggregating $395,000,
(ii) the dissolution of the 13D Group (Note: Members of the 13D Group plan to
file an amendment to their Form 13D dissolving the 13D Group in either December
1998 or January 1999.), and (iii) the former proxy contestants to abide by
certain standstill provisions until October 1, 2000.
The Company is also the defendant in GERARD V. TECHNICAL COMMUNICATIONS
CORPORATION, ET AL., filed in United States District Court for the District of
Massachusetts in 1998. This case arises from disputes concerning the hiring and
termination of Roland Gerard, former president of the Company. According to the
Complaint, the Company violated federal securities laws in the hiring process
for Mr. Gerard by making false statements about the Company which induced him to
accept employment, the compensation for which included certain stock options.
The Complaint also alleges breach of contract, wrongful termination, and civil
conspiracy. At present, the Company's motion to dismiss is pending. Because of
the early stage of the litigation, it is impossible to determine the ultimate
outcome. The Company is determined to contest this suit vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on August 14,
1998. The meeting was conducted for the purpose of (i) electing two Class I
Directors, each to serve for a term of three years, (ii) ratifying the election
of the Company's independent auditors and (iii) considering a stockholder
proposal for revoking the April 30, 1998 vote of the Company's Board of
Directors to classify the Board into three classes having staggered terms.
Based on the preliminary, uncertified count in August 1998, the Company's
nominees for directors, Mr. Bernard Resnick and Mr. Mitchell Briskin, each
received 322,920 votes in favor and 70,525 votes withholding authority. The 13D
Group's nominees, Dr. Mahmud Awan, Mr. Joseph J. Hansen, Mr. Ernest R. Fenton
and Mr. David A. B. Brown, each received 459,351 votes in favor; Mr. Philip A.
Phalon received 459,251 votes in favor and 100 votes withholding authority.
However, these votes were disputed in a suit filed in Massachusetts Superior
Court that called into question the results based on applicable state law. As a
result of the settlement of the litigation, the proxy contest was terminated and
Dr. Mahmud Awan and Mr. Mitchell Briskin were deemed elected to the Board of
Directors.
The ratification of the Company's auditors was approved with 376,845 votes
in favor, 16,100 votes against, and 500 votes abstaining.
The stockholder proposal was approved with 542,733 votes in favor, 304,385
votes against, and 5,778 votes abstaining. The Company considers this
stockholder proposal to be a non-binding referendum and the current
staggered-term format will remain in place for at least the upcoming fiscal
year.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock, $.10 par value, is traded on the
over-the-counter market, on the NASDAQ National Market System, under the symbol
"TCCO". The following table presents low and high bid information for the time
periods specified. The over-the-counter market quotations reflect inter-dealer
prices, without retail markup, markdown or commission and may not necessarily
represent actual transactions. The over-the-counter market quotations have been
furnished by The NASDAQ Stock Market, Inc.
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PRICE
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TITLE OF CLASS QUARTER ENDING LOW HIGH
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Common Stock,
$.10 par value 12/28/96 8.750 15.750
03/29/97 9.625 14.125
06/28/97 7.875 10.375
09/27/97 5.000 9.000
12/27/97 5.125 9.875
03/28/98 4.000 6.500
06/27/98 5.000 7.500
10/03/98 4.000 8.500
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The Company has paid no cash dividends in the past and has no plans to pay
cash dividends in the forseeable future.
As of December 11, 1998, there were approximately 1,200 record holders of
Common Stock, $.10 par value. On December 11, 1998, the closing prices of the
Common Stock was $5.375.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA:
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FISCAL YEARS ENDED:
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OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30, OCTOBER 1,
1998 1997 1996 1995 1994
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Net Sales:
Domestic............................. $ 1,631,459 $ 2,734,690 $ 3,633,425 $ 1,535,015 $ 707,735
Foreign (Note A)..................... 12,224,322 9,523,948 10,379,377 8,692,550 8,357,980
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Total net sales (Note B)............... 13,855,781 12,258,638 14,012,802 10,227,565 9,065,715
Gross profit........................... 8,393,173 7,104,975 8,231,388 5,351,882 5,294,825
Net income (loss)...................... 481,603 (1,243,501) 532,147 88,745 116,046
Net income (loss) per share
of common stock (Note C)
Basic................................ $.38 $(.98) $.42 $.07 $.09
Diluted.............................. $.37 $(.98) $.41 $.07 $.09
Weighted average shares outstanding
Basic................................ 1,281,924 1,270,625 1,257,384 1,252,567 1,245,410
Diluted.............................. 1,288,007 1,270,625 1,298,387 1,252,567 1,245,410
</TABLE>
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AS OF:
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OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30, OCTOBER 1,
1998 1997 1996 1995 1994
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Assets............................... $ 16,172,729 $ 12,892,899 $ 16,000,033 $ 15,348,435 $ 12,088,955
Line of credit/current portion,
long-term debt (D)................. $ 2,250,000 $ -- $ 1,145,175 $ 696,136 $ 246,136
Long-term obligations................ $ -- $ -- $ 1,200,000 $ 2,550,612 $ 1,132,748
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NOTES TO SELECTED FINANCIAL DATA
(A) A summary of foreign sales by geographic area may be found in Note 13 of the
Notes to the Consolidated Financial Statements on Page F-15.
(B) Amounts include the sales since May 31, 1995 of Datotek, Inc. The Company
acquired the assets comprising the secure communications business of
Datotek, Inc. on May 31, 1995.
(C) Dual Earnings per Share reporting in accordance with Financial Accounting
Standards Board Statement 128, "Earnings Per Share".Diluted weighted average
shares outstanding have not been calculated for fiscal years 1994 or 1995.
(D) At October 3, 1998, amount represents outstanding borrowings against line of
credit.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and the results of
operations should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto appearing elsewhere herein.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
The discussions in this Form 10-K, including any discussion of or impact,
expressed or implied, on the Company's anticipated operating results and future
earnings contain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended. The Company's results may differ
significantly from results indicated by such forward-looking statements. The
Company's operating results may be affected by many factors, including but not
limited to the following: 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, the Company's ability to renegotiate its line of
credit with its banks, the correctness of management judgment that certain
current expenditures will benefit the Company in the future, and the accuracy of
management's estimates of the value of the Company's assets and of the adequacy
of its reserves. These and other risks are detailed from time to time in the
Company's filings with the Securities & Exchange Commission, including this Form
10-K, for the fiscal year ended October 3, 1998.
YEAR 2000 COMPLIANCE UPDATE
Technical Communications Corporation has been actively addressing the Year
2000 (Y2K) problem since April 1998. Generally speaking, the Y2K problem results
from the use of two-digit, rather than four-digit, date years in computer
systems and software applications. Today, many systems rely on two (or one)
digits to represent the year portion of a date. For example, 1997 is usually
stored as 97 (or 7). As a result, the year 2000, represented by 00 (or 0), could
be interpreted as 1900. This type of error could cause problems when systems
display, calculate, store and print dates.
The Company understands the importance of identifying and solving the Y2K
problem. As a supplier of mission-critical encryption products, the Company is
committed to providing products that will function,
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without interruption, into the year 2000. In addition, Technical Communications
Corporation is taking proactive steps to ensure that all critical systems, from
both an internal and external perspective, are reviewed and, if necessary,
corrected.
COMPANY'S STATE OF READINESS
Technical Communications Corporation has divided its Y2K efforts into three
major areas: (i) products and customers, (ii) enterprise business systems and
information technology and (iii) external systems and suppliers. The review of
each area will consist of an inventory of potentially affected systems, an
assessment of Y2K readiness and corrective action deployment. As indicated, the
Company has been actively working on Y2K related issues for eight months, and is
prioritizing its efforts based on how severe an effect a potential noncompliance
would have on customer service and core business functions. It is anticipated
that the entire Y2K initiative will be complete by June 1999. Product testing
and internal/ external system evaluations are expected to be complete by the end
of January 1999. To facilitate the plan, the Company has appointed a program
manager to oversee all Y2K initiatives.
Technical Communications Corporation has tested approximately 90% of its
products for Y2K problems to date. A product is deemed Y2K compliant if the
product, when used in accordance with its associated documentation, is capable
of processing, receiving, and/ or providing data within or between the 20(th)
and 21(st) centuries, provided that all other products used in conjunction with
the product in question properly exchange date data with that product. It should
be noted that certain TCC products deemed to be Y2K compliant may require a
service update in order to achieve Y2K compliant status.
Although no assurances can be given, the Company believes that all current
products are either Y2K compliant, or can be made Y2K compliant with minor
adjustments or software upgrades. This product assessment has identified
date-related issues with certain older products that TCC no longer manufactures
or sells. It is the Company's intent to offer upgrades or alternative products
where reasonably practicable. In some cases the Company sells encryption systems
that interact with third party products or operate with computer systems not
under the Company's control. There can be no assurances that such third party
equipment will function correctly into the year 2000.
TCC's internal Y2K initiative includes a review of all computer hardware and
software related systems including; internal LAN, product development tools,
facility operations, interfaces with third parties via EDI links and desktop
systems. The inventory and assessment phase of this review is approximately 80%
complete. The Company's enterprise information system, which includes
manufacturing, financial accounting and sales administration, is now year 2000
compliant. Supporting systems will continue to be tested and evaluated. At this
time, the Company does not anticipate that any internal system will create a
substantive disruption in the Company's operation into the year 2000.
The Y2K external systems review process consists of identifying and
contacting suppliers and service providers that are believed to be significant
to the Company's business operations. The Company will assess each supplier's
Y2K readiness based on its formal response to a TCC Y2K status request. The
Company intends to monitor the Y2K compliant process of key suppliers that
either indicate they are not yet Y2K compliant or do not respond to the
Company's requests. This process is ongoing and is expected to continue into
1999.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
As of October 3, 1998, the Company has incurred expenses related to the year
2000 problem of approximately $25,000. The main portion of these costs relates
to the evaluation and testing of products for Y2K compliance. The Company
anticipates additional costs ranging from $45,000--$110,000 in order to complete
the Y2K process and to upgrade a small number of older products currently still
in use. The preceding numbers represent TCC's best estimate of remediation costs
pertaining to Y2K issues. There can be no assurances that the Company will not
encounter unexpected costs or delays in achieving year 2000 compliance.
8
<PAGE>
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
Based on current information, the Company believes that the year 2000
problem will not have a material adverse effect on the Company's overall
business and financial condition. Since all current products are either Y2K
compliant or can be made Y2K compliant, future sales of all such products do not
represent a Y2K risk to the Company. Even though TCC is adopting a proactive
strategy, there can be no assurances that year 2000 problems will not have any
impact on the business. Despite efforts to ensure that products will function
correctly into the year 2000, The Company may see an increase in warranty and
other claims, especially those related to older products or products that
incorporate third party software or hardware. If any of the Company's material
suppliers or service providers experience unforeseen Y2K issues, the Company's
production, product development, and operations may also be materially adversely
effected.
COMPANY'S CONTINGENCY PLAN
TCC is working diligently to minimize the risks associated with Y2K issues.
The Company plans to dedicate appropriate resources to address all known Y2K
related issues in an expeditious manner. In addition, the Company is prepared to
take immediate action on unforeseen problems as they arise. Such action may
include the use of alternative sources of supply to support manufacturing and
product development.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Consolidated net sales for the year ended October 3, 1998, were $13,855,781
compared with sales of $12,258,638 for the prior fiscal year. This increase of
$1,597,143, or 13.0%, is mainly attributed to shipment of a large order for
encryption equipment to a foreign customer.
Foreign sales increased by $2,700,374 or 28.4% to $12,224,322, primarily due
to the aforementioned sale. On the other hand, domestic sales decreased
$1,103,231 or 40.3% to $1,631,459; the decrease is predominantly due to
continued procurement reductions by U. S. government agencies.
Gross profit for fiscal year 1998 was $8,393,173 compared to $7,104,975 in
fiscal 1997, an increase of 18.1%. Gross profit expressed as a percentage of
sales was 61% in fiscal 1998 compared to 58% in the prior year, which was
primarily due to improved product mix and tighter cost controls.
Engineering, design and product development costs in fiscal 1998 were
$1,414,746, compared to $2,378,564 in fiscal 1997. The $963,818, or 40.5%
decrease is attributable in part to charging more support engineering costs
directly to the aforementioned customized systems orders and the capitalization
of certain software development costs related to the Company's KEYNET 2 product.
In addition, outside product development costs were sharply reduced by focusing
engineering design developments on selected products and by bringing most of
these efforts in house.
Selling, general and administrative expenses decreased slightly from
$6,282,108 in fiscal 1997 to $6,220,992 for the year just ended, primarily due
to significantly lower marketing and business development expenditures
reflecting more realistic new product introduction schedules, largely offset by
increased sales support costs and higher legal expenses related to the
aforementioned litigations.
Investment income earned during fiscal 1998 was $24,068 compared to $128,722
in fiscal 1997. The decrease was largely the result of increased working capital
requirements associated with the aforementioned large foreign contract, which
was not shipped until the fourth quarter of fiscal 1998.
The Company attained a net profit of $481,603, or $.37 per diluted share
during fiscal 1998 compared to a net loss of $1,243,501, or $.98 per share
during fiscal 1997. The improvement in fiscal 1998 profitability was a result of
an improved mix of higher margin foreign sales combined with reductions in fixed
expense, particularly in internal product development.
9
<PAGE>
The effects of inflation and changing costs have not had a significant
impact on sales or earnings in recent years. As of October 3, 1998, none of the
Company's monetary assets or liabilities were subject to foreign exchange risks.
The Company usually includes an inflation factor in its pricing when negotiating
multi-year contracts with customers.
FISCAL 1997 COMPARED TO FISCAL 1996
Consolidated net sales for the year ended September 27, 1997, were
$12,258,638 compared with sales of $14,012,802 for the prior fiscal year. This
decrease of $1,754,164, or 13%, is attributed to declining sales of certain
Datotek products acquired during fiscal 1995 which are reaching the end of their
product life cycle, and the failure to receive certain customer orders in time
to ship before year-end. Other products helped to offset some of the revenue
decline in Datotek products.
Domestic and foreign sales declined by $898,735 and $855,429 in fiscal 1997,
or 25% and 8%, respectively. The decline in domestic sales is predominantly due
to procurement reductions by U.S. Government agencies. This is not expected to
be a trend that will continue into the current fiscal year. The decline in
Datotek product sales combined with the late or non-receipt of customer orders
that could not be shipped before year-end contributed to the decrease in foreign
sales.
Gross profit for fiscal year 1997 was $7,104,975 compared to $8,231,388 in
fiscal 1996. The 14% decrease in gross profit is primarily the result of the
decline in revenue. Gross profit expressed as a percentage of sales was 58% in
fiscal 1997 compared to 59% in the prior year. Higher margins tend to be
associated with higher sales because not all manufacturing costs are truly
variable.
Engineering, design and product development costs in fiscal 1997 were
$2,378,564, compared to $1,955,852 in fiscal 1996. The $422,712, or 22% increase
represents an investment in high-speed communications security systems that are
intended to enable the Company to compete for emerging opportunities in the
corporate enterprise and business-to-business electronic commerce security
markets during fiscal 1998 and future years.
Selling, general and administrative expenses increased by $699,555 from
$5,582,553 in fiscal 1996 to $6,282,108 for fiscal 1997. The increase is
predominantly the result of higher selling and business development charges as
the Company increased its staff in those areas and entered into service support
agreements with overseas representatives.
Investment income earned during fiscal 1997 was $128,722 compared to
$239,142 in fiscal 1996. The decrease of $110,420 was predominantly the result
of the Company's lower average cash balances during the current year caused by
the payment of the Datotek acquisition and ESOP loans. Interest expense also
declined by $179,493 from $243,472 in fiscal 1996 to $63,979 for the year just
ended, again as a result of the payment of these loans. The $167,047 in other
expense incurred during fiscal 1997 was primarily the result of the Company's
disposal loss associated with certain capital equipment.
The Company incurred a net loss of $1,243,501, or $.98 per share during
fiscal 1997 compared to net earnings of $532,147, or $.41 per diluted share in
the prior year. The loss in the current year was a direct consequence of lower
sales coupled with a higher investment in new product and a substantial increase
in selling and business development expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from $1,876,748 at September 27, 1997 to
$740,049 at October 3, 1998. This decrease was primarily due to increased
accounts receivable associated with a $7.4 million sale which was essentially
completed during the fourth quarter of fiscal 1998. The current ratio of the
Company decreased from 3.5 to 1 as of September 27, 1997 to 2.5 to 1 as of
October 3, 1998. This decrease was primarily caused by a $2,250,000 increase in
borrowings against the Company's line of credit which relates directly to a
build up of working capital associated with the aforementioned $7.4 million
sale.
10
<PAGE>
The Company's short-term capital requirements are funded primarily from cash
from operations and borrowings under the Company's bank credit line. Long-term
capital requirements have historically been funded from the Company's
operations. Effective May 1, 1998, the Company and its bank increased its
existing Revolving Line of Credit Agreement from $3,500,000 to $5,000,000. This
line of credit is available until May 1, 1999. Borrowings under the Agreement
bear interest at the bank's prime rate plus one-half percent per annum. The line
of credit is secured by a lien on substantially all of the Company's assets and
is used for working capital requirements and to support letters of credit.
During fiscal 1998, the Company borrowed $4,500,000 against this credit line in
order to accommodate additional working capital requirements in conjunction with
a $7.4 million sale which was substantially completed during the fourth quarter
of FY 1998. $2,250,000 of the amount borrowed was repaid during fiscal 1998,
reducing the outstanding borrowings at October 3, 1998 to $2,250,000.
Availability under the line of credit as of October 3, 1998, has been further
reduced by $911,526 for outstanding letters of credit. During the first week of
October, 1998, the Company repaid the entire outstanding amount upon receipt of
payment in full of the outstanding receivable balance on the $7.4 million sale.
As of December 11, 1998, no borrowings were outstanding under the line of
credit.
In connection with the acquisition of the assets of Datotek, Inc., a
subsidiary of AT & T Corp., in May 1995, the Company entered into a reseller
agreement whereby it would commit to purchasing minimum annual levels of various
AT & T Secure Communications System's (now General Dynamics) products, in
exchange for exclusive distribution rights. This agreement, as modified in
October 1997, would have required the Company to purchase $850,000 and
$1,000,000 for the years ended September 30, 1998 and September 30, 1999
respectively.
On December 8, 1998, the Company entered into a new agreement with General
Dynamics (Addendum No. 5) which replaced the previous agreement. Under terms of
this agreement, the Company will: a) purchase selected General Dynamics
inventory at General Dynamics' cost of $1.1 million during Fiscal 1999; b)
receive expanded distribution rights for the United States, Canada and Europe,
areas previously excluded from the agreement by General Dynamics; and c) assume
responsibility for certain product warranties granted by General Dynamics on
sales within the U. S., Canadian and European territories. Most of the affected
products were sold by General Dynamics during 1998 under one year warranties
scheduled to expire during 1999, although there are a small number of extended
warranty products with expiration dates in 2000. The Company does not believe
that its total warranty exposure is material. The Company does not believe that
its obligations under this Agreement will materially adversely impact its
liquidity or operations. Although no assurances can be given that certain
purchased products will not eventually become technologically obsolete, the
Company believes that the selected product inventory that will be purchased from
General Dynamics can either be sold to certain foreign customers of the Company
or to new customers in the expanded distribution territories of the U.S., Canada
and Europe in the forseeable future.
In connection with the litigation set forth in Item 3 above, the Company has
agreed to reimburse members of the 13D Group $395,000 ($300,000 payable in the
first quarter of fiscal 1999; $50,000 payable before the end of fiscal 1999; and
$45,000 payable before the end of fiscal 2000) and incurred approximately
$300,000 in additional legal fees related to its defense of this litigation in
fiscal 1998. The Company has made and expects to make such future payments from
available working capital.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index to the Financial Statements and Schedules under Part IV, Item
14, in this report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
(a) IDENTIFICATION OF DIRECTORS
The following table sets forth the year each director first became a
director, the position currently held by each director with the Company, their
principal occupation during the past five years, any other directorships held by
such person in any company subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended, or in any company registered as an
investment company under the Investment Company Act of 1940, as amended, and
their age. The terms of the Class I Directors expire at the 2001 Annual Meeting
of Stockholders; the terms of the Class II Directors expire at the 1999 Annual
Meeting of Stockholders; and the terms of the Class III Directors expire at the
2000 Annual Meeting of Stockholders.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND YEAR FIRST BECAME A DIRECTOR WITH THE COMPANY AGE
- ----------------------------------------------------- ----------------------------------------------------- ---
<S> <C> <C>
Dr. Mahmud Awan (1) (8) 1998......................... Director, Chairman of the Board 46
Class I Director
David A. B. Brown (2) (8) 1998....................... Director 55
Class II Director
Mitchell B. Briskin (3) 1998......................... Director 39
Class I Director
Carl H. Guild, Jr. (4) 1997.......................... Director, Vice Chairman of the Board, Chief Executive 54
Class III Director Officer and President
Donald Lake (5) 1998................................. Director 54
Class III Director
Robert T. Lessard (6) 1997........................... Director 58
Class II Director
Thomas E. Peoples (7) 1998........................... Director 50
Class III Director
</TABLE>
- ------------------------
(1) Dr. Awan joined the Board of Directors and became Chairman of the Board on
November 19, 1998, following settlement of the aforementioned litigations.
Dr. Awan has served as Chairman and Chief Executive Officer of TechMan
International Corporation, a privately held manufacturer of fiber optic
medical devices and communication systems, since 1982.
(2) Mr. Brown joined the Board of Directors on November 19, 1998, filling a
vacancy created by the resignation of Herbert A. Lerner. Since 1984, Mr.
Brown has been the president of The Windsor Group, Inc., a business
consulting firm focused on the oil industry and international operations.
(3) Mr. Briskin, a principal at Concord Investment Partners since 1995, was
deemed elected to the Board of Directors on November 19, 1998 in accordance
with the terms of the aforementioned settlement of the litigation. From 1990
to 1995, Mr. Briskin was General Manager at General Chemical Corporation;
previously, he was a lawyer with Patterson, Belknap, Webb & Tyler in New
York City.
(4) In conjunction with the legal settlements reached by the Company on November
19, 1998 and the appointment of Dr. Awan as Chairman of the Board, Mr. Guild
was named to the new position of Vice Chairman of the Board on the same
date. Mr. Guild had served as Chairman of the Board and Chief Executive
Officer of the Company from February 13, 1998 until November 19, 1998; he
continues to serve as Chief Executive Officer and President. Mr. Guild was
elected to the Board on May 1, 1997 and had been an independent consultant
to the Company from that time until February 13, 1998. From 1993 to 1997, he
was a Senior Vice President with Raytheon Engineers and Constructors, Inc.,
a unit of Raytheon Company.
12
<PAGE>
(5) Mr. Lake has been a financial consultant to various government agencies
since 1991. Before initiating his consulting practice, Mr. Lake served as
Director of the International Banking Services Division of the American
Security Bank in Washington, D.C.
(6) Mr. Lessard was employed in a variety of management positions from 1966
through December 1995 at the U.S. National Security Agency ("NSA"),
Department of Defense. During his final two years at NSA, Mr. Lessard was
the Group Chief in the Operations Directorate responsible for communications
and cryptographic technology. Since his retirement in December 1995, he has
represented the Director of the National Security Agency on several special
projects.
(7) Mr. Peoples is the Vice President for International and Washington
Operations of Aerojet, a privately held aerospace and defense contractor,
and has been employed by that Company since 1992. Previously, Mr. Peoples
served as Manager of Business Development for Smart Munitions Programs at
Raytheon Company.
(8) Dr. Awan and Mr. Brown were deemed elected pursuant to the settlement
agreement set forth in Item 3.
(b) IDENTIFICATION OF EXECUTIVE OFFICERS
The following table sets forth the names of all executive officers of the
Company, excluding those who are also directors, the year each first became an
executive officer, the position currently held by each officer of the Company,
the principal occupation of each officer during the past five years, and the age
of each officer.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND YEAR FIRST BECAME AN OFFICER WITH THE COMPANY AGE
- ----------------------------------------------------- ----------------------------------------------------- ---
<S> <C> <C>
John I. Gill (1) 1985................................ Executive Vice President 59
</TABLE>
- ------------------------
(1) Mr. Gill has been employed by the Company since August 1983.
(c) FAMILY RELATIONSHIPS
With the exception of Arnold M. McCalmont, former Chairman of the Board and
director who retired in fiscal year 1998, and James A. McCalmont, who also
resigned from the Board in fiscal year 1998, no director or executive officer is
related to any other director or executive officer by blood or marriage.
(d) SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who beneficially own more than
ten percent (10%) of the Company's stock, to file initial reports of ownership
on Form 3 and reports of changes in ownership on Form 4, and annual statements
of beneficial ownership on Form 5 with the SEC and any national securities
exchange on which the Company's securities are registered. Executive officers,
directors and greater than ten percent (10%) beneficial owners are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the executive officers and directors
that no other reports were required, the Company believes that during fiscal
1998, its executive officers, directors and greater than ten percent (10%)
beneficial owners complied with all applicable Section 16(a) filings.
13
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
(a) SUMMARY COMPENSATION TABLE
The following tables set forth certain summary information concerning
compensation paid or accrued by the Company during the past three fiscal years
to its Chief Executive Officer and the other executive officers of the Company
whose annual compensation during Fiscal Year 1998 exceeded $100,000 (hereafter
referred to as the "named executive officers"):
<TABLE>
<CAPTION>
FISCAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- -------------------------------------------------- ------ ------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Graham R. Briggs(1)............................... 1998 $ 36,106 $ -- $ 400(2)
Former Vice President of Finance 1997 $ 96,324 $ 11,171(3) $ --
1996 $ 85,865 $ 1,500(3) $ 1,747(4)
Roland S. Gerard (5).............................. 1998 $ 62,399 -- $ 18,274(6)
Former President and Chief Executive Officer 1997 $158,708 $ 45,171(7) $ 1,173(8)
1996 $125,862 $ 15,000(7) $ 4,233(9)
John I. Gill...................................... 1998 $118,591 -- $ 1,493(10)
Executive Vice President 1997 $116,325 $ 18,171(11) --
1996 $108,953 $ 1,500(11) $ 2,209(4)
Carl H. Guild, Jr. (12)........................... 1998 $126,548 $ -- $ 125,502(13)
Chief Executive Officer and President 1997 $-- $ -- $ 3,600(14)
</TABLE>
- ------------------------
(1) Mr. Briggs was employed as the Company's Vice President of Finance until
January 14, 1998. From that time until his resignation on November 19, 1998,
Mr. Lerner had performed the duties of the Vice President of Finance in his
capacity as Treasurer and Chief Financial Officer of the Company.
(2) Represents the Company's 25% match on the first 6% of Mr. Briggs' fiscal
1998 401(k) contribution.
(3) These amounts of $11,171 and $1,500 were paid to Mr. Briggs for services
rendered in Fiscal Years 1996 and 1995, respectively.
(4) Represents the Company's contribution for the respective officer under the
Company's Profit-Sharing Plan, a plan qualified under Section 401 (k) of the
Internal Revenue Code of 1986, as amended (the "Code"). The contribution is
determined by the Board of Directors in its sole discretion, but may not
exceed 15% of the Company's net profits before taxes for any given Plan
year, nor certain limits imposed by the Internal Revenue Code.
(5) Mr. Gerard resigned from the Company and from the Board of Directors on
February 13, 1998.
(6) Includes income realized upon exercise of stock options, the personal use
portion of Mr. Gerard's car allowance and moving expenses related to
previous periods.
(7) These amounts of $45,171, and $15,000 were paid to Mr. Gerard for services
rendered in fiscal years 1996 and 1995, respectively.
(8) Represents the personal use portion of Mr. Gerard's automobile allowance.
(9) Represents the Company's $3,625 contribution to Mr. Gerard under the
Company's Profit-Sharing Plan as described in note (3) above, plus $608 for
the personal use portion of Mr. Gerard's automobile allowance.
(10) Represents the Company's 25% match on the first 6% of Mr. Gill's fiscal
1998 401(k) contribution.
14
<PAGE>
(11) These amounts of $18,171 and $1,500 were paid to Mr. Gill for services
rendered in fiscal years 1996 and 1995, respectively. No payment was
received in fiscal year 1998 for services rendered in fiscal 1997.
(12) Prior to his employment as Chief Executive Officer of the Company and his
election as Chairman of the Board on February 13, 1998, Mr. Guild had been
an independent consultant to the Company and a Director since May 1, 1997.
(13) Includes consultant's fees and expenses of $109,689 related to work
performed in fiscal year 1997 and paid in fiscal 1998, as well as work
performed prior to February 13, 1998 and paid in fiscal 1998. The total also
includes Director's fees of $11,300 from the beginning of fiscal 1998 until
February 13, 1998, income realized upon receipt of company stock of $3,015
as a result of the Company's August 14, 1998 grant of stock to members of
its Board of Directors and $1,498 for the Company's 25% match on the first
6% of Mr. Guild's fiscal 1998 401(k) contribution.
(14) Includes Director's fees earned and paid in fiscal year 1997. Although Mr.
Guild performed consulting services for the Company in fiscal 1997, no
payments to him were made until the following year.
(b) STOCK OPTIONS
Set forth below is an Option/SAR Grants table concerning individual grants
of stock options and SARs made during fiscal 1998 to each of the named executive
officers.
OPTIONS/SAR GRANTS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SECURITIES PERCENT OF TOTAL OPTIONS/ OF BASE
UNDERLYING OPTIONS/ SARS GRANTED TO PRICE EXPIRATION
SARS GRANTED EMPLOYEES IN FY 1998(1) ($/SH) DATE
------------------- --------------------------- ----------- -----------
<S> <C> <C> <C> <C>
Graham R. Briggs.......................... -- -- --
Roland S. Gerard.......................... -- -- --
John I. Gill.............................. -- -- --
Carl H. Guild, Jr.(2)..................... 20,000 18.8% $ 5.000 2/16/08
10,000 9.4% $ 5.500 2/16/08
10,000 9.4% $ 6.050 2/16/08
10,000 9.4% $ 6.655 2/16/08
945 0.9% $ 5.420 8/14/03
</TABLE>
- ------------------------
(1) In fiscal year 1998, options to purchase a total of 106,369 shares of the
Company's Common Stock were granted to employees of the Company.
(2) Common Stock which were granted to Mr. Guild under the 1991 Plan on
11/19/98. These options are exercisable as follows: (i) 60,000 shares became
exercisable on 11/19/98 at an exercise price of $4.00 per share, (ii) 20,000
shares are exercisable on 6/30/99 at an exercise price of $4.00, and (iii)
20,000 shares are exercisable on 9/30/99 at an exercise price of $4.00.
The above table does not include outstanding options granted to the
Company's former president, Dale G. Peterson, on March 2, 1998 to purchase
20,000 shares of Common Stock under the 1991 Plan. These shares were granted and
exercisable on that date at an exercise price of $6.38 per share. An additional
30,000 shares, granted on March 2, 1998, but not exercisable until anniversary
dates of Mr. Peterson's employment in subsequent years, were cancelled as a
result of Mr. Peterson's resignation effective September 19, 1998.
15
<PAGE>
Set forth below is a table concerning each exercise of stock options (or
tandem SARs) and freestanding SARs during fiscal 1998 by each of the named
executive officers and the value at October 3, 1998 of unexercised options and
SARs.
AGGREGATED OPTION/SAR EXERCISES FOR FISCAL YEAR ENDED OCTOBER 3, 1998 AND
FISCAL YEAR OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
OPTIONS
NUMBER OF UNEXERCISED AT FISCAL YEAR
SHARES OPTIONS AT FISCAL YEAR-END END(1)
ACQUIRED ON VALUE ---------------------------- ---------------
NAME EXERCISE REALIZED EXERCISABLE NOT EXERCISABLE EXERCISABLE
- ------------------------------------ ----------------- ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Carl H. Guild, Jr................... -- -- 24,945(2) 46,000(3) --
Roland S. Gerard.................... -- -- --(4) -- --
<CAPTION>
NAME NOT EXERCISABLE
- ------------------------------------ -------------------
<S> <C>
Carl H. Guild, Jr................... --
Roland S. Gerard.................... --
</TABLE>
- ------------------------
(1) Value is based on the difference between the option exercise price and the
fair market value at October 3, 1998 ($4.25 per share) multiplied by the
number of shares underlying the in-the-money portion of the option.
(2) This represents grants of options under the 1991 Plan to buy 4,000 shares
granted on May 1, 1997 at an exercise price of $8.875 per share, 20,000
shares granted on February 16, 1998 at an exercise price of $5.000 per
share, and 945 shares granted on August 14, 1998 at an exercise price of
$5.420 per share.
(3) This represents unexercisable grants of options under the 1991 Plan to buy
16,000 shares granted on May 1, 1997 at the following exercise dates and
prices: (i) 4,000 shares on May 1, 1999 at an exercise price of $9.76 per
share;(ii) 4,000 shares on May 1, 2000 at an exercise price of $10.74 per
share;(iii) 4,000 shares on May 1, 2001 at an exercise price of $11.81 per
share; and (iv) 4,000 shares on May 1, 2002 at an exercise price of $12.99
per share. In addition, there are unexercisable grants of options under the
1991 Plan to buy 30,000 shares granted on February 16, 1998 at the exercise
dates and prices detailed in the above table on fiscal 1998 Stock Option/
SAR Grant activity.
(4) Options to purchase 100,000 shares of Common Stock under the 1991 Plan
granted to Mr. Gerard in previous years have all expired due to
termination of Mr. Gerard's employment with the Company in February 1998.
(c) COMPENSATION OF DIRECTORS
Directors who were not regular employees of the Company received a fee of
$1,200 for attendance at all meetings attended during fiscal years 1997 and
1998. In addition, each outside director is the recipient of an annual retainer
of $2,800 paid in arrears in quarterly increments of $700. During fiscal years
1997 and 1998, outside directors also received a fee of $500 for each meeting of
a committee of the Board of Directors they attended. Mr. Lerner, who was an
employee until his resignation on November 19, 1998, was also authorized to
receive the retainer and fees for attendance at meetings.
In February 1997, the Board approved additional director compensation that
was intended to grant 1,000 share stock options under the Company's 1991 Stock
Option Plan and also to grant 500 shares of Technical Communications
Corporation's common stock to all directors on a pro rata basis effective on the
date of the 1998 Annual Meeting of the Board of Directors. At the 1998 Annual
Meeting on August 14, a total of 4,669 immediately exercisable options were
granted with a term of five (5) years from the date of the grant at an exercise
price of $5.42, 85% of fair market value. Seven different directors received
these grants. In addition, a total of 2,865 shares of TCC common stock were
granted to ten different directors and former directors at a price per share of
$6.38 on August 14, 1998.
16
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows, as of December 11, 1998, the ownership of common
stock of the Company by any person or group who is known to the Company to be
the beneficial owner of more than 5% of the Company's common stock outstanding
and entitled to vote as of such date.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP PERCENT OF
NAME AND ADDRESS (NUMBER OF SHARES)(1) CLASS(1)
- -------------------------------------------------------------------------------- --------------------- -----------
<S> <C> <C>
Carl H. Guild, Jr., Trustee..................................................... 78,975(2) 6.1%(2)
Technical Communications Corporation
Employees' Stock Ownership Trust
100 Domino Drive
Concord, MA 01742-2892
Martindale Andres & Company, Inc................................................ 77,000(3) 5.9%(3)
200 Four Falls Corporate Center, Suite 200
West Conshohocken, PA 19428
M. Mahmud Awan.................................................................. 199,028(4) 15.4%(4)
c/o TechMan International Corporation
240 Sturbridge Rd.
Charlton City, MA 01506
Quest Advisory Corporation...................................................... 127,200(5) 9.8%(5)
c/o Charles M. Royce
1414 Avenue of the Americas
New York, NY 10019
</TABLE>
- ------------------------
(1) Unless otherwise indicated, each of the persons named in the table has sole
voting and investment power with respect to the shares set forth opposite
such person's name. Information with respect to beneficial ownership is
based upon information furnished by each stockholder.
(2) Held as Trustee for the ESOP and represents shares that are allocated to the
participants. Until vested shares of the terminated plan have been
distributed, each participant may direct the Trustee as to the manner in
which shares allocated to his or her account shall be voted. The ESOP
provides that the Trustee shall vote any shares allocated to participants'
accounts as to which they have not received voting instructions in the same
proportion as to which voting rights are received. Mr. Guild disclaims
beneficial ownership of these 78,975 shares. As a result of Internal Revenue
Service determination that the October 1, 1997 termination of the Company's
ESOP Plan does not affect the qualified status of the Plan, all vested
shares of the terminated plan will be distributed early in fiscal year 1999.
(3) The nature of ownership of Martindale Andres & Company ("MAC") as set forth
herein is based upon a Schedule 13D filed with the Securities and Exchange
Commission ("SEC") on September 15, 1998. The Schedule 13D was filed on
behalf of a "group" (as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended) consisting of Dr. Mahmud Awan, Philip A.
Phalon, Robert B. Bregman and William C. Martindale, Jr., principal of MAC.
Of the 77,000 shares, Mr. Martindale has sole dispositive and voting power
over 10,000 shares and shared dispositive and voting power over 67,000
shares.
(4) Dr. Awan individually owns 118,850 shares of Common Stock. TechMan
International Corporation, which is wholly owned by Dr. Awan, owns 80,178
shares of Common Stock.
(5) The nature of ownership of Quest Advisory Corporation ("Quest") as set forth
herein is based upon their Schedule 13G on file with the SEC. Quest in its
capacity as investment advisor may be deemed the beneficial owner of the
127,200 shares indicated in the above table, which shares are owned by
numerous clients of Quest. Mr. Royce disclaims beneficial ownership of the
127,200 shares owned by Quest.
17
<PAGE>
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares and percentage of common
stock of the Company outstanding and entitled to vote beneficially owned by each
director and named executive officer as well as all directors and officers as a
group as of December 11, 1998:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
POSITIONS AND OF BENEFICIAL
OFFICES WITH OWNERSHIP PERCENT OF
NAME OF DIRECTOR OR OFFICER THE COMPANY (# OF SHARES)(1) CLASS(1)
- ------------------------------------------------ ---------------------------- ---------------------- -----------
<S> <C> <C> <C>
Dr. Mahmud Awan................................. Director, Chairman of the 199,028(2) 14.1%
Board
David A. Brown.................................. Director 300 0.0%
Mitchell B. Briskin............................. Director 417(3) 0.0%
John I. Gill.................................... Executive Vice President 19,551(4) 1.4%
Carl H. Guild, Jr............................... Director, Vice-Chairman, CEO 85,413(5) 6.1%
and President
Donald Lake..................................... Director 417(3) 0.0%
Herbert A. Lerner............................... Former Director, Treasurer, 5,504(6) 0.4%
CFO
Robert T. Lessard............................... Director 1,418(7) 0.1%
Thomas E. Peoples............................... Director 417(3) 0.0%
Dale G. Peterson................................ Former President 20,000(8) 1.4%
Philip A. Phalon................................ Former Director 3,750(9) 0.3%
All directors and officers as a group........... 336,215(10) 23.9%
</TABLE>
- ------------------------
(1) Unless otherwise indicated, each of the persons named in the table has sole
voting and investment powers with respect to the shares set forth opposite
such person's name. With respect to each person or group, percentages are
calculated based on the number of shares outstanding plus shares that such
person or group may acquire within sixty (60) days upon the exercise of
stock options.
(2) Includes 80,178 shares owned by TechMan International, which is wholly owned
by Dr. Awan.
(3) Includes 278 shares each that may be acquired by Messrs. Briskin, Lake and
Peoples within sixty days upon exercise of stock options.
(4) Includes 9,551 shares currently allocated to Mr. Gill under the ESOP.
(5) Includes 84,945 shares that may be acquired by Mr. Guild within sixty (60)
days upon exercise of stock options. Excludes 78,975 held by the ESOP, which
Mr. Guild, as Trustee of the ESOP, may be deemed to own beneficially. Mr
Guild disclaims beneficial ownership of these shares.
(6) Includes 4,845 shares that may be acquired by Mr. Lerner within sixty (60)
days upon exercise of stock options. With respect to shares now owned by
him, Mr. Lerner shares the voting and investment powers with his wife.
(7) Includes 945 shares that may be acquired by Mr. Lessard within sixty days
upon exercise of stock options.
(8) Includes 20,000 shares that may be acquired by Mr. Peterson within sixty
days upon exercise of stock options. Mr. Peterson resigned from the Company
on September 19, 1998.
(9) Includes 2,750 shares that may be acquired by Mr. Phalon within sixty (60)
days upon exercise of stock options.
(10) Includes 114,319 shares that the directors and officers have the right to
acquire within 60 days of December 11, 1998, upon the exercise of stock
options.
18
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Carl H. Guild, Jr., Vice Chairman of the Board, Chief Executive Officer and
President of the Company, is Trustee of the Technical Communications Corporation
Employees' Stock Ownership Trust. Herbert A. Lerner, who resigned as a Director
of the Company and as Company Treasurer and Chief Financial Officer on November
19, 1998, was formerly a Trustee of the Employees' Stock Ownership Plan. James
A. McCalmont, a former Director of the Company, was also a Trustee of the
Employees' Stock Ownership Trust until his resignation from the Board in fiscal
year 1998. At its August 27, 1997 meeting, the Board of Directors voted to
terminate the Employee Stock Ownership Plan effective October 1, 1997.
Edward E. Hicks, Esq., the Company's Secretary and Clerk, is a member of a
law firm that provides legal services to the Company.
Lawrence A. Kletter, Esq., who resigned as a director during fiscal year
1997, is a member of a law firm that provided legal services to the Company.
During fiscal years 1997 and 1996, the Company incurred expenses of $116,038
and $96,360, respectively, to FutureComms, Inc., a privately held
telecommunications software consulting services company. FutureComms is owned
and operated by Michelle D. Gerard, the wife of the Company's President and CEO
prior to his termination in February 1998. FutureComms' work ended in August
1997.
During 1996, the Company leased a sales office from Arnold McCalmont, the
Chairman of the Board; the lease payment for the year was $1.00. The fair market
value of such rent was estimated at less than $5,000.
On November 19, 1998, the Company settled certain litigation as set forth in
Item 3 above. Pursuant to such settlement, the Company, Arnold McCalmont,
Herbert A. Lerner, Robert T. Lessard, Carl H. Guild, Jr., Mitchell B. Briskin,
Donald Lake and Thomas E. Peoples entered into a settlement agreement with M.
Mahmud Awan and Philip Phalon. The settlement agreement and standstill agreement
set forth mutual full releases as to the litigation and also include provisions
requiring among other things (i) the Company to reimburse the former proxy
contestants' expenses in payments aggregating $395,000, (ii) the dissolution of
the Awan/Phalon group created to facilitate the proxy contest, and (iii) the
former proxy contestants to abide by certain standstill provisions until October
1, 2000.
An additional related transaction, dealing with the Company's minority
investment in Net2Net Corporation in 1995 and subsequent developments related to
the sale of Net2Net to Visual Networks in May, 1998 are fully described in Note
12 of the Notes to the Consolidated Financial Statements in Technical
Communication's Corporation's 1998 Annual Report.
19
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
[a](1) The following Consolidated Financial Statements, Notes thereto and Independent
Auditors' Report of the Company are filed on the pages listed below, as part of
Part II, Item 8 of this report:
</TABLE>
<TABLE>
<CAPTION>
PAGE
----------
<S> <C> <C>
Consolidated Balance Sheets for the Years Ended October 3, 1998 and September 27, 1997... F-1
Consolidated Statements of Operations for the Years Ended October 3, 1998, September 27,
1997, and September 28, 1996............................................................. F-2
Consolidated Statements of Cash Flows for the Years Ended October 3, 1998, September 27,
1997, and September 28, 1996............................................................. F-3
Consolidated Statements of Stockholders' Equity for the Years Ended October 3, 1998,
September 27, 1997, and September 28, 1996............................................... F-4
Notes to Consolidated Financial Statements............................................... F-5-F-18
Report of Independent Auditors........................................................... F-19
[a](2) The following Consolidated Financial Statement Schedule is included herein:
Schedule II--Valuation Accounts and Report of Independent Auditors....................... F-20
(a)3 List of Exhibits
3.3(a)* Articles of Organization of the Company
3.3(b)** By-laws of the Company
10.1 Employment Agreement for Carl H. Guild, Jr.
10.2 Standstill Agreement
21 List of Subsidiaries of the Company
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference to previous filings with the Commission
** Incorporated by reference to the Company's 8-K filed on May 5, 1998.
(b) REPORTS ON FORM 8-K
During the fourth quarter of fiscal 1998, Technical Communications
Corporation made four (4) filings on Form(s) 8-K. Current Reports on Form(s)
8-K were filed with the Securities and Exchange Commission on July 9, 1998,
on July 16, 1998, on August 14, 1998 and on August 27, 1998. In all cases,
Item 5 was reported.
20
<PAGE>
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.
<TABLE>
<S> <C> <C>
TECHNICAL COMMUNICATIONS CORPORATION
By: /s/ CARL H. GUILD, JR.
------------------------------------------
Carl H. Guild, Jr.
CHIEF EXECUTIVE OFFICER AND PRESIDENT
VICE CHAIRMAN OF THE BOARD, DIRECTOR
December 16, 1998
</TABLE>
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.
<TABLE>
<S> <C> <C>
By: /s/ DR. MAHMUD AWAN
------------------------------------------
Dr. Mahmud Awan
CHAIRMAN OF THE BOARD, DIRECTOR
December 16,1998
By: /s/ MITCHELL B. BRISKIN
------------------------------------------
Mitchell B. Briskin
DIRECTOR
December 16, 1998
By: /s/ DAVID A. B. BROWN
------------------------------------------
David A. B. Brown
DIRECTOR
December 16, 1998
By: /s/ DONALD LAKE
------------------------------------------
Donald Lake
DIRECTOR
December 16, 1998
By: /s/ ROBERT T. LESSARD
------------------------------------------
Robert T. Lessard
DIRECTOR
December 16, 1998
By: /s/ THOMAS E. PEOPLES
------------------------------------------
Thomas E. Peoples
DIRECTOR
December 16, 1998
By: /s/ LEONARD H. CANDEE
------------------------------------------
Leonard H. Candee
INTERIM TREASURER AND PRINCIPAL FINANCIAL
OFFICER
December 16, 1998
</TABLE>
21
<PAGE>
CONSOLIDATED BALANCE SHEETS
OCTOBER 3, 1998, AND SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 740,049 $ 1,876,748
Accounts receivable, less allowance for doubtful accounts
of $70,000 and $25,000......................................................... 8,196,296 3,259,549
Unbilled revenue................................................................. -- 198,038
Inventories (Note 3)............................................................. 3,119,291 3,423,979
Refundable income taxes (Note 7)................................................. 361,532 292,629
Deferred income taxes (Note 7)................................................... 499,521 830,382
Other current assets............................................................. 88,483 117,947
------------- -------------
Total current assets......................................................... 13,005,172 9,999,272
------------- -------------
Equipment and leasehold improvements (Note 16)..................................... 4,818,515 4,382,655
Less accumulated depreciation and amortization................................... 3,773,457 3,200,075
------------- -------------
Equipment and leasehold improvements--net.................................... 1,045,058 1,182,580
------------- -------------
Goodwill........................................................................... 1,614,131 1,614,131
Less accumulated amortization.................................................... 716,443 501,533
------------- -------------
Goodwill--net................................................................ 897,688 1,112,598
------------- -------------
Available for Sale Securities (Note 18)............................................ 900,800 250,800
Other assets....................................................................... 324,011 347,649
------------- -------------
$ 16,172,729 $ 12,892,899
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS'EQUITY
Current Liabilities:
Line of Credit (Note 6)............................................................ $ 2,250,000 $ --
Accounts payable................................................................. 302,742 861,633
Accrued liabilities:
Compensation and related expenses............................................ 401,596 290,093
Other (Note 4)............................................................... 2,241,434 1,693,269
------------- -------------
Total current liabilities.................................................... 5,195,772 2,844,995
------------- -------------
Other long-term liabilities (Notes 7 and 15)....................................... 456,356 537,858
Commitments and contingencies (Notes 11, 14, 15 and 20)
Stockholders' Equity:
Common stock--par value $.10 per share; authorized
3,500,000 shares, issued 1,283,238 shares
and 1,273,703 shares........................................................... 128,324 127,370
Treasury stock at cost, 30,678 shares and 10,000 shares
(Notes 6 and 17)............................................................... (241,861) (80,000)
Additional paid-in capital (Note 17)............................................. 1,266,197 1,526,110
ESOP deferred compensation (Notes 6 and 17)...................................... -- (527,772)
Unrealized gain on investment, net (Note 18)..................................... 422,000 --
Retained earnings................................................................ 8,945,941 8,464,338
------------- -------------
Total stockholders' equity................................................... 10,520,601 9,510,046
------------- -------------
$ 16,172,729 $ 12,892,899
------------- -------------
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-1
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 3, 1998, SEPTEMBER 27, 1997, AND SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales (Note 13)................................................. $ 13,855,781 12,258,638 $ 14,012,802
Cost of sales....................................................... 5,462,608 5,153,663 5,781,414
------------- ------------- -------------
Gross profit................................................ 8,393,173 7,104,975 8,231,388
------------- ------------- -------------
Operating expenses:
Selling, general and administrative expenses.................... 6,220,992 6,282,108 5,582,553
Product development costs....................................... 1,414,746 2,378,564 1,955,852
------------- ------------- -------------
Total operating expenses.................................... 7,635,738 8,660,672 7,538,405
------------- ------------- -------------
Operating profit (loss)..................................... 757,435 (1,555,697) 692,983
Other income (expense):
Investment income............................................... 24,068 128,722 239,142
Interest expense................................................ (142,056) (63,979) (243,472)
Other........................................................... 2,690 (167,047) 20,876
------------- ------------- -------------
Total other income (expense)................................ (115,298) (102,304) 16,546
------------- ------------- -------------
Income (loss) before income taxes................................... 642,137 (1,658,001) 709,529
Provision (benefit) for income taxes (Note 7)....................... 160,534 (414,500) 177,382
------------- ------------- -------------
Net income (loss)................................................... $ 481,603 $ (1,243,501) $ 532,147
------------- ------------- -------------
------------- ------------- -------------
Net income (loss) per common share (Notes 2 and 5)
Basic........................................................... $0.38 $(0.98) $0.42
Diluted......................................................... $0.37 $(0.98) $0.41
Weighted average common shares outstanding used in computation
(Notes 2 and 5)
Basic........................................................... 1,281,924 1,270,625 1,257,384
Diluted......................................................... 1,288,007 1,270,625 1,298,387
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 3, 1998, SEPTEMBER 27, 1997, AND SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...................................................... $ 481,603 $ (1,243,501) $ 532,147
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization...................................... 873,642 911,331 882,905
Net loss on disposal of fixed assets............................... 20,000 192,425 --
Non-cash compensation.............................................. 18,263 -- --
Deferred income taxes.............................................. 9,907 (70,904) (427,077)
Compensation associated with ESOP.................................. -- 167,403 246,136
Changes in assets and liabilities:
(Increase) decrease in accounts receivable......................... (4,936,747) (40,425) 1,792,842
Decrease (increase) in unbilled revenue............................ 198,038 (198,038) --
Decrease (increase) in inventories................................. 304,688 (808,207) (187,944)
(Increase) decrease in refundable income taxes..................... (68,903) (292,629) 139,944
Decrease in other current assets................................... 29,464 81,175 143,634
Increase (decrease) in accounts payable and accrued liabilities.... 114,723 (277,086) 689,165
----------- ------------- ------------
Net cash (used) provided by operating activities............... (2,955,322) (1,578,456) 3,811,752
----------- ------------- ------------
INVESTING ACTIVITIES:
Additions to equipment and leasehold improvements.................. (511,423) (533,177) (597,452)
Proceeds from disposal of equipment................................ -- 38,884 --
Cancellation of life insurance policies............................ 152,787 -- --
Long-term receivable............................................... 114,665 (104,841) --
Investment in capitalized software................................. (275,101) (34,104) (48,240)
Other assets....................................................... 1,500 (796) (7,900)
Cash paid for Datotek acquisition.................................. -- -- (44,511)
----------- ------------- ------------
Net cash (used) by investing activities........................ (517,572) (634,034) (698,103)
----------- ------------- ------------
FINANCING ACTIVITIES:
Exercise of stock options, including income tax benefits........... 88,689 53,387 85,723
Borrowings under line of credit.................................... 4,500,000 500,000 --
Payment of line of credit.......................................... (2,250,000) (500,000) --
Payment of debt.................................................... (2,494) (2,345,175) (696,136)
----------- ------------- ------------
Net cash provided (used) by financing activities............... 2,336,195 (2,291,788) (610,413)
----------- ------------- ------------
Net (decrease) increase in cash and cash equivalents............... (1,136,699) (4,504,278) 2,503,236
Cash and cash equivalents at beginning of year......................... 1,876,748 6,381,026 3,877,790
----------- ------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................... $ 740,049 $ 1,876,748 $ 6,381,026
----------- ------------- ------------
----------- ------------- ------------
Supplemental disclosures:
Interest paid...................................................... $ 139,063 $ 70,991 $ 243,472
Income taxes paid (net of refunds received)........................ 108,765 408,193 103,497
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 3, 1998, SEPTEMBER 27, 1997, AND SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Shares of Common Stock:
Beginning balance................................................. 1,273,703 1,264,496 1,254,426
Exercise of stock options......................................... 9,535 9,207 10,070
------------- ------------- -------------
Ending balance................................................ 1,283,238 1,273,703 1,264,496
------------- ------------- -------------
------------- ------------- -------------
Common Stock at par value:
Beginning balance................................................. $ 127,370 $ 126,450 $ 125,443
Exercise of stock options......................................... 954 920 1,007
------------- ------------- -------------
Ending balance................................................ 128,324 127,370 126,450
------------- ------------- -------------
Additional Paid-in Capital:
Beginning balance................................................. 1,526,110 1,473,643 1,388,927
Exercise of stock options......................................... 87,735 52,467 84,716
Termination of ESOP (Note 17)..................................... (347,648) -- --
------------- ------------- -------------
Ending balance................................................ 1,266,197 1,526,110 1,473,643
------------- ------------- -------------
ESOP Deferred Compensation:
Beginning balance................................................. (527,772) (695,175) (941,311)
Principal payments on ESOP debt (Note 6).......................... -- 167,403 246,136
Termination of ESOP (Note 17)..................................... 527,772 -- --
------------- ------------- -------------
Ending balance................................................ -- (527,772) (695,175)
------------- ------------- -------------
Unrealized Gain on Investment:
Beginning balance................................................. -- -- --
Available for sale investment (Note 18)........................... 422,000 -- --
------------- ------------- -------------
Ending balance................................................ 422,000 -- --
------------- ------------- -------------
Retained Earnings:
Beginning balance................................................. 8,464,338 9,707,839 9,175,692
Net income (loss)................................................. 481,603 (1,243,501) 532,147
------------- ------------- -------------
Ending balance................................................ 8,945,941 8,464,338 9,707,839
------------- ------------- -------------
Treasury Stock:
Beginning balance................................................. (80,000) (80,000) (80,000)
Termination of ESOP (Note 17)..................................... (180,124) -- --
Issuance of stock grants (Note 17)................................ 18,263 -- --
------------- ------------- -------------
Ending balance................................................ (241,861) (80,000) (80,000)
------------- ------------- -------------
Total stockholders' equity.......................................... $ 10,520,601 $ 9,510,046 $ 10,532,757
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) COMPANY OPERATIONS
Technical Communications Corporation, incorporated in 1961 in Massachusetts,
and its wholly-owned subsidiaries (the Company) operate in one industry segment:
the design, development, manufacture, distribution and sale of communications
security devices and systems.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, TCC Foreign Sales Corporation (FSC), a
qualified foreign sales corporation, and TCC Investment Corporation, a
Massachusetts Security Corporation. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits at banks, and certificates
of deposit and other investments (including mutual funds) readily convertible
into cash. Cash equivalents are stated at cost, which approximates market value.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful life of the asset. When assets are retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recognized in income for the period. The cost of
maintenance and repairs is charged to income as incurred; significant renewals
and betterments are capitalized. (Note 16)
CAPITALIZED SOFTWARE COSTS
The Company sells software as a component of its communications systems.
Certain computer software costs are capitalized in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," and are reported at the
lower of unamortized cost or net realizable value. Upon initial product release,
these costs are amortized based upon the straight-line method, over three years.
As of October 3, 1998, the Company's aggregate investment in capitalized
software was $357,445 ($327,658 after accumulated amortization).
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist primarily of the costs of goodwill, patents and
trademarks purchased in business acquisitions. Intangible assets are amortized
on a straight-line basis over either 7 1/2 years or an estimated useful life,
whichever is shorter. The Company accounts for long-lived and intangible assets
in accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of".
The Company acquired substantially all of the assets of Datotek, Inc. in May
1995; the acquisition was accounted for as a purchase and, accordingly, an
allocation of purchase cost to the Company's assets and liabilities was made to
reflect fair values. The allocation resulted in unallocated excess purchase cost
over net assets acquired (goodwill) of $1,614,131, which is being amortized on a
straight-line basis over 7 1/2 years.
RECOGNITION OF REVENUE
The Company generally recognizes revenue upon shipment of products, except
in the case of long-term contracts for which the revenue is recognized under the
percentage-of-completion method. In 1998, the Company recorded a significant
amount of deferred revenue due to customer billings in excess of the revenue
recognized under the percentage of completion accounting method.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
RECLASSIFICATION
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the 1998 presentation.
INCOME TAXES
The Company records income tax expense in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes," which
requires the use of the liability method in accounting for income taxes. Under
the 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 and tax bases of assets and liabilities.
WARRANTY COSTS
The Company provides for warranty costs at the time of sale based upon
actual experience.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
that value.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a.) Cash and Cash Equivalents, Accounts Receivable and Accounts Payable--The
carrying amount of these assets and liabilities on the Company's
consolidated balance sheet approximates their fair value because of the
short maturity of these instruments.
b) Available for Sale Investment--The carrying amount of this asset on the
Company's consolidated balance sheet equals fair market value based on
market valuation.
c.) Line of Credit--The carrying amount of this liability on the Company's
consolidated balance sheet approximates its fair value because of the short
maturity of this instrument.
EARNINGS PER SHARE
At the beginning of fiscal year 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which
establishes standards for computing and presenting earnings per share for
entities with publicly held common stock (Note 5). As a result, all prior period
EPS data has been restated to conform with the provisions of this statement,
which includes the presentation of both a "Basic" and a "Diluted" EPS. Basic EPS
has been computed by dividing net income by a weighted average number of shares
of common stock outstanding during the period. In computing diluted EPS, only
stock options that are dilutive--those that reduce earnings per share--have been
calculated 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.
AVAILABLE FOR SALE INVESTMENT
Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", the Company's
investments in marketable equity securities are accounted for at market value,
with the difference between cost and market value, net of related tax effects,
recorded currently to stockholders equity as "Net Unrealized Gain on Available
for Sale Investment" (Note 18).
FISCAL YEAR-END POLICY
The Company by-laws call for its fiscal year to end on the Saturday closest
to the last day of September, unless other-wise decided by its Board of
Directors. The year ended October 3, 1998, included 53 weeks, while the years
1997 and 1996 ended on September 27, 1997 and September 28, 1996 each included
52 weeks.
NEWLY ISSUED PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures About Segments of an Enterprise and Related Information". SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components. SFAS 131 establishes standards for the way that public companies
report information about operating segments in financial statements. This
Statement supercedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise", but retains the
requirement to report information about major customers. The Statements are
effective for fiscal years beginning
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
after December 15, 1997. The Company does not believe that the adoption of these
Statements will have a material effect on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. Management
does not expect the adoption of this statement to have a material impact on its
financial condition or results of operations, based upon current business
practices.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27,
1998 1997
------------ -------------
<S> <C> <C>
Finished goods............................................................. $ 173,141 $ 64,781
Work in process............................................................ 776,047 1,220,152
Raw materials and supplies................................................. 2,170,103 2,139,046
------------ -------------
Total inventories.......................................................... $ 3,119,291 $ 3,423,979
------------ -------------
------------ -------------
</TABLE>
(4) OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27,
1998 1997
------------ -------------
<S> <C> <C>
Reserve for product warranty............................................... $ 167,772 $ 163,480
Customer advance payments.................................................. 83,885 149,011
Sales representative commissions........................................... 135,514 746,833
Deferred revenues.......................................................... 447,375 --
Customer support agreements................................................ 914,585 519,839
Income taxes payable....................................................... 289,513 --
Other...................................................................... 202,790 114,106
------------ -------------
Total accrued liabilities.................................................. $ 2,241,434 $ 1,693,269
------------ -------------
------------ -------------
</TABLE>
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share", basic and diluted EPS
were calculated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------- ----------
<S> <C> <C> <C>
BASIC NET INCOME/(LOSS)............................................. $ 481,603 $ (1,243,501) $ 532,147
---------- ------------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING................................. 1,281,924 1,270,625 1,257,384
Outstanding dilutive stock options with option price less than
average market price.............................................. 6,083 -- 41,003
---------- ------------- ----------
ADJUSTED WEIGHTED AVERAGE SHARES.................................... 1,288,007 1,270,625 1,298,387
---------- ------------- ----------
BASIC EARNINGS PER SHARE............................................ $0.38 $(0.98) $0.42
---------- ------------- ----------
---------- ------------- ----------
DILUTED EARNINGS PER SHARE.......................................... $0.37 $(0.98) $0.41
---------- ------------- ----------
---------- ------------- ----------
</TABLE>
Outstanding potentially dilutive stock options which were not included in
the above calculations for the respective fiscal years were as follows: 138,316
in 1998; 261,155 in 1997; and 192,902 in 1996.
(6) DEBT
At October 3, 1998, the Company had a $5,000,000 line of credit (increased
from $3,500,000 on May 1, 1998) at a rate of prime plus 1/2 of 1% (8.75% at
October 3, 1998). Availability under the line of credit has been reduced by
$911,526 for outstanding standby letters of credit (see Note 11). During the
twelve months ended October 3, 1998, the Company borrowed $4,500,000 against its
credit line in order to accommodate additional working capital requirements in
conjunction with a $7.4 million sale which was substantially completed during
the final quarter of fiscal 1998. The Company repaid $2,250,000 during the year,
reducing the outstanding indebtedness to $2,250,000 at the end of fiscal 1998.
On October 8, 1998, the Company repaid the entire amount borrowed following
receipt of payment in full of the outstanding receivable balance on the $7.4
million sale.
Other than outstanding standby letters of credit, the Company had no
borrowings under the line of credit in 1997 or 1996. This line of credit is
secured by a pledge of substantially all the assets of the Company. This line of
credit expires on May 1, 1999, unless renewed.
On November 17, 1989, the Company established the Technical Communications
Corporation Employees' Stock Ownership Trust (the "Trust") for the benefit of
its employees. During 1990 and 1991, the Trust borrowed $1,212,500 and
$1,287,488, respectively, from two banks, and purchased 190,350 shares of the
Company's common stock at fair market value. The Company acted as guarantor on
these loans and, as a result, recorded the principal balance of such loans on
its balance sheet as long-term debt with an offsetting charge to "ESOP deferred
compensation" within the Stockholders' Equity section. On April 30, 1997, the
Company provided a loan of $82,702 to the Trust in order to pay off the
remaining balance of the 1990 bank loan. This new loan, which bears interest at
9% per annum, required equal monthly payments of principal of $3,446, commencing
on May 31, 1997. On August 28, 1997, the Company provided a second loan of
$472,222 to the Trust in order to pay off the 1991 bank loan. This second
Company loan to the Trust bore interest at 13.6% per annum and required equal
monthly principal payments of $9,838 beginning on September 28, 1997.
At its August 27, 1997 meeting, the Board of Directors voted to terminate
the Employee Stock Ownership Plan effective October 1, 1997. Actual termination
of the Company's ESOP was effected in
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) DEBT (CONTINUED)
fiscal 1998 by transferring all remaining shares that had not been allocated to
participants to Treasury Stock (Note 17).
The Company made contributions to the Trust equal to the monthly payment of
principal and interest on the ESOP loans as they became due. Because the payment
of principal resulted in the release of shares from collateral, which shares
were then available for allocation to employees, the principal portion of these
contributions was recorded as compensation expense. Such contributions were,
therefore, expensed to compensation and interest when they were made or accrued.
The compensation and interest elements are as follows:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
---------- ------------- -------------
<S> <C> <C> <C>
Compensation................................................. $ -- $ 167,403 $ 246,136
Interest..................................................... -- 49,104 71,996
---------- ------------- -------------
Total contributions.......................................... $ -- $ 216,507 $ 318,132
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
On May 31, 1995, the Company completed an asset purchase of the secure
communications business of Datotek, Inc., a subsidiary of AT&T Corp., for
$3,687,000. This acquisition was funded partly by the Company's cash reserves
and partly through loans amounting to $2,250,000 from two banks. These loans,
payable in equal installments of principal over a period of five years, plus
interest at The First National Bank of Boston's prime rate plus 1/2 of 1%, were
paid in full during November 1996.
(7) INCOME TAXES
The provisions (credits) for income taxes consist of the following:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
---------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal......................................................... $ 29,629 $ (294,024) $ 502,784
State........................................................... 26,706 113,495 132,028
---------- ------------- -------------
Total current taxes............................................... 56,335 (180,529) 634,812
---------- ------------- -------------
Deferred:
Federal......................................................... 111,641 (16,519) (365,442)
State........................................................... (7,442) (217,452) (91,988)
---------- ------------- -------------
Total deferred taxes.............................................. 104,199 (233,971) (457,430)
---------- ------------- -------------
Total provision (benefit)......................................... $ 160,534 $ (414,500) $ 177,382
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
The provisions for income taxes are different from those that would be
obtained by applying the statutory federal income tax rate to earnings before
income taxes due to the following:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
---------- ------------- -------------
<S> <C> <C> <C>
Tax at U.S. statutory rate........................................ $ 220,210 $ (563,720) $ 241,240
Benefit of Foreign Sales Corp..................................... (74,269) -- (23,604)
State income taxes, net of Federal benefit........................ 12,714 (103,957) 28,260
Tax-exempt interest............................................... -- -- (6,875)
Other............................................................. 32,933 (17,912) 5,861
Increase (reduction) in valuation allowance....................... (31,054) 271,089 (67,500)
---------- ------------- -------------
Total............................................................. $ 160,534 $ (414,500) $ 177,382
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27,
1998 1997
------------ -------------
<S> <C> <C>
NOL carryforward................................................................ $ -- $ 543,891
FAS 115 investment.............................................................. (228,000) --
Goodwill........................................................................ 126,671 88,823
Inventory reserve............................................................... 457,158 426,247
Warranty reserve................................................................ 67,562 98,237
Payroll related accruals........................................................ 476,082 144,589
Other........................................................................... 193,914 153,515
------------ -------------
Total........................................................................... 1,093,387 1,455,302
Less: Valuation allowance....................................................... $ (593,866) $ (624,920)
------------ -------------
Total........................................................................... $ 499,521 $ 830,382
------------ -------------
------------ -------------
</TABLE>
The valuation allowance relates to uncertainty with respect to the Company's
ability to realize prepaid tax assets.
Refundable income taxes represent estimated refunds from the Federal
government from carryback claims. All refunds are expected to be received within
the next fiscal year.
(8) STOCK OPTIONS
At the February 1992 Annual Meeting of Stockholders, the Company adopted the
Technical Communications Corporation 1991 Stock Option Plan (the SOP Plan) to
replace a previous, expired plan. The Company reserved 250,000 shares of common
stock for issuance to employees at prices not less than the fair market value on
the date of grant.
At the February 1997 Annual Meeting of Stockholders, the Company increased
the reserve for shares under the SOP Plan to 350,000. Options under this plan
generally expire ten years from the date of grant and are exercisable in
cumulative annual increments commencing one year after the date of grant.
The Company had previously adopted an Incentive Stock Option Plan (the ISO
Plan) which reserved shares of common stock for issuance to employees at prices
not less than the fair market value on the date of grant. The ISO Plan expired
December 15, 1991. Options are still outstanding, generally expire ten years
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OPTIONS (CONTINUED)
from the date of grant, and are exercisable in cumulative annual increments
commencing one year after the date of grant.
In 1991, the stockholders approved a Non-Qualified Stock Option Plan which
reserved 50,000 shares of common stock for issuance to non-employee Directors of
the Company at prices not less than the fair market value on the date of grant.
This plan was discontinued in February 1997, but options are still outstanding
and are exercisable at any time after the date of the grant until expiration,
which is five years from the date of grant.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which sets forth a fair-value based method of recognizing stock-
based compensation expense. As permitted by SFAS No. 123, the Company has
elected to continue to apply Accounting Principles Board Opinion No. 25 to
account for its stock-based compensation plans. Had compensation for awards in
fiscal years 1996 through 1998 under the Company's stock-based compensation been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on the Company's net income and
earnings per share would have been as follows:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
---------- ------------- -------------
<S> <C> <C> <C>
Net Income (loss)
As reported..................................................... $ 481,603 $(1,243,501) $ 532,147
Pro forma....................................................... $ 296,646 $(1,432,295) $ 376,293
Basic Earnings per common share
As reported..................................................... $0.38 $(0.98) $0.42
Pro forma....................................................... $0.26 $(1.23 ) $0.31
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to September 1, 1994, the resulting pro forma compensation
expense may not be representative of the amount to be expensed in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; future pro forma compensation expense may be greater as additional
options are granted.
The fair value of each option granted was estimated on the grant date using
the Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 4.08%, 6.00%, and 6.43% for 1998, 1997,
and 1996, respectively, expected life equal to each grant's vesting period (1 to
10 years), expected volatility of 100%, and an expected dividend yield of 0%.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ -----------
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF
SHARES PRICE SHARES PRICE SHARES
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Options outstanding, beginning of year.................. 261,155 $ 10.14 233,905 $ 10.13 167,550
Options granted
Option Price = Fair Market Value...................... 106,369 $ 6.58 34,700 $ 9.33 46,950
Option Price > Fair Market Value...................... -- -- 16,000 $ 11.45 50,000
Options exercised....................................... (3,100) $ 4.00 (7,500) $ 6.90 (10,070)
Options forfeited....................................... (220,025) $ 9.57 (15,950) $ 10.92 (20,525)
----------- ----------- -----------
Options outstanding, end of year........................ 144,399 $ 8.58 261,155 $ 10.14 233,905
Options exercisable..................................... 69,029 $ 8.12 72,965 $ 9.50 51,470
Weighted average fair value per share of options granted
during the year....................................... $ 4.65 $ 7.76
<CAPTION>
AVERAGE
EXERCISE
PRICE
-----------
<S> <C>
Options outstanding, beginning of year.................. $ 10.24
Options granted
Option Price = Fair Market Value...................... $ 8.71
Option Price > Fair Market Value...................... $ 11.24
Options exercised....................................... $ 11.26
Options forfeited....................................... $ 11.03
Options outstanding, end of year........................ $ 10.13
Options exercisable..................................... $ 9.78
Weighted average fair value per share of options granted
during the year....................................... $ 6.77
</TABLE>
The following summarizes certain data for options outstanding at October 3,
1998;
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER OF RANGE OF EXERCISE CONTRACTUAL
SHARES EXERCISE PRICES PRICE LIFE
----------- ----------------- ----------- -------------
<S> <C> <C> <C> <C>
Options outstanding, end of year:.......................... 78,619 $ 4.00-- $8.00 $ 5.97 9.36
55,670 $ 8.01--$12.00 $ 9.57 8.90
10,110 $ 12.01--$16.75 $ 13.61 10.20
-----------
144,399 $ 8.58 9.25
Options exercisable:....................................... 46,219 $ 4.00-- $8.00 $ 5.84
17,970 $ 8.01--$12.00 $ 9.56
4,840 $ 12.01--$16.75 $ 13.64
-----------
69,029 $ 8.12
</TABLE>
(9) PROFIT-SHARING PLAN
The Company has a qualified, contributory, trusteed profit-sharing plan
covering substantially all employees. The Company's policy is to fund
contributions as they are accrued. The contributions are allocated based on the
employee's proportionate share of total compensation. The Company's
contributions to the plan are determined by the Board of Directors and are
subject to other specified limitations. No provision for contributions was made
for 1997. However, the Board of Directors approved a corporate match of 25 cents
per dollar of the first 6% of each participant's contributions to the plan for
fiscal 1998 and elected to extend the 25 cents per dollar of the first 6%
throughout fiscal 1999. The Company contributed approximately $37,700 and
$46,000 in 1996 for the Company's contribution to the plan.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) EXECUTIVE INCENTIVE BONUS PLAN
The Company has an Executive Incentive Bonus Plan for the benefit of key
management employees. The bonus pool is determined based on the Company's
performance as defined in the plan. Bonuses of $104,500 were earned and accrued
in fiscal 1996 for key management employees, while no bonuses were earned and
accrued under the plan in either 1997 or 1998.
(11) OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
At October 3, 1998, and September 27, 1997, the Company was contingently
liable under open standby letters of credit totaling $911,526 and $839,158,
respectively. These letters of credit are issued in the ordinary course of
business to secure the Company's performance under contracts with its customers.
These letters of credit expire as provided for in the contracts, unless
exercised or renewed. To date, no letters of credit have been exercised. The
Company does not expect to incur any loss associated with these letters of
credit.
As of October 3, 1998, management believes it has no significant
concentrations of credit risk due to placement of its cash equivalents with
high-credit-quality financial institutions, and the fact that the majority of
its foreign trade receiv-ables are secured by letters of credit or foreign
credit insurance.
(12) RELATED PARTY TRANSACTIONS
During fiscal years 1997 and 1996, the Company incurred expenses of $116,038
and $96,360, respectively, with FutureComms, Inc., for telecommunications
software consulting services. FutureComms is owned and operated by Michelle D.
Gerard, the wife of the Company's President and CEO prior to his termination in
February, 1998. FutureComm's work ended in August, 1997.
Lawrence A. Kletter, Esq., who resigned as a director during fiscal 1997, is
a member of a law firm which provided legal services to the Company.
During 1996, the Company leased a sales office from Arnold McCalmont, former
Chairman of the Board; the lease payment for the year was $1.00. The fair value
of such rent was estimated at less than $5,000.
On November 19, 1998, the Company settled certain litigation as set forth in
Note 20 below.
On June 27, 1995, the Company invested $250,800 for a minority interest in
Corporation, a privately held company that develops high performance management
and analysis systems for Asynchronous Transfer Mode (ATM) networks. The Company
also paid a deposit for inventory, purchased at a discounted price, valued at
$244,200 as well as entered into a distribution agreement with Net2Net that gave
TCC the exclusive right to sell Net2Net products to certain U.S. Government
departments. As of October 3, 1998, $144,283 of the inventory had been sold and
the remaining $99,917 has been either written down or fully reserved. On May 15,
1998, Visual Networks, Inc. ("Visual"), a public company, merged with and into
Net2Net. Under the terms of the merger, all outstanding shares of Net2Net were
exchanged for an aggregate of 2,250,000 shares of Visual common stock. Pursuant
to an Escrow Agreement by State Street Bank & Trust Company to indemnify and
hold Visual and the Merger Subsidiary harmless from the breach of default of
representations, warranties, covenants and agreements given or made by Net2Net,
seven and one-half percent (7.5%) of the aggregate number of shares of Visual
Common Stock issued to Net2Net stockholders in connection with the merger are
being held in escrow until the earlier of (i) three business days after the
delivery by Visual's independent certified public accountants of its reports for
the fiscal year ended December 31, 1998 and (ii) the close of business on March
31, 1999. Pursuant to a Registration Rights Agreement, Visual has agreed to file
a registration
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) RELATED PARTY TRANSACTIONS (CONTINUED)
statement covering the shares of Visual Common Stock issued in the Merger by no
later than one month after March 1, 1999. Until this registration has been
completed, Visual shares are considered restricted, in that they may not be
transferred or resold except as permitted under the Securities Act of 1933.
Net2Net's President was Stephen McCalmont, son of Arnold McCalmont, a former
director and former Chairman of Technical Communications Corporation, and
brother of James McCalmont, another former Director of the Company. Both of
these gentlemen, in addition to Herbert A. Lerner, a former director and former
Treasurer of the Company, were also investors in Net2Net Corporation. This
investment, which represents less than a 5% interest, was accounted for using
the cost method; however, under Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company's investment in Visual securities is now accounted for
at market value (Note 18).
(13) MAJOR CUSTOMERS AND EXPORT SALES
In fiscal 1998, the Company had two customers representing 71% (54% and 17%)
of net sales. In fiscal 1997, the Company had three customers, including the
U.S. Government as one customer, representing 51% (25%, 13%, and 13%) of net
sales. In fiscal 1996, the Company had three customers, including the U.S.
Government, representing 54% (26%, 16%, and 12%) of net sales.
A breakdown of net sales is as follows:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Domestic....................................................... $ 1,631,459 $ 2,734,690 $ 3,633,425
Foreign........................................................ $ 12,224,322 $ 9,523,948 $ 10,379,377
------------- ------------- -------------
Total Sales.................................................... $ 13,855,781 $ 12,258,638 $ 14,012,802
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
A summary of foreign sales by geographic area follows:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
------------- ----------------- -----------------
<S> <C> <C> <C>
North America
(excluding the U.S.)............................................. 0.1% 1.0% 1.3%
Central and South America.......................................... 5.0% 33.8% 6.7%
Europe............................................................. 4.2% 6.1% 11.6%
Mid-East and Africa................................................ 84.4% 53.8% 46.0%
Far East........................................................... 6.3% 5.3% 34.4%
</TABLE>
(14) COMMITMENTS AND CONTINGENCIES
The Company is the defendant in GERARD V. TECHNICAL COMMUNICATIONS
CORPORATION, ET AL., filed in United States District Court for the District of
Massachusetts in 1998. This case arises from disputes concerning the hiring and
termination of Roland Gerard, former president of the Company. According to the
Complaint, the Company violated federal securities laws in the hiring process
for Mr. Gerard by making false statements about the Company which induced him to
accept employment, the compensation for which included certain stock options.
The Complaint also alleges breach of contract, wrongful termination, and civil
conspiracy. At present, the Company's motion to dismiss is pending. Because of
the
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) COMMITMENTS AND CONTINGENCIES (CONTINUED)
early stage of the litigation, it is impossible to determine the ultimate
outcome. The Company is determined to contest this suit vigorously.
The Company is also party to various claims arising in the normal course of
business. Management believes that these are adequately provided for or will not
result in a significant additional liability to the Company.
(15) LEASES
The Company leases its headquarters under an operating lease. The Company
has renewed the lease on its headquarters located in Concord, Massachusetts
through June 30, 2000. Future minimum lease payments depend on the Consumer
Price Index at December 31, 1998, but are estimated at $158,700 a year through
fiscal 1999 and $119,000 for the first nine months of fiscal 2000. This lease
may be further renewed for an additional two and one-half years through December
31, 2002. The Company also retains an option to purchase the building at fair
market value, but not to exceed $2,262,000, exercisable at the end of the
current renewal term, and of the additional renewal term, if elected. Annual
rental expense amounted to $155,300 in fiscal year 1998 and $146,160 per year
for fiscal years 1996 and 1997.
On April 6, 1998, the Company entered into a capital lease for computer
equipment valued and recorded at $20,370 ($17,876 after accumulated
depreciation) which is included in the Engineering and Manufacturing Equipment
category of the Company's equipment and leasehold improvements. The lease term
is for three years and contains a bargain purchase option which may be exercised
upon lease expiration. Minimum annual principal payments over the next three
years are: $6,404 in 1999; $7,043 in 2000; and $4,429 in 2001.
(16) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27, ESTIMATED
1998 1997 USEFUL
------------ ------------- ----------
<S> <C> <C> <C>
Engineering and manufacturing equipment............................ $ 2,221,594 $ 1,920,289 3-8 years
Demonstration equipment............................................ 1,058,550 922,696 3-5 years
Furniture and fixtures............................................. 1,079,569 1,036,423 3-8 years
Automobiles........................................................ 44,335 89,899 5 years
Leasehold improvements............................................. 414,467 413,348 2-5 years
------------ ------------- ----------
Total equipment and leasehold improvements......................... $ 4,818,515 $ 4,382,655 2-8 years
------------ ------------- ----------
------------ ------------- ----------
</TABLE>
(17) TREASURY STOCK TRANSACTIONS
Following termination of its ESOP on October 1, 1997 (Note 6), the Company
accounted for the termination in the manner specified in AICPA Statement of
Position (SOP) 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS,
paragraph 38. Specifically, the Company transferred the remaining 23,543 shares
that had not been allocated to participants to Treasury Stock and valued the
transaction at the fair market value of the shares at the October 1, 1997
reacquisition date. Unearned ESOP shares were credited for the cost of the
shares, zeroing out the balance remaining in the Deferred Compensation liability
contra account, and the difference was recognized in Additional Paid in Capital.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) TREASURY STOCK TRANSACTIONS (CONTINUED)
On August 14, 1998, 2,865 shares of Technical Communications Corporation
Common Stock were granted to members of the Company's Board of Directors at a
price per share of $6.38, which was equal to current market value on date of
grant. These shares were issued from the Company's Treasury Stock.
(18) AVAILABLE-FOR-SALE INVESTMENT
The Company's investment in Visual Network's Common Stock following the
merger of Net2Net into Visual Networks, Inc. on May 15, 1998 (Note 12), although
restricted pending the filing of a registration statement by Visual in March,
1999, is considered an available-for-sale investment in the accompanying balance
sheet and is carried at market value. At October 3, 1998, the market value of
this investment was $900,800, giving rise to an unrealized gain of $650,000
($422,000 net of tax effects) when compared to the $250,800 cost.
(19) RISKS
The Company is exposed to a number of business risks. These include, but are
not limited to, concentration of its business among a relatively small number of
customers (Note 13), technological change (which can cause obsolescence of the
Company's products and inventories), actions of competitors (some of whom have
access to considerably greater financial resources than the Company),
cancellation of major contracts (either before or after award), variations in
market demand, the loss of key personnel, etc. The Company attempts to protect
itself in various ways against such risks, but its success cannot be guaranteed.
(20) SUBSEQUENT EVENTS
On November 19, 1998, the Company reached agreement on and subsequently
announced the settlement of shareholder litigation initiated by Philip Phalon
and Dr. Mahmud Awan, which had been pending in Middlesex County, Massachusetts
Superior Court since February 1998. The settlement agreement and standstill
agreement executed by the Company and members of the opposition group that had
filed a Form 13D (the "13D Group") in the settlement of the above described
litigation set forth mutual full releases as to the litigation and also include
provisions requiring (i) the Company to reimburse the 13D Group's expenses in
payments aggregating $395,000 ($300,000 expensed and payable in the first
quarter of fiscal 1999; $50,000 payable before the end of fiscal 1999; and
$45,000 payable before the end of fiscal 2000), (ii) the dissolution of the 13D
Group (Note: Members of the 13D Group plan to file an amendment to their Form
13D dissolving the 13D Group in either December 1998 or January 1999.), and
(iii) the former proxy contestants to abide by certain standstill provisions
until October 1, 2000.
On November 19, 1998, Carl H. Guild, Jr., the Company's Chief Executive
Officer and President, was granted warrants to purchase 100,000 shares of the
Company's Common Stock under the 1991 Stock Option Plan. These options are all
at a price of $4.00 per share, equal to fair market value at date of grant, and
are exercisable as follows: (i) 60,000 shares became exercisable on November 19,
1998; (ii) 20,000 are exercisable on June 30, 1999; and 20,000 are exercisable
on September 30, 1999.
On December 8, 1998, the Company entered into a new agreement with General
Dynamics (Addendum No. 5) which replaced the previous minimum purchase agreement
for AT&T Secure Communications Systems products. Under terms of this agreement,
the Company will: a) purchase selected General Dynamics inventory at General
Dynamics' cost of $1.1 million during Fiscal 1999; b) receive expanded
distribution rights for the United States and Europe, areas previously excluded
from the agreement by General Dynamics; and c) assume responsibility for certain
product warranties granted by General
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) SUBSEQUENT EVENTS (CONTINUED)
Dynamics on sales within the U. S. and European territories. Most of the
affected products were sold by General Dynamics during 1998 under one year
warranties scheduled to expire during 1999, although there are a small number of
extended warranty products with expiration dates in 2000. The Company does not
believe that its total warranty exposure is material. The Company does not
believe that its obligations under this Agreement will materially adversely
impact its liquidity or operations. Although no assurances can be given that
certain purchased products will not eventually become technologically obsolete,
the Company believes that the selected product inventory that will be purchased
from General Dynamics can either be sold to certain foreign customers of the
Company or to new customers in the expanded distribution territories of the U.S.
and Europe in the forseeable future.
(21) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
For the years ended October 3, 1998, and September 27, 1997.
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
FISCAL 1998 DECEMBER 27, 1997 MARCH 28, 1998 JUNE 27, 1998 OCTOBER 3, 1998
- -------------------------------------------------- ----------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net sales......................................... $2,935,048 $3,405,457 $3,281,399 $4,233,877
Gross profit...................................... 1,363,962 2,110,584 2,123,894 2,794,733
Net (loss) income................................. (128,719) 178,142 222,415 209,765
Net (loss) income per share
Basic........................................... $(.10) $.14 $.17 $.16
Diluted......................................... $(.10) $.14 $.17 $.16
</TABLE>
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
FISCAL 1997 DECEMBER 28, 1996 MARCH 29, 1997 JUNE 28, 1997 SEPTEMBER 27, 1997
- -------------------------------------------------- ----------------- -------------- ------------- ------------------
<S> <C> <C> <C> <C>
Net sales......................................... $3,058,114 $4,054,348 $2,027,070 $3,119,106
Gross profit...................................... 1,853,362 2,664,537 803,410 1,783,666
Net income (loss)................................. 35,951 121,924 (998,674) (402,702)
Net income (loss) per share
Basic........................................... $.03 $.09 $(.78) $(.32)
Diluted......................................... $.03 $.09 $(.78) $(.32)
</TABLE>
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Technical Communications Corporation:
We have audited the accompanying consolidated balance sheets of Technical
Communications Corporation (a Massachusetts corporation) and its subsidiaries as
of October 3, 1998, and September 27, 1997, and the related consolidated
statements of operations, cash flows, and stockholders' equity for the years
ended October 3, 1998, September 27, 1997, and September 28, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Technical
Communications Corporation and subsidiaries as of October 3, 1998 and September
27, 1997, and the results of their operations and their cash flows for the years
ended October 3, 1998, September 27, 1997 and September 28, 1996, in conformity
with generally accepted accounting principles.
Boston, Massachusetts
October 30, 1998
(except for the matters discussed in Note 20
as to which the date is December 8, 1998)
F-19
<PAGE>
SCHEDULE II
TECHNICAL COMMUNICATIONS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO FROM END
OF YEAR EXPENSE RESERVES OF YEAR
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts--
Year Ended October 3, 1998...................................... $ 25,000 $ 187,075 $ 142,075 $ 70,000
Year Ended September 27, 1997................................... 53,707 -- 28,707 25,000
Year Ended September 28, 1996................................... 48,692 10,000 4,985 53,707
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
To Technical Communications Corporation:
We have audited, in accordance with generally accepted auditing standards, the
supplemental schedule of Valuation and Qualifying Accounts listed as Schedule II
above, and have issued our report thereon dated October 30, 1998. Our audit was
made for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. The supplemental schedule to the consolidated
financial statements listed as Schedule II is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This supplemental schedule has been subjected
to the auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Boston, Massachusetts
October 30, 1998
F-20
<PAGE>
Exhibit 10.1
TECHNICAL COMMUNICATIONS CORPORATION
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
TO: Mr. Carl H. Guild, Jr. Effective as of November 19, 1998
c/o Technical Communications Corporation
100 Domino Drive
Concord, Massachusetts 01742
This Agreement is intended to amend and restate that certain Employment
Agreement, dated as of February 16, 1998, by and between you and Technical
Communications Corporation, a Massachusetts corporation (the "Company"). The
Company hereby agrees with you as follows:
1. Position and Responsibilities.
1.1 Your duties as Chief Executive Officer and President of
the Company shall include, but not be limited to, the following: (i) serving as
the chief and principal spokesperson for the Company on all matters, (ii)
supervising the hiring and termination of all Company employees, consultants or
other agents (iii) serving as a liaison for the Company's management team to the
Board of Directors, (iv) the day-to-day management of the Company's operations
under the direction of the Board of Directors and (v) such other duties
customarily associated with such positions.
1.2 You will, to the best of your ability, devote your best
efforts to the performance of your duties hereunder and the business and affairs
of the Company. You agree to perform such duties as may be assigned to you by
the Company's Board of Directors from time to time.
1.3 You will duly, punctually and faithfully perform and
observe any and all rules and regulations which the Company may now or shall
hereafter establish governing the conduct of its business.
2. Term of Employment.
2.1 The term of this Agreement shall be for the period of
years set forth on Exhibit A annexed hereto commencing with the date hereof.
Thereafter, this Agreement shall be automatically renewed for successive periods
of one (1) year, unless: (a) you give the Company written notice of non-renewal
or termination; or (b) the Company shall give you written notice of non-renewal
or termination. Your employment with the Company may be terminated at any time
as provided in Section 2.2 or 2.4 of this Agreement.
2.2 The Company shall have the right, on written notice to
you, to terminate your employment:
(a) immediately at any time for Cause (as hereinafter
defined); or
(b) at any time without Cause or upon your inability
for a continuous period of at least one hundred eighty (180) days in
the aggregate during any 360-day period to perform duties hereunder due
to a physical or mental disability that is incapable of reasonable
accommodation under applicable law, including but not limited to the
Americans with Disabilities Act of 1990, as amended (such condition,
your "Disability").
2.3 For purposes of Section 2.2, the term "Cause" shall mean:
<PAGE>
(a) Your failure or refusal to perform the services
specified herein, or to carry out any lawful directions of the Board of
Directors of the Company with respect to the services to be rendered or
the manner of rendering such services by you;
(b) conviction of a felony;
(c) fraud or embezzlement involving the assets of the
Company, its customers, suppliers or affiliates;
(d) gross negligence or willful misconduct; or
(e) breach of any term of this Agreement other than
as noted in (a) above.
Further, any dispute, controversy, or claim arising out of, in
connection with, or in relation to this definition of "Cause" shall be settled
by arbitration in Boston, Massachusetts, pursuant to the Commercial Rules then
in effect of the American Arbitration Association and in no other place. Any
award or determination shall be final, binding, and conclusive upon the parties,
and a judgment rendered may be entered in any court having jurisdiction thereof.
You and the Company knowingly waive any and all rights to a jury trial in any
forum. Each party shall bear its own expenses relating to the arbitration,
unless otherwise determined in arbitration.
2.4 You shall have the right to terminate this Agreement upon
prior written notice to the Company. Such notice shall contain the termination
date of your employment (your last date of employment in all cases under this
Agreement is hereby defined as the "Termination Date"). In the event you
terminate this Agreement, you will be paid Severance Pay [defined, for purposes
of this Section as your Base Salary (as defined in Exhibit A hereto) at the then
current level (as set forth on Exhibit A attached hereto), less applicable taxes
and other required withholdings and any amounts you may owe the Company] as
follows:
(i) If the Termination Date is on the renewal date of this
Agreement, you will be paid Severance Pay for six (6) months.
(ii) If the Termination Date is before the renewal date of
this Agreement, you will be paid Severance Pay in an amount for the lesser of
six (6) months or the balance of the Term of this Agreement or the number of
months worked within the current Term.
2.5 In the event the Company terminates your employment or
chooses not to renew your employment, the Company shall be obligated to pay you
as Severance Pay (defined as one of the following, as applied to the facts):
(a) In the event of your termination by the Company
(i) without Cause or (ii) upon your death or Disability, you (or your
estate, as the case may be) shall be paid an amount equal to the
greater of six (6) months' Base Salary at the then current level (as
set forth on Exhibit A attached hereto) or your Base Salary for the
remaining Term of this Agreement, less applicable taxes and other
required withholdings and any amounts you may owe the Company, and all
health and other benefits to which you had been entitled while employed
by the Company shall be continued at the Company's expense for at least
six (6) months, including all payments to be made by the Company and
you pursuant to COBRA. The Company shall also ; or
(b) In the event the Company notifies you of its
intent not to renew this Agreement, an amount equal to six (6) months'
Base Salary at the then current level (as set forth on Exhibit A
attached hereto), less applicable taxes and other required withholdings
and any amounts you may owe
<PAGE>
the Company, and all health and other benefits to which you had been
entitled while employed by the Company shall be continued at the
Company's expense for at least six (6) months, including all payments
to be made by the Company and you pursuant to COBRA; or
(c) In the event of your termination by the Company
for Cause (as defined in Section 2.3), you shall be entitled to no
Severance Pay.
In all circumstances arising under Section 2.4 or this Section 2.5, you
agree that at the time of your leaving the employ of the Company, the Company
has a right of set-off against all monies, salary, expenses or other payments
owed to you as of that date with respect to any and all amounts owed by you to
the Company.
In all circumstances in which you are to receive Severance Pay you may
receive Severance Pay in either a lump sum payment or in twenty-four (24) equal
weekly payments at your option. You must notify the Company of your selection in
writing within one (1) week of the Termination Date.
3. Compensation. You shall receive the compensation and benefits set
forth on Exhibit A hereto ("Compensation") for all services to be rendered by
you hereunder.
4. Confidentiality.
4.1 You agree at all times during the term of your employment
and thereafter to hold in strictest confidence, and not to use, except for the
benefit of the Company, or to disclose to any person, firm or corporation
without written authorization of the Company, any Proprietary Information of the
Company. "Proprietary Information" means any Company proprietary information,
technical data, trade secrets or know-how, including, but not limited to,
research and development information, product plans, products, services,
customer lists and customers (including, but not limited to customers of the
Company on whom you called or with whom you became acquainted during the term of
your employment), suppliers, markets, software, developments, inventions,
processes, formulas, technology, designs, drawings, engineering information,
hardware configuration information, marketing information, costs, pricing,
finances or other business information disclosed to you by the Company either
directly or indirectly in writing, orally or by drawings or inspection of parts
or equipment. Proprietary Information does not include any of the foregoing
items that have become publicly known and made generally available through no
wrongful act of yours. You further agree that all Proprietary Information shall
at all times remain the property of the Company.
4.2 You agree that any and all information generated by you
during working hours, or on Company property, or by the use of any Company
assets, whether in electronic or physical form, is and shall remain the property
of the Company, and that the Company has the right of access to any information
belonging to you that is at any time stored in Company equipment, or on Company
property, in any form, including the right to inspect the contents of
briefcases, handbags, and the like.
4.3 You agree that at the time of your leaving the employ of
the Company, you will immediately deliver to the Company (and will not keep in
your possession or deliver to anyone else) any and all devices, records, data,
notes, reports, proposals, lists, correspondence, specifications, drawings,
blueprints, sketches, materials, equipment, other documents or property, or
reproductions of any aforementioned items, containing Proprietary Information or
otherwise belonging to the Company, its successors or assigns.
4.4 You agree that you will not, during your employment with
the Company, improperly use or disclose any proprietary information or trade
secrets of any former employer or other person or entity, if any, with which you
have an agreement or duty to keep such information in confidence, and that you
will not bring onto the premises of the Company any unpublished document or
proprietary information belonging to any such employer, person or entity.
<PAGE>
4.5 You recognize that the Company has received and in the
future will receive from third parties their trade secrets or proprietary
information subject to a duty on the Company's part to maintain the
confidentiality of such information to use it only for certain limited purposes.
You agree to hold all such trade secrets or proprietary information in the
strictest confidence and not to disclose it to any person, firm or corporation
or to use it except as necessary in carrying out my work for the Company
consistent with the Company's agreement with such third party.
5. Non-Competition.
THIS SECTION MAY AFFECT YOUR RIGHT TO ACCEPT EMPLOYMENT WITH OTHER
COMPANIES SUBSEQUENT TO YOUR EMPLOYMENT BY THE COMPANY.
5.1 For the purpose of this Section:
(i) "Competing Product" means any product, process or
service of any person or organization other than the Company, in existence or
under development, which is (A) identical to, substantially the same as, or an
adequate substitute for any product, process or service of the Company, in
existence or under development, on which you worked during the last two (2)
years of your employment with the Company or about which you acquired
Proprietary Information and (B) which is (or could reasonably be anticipated to
be) marketed or distributed in such a manner and in such a geographic area as to
actually compete with such product, process or service of the Company.
(ii) "Competing Organization" means any person or
organization, including yourself, engaged in, or about to become engaged in,
research on or the acquisition, development, production, distribution,
marketing, or providing of, a Competing Product.
5.2 As a material inducement to the Company to employ you and
to continue to employ you, and in order to protect the Company's Proprietary
Information and good will, you agree to the following stipulations:
(i) You agree that, during the term of your
employment with the Company, you will not engage in any other employment,
occupation, consulting or other business activity related to the business in
which the Company is now involved or becomes involved during the term of your
employment, nor will you engage in any other activities that conflict with your
obligations to the Company.
(ii) In the event you terminate (or do not renew)
this Agreement, then you will not directly or indirectly, participate or engage
in, solicit, deliver or accept business relating in any manner to Competing
Products or to products, processes or services of the Company from or with any
of the customers or accounts of the Company with which you had any contact as a
result of your employment with the Company for a period which is the greater of
(A) six (6) months commencing with the Termination Date, or (B) the balance of
the Term of this Agreement (both A or B being a "Noncompete Period").
(iii) In the event the Company terminates without
Cause (or does not renew) this Agreement, then you will not directly or
indirectly, participate or engage in, solicit, deliver or accept business
relating in any manner to Competing Products or to products, processes or
services of the Company from or with any of the customers or accounts of the
Company with which you had any contact as a result of your employment with the
Company for a period which is the greater of (A) six (6) months commencing with
the Termination Date, or (B) the balance of the Term of this Agreement (both A
or B being a "Noncompete Period").
(iv) In the event the Company terminates your
employment with Cause, then, you will not, directly or indirectly, participate
or engage in, solicit, deliver or accept business relating in any manner to
<PAGE>
Competing Products or to products, processes or services of the Company from or
with any of the customers or accounts of the Company with which you had any
contact as a result of your employment with the Company for a period of six (6)
months commencing with the Termination Date (a "Noncompete Period").
(v) During any Noncompete Period you will not render
services, directly or indirectly, as an employee, consultant or otherwise, to
any Competing Organization in connection with research on, or the acquisition,
development, production, distribution, marketing, sale or provision of any
Competing Product.
(vi) During any Noncompete Period you will not,
directly or indirectly: (a) induce any employee of the Company to leave the
Company's employment; (b) assist any other person or entity in requesting or
inducing any such employee of the Company to leave such employment; or (c)
induce or attempt to induce any employee of the Company to join with you in any
capacity, direct or indirect.
5.3 You agree that the restrictions set forth in this Section
5 are fair and reasonable and are reasonably required for the protection of the
interests of the Company. However, should an arbitrator or court nonetheless
determine at a later date that such restrictions are unreasonable in light of
the circumstances as they then exist, then you agree that this Section 5 shall
be construed in such a manner as to impose on you such restrictions as may then
be reasonable and sufficient to assure the Company of the intended benefits of
this Section.
5.4 Notwithstanding the provisions of this Section 5, the
Board of Directors may, in its sole discretion, permit you to accept employment
with a Competing Organization.
6. Other Employers. You represent and warrant that your employment by
the Company will not conflict with and will not be constrained by any prior or
current employment, consulting agreement or other relationship whether oral or
written. You represent and warrant that you do not possess confidential
information arising out of any such employment, consulting agreement or
relationship which, in your best judgment, would be utilized in connection with
your employment by the Company.
7. Assignment of Inventions.
7.1 Except as set forth in Section 7.3 of this Agreement, you
hereby acknowledge and agree that the Company is the owner of all Inventions (as
hereinafter defined). In order to protect the Company's rights to such
Inventions, by executing this Agreement you hereby irrevocably assign to the
Company all of your right, title and interest in and to all Inventions to the
Company.
7.2 For purposes of this Agreement, "Inventions" shall mean
all discoveries, processes, designs, technologies, devices, or improvements in
any of the foregoing or other ideas, whether or not patentable and whether or
not reduced to practice, made or conceived by you (whether solely or jointly
with others) during or prior to the period of your employment with the Company,
which relate in any manner to the actual or demonstrably anticipated business,
work, or research and development of the Company, or result from or are
suggested by any task assigned to you or any work performed by you for or on
behalf of the Company.
7.3 You agree that in connection with any Invention, you will
promptly disclose such Invention to your immediate superior at the Company in
order to permit the Company to enforce its property rights to such Invention in
accordance with this Agreement. Your disclosure shall be received in confidence
by the Company.
7.4 Upon request, you agree to assist the Company or its
nominee (at its expense) during and at any time subsequent to your employment in
every reasonable way to obtain for its own benefit patents and copyrights for
Inventions in any and all countries. Such patents and copyrights shall be and
remain the sole and exclusive property of the Company or its nominee. You agree
to perform such lawful acts as the Company deems to be necessary to allow it to
exercise all right, title and interest in and to such patents and copyrights.
<PAGE>
7.5 In connection with this Agreement, you agree to execute,
acknowledge and deliver to the Company or its nominee upon request and at its
expense all documents, including assignments of title, patent or copyright
applications, assignments of such applications, assignments of patents or
copyrights upon issuance, as the Company may determine necessary or desirable to
protect the Company's or its nominee's interest in Inventions, and/or to use in
obtaining patents or copyrights in any and all countries and to vest title
thereto in the Company or its nominee to any of the foregoing.
7.6 You agree to keep and maintain adequate and current
written records of all Inventions made by you (in the form of notes, sketches,
drawings, flowcharts and other records as may be specified by the Company),
which records shall be available to and remain the sole property of the Company
at all times.
7.7 You acknowledge that the Company from time to time may
have agreements with other persons or with the U.S. Government or agencies
thereof, which impose obligations or restrictions on the Company regarding
Inventions made during the course of work thereunder or regarding the
confidential nature of such work. You agree to be bound by all such obligations
and restrictions and to take all action necessary to discharge the Company's
obligations.
7.8 You represent that your performance of all the terms of
this Agreement and as an employee of the Company does not and will not breach
any agreement to keep confidential proprietary information, knowledge or data
acquired by you in confidence or in trust prior to your employment by the
Company, and you will not disclose to the Company, or induce the Company to use,
any confidential or proprietary information or material belonging to any
previous client, employer or others. You agree not to enter into any agreement
either written or oral in conflict herewith.
8. Remedies. Your obligations under the provisions of Sections 4, 5, 6
and 7 of this Agreement (as modified by Section 10, if applicable) shall survive
the expiration or termination of your employment (whether through your
resignation or otherwise) with the Company. You acknowledge that a remedy at law
for any breach or threatened breach by you of the foregoing provisions would be
inadequate and you therefore agree that the Company shall be entitled to
injunctive relief in case of any such breach or threatened breach.
9. Assignment. This Agreement and the rights and obligations of the
parties hereto shall bind and inure to the benefit of any successor or
successors of the Company by reorganization, merger or consolidation and any
assignee of all or substantially all of its business and properties, but, except
as to any such successor or assignee of the Company, neither this Agreement nor
any rights or benefits hereunder may be assigned by the Company or by you,
except by operation of law.
10. Governing Law; Construction and Enforcement; Indemnification. This
Agreement shall be construed and enforced in accordance with the laws of the
Commonwealth of Massachusetts. You agree that any judicial action relating to
this Agreement shall be adjudicated in the courts of the Commonwealth of
Massachusetts and you consent to the exclusive jurisdiction of and venue in such
courts with respect to all such actions. Your covenants set forth herein are of
the essence of this Agreement; they shall be construed as independent of any
other provision in this Agreement, and the existence of any claim or cause of
action that you may have against the Company, whether predicated on this
Agreement or not, shall not constitute a defense to the enforcement by the
Company of these covenants. The remedies hereunder, and at law and in equity,
shall be cumulative and not alternative, and shall not be exhausted by any one
or more uses thereof. The nondisclosure and non-solicitation obligations
contained herein shall be extended by the length of time during which you shall
have been in breach of any of said provisions. You agree that, in addition to
any of the remedies provided to the Company and its subsidiaries and affiliates
herein, you shall indemnify and hold harmless the Company and its subsidiaries
and affiliates from and against any loss, liability, claim, damage or expense
(including without limitation attorneys' fees) occasioned by any breach of your
covenants or agreements or the inaccuracy of any of your representations set
forth in this Agreement.
11. Severability. IT IS THE INTENT OF THE PARTIES THAT in case any one
or more of the provisions contained in this Agreement shall, for any reason, be
held to be invalid, illegal or unenforceable in any
<PAGE>
respect, such invalidity, illegality or unenforceability shall not affect the
other provisions of this Agreement, and this Agreement shall be construed as if
such invalid, illegal or unenforceable provision had never been contained
herein.
12. Notices. Any notice which the Company is required to or may desire
to give you shall be given by personal delivery or registered or certified mail,
return receipt requested, addressed to you at your address of record with the
Company, or at such other place as you may from time to time designate in
writing. Any notice which you are required or may desire to give to the Company
hereunder shall be given by personal delivery or by registered or certified
mail, return receipt requested, addressed to the Company at its principal
office, or at such other office as the Company may from time to time designate
in writing. The date of personal delivery or the date of making any notice under
this Section 12 shall be deemed to be the date of delivery thereof.
13. Waivers. If either party should waive any breach of any provision
of this Agreement, such party shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement.
14. Complete Agreement; Amendments. The foregoing, including Exhibit A
attached hereto, is the entire agreement of the parties with respect to the
subject matter hereof, superseding any previous oral or written communications,
representations, understandings, or employment agreements with the Company or
any officer or representative thereof. Any amendment to this Agreement or waiver
by the Company of any right hereunder shall be effective only if evidenced by a
written instrument executed by the parties hereto, upon authorization of the
Company's Board of Directors.
15. Headings. The headings of the Sections hereof are inserted for
convenience and shall not be deemed to constitute a part hereof nor to affect
the meaning of this Agreement in any way.
16. Counterparts. This Agreement may be signed in two counterparts,
each of which shall be deemed an original and both of which shall together
constitute one agreement.
17. Independent Advice. You hereby acknowledge that you have been
advised of the opportunity available to you to seek and obtain the advice of
legal counsel and financial advisors of your own choosing prior to and in
connection with your execution of this Agreement. In addition you hereby affirm
that you have either obtained such advice or knowingly and willingly decided to
forego the opportunity to avail yourself of such advice.
If you are in agreement with the foregoing, please sign your name
below, whereupon this Agreement shall become binding in accordance with its
terms. Please then return this Agreement to the Company. (You may retain for
your records the accompanying counterpart of this Agreement enclosed herewith).
Very truly yours,
TECHNICAL COMMUNICATIONS
CORPORATION
(As authorized by the Board of Directors)
By:
--------------------------------------------
Title: R.T. Lessard, Director and Chairman of
Compensation Committee
Accepted and Agreed:
- -----------------------------
Carl H. Guild, Jr.
<PAGE>
EXHIBIT A
EMPLOYMENT TERM, COMPENSATION AND BENEFITS OF CARL H. GUILD, JR.
1. Term. The term of the Agreement to which this Exhibit A is annexed and
incorporated shall run through September 30, 2000.
2. Compensation.
(a) Base Salary. Your Base Salary shall be $160 per hour, up to a
maximum of 24 hours per week per year, payable in accordance
with the Company's payroll policies.
(b) Salary Adjustment; Bonuses. Your salary shall be subject to
merit review and adjustment from time to time by the Company's
Board of Directors. You shall be eligible for bonuses in the
discretion of the Company's Board of Directors, based on an
exceptional performance assessment.
(c) Stock Options. During the first year of your employment, you
shall receive incentive stock options in the form attached as
Annex 1 hereto. Nothing herein shall be deemed to void or
cancel any incentive stock options previously granted to you.
3. Vacations. You shall be entitled to vacation time and sick leave in
accordance with current Company policy, as amended from time to time.
4. Insurance and Benefits. You shall be eligible for participation in any
401(k) savings plan, health insurance plan, and other benefits in
accordance with current Company policy, which policy is subject to
change from time to time, and you shall be covered by the Company's
officer and director liability insurance policy.
5. Expenses. The Company shall reimburse you for relocation expenses in
accordance with Company policy, as amended from time to time, and all
reasonable and ordinary business expenses incurred by you in the scope
of your employment hereunder.
6. Part Time. To be entitled to the benefits described in the Agreement to
which this Exhibit is annexed and incorporated, you shall devote a
minimum of 30 hours per week (as computed by a cumulative annual
average) to the Company.
<PAGE>
Exhibit 10.2
STANDSTILL AGREEMENT
This Standstill Agreement, by and among Technical
Communications Corporation, a Massachusetts corporation (the
"Company"), M. Mahmud Awan, an individual ("Awan"), Philip A. Phalon,
an individual ("Phalon"), Robert B. Bregman, an individual ("Bregman"),
William C. Martindale, an individual ("Martindale") is dated as of
November 19, 1998.
WHEREAS, Messrs. Awan, Phalon, Bregman, and Martindale
(together, the "13D Group")have been acting as a group in connection
with their stock ownership of the Company, as more fully described in
the Schedule 13D filed by them;
WHEREAS, the Company and the 13D Group have been in litigation
regarding certain matters, including the election of the Company's
Directors, and such litigation is being settled contemporaneously with
the execution of this Standstill Agreement; and
WHEREAS, the parties have determined that a settlement of
their differences and an agreement on voting going forward is in the
best interests of the Company.
NOW THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. Each of Messrs. Awan, Phalon, Bregman, Martindale agrees that from the
date hereof until after September 30, 2000, he will not, nor will he
permit any of his assigns, affiliates or associates (such terms as used
throughout this Standstill Agreement having the same meaning as
ascribed to them under the Exchange Act and the Securities Act,
including rules and regulations promulgated thereunder), from and after
the date that such person becomes an assign, affiliate or associate
unless in any such case specifically approved by the Board of Directors
of the Company to:
(a) participate in the formation or encourage the formation of,
or join, or in any way participate with, any "person" (as
such term is used in Section 13(d)(3) of the Exchange Act
and Section 2(2) of the Securities Act of 1933 (the
"Securities Act"), such term to have such meaning throughout
this agreement) that owns or seeks to acquire record or
beneficial ownership of Company Common Stock or any
securities convertible into, exchangeable for or exercisable
for the Company's Common Stock (all such securities and the
Company Common Stock, collectively, "Company Voting
Securities");
(b) solicit, or participate in any "solicitation" of "proxies" or
become a "participant" in any "election contest" (as such
terms are defined or used in Regulation 14A under the Exchange
Act, these terms to have such meanings throughout this
agreement) with respect to the Company;
(c) initiate, propose or otherwise solicit stockholders for the
approval of one or more stockholder proposals with respect to
the Company or induce any other person to initiate any such
stockholder proposal;
<PAGE>
(d) seek to place any person not nominated by the Board of
Directors on the Board of Directors of the Company or seek to
have called any meeting of the stockholders of the Company;
(e) deposit any Company Voting Securities in a voting trust or
subject them to a voting agreement or other agreement or
arrangement or arrangement with respect to the voting of such
Company Voting Securities;
(f) otherwise act, alone or in concert with others, to seek to
control or influence the management, Board of Directors,
policies or affairs of the Company or solicit, propose, seek
to effect or negotiate with any person with respect to any
form of transaction or investment, business combination or
other extraordinary transaction with the Company or any of its
subsidiaries or any restructuring, recapitalization, similar
transaction or other transaction not in the ordinary course of
business with respect to the Company or any of its
subsidiaries, or solicit, make or propose or negotiate with
any other person with respect to, or announce an intent to
make, any tender offer or exchange offer for any securities of
the Company or any of its subsidiaries unless requested to do
so by the Board of Directors of the Company, or publicly
disclose an intent, purpose, plan or proposal with respect to
the Company, any of its subsidiaries or any securities or
assets of the Company or any of its subsidiaries, that would
violate the provisions of this agreement, or assist,
participate in, facilitate or solicit any effort or attempt by
any person to do so or seek to do any of the foregoing;
(g) solicit any of the current officers or employees of the
Company or have any discussions with any employee regarding
cessation of employment with the Company, so long as they are
employed by the Company; or
(h) make any public request to waive any provision of this
Agreement or to permit the taking of any action specified
herein;
(i) provided, however, that nothing in this Agreement shall be
deemed to prevent Dr. Awan or Mr. Brown from taking such
actions as are within the scope of their roles as members of
the TCC Board of Directors as long as such actions are
consistent with any vote or direction of the TCC Board of
Directors.
2. Each of Messrs. Awan, Phalon, Bregman, Martindale further agrees that, from
the date hereof until after September 30, 2000, he will vote all Company Voting
Securities owned or controlled, directly or indirectly, by him (of record,
beneficially or otherwise), whether currently or hereafter owned, acquired or
controlled, for and in favor of (i) all Board nominees, and (ii) all proposals
(or Company opposition to proposals), each as approved in advance by the
Company's Board of Directors, as the same are presented to stockholders from
time to time, whether or not at a meeting of stockholders. Nothing herein shall
apply to or for Company Voting Securities held by Martindale in or through
non-affiliate, third party investment or brokerage accounts controlled or
managed by Martindale as to which he does not have discretionary or appointive
voting authority, provided that Martindale shall not seek to influence the
beneficial owners of such Company Voting Securities to vote against any Board
nominees or Board-supported proposals (or Company opposition to proposals).
3. Each of Messrs. Awan, Phalon, Bregman, Martindale agrees that any action or
omission by any assign, affiliate, associate or representative of his which, if
committed by him, would constitute a breach hereof by him shall also constitute
a breach hereof by him for which he and such assign, affiliate, associate or
representative, as the case may be, shall be jointly and severally responsible.
<PAGE>
4. Each of Messrs. Awan, Phalon, Bregman, Martindale acknowledges that the
Company and its affiliates will suffer immediate and irreparable harm in the
event of any breach of any of his obligations hereunder, including but not
limited to any breach by any assign, affiliate, associate or representative of
his attributable to him as provided herein, that monetary damages alone will not
be adequate in such an event and, accordingly, that the Company will be entitled
in such an event to appropriate equitable relief, including but not limited to
an injunction and an order of specific performance, in addition to all other
remedies available to the Company at law or in equity. Each of Awan, Phalon,
Bregman, Martindale hereby consents to the exclusive jurisdiction of the state
and federal courts located in Massachusetts, with regard to any dispute relating
to this agreement and he acknowledges that venue in any such court will be
proper and not inconvenient in the case of any such dispute. The provisions of
this agreement shall inure to the benefit of the Company.
5. No failure or delay by the Company or any affiliate of the Company in
exercising any of the Company's or such affiliate's right or remedies hereunder
shall operate as a waiver thereof, nor shall any waiver in any instance
constitute a waiver in any other instance. The provisions hereof are severable
and, in the event any provision hereof is determined in any circumstances to be
unlawful or unenforceable, such determination shall not affect any other
provision hereof or this agreement as a whole or the application of such
provision in any other circumstances.
6. The provisions hereof shall be governed by and construed in accordance with
the laws of Massachusetts without regard to principles of conflicts of laws that
would be otherwise applicable.
7. Each of Messrs. Awan, Phalon, Bregman, Martindale agrees that (i) the
provisions of this agreement shall irrevocably bind his heirs, successors, or
assigns, and (ii) he (or they) will execute such additional documents,
certificates, agreements, including but not limited to voting trusts or trust
agreements, as the Company deems reasonably necessary to effect further the
actions or intent of the parties as set forth above.
8. Each of the parties hereto has had the full and free opportunity to consult
with legal counsel concerning this Agreement including its legal effect and
interpretation. Each party represents and acknowledges that it or its duly
authorized representative has read this Agreement and is acting freely,
voluntarily, and without coercion.
9. This Agreement may be executed in counterparts, each of which shall be deemed
to be equally authentic and which collectively shall constitute this Agreement.
This Agreement, together with its attachments, represent the entire agreement
between the parties and may not be amended except in writing and signed by all
parties hereto.
10. This Agreement shall be deemed to be a sealed instrument for all purposes
and the execution by the parties hereto shall be deemed to be the application of
their seal for such purpose.
<PAGE>
The parties hereto have confirmed their agreement to the terms set
forth above by signing below.
TECHHNICAL COMMUNICATIONS CORPORATION
By:
----------------------
Title:
-------------------------
M. Mahmud Awan
-------------------------
Philip A. Phalon
-------------------------
Robert B. Bregman
-------------------------
William C. Martindale
<PAGE>
LIST OF SUBSIDIARIES OF TECHNICAL COMMUNICATIONS CORPORATION
Technical Communications Corporation Foreign Sales Corporation (TCC FSC)
Technical Communications Corporation Investment Corporation (TCC Investment
Corp.)
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> OCT-03-1998
<EXCHANGE-RATE> 1
<CASH> 740,049
<SECURITIES> 0
<RECEIVABLES> 8,266,296
<ALLOWANCES> 70,000
<INVENTORY> 3,119,291
<CURRENT-ASSETS> 13,005,172
<PP&E> 4,818,515
<DEPRECIATION> 3,773,457
<TOTAL-ASSETS> 16,172,729
<CURRENT-LIABILITIES> 5,195,772
<BONDS> 0
0
0
<COMMON> 128,328
<OTHER-SE> 10,392,277
<TOTAL-LIABILITY-AND-EQUITY> 16,172,729
<SALES> 13,855,781
<TOTAL-REVENUES> 13,855,781
<CGS> 5,462,608
<TOTAL-COSTS> 5,462,608
<OTHER-EXPENSES> 7,635,738
<LOSS-PROVISION> 45,000
<INTEREST-EXPENSE> 142,056
<INCOME-PRETAX> 642,137
<INCOME-TAX> 160,534
<INCOME-CONTINUING> 481,603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 481,603
<EPS-PRIMARY> .38
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