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TECHNICAL COMMUNICATION CORPORATION
100 Domino Drive
Concord, Massachusetts 01742
Annual Meeting of Stockholders
(cid:41)(cid:72)(cid:69)(cid:85)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:28)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)
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TECHNICAL COMMUNICATIONS CORPORATION
Notice of Annual Meeting of Stockholders
To Be Held February 9, 2015
To Our Stockholders:
NOTICE IS HEREBY GIVEN that the 2015 Annual Meeting of Stockholders (the
“Meeting”) of Technical Communications Corporation, a Massachusetts corporation (the
“Company”), will be held at the offices of the Company, 100 Domino Drive, Concord,
Massachusetts 01742, at 10:00 a.m. (local time) on Monday, February 9, 2015, to:
1. Elect two Class III Directors to serve on the Board of Directors for a term of three years
expiring at the 2018 Annual Meeting of Stockholders;
2. Hold a stockholder advisory vote on the compensation of the Company’s named
executive officers as disclosed in the proxy statement for the Meeting;
3. Ratify the appointment of McGladrey, LLP as the independent registered public
accounting firm of the Company for the fiscal year ending October 3, 2015; and
4. Consider and act upon such other business and matters as may properly come before the
Meeting or any adjournments thereof.
The Board of Directors knows of no other matters to be presented at the Meeting. Only
stockholders of record of the Company at the close of business on December 12, 2014 are entitled
to notice of and to vote at the Meeting or any adjournments thereof.
All stockholders are cordially invited to attend the Meeting. Whether or not you expect
to attend the Meeting, please complete, sign, date and return the enclosed proxy card in the
envelope provided at your earliest convenience. If you return your proxy, you may nevertheless
attend the Meeting and vote your shares in person.
A copy of the Company’s Annual Report to Stockholders on Form 10-K for the fiscal
year ended September 27, 2014, which contains financial statements and other information of
interest to stockholders, accompanies this Notice and the attached Proxy Statement.
By Order of the Board of Directors,
David A. White, Secretary
Concord, Massachusetts
January 9, 2015
It is important that your shares be represented at the Meeting. Whether or not you plan to
attend the Meeting, please promptly complete, sign, date and mail the enclosed proxy card in
the envelope provided, which requires no postage if mailed in the United States.
-1-
Important Notice Regarding the Availability of Proxy Materials
for the Annual Shareholder Meeting to be Held on February 9, 2015
This Proxy Statement and related materials are available at the Company’s website at
https://www.tccsecure.com/Investors.aspx .
This Proxy Statement relates to the Company’s 2015 Annual Meeting of Stockholders to
be held on February 9, 2015 at 10:00 a.m. (local time) at the Company’s offices located at 100
Domino Drive, Concord, Massachusetts 01742.
The matters to be voted upon at such meeting are:
(1)
(2)
(3)
the election of two Class III Directors to serve on the Board of Directors
for a term of three years expiring at the 2018 Annual Meeting of
Stockholders;
a stockholder advisory vote on the compensation of the Company’s
named executive officers as disclosed in the proxy statement for the
meeting; and
the ratification of McGladrey, LLP as the Company’s independent
registered public accounting firm for the fiscal year ending October 3,
2015.
Stockholders will also consider and act upon such other business and matters as may
properly come before such meeting or any adjournments thereof.
Only stockholders of record at the close of business on December 12, 2014 are entitled to
notice of and to vote at the meeting and any adjournments thereof.
Materials that will be available electronically at the website identified above include:
•
•
•
•
the Notice of Annual Meeting of Stockholders;
the Proxy Statement for the meeting;
the form of proxy card; and
the Company’s Annual Report to Stockholders on Form 10-K for the fiscal year
ended September 27, 2014.
If you wish to attend the meeting in person and need directions, please contact TCC Investor
Relations at (978) 287-5100. Instructions on how to complete, sign, date and return the proxy
card are provided on the card, as well as a stockholder’s control/identification number(s).
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TECHNICAL COMMUNICATIONS CORPORATION
100 Domino Drive
Concord, MA 01742
PROXY STATEMENT
for the
2015 Annual Meeting of Stockholders
February 9, 2015
This Proxy Statement is being furnished in connection with the solicitation of proxies by
the Board of Directors of Technical Communications Corporation, a Massachusetts corporation
(“TCC” or the “Company”), for use at the Company’s 2015 Annual Meeting of Stockholders and
any adjournments thereof (the “Meeting”), to be held at the offices of the Company, 100 Domino
Drive, Concord, Massachusetts 01742, at 10:00 a.m. (local time) on Monday, February 9, 2015.
It is expected that the Notice of Meeting, this Proxy Statement and the accompanying
proxy card, and an Annual Report to Stockholders on Form 10-K for the fiscal year ended
September 27, 2014 containing financial statements and other information of interest to
stockholders, will be mailed to stockholders on or about January 9, 2015.
Record Date and Outstanding Shares
Only record holders of shares of the Company’s Common Stock, par value $0.10 per
share, as of the close of business on December 12, 2014 (the “Record Date”) are entitled to notice
of and to vote at the Meeting.
As of the Record Date, there were 1,838,921 shares of the Company’s Common Stock
outstanding and entitled to vote. The shares of Common Stock are the only voting securities of
the Company. Stockholders are entitled to cast one vote for each share held of record.
Proxies
If the enclosed proxy card is properly marked, signed, and returned in time to be voted at
the Meeting, and is not subsequently revoked, the shares represented will be voted in accordance
with the instructions marked thereon. SIGNED PROXIES RETURNED TO THE COMPANY
AND NOT MARKED TO THE CONTRARY WILL BE VOTED AS RECOMMENDED BY
THE BOARD OF DIRECTORS. Thus, proxies not marked to the contrary will be voted:
•
•
•
in favor of the nominees for election to the Board,
in favor of the compensation of our named executive officers as disclosed in this
Proxy Statement, and
in favor of ratification of the Company’s independent registered public
accounting firm.
Any stockholder may revoke a proxy at any time prior to its exercise by signing and
delivering a later-dated proxy or a written notice of revocation to the Secretary of the Company.
Stockholders attending the Meeting may also revoke their proxies by voting in person at the
Meeting. Attendance at the Meeting will not itself be deemed to revoke a proxy unless a
stockholder gives affirmative notice at the Meeting that such stockholder intends to revoke the
proxy and vote in person.
-3-
Quorum and Approval
The presence in person or by proxy of the holders of a majority in interest of the shares of
Common Stock issued and outstanding on the Record Date and entitled to vote is required to
constitute a quorum at the Meeting. The stockholders entitled to vote that are present in person or
by proxy at the Meeting may adjourn the Meeting without additional notice unless a new record
date is or must be fixed. At any adjourned Meeting at which a quorum is present, any business
may be transacted that might have been transacted at the Meeting as originally scheduled.
Abstentions and broker non-votes will count in determining whether a quorum is present
at the Meeting and any adjourned Meeting. A broker non-vote occurs if the broker or other
nominee who holds shares represented by a proxy has not received instructions with respect to a
particular proposal and does not have discretionary authority with respect to such proposal.
Matters as to which brokers do not have discretionary authority include the election of directors,
even in uncontested elections, and “say on pay” and “say when on pay” proposals.
The affirmative vote of a plurality of the votes cast at the Meeting by the shares entitled to
vote thereon is required to elect a director. Abstentions, broker non-votes and votes withheld will
not be included in the totals for director elections, and will have no effect on the outcome of the
vote.
The affirmative vote of the holders of a majority of the shares of Common Stock voting on
the matter shall be required for the stockholder advisory vote on the compensation of the
Company’s named executive officers as disclosed in the Compensation section (including the
tables therein) of this Proxy Statement. Abstentions and broker non-votes will not be included in
the totals for the proposal, and will have no effect on the outcome of the vote.
The affirmative vote of the holders of a majority of the shares of Common Stock voting on
the matter is required for the ratification of the selection of the independent registered public
accounting firm. Abstentions and broker non-votes will not be included in the totals for the
proposal, and will have no effect on the outcome of the vote.
Other Matters
The Board of Directors knows of no matters to be presented for consideration at the
Meeting other than as set forth in this Proxy Statement. If any other matter should be presented at
the Meeting upon which a vote may be properly taken, shares represented by all proxies received
by the Company will be voted with respect thereto in accordance with the judgment of the
persons named as proxies.
No director, executive officer or nominee for director, nor any associate of any of the
foregoing, has any substantial interest, direct or indirect, by security holdings or otherwise, in any
matter to be acted upon at the Meeting.
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PROPOSAL I. ELECTION OF DIRECTORS
The business corporation statute of Massachusetts requires, unless a company opts out,
that the terms of directors of public companies be staggered by dividing the number of directors
into three groups, as nearly equal in number as possible, with the number of directors subject to
such requirement being fixed by a vote of the board. The Company’s Board of Directors
currently consists of four directors. Pursuant to the statute and the Company’s By-laws, the
members of the Company’s Board of Directors are divided into three classes, designated Class I,
Class II and Class III, each serving staggered three-year terms. The term of the Class I Director
expires at the 2016 annual meeting of stockholders; the term of the Class II Director expires at the
2017 annual meeting of stockholders; and the term of the Class III Directors to be elected at the
Meeting will expire at the 2018 annual meeting of stockholders.
Directors elected by the stockholders at an annual meeting to succeed those whose terms
expire are of the same class as the directors they succeed and are elected for a term to expire at
the third annual meeting of stockholders after their election and until their successors are duly
elected and qualified. Vacancies on the Board, including a vacancy resulting from an
enlargement of the Board of Directors, shall be filled by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum. Any director so elected holds
office for the remainder of the full term of the class of directors in which the vacancy occurred or
the new directorship was created and until the director’s successor shall have been elected and
qualified.
Nominees for Director
Two directors are to be elected at the Meeting as the Class III directors. The Board of
Directors, as recommended by its Compensation, Nominating and Governance Committee, has
nominated Carl H. Guild, Jr. and Thomas E. Peoples for election as the Company’s Class III
Directors. Mr. Guild is currently and has been a director of the Company since 1997 and has
consented to being named in this Proxy Statement and to serve if elected. Mr. Peoples is currently
and has been a director of the Company since 1998 and has consented to being named in this
Proxy Statement and to serve if elected. If elected, the nominees will hold office until the 2018
Annual Meeting of Stockholders and until their successors are duly elected and qualified. The
Board of Directors knows of no reason why such nominees should be unable or unwilling to
serve, but, if such should be the case, proxies may be voted for the election of some other person
or persons.
The affirmative vote of a plurality of the votes cast at the Meeting by the shares entitled
to vote thereon is required to elect a director. Thus, abstentions, broker non-votes and votes
withheld will not be included in the totals and will have no effect on the outcome of the vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR”
THE ELECTION OF THE NOMINEES.
-5-
Members of the Board of Directors, Nominees and Executive Officers
The following table sets forth the name and address of each director, nominee and
executive officer of the Company, the year each current director first became a director, and the
age and positions currently held by each such individual with the Company. The following table
is as of December 12, 2014.
Name and Address(1)
Year First Became
a Director
Age
Positions and Offices
with the Company
Mitchell B. Briskin
Francisco F. Blanco
Carl H. Guild, Jr.
1998
2011
1997
55
72
70
Class I Director
Class II Director
Class III Director, Chairman of
the Board, Chief Executive
Officer and President
Thomas E. Peoples
1998
66
Class III Director
Non-Director
Executive Officers
Michael P. Malone
--
55
Chief Financial Officer, Treasurer
and Assistant Secretary
(1)
The address of Messrs. Briskin, Blanco, Guild, Peoples and Malone is c/o Technical
Communications Corporation, 100 Domino Drive, Concord, Massachusetts 01742.
Directors and Nominees
Mitchell B. Briskin. Mr. Briskin served as Vice President of Strategic Relationships at
Thermalin Diabetes, LLC, a next-generation insulin development company, from April 2012 until
May 2014. Formerly, Mr. Briskin was a Managing Director at Stonebridge Associates, LLC, an
investment bank, where he worked from 1999 to 2012. Mr. Briskin was a Principal at Concord
Investment Partners, a private equity investment group, from 1997 to 1999. From 1996 to 1997,
Mr. Briskin attended Harvard Business School. From 1990 to 1995, Mr. Briskin was General
Manager at General Chemical Corporation; previously, he was a lawyer with Patterson Belknap
Webb & Tyler LLP in New York, New York.
Mr. Briskin’s qualifications for election to and service on the Board of Directors include
his financial expertise and knowledge and his understanding of the Company’s accounting
practices and general accounting principles. Mr. Briskin’s investment banking experience and
legal education and experience add other valuable perspectives to the Board.
Francisco F. Blanco. Mr. Blanco is President and CEO of The Pola Group, LLC, a
consulting firm focused on providing advice and assistance, strategic direction and creative
business development solutions for commercial and government clients, where he has worked
since 2010. From 2001 to 2010, Mr. Blanco was Executive Vice President of the Intelligence and
National Security Alliance (INSA), a member-based non-profit, non-partisan, public-private
organization that works to promote and recognize the highest standards within the national
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security and intelligence communities. Prior to joining INSA, Mr. Blanco was employed in a
variety of senior management and leadership positions during his 30-year tenure at the U.S.
Department of Defense.
Mr. Blanco’s qualifications for election to and service on the Board of Directors include
his industry experience, his government experience and relationships with government leaders
and agencies, his management and business development skills, and his in-depth understanding of
the Company’s products and their markets.
Carl H. Guild, Jr. Mr. Guild has been President and Chief Executive Officer of the
Company since 1998 and Chairman of the Board of Directors since 2001. He was also Vice-
Chairman of the Board from 1998 to 2001 and Chairman in 1998, and was an independent
consultant to the Company from 1997 to 1998. From 1993 to 1997, he was a Senior Vice
President with Raytheon Engineers and Constructors, Inc., a former unit of Raytheon Company, a
defense, homeland security and aerospace technology company. Mr. Guild serves as President
and Chief Executive Officer of the Company pursuant to an Employment Agreement (as
amended) with the Company, which agreement is summarized under “Employment Agreements”
in the Compensation section below.
Mr. Guild’s qualifications for election to and service on the Board of Directors include
his management and leadership experience and financial acumen, his deep understanding of the
Company’s products, business and industry, including its international operations and customers,
and his demonstrated commitment to TCC and its stockholders.
Thomas E. Peoples. Mr. Peoples is Vice President and Managing Director of The
SPECTRUM Group, a Washington, DC area-based consulting firm with which he has been
affiliated since 2004, and also currently serves as President of International Executive
Counselors, LLC, a consulting company he established in Virginia in 2005. Between 2001 and
2004, Mr. Peoples was retired. From 1999 to 2001, Mr. Peoples was the Senior Vice President for
International and Washington Operations of Gencorp, Inc., a publicly-held manufacturer of
automotive, polymer, aerospace, and defense products. From 1992 to 1999, Mr. Peoples was a
Vice President of Aerojet, a privately-held aerospace and defense contractor. Prior to 1992, Mr.
Peoples served as Manager of Business Development for Smart Munitions Programs at Raytheon
Company. He also served in the U.S. Army between August 1966 and February 1987, retiring
from service as a Lieutenant Colonel. He is also a former Board member and Treasurer of the
National Guard Youth Foundation and was an appointed member of the U.S. Department of
Defense Science Board from 2000 to 2002.
Mr. Peoples’s qualifications for election to and service on the Board of Directors include
his management and business experience, his government experience and relationships with
government leaders and agencies, his business development skills and engineering expertise, and
his in-depth understanding of the Company’s products and their markets.
Officers
Michael P. Malone. Mr. Malone, Chief Financial Officer, Treasurer and Assistant
Secretary, joined the Company in 1998 as Director of Finance and Treasurer and became Chief
Financial Officer in 2000. From 1997 to 1998, he was the Controller at Vasca, Inc., a privately-
held medical device company. Prior to 1997, Mr. Malone was with ZOLL Medical Corporation,
a publicly-traded medical device and software solutions company, for five years as its Controller
and Treasurer. Mr. Malone and the Company are parties to an Employment Agreement, which
agreement is summarized under “Employment Agreements” in the Compensation section below.
-7-
Corporate Governance
Board Composition and Independence; Meetings
The Board of Directors is currently composed of four members, each of whom, with the
exception of Mr. Guild, the Board has determined is an “independent” director as that term is
defined in the rules and regulations of The Nasdaq Stock Market (“Nasdaq”), including Listing
Rule 5605, and Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). The Company does not utilize any other definition or criteria for determining the
independence of a director or nominee, and no other transactions, relationships, or arrangements
exist to the Board’s knowledge or were considered by the Board in determining any director’s or
nominee’s independence.
The Board of Directors held five meetings during the fiscal year ended September 27,
2014. Each director attended 100% of the aggregate of (a) the total number of meetings of the
Board of Directors he was eligible to attend, and (b) the total number of meetings of all
committees of the Board of Directors on which he served that were held during fiscal year 2014.
Board Structure; Role in Risk Oversight
The Board currently combines the role of Chairman of the Board with the role of Chief
Executive Officer, with Carl H. Guild, Jr. serving in both capacities since 2001. The Board
believes that combining these roles fosters clear accountability, effective decision-making and
alignment on corporate strategy. The structure allows one person to speak for and lead the
Company and avoids duplication of work and confusion about who is in charge. Given the
Company’s historic size and financial results, and the requirement that members of the Board
serve staggered terms, the Board has determined that neither dividing these roles nor designating
a lead independent director is necessary or would result in significant benefits to the Company.
The Board believes that its composition and membership – with 75% of its members considered
independent - contribute to, and are currently sufficient for, effective independent oversight and
minimize any potential conflicts that may result from the combination of the CEO and Chairman
roles.
The Board of Directors oversees the business of the Company, including management
performance and risk management, to assure that the long-term interests of TCC’s stockholders
are being served. The process to identify, analyze, report and manage risks has been developed
informally over time and involves managers reporting to the Chief Executive Officer and Chief
Financial Officer, who in turn report to the Board on the significant risks facing the Company.
Each risk is discussed and quantified when possible and a plan is developed to address and
mitigate identified risks. Each committee of the Board is also responsible for reviewing the risk
exposure of the Company related to the committee’s areas of responsibility and providing input to
management and the Board on such risks. The Audit Committee is especially critical in this
process, and such committee’s responsibilities include reviewing risk management and
compliance programs and consulting with management and the Board on risk identification,
measurement and mitigation.
-8-
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Committees
The Board of Directors currently has two committees, the Audit Committee and the
Compensation, Nominating and Governance Committee, each as described below.
Audit Committee
The Audit Committee of the Board, which consists of Messrs. Briskin (Chairman),
Blanco and Peoples, held four meetings during fiscal year 2014. The Audit Committee’s primary
function is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing
the financial reports and other financial information of the Company, reviewing the Company’s
system of internal controls regarding finance and accounting and the Company’s auditing,
accounting and financial reporting processes, serving as an independent and objective party to
monitor the Company’s financial reporting process and internal control system, reviewing and
appraising the audit efforts of the Company’s independent registered public accounting firm,
reviewing, approving and/or ratifying related person transactions, and providing an open avenue
of communication among the independent accountants, financial and senior management, and the
Board of Directors.
The Audit Committee acts pursuant to an Audit Committee Charter, a copy of which is
posted on the Company’s website at https://www.tccsecure.com/Investors.aspx. The Audit
Committee’s charter requires that the committee review and update the charter periodically as
conditions dictate. In August 2014, the Audit Committee’s charter was reviewed and reaffirmed
without change.
The Board of Directors has determined that Mr. Briskin satisfies the definition of “audit
committee financial expert” as promulgated by the Securities and Exchange Commission (the
“Commission”) by virtue of his educational and work experience as described above. Mr. Briskin
and each of the other members of the Audit Committee are also independent under Nasdaq’s
listing standards for directors and Audit Committee members under Rules 5605(b) and (c).
Compensation, Nominating and Governance Committee
(the
The Company’s Compensation, Nominating and Governance Committee
“Governance Committee”) consists of Messrs. Peoples (Chairman), Briskin and Blanco, and held
four meetings and acted once by written consent in lieu of a meeting during the 2014 fiscal year.
As noted above, the Board has determined that each of these individuals satisfies applicable
independence requirements for directors as well as members of such committee under Nasdaq
Rules 5605(d) and (e).
The primary function of the Governance Committee is to assist the Board of Directors in
discharging its responsibilities with respect to the Company’s compensation and benefit
programs, the organization and membership of the Board, and corporate governance matters. The
Governance Committee’s goal is to assure that the composition, practices and operation of the
Board contribute to value creation and effective representation of the Company’s stockholders,
and to play a leadership role in shaping the Company’s corporate governance.
The Governance Committee acts pursuant to the Compensation, Nominating and
Governance Committee Charter, a copy of which is posted on the Company’s website at
https://www.tccsecure.com/Investors.aspx. The Governance Committee’s charter requires that
the committee review and reassess the adequacy of the charter annually and recommend any
-9-
proposed changes to the Board for approval. In August 2014, the Governance Committee’s
charter was reviewed and reaffirmed without change. The Governance Committee must also
annually evaluate its own performance.
The Board has approved policies and procedures for the Governance Committee with
respect to the nomination of candidates to the Board and any committees thereof. These policies
and
at
https://www.tccsecure.com/Investors.aspx and are summarized below, and have not been
materially changed since adoption.
Company’s
procedures
available
website
the
are
on
Nomination Policies and Procedures
The Governance Committee will accept for consideration any candidate properly
recommended by a stockholder; acceptance of a recommendation for consideration does not
imply the committee will nominate or recommend for nomination the proposed candidate.
Stockholders who wish to nominate qualified candidates to serve as directors must notify
the Company in writing, by notice delivered to the attention of the Secretary of the Company at
the address of the Company’s executive offices as set forth in the Company’s periodic reports as
filed with the Commission, of a proposed nominee. Submissions may be by mail, courier or
personal delivery. E-mail submissions will not be considered. In order to ensure meaningful
consideration of such candidates, notice must be received not later than 120 calendar days prior to
the first anniversary of the date of the proxy statement for the prior year’s annual meeting of
stockholders.
The notice must set forth as to each proposed nominee:
•
the nominee’s name, age, business address and, if known, residence address,
•
• his or her principal occupation or employment and business experience,
•
the number of shares of stock of the Company, if any, which are beneficially
owned by such nominee, and
any other information concerning the nominee that must be disclosed as to
nominees in proxy solicitations pursuant to applicable law, including but not
limited to any arrangements or agreements regarding the proposed candidate’s
nomination, all
the
recommending stockholder and the Company, and all transactions between such
parties.
the proposed nominee and
relationships between
The notice must also set forth with respect to the stockholder giving the notice the name
and address, as they appear on the Company’s books, of such stockholder, the number of shares
of the Company that are owned beneficially or of record by such stockholder, and the time period
such shares have been held.
Submissions received through this process will be forwarded to the Governance
Committee for review. Only those submissions that comply with these procedures and those
nominees who satisfy the qualifications determined by the Governance Committee for directors
of the Company will be considered.
When considering candidates, the Governance Committee strives to achieve a balance of
knowledge, experience and accomplishment such that the Board reflects a diversity of talent, age,
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skill, expertise and perspective. While there are no set minimum requirements, a candidate
should:
• be intelligent, thoughtful and analytical,
• possess superior business-related knowledge, skills and experience,
•
reflect the highest integrity, ethics and character, and value such qualities in
others,
• have excelled in both academic and professional settings,
• demonstrate achievement in his or her chosen field,
• be free of actual or potential conflicts of interest,
• be familiar with regulatory and governance matters,
• have the ability to devote sufficient time to the business and affairs of the
Company, and
• demonstrate the capacity and desire to represent, fairly and equally, the best
interests of the Company’s stockholders as a whole.
In addition to the above criteria (which may be modified from time to time), the
Governance Committee may consider such other factors as it deems in the best interests of the
Company and its stockholders, including a candidate’s independence, financial sophistication and
special competencies. The Governance Committee does not have a formal policy with regard to
the consideration of diversity when identifying and evaluating nominees but diversity may be
considered when making nominations, including racial and ethnic diversity, gender, and diversity
of personal and professional experiences, backgrounds, skills and qualifications.
The Governance Committee identifies potential candidates through referrals and
recommendations, including by incumbent directors, management and stockholders, as well as
through business and other organizational networks. The Governance Committee may retain and
compensate third parties, including executive search firms, to identify or evaluate, or assist in
identifying or evaluating, potential director nominees.
Current members of the Board with the requisite skills and experience are considered for
re-nomination, balancing the value of the member’s continuity of service and familiarity with the
Company with that of obtaining a new perspective, and considering each individual’s
contributions, performance and level of participation, the current composition of the Board, and
the Company’s needs. If any existing members do not want to continue in service or if it is
decided not to re-nominate a director, new candidates are identified in accordance with those
skills, experience and characteristics deemed necessary for new nominees, and are evaluated
based on the qualifications set forth above. In every case, the Governance Committee meets (in
person or telephonically) to discuss each candidate, and may require personal interviews before
final approval. Once a slate is selected, the Governance Committee presents it to the full Board.
The Governance Committee does not currently, and does not intend in the future, to
differentiate between or alter the manner in which it evaluates candidates based on the
constituency (including stockholders) that proposed the candidate.
For a description of the Governance Committee’s role in evaluating and establishing
compensation programs, policies and levels for the Company, see the Compensation Discussion
and Analysis and Compensation sections below.
-11-
Stockholder Communications and Director Attendance at Annual Stockholder Meetings
The Board welcomes communications from stockholders and has adopted a procedure for
receiving and addressing such communications. Stockholders may send written communications
to the entire Board or individual directors, addressing them to Technical Communications
Corporation, 100 Domino Drive, Concord, MA 01742, Attention: Chief Financial Officer. All
such communications will be forwarded to the full Board of Directors or to any individual
director or directors to whom the communication is directed unless the communication is clearly
junk mail or a mass mailing, a business solicitation, advertisement or job inquiry, or is unduly
hostile, threatening, illegal, or similarly inappropriate, in which case the Company has the
authority to discard or take appropriate legal action regarding the communication.
Recognizing that director attendance at the Company’s annual meetings of stockholders
can provide stockholders with an opportunity to communicate with members of the Board of
Directors, it is the policy of the Board of Directors to strongly encourage, but not require, the
members of the Board to attend such meetings. All members of the Board attended the 2014
Annual Meeting of Stockholders.
TCC’s policies regarding stockholder communications and director attendance (which
may be modified from time to time) can be found on the Company’s website at
https://www.tccsecure.com/Investors.aspx.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s officers, directors, and
persons who beneficially own more than 10% of a registered class of the Company’s equity
securities to file reports of ownership and changes in ownership with the Commission. Officers,
directors and greater-than-10% stockholders are required by regulation to furnish the Company
with copies of all Section 16(a) reports they file.
Based solely on the Company’s review of the copies of such reports and any amendments
thereto furnished to the Company during and with respect to the Company’s 2014 fiscal year, or
written representations from certain reporting persons that they were not required to file, the
Company believes that during fiscal year 2014, its officers, directors, and beneficial owners of
more than 10% of the Common Stock complied with all applicable Section 16(a) filing
requirements except that each director filed his Form 4 reporting the annual grant of options for
Board service three days late.
Certain Relationships and Related Person Transactions; Legal Proceedings
David A. White, the Company’s Secretary, is a member of a law firm that provides legal
services to the Company. Fees paid to Mr. White’s law firm were approximately $67,000 for
fiscal year 2014 and approximately $51,000 for fiscal year 2013. There were no other
transactions during fiscal years 2014 or 2013, and there are no currently proposed transactions, to
which the Company was or is to be a participant and in which any related person had or will have
a direct or indirect material interest. There are no family relationships among the directors,
executive officers or any nominee therefor, and to the Company’s knowledge no arrangements or
understandings exist between any director or nominee and any other person pursuant to which
such director or nominee was or is to be selected as a director or executive officer.
-12-
There are no material proceedings to which a director, executive officer or nominee is a
party adverse to the Company or its subsidiary or has a material interest adverse to the Company
or its subsidiary, nor to the Company’s knowledge are there any proceedings or events material to
an evaluation of the ability or integrity of the Company’s directors, nominees or executive
officers.
Code of Ethics
The Company has a Code of Business Conduct and Ethics, which applies to all of its
employees, officers and directors. A copy of this code can be found on the Company’s website at
https://www.tccsecure.com/Investors.aspx.
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REPORT OF THE AUDIT COMMITTEE
The following is the report of the Audit Committee with respect to the Company’s
audited financial statements for the fiscal year ended September 27, 2014.
The Audit Committee has reviewed and discussed the 2014 fiscal year audited financial
statements with management. The Audit Committee has also discussed with the Company’s
independent registered public accounting firm, McGladrey, LLP, the matters required to be
discussed by Statement on Auditing Standards No. 61 (as amended) as adopted by the Public
Company Accounting Oversight Board; received and reviewed the written disclosures and the
letter from the independent registered public accounting firm required by applicable requirements
of the Public Company Accounting Oversight Board regarding the independent registered public
accounting firm’s communications with the Audit Committee concerning independence; and
discussed with the independent registered public accounting firm its independence and any
relationships that may impact its objectivity and independence.
Based upon the review and discussions referred to above, the Audit Committee
recommended to the Board of Directors that the audited financial statements for the fiscal year
ended September 27, 2014 be included in the Company’s Annual Report on Form 10-K for filing
with the Securities and Exchange Commission.
Audit Committee
Mitchell B. Briskin (Chair)
Thomas E. Peoples
Francisco F. Blanco
-13-
COMPENSATION DISCUSSION AND ANALYSIS
As noted above, one role of the Compensation, Nominating and Governance Committee
of the Board of Directors, comprised solely of non-employee, “independent” directors, is to assist
the Board with discharging its responsibilities relating to the compensation of TCC’s employees,
officers and directors, and the development and administration of the Company’s compensation
and benefit programs.
The Governance Committee operates under a written charter, which is available at
https://www.tccsecure.com/Investors.aspx. As set forth in the charter, the committee’s authority
and responsibilities with respect to compensation include:
• For executives, to assist with the development of an executive compensation program
supportive of the achievement of the Company’s strategic goals and objectives, to
review and approve the goals and objectives relevant to the compensation of the
Chief Executive Officer of the Company, including an annual evaluation of the
CEO’s performance and the establishment of the CEO’s compensation and other
material terms of employment, and to review and approve senior management team
member compensation;
• For directors, to annually evaluate the appropriate level and form of compensation
for members of the Board and its committees, and to recommend changes to the
Board when appropriate; and
• For employees generally, to monitor and review all general compensation strategies
and programs of the Company, including equity incentive and benefit programs.
The following discussion provides information about the Company’s compensation plans
and programs generally, as well as compensation awarded to, earned by or paid to our “named
executive officers” pursuant to applicable Commission rules and regulations. For additional
information, please see the Compensation section that follows this discussion and analysis.
Compensation Philosophy and Objectives
The philosophy underlying
the Company’s compensation plans
to provide
compensation that rewards both individual and organizational performance and align such
compensation with stockholder interests. The Company aims to make executive compensation
sensitive to Company performance, which is defined in terms of revenue growth and profitability.
Compensation also must be competitive, thereby enabling the Company to attract, retain and
motivate highly-qualified individuals who contribute to the Company’s success, and reflective of
the Company’s financial position.
is
Procedure
Compensation decisions are made annually and are tied to the Company’s fiscal year-
end. For each employee, a performance evaluation is conducted by his or her supervisor, the
results of which are shared with the employee. The evaluation encompasses a review of the
employee’s individual performance over the course of the fiscal year, and includes recognition of
the achievement by TCC of its strategic objectives and priorities. Compensation decisions for
non-officer employees are made after the results of the performance evaluations have been
considered and an informal analysis is completed that considers the goals of market
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competitiveness and enhancement of stockholder value. No upward adjustment is made to an
employee’s compensation if the individual’s performance does not merit, or if the Company’s
financial condition and performance do not support, such an adjustment.
The Governance Committee does not make individual compensation decisions for non-
officer employees. Rather, our Chief Executive Officer sets compensation levels and presents the
aggregate information to the Governance Committee for its information. Bonuses are typically
paid in December, and salary increases are effective October 1 and paid retroactively before the
end of the calendar year.
Compensation packages for our named executive officers are analyzed and discussed
individually by the Governance Committee, and decisions are made once the Governance
Committee has obtained all of the information it deems necessary. Information that is considered
in making named executive officer compensation decisions includes information provided to the
Governance Committee via presentations made to the committee by the named executive officers
themselves. Such presentations include highlights of achievements and milestones met by the
officers in the fiscal year and the results of each individual’s performance self-evaluation. The
Governance Committee also considers the Company’s financial condition and performance.
The accounting and tax treatment of compensation decisions generally have not been
material factors in determining the amount and type of compensation given to executive officers,
other than to balance the potential cost to the Company with the benefit or value to the executive.
The tax and accounting treatment of different compensation arrangements may play a greater role
in the decision-making process in the future. The effects on Section 409A of the Internal
Revenue Code of 1986, as amended (the “Code”) also would be considered when applicable.
The Governance Committee has not to date employed any compensation consultants to
assist it with compensation decisions, although it is authorized by its charter to do so and reserves
the right to engage such consultants when and if deemed necessary or advisable. The Governance
Committee also has the authority to form, and delegate any of its responsibilities to,
subcommittees as it deems appropriate, although to date it has not done so.
Compensation Components
The components of compensation provided to named executive officers (as well as non-
officer employees) typically include base salary, annual discretionary bonuses and equity
incentives. Bonuses and equity incentives have historically been granted in periods during which
the Company’s financial performance have supported such awards. Executive officers have not
received these components of compensation when the Company’s operating results have not been
positive and/or the recipients have not achieved specified performance milestones. No bonuses
were paid in fiscal 2014 to any named executive officer due to the financial performance of the
Company. Mr. Malone received a $10,000 bonus for his performance in fiscal 2013 as a result of
achieving a specified performance milestone.
The Company also has in place retirement and change of control arrangements with its
two named executive officers, who participate in the group benefits offered to all employees, such
as medical and life insurance.
-15-
Base Salary
Base salary levels for the Company’s named executive officers are based on an informal
review of compensation for competitive positions in the market and reflect job responsibilities
and skills, level of experience, individual performance, judgments as to past and future
contributions to the Company, and the Company’s compensation budget. Specific weight is not
given to any particular factor when establishing base salaries, although most weight is typically
given for individual performance. The Company’s practice has been to review base salaries at the
fiscal year-end as noted above, although in unusual cases salaries may be reviewed more
frequently if circumstances dictate.
Annual Bonuses
Bonuses, when paid, are designed to tie awards to individual performance and motivate
and reward employees for their contributions to the Company. A number of factors are
considered in determining whether annual bonuses should be paid, most importantly the
achievement by the Company of specified financial objectives and the achievement by the
employees of individual objectives. Recognition of individual performance and accomplishment
is based on a subjective analysis of each individual’s performance; recognition of Company
performance is based on an evaluation of specified measures of corporate performance, such as
corporate profits and sales order activity.
The Company has an Executive Bonus Program for the benefit of key management
employees – traditionally the Chief Executive Officer and Chief Financial Officer – and an
informal bonus program for all other employees. For named executive officers, an initial plan is
set and approved by the Governance Committee at the beginning of the year and bonus awards
are determined out of such plan at year-end based on Company and individual performance. For
non-officer employees, the budget is established by management, subject to review by the
Governance Committee, at year-end based on the Company’s financial performance during the
year, and individual awards are determined through a consultative process involving an
employee’s supervisor and our Chief Executive Officer.
Equity Incentives
As with base salary and bonus determinations, equity compensation awards are
determined on an informal, annual basis. An important objective of this component of
compensation is to strengthen the relationship between the long-term value of the Company’s
stock price and the potential financial gain for employees, as well as retention of personnel.
Historically the Company has awarded stock options to its employees and directors as the equity
component of compensation, which provide recipients the opportunity to purchase shares of our
Common Stock upon vesting and become valuable only if the trading price of the Common Stock
increases. The recipient is therefore motivated to remain with the Company until the options vest
and motivated to improve individual performance in support of improved Company performance.
In selecting employees eligible to receive equity compensation grants (whether at the
initial hire date or through periodic grants) and determining the size of such grants, a variety of
factors are considered, including the job and responsibility level of the employee and past, current
and prospective services rendered, or to be rendered, to the Company by the employee.
Determination of the employees eligible to receive awards and the size of such awards is based on
a subjective analysis by the Governance Committee, with input from Mr. Guild, of each
individual’s position within the Company, his or her performance, and his or her growth potential
and that of the Company.
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Equity Plans
Under
The Company currently administers three plans that provide for the grant of equity
the Technical
to officers, directors and employees.
incentive compensation
Communications Corporation 2001 Stock Option Plan, as amended (the “2001 Plan”), the
Company was authorized to grant non-qualified and incentive stock options to its employees,
officers, directors and consultants to purchase up to 350,000 shares of Common Stock. The
stated purpose of the 2001 Plan is to attract and retain the best available personnel for positions of
substantial responsibility, provide additional incentives to recipients, and promote the success of
the Company’s business. Under the 2001 Plan, the exercise price of each incentive option must
equal or exceed the market price of the Company’s stock on the date of grant, but was permitted
to be set at any price for non-qualified options. The maximum term for any option granted under
the 2001 Plan was 10 years; vesting periods are at the Board’s discretion and typically ranged
between zero and five years. The 2001 Plan expired on August 2, 2011 and as of December 12,
2014, no shares remained available for awards under such plan, although options to purchase
2,400 shares granted under the 2001 Plan remain outstanding.
The Technical Communications Corporation 2005 Non-Statutory Stock Option Plan, as
amended (the “2005 Plan”), was adopted by the Board of Directors in May 2005 and permits the
grant of non-statutory stock options to purchase up to 200,000 shares of Common Stock to
employees, directors and consultants. The stated purpose of the 2005 Plan is to promote the
success and interests of the Company and its stockholders by permitting and encouraging
employees, directors and consultants of the Company to obtain a proprietary interest in the
Company or its subsidiaries through the grant of non-statutory options to purchase shares of the
Company. Determinations as to recipients of awards, option term, vesting period and exercise
price are made by the Governance Committee in its discretion. As of December 12, 2014, the
Company had issued a total of 180,277 options pursuant to the 2005 Plan and 19,723 shares were
still available for awards. If an option expires, terminates or becomes unexercisable for any
reason without being exercised in full, the unpurchased shares become available for future grant
under the 2005 Plan, as do any shares that are retained or withheld by the Company upon exercise
of an option in order to satisfy the exercise price for such option or any withholding taxes due
with respect to such exercise.
The Technical Communications Corporation 2010 Equity Incentive Plan, as amended and
restated (the “2010 Plan”) provides for the issuance of up to 200,000 shares of Common Stock
pursuant to awards of stock options (incentive and non-qualified), stock appreciation rights or
“SARs”, and restricted stock to employees, directors and consultants to the Company. The stated
purpose of the 2010 Plan is to promote the success and interests of the Company and its
stockholders by permitting and encouraging participants to obtain a proprietary interest in the
Company through the grant of awards that are consistent with the Company’s goals and that link
the personal interests of participants to those of the Company’s stockholders. The 2010 Plan is
further intended to enable the Company to attract, retain and motivate those whose services are
deemed critical to the success of the Company and align the interests of such individuals with
those of the Company. Determinations as to award recipients, duration, price, vesting and
performance requirements and other material terms are made by the Governance Committee,
although there are specific requirements as to the price and term of certain awards depending on
the award type and recipient. If any award under the 2010 Plan is canceled, terminates, expires or
lapses for any reason without having been exercised in full, any shares subject to such award that
remain unpurchased will be available for future grant. In addition, any shares retained by the
Company upon exercise of an award in order to satisfy the exercise price of such award, or any
withholding taxes due with respect to such exercise, shall be treated as not issued and shall
-17-
continue to be available. At the same time, shares issued under the 2010 Plan and later
repurchased by the Company are not available for future grant or sale. As of December 12, 2014,
the Company had issued options to purchase an aggregate 150,814 shares pursuant to the 2010
Plan and 55,603 shares were still available for awards.
Retirement, Severance, Change in Control and Similar Compensation
The Company does not offer or have in place any formal retirement, severance or similar
compensation programs other than its 401(k) plan. Rather, the Company individually negotiates
with those employees for whom retirement, severance or similar compensation is deemed
necessary. A description of the severance arrangements with the Company’s named executive
officers follows.
Carl H. Guild, Jr., President and Chief Executive Officer
Pursuant to his employment agreement, upon termination of his employment without
“cause” by the Company or upon his death or disability, Mr. Guild is entitled to receive severance
pay in an amount equal to the greater of six months’ base salary at the then-current level or the
balance of the term of the agreement, less applicable taxes and other required withholdings and
amounts owed to the Company, and including all health and other benefits to which he had been
entitled while employed by the Company at the Company’s expense for at least six months. If the
Company determines not to renew Mr. Guild’s employment agreement, he is entitled to an
amount equal to six months’ base salary at the then-current level, less applicable taxes and other
required withholdings and amounts owed to the Company, and the continuation of all health and
other benefits to which he had been entitled while employed by the Company at the Company’s
expense for at least six months.
“Cause” is defined as Mr. Guild’s failure or refusal to perform the services specified in
his employment agreement or to carry out any lawful directions of the Board; conviction of a
felony; fraud or embezzlement involving the assets of the Company, its customers, suppliers or
affiliates; gross negligence or willful misconduct; or breach of any term of his employment
agreement.
Mr. Guild may terminate his employment agreement upon prior written notice to the
Company. Upon his voluntary termination, he is entitled to severance pay – defined as his base
salary at the then-current level, less applicable taxes and other required withholdings and amounts
owed to the Company – equal to six months if the termination date is on the renewal date of the
agreement or the lesser of six months or the balance of the term of the agreement if the
termination date is before such renewal date.
In the event of a change in control of the Company where Mr. Guild resigns or is
terminated without cause by the Company within 24 months after such an event, any unvested
options held shall automatically vest and become immediately exercisable. In addition, Mr. Guild
would be entitled to receive severance pay in an amount equal to 24 months’ base salary at the
then-current level, less applicable taxes and other withholdings and amounts due and plus all
accrued and unpaid expenses and vacation time. In the event that any payment to be received
pursuant to such change in control or the value of any acceleration right in any Company stock
options held in connection with the change in control of the Company would be subject to an
excise tax pursuant to Section 4999 of the Code, whether in whole or in part as a result of being
an “excess parachute payment” within the meaning of such terms in Section 280G(b) of the Code,
-18-
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the amount payable will be increased (grossed up) to cover the excise tax liability due under
Section 4999 of the Code, if otherwise permitted under the Code.
“Change in control” is defined as the occurrence of any one of the following: (a) any
person or entity, including a “group” as defined in Section 13(d) of the Exchange Act (other than
the Company, a wholly-owned subsidiary of the Company, or any employee benefit plan of the
Company or its subsidiaries), becoming the beneficial owner of the Company’s securities having
51% or more of the combined voting power of the then-outstanding securities of the Company
that may be cast for the election of directors of the Company; or (b) as the result of, or in
connection with, any cash tender or exchange offer, merger or other business combination, sale of
assets or contested election or any combination of the foregoing transactions, less than a majority
of the combined voting power of the then-outstanding securities of the Company or any successor
corporation or entity entitled to vote generally in the election of directors of the Company or such
other corporation or entity after such transaction, are held in the aggregate by holders of the
Company’s securities entitled to vote generally in the election of directors of the Company
immediately prior to such transaction; or (c) the approval of the stockholders of the Company of a
plan of liquidation.
Michael P. Malone, Treasurer and Chief Financial Officer
Under Mr. Malone’s employment agreement, the Company has the right, upon written
notice, to terminate his employment (a) immediately at any time for “cause” or (b) at any time
without “cause”. Cause is defined as his failure or refusal to perform the services specified in his
employment agreement or to carry out any lawful directions of the Board; conviction of a felony;
fraud or embezzlement involving the assets of the Company, its customers, suppliers or affiliates;
gross negligence or willful misconduct; inability for a continuous period of at least 180 days in
the aggregate during any 360-day period to perform his duties due to a physical or mental
disability incapable of reasonable accommodation under applicable law; or breach of any term of
his employment agreement.
Upon termination of employment without cause by the Company, Mr. Malone is entitled
to receive severance pay in an amount equal to the greater of six months’ base salary at the then-
current level or his base salary for the balance of the term of the agreement. If the Company
determines not to renew Mr. Malone’s employment agreement, he is guaranteed, at the
Company’s option, at will employment for six months or severance pay in an amount equal to six
months’ base salary at the then-current level. In either case, such amounts shall be less applicable
taxes and other required withholdings and amounts owed to the Company, plus all accrued but
unpaid expenses and vacation time.
In the event of a change in control of the Company where Mr. Malone resigns or is
terminated without cause by the Company within six months after such an event, any unvested
options held shall automatically vest and become immediately exercisable. In addition, Mr.
Malone would be entitled to receive severance pay in an amount equal to six months’ base salary
at the then-current level, less applicable taxes and other withholdings and amounts due and plus
all accrued and unpaid expenses and vacation time. In the event that any payment to be received
pursuant to such change in control or the value of any acceleration right in any Company stock
options held in connection with the change in control of the Company would be subject to an
excise tax pursuant to Section 4999 of the Code, whether in whole or in part as a result of being
an “excess parachute payment” within the meaning of such terms in Section 280G(b) of the Code,
the amount payable to Mr. Malone will be increased (grossed up) to cover the excise tax liability
due under Section 4999 of the Code, if otherwise permitted under the Code. “Change in control”
-19-
in Mr. Malone’s employment agreement has the same definition as that found in Mr. Guild’s
agreement, provided above.
No other employees receive or are entitled to receive any retirement, severance or similar
compensation.
Perquisites and Other Benefits
The Company generally does not provide its officers with “perks” or similar types of
benefits. Messrs. Guild and Malone have life insurance policies for which the Company pays the
premium, and the Company also typically matches up to a certain percentage of their
contributions to the Company’s 401(k) plan. Both of these benefits are generally available to all
Company employees, subject to certain limitations and restrictions. Messrs. Guild and Malone,
like other employees, also are entitled to participate in TCC’s employee benefit plans offering
group disability insurance, group medical and hospitalization plans, and retirement and profit-
sharing plans.
Chief Executive Officer Compensation
Mr. Guild has been President and Chief Executive Officer of the Company since 1998
and Chairman of the Board of Directors since 2001. His base salary for fiscal years 2014 and
2013 was set at $285,000, effective March 1, 2012.
Mr. Guild received no bonuses for the fiscal years ended September 27, 2014 and
September 28, 2013 due to the Company’s financial condition at year-end and Mr. Guild’s failure
to achieve his specified performance milestones for the periods.
In fiscal 2014, the Board awarded Mr. Guild an option to purchase 3,500 shares of
Common Stock for his service as a director, as it did for all other directors. These non-qualified
options were granted on February 12, 2014 under the 2005 Plan at an exercise price of $7.65 per
share with a term of 10 years, and vested immediately. Mr. Guild also was awarded a non-
qualified option to purchase 3,500 shares of Common Stock for his service as a director during
fiscal 2013. These non-qualified options were granted on February 11, 2013 under the 2005 Plan
at an exercise price of $4.67 per share with a term of 10 years, and vested immediately. See
“Director Compensation” in the Compensation section below for more information regarding
such director option grants.
See “Retirement, Severance, Change in Control and Similar Compensation” above for a
discussion of the severance payments payable to Mr. Guild under the terms of his employment
agreement.
Chief Financial Officer Compensation
Mr. Malone has been Chief Financial Officer of the Company since 2000 and Treasurer
since 1998. His base salary for fiscal years 2014 and 2013 was set at $160,000, effective March
1, 2012.
Mr. Malone received a $10,000 bonus for the fiscal year ended September 28, 2013 as a
result of the achievement of additional responsibilities outlined by Mr. Guild and the Governance
Committee, including the realization of specified tax savings. Mr. Malone received no bonus for
the fiscal year ended September 27, 2014 due to the Company’s financial condition at year-end
and Mr. Malone’s failure to achieve his specified performance milestones for the year.
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Mr. Malone was not awarded any stock options during fiscal years 2014 or 2013.
See “Retirement, Severance, Change in Control and Similar Compensation” above for a
discussion of the severance payments payable to Mr. Malone under the terms of his employment
agreement.
Tax Considerations
Section 162(m) of the Code generally disallows a tax deduction to public companies for
compensation over $1,000,000 paid to certain employees, generally the Chief Executive Officer
and the four other most highly compensated executive officers. Qualifying performance-based
compensation is not subject to the deduction limit if certain requirements are met. In fiscal 2014,
no compensation paid by the Company was nondeductible as a result of the $1,000,000
limitation. Furthermore, the Board of Directors believes that, given the general range of salaries
and bonuses for executive officers of the Company, the $1,000,000 threshold of Section 162(m)
will not be reached by any executive officer of the Company in the foreseeable future.
Accordingly, the Board has not formulated a policy to address non-qualifying compensation.
Say on Pay Proposals and Votes
As discussed under Proposal II below, stockholders will have the opportunity to cast their
vote on the compensation of TCC’s named executive officers as described in this Proxy
Statement at the Meeting. The advisory vote will not be binding on the Governance Committee or
the Board of Directors. However, the Governance Committee and the Board will review the
voting results and any concerns raised by stockholders will be considered when determining
future compensation arrangements and making decisions about future compensation programs
and practices. The Board and Governance Committee also may consult directly with
stockholders to better understand any issues and concerns. Stockholders (not including broker
non-votes) have voted in favor of the compensation of the Company’s named executive officers
every year since being given the opportunity to do so. Stockholders also voted in favor of
including an advisory vote on executive compensation in the Company’s proxy materials every
year as recommended by the Board, which annual vote the Board has implemented.
-21-
Named Executive Officers
COMPENSATION
The following tables set forth all plan and non-plan compensation awarded to, earned by
or paid to the Chief Executive Officer and Chief Financial Officer of the Company, who were the
only “named executive officers” of the Company during its 2014 fiscal year, for all services
rendered by such officers to the Company and its subsidiary in all capacities for the periods
presented.
Summary Compensation Table
Name
and
Principal Position
Carl H. Guild, Jr.
President, Chief
Executive Officer
and Chairman
Michael P. Malone
Chief Financial Officer,
Treasurer and Assistant
Secretary
Year
Salary
($)
Bonus
($)
2014
$285,006(1)
2013
$285,006(1)
2014
$160,014(5)
--
--
--
2013
$160,014(5)
$10,000
(6)
Option
Awards
($)
$15,847
(2)
$9,972
(4)
--
--
All
Other
Compensation
($)
$6,496
(3)
$6,931
(3)
$5,744
(7)
$6,108
(7)
Total
($)
$307,349
$301,909
$165,758
$176,122
(1)
(2)
(3)
(4)
Mr. Guild’s annual base salary was set at $285,000 effective March 1, 2012.
Amount represents an award on February 12, 2014 of a non-qualified option to
purchase 3,500 shares of Common Stock at $7.65 per share, which vested in full on
that date and has a 10 year term. Such award was made to Mr. Guild for his service
as a director of the Company. The dollar amount presented includes the aggregate
fair value of the award on the date of grant. The fair value of the option was
estimated on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in fiscal 2014: dividend
yield of 0%, expected volatility of 62%, risk-free interest rate of 1.5%, and expected
life of 6.5 years.
Includes the Company’s 25% match on the first 6%, and 30% match on the second
6%, of Mr. Guild’s 401(k) contributions for fiscal 2014 and 2013. Also includes life
insurance premiums paid by the Company of $444 and $828, respectively, for each of
fiscal years 2014 and 2013.
Amount represents an award on February 11, 2013 of a non-qualified option to
purchase 3,500 shares of Common Stock at $4.67 per share, which vested in full on
that date and has a 10 year term. Such award was made to Mr. Guild for his service
as a director of the Company. The dollar amount presented includes the aggregate
fair value of the award on the date of grant. The fair value of the option was
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estimated on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in fiscal 2013: dividend
yield of 0%, expected volatility of 66%, risk-free interest rate of 0.8%, and expected
life of 6.5 years.
Mr. Malone’s annual base salary was set at $160,000 effective March 1, 2012.
The bonus amount of $10,000 for fiscal 2013 was accrued but unpaid at September
28, 2013, and paid as of December 31, 2013.
Includes the Company’s 25% match on the first 6%, and 30% match on the second
6%, of Mr. Malone’s 401(k) contributions for fiscal 2014 and 2013. Also includes
life insurance premiums paid by the Company of $666 and $840, respectively, for
each of fiscal years 2014 and 2013.
(5)
(6)
(7)
For further information on equity incentive awards granted to our named executive
officers, see the disclosure below. For more information on compensation generally and
information on severance and change of control rights, see the Compensation Discussion and
Analysis section above.
Employment Agreements
Carl H. Guild, Jr.
The Company entered into an employment agreement with Carl H. Guild, Jr., its
President and Chief Executive Officer, effective as of November 19, 1998 and amended
November 8, 2001. The original term of the agreement expired September 30, 2000; the
agreement renews automatically thereafter for successive periods of one year unless earlier
terminated or not renewed. Mr. Guild’s agreement contains provisions specifying his annual
compensation, subject to an annual merit review by the Board of Directors. The agreement also
provides for performance awards to be paid at the discretion of the Company’s Board of
Directors, based on an assessment of exceptional performance. Mr. Guild’s base salary was
increased to $285,000 effective March 1, 2012 from $270,000. No performance awards were
earned in fiscal 2014 and 2013.
For a more in-depth discussion of Mr. Guild’s right to receive annual performance
bonuses and his right to severance and change in control payments, see the Compensation
Discussion and Analysis section above. For information on stock options granted to Mr. Guild,
see “Outstanding Equity Awards at Fiscal Year-End” below.
Michael P. Malone
The Company entered into an employment agreement with Michael P. Malone, its Chief
Financial Officer, effective as of February 12, 2001. The original term of the agreement was 12
months, and the agreement renews automatically for successive periods of one year unless earlier
terminated or not renewed. Mr. Malone’s agreement contains provisions specifying his annual
base salary, subject to an annual merit review by the Board of Directors. The agreement also
provides for performance awards to be paid at the discretion of the Company’s Board of
Directors, based on an exceptional performance assessment. Mr. Malone’s base salary was
increased to $160,000 effective March 1, 2012 from $150,000, and he received a performance
award in the amount of $10,000 for fiscal 2013. No performance award was earned in fiscal 2014.
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For a more in-depth discussion of Mr. Malone’s right to receive annual performance
bonuses and his right to severance and change in control payments, see the Compensation
Discussion and Analysis section above. For information on stock options granted to Mr. Malone,
see “Outstanding Equity Awards at Fiscal Year-End” below.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information regarding unexercised options held by
our named executive officers outstanding as of the end of the Company’s 2014 fiscal year, which
date was September 27, 2014.
Option Awards
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
Number of
Securities
Underlying
Unexercised
Options
(#) Exercisable
Number of
Securities
Underlying
Unexercised
Options
(#) Unexercisable
3,500 (1)
15,120 (2)
3,500 (3)
3,500 (4)
3,500 (5)
3,500 (6)
10,000 (7)
8,401 (2)
--
3,780 (2)
--
--
--
--
--
2,100 (2)
--
--
--
--
--
--
--
--
Name
Carl H. Guild, Jr.
Michael P. Malone
Option
Exercise
Price
($)
7.02
11.51
9.77
10.20
4.67
7.65
3.00
11.51
Option
Expiration
Date
02/08/20
07/29/20
05/05/21
05/03/22
02/11/23
02/12/24
11/10/15
07/29/20
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Granted on February 8, 2010 under the 2005 Plan; options have 10 year term and
were fully vested as of February 8, 2010.
Granted on July 29, 2010 under the 2010 Plan; options have 10 year term and vest as
to 20% of the shares on each of the first five anniversaries of the date of grant.
Granted on May 5, 2011 under the 2010 Plan; options have 10 year term and were
fully vested as of May 5, 2011.
Granted on May 3, 2012 under the 2005 Plan; options have 10 year term and were
fully vested as of May 3, 2012.
Granted on February 11, 2013 under the 2005 Plan; options have 10 year term and
were fully vested as of February 11, 2013.
Granted on February 12, 2014 under the 2005 Plan; options have 10 year term and
were fully vested as of February 12, 2014.
Granted on November 10, 2005 under the 2005 Plan; options have 10 year term and
were fully vested as of November 10, 2008.
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Equity Incentive Plans
The Company currently administers three plans that provide for the grant of equity
incentive compensation to officers, directors and employees: the Technical Communications
Corporation 2010 Equity Incentive Plan, the 2005 Non-Statutory Stock Option Plan and the 2001
Stock Option Plan. At December 12, 2014, there were an aggregate of 750,000 shares authorized
under these plans, of which 269,485 were outstanding and 75,326 were available for future grant.
Generally, these plans provide for the grant of equity awards to employees, officers, directors and
consultants of the Company, in each case in amounts, at prices and subject to such restrictions
and limitations as determined by the Board of Directors or a committee thereof. For more
information about each plan, see “Equity Incentives” in the Compensation Discussion and
Analysis section above. The goal of the Company’s equity incentive awards is to promote the
success and interests of the Company and its stockholders by permitting and encouraging
recipients to obtain a proprietary interest in the Company or its subsidiaries through the grant and
exercise of such awards, and motivating such recipients to remain with the Company and work
towards its success.
Grants in Fiscal 2014
On February 12, 2014, the Board of Directors granted to each of the members of the
Company’s Board of Directors options under the 2005 Plan to purchase 3,500 shares of Common
Stock, for an aggregate 14,000 shares. These non-qualified stock options, which are exercisable
at $7.65 per share, vested immediately and have a term of 10 years. Such grants were the only
grants of stock options made to executive officers and directors of the Company during the 2014
fiscal year.
Retirement, Severance and Similar Compensation
No retirement, severance or similar compensation was paid to any employee during the
2014 fiscal year. For a description of the amounts that may be payable to our named executive
officers upon their resignation, retirement, termination or a change in control, please see
“Retirement, Severance, Change in Control and Similar Compensation” above in the
Compensation Discussion and Analysis section. The Company also provides to all employees a
401(k) tax qualified plan.
Compensation of Directors
The following table sets forth all compensation paid to the Company’s directors for the
fiscal year ended September 27, 2014. Mr. Guild, our President, CEO and Chairman of the Board
of Directors, did not receive any compensation for his service as a director during the 2014 fiscal
year other than the option grant discussed above.
Name
Mitchell B. Briskin
Thomas E. Peoples
Francisco F. Blanco
Fees Earned or
Paid in Cash
($)
Option Awards
($)
All Other
Compensation
($)
$30,100
(1)
$24,500
(1)
$24,500
(1)
$15,847
(2)(3)
$15,847
(2)(3)
$15,847
(2)(3)
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Total
($)
$45,947
$40,347
$40,347
(1) Includes quarterly stipend and fees paid for Board of Directors and committee meetings
attended during the fiscal year. For Mr. Briskin, also includes quarterly stipend received
for serving as Chairman of the Audit Committee.
(2) Amount represents the award on February 12, 2014 of a non-qualified option to purchase
3,500 shares of Common Stock at $7.65 per share, which option vested immediately and
has a 10 year term. The dollar amount presented represents the aggregate fair value of
the award on the date of grant. The fair value of the option was estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 2014: dividend yield of 0%, expected volatility of
62%, risk-free interest rate of 1.5%, and expected life of 6.5 years.
(3) Mr. Briskin had 24,500 options outstanding at the 2014 fiscal year-end, all of which were
fully vested and exercisable. Mr. Peoples had 29,500 options outstanding at the 2014
fiscal year-end, all of which were fully vested and exercisable. Mr. Blanco had 7,000
options outstanding at the 2014 fiscal year-end, all of which were fully vested and
exercisable.
Board members are entitled to receive a Board meeting fee of $2,500 per meeting
attended (whether in person or via telephone conference, so long as the duration of the meeting
attended exceeds 30 minutes), which fee can be waived. Board members also receive a quarterly
stipend of $3,500 for their service. Members of the Audit Committee are paid $1,000 for each
Audit Committee meeting that is not held in connection with a regularly scheduled Board
meeting, and the Audit Committee Chairman receives a quarterly stipend of $400 in addition to
the stipend he receives as a director of the Company. Members of the Governance Committee
receive $500 for each meeting that is held other than in connection with a regularly scheduled
meeting of the Board of Directors.
Commencing in 2008, directors are annually granted options to purchase 3,500 shares of
Common Stock at an exercise price equal to the closing price of the Common Stock on the date of
grant. Stock options granted to directors are considered non-qualified and vest immediately.
Each grant expires 10 years after the date of grant, except that if a director ceases to be a director,
the option terminates at the earlier of 10 years from the date of grant or three years from the last
day as a director.
TCC reimburses members of the Board of Directors for their reasonable out-of-pocket
expenses incurred in attending Board and committee meetings. The Company believes that
members of the Board of Directors received compensation during fiscal year 2014 commensurate
with their responsibilities to the Company and appropriate for a company of TCC’s size and
revenues.
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PROPOSAL II. STOCKHOLDER ADVISORY VOTE
ON EXECUTIVE COMPENSATION
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”)
and Section 14A of the Exchange Act entitle stockholders to cast a non-binding, advisory vote on
the compensation of executives as described in a company’s proxy statement, otherwise known as
“say on pay” proposals. The legislation makes clear that these votes do not overrule a Board’s
compensation decisions, impose additional fiduciary duties on the Board, or limit stockholders’
ability to make other compensation-related proposals.
The Company’s guiding compensation philosophy, as discussed above in Compensation
Discussion and Analysis, is to provide compensation that rewards individual and organizational
performance and align such compensation with the interests of long-term stockholders. The
Company aims to make executive compensation sensitive to Company performance, which is
defined in terms of revenue growth and profitability. Compensation also must be competitive,
thereby enabling the Company to attract, retain and motivate highly-qualified individuals who
contribute to the Company’s success.
We believe that the Company’s executive compensation programs have been effective at
providing appropriate incentives for the achievement of targeted results, aligning pay and
performance, creating an ownership culture in which award recipients think and act like
stockholders, and enabling TCC to attract and retain some of the most talented executives in the
communications security device and system industry.
Revenues for the 2014 fiscal year were $6,139,000 with a net loss of $2,565,000 or
$(1.39) per share. Delays in the receipt of certain foreign and domestic contracts, coupled with
customer and production delivery requirements, resulted in lower than expected revenue for fiscal
2014. Delays were primarily the result of international political unrest, which diverted foreign
government customers’ attention to domestic issues, as well as other factors associated with
government procurements that often subject the Company to unpredictable and erratic delays in
the processing of procurements and delivery of products. The Company expects that sales will
improve over the next 12 months and hopes to experience increased demand for communications
security devices, systems and services, and will continue to commit resources to internal product
development during the 2015 fiscal year and beyond.
Compensation actions taken with respect to fiscal 2014 for TCC’s named executive
officers reflected the Company’s results. Specifically, in recognition of both the Company’s
disappointing financial performance and poor individual achievement of performance milestones,
no annual performance bonuses related to company performance were awarded to our CEO or
CFO. Stockholders are encouraged to read the Compensation Discussion and Analysis and
Compensation sections of this Proxy Statement for a more detailed discussion of how the
Company’s compensation programs reflect our overarching compensation philosophy and core
principles and how such philosophy and principles were
implemented when making
compensation decisions for 2014.
Our Board values constructive dialogue on compensation and other governance topics,
and recognizes the interest that investors have in executive compensation. In response to the
passage of the Reform Act and in recognition of growing support for advisory votes on
compensation and our stockholders’ say-on-pay and say-when-on-pay votes, stockholders now
have the opportunity to vote on an advisory resolution concerning the compensation of our
executives on an annual basis.
-27-
Accordingly, stockholders are being asked to vote on the following resolution at the
Meeting:
RESOLVED, that the compensation paid to the Company’s named executive
officers as disclosed in the Compensation section (including the tables and
narrative discussion therein) of this Proxy Statement be hereby APPROVED.
Stockholders will have the opportunity to vote for or against such resolution, or abstain
from voting. The affirmative vote of the holders of a majority of the shares of Common Stock
voting on the matter shall be required to approve the stockholder advisory vote on executive
compensation as disclosed in this Proxy Statement. Abstentions and broker non-votes will not be
included in the totals for the proposal, and will have no effect on the outcome of the vote.
The advisory vote will not be binding on the Governance Committee or the Board of
Directors. However, the Governance Committee and the Board will review the voting results and
any concerns raised by stockholders will be considered when determining future compensation
arrangements and making decisions about future compensation programs and practices. The
Board and Governance Committee also may consult directly with stockholders to better
understand any issues and concerns.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR”
THE ADVISORY RESOLUTION APPROVING EXECUTIVE COMPENSATION.
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PROPOSAL III. RATIFICATION OF SELECTION OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Independent Registered Pubic Accounting Firm
The Audit Committee has selected the firm of McGladrey, LLP (“McGladrey”),
independent certified public accountants, to serve as the Company’s independent registered
public accounting firm for the fiscal year ending October 3, 2015. McGladrey acted as the TCC’s
independent registered public accounting firm for the company’s 2014 and 2013 fiscal years.
It is expected that a member of McGladrey will be present at the Meeting and will be
available to respond to appropriate questions and make a statement if he so desires.
Fees
Audit Fees. The aggregate fees billed by McGladrey for professional services rendered
for the audit of the Company’s annual financial statements for fiscal years 2014 and 2013, and the
reviews of the financial statements included in the Company’s quarterly reports during fiscal
years 2014 and 2013, were approximately $26,052 (of total audit fees for fiscal 2014 of $72,852,
the remainder of which will be billed in fiscal year 2015) and $67,652, respectively.
Audit-Related Fees. No fees were billed by McGladrey for assurance and related services
that were reasonably related to the performance of its audit or review of the Company’s financial
statements for fiscal years 2014 and 2013.
Tax Fees. The aggregate fees billed by McGladrey for professional services rendered for
tax compliance, tax advice and tax planning for the Company for each of fiscal years 2014 and
2013 were approximately $30,451 and $39,680, respectively. These amounts represent those
billed for tax return preparation and tax advice for the Company and its subsidiary.
All Other Fees. No fees were billed by McGladrey for products or services provided
other than those otherwise described above for fiscal years 2014 and 2013.
Pre-Approval Policies
It is the policy of the Audit Committee to pre-approve the audit and permissible non-audit
services performed by the Company’s independent registered public accounting firm in order to
ensure that the provision of such services does not impair such firm’s independence, in
appearance or fact. In fiscal year 2014, the Audit Committee pre-approved all such services
performed by McGladrey.
Ratification
Stockholder ratification of the appointment of the Company’s independent registered
public accounting firm is not required by the Company’s By-laws or otherwise, but is being done
as a matter of good corporate governance. If stockholders fail to ratify the selection, the Audit
Committee will reconsider this selection. Even if the selection is ratified, the Audit Committee in
its discretion may direct the appointment of a different independent registered public accounting
firm at any time during the year if it determines that such a change would be in the best interests
of the Company and its stockholders.
-29-
The affirmative vote of the holders of a majority of the shares of Common Stock voting on
the matter is required for the ratification of the selection of the independent registered public
accounting firm. Abstentions and broker non-votes will not be included in the totals for the
proposal, and will have no effect on the outcome of the vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION
OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FOR FISCAL YEAR 2015.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table shows, as of December 12, 2014, the beneficial ownership of
Common Stock of the Company by (i) 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, (ii) each of TCC’s
current directors and nominees, (iii) each of the Company’s named executive officers, and (iv) all
current directors and executive officers of the Company as a group. As of December 12, 2014,
there were 1,838,921 shares of Common Stock outstanding.
Name and Address of
Beneficial Owner(1)
Amount and Nature of
Beneficial Ownership(1)
Percent of Class
Francisco F. Blanco
Mitchell B. Briskin
Carl H. Guild, Jr.
Thomas E. Peoples
Michael P. Malone
Heber Allred
All current directors, executive
officers and 5% holders as a group
(6 persons)
7,000 (2)
31,277(3)
330,579(4)
29,590(5)
98,656(6)
96,287(7)
593,389(8)
0.4%
1.7%
17.7%
1.6%
5.3%
5.2%
30.4%
(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. With respect to each person or group, percentages are calculated based on the
number of shares beneficially owned, including shares that may be acquired by such
person or group, within 60 days of December 12, 2014, upon the exercise of stock
options or other purchase rights, but not the exercise of options or warrants held by
any other person. The address of Messrs. Blanco, Briskin, Guild, Peoples and
Malone is c/o Technical Communications Corporation, 100 Domino Drive, Concord,
Massachusetts 01742.
(2) Represents 7,000 shares issuable upon the exercise of stock options.
(3) Includes 24,500 shares issuable upon the exercise of stock options.
(4) Includes 33,620 shares issuable upon the exercise of stock options, and 297,959
shares held jointly by Mr. Guild and his wife.
(5) Includes 29,500 shares issuable upon the exercise of stock options.
(6) Includes 18,401 shares issuable upon the exercise of stock options.
(7) As determined from a report of non-objecting beneficial owners, dated as of
December 12, 2014. The address of Mr. Allred is 474 S Coyote Rd, Apple Valley,
UT 84737.
(8) Includes an aggregate 112,021 shares issuable upon the exercise of stock options.
-31-
Change in Control
The Company knows of no arrangements (including any pledge by any person of
securities of TCC) that may result or have resulted in a change in control of the Company.
ADDITIONAL INFORMATION
Other Matters
The Board of Directors of the Company is not aware of any matter, other than those
described above, that may come before the Meeting. However, if any other matters are properly
presented to the Meeting for action, it is intended that the persons named in the enclosed proxy
card will vote on such matters in accordance with their best judgment.
Stockholder Proposals for 2016 Annual Meeting
Proposals of stockholders for inclusion in the Proxy Statement and form of proxy,
including director nominees, for the Company’s 2016 Annual Meeting of Stockholders must be
received by the Company at its principal executive offices no later than September 11, 2015, and
must comply with the applicable requirements of federal securities laws and the Company’s
nomination procedures as discussed herein. Stockholder proposals received outside this process
will be considered untimely if the Company is not provided written notice thereof at least 45 days
prior to the first anniversary of the date of mailing of this year’s proxy materials, as set forth on
the first page of this Proxy Statement, or November 25, 2015. In order to curtail controversy as
to the date on which the Company received a proposal, it is suggested that proponents submit
their proposals by certified mail, return receipt requested.
Expenses and Solicitations
The cost of the solicitation of proxies will be borne by the Company. Proxies will be
solicited principally through the mail. Further solicitation of proxies from some stockholders
may be personally made by directors, officers and regular employees of the Company, by
telephone, facsimile or special letter. No additional compensation, except for reimbursement of
reasonable out-of-pocket expenses, will be paid for any such further solicitation by such
individuals.
In addition, the Company may request banks, brokers, custodians, nominees, and
fiduciaries to forward copies of the Company’s proxy materials to those persons for whom they
hold shares to request instructions for voting the proxies. The Company will reimburse any such
persons for their reasonable out-of-pocket costs.
Householding
Certain stockholders who share the same address may receive only one copy of this
Proxy Statement (which includes the Notice of Internet Availability of Proxy Materials) and the
2014 Annual Report to Stockholders in accordance with a notice delivered from such
stockholders’ bank, broker or other holder of record, unless the applicable bank, broker or other
holder of record received contrary instructions. This practice, known as “householding,” is
designed to reduce printing and postage costs. If you own your shares through a bank, broker or
other holder of record and wish to either stop or begin householding, you may do so, or you may
-32-
request a separate copy of this Proxy Statement (which includes the Notice of Internet
Availability of Proxy Materials) or the Annual Report, either by contacting your bank, broker or
other holder of record at the telephone number or address provided in the above referenced
notice, or by contacting TCC via telephone at (978) 287-5100 or in writing at Technical
Communications Corporation, 100 Domino Drive, Concord, Massachusetts, 01742, Attention:
Investor Relations. If you request to begin or stop householding, you should provide your name,
the name of your broker, bank or other record holder, and your account information.
Annual Report of Form 10-K
The Company will provide, upon written request and without charge to each stockholder
entitled to vote at the Meeting, a copy of the Company’s Annual Report on Form 10-K as filed
with the Commission for the fiscal year ended September 27, 2014. A request for copies of such
report should be addressed to the Company at 100 Domino Drive, Concord, Massachusetts
01742, Attention: Investor Relations.
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-K
(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended
September 27, 2014
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number
001-34816
Technical Communications Corporation
(Exact name of registrant as specified in its charter)
Massachusetts
(State or other jurisdiction of incorporation
or organization)
100 Domino Drive, Concord, MA
(Address of principal executive offices)
(978) 287-5100
(Registrant’s telephone number, including area code)
(I.R.S. Employer Identification No.)
04-2295040
01742-2892
(Zip code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.10 par value
(Title of each class)
NASDAQ Capital Market
(Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Not applicable
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. YES (cid:133) NO (cid:59)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act. YES (cid:133) NO (cid:59)
(cid:59) 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 (cid:59) NO (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). YES (cid:59) NO (cid:133)
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 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. (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
(cid:133)
(cid:133)
Accelerated filer
(cid:133)
Smaller reporting company (cid:59)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). YES (cid:133) NO (cid:59)
Based on the closing price as of March 28, 2014, the aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant was approximately $9,435,422.
The number of shares of the registrant’s common stock, par value $ 0.10 per share, outstanding as
of December 12, 2014 was 1,838,921.
Portions of the Company’s Definitive Proxy Statement to be delivered to shareholders in
connection with the Company’s 2015 Annual Meeting of Shareholders to be held February 9, 2015 are
incorporated by reference into Part III of this Form 10-K.
TECHNICAL COMMUNICATIONS CORPORATION
Annual Report on Form 10-K
For the Year Ended September 27, 2014
Table of Contents
Business
Part I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
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This annual report on Form 10-K contains or incorporates by reference not only historical information, but
also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe
harbor created by those sections. We refer you to the information under the heading “Forward-Looking
Statements." As used in this annual report on Form 10-K, references to "Technical Communications Corp,"
the "Company," "we," "our" or "us," unless the context otherwise requires, refer to Technical
Communications Corporation and our subsidiaries. All trademarks or trade names referred to in this report
are the property of their respective owners.
Item 1.
BUSINESS
PART I
Technical Communications Corporation was organized in 1961 as a Massachusetts corporation to
engage primarily in consulting activities. Since the late 1960s, the business has consisted entirely of the
design, development, manufacture, distribution, marketing and sale of communications security devices,
systems and services. The secure communications solutions provided by TCC protect vital information
transmitted over a wide range of data, video and voice networks. TCC’s products have been sold into over
115 countries to governments, military agencies, telecommunications carriers, financial institutions and
multinational corporations. The Company’s business consists of one industry segment, which is the design,
development, manufacture, distribution, marketing and sale of communications security devices, systems
and services.
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Overview
The Company’s products consist of sophisticated electronic devices that enable users to transmit
information in an encrypted format and permit recipients to reconstitute the information in a deciphered
format if the recipient possesses the right decryption “key”. The Company’s products can be used to protect
confidentiality in communications between radios, telephones, mobile phones, facsimile machines and data
network equipment over wires, fiber optic cables, radio waves, and microwave and satellite links. The
principal markets for the Company’s products are foreign and domestic governmental agencies, law
enforcement and military agencies, financial institutions, and multinational companies requiring protection
of mission-critical information.
TCC historically and presently designs and develops its own equipment and software to meet the
requirements of general secure communications applications, as well as the custom-tailored requirements of
specific users. A customer may order equipment that is specially programmed to encrypt transmissions in
accordance with a code to which only the customer has access. Management believes the coordinated
development of cryptographic software and associated hardware allows TCC to provide high-strength
encryption security products with efficient processing and transmission. Both criteria, the Company
believes, are essential to customer satisfaction.
TCC manufactures most of its products using third-party vendors for the supply of components and
selected processing. Final assembly, software loading, testing and quality assurance are performed by TCC
at its factory. This manufacturing approach allows TCC to competitively procure the components from
multiple suppliers while maintaining control of the manufacture and performance of the final product.
TCC’s products are sold worldwide through a variety of channels depending on the country and the
customer. Generally, TCC does not use stocking distributors because the Company’s products are required
to be sold under an applicable U.S. government license, which generally requires end-user information.
Rather, the Company sells directly to customers, original equipment manufacturers and value-added
resellers using its in-house sales force as well as domestic and international representatives, consultants and
distributors. The marketing and selling approach varies with each country and often involves extensive test
and demonstration activity prior to the consummation of a sale. TCC has a network of in-country
representatives and consultants who conduct performance demonstrations, market the products and close the
sale, and who handle on behalf of TCC many of the ancillary requirements pertaining to importation duties,
taxes, registration fees, and product receipt and acceptance. After-sale, in-country support by the
representatives maintains customer satisfaction and provides a liaison for the Company’s customer support
services.
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Providing secure communications systems and services for government and military markets
worldwide remains a principal focus for TCC, as the Company believes continued concerns over security
will sustain demand for increased protection of both voice and data networks. Our focus in the government
market also now includes law enforcement special operations customers. Additionally, we see increased
interest for secure communications in the corporate industrial sector. Management has planned selected,
evolutionary upgrades and product derivatives of our government/military products both to provide entry
into these new markets and meet new requirements of our existing customers. We believe the ability of TCC
to custom-tailor cryptographic functions and control systems to satisfy unique customer requirements will
meet a growing demand as customers become more sophisticated in defining their communications security
needs.
2014 Highlights and Recent Events
Delays in the receipt of certain foreign and domestic contracts, coupled with customer and
production delivery requirements, resulted in lower than expected revenue for fiscal 2014. Delays were
primarily the result of international political unrest, which diverted foreign government customers’ attention
to domestic issues, as well as other factors associated with government procurements that often subject the
Company to unpredictable and erratic delays in the processing of procurements and delivery of products.
TCC did receive a significant foreign contract for $3.3 million from the Government of Egypt in the first
quarter of fiscal 2015.
Revenues in fiscal 2014 were $6,139,000 with a net loss of $(2,565,000) or $(1.39) per share. The
fiscal 2014 results reflect a partial shipment of our large contract received in fiscal 2013 for network
encryption for use by the Government of Egypt, along with strong sales for radio applications during the
year. TCC’s backlog at the end of the 2014 fiscal year was $402,000, as compared to $2.28 million at the
end of fiscal 2013.
Offering high-end custom cryptographic services and solutions is an established market niche for
the Company and we believe an important competitive differentiator. In fiscal 2014, custom TCC equipment
and services continued to provide recurring revenue opportunities within the Company’s established
government systems product line, as well as new market opportunities for network encryption, including the
following:
•
•
In fiscal 2014, the Company delivered on contracts received in fiscal 2013 and fiscal 2014 of $1
million from Datron Worldwide Communications, Inc., a radio communications manufacturer, as
part of an original equipment manufacturer (“OEM”) relationship for its DSP 9000 radio encryption
equipment for deployment into Afghanistan and other countries. TCC provides a radio encryption
card designed to be embedded in Datron radios, a DSP 9000 radio encryption handset sold with
Datron radios, and other interoperable secure radio equipment.
In fiscal 2014, TCC delivered $1.28 million of secure radio and telephone equipment and
customized services, tools and training orders that were received in both fiscal 2013 and fiscal 2014
from a domestic prime contractor supporting a government customer in North Africa. TCC provided
the customer its DSP 9000 military radio encryption system as well as a secure telephone solution.
Additionally, TCC delivered operation, maintenance and cryptography training services, as well as
customized tools to enable customer-independent system maintenance and testing, and cryptographic
validation.
• TCC delivered the remaining $1.79 million of additional products and services in fiscal 2014 on a
$3.6 million foreign military sales (“FMS”) contract received in fiscal 2013 from the U.S. Army
Communications and Electronics Command (“CECOM”) to upgrade the DSD 72A-SP military bulk
encryption system currently in use securing strategic-level military communications for the
Government of Egypt. In addition to product upgrade kits, which were specifically designed for this
customer requirement, TCC provided test equipment and training services both at TCC’s facility in
Concord, Massachusetts as well as in-country. The Company expects future follow-on sales from the
Government of Egypt as this customer proceeds to upgrade the balance of its network, as well as
sales of new systems for additional communications security applications. As noted above, in the
first quarter of fiscal 2015 the Company received the first of these follow-on orders: a $3.3 million
order for its DSD 72A-SP bulk encryption systems.
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• TCC delivered $800,000 of an order received in fiscal 2014 from a government in the Middle East
for TCC’s Cipher X 7211 IP encryption system with custom-developed capability to secure high-
bandwidth satellite communications. The custom-developed capability is also marketable worldwide
as an option on the Cipher X 7211.
• TCC’s DLE 7050 link encryptor continues to provide incremental revenue from established
customers. A $323,000 contract for the DLE 7050 link encryption system for deployment into Saudi
Arabia was delivered in fiscal 2014. TCC received an additional contract in the first quarter of fiscal
2015 for the DLE 7050 for $432,000, also for deployment into Saudi Arabia.
TCC continued to increase sales and marketing efforts in fiscal 2014 with lead generation
initiatives and strategic partnerships, and plans to continue such efforts in fiscal 2015. Technical work
continued to focus on three principal areas: development of solutions that meet the needs of OEMs; product
enhancements that include expanded features, planned capability and applications growth; and custom
solutions that tailor our products and services to meet the unique needs of our customers. Going forward, the
Company expects to continue technical efforts in these areas while also increasing our systems design and
integration capabilities and services offering portfolio. The following are highlights of product development
efforts in fiscal 2014:
• Production readiness of the HSE 6000 headset radio encryptor for secure land mobile radio
communications. Production of the HSE 6000 is complete and it is currently being field tested in
several countries by military and first responder organizations.
• Design and development of capability for TCC’s Cipher X 7211 IP encryptor to secure high-
bandwidth satellite communications. The capability was developed for a customer-specific
requirement and is now also marketable worldwide as an option for all customers.
• Development to enhance the ability of TCC’s Cipher X 7211 IP encryption system to integrate
custom and national algorithms without requiring modification to hardware. Development efforts are
expected to continue in fiscal 2015 to offer a broader range of national algorithm solutions. TCC
believes this is a competitive differentiator for the Company in foreign markets.
• Development of KEYNET Lite-IP and KEYNET Lite-Optical key and device management systems.
These KEYNET Lite systems are specifically designed to meet the needs of small networks and
provide the same robust flexibility, security and ease of use of TCC’s fully featured KEYNET
systems at a significantly lower price.
Escalating turmoil around the world presents both significant opportunities and challenges for TCC.
The threat of terrorism and other political unrest increases the demand for security products that provide
both strategic and tactical benefits, and are readily available. At the same time, political disruptions can
cause unpredictable and erratic delays in the processing of procurements and delivery of products. The
combined effects present a situation that challenges both our sales capture teams and our production
capabilities. The Company believes these market conditions will provide opportunities to build a successful
future through its efforts to enlarge and enhance its product line and expand its customer base by both
identifying new customers for existing and new products and offering such products to current customers.
Products and Services
Described below is TCC’s portfolio of communications security solutions for mission-critical
voice, data and video networks for military, government and corporate/industrial applications.
The Government Systems product line has traditionally been the Company’s core product base and
generated more than 80% of the Company’s revenue during the 2013 and 2014 fiscal years. These products,
such as the DSD 72A-SP military bulk encryptor, CSD 3324SE telephone/fax encryptor, and the DSP 9000
radio encryptor, have proven to be highly durable, which has led to significant repeat business from our
government customers. The Company believes that these products and their derivatives will continue to be
the Company’s most significant source of future revenues.
The Company’s Secure Office Systems product line primarily consists of products that were
originally acquired through an asset and rights purchase from a subsidiary of AT&T in 1995. These products
have produced modest revenues since their acquisition. Although some of these products are still available
and remain profitable, demand for them has diminished in recent years. We will continue to offer our Secure
Office Systems products from existing inventory, which we anticipate will be sufficient for several more
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years. Offering CipherTalk® secure mobile phone communications since 2005, the Company in 2012
introduced its next-generation CipherTalk secure mobile IP-based phone as part of this product line. The
market for high-end secure wireless mobile phones continues to develop modestly.
With the availability of our next-generation IP and SONET/SDH encryptors and ability to integrate
customer-specific national algorithms, the Company believes that its Network Security Systems are
competitive for a growing niche of mission-critical government and industrial/corporate network
applications worldwide. TCC is hopeful that future derivatives of its IP encryptor and KEYNET IP Manager
system will expand the market opportunity for these products.
The Company also provides customized tools, products and training upon a customer’s request, as
well as designs solutions for OEM requirements. In addition, the Company actively sells its engineering
services in support of funded research and development. These services are typically billed to a customer on
a time and materials basis and can run for several months to several years depending on the scope of the
project.
Government Systems
The Company’s DSD 72A-SP Military Bulk Ciphering System is a rugged military system that
provides a high level of cryptographic security for data networks operating at up to 34 million bits per
second. The product supports a wide variety of interfaces and is designed to integrate into existing
networks. Reliable secure communication is achieved with communication synchronization methods built to
maintain connections in error and jamming environments such as radio relay networks, missile systems and
microwave systems.
TCC’s DSD 72A-SP (STM) SONET/SDH network encryptor meets the environmental and
operational requirements for military environments and operates at 155 Mb/s and 622 Mb/s performance. It
is designed to support customers with TCC’s DSD 72A-SP system that are transitioning to higher speed
SONET/SDH networks.
The Company’s DSP 9000 Radio Security family of products offers strategic-level security for
voice and data communications sent over HF, VHF and UHF channels. Designed for military environments,
the Company believes these products provide high voice quality over poor line connections, making them an
attractive security solution for military aircraft, naval, base station and manpack radio applications. These
products provide automated key distribution for security and ease of use. They are also radio independent
because software programmable interfaces allow radio interface levels to be changed without configuring
the hardware. Base station, handset and implant board configurations are available options. All versions
interoperate with TCC’s HSE 6000 Squad Radio Headset and Telephone Encryptor for cross-network secure
voice conferencing. The base station model also interoperates with the Company’s CSD 3324 SE secure
telephone system to enable “office-to-field” communications.
TCC’s HSE 6000 Squad Radio Headset and Telephone Encryptor is designed for public safety
special operations land mobile radio applications, as well as military applications. With the optional
Telephone Interconnect Kit, the HSE 6000 connects to corded handset telephones for secure voice
communications and radio-to-telephone conferencing over Voice over IP, digital, and analog telephone
networks. It is also interoperable with the DSP 9000 radio security product family, enabling secure voice
communications and cross-network conferencing across and between air, land, sea and office.
The Company’s CSD 3324 SE Secure Telephone, Fax and Data system provides strategic-level
communications security for voice, fax and data encryption in a telephone package designed for government
applications needing high reliability. The product has a fallback mode, which was originally developed for
poor HF channels. As a result, secure communications are possible even over poor line conditions. TCC's
high-level encryption and automated key distribution system protect sensitive information, and internal
storage of 800 keys provides hands-off security.
The Company’s CSD 3324 SP telephone and fax system provides integrated secure voice and fax
security in a telephone package designed for homeland security and U.S. and international government
applications. The CSD 3324 SPF fax encryptor attaches to fax machines to secure transmissions and is
compatible with the CSD 3324 SP.
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Secure Office Systems
The Company’s CSD 3600 Secure Portable Telephone Attachment may be placed between any
telephone and corded handset worldwide to provide digital security. The attachment is small and portable,
operates over both digital and analog telephone lines, and is designed to ensure protection through new and
unique random keys negotiated with each communication session.
The Company’s CSD 4100 Executive Secure Telephone offers strategic-level voice and data
security in an executive telephone package. Exceptional voice quality can be achieved with three different
voice-coding algorithms. The product provides ease-of-use security features such as automated key
management, authentication, certification and access control.
The CipherTalk 8000 series of secure mobile phones is designed to provide encrypted mobile voice
communications anywhere in the world. Introduced in fiscal 2012, the CipherTalk 8000 series of IP-based
secure wireless phones is designed to set up secure calls with all GSM bands, GPRS, EDGE, and 3G. In
addition, it can establish secure calls connecting directly to the Internet via Wi-Fi, USB and satellite links
without needing a SIM card.
Network Security Systems
TCC offers network encryption systems with KEYNET centralized key and device management for
IP, SONET/SDH and frame relay networks to secure data in transit from local area network to local area
network and across wide area networks. During 2014 the Company introduced KEYNET Lite, a version of
KEYNET for small networks. The Company supports the industry standard Advanced Encryption Standard
(“AES”) 256-bit cryptographic algorithm and can integrate customer-specific national algorithms to meet
customer-specific needs. All of TCC’s encryption systems are designed to seamlessly overlay onto existing
networks without requiring infrastructure changes. Network performance impact is negligible and we
believe the systems are easy to deploy, monitor and manage. Additionally, the Cipher X family offers
scalable performance to higher speeds without changing hardware. This minimizes the entry cost of
deploying a security solution and provides a cost-effective path to meet evolving business needs. Upgrades
are licensed and made available on-demand via the KEYNET management system. All performance levels
interoperate and have identical functionality.
Cipher X 7211 IP Encryption with KEYNET IP Manager provides strategic-level secure
communications for large IP networks for point-to-point and multicast applications such as video
conferencing. It offers a unique combination of flexibility, scalable 1 gigabit per second performance and
KEYNET IP Manager for ease of use. The Cipher X 7211 is a hardware-based, FIPS 140-2 Level 3 designed
encryption device.
The DSD 72B-SP and DSD 72A-SP (STM) encryption family with KEYNET Optical Manager
provides strategic-level path encryption of voice, data and video transmitted over SONET/SDH networks at
wirespeed 155 Mb/s and 622 Mb/s performance. It comes in rugged industrial and industrial versions to
meet various environmental and operating requirements. Protocol agnostic, the DSD 72B-SP family
interoperates with any standard SDH or SONET network element. Automated KEYNET key and device
management provides ease of use. The DSD 72B-SP family is interoperable with the DSD 72A-SP (STM)
SONET/SDH encryptor for military environments.
Our Cipher X 7100 Frame Relay Encryption with KEYNET key and device management secures
data transmitted over frame relay networks at up to 2 megabits per second. Encryption based on both the
Triple DES and AES 256-bit algorithm are available and the same KEYNET system manages both system
types. This product was designed to enable customers with Triple DES systems to evolve their network to
the latest AES 256-bit standard.
Competition
The market for communications security devices and systems is highly competitive and
characterized by rapid technological change. The Company has several competitors, including foreign-based
companies, in the communications security device field. The Company believes its principal competitors
include Crypto AG, Thales Group, Motorola Solutions, Inc., General Dynamics Corporation, Omnisec AG,
Cisco Systems, Inc., Certes Networks, Inc., SafeNet, Inc. and Alcatel-Lucent.
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The Company competes based on its service, the operational and technical features of its products,
its customization abilities, its sales expertise, and pricing. Many of TCC’s competitors have substantially
greater financial, technical, sales and marketing, distribution and other resources, greater name recognition
and longer standing relationships with customers. Competitors with greater financial resources can be more
aggressive in marketing campaigns, can survive sustained price reductions in order to gain market share and
can devote greater resources to support existing products and develop new competing products.
Our competitive position also depends on our ability to attract and retain qualified personnel, obtain
and maintain intellectual property protection or otherwise develop proprietary products or processes, and
secure sufficient capital resources for product, research and development efforts.
Sales and Backlog
In fiscal 2014, the Company had four customers representing 73% of total net sales. These sales
consisted of sales of upgrade kits to our 72A-SP bulk encryptors to the US Army CECOM for deployment in
Egypt representing 29% of sales, our radio encryptors to a radio manufacturer for deployment in
Afghanistan representing 17% of sales, our narrowband radio encryptors and the supply of customized
cryptographic services, tools and training to a domestic prime contractor supporting a government customer
in North Africa representing 14% of sales, and our CipherX 7211 IP encryptors to a customer in the Middle
East representing 13% of sales. In fiscal 2013, the Company had three customers representing 71% of total
net sales. These sales consisted of sales of upgrade kits to our 72A-SP bulk encryptors to the US Army
CECOM for deployment in Egypt representing 29% of sales, engineering services provided to the U.S.
government representing 27% of sales, and our radio encryptors to a radio manufacturer for deployment in
Afghanistan representing 15% of sales.
The Company sells directly to customers, original equipment manufacturers and value-added
resellers using its in-house sales force as well as domestic and international representatives, consultants and
distributors. International sales are made primarily through our main office. We seldom have long-term
contractual relationships with our customers and, therefore, generally have no assurance of a continuing
relationship within a given market.
Orders for our products are usually placed by customers on an as-needed basis and we typically
ship products within 30 to 180 days of receipt of a customer's firm purchase order. Our backlog consists of
all orders received where the anticipated shipping date is within 12 months of the order date. Because of the
possibility of customer changes in delivery schedules or the cancellation of orders, our backlog as of any
particular date may not be indicative of sales in any future period. Our backlog as of September 27, 2014
and September 28, 2013 was approximately $402,000 and $2,285,000, respectively.
The Company expects that sales to relatively few customers will continue to account for a high
percentage of the Company’s revenues in any accounting period for the foreseeable future. A reduction in
orders from any such customer, or the cancellation of any significant order and failure to replace such order
with orders from other customers, would have a material adverse effect on the Company’s financial
condition and results of operations.
Regulatory Matters
As a party to a number of contracts with the U.S. government and its agencies, the Company must
comply with extensive regulations with respect to bid proposals and billing practices. Should the U.S.
government or its agencies conclude that the Company has not adhered to federal regulations, any contracts
to which the Company is a party could be canceled and the Company could be prohibited from bidding on or
participating in future contracts. Such a prohibition would have a material adverse effect on the Company.
All payments to the Company for work performed on contracts with agencies of the U.S.
government are subject to adjustment upon audit by the U.S. Defense Contract Audit Agency, the U.S.
Government Accountability Office, and other agencies. The Company could be required to return any
payments received from U.S. government agencies if it is found to have violated federal regulations. There
have been no government audits in recent years and the company believes the result of such audits, should
they occur, will not have a material adverse effect on its financial position or results of operations. In
addition, U.S. government contracts may be canceled at any time by the government with limited or no
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notice or penalty. Contract awards are also subject to funding approval from the U.S. government, which
involves political, budgetary and other considerations over which the Company has no control.
The Company’s security products are subject to export restrictions administered by the U.S.
Department of Commerce and Department of State, which license the export of encryption products, subject
to certain technical restrictions. In addition, U.S. export laws prohibit the export of encryption products to a
number of hostile countries. Although to date the Company has been able to secure necessary U.S.
government export licenses, there can be no assurance that the Company will continue to be able to secure
such licenses in a timely manner in the future, or at all.
The U.S. government controls, through a licensing process, the distribution of encryption
technology and the sale of encryption products. The procedure for obtaining the applicable license from
either the Department of Commerce or the Department of State (depending on the U.S. government’s
determination of jurisdiction) is well documented. The Company submits a license request application,
which contains information pertaining to: the type of equipment being sold; detailed technical description (if
required); the buyer; the end-user and use; quantity; and destination location. The appropriate departments of
the U.S. government review the application and a licensing decision is provided to the Company. Pursuant to
the receipt of the license, the Company may ship the product.
Many of TCC’s products can be sold under existing “blanket” licenses which have been obtained
through a variant of the licensing process that approves products for sale to certain classes of customers (e.g.
financial institutions, civilian government entities and commercial users). The Company has obtained
“blanket” licenses for its secure telephone and office system products and its family of network encryptors.
Licenses for sales of certain other products and/or to certain end users must be submitted for specific
approval as described above. Although the U.S. government retains the right and ability to restrict product
exports, the Company does not believe that U.S. government licensing will become more restrictive or an
impediment to its business. The trend has been for the U.S. government to reduce the restrictions on the
foreign sale of cryptographic equipment. TCC believes this trend is driven by the government’s recognition
of the technology available from foreign sources and the need to allow domestic corporations to compete in
foreign markets. However, should the regulations become more restrictive, it would have a negative impact
on the Company’s international business, the impact of which could be material.
The costs and effects of compliance by the Company with applicable environmental laws during
fiscal 2014 were, and historically have been, immaterial. In 2003 the European Union adopted the
“Restriction of Hazardous Substances Directive 2002/95/EC”. In the event the Company’s sales to Europe
increase, the Company may have to incur additional costs to provide for the disposal of its products in
compliance with that directive.
Manufacturing
TCC has several manufacturing subcontractors and suppliers that provide outside processing of
electronic circuit boards, fabrication of metal components, and supply of electronic components. For the
majority of purchased materials and services, TCC has multiple suppliers that are able to deliver materials
and services under short-term delivery purchase orders. Payment is typically made after delivery, based
upon standard credit arrangements. For a small minority of parts, there are limited sources of supply. In such
cases, TCC monitors source availability and usually stocks for anticipated long-term requirements to assure
manufacturing continuity. Notwithstanding the Company’s efforts to maintain material supplies, shortages
can and do develop, resulting in delays in production, significant engineering development effort to find
alternative solutions and, if production cannot be maintained, the discontinuation of the affected product
design.
The Company’s internal manufacturing process consists primarily of adding critical components,
final assembly, quality control, testing and system burn-in. Delivery times vary depending on the products
and options ordered.
Technological Expertise
The Company’s technological expertise and experience, including certain proprietary rights which
it has developed and maintains as trade secrets, are crucial to the conduct of the Company’s business.
Management is of the opinion that, while patent protection is desirable with respect to certain of its products,
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none of the Company's patents are material to the conduct of its business. Eight patents have been issued to
the Company. The Company also has a number of registered and unregistered trademarks for various
products, none of which are material to the conduct of TCC’s business.
TCC has an on-going technology license for communications protocol software used in the
CipherONE family of Network Security System products. The license is royalty-based and runs without a
specified termination date. The cost of this license is immaterial.
TCC has been designing and producing secure, cryptography-based communications systems for
over 50 years, during which time the Company has developed many technological techniques and practices.
This expertise and experience is in the areas of cryptographic algorithm design and implementation, key
distribution and management systems, cryptographic processors, voice and fax encryption, and electronic
hardware design. TCC relies on its internal technical expertise and experience, which TCC considers to be
proprietary. These proprietary technologies are owned by TCC, are under TCC’s control, and have been
documented consistent with standard engineering practices. It is estimated that the majority of sales during
the past two years and during the next two years will be of products that are based upon TCC-proprietary
designs.
Such technological experience and expertise are important as they enable an efficient design and
development process. Loss of this experience and expertise would have an adverse impact on the Company.
However, TCC’s practices governing the internal documentation of design data mitigate some of the risk
associated with the loss of personnel who are skilled in the core competencies described above.
With the exception of the technology license referred to above, TCC has no material third party
rights upon which the Company relies. Sales of the products associated with this license have not been and
are not anticipated to be significant to the Company’s revenues.
Research and Development
Research and development efforts are undertaken by the Company primarily on its own initiative.
In order to compete successfully, the Company must attract and retain qualified personnel, improve existing
products and develop new products. No assurances can be given that the Company will be able to hire and
train such technical management and sales personnel or successfully improve and develop its products.
During each of the years ended September 27, 2014 and September 28, 2013, the Company spent
$2,729,000 on internal product development. The Company also spent $855,000 on billable development
efforts during fiscal 2013. In fiscal 2014, the Company’s total product development costs were 23% lower
than prior years but in line with its planned commitment to research and development, and reflected the
costs of custom development, product capability enhancements and production readiness. It is expected that
development expenses in fiscal 2015 will be approximately 10-15% lower than fiscal 2014 levels.
Research and development expenses (including internal product development and billable
development efforts) in fiscal 2014 were lower than fiscal 2013 as major new product development efforts
were previously completed and efforts focused on customer-specific requirements, product enhancements,
production readiness and future product planning. The following are key fiscal 2014 research and
development initiatives:
• Production readiness of the HSE 6000 headset radio encryptor for secure land mobile radio
communications. Production of the HSE 6000 is complete and it is currently being field tested in
several countries by military and first responder organizations.
• Design and development of capability for TCC’s Cipher X 7211 IP encryptor to secure high-
bandwidth satellite communications. The capability was developed for a customer-specific
requirement and is also marketable worldwide as an option for all customers.
• Development to enhance the ability of TCC’s Cipher X 7211 IP encryption system to integrate
custom and national algorithms without requiring modification to hardware. Development efforts
are expected to continue in fiscal 2015 to offer a broader range of national algorithm solutions.
TCC believes is a competitive differentiator for the Company in foreign markets.
• Development of KEYNET Lite-IP and KEYNET Lite-Optical key and device management
systems. These KEYNET Lite systems are specifically designed to meet the needs of small
networks and provide the same robust flexibility, security and ease of use of TCC’s fully featured
KEYNET systems at a significantly lower price.
In fiscal 2014, technical efforts continued to focus on three principal areas: development of
solutions that meet the needs of OEMs; product enhancements that include expanded features, planned
8
capability and applications growth; and custom solutions that tailor our products and services to meet the
unique needs of our customers. Going forward, the Company expects to continue technical efforts in these
areas while also increasing our systems design and integration capabilities and services offering portfolio.
Foreign Operations
The Company’s results of operations are dependent upon its foreign sales, including domestic sales
shipped to foreign end-users. Although foreign sales were more profitable than domestic sales during fiscal
years 2014 and 2013 because the mix of products sold abroad included a greater number of products with
higher profit margins, this does not represent a predictable trend. Sales to foreign markets have been and will
continue to be affected by, among other things, the stability of foreign governments, foreign and domestic
economic conditions, export and other governmental regulations, and changes in technology. The Company
attempts to minimize the financial risks normally associated with foreign sales by utilizing letters of credit
confirmed by U.S. and foreign banks and by using foreign credit insurance. Foreign sales contracts are
usually denominated in U.S. dollars.
The Company utilizes the services of sales representatives, consultants and distributors in
connection with foreign sales. Typically, representatives are paid commissions and consultants are paid
fixed amounts on a stipulated schedule in return for services rendered. Distributors are granted discounted
pricing.
The export from the United States of many of the Company’s products may require the issuance of
a license by the Department of State under the Arms Export Control Act of 1976, as amended, or by the
Department of Commerce under the Export Administration Act as kept in force by the International
Emergency Economic Powers Act of 1977, as amended. The licensing process is discussed in more detail
under the “Regulatory Matters” section above.
In fiscal years 2014 and 2013, sales directly to international customers accounted for approximately
25.5% and 8.5%, respectively, of our net sales. During those periods a significant portion of domestic sales
(17% and 15%, respectively) were made to a domestic radio manufacturer that shipped our radio encryption
products overseas for use in Afghanistan. During fiscal year 2013, we initiated shipments of products
delivered to the Government of Egypt representing 29% of sales under a contract with the U.S. Army. Based
on our historical results we expect that international sales, including sales to domestic customers that ship to
foreign end-users, will continue to account for a significant portion of our revenues for the foreseeable
future. As a result, we are subject to the risks of doing business internationally, including:
changes in regulatory requirements,
(cid:404)
(cid:404) domestic and foreign government policies, including requirements to expend a portion of
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program funds locally and governmental industrial cooperation requirements,
fluctuations in foreign currency exchange rates,
the complexity and necessity of using foreign representatives, consultants and distributors,
the uncertainty of the ability of foreign customers to finance purchases,
(cid:404)
(cid:404) delays in placing orders,
(cid:404)
(cid:404)
(cid:404) uncertainties and restrictions concerning the availability of funding credit or guarantees,
(cid:404)
(cid:404)
(cid:404)
imposition of tariffs or embargoes, export controls and other trade restrictions,
the difficulty of managing and operating an enterprise spanning several countries,
compliance with a variety of foreign laws, as well as U.S. laws affecting the activities of U.S.
companies abroad, and
economic and geopolitical developments and conditions, including international hostilities,
acts of terrorism and governmental reactions, inflation, trade relationships and military and
political alliances.
(cid:404)
While these factors and their impact are difficult to predict, any one or more of these factors could
adversely affect our operations in the future.
We also may not be successful in obtaining the necessary licenses to conduct operations abroad,
and the U.S. government may prevent proposed sales to foreign governments or other end-users.
9
Employees
As of September 27, 2014, the Company employed 33 full-time employees and three part-time
employees, as well as several full and part-time consultants. The Company believes that its relationship
with its employees is good.
Item 1A.
RISK FACTORS
You should carefully consider the following risk factors that affect our business. Such risks could cause our
actual results to differ materially from those that are expressed or implied by forward-looking statements
contained herein. The risks and uncertainties described below are not the only ones facing us. Additional
risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become
important factors that affect us. If any of the following risks occur, our business, financial condition or
results of operations could be materially and adversely affected. You should also consider the other
information included in this Annual Report on Form 10-K for the fiscal year ended September 27, 2014 and
subsequent quarterly reports filed with the SEC.
Our quarterly operating results typically fluctuate and our future revenues and profitability are
uncertain.
We have experienced significant fluctuations in our quarterly operating results during the last five
years and anticipate continued substantial fluctuations in our future operating results. A number of factors
have contributed to these quarterly fluctuations including, but not limited to:
• foreign political unrest;
• budgeting cycles of customers, including the U.S. government;
• introduction and market acceptance of new products and product enhancements by us and our
competitors;
• timing and execution of individual contracts;
• competitive conditions in the communications security industry;
• changes in general economic conditions; and
• shortfalls of revenues in relation to expectations that formed the basis for the calculation of fixed
expenses.
Our international operations expose us to additional risks.
The Company is dependent upon its foreign sales (including domestic sales shipped to foreign end-
users) and we expect that sales to foreign end-users will continue to account for a significant portion of our
revenues for the foreseeable future. As a result, we are subject to the risks of doing business internationally,
including imposition of tariffs or embargoes, export controls, trade barriers and trade disputes, regulations
related to customs and export/import matters, fluctuations in foreign economies and currency exchange
rates, longer payment cycles and difficulties in collecting accounts receivable, the complexity and necessity
of using foreign representatives, consultants and distributors, tax uncertainties and unanticipated tax costs
due to foreign taxing regimes, the difficulty of managing and operating an enterprise spanning several
countries, the uncertainty of protection for intellectual property rights and differing legal systems generally,
compliance with a variety of laws, and economic and geopolitical developments and conditions, including
international hostilities, armed conflicts, acts of terrorism and governmental reactions, inflation, trade
relationships, and military and political alliances.
We also may not be successful in obtaining the necessary licenses to conduct operations abroad,
including the export of many of the Company’s products, and the U.S. government may prevent proposed
sales to foreign governments or certain international end-users. Export restrictions, compliance with which
imposes additional burdens on the Company, may further provide a competitive advantage to foreign
competitors facing less stringent controls on their products and services.
We continue to focus our efforts in emerging markets, including South America and Southwest
Asia. In many of these emerging markets, we may be faced with risks that are more significant than if we
were to do business in developed countries, including undeveloped legal systems, unstable governments and
economies, and potential governmental actions affecting the flow of goods and currency.
10
We continue to face a number of risks related to current global economic and political conditions that
could unfavorably impact our business.
Global economic conditions continue to be challenging for the secure communications markets, as
many economies and financial markets remain in a recession resulting from a number of factors, including
adverse credit conditions, low economic growth rates, continuing high rates of unemployment, and reduced
corporate capital spending. Economic growth in the U.S. and many other countries has remained low and the
length of time these adverse economic conditions may persist is unknown. In addition, conflicts in the
Middle East and elsewhere have created many economic and political uncertainties that have impacted
worldwide markets. These global economic and political conditions have impacted and could continue to
impact our business in a number of ways, including:
• Budgeting and forecasting are difficult: It is difficult to estimate changes in various parts of the
U.S. and world economy, including the markets in which we participate. Components of our
budgeting and forecasting are dependent upon estimates of demand for our products, and the
prevailing economic and political uncertainties render estimates of future income and
expenditures difficult.
• Potential deferment or cancellation of purchases and orders by customers: Uncertainty about
current and future global economic and political conditions may cause, and in some cases has
caused, governments and businesses to defer or cancel purchases. If future demand for our
products declines due to deteriorating global economic and political conditions, it will
negatively impact our financial results.
• Customers' inability to obtain financing to make purchases: Some of our customers require
substantial financing, including government financing, in order to fund their operations and
make purchases from us. The inability of these customers to obtain sufficient credit or other
funds to finance purchases of our products and/or meet their payment obligations could have a
negative impact on our financial results.
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Our future success will depend on our ability to respond to rapid technological changes in the markets in
which we compete.
The markets for TCC’s products and services are characterized by rapid technological
developments, changing customer technological requirements and preferences, frequent new product
introductions, enhancements and modifications, and evolving industry standards. Our success will depend
in large part on our ability to correctly identify emerging technological trends, enhance capabilities, and
develop and manufacture new technologies and products quickly, in a cost-effective manner, and at
competitive prices. The development of new and enhanced products is a complex and costly process. We
may need to make substantial capital expenditures and incur significant research and development costs to
develop and introduce such new products and enhancements. Our choices for developing technologies may
prove incorrect if customers do not adopt the products we develop or if the technologies ultimately prove to
be technically or commercially unviable. Development schedules also may be adversely affected as the
result of the discovery of performance problems. If we fail to timely develop and introduce competitive new
technologies, our business, financial condition and results of operations would be adversely affected.
Existing or new competitors may develop competing or superior technologies.
The industry in which the Company competes is highly competitive, and the Company has several
domestic and foreign competitors. Many of these competitors have substantially greater financial, technical,
sales and marketing, distribution and other resources, greater name recognition and longer standing
relationships with customers. Competitors with greater financial resources can be more aggressive in
marketing campaigns, can survive sustained price reductions in order to gain market share, and can devote
greater resources to support existing products and develop new competing products. Any period of sustained
price reductions for our products would have a material adverse effect on the Company’s financial condition
and results of operations. TCC may not be able to compete successfully in the future and competitive
pressures may result in price reductions, loss of market share or otherwise have a material adverse effect on
the Company’s financial condition and results of operations. It is also possible that competing products will
emerge that may be superior in quality and performance and/or less expensive than those of the Company, or
11
that similar technologies may render TCC’s products obsolete or uncompetitive and prevent the Company
from achieving or sustaining profitable operations.
The operating performance of our products is critical to our business and reputation.
The sale and use of our products entail a risk of product failure, product liability or other claims.
Occasionally, some of our products have quality issues resulting from the design or manufacture of the
product or the software used in the product. Often these issues are discovered prior to shipment and may
result in shipping delays or even cancellation of orders by customers. Other times problems are discovered
after the products have shipped, requiring us to resolve issues in a manner that is timely and least disruptive
to our customers. Such pre-shipment and post-shipment problems have ramifications for TCC, including
cancellation of orders, product returns, increased costs associated with product repair or replacement, and a
negative impact on our goodwill and reputation.
Once our products are in use, any product failure, including software or hardware failure, which
causes a breach of security with respect to our customer’s confidential communications, could have a
material adverse effect on TCC. There is no guarantee of product performance or that our products are
adequate to protect against all security breaches. While we attempt to mitigate such risks by maintaining
insurance and including warranty disclaimers and liability limitation clauses in our arrangements with
customers, such mitigation devices may not protect us against liability in all instances. If our products failed
for any reason, our clients could experience data loss, financial loss, personal and property losses, harm to
reputation, and significant business interruption. Such events may expose us to substantial liability,
increased regulation and/or penalties, as well as loss of customer business and a diminished reputation. Any
product liability claims and related litigation would likely be time-consuming and expensive, may not be
adequately covered by insurance, and may delay or terminate research and development efforts, regulatory
approvals and commercialization activities.
If our products and services do not interoperate with our end-users’ products, orders could be delayed or
cancelled, which could significantly reduce our revenues.
Our products are designed to interface with our end-users’ existing products, each of which has
different specifications and utilizes multiple protocol standards. Many of our end-users’ systems contain
multiple generations of products that have been added over time as these systems have grown and evolved.
Our products and services must interoperate with all of these products and services as well as with future
products and services that might be added to meet our end-users’ requirements. If our products do not
interface with those within our end-users’ products and systems, orders for our products could be delayed or
cancelled, which could significantly reduce our revenues.
Government regulation and legal uncertainties could harm our business.
As a party to a number of contracts with the U.S. government and its agencies, the Company must
comply with extensive regulations with respect to bid proposals and billing practices. Should the U.S.
government or its agencies conclude that the Company has not adhered to federal regulations, any contracts
to which the Company is a party could be canceled and the Company could be prohibited from bidding on or
participating in future contracts. Moreover, payments to the Company for work performed on contracts with
agencies of the U.S. government are subject to audit and adjustment. The Company could be required to
return any payments received from U.S. government agencies if it is found to have violated federal
regulations. There have been no government audits in recent years and the company believes the result of
such audits, should they occur, will not have a material adverse effect on its financial position or results of
operations. In addition, U.S. government contracts may be canceled at any time by the government with
limited or no notice or penalty. Contract awards are also subject to funding approval from the U.S.
government, which involves political, budgetary and other considerations over which the Company has no
control.
The Company’s security products are subject to export restrictions administered by the U.S.
Department of Commerce and Department of State, which license the export of encryption products, subject
to certain technical restrictions. In addition, U.S. export laws prohibit the export of encryption products to a
number of hostile countries and some end-users. Although to date the Company has been able to secure
necessary U.S. government export licenses, there can be no assurance that the Company will continue to be
able to secure such licenses in a timely manner in the future, or at all. Delays in obtaining necessary
12
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approvals could be costly in terms of lost sales opportunities and compliance costs. Should export
restrictions increase or regulations become more restrictive, or should new laws be enacted, it could have a
negative impact on the Company’s international business, which impact could be material.
Contracts with the U.S. government may not be fully funded at inception and are subject to termination.
A portion of our revenues has historically been generated under agreements with the U.S.
government. Any changes or delays in the budget of the U.S. government, and in particular defense
spending, could affect our business, and funding levels are difficult to predict with any certainty. Moreover,
certain multi-year contracts are conditioned on the continuing availability of appropriations. However,
funds are typically appropriated on a fiscal-year basis, even though contract performance may extend over
many years, making future sales and revenues under multi-year contracts uncertain. Changes in
appropriations and budgets as well as economic conditions generally in subsequent years may impact the
funding for these contracts. In addition, changes in funding and other factors may lead to the termination of
such contracts. The U.S. government typically has the right to terminate agreements for convenience with
little or no penalty. Adverse changes in funding and the termination of government contracts could have a
material adverse impact on the Company’s financial condition and results of operations.
If the protection of our intellectual property is inadequate, our competitors may gain access to our
technologies.
The Company’s technological expertise and experience, including certain proprietary rights that it
has developed and maintains as trade secrets, are crucial to the conduct of the Company’s business and its
ability to compete in the marketplace. Such technological expertise and experience are important as they
enable an efficient design and development process. Loss of this experience and expertise would have an
adverse impact on the Company. To protect our proprietary information, we rely primarily on a combination
of internal procedures, contractual provisions, and patent, copyright, trademark and trade secret laws. Such
internal procedures and contractual provisions may not prove sufficient to maintain the confidentiality and
proprietary nature of such information and may not provide meaningful protection in the event of any
unauthorized use or disclosure. Trade secret and copyright laws afford only limited protection. Current and
potential patents and trademarks may not provide us with any competitive advantage and patents and
trademarks must be enforced and maintained to provide protection, which may prove costly and time-
consuming.
Despite our efforts to safeguard and maintain our proprietary rights, we may not be successful in
doing so or the steps taken by us may be inadequate to deter unauthorized parties from misappropriating our
technologies or prevent them from obtaining and using our proprietary information, products and
technologies. Moreover, our competitors may independently develop similar technologies or design around
patents issued to us.
Other parties may have patent rights relating to the same subject matter covered by our products or
technologies, enabling them to prevent us from operating without obtaining a license and paying royalties.
Third parties also may challenge our patents or proprietary rights or claim we are infringing on their rights.
Any claims of infringement or misappropriation, with or without merit, would likely be time-consuming,
result in costly litigation and diversion of resources, and cause delays in the development and
commercialization of our products. We may be required to expend significant resources to develop non-
infringing intellectual property, pay royalties, or obtain licenses to the intellectual property that is the subject
of such litigation. Royalties may be costly and licenses, if required, may not be available on terms
acceptable to us, the absence of which could seriously harm our business.
In addition, the laws and enforcement mechanisms of some foreign countries may not offer the
same level of protection as do the laws of the United States. Legal protections of our rights may be
ineffective in such countries, and technologies developed in such countries may not be protected in
jurisdictions where protection is ordinarily available. Our inability to protect our intellectual property both
in the United States and abroad would have a material adverse effect on our financial condition and results
of operations.
The Company relies on a small number of customers for a large percentage of its revenues.
We will be successful only if a significant number of customers adopt our secure communications
products. Historically the Company has had a small number of customers representing a large percentage of
13
its total sales. Although the Company endeavors to expand its customer base, we expect that sales to a
limited number of customers will continue to account for a high percentage of our revenues in any given
period for the foreseeable future. This reliance makes us particularly susceptible to factors affecting those
customers. If such customers’ business declines and as a result our sales to such customers decline without
corresponding sales orders from other customers, our financial condition and results of operations would be
adversely affected. It is difficult to predict the rate at which customers will use our products, even in the
case of repeat customers, and we do not typically have long-term contractual arrangements.
We may not be able to maintain effective product distribution channels.
We rely on an in-house sales force as well as domestic and international representatives,
consultants and distributors for the sale and distribution of our products. Our sales and marketing
organization may be unable to successfully compete against more extensive and well-funded operations of
certain of our competitors. In addition, we must manage sales and marketing personnel in numerous
countries around the world with the concomitant difficulties in maintaining effective communications due to
distance, language and cultural barriers. Further, certain of our distributors may carry competing products
lines, which may negatively impact our sales revenues.
Our management has determined that the Company’s internal control over financial reporting is
currently not effective.
Our management team, under the supervision and with the participation of our Chief Executive
Officer and our Chief Financial Officer, conducted an assessment of the effectiveness of the Company’s
internal control over financial reporting as of the end of the Company’s 2014 fiscal year. In the course of
that assessment, management identified a control deficiency that was also identified in the course of its
assessments for fiscal years 2008 through 2013. Specifically, management determined that TCC lacked
sufficient staff to adequately segregate accounting duties, which could result in a misstatement of financial
statement items that would not be detected. Management concluded that such control deficiency constituted
a material weakness and that our internal control over financial reporting was not effective as of September
27, 2014.
Until we are able to remediate the material weakness identified, such material weakness may
materially and adversely affect our ability to report accurately our financial condition and results of
operations in the future in a timely and reliable manner. In addition, although we review and evaluate our
internal control systems to allow management to report on the sufficiency of our internal control over
financial reporting, we cannot assure you that we will not discover additional weaknesses in the future or
that any corrective actions taken to remediate issues identified during the course of an assessment will be
effective. Any such additional weaknesses or failure to remediate any existing weakness could materially
adversely affect our financial condition or ability to comply with applicable financial reporting
requirements.
We rely on single or limited sources for the manufacture and supply of certain product components.
For a small percentage of parts, we rely upon a single or limited number of manufacturers and
suppliers. Moreover, because we depend on third party manufacturers and suppliers, we do not directly
control product delivery schedules or product quality. In addition, we may not be able to maintain
satisfactory contractual relations with our manufacturers and suppliers. A significant delay in delivering
products to our customers, whether from unforeseen events such as natural disasters or otherwise, could
have a material adverse effect on our results of operations and financial condition. If we lose any of the
manufacturers or suppliers of certain product components, we expect that it would take from three to six
months for a new manufacturer or supplier to begin full-scale production of one of our products. The delay
and expense associated with qualifying a new manufacturer or supplier and commencing production could
result in a material loss of revenue and reduced operating margins and harm our relationships with
customers. While we have not experienced any significant supply problems or problems with the quality of
the manufacturing process of our suppliers and there have been no materially late deliveries of components
or parts to date, it is possible that in the future we may encounter problems in the manufacturing process or
shortages in parts, components or other elements vital to the manufacture, production and sale of our
products.
14
The loss of existing key management and technical personnel and the inability to attract new hires could
have a detrimental effect on the Company.
Our success depends on identifying, hiring, training, and retaining qualified professionals.
Competition for qualified employees in our industry is intense and we expect this to remain so for the
foreseeable future. If we were unable to attract and hire a sufficient number of employees, or if a significant
number of our current employees or any of our senior managers resign, we may be unable to complete or
maintain existing projects or bid for new projects of similar scope and revenue. The Company’s success is
particularly dependent on the retention of existing management and technical personnel, including Carl H.
Guild, Jr., the Company’s President and Chief Executive Officer. Although the Company has entered into
an employment agreement with Mr. Guild, the loss or unavailability of his services could impede our ability
to effectively manage our operations.
We may need to expand our operations and we may not effectively manage any future growth.
As of December 12, 2014, we employed 33 full-time and three part-time employees as well as
several full-time and part-time consultants. In the event our products and services obtain greater market
acceptance, we may be required to expand our management team and hire and train additional technical and
skilled personnel. We may need to scale up our operations in order to service our customers, which may
strain our resources, and we may be unable to manage our growth effectively. If our systems, procedures,
and controls are inadequate to support our operations, growth could be delayed or halted, and we could lose
our opportunity to gain significant market share. In order to achieve and manage growth effectively, we
must continue to improve and expand our operational and financial management capabilities. Any inability
to manage growth effectively could have a material adverse effect on our business, results of operations, and
financial condition.
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Item 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
Item 2. PROPERTIES
On April 1, 2014, the Company entered into a new lease for its current facilities. This lease is for
22,800 square feet located at 100 Domino Drive, Concord, MA. The Company has been a tenant in this
space since 1983. This is the Company’s only facility and houses all manufacturing, research and
development, and corporate operations. The initial term of the lease is for five years through March 31,
2019 at an annual rate of $171,000. In addition, the lease contains options to extend the lease for two and
one half years through September 30, 2021 and another two and one half years through March 31, 2024 at an
annual rate of $171,000. Rent expense for each of the years ended September 27, 2014 and September 28,
2013 was $171,000.
Item 3. LEGAL PROCEEDINGS
There are no current legal proceedings as to which TCC or its subsidiary is a party or as to which
any of their property is subject.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
15
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s common stock, $0.10 par value, trades on the NASDAQ Capital Market under the
symbol “TCCO.” The following table presents low and high sales prices for the common stock for the time
periods specified as reported by The NASDAQ Stock Market, Inc.
Title of Class
Quarter Ending
Common Stock,
$0.10 par value
Holders
9/27/2014
6/28/2014
3/29/2014
12/28/2013
9/28/2013
6/29/2013
3/30/2013
12/29/2012
Price
Low
High
$ 3.66
4.19
6.40
6.49
$ 6.00
4.29
3.91
4.22
$ 6.43
6.64
8.50
9.97
$ 7.90
8.00
5.45
6.00
As of December 12, 2014, there were approximately 75 record holders of our Common Stock. We
believe there are approximately 914 beneficial holders of our stock.
Dividends
The Company paid cash dividends on its common stock during the first quarter of fiscal year 2013
as follows:
Payment Date
December 28, 2012
Aggregate
$183,872
Per Share
$ 0.10
It is not the Company’s intention to pay dividends unless future profits warrant such actions. The
Board of Directors decided on December 6, 2012 that it would suspend consideration of future dividends
until such time as the Company’s revenue and profit performance justified it.
Equity Compensation Plan Information
The following table presents information about the Technical Communications Corporation 2010
Equity Incentive Plan, the Technical Communications Corporation 2005 Non-Statutory Stock Option Plan,
and the Technical Communications Corporation 2001 Stock Option Plan as of the fiscal year ended
September 27, 2014. For more information on these plans, see the discussion of the Company’s stock option
plans and stock-based compensation plans included in Note 2 to the Company’s financial statements as of and for
the year ended September 27, 2014, included herewith.
Plan category
Equity compensation plans
approved by stockholders . . . . .
Equity compensation plans not
approved by stockholders . . . . . . .
Total . . . . . . . . . . . . . . . . .
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of
securities
remaining
available for
future issuance
146,797(1)
$10.99
55,603
122,688(2)
269,485
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$6.04
$8.74
19,723
75,326
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(1) Of the 146,797 options outstanding as of September 27, 2014, 115,447 were exercisable as of such date
at an average exercise price of $11.09 per share.
(2) Of the 122,688 options outstanding as of September 27, 2014, 121,288 were exercisable as of such date
at an average exercise price of $5.97 per share.
Sales of Unregistered Securities and Purchases by the Issuer and Affiliated Purchasers
There were no sales by the Company of unregistered shares of the Company’s common stock during the
2014 fiscal year and no purchases of TCC stock by or on behalf of the Company or any affiliated purchaser during
the fourth fiscal quarter of the 2014 fiscal year.
Item 6.
SELECTED FINANCIAL DATA
Not applicable.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the Company’s financial condition and results of operations should be
read in conjunction with the Company’s audited consolidated financial statements and notes thereto
appearing elsewhere herein.
Forward-Looking Statements
The following discussion may contain statements that are not purely historical. Such statements
contained herein or as may otherwise be incorporated by reference herein constitute “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include but are not limited to statements regarding anticipated operating results, future earnings,
and the ability to achieve growth and profitability. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors, including but not limited to the effect of foreign political
unrest; domestic and foreign government policies and economic conditions; future changes in export laws or
regulations; changes in technology; the ability to hire, retain and motivate technical, management and sales
personnel; the risks associated with the technical feasibility and market acceptance of new products; changes
in telecommunications protocols; the effects of changing costs, exchange rates and interest rates; and the
Company's ability to secure adequate capital resources. Such risks, uncertainties and other factors could
cause the actual results, performance or achievements of the Company, or industry results, to be materially
different from any future results, performance or achievements expressed or implied by such forward-
looking statements. For a more detailed discussion of the risks facing the Company, see the Company’s
filings with the Securities and Exchange Commission, including this Form 10-K for the fiscal year ended
September 27, 2014 and the “Risk Factors” section included herein.
Overview
TCC designs, manufactures, markets and sells communications security equipment that utilizes
various methods of encryption to protect the information being transmitted. Encryption is a technique for
rendering information unintelligible, which information can then be reconstituted if the recipient possesses
the right decryption “key”. The Company manufactures several standard secure communications products
and also provides custom-designed, special-purpose secure communications products for both domestic and
international customers. The Company’s products consist primarily of voice, data and facsimile encryptors.
Revenue is generated principally from the sale of these products, which have traditionally been to foreign
governments either through direct sale, pursuant to a U.S. government contract, or made as a sub-contractor
to domestic corporations under contract with the U.S. government. We have also sold these products to
commercial entities and U.S. government agencies. In addition to product sales, we generate revenues from
contract engineering services performed for certain government agencies, both domestic and foreign, and
commercial entities.
17
Critical Accounting Policies and Significant Judgments and Estimates
The discussion and analysis of our financial condition and results of operations are based on our
consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods.
On an ongoing basis, management evaluates its estimates and judgments, including those related to
revenue recognition, inventory reserves, receivable reserves, impairment of long-lived assets, income taxes
and stock-based compensation. Management bases its estimates on historical experience and on various
other factors that are believed to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying value of assets and liabilities that are not readily apparent from
other sources. By their nature estimates are subject to an inherent degree of uncertainty. Actual results may
differ from these estimates under different assumptions or conditions and such differences may be material.
The accounting policies that management believes are most critical to aid in fully understanding
and evaluating our reported financial results include those listed below. For a more detailed discussion, see
Note 2 in the Notes to Consolidated Financial Statements included herewith.
Revenue Recognition
Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed
or determinable, delivery of the product and passage of title to the customer has occurred and we have
determined that collection of the fee is probable. Title to the product generally passes upon shipment of the
product, as the products are shipped FOB shipping point, except for certain foreign shipments where title
passes upon entry of the product into the first port in the buyer’s country. If the product requires installation
to be performed by TCC, all revenue related to the product is deferred and recognized upon completion of
the installation. We provide for a warranty reserve at the time the product revenue is recognized.
We perform funded research and development and technology development for commercial companies and
government agencies under both cost reimbursement and fixed-price contracts. Cost reimbursement
contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee.
These contracts may contain incentive clauses providing for increases or decreases in the fee depending on
how actual costs compare with a budget. Revenue from reimbursement contracts is recognized as services
are performed. On fixed-price contracts that are expected to exceed one year in duration, revenue is
recognized pursuant to the proportional performance method based upon the proportion of actual costs
incurred to the total estimated costs for the contract. In each type of contract, we receive periodic progress
payments or payments upon reaching interim milestones, and we retain the rights to the intellectual property
developed in government contracts. All payments to TCC for work performed on contracts with agencies of
the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency.
Adjustments are recognized in the period made. There have been no government audits in recent years and
the company believes the result of such audits, should they occur, will not have a material adverse effect on
its financial position or results of operations. When the current estimates of total contract revenue and
contract costs for a product development contract indicate a loss, a provision for the entire loss on the
contract is recorded. Any losses incurred in performing funded research and development projects are
recognized as funded research and development expenses.
Cost of product revenue includes material, labor and overhead. Costs incurred in connection with
funded research and development are included in cost of sales. Product development costs are charged to
billable engineering services, bid and proposal efforts or business development activities, as appropriate.
Product development costs charged to billable projects are recorded as cost of sales; engineering costs
charged to bid and proposal efforts are recorded as selling expenses; and product development costs charged
to business development activities are recorded as marketing expenses. Product development costs consist
primarily of personnel costs, outside contractor and engineering services, supplies and materials.
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Inventory
We value our inventory at the lower of actual cost (based on first-in, first-out (FIFO) method) to
purchase and/or manufacture or the current estimated market value (based on the estimated selling prices,
less the cost to sell) of the inventory. We periodically review inventory quantities on hand and record a
provision for excess and/or obsolete inventory based primarily on our estimated forecast of product demand,
as well as historical usage. Due to the custom and specific nature of certain of our products, demand and
usage for products and materials can fluctuate significantly. A significant decrease in demand for our
products could result in a short-term increase in the cost of inventory purchases and an increase in excess
inventory quantities on hand. In addition, our industry is characterized by rapid technological change,
frequent new product development and rapid product obsolescence, any of which could result in an increase
in the amount of obsolete inventory quantities on hand. Therefore, although we make every effort to ensure
the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or
technological developments could have a significant negative impact on the value of our inventory and
would reduce our reported operating results.
Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the
future. The estimated allowance for uncollectible amounts is based primarily on a specific analysis of
accounts in the receivable portfolio and historical write-off experience. While management believes the
allowance to be adequate, if the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required, which would reduce
net income.
Accounting for Income Taxes
The preparation of our consolidated financial statements requires us to estimate our income taxes in
each of the jurisdictions in which we operate, including those outside the United States, which may subject
the Company to certain risks that ordinarily would not be expected in the United States. The income tax
accounting process involves estimating our actual current exposure together with assessing temporary
differences resulting from differing treatments of items, such as inventory obsolescence and stock-based
compensation, for tax and accounting purposes. These differences result in the recognition of deferred tax
assets and liabilities. We must then record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized.
Significant management judgment is required in determining our provision for income taxes, our
deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. We
have recorded a full valuation allowance against our deferred tax assets of approximately $2.4 million as of
September 27, 2014 due to uncertainties related to our ability to realize these assets. The valuation
allowance is based on our estimates of taxable income by jurisdiction and the period over which our deferred
tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these
estimates in future periods, we may need to adjust our valuation allowance, which could materially impact
our financial position and results of operation.
Due to the nature of our current operations in foreign countries (selling products into these
countries with the assistance of local representatives), the Company has not been subject to any foreign taxes
in recent years and it is not anticipated that we will be subject to foreign taxes in the near future.
Stock-Based Compensation
We record the compensation expense for all stock-based payments based on the grant date fair value.
We expense stock-based compensation over the employee’s requisite service period, generally the vesting
period of the award.
The choice of a valuation technique, and the approach utilized to develop the underlying assumptions
for that technique, involve significant judgments. These judgments reflect management’s assessment of the
most accurate method of valuing the stock options we issue, based on our historical experience, knowledge
of current conditions, and beliefs of what could occur in the future given available information. Our
judgments could change over time as additional information becomes available to us, or the facts underlying
our assumptions change. Any change in our judgments could have a material effect on our financial
statements. We believe that our estimates incorporate all relevant information available at the time made and
represent a reasonable approximation in light of the difficulties involved in valuing non-traded stock options.
19
Results of Operations
Year ended September 27, 2014 as compared to year ended September 28, 2013
Net Sales
Net sales for the years ended September 27, 2014 and September 28, 2013 were $6,139,000 and
$6,250,000, respectively, a decrease of $111,000 or 2%. Sales for fiscal 2014 consisted of $4,575,000, or
75%, from domestic sources and $1,564,000, or 25%, from international customers as compared to fiscal
2013, in which sales consisted of $5,720,000, or 92%, from domestic sources and $530,000, or 8%, from
international customers.
Foreign sales consisted of shipments to three different countries during the year ended September
27, 2014 and five different countries during the year ended September 28, 2013. A sale is attributed to a
foreign country based on the location of the contracting party. Domestic revenue may include the sale of
products shipped through domestic resellers or manufacturers to international destinations. The table below
summarizes our principal foreign sales by country:
Saudi Arabia
Egypt
Colombia
Other
2014
2013
$ 1,155,000
164,000
245,000
-
$ 1,564,000
$ 370,000
149,000
-
11,000
$ 530,000
Delays in the receipt of certain foreign and domestic contracts, coupled with customer and
production delivery requirements, resulted in lower than expected revenue for fiscal 2014. Delays were
primarily the result of international political unrest, which diverted foreign government customer’s attention
to domestic issues, as well as other factors associated with government procurements that often subject the
Company to unpredictable and erratic delays in the processing of procurements and delivery of products.
For the year ended September 27, 2014, product sales revenue was derived from the Company
making additional shipments, amounting to $1,788,000, to the U.S. Army Communications and Electronics
Command to upgrade the DSD 72A-SP military bulk encryption system currently in use by the Government
of Egypt. The Company made shipments of our narrowband radio encryptors, and supplied customized
cryptographic services, tools and training, for a domestic prime contractor supporting a government
customer in North Africa amounting to $1,280,000 and also made shipments of our narrowband radio
encryptors to a U.S. radio manufacturer for deployment into Afghanistan amounting to $1,044,000 during
the year. We also sold our Cipher X 7211 IP encryptor to a customer in the Middle East amounting to
$800,000 for fiscal 2014. Sales of our data link encryptor for deployment into Saudi Arabia amounted to
$323,000, and sales of our secure telephone, fax, and data encryptors to a foreign customer amounted to
$245,000. In addition, the Company made shipments of our narrowband radio encryptors to supply the
secure radio and telephone encryption solutions for a domestic customer supporting a government customer
in North Africa amounting to $220,000 during the period. Royalty sales to a domestic radio manufacturer
amounted to $128,000 during the year ended September 27, 2014.
For the year ended September 28, 2013, we derived $1,600,000 in service revenue from the sale of
engineering services to select customers. Product sales revenue were derived from the Company making the
initial shipments, amounting to $1,679,000, to CECOM to upgrade the DSD 72A-SP military bulk
encryption system currently in use by the Government of Egypt during the fourth quarter of the year. The
Company also made shipments of our narrowband radio encryptors to supply the secure radio and telephone
encryption solutions, and supplied customized cryptographic services and tools, for a domestic prime
contractor supporting a government customer in North Africa amounting to $982,000 during the year. We
also had sales of the Company’s narrowband radio encryptors to a U.S. radio manufacturer for deployment
into Afghanistan amounting to $961,000, our Ethernet IP encryptor for deployment into the Middle East
amounting to $263,000, our link encryptor into the Middle East amounting to $204,000, a spare parts order
shipped to Egypt amounting to $149,000, and a domestic order for our narrowband radio encryptors
amounting to $65,000. Royalty income for fiscal 2013 amounted to $60,000.
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Gross Profit
Gross profit for fiscal year 2014 was $4,105,000, a decrease of $35,000 from gross profit of
$4,140,000 for fiscal year 2013. Gross profit expressed as a percentage of sales was 67% in fiscal year 2014
compared to 66% in the prior year.
Operating Costs and Expenses
Selling, General and Administrative
Selling, general and administrative expenses for fiscal 2014 were $2,980,000, compared to
$2,956,000 for fiscal 2013. This increase of $24,000 was attributable to an increase in general and
administrative expenses of $44,000 offset by a decrease in selling and marketing expenses of $20,000 during
the 2014 fiscal year.
The increase in general and administrative costs for the year ended September 27, 2014 was
attributable to increases in personnel-related costs of $69,000 and insurance costs of $6,000 for the year.
These increases were offset by decreases in recruiting costs of $22,000, professional and other public
company fees of $7,000 and bank and investment fees of $5,000 during the year.
The decrease in selling and marketing expenses during fiscal 2014 were attributable to decreases in
product evaluation costs of $92,000, bid and proposal efforts of $47,000, engineering sales support expenses
of $42,000 and travel related costs of $12,000 during the year. These decreases were offset by increases in
customer support costs of $90,000, advertising and marketing costs of $53,000, product demonstration costs
of $12,000, bank fees of $8,000 and personnel-related costs of $6,000 during the year.
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Product Development Costs
Product development costs for fiscal years 2014 and 2013 were $2,729,000. There were decreases
during the 2014 fiscal year as a result of decreases in outside contractor costs of $512,000, project material
costs of $84,000 and personnel-related costs of $133,000. These decreases were offset by increases in
engineering support of sales and business development activities and a decrease in billable engineering
services work, which resulted in increased product development costs of approximately $734,000 for the
year ended September 27, 2014.
The Company actively sells its engineering services in support of funded research and
development. The receipt of these orders is sporadic, although such programs can span over several months.
In addition to these programs, the Company invests in research and development to enhance its existing
products or to develop new products, as it deems appropriate. There was $1,600,000 of billable engineering
services revenue generated during fiscal 2013 and no such revenue generated during fiscal 2014.
Net Loss
The Company generated a net loss of $2,565,000 for fiscal 2014, as compared to a net loss of
$714,000 for fiscal 2013. This $1,852,000 increase in net loss is primarily attributable to an increase in the
income tax provision of $1,789,000 during fiscal 2014. During the year ended September 27, 2014, the
Company established a valuation allowance against deferred tax assets of $894,000, which is included in the
income tax provision for the year ended September 27, 2014. This compares to an income tax benefit of
$799,000 during fiscal 2013 based on its expected effective tax rate of 52.8%. The Company received a
refund in fiscal 2013 of $214,000 in connection with an abatement claim from a prior year, which
contributed to the increase in the effective tax rate in fiscal 2013. There was uncertainty regarding the
outcome of the claim, therefore a benefit was not recorded until fiscal 2013.
The effects of inflation and changing costs have not had a significant impact on sales or earnings in
recent years. As of September 27, 2014, none of the Company’s monetary assets or liabilities was subject
to foreign exchange risks. The Company usually includes an inflation factor in its pricing when negotiating
multi-year contracts with customers.
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Liquidity and Capital Resources
We believe that our overall financial condition remains strong. Our cash, cash equivalents and
marketable securities at September 27, 2014 totaled $6,043,000 compared with $6,044,000 at September 28,
2013. We continue to have no long-term debt. It is anticipated that our cash balances and cash generated
from operations will be sufficient to fund our near-term research and development and marketing activities.
Cash Requirements
We believe that the combination of existing cash, cash equivalents, and highly liquid short-term
investments, together with future cash to be generated by operations, will be sufficient to meet our ongoing
operating and capital expenditure requirements for the foreseeable future and at least through the end of
fiscal year 2015. We also believe that, in the long term, an anticipated improvement of business prospects,
current billable activities and cash from operations will be sufficient to meet the Company’s investment in
product development, although we can give no assurances. Any increase in development activities - either
billable or new product related - will require additional resources, which we may not be able to fund through
cash from operations. In circumstances where resources will be insufficient, the Company will look to other
sources of financing, including debt and/or equity investments, however, we can provide no guarantees that
we will be successful in securing such additional financing.
Sources and Uses of Cash
The following table presents our abbreviated cash flows for the years ended September 27, 2014
and September 28, 2013:
2014
2013
Net loss
Changes not affecting cash
Changes in assets and liabilities
Cash provided by (used in) operating activities
Cash provided by investing activities
Cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents - beginning of period
$ (2,565,000)
1,378,000
1,421,000
234,000
165,000
-
399,000
2,811,000
$ (714,000)
199,000
316,000
(199,000)
1,138,000
(184,000)
755,000
2,056,000
Cash and cash equivalents - end of period
$ 3,210,000
$ 2,811,000
Operating Activities
The Company generated approximately $433,000 more cash from operating activities in fiscal 2014
compared to fiscal 2013. This increase was primarily attributable to higher collections of accounts and
income taxes receivables, a decrease in deferred tax assets, as well as a reduction of inventories, offset by a
decrease in customer deposits during the year.
Investing Activities
Cash provided by investing activities during fiscal 2014 decreased by approximately $973,000 to
$165,000 compared to cash provided by investing activities of $1,138,000 during fiscal 2013. This change is
primarily attributable to an increase in the purchase of short-term investments in marketable securities in
fiscal 2014.
Financing Activities
Cash used in financing activities during fiscal 2013 was $184,000 compared to no activity during
fiscal 2014. The reduction in activity is due to the suspension of dividend payments during the second
quarter of fiscal 2013.
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Debt Instruments and Related Covenants
The Company maintains a line of credit agreement with Bank of America (the “Bank”) for a line of
credit not to exceed the principal amount of $600,000. The line is supported by a financing promissory note.
The loan is a demand loan with interest payable at the Bank’s prime rate plus 2.75% on all outstanding
balances. The loan is secured by all assets of the Company (excluding consumer goods) and requires the
Company to maintain its deposit accounts with the Bank, as well as comply with certain other covenants. At
September 27, 2014 the company was in violation of the agreements covenant to maintain a minimum level
of tangible net worth. The bank has subsequently waived that requirement for the current year. The line is
available to support new letters of credit issued by the Company, although any standby letters of credit are
required to be secured with cash. There were no cash borrowings against the line during the fiscal years
ended September 27, 2014 and September 28, 2013.
Backlog
Backlog at September 27, 2014 and September 28, 2013 amounted to $402,000 and $2,285,000,
respectively. The orders in backlog at September 27, 2014 are expected to ship over the next six months
depending on customer requirements and product availability.
Performance guaranties
Certain foreign customers require the Company to guarantee bid bonds and performance of
products sold. These guaranties typically take the form of standby letters of credit. Guaranties are generally
required in amounts of 5% to 10% of the purchase price and last in duration from three months to one year.
At September 27, 2014, the Company had three outstanding letters of credit in the amounts of $329,000,
$16,000 and $4,000, which are secured by collateralized bank accounts totaling $349,000.
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Research and Development
Research and development efforts are undertaken by the Company primarily on its own initiative.
In order to compete successfully, the Company must attract and retain qualified personnel, improve existing
products and develop new products. No assurances can be given that the Company will be able to hire and
train such technical management and sales personnel or successfully improve and develop its products.
During each of the years ended September 27, 2014 and September 28, 2013, the Company spent
$2,729,000 on internal product development. The Company also spent $855,000 on billable development
efforts during fiscal 2013. In fiscal 2014, the Company’s total product development costs were 23% lower
than prior years but in line with its planned commitment to research and development, and reflected the
costs of custom development, product capability enhancements and production readiness. It is expected that
development expenses in fiscal 2015 will be approximately 10-15% lower than fiscal 2014 levels.
Research and development expenses in fiscal 2014 were lower than the prior as major new product
development was completed during fiscal 2013 and efforts in fiscal 2014 focused on customer-specific
requirements, product enhancements, production readiness and future product planning. The following are
key fiscal 2014 research and development initiatives:
• Production readiness of the HSE 6000 headset radio encryptor for secure land mobile radio
communications. Production of the HSE 6000 is complete and it is currently being field tested in
several countries by military and first responder organizations.
• Design and development of capability for TCC’s Cipher X 7211 IP encryptor to secure high-
bandwidth satellite communications. The capability was developed for a customer-specific
requirement and is also marketable worldwide as an option for all customers.
• Development to enhance the ability of TCC’s Cipher X 7211 IP encryption system to integrate
custom and national algorithms without requiring modification to hardware. Development efforts
are expected to continue in fiscal 2015 to offer a broader range of national algorithm solutions.
TCC believes this is a competitive differentiator for the Company in foreign markets.
• Development of KEYNET Lite-IP and KEYNET Lite-Optical key and device management
systems. These KEYNET Lite systems are specifically designed to meet the needs of small
networks and provide the same robust flexibility, security and ease of use of TCC’s fully featured
KEYNET systems at a significantly lower price.
23
In fiscal 2014, technical efforts continued to focus on three principal areas: development of
solutions that meet the needs of OEMs; product enhancements that include expanded features, planned
capability and applications growth; and custom solutions that tailor our products and services to meet the
unique needs of our customers. Going forward, the Company expects to continue technical efforts in these
areas while also increasing our systems design and integration capabilities and services offering portfolio.
It is anticipated that cash from operations will fund our near-term research and development and
marketing activities through at least the end of fiscal year 2015. We also believe that, in the long term, based
on current billable activities, cash from operations will be sufficient to meet the development goals of the
Company, although we can give no assurances. Any increase in development activities - either billable or
new product related - will require additional resources, which we may not be able to fund through cash from
operations. In circumstances where resources will be insufficient, the Company will look to other sources of
financing, including debt and/or equity investments.
Capital Expenditures
Other than those stated above, there are no plans for significant internal product development or
material commitments for capital expenditures in fiscal 2015.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
New Accounting Pronouncements
ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the
FASB Emerging Issues Task Force)
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized
tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.
This guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented
in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward. If a net operating loss carryforward, a similar tax loss, or a tax
credit carryforward is not available at the reporting date, the unrecognized tax benefit should be presented in
the financial statements as a liability and not combined with deferred tax assets. This guidance is effective
prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013,
with early adoption permitted. The Company is currently evaluating the impact of this guidance but does not
expect its adoption will have a material effect on the Company’s consolidated financial statements. This
guidance will become effective for TCC as of the beginning of our 2015 fiscal year and is consistent with
our present practice.
ASU 2014-09, Revenue From Contracts With Customers (Topic 606)
In May 2014, the FASB and the International Accounting Standards Board issued guidance on the
principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and
International Financial Reporting Standards (“IFRS”) that would: (1) remove inconsistencies and
weaknesses in revenue requirements, (2) provide a more robust framework for addressing revenue issues,
(3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and
capital markets, (4) provide more useful information to users of financial statements through improved
disclosure requirements, and (5) simplify the preparation of financial statements by reducing the number of
requirements to which an entity must refer. This guidance is effective prospectively for annual reporting
periods beginning after December 15, 2016, including interim periods within that reporting period. Early
adoption is not permitted. The Company is currently evaluating the impact of this guidance but does not
expect its adoption will have a material effect on the Company’s consolidated financial statements. This
guidance will become effective for TCC as of the beginning of our 2018 fiscal year.
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ASU 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of
Uncertainties about an Entity’s Ability to Continue as a Going Concern
In August 2014 the Financial Accounting Standards Board updated U.S. Generally Accepted
Accounting Principles to eliminate a critical gap in existing standards. The new guidance clarifies the
disclosures management must make in the organization’s financial statement footnotes when management
has substantial doubt about its ability to continue as a “going concern.” The Company is currently
evaluating the impact of this guidance but does not expect its adoption will have a material effect on the
Company’s consolidated financial statements. The guidance applies to all companies and is effective for
the annual reporting periods ending after December 15, 2016, including interim periods within that
reporting period.
Management does not believe that any other recently issued, but not yet effective, accounting
standards if currently adopted would have a material impact on the accompanying financial statements.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto listed in the accompanying index to financial statements
(Item 15) are filed as part of this Annual Report on Form 10-K and are incorporated herein by reference.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and
Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Annual Report
on Form 10-K. Based on that review and evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company’s current disclosure controls and procedures, as designed and
implemented, are effective to ensure that such officers are provided with information relating to the
Company required to be disclosed in the reports the Company files or submits under the Exchange Act and
that such information is recorded, processed, summarized and reported within the specified time periods.
Management’s annual report on internal control over financial reporting. Our management is
responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Rule 13a-15(f) promulgated under the Exchange Act. Under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an
assessment of the effectiveness of our internal control over financial reporting as of September 27, 2014. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control—Integrated Framework, established in
1992.
A goal of the assessment was to determine whether any material weaknesses or significant
deficiencies existed with respect to the Company’s internal control over financial reporting. A “material
weakness” is defined as a significant deficiency, or a combination of significant deficiencies, that results in
more than a remote likelihood that a material misstatement of the annual or interim financial statements will
not be prevented or detected. A “significant deficiency” is a control deficiency, or a combination of control
deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process or report
external financial data reliably in accordance with generally accepted accounting principles such that there is
more than a remote likelihood that a misstatement of the annual or interim financial statements that is more
than inconsequential will not be prevented or detected.
25
In the course of its assessment for fiscal year 2014, management identified a control deficiency that
was also identified during its assessments for the 2008 through 2013 fiscal years. During the course of the
previous years’ evaluations, and again during the evaluation for the 2014 fiscal year, management
determined that the Company lacked sufficient staff to segregate accounting duties. Management believes
this control deficiency is primarily the result of the Company employing, due to its limited size, the
equivalent of only one and one-half persons performing all accounting-related on-site duties. As a result,
TCC does not maintain adequate segregation of duties within its critical financial reporting applications, the
related modules and financial reporting processes. This control deficiency could result in a misstatement of
our interim or annual consolidated financial statements that would not be detected. Accordingly,
management has determined that this control deficiency constituted a material weakness, and that the
Company’s internal control over financial reporting was not effective, as of September 27, 2014.
Management has discussed the material weakness and related potential corrective actions with the
Audit Committee and Board of Directors of the Company and TCC’s independent registered public
accounting firm. As part of our 2015 assessment of internal control over financial reporting, our
management will test and evaluate additional controls implemented, if any, to assess whether they are
operating effectively. Our goal is to take all actions feasible given our financial condition to remediate any
material weaknesses and enhance our internal controls, but we cannot guarantee that our efforts, if any, will
result in the remediation of our material weakness or that new issues will not be exposed in the process. In
designing and evaluating our internal control over financial reporting, management recognizes that any
controls, no matter how well designed and operated, can provide only reasonable, but not absolute,
assurance that misstatements due to error or fraud will not occur or that all control issues and instances of
fraud, if any, with the Company will be detected.
Changes in internal control over financial reporting. There were no changes in the Company’s internal
control over financial reporting that occurred during its fourth quarter of fiscal 2014 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Item 9B. OTHER INFORMATION
Not applicable.
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Part III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 is incorporated herein by reference to our Definitive Proxy
Statement, under the captions “Members of the Board of Directors, Nominees and Executive Officers,”
“Certain Relationships and Related Person Transactions; Legal Proceedings,” “Corporate Governance,” and
“Section 16(a) Beneficial Ownership Reporting Compliance,” with respect to our 2015 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end
of the Company’s 2014 fiscal year.
The Company has adopted a Code of Business Conduct and Ethics, which applies to all of its
employees, officers and directors. A copy of this code can be found on the Company’s website at
www.tccsecure.com/investors.
Item 11.
EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference to our Definitive
Proxy Statement, under the captions “Compensation” and “Compensation Discussion and Analysis” with
respect to our 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the Company’s 2014 fiscal year.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is incorporated herein by reference to Part II, Item 5
herein under the caption “Equity Compensation Plan Information” and by reference to our Definitive Proxy
Statement, under the caption “Security Ownership of Certain Beneficial Owners and Management,” with
respect to our 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the Company’s 2014 fiscal year.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item 13 is incorporated herein by reference to our Definitive Proxy
Statement, under the captions “Certain Relationships and Related Person Transactions; Legal Proceedings”
and “Corporate Governance” with respect to our 2015 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission not later than 120 days after the end of the Company’s 2014 fiscal year.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is incorporated herein by reference to our Definitive
Proxy Statement, under the caption Proposal III – Ratification of Selection of Independent Registered Public
Accounting Firm with respect to our 2015 Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission not later than 120 days after the end of the Company’s 2014 fiscal year.
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Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(1) Financial Statements The following Consolidated Financial Statements and Notes thereto are filed
as part of Part II, Item 8 of this report:
Consolidated Balance Sheets as of
September 27, 2014 and September 28, 2013
Consolidated Statements of Operations for the Years Ended
September 27, 2014 and September 28, 2013
Consolidated Statements of Comprehensive Loss for the
Years Ended September 27, 2014 and September 28, 2013
Consolidated Statements of Cash Flows for the Years Ended
September 27, 2014 and September 28, 2013
Consolidated Statements of Changes in Stockholders’ Equity for the
Years Ended September 27, 2014 and September 28, 2013
Page
31
32
33
33
34
Notes to Consolidated Financial Statements
35-48
(2) List of Exhibits
4
3.1
3.2
Articles of Organization of the Company (incorporated by reference to the Company’s Annual
Report for 2005 on Form 10-KSB, filed with the Securities and Exchange Commission on
December 21, 2005)
By-laws of the Company (incorporated by reference to the Company’s 8-K filed with the
Securities and Exchange Commission on May 5, 1998)
Rights Agreement, dated as of August 7, 2014, by and between the Company and American
Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to the
Company’s 8-K filed with the Securities and Exchange Commission on August 11, 2014)
10.1+ Employment Agreement, effective November 19, 1998, with Carl H. Guild, Jr. (incorporated
by reference to the Company’s Annual Report for 1998 on Form 10-K, as amended, filed with
the Securities and Exchange Commission on December 21, 1998)
10.2+ Employment Agreement, effective February 12, 2001, with Michael P. Malone (incorporated
by reference to the Company’s Form 10-QSB filed with the Securities and Exchange
Commission on May 15, 2001)
10.4+
10.3+ Amendment to Employment Agreement between the Company and Carl H. Guild Jr., as of
November 8, 2001 (incorporated by reference to the Company’s Form 10-QSB filed with the
Securities and Exchange Commission on August 13, 2002)
1995 Employee Stock Purchase Plan (incorporated by reference to the Company's Registration
Statement on Form S-8, filed with the Securities and Exchange Commission on May 23, 1996)
2001 Stock Option Plan (incorporated by reference to the Company's Registration Statement
on Form S-8, filed with the Securities and Exchange Commission on December 28, 2001)
Standard Form Commercial Lease, dated March 27, 2014, between the Company and Batstone
LLC (incorporated by reference to the Company’s 8-K filed with the Securities and Exchange
Commission on April 2, 2014)
10.5+
10.6
10.7* Loan Agreement, dated February 22, 2012, between the Company and Bank of America, N.A.
10.8* Security Agreement, dated February 22, 2012, between the Company and Bank of America,
10.9+
N.A.
2005 Non-Statutory Stock Option Plan (incorporated by reference to the Company’s Form 10-
QSB filed with the Securities and Exchange Commission on May 10, 2005.)
10.10+ 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.17 to the Company’s
Form 10-K filed with the Securities and Exchange Commission on December 22, 2010.)
10.11 Contract with U.S. Army Contracting Command, dated May 2, 2013, contract No. W15P7T-
13-C-D519 (Confidential portions of this exhibit have been omitted and filed separately with
28
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the Securities and Exchange Commission pursuant to a request for confidential treatment.)
(incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the
Securities and Exchange Commission on August 13, 2013.)
10.12 Purchase Order from Datron World Communications dated October 8, 2013 (Confidential
portions of this exhibit have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.) (incorporated by
reference to Exhibit 10.22 to the Company’s Form 10-K filed with the Securities and Exchange
Commission on December 19, 2013.)
14
10.13* Contract with the Egyptian Armament Authority with an effective date of November 25, 2014
(Confidential portions of this exhibit have been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment.)
Code of Business Conduct and Ethics (incorporated by reference to the Company’s Annual
Report for 2003 on Form 10-KSB, filed with the Securities and Exchange Commission on
December 22, 2004.)
List of Subsidiaries of the Company
21*
23.1* Consent of Independent Registered Public Accounting Firm
31.1* Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2* Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of
32*
2002
Certifications of Chief Executive and Chief Financial Officers pursuant to 18 U.S.C. Section
1350
101.INS XBRL Report Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Calculation Linkbase Document
101.LAB XBRL Taxonomy Label Linkbase Document
101.PRE XBRL Presentation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
Footnotes:
* Attached to this filing
+ Denotes a management contract or compensatory plan or arrangement
29
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.
SIGNATURES
TECHNICAL COMMUNICATIONS CORPORATION
By: /s/ Carl H. Guild, Jr.
Carl H. Guild, Jr.
Chief Executive Officer and President
Chairman of the Board, Director
Date: December 22, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Carl H. Guild, Jr.
Carl H. Guild, Jr.
Chief Executive Officer and President
Chairman of the Board, Director
(Principal Executive Officer)
December 22, 2014
/s/ Michael P. Malone
Michael P. Malone
Treasurer and Chief Financial Officer
(Principal Financial
and Accounting Officer)
December 22, 2014
/s/ Mitchell B. Briskin
Mitchell B. Briskin
/s/ Thomas E. Peoples
Thomas E. Peoples
/s/ Francisco F. Blanco
Francisco F. Blanco
Director
December 22, 2014
Director
December 22, 2014
Director
December 22, 2014
30
Technical Communications Corporation and Subsidiary
Consolidated Balance Sheets
September 27, 2014 and September 28, 2013
ASSETS
2014
2013
Current assets:
Cash and cash equivalents
Marketable securities:
Available for sale securities
Held to maturity securities
Accounts receivable - trade, less allowance of $25,000
at September 27, 2014 and September 28, 2013
Inventories
Income taxes receivable
Deferred income taxes
Other current assets
Total current assets
$ 3,210,237
$ 2,810,923
1,416,890
310,437
403,139
2,721,313
-
-
210,379
8,272,395
1,247,384
522,856
1,375,764
2,618,604
723,988
894,459
225,583
10,419,561
Marketable securities:
Held to maturity securities
1,105,140
1,462,622
Equipment and leasehold improvements
Less accumulated depreciation and amortization
Equipment and leasehold improvements, net
4,465,096
(4,033,233)
431,863
4,300,304
(3,831,402)
468,902
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued liabilities:
Compensation and related expenses
Customer deposits
Other current liabilities
Income taxes payable
Total current liabilities
Commitments and contingencies (Note 12)
Stockholders' equity
Common stock - par value $0.10 per share;
7,000,000 shares authorized, 1,838,921 issued
and outstanding at September 27, 2014 and
1,838,716 issued and outstanding at September 28, 2013
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total stockholders' equity
$ 9,809,398
$ 12,351,085
$ 173,553
$ 261,588
163,410
169,943
157,784
76,859
741,549
241,003
259,602
166,848
-
929,041
183,892
3,986,996
(3,598)
4,900,559
9,067,849
183,872
3,774,759
(2,020)
7,465,433
11,422,044
$ 9,809,398
$ 12,351,085
The accompanying notes are an integral part of these consolidated financial statements.
31
Technical Communications Corporation and Subsidiary
Consolidated Statements of Operations
Years ended September 27, 2014 and September 28, 2013
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Product development
Total operating expenses
2014
2013
$ 6,138,575
2,033,961
4,104,614
$ 6,249,649
2,109,394
4,140,255
2,980,388
2,729,276
5,709,664
2,956,465
2,729,473
5,685,938
Operating loss
(1,605,050)
(1,545,683)
Other income
Investment income
30,289
32,752
Loss before provision (benefit) for income taxes
(1,574,761)
(1,512,931)
Provision (benefit) for income taxes
990,113
(798,802)
Net loss
$ (2,564,874)
$ (714,129)
Net loss per common share
Basic
Diluted
Weighted average shares
Basic
Diluted
$ (1.39)
$ (1.39)
$ (0.39)
$ (0.39)
1,838,866
1,838,866
1,838,716
1,838,716
Dividends paid per common share
-
$ 0.10
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years ended September 27, 2014 and September 28, 2013
Net loss
Other comprehensive loss, net of tax
Comprehensive loss
2014
2013
$ (2,564,874)
(1,578)
$ (2,566,452)
$ (714,129)
(12,062)
$ (726,191)
The accompanying notes are an integral part of these consolidated financial statements.
32
Technical Communications Corporation and Subsidiary
Consolidated Statements of Cash Flows
Years ended September 27, 2014 and September 28, 2013
Operating activities:
Net loss
Adjustments to reconcile net income
to cash (used in) provided by operating activities:
Depreciation and amortization
Stock-based compensation
Deferred income taxes
Amortization of premium on held to maturity securities
Unrealized (loss) gain on available for sale securities
Changes in current assets and current liabilities:
Accounts receivable
Inventories
Income taxes receivable
Other current assets
Customer deposits
Accounts payable and accrued liabilities
2014
2013
$ (2,564,874)
$ (714,129)
201,831
213,243
894,459
70,394
(1,578)
972,625
(102,709)
723,988
15,204
(89,659)
(98,819)
199,114
205,028
(276,381)
83,716
(12,062)
4,708
14,804
135,348
(54,854)
207,230
9,094
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Cash provided by (used in) operating activities
234,105
(198,924)
Investing activities:
Additions to equipment and leasehold improvements
Proceeds from maturities of marketable securities
Purchases of marketable securities
(164,792)
2,909,001
(2,579,000)
(215,418)
2,957,501
(1,604,675)
Cash provided by investing activities
165,209
1,137,408
Financing activities:
Dividends paid
Cash used in financing activities
-
-
(183,872)
(183,872)
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
399,314
2,810,923
754,612
2,056,311
Cash and cash equivalents at end of year
$ 3,210,237
$ 2,810,923
Supplemental disclosures:
Income taxes paid
$ 4,942
$ 576
The accompanying notes are an integral part of these consolidated financial statements.
33
Technical Communications Corporation and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years ended September 27, 2014 and September 28, 2013
Stockholders' Equity
Shares of common stock:
Beginning balance
Cashless exercise of stock options
Ending balance
Common stock at par value:
Beginning balance
Cashless exercise of stock options
Ending balance
Additional paid-in capital:
Beginning balance
Cashless exercise of stock options
Stock-based compensation
Ending balance
2014
2013
1,838,716
205
1,838,921
1,838,716
-
1,838,716
$ 183,872 $ 182,732
-
183,872
20
183,892
$ 3,774,759 $ 3,569,731
-
205,028
3,774,759
(1,006)
213,243
3,986,996
Other comprehensive income (loss):
Beginning balance
Unrealized loss on available for sale securities
Ending balance
(2,020)
(1,578)
(3,598)
10,042
(12,062)
(2,020)
Retained earnings:
Beginning balance
Dividends paid
Net loss
Ending balance
$ 7,465,433 $ 8,363,434
(183,872)
(714,129)
7,465,433
-
(2,564,874)
4,900,559
Total stockholders’ equity
$ 9,067,849 $ 11,422,044
The accompanying notes are an integral part of these consolidated financial statements.
34
Notes to Consolidated Financial Statements
(1) Company Operations
Technical Communications Corporation was incorporated in Massachusetts in 1961; its wholly-
owned subsidiary, TCC Investment Corp., was organized in that jurisdiction in 1982. The
Company’s business consists of only one industry segment, which is the design, development,
manufacture, distribution, marketing and sale of communications security devices, systems and
services. The secure communications solutions provided by TCC protect vital information
transmitted over a wide range of data, fax and voice networks. TCC’s products have been sold into
over 115 countries and are in service with governments, military agencies, telecommunications
carriers, financial institutions and multinational corporations.
included significant
The Company’s revenues have historically
transactions with foreign
governments, U.S. government agencies and other organizations. The Company expects this to
continue. The timing of these transactions has in the past and will in the future have a significant
impact on the cash flow and the earnings of the Company. Delays in the timing of significant
expected sales transactions would have a significant negative effect on the Company’s operations.
The Company has some ability to mitigate this effect through cost-cutting measures. The Company
has incurred losses of approximately $4.1 million during the past three years, however we believe we
will have sufficient cash resources through at least the end of fiscal year 2015.
(2) Summary of Significant Accounting Policies
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We follow accounting standards set by the Financial Accounting Standards Board, commonly
referred to as the FASB. The FASB sets generally accepted accounting principles (GAAP) that we
follow to ensure we consistently report our financial condition, results of operations, and cash flows.
References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards
CodificationTM, sometimes referred to as the Codification or ASC.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, TCC Investment Corp., a Massachusetts corporation. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting periods.
Significant judgments and estimates include those related to revenue recognition, receivable reserves,
inventory reserves, impairment of long-lived assets, income taxes and stock-based compensation.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits at banks and other investments (including mutual
funds) readily convertible into cash. Cash equivalents are stated at cost, which approximates market
value. At September 27, 2014, the Company had restrictions on the use of cash which was used as
collateral to secured three outstanding letters of credit totaling $348,695.
Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the
future. The estimated allowance for uncollectible amounts is based primarily on a specific analysis of
accounts in the receivable portfolio and historical write-off experience. While management believes
the allowance to be adequate, if the financial condition of our customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances may be required, which
would reduce net income. In addition, if the Company becomes aware of a customer’s inability to
meet its financial obligations, a specific write-off is recorded in that amount.
35
Notes to Consolidated Financial Statements (continued)
Inventories
The Company values its inventory at the lower of actual cost (based on first-in, first-out (FIFO)
method) to purchase and/or manufacture or the current estimated market value (based on estimated
selling prices, less the cost to sell) of the inventory. The Company periodically reviews inventory
quantities on hand and records a provision for excess and/or obsolete inventory based primarily on
our estimated forecast of product demand, as well as historical usage. The Company evaluates the
carrying value of inventory on a quarterly basis to determine if the carrying value is recoverable at
estimated selling prices. To the extent that estimated selling prices are less than the associated
carrying values, inventory carrying values are written down. In addition, the Company makes
judgments as to future demand requirements and compares those with the current or committed
inventory levels. Reserves are established for inventory levels that exceed future demand. It is
possible that additional reserves above those already established may be required in the future if
market conditions for our products should deteriorate.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation and amortization are
computed using the straight-line method over the lesser of the estimated useful life of the asset or the
applicable lease term. When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized
in operations for the period. The costs of maintenance and repairs are charged to operations as
incurred; significant renewals and betterments are capitalized.
Long-lived Assets
The Company’s only long-lived assets are equipment and leasehold improvements. Long-lived assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. These events include, a significant decrease in the market
price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived
asset is being used or in its physical condition, a significant adverse change in legal factors or in the
business climate that could affect the value of a long-lived asset, including an adverse action or
assessment by a regulator, an accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived asset, a current-period operating or cash
flow loss combined with a history of operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived asset, among other items.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
the asset to the estimated undiscounted future cash flows expected to be generated by such asset. If
the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment
charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset.
Although an indicator did exist at September 27, 2014 we determined that no impairment charge was
required as an estimate of our future undiscounted cash flows was sufficient to recover the assets.
Revenue Recognition
The Company recognizes product revenue when there is persuasive evidence of an arrangement, the
fee is fixed or determinable, delivery of the product and passage of title to the customer has occurred
and the Company has determined that collection of the fee is probable. Title to the product generally
passes upon shipment of the product, as the products are shipped FOB shipping point, except for
certain foreign shipments where title passes upon entry of the product into the first port in the buyer’s
country. If the product requires installation to be performed by TCC, all revenue related to the
product is deferred and recognized upon completion of the installation. The Company provides for a
warranty reserve at the time the product revenue is recognized.
The Company performs funded research and development and technology development for
commercial companies and government agencies under both cost reimbursement and fixed-price
contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in
some situations, the payment of a fee. These contracts may contain incentive clauses providing for
increases or decreases in the fee depending on how actual costs compare with a budget. Revenue
from reimbursement contracts is recognized as services are performed. On fixed-price contracts that
are expected to exceed one year in duration, revenue is recognized pursuant to the proportional
36
Notes to Consolidated Financial Statements (continued)
performance method based upon the proportion of actual costs incurred to the total estimated costs for
the contract. In each type of contract, the Company receives periodic progress payments or payments
upon reaching interim milestones. All payments to the Company for work performed on contracts
with agencies of the U.S. government are subject to audit and adjustment by the Defense Contract
Audit Agency. Adjustments are recognized in the period made. There have been no audits in recent
years and the company believes the result of such audits, should they occur, will not have a material
adverse effect on its financial position or results of operations. If the current estimates of total
contract revenue and contract costs for a product development contract indicate a loss, a provision for
the entire loss on the contract is recorded. Any losses incurred in performing funded research and
development projects are recognized as funded research and development expenses.
Cost of product revenue includes material, labor and overhead. Costs incurred in connection with
funded research and development are included in cost of sales. Product development costs are
charged to billable engineering services, bid and proposal efforts or business development activities,
as appropriate. Product development costs charged to billable projects are recorded as cost of sales;
engineering costs charged to bid and proposal efforts are recorded as selling expenses; and product
development costs charged to business development activities are recorded as marketing expenses.
Product development costs consist primarily of personnel costs, outside contractor and engineering
services, supplies and materials.
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Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the calculated fair value of the
award. The expense is recognized over the employee’s requisite service period, generally the vesting
period of the award. The related excess tax benefit received upon the exercise of stock options, if any,
is reflected in the Company’s statement of cash flows as a financing activity rather than an operating
activity. There were no excess tax benefits for the years ended September 27, 2014 and September
28, 2013.
The Company uses the Black-Scholes option pricing model as the method for determining the
estimated fair value of its stock awards. The Black-Scholes method of valuation requires several
assumptions: (1) the expected term of the stock award, (2) the expected future stock price volatility
over the expected term, (3) a risk-free interest rate and (4) the expected dividend rate. The expected
term represents the expected period of time the Company believes the options will be outstanding
based on historical information. Estimates of expected future stock price volatility are based on the
historic volatility of the Company’s common stock and the risk free interest rate is based on the U.S.
Treasury Note rate. The Company utilizes a forfeiture rate based on an analysis of its actual
experience. The forfeiture rate is not material to the calculation of stock-based compensation. The fair
value of options at date of grant was estimated with the following assumptions:
Assumptions:
Option life
Risk-free interest rate
Stock volatility
Dividend yield
September 27,
2014
September 28,
2013
6.5 years
1.33 % to 1.88%
60% to 65%
0%
5 to 6.5 years
0.71 % to 0.79%
66%
0%
There were 15,700 options granted during the year ended September 27, 2014 and 16,500 options
granted during the year ended September 28, 2013. The following table summarizes stock-based
compensation costs included in the Company’s consolidated statements of income for the years ended
September 27, 2014 and September 28, 2013:
Cost of sales
Selling, general and administrative
Product development
Total stock-based compensation expense before taxes
2014
$ 16,287
111,067
85,889
$ 213,243
2013
$ 16,295
87,613
101,120
$ 205,028
37
Notes to Consolidated Financial Statements (continued)
As of September 27, 2014, there was $141,213 of unrecognized compensation cost related to options
outstanding. The unrecognized compensation cost will be recognized as the options vest. The
weighted average period over which the stock-based compensation cost is expected to be recognized
is 1.34 years.
The Company had the following stock option plans outstanding as of September 27, 2014: the
Technical Communications Corporation 2001 Stock Option Plan, the 2005 Non-Statutory Stock
Option Plan and the 2010 Equity Incentive Plan. There were an aggregate of 750,000 shares
authorized for issuance under these plans, of which options to purchase 269,485 shares were
outstanding at September 27, 2014. Vesting periods are at the discretion of the Board of Directors and
typically range between zero and five years. Options under these plans are granted with an exercise
price equal to fair market value at time of grant and have a term of ten years from the date of grant.
As of September 27, 2014, there were no shares available for new grants under the 2001 Stock Option
Plan; there were 19,723 shares available for grant under the 2005 Non-Statutory Stock Option Plan
and 55,603 available for grant under the 2010 Equity Plan.
The following tables summarize stock option activity during fiscal years 2013 and 2014:
Options Outstanding
Number of Shares Weighted Average Weighted Average
Unvested Vested Total Exercise Price Contractual Life
Outstanding, September 29, 2012 93,418 151,784 245,202
$ 9.12
6.99 years
Grants
Vested
Cancellations/forfeitures
14,000
2,500
(33,319)
33,319
(2,111) (2,009)
16,500
-
(4,120)
4.73
10.46
9.98
Outstanding, September 28, 2013 60,488 197,094 257,582
$ 8.83
6.21 years
Grants
Vested
Exercises
Cancellations/forfeitures
1,700
(28,239)
-
14,000
28,239
(900)
(1,210) (1,687)
15,700
-
(900)
(2,897)
7.50
11.06
5.00
11.21
Outstanding, September 27, 2014 32,739 236,746 269,485
$ 8.74
5.46 years
Information related to the stock options vested or expected to vest as of September 27, 2014 is as
follows:
Range of
Exercise Prices
$2.01 - $3.00
$3.01 - $4.00
$4.01 - $5.00
$5.01 - $10.00
$10.01 - $15.00
Weighted-
Average
Remaining
Contractual
Life (years)
.94
1.83
6.55
5.79
6.00
5.46
Weighted-
Average
Exercise Price
$ 3.00
3.66
4.78
7.48
11.41
$ 8.74
Exercisable
Number of
Shares
15,288
16,600
26,800
65,500
112,558
236,746
Exercisable
Weighted-
Average
Exercise Price
$ 3.00
3.66
4.78
7.46
11.39
$ 8.47
Number of
Shares
15,288
16,600
28,000
69,900
139,697
269,485
The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable options
as of September 27, 2014 was $29,987. There were 900 options exercised during the year ended
September 27, 2014. Nonvested common stock options are subject to the risk of forfeiture until the
fulfillment of specified conditions.
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Income Taxes
The Company accounts for income taxes using the asset/liability method. Under the asset/liability
method, deferred income taxes are recognized at current income tax rates to reflect the tax effect of
temporary differences between the consolidated financial reporting basis and tax basis of assets and
liabilities. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable value.
The Company follows the appropriate guidance relative to uncertain tax positions. This standard
provides detailed guidance for the financial statement recognition, measurement and disclosure of
uncertain tax positions recognized in the financial statements. Uncertain tax positions must meet a
recognition threshold of more-likely-than-not in order for those tax positions to be recognized in the
financial statements. For fiscal year 2014 the Company had $80,829 of uncertain tax positions and for
fiscal year 2013, the Company had no uncertain tax positions or unrecognized tax benefits.
The Company’s policy is to record estimated interest and penalties related to the underpayment of
income taxes as a component of its income tax provision. For the year ended September 27, 2014 the
Company recorded $19,000 in interest and tax penalties, and for the year ended September 28, 2013,
the Company had no interest or tax penalties.
Warranty Costs
The Company provides for estimated warranty costs at the time product revenue is recognized based
in part upon historical experience.
Fair Value of Financial Instruments
In determining the fair value of financial instruments, the Company follows the provisions of FASB
ASC 820, Fair Value Measurements and Disclosures. FASB ASC 820 defines fair value, establishes
a framework for measuring fair value under GAAP, and enhances disclosures about fair value
measurements. The topic provides a consistent definition of fair value which focuses on an exit price,
which is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The topic also prioritizes, within
the measurement of fair value, the use of market-based information over entity-specific information
and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used
in the valuation of an asset or liability as of the measurement date. The three level hierarchy is as
follows:
Level 1 - Pricing inputs are quoted prices available in active markets for identical
investments as of the reporting date.
Level 2 - Pricing inputs are quoted prices for similar investments, or inputs that are
observable, either directly or indirectly, for substantially the full term through
corroboration with observable market data.
Level 3 - Pricing inputs are unobservable for the investment, that is, inputs that reflect the
reporting entity’s own assumptions about the assumptions market participants
would use in pricing the asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest
level of input that is significant to the fair value measurement. The Company’s assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment, and
considers factors specific to the investment.
The Company’s held to maturity securities are comprised of investments in municipal bonds. These
securities represent ownership in individual bonds in municipalities within the United States,
certificates of deposit in U.S. banks, and money market funds held in a brokerage account.
39
Notes to Consolidated Financial Statements (continued)
The fair value of these investments is based on quoted prices from recognized pricing services (e.g.
Standard & Poor’s, Bloomberg, etc.), or in the case of mutual funds, at their closing net asset value.
The Company assesses the levels of the investments at each measurement date, and transfers between
levels are recognized on the actual date of the event or change in circumstances that caused the
transfer in accordance with the Company’s accounting policy regarding the recognition of transfers
between levels of the fair value hierarchy. During the fiscal years ended September 27, 2014 and
September 28, 2013, there were no transfers between levels.
The following table sets forth by level, within the fair value hierarchy, the financial instruments
carried at fair value as of September 27, 2014 and September 28, 2013, in accordance with the fair
value hierarchy as defined above. As of September 27, 2014 and September 28, 2013, the Company
did not hold any assets classified as Level 3.
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Total
September 28, 2013
Debt and certificates of deposits:
Certificates of deposit
Total debt instruments
Mutual funds:
Money market funds
Total mutual funds
$ 1,247,384
1,247,384
-
-
$ 1,247,384
1,247,384
880,230
880,230
880,230
880,230
-
-
Total investments
$ 2,127,614
$ 880,230
$ 1,247,384
September 27, 2014
Debt and certificates of deposits:
Certificates of deposit
Total debt instruments
Mutual funds:
Money market funds
Total mutual funds
$ 1,416,890
1,416,890
-
-
$ 1,416,890
1,416,890
1,801,443
1,801,443
1,801,443
1,801,443
-
-
Total investments
$ 3,218,333
$ 1,801,443
$ 1,416,890
There were no assets or liabilities measured on a nonrecurring basis at September 27, 2014 and
September 28, 2013.
Earnings per Share (EPS)
The Company presents both a “basic” and a “diluted” EPS. Basic EPS is computed by dividing net
income by the weighted average number of shares of common stock outstanding during the period.
In computing diluted EPS, stock options that are dilutive (those that reduce earnings per share) are
included in the calculation of EPS using the treasury stock method. The exercise of outstanding
stock options is not included 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.
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Notes to Consolidated Financial Statements (continued)
Research and Development
Research and development costs are included in product development expenses in our consolidated
statements of operations. Expenditures for Company-sponsored research and development projects
are expensed as incurred, and were $2,729,276 and $2,729,473 in 2014 and 2013, respectively.
Customer-sponsored research and development projects performed under contracts are accounted for
as contract costs as the work is performed and included in cost of sales and were $855,370 in FY
2013. There was no customer-sponsored research and development in FY 2014.
Fiscal Year-End Policy
The Company’s by-laws call for its fiscal year to end on the Saturday closest to the last day of
September, unless otherwise decided by its Board of Directors. The 2014 and 2013 fiscal years ended
on September 27, 2014 and September 28, 2013, respectively, and each included 52 weeks.
Comprehensive Income (loss)
Comprehensive income (loss) consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains (losses) on securities available for sale.
Other comprehensive income (loss) is as follows, for the years ended:
Change in net unrealized gain (loss)
on available-for-sale securities
September 27, 2014
September 28, 2013
$ (1,578)
$ (12,062)
The component of accumulated other comprehensive income is as follows for the years ended:
Net unrealized gain (loss) on
available-for-sale securities
Operating Segments
September 27, 2014
September 28, 2013
$ (3,598)
$ (2,020)
The Company reports on operating segments in accordance with standards for public companies to
report information about operating segments and geographic distribution of sales in financial
statements. The Company currently has only one operating segment, which is the design,
development, manufacture, distribution, marketing and sale of communications security devices,
systems and services.
New Accounting Pronouncements
ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus
of the FASB Emerging Issues Task Force)
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized
tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward
exists. This guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax
benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net
operating loss carryforward, a similar tax loss, or a tax credit carryforward. If a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date, the
unrecognized tax benefit should be presented in the financial statements as a liability and not
combined with deferred tax assets. This guidance is effective prospectively for fiscal years, and
interim periods within those years, beginning after December 15, 2013, with early adoption permitted.
The Company is currently evaluating the impact of this guidance but does not expect its adoption will
have a material effect on the Company’s consolidated financial statements. This guidance will
become effective for TCC as of the beginning of our 2015 fiscal year and is consistent with our
present practice.
41
Notes to Consolidated Financial Statements (continued)
ASU 2014-09, Revenue From Contracts With Customers (Topic 606)
In May 2014, the FASB and the International Accounting Standards Board issued guidance on the
principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and
IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements, (2) provide a
more robust framework for addressing revenue issues, (3) improve comparability of revenue
recognition practices across entities, industries, jurisdictions, and capital markets, (4) provide more
useful information to users of financial statements through improved disclosure requirements, and (5)
simplify the preparation of financial statements by reducing the number of requirements to which an
entity must refer. This guidance is effective prospectively for annual reporting periods beginning after
December 15, 2016, including interim periods within that reporting period. Early adoption is not
permitted. The Company is currently evaluating the impact of this guidance but does not expect its
adoption will have a material effect on the Company’s consolidated financial statements. This
guidance will become effective for TCC as of the beginning of our 2018 fiscal year.
ASU 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern
In August 2014 the Financial Accounting Standards Board (FASB) updated U.S. Generally Accepted
Accounting Principles (GAAP) to eliminate a critical gap in existing standards. The new guidance
clarifies the disclosures management must make in the organization’s financial statement footnotes
when management has substantial doubt about its ability to continue as a “going concern.” The
Company is currently evaluating the impact of this guidance but does not expect its adoption will
have a material effect on the Company’s consolidated financial statements. The guidance applies to
all companies and is effective for the annual reporting periods ending after December 15, 2016,
including interim periods within that reporting period.
Management does not believe that any other recently issued, but not yet effective, accounting
standards if currently adopted would have a material impact on the accompanying financial
statements.
(3) Net Loss Per Share
Basic and diluted EPS were calculated as follows:
Net loss
Weighted Average Shares Outstanding - Basic
Dilutive effect of stock options
Weighted Average Shares Outstanding - Diluted
Basic Net Loss Per Share
Diluted Net Loss Per Share
September 27, September 28,
2014
2013
$ (2,564,874)
$ (714,129)
1,838,866
-
1,838,866
$ (1.39)
$ (1.39)
1,838,716
-
1,838,716
$ (0.39)
$ (0.39)
Outstanding potentially dilutive stock options, which were not included in the above calculations for
the respective fiscal years because their effect would have been anti-dilutive, were as follows:
269,485 in fiscal year 2014 and 257,582 in fiscal year 2013.
(4) Cash Equivalents and Marketable Securities
The Company considers all highly liquid instruments with an original maturity of three months or less to be
cash equivalents. Substantially all cash equivalents are invested in money market mutual funds. Money
market mutual funds held in a brokerage account are considered available for sale. The Company accounts
for marketable securities in accordance with FASB ASC 320, Investments—Debt and Equity Securities. All
marketable securities must be classified as one of the following: held to maturity, available for sale, or
trading. The Company classifies its marketable securities as either available for sale or held to maturity.
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Available for sale securities are carried at fair value, with unrealized holding gains and losses reported in
stockholders’ equity as a separate component of accumulated other comprehensive income (loss). Held to
maturity securities are carried at amortized cost. The cost of securities sold is determined based on the
specific identification method. Realized gains and losses, and declines in value judged to be other than
temporary, are included in investment income. During fiscal year 2013, the Company determined it would
hold its investment in municipal bonds until maturity and subsequently reclassified these securities from
available for sale to held to maturity. These securities are now carried at amortized cost.
As of September 27, 2014, available for sale securities consisted of the following:
Cost
Accrued
Interest
Gross Unrealized
Losses
Gains
Estimated
Fair Value
Money market funds
Certificates of deposit
$ 1,801,443
1,418,000
$ 3,219,443
$ -
2,488
$ 2,488
$ - $ -
3,598
-
$ - $ 3,598
$ 1,801,443
1,416,890
$ 3,218,333
As of September 27, 2014, held to maturity securities consisted of the following:
Cost
Accrued Amortization Amortized Unrealized Estimated
Gains Fair Value
Interest Bond Premium
Cost
Municipal bonds
$ 1,506,653 $17,963
$ 109,039
$ 1,415,577
$ 15,331 $ 1,430,908
As of September 28, 2013, available for sale securities consisted of the following:
Cost
Accrued
Interest
Gross Unrealized
Losses
Gains
Estimated
Fair Value
Money market funds
Certificates of deposit
$ 880,230
1,248,043
$ 2,128,273
$ -
1,186
$ 1,186
$ - $ -
1,845
-
$ - $ 1,845
$ 880,230
1,247,384
$ 2,127,614
As of September 28, 2013, held to maturity securities consisted of the following:
Cost
Accrued Amortization Amortized Unrealized Estimated
Gains Fair Value
Interest Bond Premium
Cost
Municipal bonds
$ 2,056,276 $24,087
$ 94,885
$ 1,985,478
$ 10,425 $ 1,995,903
The contractual maturities of available for sale investments as of September 27, 2014 were all due within
fourteen months. The contractual maturities of held to maturity investments as of September 27, 2014 were
as follows:
Within 1 year
After 1 year through 5 years
Cost
$ 336,678
1,169,975
$ 1,506,653
Amortized Cost
$ 310,437
1,105,140
$ 1,415,577
The Company’s available for sale securities were included in the following captions in the consolidated
balance sheets:
September 27, 2014
September 28, 2013
Cash and cash equivalents
Marketable securities
$ 1,801,443
1,416,890
$ 3,218,333
$ 880,230
1,247,384
$ 2,127,614
43
Notes to Consolidated Financial Statements (continued)
(5) Inventories
Inventories consist of the following:
Finished goods
Work in process
Raw materials and supplies
Total inventories
September 27, 2014 September 28, 2013
$ 8,014
1,126,365
1,586,934
$ 2,721,313
$ 10,295
1,110,169
1,498,140
$ 2,618,604
(6) Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
September 27,
2014
September 28,
2013
Estimated
Useful Life
Engineering and manufacturing equipment
Demonstration equipment
Furniture and fixtures
Automobile
Leasehold improvements
$ 2,074,488
832,056
1,014,602
49,441
494,509
$ 2,011,821
781,790
962,743
49,441
494,509
Total equipment and
leasehold improvements
Less accumulated depreciation and
amortization
4,465,096
4,300,304
(4,033,233)
(3,831,402)
Equipment and leasehold improvements, net
$ 431,863
$ 468,902
3-8 years
3 years
3-8 years
5 years
Lesser of useful life
or term of lease
Depreciation expense was $201,831 and $199,114 for the fiscal years ended September 27, 2014 and
September 28, 2013, respectively.
(7) Other Current Liabilities
September 27, September 28,
2014
2013
Product warranty costs
Professional service fees
Annual report and investor relations fees
Customer support agreements and commissions
$ 41,532
72,464
18,032
25,756
$ 28,639
107,236
11,853
19,120
Total other current liabilities
$ 157,784
$ 166,848
(8) Leases
On April 1, 2014, the Company entered into a new lease for its current facilities. This lease is for
22,800 square feet located at 100 Domino Drive, Concord, MA. The Company has been a tenant in
this space since 1983. This is the Company’s only facility and houses all manufacturing, research and
development, and corporate operations. The initial term of the lease is for five years through March
31, 2019 at an annual rate of $171,000. In addition the lease contains options to extend the lease for
two and one half years through September 30, 2021 and another two and one half years through
March 31, 2024 at an annual rate of $171,000. Rent expense for each of the years ended September
27, 2014 and September 28, 2013 was $171,000.
44
Notes to Consolidated Financial Statements (continued)
(9) Guarantees
The Company's products generally carry a standard 15 month warranty. The Company sets aside a
reserve based on anticipated warranty claims at the time product revenue is recognized. Factors that
affect the Company's product warranty liability include the number of installed units, the anticipated
cost of warranty repairs and historical and anticipated rates of warranty claims.
The following table reflects changes in the Company's accrued warranty account:
September 27,
2014
September 28,
2013
Beginning balance
Plus: accruals related to new sales
Less: payments and adjustments to prior period accruals
$ 28,639
27,928
(15,035)
$ 61,702
22,207
(55,270)
Ending balance
$ 41,532
$ 28,639
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(10) Income Taxes
The provision (benefit) for income taxes consists of the following:
Current:
Federal
State
Total current taxes
Deferred:
Federal
State
Total deferred taxes
September 27,
2014
September 28,
2013
$ 94,660
994
95,654
590,943
303,516
894,459
$ (304,307)
(218,114)
(522,421)
(260,678)
(15,703)
(276,381)
Total provision (benefit) for income taxes
$ 990,113
$ (798,802)
The provision (benefit) for income taxes are different from those that would be obtained by applying
the statutory federal income tax rate to income before income taxes due to the following:
September 27, 2014
Amount Percent
September 28, 2013
Amount Percent
Tax benefit at U.S. statutory rate
State income tax provision, net of federal benefit
Federal tax credits
State refund from prior years
Change in state effective rate
Stock compensation
Prior year true-up
Uncertain tax positions
Other
Valuation allowance
$ (535,419) (34.0%)
(36,235) (2.3%)
-
-
-
-
2.5%
39,616
2.7%
41,992
2.1%
32,691
5.1%
80,829
3.5%
54,809
1,311,830 83.3%
$ (514,397) (34.0%)
(81,859) (5.4%)
(71,799) (4.8%)
(141,034) (9.3%)
6.6%
2.8%
(56,822) (3.8%)
-
-
.2%
2,752
(77,633) (5.1%)
99,428
42,562
Total provision (benefit) for income taxes
$ 990,113 62.9%
$ (798,802) (52.8%)
45
Notes to Consolidated Financial Statements (continued)
Deferred income taxes consist of the following:
Inventory differences
Net operating losses
Payroll-related accruals
Other
Total
Less: valuation allowance
September 27,
2014
September 28,
2013
$ 1,067,748
682,031
44,715
590,734
2,385,228
(2,385,228)
$ 1,073,398
44,315
54,777
795,367
1,967,857
(1,073,398)
Total
$ -
$ 894,459
The Company established a valuation allowance against deferred tax assets and as a result recorded
an income tax provision as a result of this allowance of $894,459. The valuation allowance is related
to uncertainty with respect to the Company’s ability to realize its deferred tax assets. Deferred tax
assets consist of net operating loss carryforwards, tax credits, inventory differences and other
temporary differences. During fiscal year 2014 the change in the valuation allowance was $1,311,830
and related to the establishment of a full valuation allowance. During fiscal year 2013 the change in
the valuation allowance was $77,633 and related to the inventory differences.
The Company had previously determined that the tax benefit related to its obsolete inventory will not
likely be realized, and therefore provided a full valuation allowance against the related deferred tax
asset. It is the Company’s intention to maintain the related inventory items for the foreseeable future
to support equipment in the field, and therefore cannot determine when the tax benefit, if any, will be
realized.
Due to the nature of the Company’s current operations in foreign countries (selling products into
these countries with the assistance of local representatives), the Company has not been subject to any
foreign taxes in recent years. Also, it is not anticipated that the Company will be subject to foreign
taxes in the near future.
The Company files income tax returns in the U.S. federal jurisdiction and in the states of
Massachusetts and New Hampshire. For U.S. federal purposes, the tax years 2012 through 2013 and
for state purposes 2010 through 2013 remain open to examination. In addition, the amount of the
Company’s federal and state net operating loss carryforwards utilized in prior periods may be subject
to examination and adjustment. The Company has federal research credits of $72,186 available
through fiscal year 2033 and net operating loss carryforwards of $1,858,270 available through fiscal
year 2034. In addition, the Company has Massachusetts research credits of $80,315 available through
fiscal year 2027 and net operating loss carryforwards of $2,094,864 available through fiscal year
2034.
The below table details the changes in uncertain tax positions, which if recognized would favorably
impact our effective tax rate:
Balance at September 28, 2013
Addition for tax positions of prior year year
Balance at September 27, 2014
$ -
80,829
$ 80,829
The increase in the Company’s total uncertain tax positions relates to research credits taken on a prior
year state tax return.
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(11) Employee Benefit Plans
The Company has a qualified, contributory, profit sharing plan covering substantially all employees.
The Company’s policy is to fund contributions as they are accrued. The contributions are allocated
based on the employee’s proportionate share of total compensation. The Company’s contributions to
the plan are determined by the Board of Directors and are subject to other specified limitations. There
were no Company profit sharing contributions during fiscal years 2014 or 2013. The Company's
matching contributions were $81,936 and $85,630 in fiscal years 2014 and 2013, respectively.
The Company has an Executive Incentive Bonus Plan for the benefit of key management employees.
The bonus pool is determined based on the Company’s performance as defined by the plan. Under the
plan, there was $10,000 of bonuses accrued for executives at September 28, 2013 and there were no
bonuses accrued at September 27, 2014. Bonus expense is included in selling, general and
administrative expense.
(12) Commitments and contingencies
The Company maintains a line of credit agreement with Bank of America (the “Bank”) for a line of
credit not to exceed the principal amount of $600,000. The line is supported by a financing
promissory note. The loan is a demand loan with interest payable at the Bank’s prime rate plus 2.75%
on all outstanding balances. The loan is secured by all assets of the Company (excluding consumer
goods) and requires the Company to maintain its deposit accounts with the Bank, as well as comply
with certain other covenants. At September 27, 2014 the company was in violation of the agreements
covenant to maintain a minimum level of tangible net worth. The bank has subsequently waived that
requirement for the current year. The line is available to support new letters of credit issued by the
Company, although any standby letters of credit are required to be secured with cash. There were no
cash borrowings against the line during the fiscal years ended September 27, 2014 and September 28,
2013.
At September 27, 2014, the Company had three outstanding letters of credit in the amounts of
$328,732, $16,363 and $3,600, which are secured by collateralized bank accounts totaling $348,695.
At September 28, 2013, the Company had two outstanding letters of credit in the amounts of $17,883
and $14,903, which were secured by collateralized bank accounts totaling $32,786.
The Company maintains its cash and cash equivalents in bank deposit accounts and money market
accounts that, at times, may exceed federally insured limits. The Company holds marketable
securities consisting of certificates of deposit and municipal bonds. The certificates of deposit are
maintained in accounts that are within the federal insurance limits. The municipal bonds are
considered investment grade but may be subject to the issuing entities’ default on interest or principal
repayments. The Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on its cash, cash equivalents or marketable securities.
(13) Major Customers and Export Sales
In fiscal year 2014, the Company had four customers representing 73% (29%, 17%, 14% and 13%) of
total net sales and at September 27, 2014 had three customers representing 69% (38%, 19% and 12%)
of accounts receivable. In fiscal year 2013, the Company had three customers representing 71%
(29%, 27% and 15%) of total net sales and at September 28, 2013 had three customers representing
89% (32%, 29% and 28%) of accounts receivable.
A breakdown of net sales is as follows:
Domestic
Foreign
Total Sales
September 27, September 28,
2014
2013
$ 4,574,733
1,563,842
$ 5,719,765
529,884
$ 6,138,575
$ 6,249,649
47
Notes to Consolidated Financial Statements (continued)
A summary of foreign sales, as a percentage of total foreign revenue, by geographic area, is as follows:
North America (excluding the U.S.)
Central and South America
Mid-East and Africa
Far East
September 27, September 28,
2014
2013
-
15.7%
84.3%
-
0.6%
-
99.4%
-
The Company sold products to three different countries during the year ended September 27, 2014
and five different countries during the year ended September 28, 2013. A sale is attributed to a
foreign country based on the location of the contracting party. Domestic revenue may include the sale
of products shipped through domestic resellers or manufacturers to international destinations. The
table below summarizes our foreign revenues by country as a percentage of total foreign revenue.
Saudi Arabia
Colombia
Egypt
Other
(14) Shareholder Rights Plan
September 27, September 28,
2014
73.8%
15.7%
10.5%
-
2013
69.8%
-
28.1%
2.1%
On August 7, 2014, the Board of Directors of the Company adopted a Stockholder Rights Plan to
replace the company's former plan, which had expired on August 5, 2014. The new plan is
substantially similar to the former plan, and was not adopted in response to any specific takeover
threat. In adopting the plan, the Board declared a dividend distribution of one common stock
purchase right for each outstanding share of common stock of the Company, payable to stockholders
of record at the close of business on August 18, 2014. Until the rights become exercisable, which
occurs with certain exceptions when a person or affiliated group acquires 15% or more of TCC's
common stock, they will trade automatically with the common stock and separate rights certificates
will not be issued. Each right, once exercisable, will entitle the holder (other than rights owned by the
acquiring person or group) to buy one share of the common stock at a price of $25 per share, subject
to certain adjustments. The rights can generally be redeemed by the Company at $.001 per right at
any time prior to the close of business on the 10th business day after there has been a public
announcement of the acquisition of beneficial ownership by any person or group of 15% or more of
the company’s outstanding common stock, subject to certain exceptions. The rights will expire on
August 6, 2024 unless earlier redeemed.
(15) Subsequent Events
On October 30, 2014 the Company made an equity investment of $275,000 in PulsedLight, Inc., an
early stage start-up company located in Bend, Oregon. Our investment represented an 11% ownership
stake in PulsedLight at the time of the investment.
48
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Technical Communications Corporation:
We have audited the accompanying consolidated balance sheets of Technical Communications Corporation
and subsidiary (the “Company”) as of September 27, 2014 and September 28, 2013, and the related
consolidated statements of operations, comprehensive loss, changes in stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Technical Communications Corporation and subsidiary as of September 27, 2014
and September 28, 2013, and the results of their operations and their cash flows for the years then ended, in
conformity with U.S. generally accepted accounting principles.
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/s/ McGladrey LLP
Boston, Massachusetts
December 22, 2014
49
CORPORATE INFORMATION
AS OF DECEMBER 2014
OFFICERS
Carl H. Guild, Jr.
Chairman, President
and Chief Executive Officer
Michael P. Malone
Chief Financial Officer
and Treasurer
David A. White, Esquire
Secretary
Partner, White, White & Van Etten PC
DIRECTORS
Carl H. Guild, Jr.
Chairman, President
and Chief Executive Officer, TCC
Mitchell B. Briskin
Consultant
Francisco F. Blanco
President and CEO of The Pola Group, LLC
Thomas E. Peoples
President of International Executive Counselors, LLC
INDEPENDENT PUBLIC ACCOUNTANTS
McGladrey LLP
Boston, Massachusetts
GENERAL COUNSEL
White, White & Van Etten PC
Cambridge, Massachusetts
ANNUAL STOCKHOLDERS MEETING
This year’s annual meeting will be held Monday, February 9, 2015
at 10:00 a.m. at TCC’s facilities in Concord, Massachusetts. The
shareholder record date is December 12, 2014.
STOCK EXCHANGE LISTING
The common stock is traded on the NASDAQ Capital Market,
NASDAQ Symbol: TCCO.
10-K REPORT
A copy of the Company’s Annual Report on Form 10-K for 2014,
filed with the Securities and Exchange Commission, may be
obtained upon written request to the Company.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10038
INVESTOR RELATIONS
Technical Communications Corporation
100 Domino Drive
Concord, MA 01742
(978) 287-5100
The discussion in this Annual Report and Form 10-K may contain statements that are not historical. Such statements contained herein or as may
otherwise be incorporated by reference herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995. Forward-looking statements include but are not limited to statements regarding anticipated operating results, future earnings, and the
ability to achieve growth and profitability. Such forward-looking statements involve known and unknown risks, uncertainties and other factors,
including but not limited to the effect of foreign political unrest; domestic and foreign government policies and economic conditions; future changes in
export laws or regulations; changes in technology; the ability to hire, retain and motivate technical, management and sales personnel; the risks
associated with the technical feasibility and market acceptance of new products; changes in telecommunications protocols; the effects of changing
costs, exchange rates and interest rates; and the Company's ability to secure adequate capital resources. Such risks, uncertainties and other factors
could cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking statements. For a more detailed discussion of the risks facing the
Company, see the Company’s filings with the Securities and Exchange Commission, including this Form 10-K for the fiscal year ended September 27,
2014 and the “Risk Factors” section included herein.
ISO 9001:2008 Certified
Quality Management System
Technical Communications Corporation
100 Domino Drive • Concord, MA 01742-2892, U.S.A.
Telephone: 978-287-5100 • Fax: 978-371-1280 • tccinfo@tccsecure.com • www.tccsecure.com