-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TcxYBBBoosOQvFudMalA8dloRi7U/PtY0Yaa3PjSrSIRHHOxLi2udNNkU0hnxB9l AIfd/C2USsSQ+gMt4UM1Tw== 0000927016-00-004507.txt : 20010101 0000927016-00-004507.hdr.sgml : 20010101 ACCESSION NUMBER: 0000927016-00-004507 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECHNICAL COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000096699 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 042295040 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-08588 FILM NUMBER: 798996 BUSINESS ADDRESS: STREET 1: 100 DOMINO DR CITY: CONCORD STATE: MA ZIP: 01742 BUSINESS PHONE: 9782875100 MAIL ADDRESS: STREET 1: 100 DOMINO DRIVE CITY: CONCORD STATE: MA ZIP: 01742-2892 10-K 1 0001.txt FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission File Number September 30, 2000 0-8588 - ------------------ ------ or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________TO_______________. Technical Communications Corporation ------------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 04-2295040 - --------------------------------------------- ----------------------------------- (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization)
100 Domino Drive, Concord, MA 01742-2892 - ---------------------------------------- --------------------------- (Address of principal executive offices) (Zip code) (978) 287-5100 - ------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: None None - ------------------------------- ---------------------------- (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.10 Par Value ---------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Based on the closing price of the stock as of December 15, 2000, the aggregate market value of the registrant's Common Stock, par value $ .10 per share, held by non-affiliates of the registrant as of December 15, 2000, was approximately $2,451,352. The number of shares of the registrant's Common Stock, par value $ .10 per share, outstanding as of December 15, 2000, was 1,308,291. 2 FORWARD-LOOKING STATEMENTS - -------------------------- NOTE: THE DISCUSSIONS IN THIS FORM 10-K, INCLUDING ANY DISCUSSION OF OR IMPACT, EXPRESSED OR IMPLIED, ON TECHNICAL COMMUNICATIONS CORPORATION'S (THE COMPANY) ANTICIPATED OPERATING RESULTS AND FUTURE EARNINGS, INCLUDING STATEMENTS ABOUT THE COMPANY'S ABILITY TO ACHIEVE GROWTH AND PROFITABILITY, CONTAIN FORWARD- LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED. THE COMPANY'S OPERATING RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S OPERATING RESULTS MAY BE AFFECTED BY MANY FACTORS, INCLUDING BUT NOT LIMITED TO FUTURE CHANGES IN EXPORT LAWS OR REGULATIONS, CHANGES IN TECHNOLOGY, THE EFFECT OF FOREIGN POLITICAL UNREST, THE ABILITY TO HIRE, RETAIN AND MOTIVATE TECHNICAL, MANAGEMENT AND SALES PERSONNEL, THE RISKS ASSOCIATED WITH THE TECHNICAL FEASIBILITY AND MARKET ACCEPTANCE OF NEW PRODUCTS, CHANGES IN TELECOMMUNICATIONS PROTOCOLS, THE EFFECTS OF CHANGING COSTS, EXCHANGE RATES AND INTEREST. THESE AND OTHER RISKS ARE DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THIS FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000. PART I Item 1. BUSINESS (a) General ------- The Company was organized in 1961 as a Massachusetts corporation to engage primarily in consulting activities. However, since the late 1960s its business has consisted entirely of the design, development, manufacture, distribution, marketing and sale of communications security devices and systems. (b) Information as to Industry Segments ----------------------------------- The Company's business consists of only one industry segment, which is the design, development, manufacture, distribution, marketing and sale of communications security devices and systems. (c) Description of Business ----------------------- The Company's products consist of sophisticated electronic devices which enable users to transmit information in an encrypted format and permit receivers to reconstitute the information in a deciphered format. The Company's products can be used to protect confidentiality in communications between radios, telephones, facsimile machines and data processing equipment over wires, fiber optic cables, radio waves and microwave and satellite links. A customer may order and receive equipment, which is specially programmed to scramble transmissions in accordance with a code to which only the customer has access. The principal markets for the Company's products are financial institutions, foreign and domestic governmental agencies, law enforcement agencies and multinational companies requiring protection of mission-critical information. (d) Products -------- Products currently available or under development provide communications security solutions for mission-critical networks, voice and facsimile, centralized key and device management, and military ciphering applications. Government Systems The DSD 72A-SP High Speed Data Encryptor is a rugged military bulk ciphering system that provides a maximum level of cryptographic security for synchronous data networks operating at up to 34 Mbps. The product supports a wide variety of interfaces and easily integrates into existing networks. Reliable secure communication is ensured with crypto synchronization methods built to maintain connections in error and jamming environments such as radio relay networks, missile systems and microwave systems. The DSP 9000 Narrowband Radio Security family of products provide strategic security for voice and data communications sent over HF, VHF and UHF channels in full and half-duplex modes. Designed for rugged military environments, the DSP 9000 provides exceptional voice quality over poor line connections making it an ideal security solution for military aircraft, naval, base station and manpack radio 3 applications. The product provides automated key management for optimum security and ease of use. It is also radio independent because software programmable interfaces allow radio interface levels to be changed without configuring the hardware. Base station, handset and implant board configurations are available options with the DSP 9000. Additionally, the DSP 9000 is compatible with the Company's CSD 3324E secure telephone to enable "office-to-field" communications. The CSD 3324, Secure Fax and Data system protects telephone, fax and data communications even over degraded line conditions. This product is designed to be a perfect solution for government or military officials based in remote locations. Secure Office Systems The CSD 3600 Secure Portable Telephone Attachment may be placed between any telephone and handset worldwide to provide high-end digital security. Small and portable, the CSD 3600 operates over both digital and analog telephone lines, and is designed to ensure protection through new and unique random keys negotiated with each communication session. The CSD 3700 Fax Security System is a highly secure, automatic transmission fax system that connects to any Group 3-fax machine via a 2-wire interface. Security protection is achieved with Diffie-Hellman negotiated key technology and randomly generated keys that are unique to each communication session. Open and closed networks are supported by the CSD 3700 to enable an open exchange of secure documents in the industrial marketplace or restrict secure communications to only authorized parties in highly confidential or government applications. The 4100 Executive Secure Telephone offers strategic level voice and data security in a full-featured executive telephone package. Exceptional voice quality is achieved with three different voice-coding algorithms. The product supports multiple security layers such as automated key management, authentication, certification and access control. Video and telephone conferencing options are also available. Network Security Systems The CipherONE(TM) family of Network Security Systems is a family of high- speed, high-performance hardware/software-based encryption products for LAN/WAN and Internet applications and includes Network Security Management. All of the systems have been designed for complete node-to-node protection and therefore provide node authentication and access control, as well as data integrity. This family of products also utilizes a modular architecture that permits the software to be updated as networks migrate to emerging protocols, thereby protecting the user's investment. Network transparent, the products support U.S. Government-backed Triple DES and proprietary encryption algorithms as well as ANSI X9.52 and public key management. Specific products within this family support Frame Relay, Internet (IP) and X.25 protocols. The Cipher x 7100 Frame Relay Network Encryptor is a high-speed end to end frame relay encryption system and is easily configured locally with Cipher Site Manager or remotely with KEYNET. The Cipher x 7200 IP Network Encryptor provides encryption security at the Internet Protocol (IP) layer and is easily configured locally with Cipher Site Manager or remotely with KEYNET. The Cipher x 7200 has been awarded Federal Information Processing Standard (FIPS 140-1) Level 3 certification, which allows the product to compete for US and Canadian federal security acquisition, which require FIPS 140-1 Compliance. KEYNET Network Security Management is a Windows NT-based key and security device management system that can centrally and simultaneously manage an entire CipherONE Security Systems Network, including those on mixed networks such as Frame Relay and IP. KEYNET has an intuitive graphical user interface (GUI), making it very easy to use. The system securely generates, distributes and exchanges keys, sets address tables, provides diagnostics and performs automatic polling and alarms from a central and remote location. KEYNET also operates with SNMP-based management systems for ease-of-use and provides instant alarm notification. These high security measures facilitate central management while maintaining optimum security for mission-critical networks worldwide. (e) Competition ----------- The Company has several competitors, including foreign-based companies, in the communications security device field. Few of these competitors offer products that compete across all of the Company's product offerings and none are believed to have a dominant share of the market. Many of these competitors, however, are companies, which have greater financial and other resources than the Company. The Company believes its principal competitors include Crypto AG, Racal Electronics Plc, Cylink Corporation, Motorola Inc., Omnisec AG, Cisco Systems, SafeNet, Inc. and TimeStep Corporation. 4 The Company competes based on its service, the operational and technical features of its products, its sales expertise and pricing. The Company sells directly to customers, original equipment manufacturers and value-added resellers, using its in-house sales force as well as domestic and international representatives and distributors. (f) Sales and Backlog ----------------- In fiscal 2000, the Company had two customers, representing 41% (21% and 20%) of net sales. In fiscal 1999, the Company had three customers, representing 60% (32%, 17% and 11%) of net sales. In fiscal 1998, the Company had two customers representing 71% (54% and 17%) of net sales. The Company expects that sales to relatively few customers will continue to account for a high percentage of the Company's revenues in any accounting period in the foreseeable future. A reduction in orders from any such customer, or the cancellation of any significant order and failure to replace such order with orders from other customers, would have a material adverse effect on the Company's business, financial condition, and results of operations. The Company's backlog of firm orders as of September 30, 2000 was approximately $400,000, compared to approximately, $2,000,000 as of October 2, 1999. The Company expects to deliver substantially its entire backlog in fiscal year 2001. (g) Regulatory Matters ------------------ As a party to a number of contracts with the U.S. Government and its agencies, the Company must comply with extensive regulations with respect to bid proposals and billing practices. Should the U.S. government or its agencies conclude that the Company has not adhered to federal regulations, any contracts to which the Company is a party could be canceled and the Company could be prohibited from bidding on future contracts. Such a prohibition would have a material adverse effect on the Company. All payments to the Company for work performed on contracts with agencies of the U.S. government are subject to adjustment upon audit by the U.S. Government Defense Contract Audit Agency, the General Accounting Office, and other agencies. The Company could be required to return any payments received from U.S. government agencies if it is found to have violated federal regulations. In addition, U.S. government contracts may be canceled at any time by the government with limited or no penalty. Contract awards are also subject to funding approval from the U.S. government, which involves political, budgetary and other considerations over which the Company has no control. The Company's security products are subject to export restrictions administered by the U.S. Department of Commerce, which licenses the export of encryption products, subject to certain technical restrictions. In addition, U.S. export laws prohibit the export of encryption products to a number of hostile countries. Although to date the Company has been able to secure U.S. export licenses, there can be no assurance that the Company will continue to be able to secure such licenses in a timely manner in the future, or at all. (h) Manufacturing and Technical Expertise ------------------------------------- The Company subcontracts a large portion of its manufacturing operations. Many of the components used in the Company's products are standard components available from more than one supplier. The Company has, or believes that it could develop without significant delay, alternative sources for almost all materials and components used in the manufacture of its products. The Company's internal manufacturing process consists primarily of adding critical components, final assembly, quality control, testing and burn-in. Delivery time varies depending on the products and options ordered. The Company's technological expertise and experience, including certain proprietary rights, which it has developed and maintains as trade secrets, are crucial to the conduct of the Company's business. Management is of the opinion that, while patent protection is desirable with respect to certain of its products, none of the Company's patents are material to the conduct of its business. Eight patents have been issued to the Company. The Company has a number of trademarks for various products, including TCC, CipherONE and CIPHER X. The Company does not deem any of its trademarks to be material to the conduct of its business. 5 (i) Research and Development ------------------------ Research and development is undertaken by the Company on its own initiative. In order to develop the technology needed to compete successfully, the Company must attract and retain qualified personnel, improve existing products and develop new products. No assurances can be given that the Company will be able to hire and train such technical management and sales personnel. During the twelve-month periods ended September 30, 2000, October 2, 1999 and October 3, 1998, the Company spent $1,156,692, $1,935,859 and $1,414,746, respectively, on product development. In addition, product development is also, undertaken by the Company on a contract specific basis; the development costs associated with these contracts are included in cost of sales. (j) Employees --------- As of September 30, 2000, the Company employed, approximately 50 persons. The Company believes that its relationship with its employees is good. (k) Foreign Operations ------------------ The Company is dependent upon its foreign sales. Although foreign sales were more profitable than domestic sales during fiscal years 2000 and 1999 because the mix of products sold abroad included more products with higher profit margins than the mix of products sold domestically, this does not represent a predictable trend. For example, during fiscal year 1996 foreign and domestic sales were equally profitable. Sales to foreign markets have been and will continue to be affected by the stability of foreign governments, economic conditions, export and other governmental regulations, and changes in technology. The Company attempts to minimize the financial risks normally associated with foreign sales by utilizing letters of credit confirmed by U.S. banks and by using foreign credit insurance. Foreign sales contracts are usually in U.S. dollars. When there is a tax advantage to the Company, export sales are conducted through its wholly owned subsidiary, TCC Foreign Sales Corporation (TCC FSC). TCC FSC is organized and incorporated in the U.S. Virgin Islands. As a qualified Foreign Sales Corporation under the Internal Revenue Code, TCC FSC is able to take advantage of tax incentives enacted by Congress to encourage export sales. Information regarding the Company's revenue from export sales for the past five years is set forth in Item 6, "SELECTED FINANCIAL DATA". Item 2. PROPERTIES The Company leases its headquarters located in Concord, Massachusetts, under an operating lease. The premises are used for manufacturing and house the Company's executive offices. On October 16, 1992, the Company signed its current lease on its headquarters. The Company has renewed the lease on its headquarters located in Concord, Massachusetts through December 31, 2002. Future minimum lease payments amount to $171,216 in fiscal 2001, $171,216 in fiscal 2002 and $42,804 in fiscal 2003. The Company also retains an option to purchase the building at fair market value, but not to exceed $2,262,000, exercisable at the end of the lease term, if elected. Management believes the current facility is capable of meeting the Company's anticipated needs for the foreseeable future. Item 3. LEGAL PROCEEDINGS On November 19, 1998, the Company settled the shareholder litigation initiated by Philip Phalon and Dr. Mahmud Awan, which had been pending in Middlesex County, Massachusetts Superior Court since February 1998. Pursuant to such settlement, the Company, Arnold McCalmont, Herbert A. Lerner, Robert T. Lessard, Carl H. Guild, Jr., Mitchell B. Briskin, Donald Lake and Thomas E. Peoples entered into a settlement agreement with M. Mahmud Awan and Philip A. Phalon. The settlement agreement and standstill agreement set forth mutual full releases as to the litigation and also include provisions requiring, among other things, (i) the Company to reimburse the former proxy contestants' expenses in payments aggregating $395,000, (ii) the dissolution of the Awan/ Phalon group created to facilitate the proxy contest and (iii) the former proxy contestants to abide by certain standstill provisions until October 1, 2000. 6 The Company was the defendant in GERARD v. TECHNICAL COMMUNICATIONS CORPORATION, ET AL., filed in the Superior Court of the Commonwealth of Massachusetts in 1999. This case arose from disputes concerning the hiring and termination of Roland Gerard, former president of the Company. The Complaint alleges state law claims for breach of contract, wrongful termination, and civil conspiracy. During the fiscal year 2000 the Company settled this lawsuit. An earlier complaint brought by Mr. Gerard in the Federal court, which included the state claims, and a federal securities claim was dismissed in July 1999; the securities claims were dismissed with prejudice. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held on February 7, 2000. The meeting was conducted for the purpose of (i) electing two Class II Directors, each to serve for a term of three years and (ii) ratifying the election of the Company's independent auditors. The ratification of the election of the Class II Directors was approved with 1,174,858 votes in favor, 45,777 votes against and -0- votes abstaining. The ratification of the Company's auditors was approved with 1,164,186 votes in favor, 7,942 votes against and 1,700 votes abstaining. PART II Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, $ .10 par value, is traded on the over-the-counter market, on the NASDAQ SmallCap Market System, under the symbol "TCCO". The following table presents low and high bid information for the time periods specified. The over-the-counter market quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions. The over-the-counter market quotations have been furnished by The NASDAQ Stock Market, Inc. Price ----- Title of Class Quarter Ending Low High - -------------- -------------- ----- ------ Common Stock, $.10 par value 1/1/2000 2.563 7.500 4/1/2000 5.188 10.813 7/1/2000 2.375 6.125 9/30/2000 2.531 3.969 01/02/99 3.375 6.000 04/03/99 2.375 4.500 07/03/99 1.625 3.375 10/02/99 2.250 3.125 The Company has paid no cash dividends in the past and has no plans to pay cash dividends in the forseeable future. As of December 15, 2000, there were approximately 1,200 record holders of Common Stock, $ .10 par value. On December 15, 2000, the closing price of the Common Stock was $2.00. 7 Item 6. SELECTED FINANCIAL DATA
Selected Financial Data: Fiscal Years Ended: September 30, October 2, October 3, September 27, September 28, 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Net Sales: Domestic $ 2,446,083 $ 1,239,275 $ 1,631,459 $ 2,734,690 $ 3,633,425 Foreign (Note A) 3,128,025 5,194,408 12,224,322 9,523,948 10,379,377 - -------------------------------------------------------------------------------------------------------------------- Total net sales $ 5,574,108 6,433,683 13,855,781 12,258,638 14,012,802 Gross profit 3,197,675 3,305,192 8,393,173 7,104,975 8,231,388 Net income (loss) (1,740,314) (1,218,542) 481,603 (1,243,501) 532,147 Net income (loss) per share of common stock Basic $ (1.35) $ (.96) $ .38 $ (.98) $ .42 Diluted $ (1.35) $ (.96) $ .37 $ (.98) $ .41 Weighted average shares outstanding Basic 1,289,523 1,264,626 1,281,924 1,270,625 1,257,384 Diluted 1,289,523 1,264,626 1,288,007 1,270,625 1,298,387
As of: September 30, October 2, October 3, September 27, September 28, 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Assets $ 8,402,717 $10,660,915 $16,172,729 $12,892,899 $16,000,033 Line of credit/current portion, long-term debt (B) - - 2,250,000 - 1,145,175 Long-term obligations - - - - 1,200,000 - ---------------------------------------------------------------------------------------------------------------------------------
Notes to Selected Financial Data (A) A summary of foreign sales by geographic area may be found in Note 15 of the Notes to Consolidated Financial Statements. (B) At October 3, 1998, amount represents outstanding borrowings against line of credit. ================================================================================ 8 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and the results of operations should be read in conjunction with the Company's audited consolidated financial statements and notes thereto appearing elsewhere herein. Certain Factors Affecting Future Operating Results -------------------------------------------------- The discussions in this Form 10-K, including any discussion of or impact, expressed or implied, on the Company's anticipated operating results and future earnings, including statements about the Company's ability to achieve growth and profitability, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. The Company's operating results may differ significantly from the results indicated by such forward-looking statements. The Company's operating results may be affected by many factors, including but not limited to future changes in export laws or regulations, changes in technology, the effect of foreign political unrest, the ability to hire, retain and motivate technical, management and sales personnel, the risks associated with the technical feasibility and market acceptance of new products, changes in telecommunications protocols, the effects of changing costs, exchange rates and interest. These and other risks are detailed from time to time in the Company's filings with the Securities and Exchange Commission, including this Form 10-K for the fiscal year ended September 30, 2000. Year 2000 Compliance Update --------------------------- Technical Communications Corporation has been actively addressing the Year 2000 (Y2K) problem since April 1998. Generally speaking, the Y2K problem results from the use of two-digit, rather than four-digit, date years in computer systems and software applications. As a result of these efforts, the Company believes that all of its material information technology systems and critical non-information technology systems are year 2000 compliant. The Company believes that all of the material products that it currently manufactures and sells are year 2000 compliant or are not date sensitive. In addition, the Company is not aware of any significant vendor that has experienced material disruption due to year 2000 issues. We will continue to monitor our systems and vendors to ensure that issues do not arise in the coming months. Although we do not anticipate any future significant business interruption, we can give no assurance that such interruption will not occur. Results of Operations - --------------------- FISCAL 2000 COMPARED TO FISCAL 1999 ----------------------------------- Consolidated net sales for the year ended September 30, 2000, were $5,574,000 compared with sales of $6,434,000 for the prior fiscal year. This decrease of $860,000, or 13%, is mainly attributed to a delay in the receipt of anticipated orders. Gross profit for fiscal year 2000 was $3,198,000, compared to $3,305,000 in fiscal 1999, a decrease of 3%. Gross profit expressed as a percentage of sales was 57% in fiscal 2000 compared to 51% in the prior year, which was primarily due to the lower sales volume, improved product mix and tighter cost controls. Selling, general and administrative expenses decreased 10% from $4,312,000 in fiscal 1999 to $3,874,000 for the year just ended, primarily attributable to approximately $475,000 in costs associated with the settlement of litigation in fiscal 1999 and was offset by $147,000 in costs associated with the settlement of litigation discussed in Note 16 to the financial statements. In addition payroll and other administrative costs have decreased due to the continued emphasis on expense controls. Product development costs in fiscal 2000 were $1,157,000, compared to $1,936,000 in fiscal 1999. The $779,000, or 40%, decrease was primarily attributable to a shift in development work from internal product development to billable product development. Investment income earned during fiscal 2000 was $267,000, compared to $1,318,000 in fiscal 1999. Included in investment income for fiscal 1999 is a one-time gain on the sale of an investment of $1,151,000. The Company showed a net loss of $1,740,000 for fiscal 2000 as compared to a net loss of $1,219,000 for the same period in fiscal 1999. The decrease in profitability is primarily attributable to the decreased sales, which was partially offset by the decrease in operating spending as described above. However, the current year did not recognize any income tax benefit associated with the current year loss and in addition included a write down of the previous years net deferred tax asset by $173,000 due to continued losses affecting the Company's ability to recognize future benefit from the carryforward of net operating losses. The 1999 income tax benefit amounted to $406,000. The effects of inflation and changing costs have not had a significant impact on sales or earnings in recent years. As of September 30, 2000, none of the Company's monetary assets or liabilities were subject to foreign exchange risks. The Company usually includes an inflation factor in its pricing when negotiating multi-year contracts with customers. FISCAL 1999 COMPARED TO FISCAL 1998 ----------------------------------- Net sales for the years ended October 2, 1999 and October 3, 1998, were $6,434,000 and $13,856,000, respectively. This decrease of 54% in net sales is attributed to variability in revenue recognition as a result of the timing of shipments as well as delays in the receipt of some anticipated orders. More specifically, weakened economic conditions in many countries resulted in reduced order flow from our traditional international government markets. Gross profit for the year ended October 2, 1999 was $3,305,000, as compared to gross profit of $8,393,000 for the same period of fiscal year 1998. This represented a 61% decrease in gross profit for the period. Gross profit expressed as a percentage of sales was 51% in 1999 as compared to 61% for the same period in fiscal year 1998. The disparity between the two fiscal years is attributed to the negative impact of a higher percentage of fixed costs due to the lower sales volume and the sale of a less favorable mix of lower margin products during 1999. Selling, general and administrative expenses were $4,312,000 for the year ended October 2, 1999 and were $6,221,000 for fiscal year 1998. This decrease of 31% was primarily attributable to a decrease of $1,506,000 in payroll and travel related costs and contract services support, associated with the lower sales volume and the continued emphasis on expense controls. In addition, there was a decrease in legal fees of $222,000 attributed to the settlement of most litigation in early 1999 and a reduction in bad debt expense of $187,000 due to the completion of a major contract in 1998, which required substantial coverage. These decreased costs were offset by an increase in product demonstration costs of $99,000 and commissions to third party representatives of $125,000. Product development costs for the year ended October 2, 1999 were $1,936,000 compared to $1,415,000 for the same period in fiscal 1998. This increase of 37% was attributable to the continued commitment to new product development, particularly the Cipher X 7000 series product line, and lower volume of billable development contracts. As a result of the Company's increase in cash available for investment and no borrowings on its line of credit, net interest income increased from a net expense of $118,000 during fiscal 1998 to a net income position of $143,000 for fiscal 1999. The Company incurred a net loss of $1,219,000 for the year ended October 2, 1999 as compared to net income of $482,000 for the same period in fiscal 1998. Included in the net loss for fiscal 1999 is a one-time gain on the sale of an investment of $1,151,000 and a loss from operations of $2,943,000. The decrease in profitability is primarily attributable to the decrease in gross profit as described above. The effects of inflation and changing costs have not had a significant impact on sales or earnings in recent years. As of October 2, 1999, none of the Company's monetary assets or liabilities were subject to foreign exchange risks. The Company usually includes an inflation factor in its pricing when negotiating multi-year contracts with customers. Recent Accounting Pronouncements - --------------------------------- In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition, presentation and disclosure in financial statements. Subsequently, the SEC has amended the implementation dates so that the Company is required to adopt the provisions of SAB No. 101 in the fourth quarter of 2001. We are currently reviewing the impact of SAB No. 101, but we believe that it will not materially affect the Company's results of operations or financial position. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities". The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. In June 1999, FASB issued Statement of Financial Accounting Standards No. 137 (SFAS 137), "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133--an amendment of FASB Statement No. 133". This Statement has delayed the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. In June 2000, SFAS No. 133 was amended by Statement of Financial Accounting Standards No. 138 (SFAS 138), "Accounting for Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. Management does not expect the adoption of these statements to have a material impact on its financial position or results of operations. Liquidity and Capital Resources - ------------------------------- Cash and cash equivalents increased by $783,000 or 33% to $3,122,000 as of September 30, 2000, from a balance of $2,339,000 at October 2, 1999. This increase was primarily due to the reduction of accounts receivable, which were partially offset by operating losses and a reduction in current liabilities. The current ratio remained substantially the same at 6.6:1 at September 30, 2000 compared to 6.7:1 as of October 2, 1999. In August 2000, the Company successfully negotiated a new $5 million asset-based credit facility with Coast Business Credit ("Coast"). The line carries an interest rate of prime plus 1/2% (10.0% at September 30, 2000). This revolving line of credit is collateralized by substantially all the assets of the Company and requires no compensating balances. There is one financial covenant associated with the line, which calls for a minimum net tangible worth starting at $6,250,000 and increasing over time based on certain criteria. The amount of borrowings is limited to a percentage of certain accounts receivable and inventory balances. At September 30, 2000 the Company was in default of the net worth covenant. Subsequently, Coast waived the default and modified the agreement to reduce the minimum net worth requirement for the future and added an interest coverage ratio requirement. In addition, Coast has suspended the Company's ability to request loans, of up to $500,000, against inventory balances. The line matures in August 2003. The Company believes this new credit facility, as amended will meet its current credit needs and its need for the foreseeable future. Previously the Company had a $5,000,000 revolving line of credit with Wainwright Bank and Trust Company at an interest rate of the bank's base rate plus 1/2 of 1%. This line of credit was secured by a pledge of substantially all the assets of the Company. This line matured on May 1, 2000 and was not renewed. As of September 30, 2000, the Company has outstanding standby letters of credit, which were supported by the line of credit amounting to $20,879. Wainwright Bank has agreed to honor these standby letters of credit until they mature on December 31, 2000. The Company's revenues have historically included significant transactions with foreign governments and other organizations. The Company expects this trend to continue. The timing of these transactions has in the past and will in the future impact the cash flow of the Company. Although the Company believes there are currently sufficient cash and available funds under the line of credit to meet its working capital needs, delays in the timing of significant transactions may cause the Company to reevaluate and adjust its operations. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure is in the area of interest rate risk. The Company's investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments. The Company may face exposure to movements in foreign currency exchange rates. Currently, all of the Company's business outside the United States is conducted in U.S. dollar-denominated transactions. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the index to the Financial Statements and Schedules under Part IV, Item 14, in this report. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Part III Item 10. DIRECTORS AND EXECUTIVE OFFICERS (a) Identification of Directors --------------------------- The following table sets forth the year each director first became a director, the position currently held by each director with the Company, their principal occupation during the past five years, any other directorships held by such person in any company subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or in any company registered as an investment company under the Investment Company Act of 1940, as amended, and their age. The terms of the Class I Directors expire at the 2001 Annual Meeting of Stockholders; the terms of the Class II Directors expire at the 2002 Annual Meeting of Stockholders and the terms of the Class III Directors expire at the 2003 Annual Meeting of Stockholders.
Name and Year First Positions and Offices Became a Director with the Company ----------------- ---------------- Dr. Mahmud Awan (1) (8) 1998 Director, Chairman of the Board 49 Class I Director David A. B. Brown (2) (8) 1998 Director 57 Class II Director Mitchell B. Briskin (3) 1998 Director 41 Class I Director Carl H. Guild, Jr. (4) 1997 Director, Vice Chairman of the 56 Class III Director Board, Chief Executive Officer and President Donald Lake (5) 1998 Director 56 Class III Director Robert T. Lessard (6) 1997 Director 60 Class II Director Thomas E. Peoples (7) 1998 Director 52 Class III Director
(1) Dr. Awan joined the Board of Directors and became Chairman of the Board on November 19, 1998. Dr. Awan has served as Chairman and Chief Executive Officer of TechMan International Corporation, a privately held manufacturer of fiber optic medical devices and communication systems, since 1982. Dr. Awan is also President/CEO of Sturbridge Finance limited, a venture capital firm based in Sturbridge, Massachusetts. (2) Mr. Brown joined the Board of Directors on November 19, 1998, filling a vacancy created by the resignation of Herbert A. Lerner. Since 1984, Mr. Brown has been the president of The Windsor Group, Inc., a business consulting firm focused on the oil industry and international operations. (3) Mr. Briskin, a Principal at Stonebridge Associates LLP, where he has worked since 1999, was re-elected to the Board of Directors in August 1998 in accordance with the terms of the settlement of litigation. From 1997 to 1999 Mr. Briskin was a principal at Concord Investment Partners. From 1996 to 1997 Mr. Briskin was attending 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 in New York City. (4) In conjunction with the legal settlements reached by the Company on November 19, 1998 and the appointment of Dr. Awan as Chairman of the Board, Mr. Guild was named to the new position of Vice Chairman of the Board on the same date. Mr. Guild had served as Chairman of the Board and Chief Executive Officer of the Company from February 13, 1998 until November 19, 1998; he continues to serve as Chief Executive Officer and President. Mr.Guild was elected to the Board on May 1, 1997 and had been an independent consultant to the Company from that time until February 13, 1998. From 1993 to 1997, he was a Senior Vice President with Raytheon Engineers and Constructors, Inc., a unit of Raytheon Company. (5) Mr. Lake has been a financial consultant to various government agencies since 1991. Before initiating his consulting practice, Mr. Lake served as Director of the International Banking Services Division of the American Security Bank in Washington, D.C. (6) Mr. Lessard was employed in a variety of management positions from 1966 through December 1995 at the U.S. National Security Agency ("NSA"), Department of Defense. During his final two years at NSA, Mr. Lessard was the Group Chief in the Operations Directorate responsible for communications and cryptographic technology. Since his retirement in December 1995, he has represented the Director of the National Security Agency on several special projects. (7) Mr. Peoples is a Senior Vice President of Gencorp, a publicly held manufacturer of automotive, polymer, aerospace and defense products, and has been employed by that Company since 1992. Previously, Mr. Peoples served as Manager of Business Development for Smart Munitions Programs at Raytheon Company. (8) Dr. Awan and Mr. Brown were elected pursuant to the settlement agreement set forth in Item 3. (b) Identification of Executive Officers ------------------------------------ The following table sets forth the names of all executive officers of the Company, excluding those who are also directors, the year each first became an executive officer, the position currently held by each officer of the Company, the principal occupation of each officer during the past five years, and the age of each officer. Name and Year Positions and Offices with First Became an Officer the Company Age ----------------------- ----------- --- John I. Gill (1) 1985 Executive Vice President 60 Michael P. Malone (2) 1998 Chief Financial Officer/ 41 Treasurer/Assistant secretary (1) Mr. Gill has been employed by the Company since August 1983. (2) Mr. Malone has been employed by the Company since November 1998. (c) Family Relationships -------------------- No director or executive officer is related to any other director or executive officer by blood or marriage. (d) Section 16(a) Beneficial Ownership Reporting Compliance ------------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers and directors, and persons who beneficially own more than ten percent (10%) of the Company's stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten percent (10%) beneficial owners are required by regulation to furnish the Company with copies of all Section 16(a) reports they file. Based solely on a review of the copies of such forms furnished to the Company and written representations from the executive officers and directors that no other reports were required, the Company believes that, during fiscal 2000, its executive officers, directors and greater than ten percent (10%) beneficial owners complied with all applicable Section 16(a) filing requirements, with the exception of the late filing of a Form 4 by the Company's Chairman, Dr. M. Mahmud Awan. Item 11. EXECUTIVE COMPENSATION (a) Summary Compensation Table -------------------------- The following tables set forth certain summary information concerning compensation paid or accrued by the Company during the past three fiscal years to its Chief Executive Officer and the other executive officers of the Company whose annual compensation during Fiscal Year 2000 exceeded $100,000 (hereafter referred to as the "named executive officers"):
Fiscal All Other Name and Principal Position Year Salary Bonus Compensation - --------------------------- ---- ------ ----- ------------ Carl H. Guild, Jr. (4) 2000 $195,720 - $ 9,198(5) Chief Executive Officer and President 1999 $199,680 - $ 4,814(6) 1998 $126,548 - $125,502(7) John I. Gill 2000 $126,583 - $ 1,133(1) Executive Vice President 1999 $119,745 $19,700(3) $ 1,797(1) 1998 $118,591 - $ 1,493(1) Michael P. Malone (8) 2000 $106,734 - $ 1,601(2) Chief Financial Officer 1999 $ 84,349 - $ 1,118(2)
(1) Represents the Company's 25% match on the first 6% of Mr. Gill's fiscal year 401(k) contribution. (2) Represents the Company's 25% match on the first 6% of Mr. Malone's fiscal year 401(k) contribution. (3) This amount of $19,700 was paid to Mr. Gill for services rendered in fiscal year 1998. (4) Prior to his employment as Chief Executive Officer of the Company and his election as Chairman of the Board on February 13, 1998, Mr. Guild had been an independent consultant to the Company and a Director since May 1, 1997. (5) Includes income realized upon receipt of Company stock of $6,800 as a result of grants on November 18, 1999, February 7, 2000 and August 3, 2000 by the Company's Board of Directors and $2,398 representing the Company's 25% match on the first 6% of Mr. Guild's 2000 fiscal year 401(k) contribution. (6) Includes income realized upon receipt of Company stock of $2,000 as a result of a February 8, 1999 grant by the Company's Board of Directors and $2,814 representing the Company's 25% match on the first 6% of Mr. Guild's 1999 fiscal year 401(k) contribution. (7) Includes consultant's fees and expenses of $109,689 related to work performed in fiscal year 1997 and paid in fiscal 1998, as well as work performed prior to February 13, 1998 and paid in fiscal 1998. The total also includes Director's fees of $11,300 from the beginning of fiscal 1998 until February 13, 1998, income realized upon receipt of company stock of $3,015 as a result of the Company's August 14, 1998 grant of stock to members of its Board of Directors and $1,498 for the Company's 25% match on the first 6% of Mr. Guild's fiscal 1998 401(k) contribution. (8) Mr. Malone joined the Company during fiscal year 1999. (b) Stock Options ------------- Set forth below is an Option/SAR Grants table concerning individual grants of stock options and SARs made during fiscal 2000 to each of the named executive officers. Options/SAR Grants in Fiscal Year 2000
Number of Percent of Total Securities Options/SARs Exercise Underlying Options/ Granted to Employees of Base Expiration SARs Granted (1) Price ($/sh) Date ------------ --- ------------ ---- Carl H. Guild, Jr. 1,000 (2) 3.7% 5.100 2/7/2005 John I. Gill 5,000 (3) 18.5% 7.125 1/24/2010
(1) Options to purchase a total of 27,000 shares of the Company's Common Stock were granted to employees of the Company. (2) Common Stock options, which were granted to Mr. Guild under the 1991 Plan on February 7, 2000 are exercisable immediately. (3) Common Stock options, which were granted to Mr. Gill under the 1991 Plan on January 24, 2000 are exercisable 20% per year over five years. Set forth below is a table concerning each exercise of stock options (or tandem SARs) and freestanding SARs during fiscal 2000 by each of the named executive officers and the value at September 30, 2000 of unexercised options and SARs. Aggregated Option/SAR Exercises for Fiscal Year Ended September 30, 2000 and Fiscal Year Option/SAR Values
Value of Unexercised Number of Unexercised In-the-Money Options Shares Options at Fiscal Year-End at Fiscal Year End(1) -------------------------- --------------------- Acquired on Value Name Exercise Realized Exercisable Not Exercisable Exercisable Not Exercisable ---- -------- -------- ----------- --------------- ----------- --------------- Carl H. Guild, Jr. - - 154,945 (2) 18,000 (3) - - John I. Gill - - 1,000 (4) 4,000 (6) - - Michael P. Malone - - 2,000 (5) 3,000 (7) - -
- -------------------------------------------------------------------------------- (1) Value is based on the difference between the option exercise price and the fair market value at September 30, 2000 ($2.75 per share) multiplied by the number of shares underlying the in-the-money portion of the option. In the money options are those options for which the fair market value of the underlying common stock is greater than the exercise price of the option. (2) This represents exercisable grants of options under the 1991 Plan to buy 12,000 shares granted on May 1, 1997 at the following exercise dates and prices: (i) 4,000 shares on May 1, 1998 at an exercise price of $8.875 per share (ii) 4,000 shares on May 1, 1999 at an exercise price of $9.76 per share (iii) 4,000 shares on May 1, 2000 at an exercise price of $10.74 per share; 40,000 shares granted on February 16, 1998 at the following exercise dates and prices: (i) 20,000 shares on February 16, 1998 at an exercise price of $5.000 per share: (ii) 10,000 shares on February 16, 1999 at $6.05 per share; and (iii) 10,000 shares on February 16, 2000 at an exercise price of $5.50; 945 shares granted on August 14, 1998 at an exercise price of $5.42 per share; 100,000 shares granted on November 18, 1998 at an exercise price of $4.00 per share; 1,000 shares granted on February 8, 1999 at an exercise price of $3.40 per share and 1,000 shares granted on February 7, 2000 at an exercise price of $5.10 per share. (3) This represents unexercisable grants of options under the 1991 Plan to buy 8,000 shares granted on May 1, 1997 at the following exercise dates and prices (i) 4,000 shares on May 1, 2001 at an exercise price of $11.81 per share and (ii) 4,000 shares on May 1, 2002 at an exercise price of $12.99 per share. This also represents unexercisable grants of options under the 1991 Plan to buy 10,000 shares granted on February 16, 1998, which vest on February 16, 2001 at $6.66 per share. (4) This represents exercisable grants of options under the 1991 Plan to buy 1,000 shares granted on January 24, 2000 at an exercise price of $7.125 per share. (5) This represents exercisable grants of options under the 1991 Plan to buy 2,000 shares granted on November 30, 1998 at an exercise price of $4.00 per share. (6) This represents unexercisable grants of options under the 1991 Plan to buy 4,000 shares granted on January 24, 2000 at 1,000 shares each on January 24, 2002, January 24, 2003, January 24, 2004 and January 24, 2005, respectively at an exercise price of $7.125 per share. (7) This represents unexercisable grants of options under the 1991 Plan to buy 3,000 shares granted on November 30, 1998 at 1,000 shares each on November 30, 2001, November 30, 2002, and November 30, 2003, respectively at an exercise price of 4.00 per share. Compensation of Directors - ------------------------- Directors who were not regular employees of the Company received a fee of $1,200 for attendance at all meetings attended during fiscal years 2000 and 1999. In addition, each outside director is the recipient of an annual retainer of $2,800 paid in arrears in quarterly increments of $700. During fiscal years 2000 and 1999, outside directors also received a fee of $500 for each meeting of a committee of the Board of Directors they attended. At the 2000 Annual Meeting of the Board of Directors on February 7, 2000, the Company granted 1,000 immediately exercisable stock options to each of the seven directors, with a term of five years from the date of grant at an exercise price of $5.10, 85% of fair market value. In addition, a total of 3,500 shares of TCC common stock were granted to the seven directors at a price per share of $6.00, which was equal to fair market value on February 7, 2000. The directors also elected to receive Company stock in lieu of cash for their director's fees on November 18, 1999 and August 3, 2000. They were granted 585 shares each on November 18, 1999 at the fair market price on that day of $3.25 and 633 shares each on August 3, 2000 at the fair market price on that day of $3.00. At the 1999 Annual Meeting of the Board of Directors on February 8, 1999 1,000 immediately exercisable stock options were granted to each of the seven directors, with a term of five years from the date of grant at an exercise price of $3.40, 85% of fair market value. In addition, a total of 3,500 shares of TCC common stock were granted to the seven directors at a price per share of $4.00, which was equal to fair market value on February 8, 1999. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners ----------------------------------------------- The following table shows, as of December 15, 2000, the ownership of common stock of the Company by any person or group who is known to the Company to be the beneficial owner of more than 5% of the Company's common stock outstanding and entitled to vote as of such date. Beneficial Ownership Percent of Name and Address (Number of Shares) (1) Class (1) ---------------- ---------------------- --------- Royce & Associates, Inc. 106,700 (2) 8.2% (2) c/o Charles M. Royce 1414 Avenue of the Americas New York, NY 10019 (1) Unless otherwise indicated, each of the persons named in the table has sole voting and investment power with respect to the shares set forth opposite such person's name. Information with respect to beneficial ownership is based upon information furnished by each stockholder to the Company directly or to the Securities and Exchange Commission ("SEC"). (2) The nature of ownership of Royce & Associates, Inc. (Royce) as set forth herein is based upon their Schedule 13G filed February 1, 2000 with the SEC. Royce in its capacity as investment advisor may be deemed the beneficial owner of the 106,700 shares indicated in the above table, which shares are owned by numerous clients of Royce. Mr. Royce disclaims beneficial ownership of the 106,700 shares owned by Royce. Security Ownership of Management -------------------------------- The following table sets forth the number of shares and percentage of common stock of the Company outstanding and entitled to vote beneficially owned by each director and named executive officer as well as all directors and officers as a group as of December 15, 2000:
Amount and Nature of Name and Year First Became a Positions and Offices Beneficial Ownership (# of Percent of Director (1) with the Company Age shares)(1) Class (1) -------- ---------------- --- ---------- --------- M. Mahmud Awan (2) Director, 49 45,341 (3) 3.0% 1998 - Class I Director Chairman of the Board Mitchell B. Briskin (4) Director 41 4,635 (5) * 1998 - Class I Director David A. B. Brown (6) Director 57 5,718 (7) * 1998 - Class II Director Robert T. Lessard (8) Director 60 6,136 (9) * 1997 - Class II Director Carl H. Guild, Jr. (10) Director, 56 163,886 (11) 11.0% 1997 - Class III Director Vice Chairman of the Board, Chief Executive Officer and President Donald Lake (12) Director 56 4,635 (13) * 1998 - Class III Director Thomas E. Peoples (14) Director 52 5,185 (15) * 1998 - Class III Director Non-Director Officers: John I. Gill (16) Executive Vice President 61 23,051 (17) 1.5% Michael P. Malone (18) Chief Financial Officer, 41 7,002 (19) * Treasurer and Asst. Clerk All directors, director nominees 265,589 (20) 17.8% and officers as a group (9 persons)
*represents less than one (1) percent of the outstanding common stock (1) Unless otherwise indicated, each of the persons named in the table has sole voting and investment powers with respect to the shares set forth opposite such person's name. With respect to each person or group, percentages are calculated based on the number of shares beneficially owned plus shares that may be acquired by such person or group within sixty days of December 15, 2000, upon the exercise of stock options. Unless otherwise indicated herein, none of the persons named in this table is, or was within the past year, a party to any contract, arrangement or understanding with any person with respect to any securities of the Company, including, but not limited to, joint ventures, loan or option arrangements, puts or calls, guarantees against loss or guarantees of profit, division of losses or profits or the giving or withholding of proxies. None of the persons named in the table, nor any of their respective associates have any arrangement or understanding with any person with respect to any future employment by the Company or its affiliates, or with respect to any future transactions to which the Company or any of its affiliates will or may be a party. Except as otherwise described herein, none of the persons named in this table own any security of the Company of record but not beneficially. The address of Messrs. Awan, Briskin, Brown, Lessard, Guild, Lake, Peoples, Gill and Malone is c/o Technical Communications Corporation, 100 Domino Drive, Concord, Massachusetts 01742. (2) Dr. Awan joined the Board of Directors and became Chairman of the Board on November 19, 1998, following settlement of shareholder litigation (the "Litigation") initiated by Dr. Awan and Philip A. Phalon, a former director of the Company, which had been pending in Middlesex County, Massachusetts Superior Court since February, 1998. Dr. Awan has served as Chairman and Chief Executive Officer of TechMan International Corporation ("Techman"), a privately held manufacturer of fiber optic medical devices and communication systems, since 1982. Dr. Awan is also President/CEO of Sturbridge Finance limited, a venture capital firm based in Sturbridge, Massachusetts. (3) Includes 37,278 shares owned by TechMan, which is wholly owned by Dr. Awan, and 2,000 shares issuable upon the exercise of stock options. (4) Mr. Briskin, is a Principal at Stonebridge Associates, an investment bank, where he has worked since 1999. Mr. Briskin was formerly a principal at Concord Investment Partners from 1997 to 1999. From 1996 to 1997 Mr. Briskin was attending 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 in New York City. (5) Includes an aggregate of 2,278 shares issuable upon the exercise of various stock options. (6) Mr. Brown joined the Board of Directors on November 19, 1998, filling a vacancy created by the resignation of Herbert A. Lerner. Since 1984, Mr. Brown has been the President of The Windsor Group, Inc., a business consulting firm focused on the oil industry and international operations. (7) Includes an aggregate of 2,000 shares issuable upon the exercise of a stock option. (8) Mr. Lessard was employed in a variety of management positions from 1966 through December 1995 at the U.S. National Security Agency ("NSA"), Department of Defense. During his final two years at NSA, Mr. Lessard was the Group Chief in the Operations Directorate responsible for communications and cryptographic technology. Since his retirement in December 1995, he has represented the Director of the National Security Agency on several special projects. (9) Includes an aggregate of 2,945 shares issuable upon the exercise of stock options. (10) In conjunction with the settlement of the Litigation reached by the Company on November 19, 1998 and the appointment of Dr. Awan as Chairman of the Board, Mr. Guild was named to the new position of Vice Chairman of the Board on the same date. Mr. Guild had served as Chairman of the Board and Chief Executive Officer of the Company from February 13, 1998 until November 19, 1998; he continues to serve as Chief Executive Officer and President. Mr. Guild was elected to the Board on May 1, 1997 and had been an independent consultant to the Company from that time until February 13, 1998. From 1993 to 1997, he was a Senior Vice President with Raytheon Engineers and Constructors, Inc., a unit of Raytheon Company. Mr. Guild serves as President and Chief Executive Officer of the Company pursuant to an Employment Agreement with Company previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ending October 3, 1998. (11) Includes an aggregate of 161,215 shares issuable upon the exercise of various stock options that have vested. (12) Mr. Lake has been a financial consultant focusing on international financial operations related to intelligence and law enforcement activities to various government agencies since 1991. Before initiating his consulting practice, Mr. Lake served as Director of the International Banking Services Division of the American Security Bank in Washington, D.C. (13) Includes an aggregate of 2,278 shares issuable upon the exercise of stock options. (14) Since October 1, 1999, Mr. Peoples has been a Senior Vice President of Gencorp, Inc., a publicly held manufacturer of automotive, polymer, aerospace and defense products. From 1992 to September 30, 1999, Mr. Peoples was the Vice President for International and Washington Operations 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. (15) Includes an aggregate of 2,278 shares issuable upon exercise of stock options. (16) Mr. Gill, Executive Vice President since 1995, has been employed by the Company since August 1983. He was Vice President, Manufacturing and Technical Operations from 1989 to 1995. (17) Includes an aggregate of 3,500 shares issuable upon the exercise of a stock option. (18) Mr. Malone, Chief Financial Officer, joined the Company in 1998 as Principal Financial Officer and Treasurer. 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 company for five years as its Controller and Treasurer. (19) Includes an aggregate of 4,500 shares issuable upon the exercise of a stock option. (20) Includes an aggregate of 182,994 shares of common stock issuable upon the exercise of vested stock options. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Edward E. Hicks, Esq., the Company's Secretary and Clerk, is a member of a law firm that provides legal services to the Company. On November 19, 1998, the Company settled the Litigation described in Item 3. Pursuant to such settlement, the Company, Arnold McCalmont, Herbert A. Lerner, Robert T. Lessard, Carl H. Guild, Jr., Mitchell B. Briskin, Donald Lake and Thomas E. Peoples entered into a settlement agreement with M. Mahmud Awan and Philip A. Phalon. The settlement agreement and standstill agreement set forth mutual full releases as to the litigation and also include provisions requiring, among other things, (i) the Company to reimburse the former proxy contestants' expenses in payments aggregating $395,000, (ii) the dissolution of the Awan/ Phalon group created to facilitate the proxy contest and (iii) the former proxy contestants to abide by certain standstill provisions until October 1, 2000. On June 27, 1995, the Company invested $250,800 for a minority interest in Series B Preferred Stock of Net2Net Corporation, then a privately held company that developed high performance management and analysis systems for Asynchronous Transfer Mode ("ATM") networks. On May 15, 1998, Visual Networks, Inc. ("Visual"), a public company, merged with and into Net2Net. Under the terms of the merger, all outstanding shares of Net2Net were exchanged for an aggregate of 2,250,000 shares of Visual common stock. During fiscal 1999, the Company sold its holdings in Visual for the aggregate sum of $1,401,972, excluding expenses. Net2Net's President was Stephen McCalmont, son of Arnold M. McCalmont, a former director and former Chairman of Technical Communications Corporation, and brother of James A. McCalmont, another former director of the Company. Both of these gentlemen, in addition to Herbert A. Lerner, a former director, Chief Financial Officer and Treasurer of the Company, were also investors in Net2Net Corporation. No director or executive officer is related to any other director or executive officer by blood marriage. PART IV Item 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K [a] (1) The following Consolidated Financial Statements, Notes thereto and Independent Auditors' Report of the Company are filed on the pages listed below, as part of Part II, Item 8 of this report:
Page ---- Consolidated Balance Sheets as of September 30, 2000 and October 2, 1999 F-1 Consolidated Statements of Operations for the Years Ended September 30, 2000, October 2, 1999 and October 3,1998 F-2 Consolidated Statements of Cash Flows for the Years Ended September 30, 2000, October 2, 1999 and October 3,1998 F-3 Consolidated Statements of Comprehensive Income (Loss) and Stockholders' Equity for the Years Ended September 30, 2000, October 2, 1999 and October 3,1998 F-4 Notes to Consolidated Financial Statements F-5-F-14 Report of Independent Public Accountants F-15 Report of Independent Public Accountants F-16 [a] (2) The following Consolidated Financial Statement Schedule is included herein: Schedule II - Valuation and Qualifying Accounts S-1 Reports of Independent Public Accountants S-1
(a) 3 List of Exhibits - ----- ---------------- 3.1* Articles of Organization of the Company 3.2 ** By-laws of the Company 10.1*** Employment Agreement for Carl H. Guild, Jr. 10.2*** Standstill Agreement 10.3 Loan and security agreement, dated July 31, 2000 between the Company and Coast Business Credit, a division of Southern Pacific Bank 10.4 Amendment to Loan and security agreement, dated December 28, 2000 between the Company and Coast Business Credit, a division of Southern Pacific Bank 21 List of Subsidiaries of the Company 23.1 Consent of Grant Thornton LLP 23.2 Consent of Arthur Andersen LLP 27 Financial Data Schedule ________________________________________________________________________________ * Incorporated by reference to previous filings with the Commission. ** Incorporated by reference to the Company's 8-K filed on May 5, 1998. *** Incorporated by reference to the Company's Annual Report for 1998 Form 10-K, as amended, filed with the Securities and Exchange (b) Reports on Form 8-K ------------------- During the third quarter of fiscal 2000 the registrant filed one (1) Form 8-K on June 16, 2000, with respect to a change of auditors. SIGNATURES - ---------- Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on December 28, 2000. TECHNICAL COMMUNICATIONS CORPORATION By: /s/ Carl H. Guild, Jr. ----------------------- Carl H. Guild, Jr. Chief Executive Officer and President Vice Chairman of the Board, Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Carl H. Guild, Jr. Chief Executive Officer and President December 28, 2000 ------------------ Carl H. Guild, Jr. Vice Chairman of the Board, Director (Principal Executive Officer) /s/ Michael P. Malone Treasurer and Chief Financial Officer December 28, 2000 --------------------- Michael P. Malone (Principal Financial and Accounting Officer) /s/ Dr. Mahmud Awan Chairman of the Board, Director December 28, 2000 ------------------- Dr. Mahmud Awan /s/ Mitchell B. Briskin Director December 28, 2000 ----------------------- Mitchell B. Briskin /s/ David A. B. Brown Director December 28, 2000 --------------------- David A. B. Brown /s/ Donald Lake Director December 28, 2000 --------------- Donald Lake /s/ Robert T. Lessard Director December 28, 2000 --------------------- Robert T. Lessard /s/ Thomas E. Peoples Director December 28, 2000 --------------------- Thomas E. Peoples
F-1 Technical Communications Corporation Consolidated Balance Sheets September 30, 2000 and October 2, 1999
ASSETS 2000 1999 Current assets: Cash and cash equivalents $ 3,121,617 $ 2,338,935 Accounts receivable - trade, less allowance for doubtful accounts of $70,000 363,742 2,603,401 Inventories 3,452,403 3,035,937 Refundable income taxes - 276,960 Deferred income taxes 157,500 809,555 Other current assets 269,980 84,065 ---------------------------------- Total current assets 7,365,242 9,148,853 ---------------------------------- Equipment and leasehold improvements 4,899,615 4,640,222 Less accumulated depreciation (4,330,749) (3,960,614) ---------------------------------- Equipment and leasehold improvements, net 568,866 679,608 ---------------------------------- Goodwill 1,614,131 1,614,131 Less accumulated amortization (1,146,262) (931,352) ---------------------------------- Goodwill, net 467,869 682,779 ---------------------------------- Other assets 740 149,675 ---------------------------------- $ 8,402,717 $10,660,915 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 524,231 $ 258,067 Accrued liabilities: Compensation and related expenses 162,420 230,654 Other 435,602 870,936 ---------------------------------- Total current liabilities 1,122,253 1,359,657 ---------------------------------- Other long-term liabilities - 365,721 Commitments and contingencies Stockholders' equity Common stock - par value $.10 per share; 131,215 129,454 authorized 3,500,000 shares, issued 1,312,153 and 1,294,541 shares Treasury stock at cost, 15,037 and 27,063 shares (118,610) (213,375) Additional paid-in capital 1,294,579 1,305,870 Accumulated other comprehensive items - - Retained earnings 5,973,280 7,713,588 ---------------------------------- Total stockholders' equity 7,280,464 8,935,537 ---------------------------------- $ 8,402,717 $10,660,915 ==================================
The accompanying notes are an integral part of these consolidated financial statements. F-2 Technical Communications Corporation Consolidated Statements of Operations Years Ended September 30, 2000 and October 2, 1999 and October 3, 1998
2000 1999 1998 Net sales $ 5,574,108 $ 6,433,683 $13,855,781 Cost of sales 2,376,433 3,128,491 5,462,608 ------------------------------------------------ Gross profit 3,197,675 3,305,192 8,393,173 ------------------------------------------------ Operating expenses: Selling, general and administrative expenses 3,874,424 4,312,162 6,220,992 Product development costs 1,156,692 1,935,859 1,414,746 ------------------------------------------------ Total operating expenses 5,031,116 6,248,021 7,635,738 ------------------------------------------------ Operating profit (loss) (1,833,441) (2,942,829) 757,435 Other income (expense) Gain on sale of investment - 1,151,172 - Investment income 210,939 147,860 24,068 Interest expense (2,305) (4,641) (142,056) Other 57,869 23,717 2,690 ------------------------------------------------ Total other income (expense) 266,503 1,318,108 (115,298) ------------------------------------------------ Income (loss) before income taxes (1,566,938) (1,624,721) 642,137 Provision (benefit) for income taxes 173,376 (406,179) 160,534 ------------------------------------------------ Net income (loss) $(1,740,314) $(1,218,542) $ 481,603 =========== =========== =========== Net income (loss) per common share Basic (1.35) (0.96) 0.38 Diluted (1.35) (0.96) 0.37 Weighted average common shares outstanding Basic 1,289,523 1,264,626 1,281,924 Diluted 1,289,523 1,264,626 1,288,007
The accompanying notes are an integral part of these consolidated financial statements. F-3 Technical Communications Corporation Consolidated Statements of Cash Flows Years Ended September 30, 2000 and October 2, 1999 and October 3, 1998
2000 1999 1998 Operating activities: Net income (loss) ($1,740,314) ($1,218,542) 481,603 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Depreciation and amortization 733,980 896,965 873,642 Loss on disposal of fixed assets - 28,697 20,000 Non-cash compensation 47,602 14,675 18,263 Deferred income taxes 292,478 (167,341) 9,907 Gain on sale of investment - (1,151,168) - Changes in current assets and current liabilities: Accounts receivable 2,239,659 5,592,895 (4,936,747) Unbilled revenue - - 198,038 Inventories (416,466) 83,354 304,688 Refundable income taxes 276,960 84,572 (68,903) Other current assets (185,915) 4,418 29,464 Accounts payable and accrued liabilities (236,423) (1,586,926) 114,723 -------------------------------------------------- Cash provided by (used for) operating activities 1,011,561 2,581,599 (2,955,322) -------------------------------------------------- Investing activities: Additions to equipment and leasehold improvements (259,393) (166,581) (511,423) Cancellation of life insurance policies - 5,437 152,787 Long term receivable - (9,824) 114,665 Proceeds from sale of investment - 1,401,968 - Investment in capitalized software - - (275,101) Other assets - - 1,500 -------------------------------------------------- Cash provided by (used for) investing activities (259,393) 1,231,000 (517,572) -------------------------------------------------- Financing activities: Exercise of stock options, including income tax benefits - - 88,689 Proceeds from stock issuance 37,633 40,803 - Borrowings under line of credit - - 4,500,000 Payment of line of credit - (2,250,000) (2,250,000) Payment of long-term debt (7,119) (4,516) (2,494) -------------------------------------------------- Cash provided by (used for) financing activities 30,514 (2,213,713) 2,336,195 -------------------------------------------------- Net increase (decrease) in cash and cash equivalents 782,682 1,598,886 (1,136,699) Cash and cash equivalents at beginning of year 2,338,935 740,049 1,876,748 -------------------------------------------------- Cash and cash equivalents at end of year $3,121,617 $2,338,935 $ 740,049 ================================================== Supplemental disclosures: Interest paid $ 4,305 $ 7,123 $ 139,063 Income taxes paid (net of refunds received) (394,430) (36,366) 108,765
The accompanying notes are an integral part of these consolidated financial statements. F-4 Technical Communications Corporation Consolidated Statements of Comprehensive Income (Loss) and Stockholders' Equity Years Ended September 30, 2000 and October 2, 1999 and October 3, 1998
2000 1999 1998 Comprehensive Income (Loss) Net income (loss) $ (1,740,314) $ (1,218,542) $ 481,603 Other comprehensive items: Unrealized gain on available for sale investment - 326,262 422,000 Less: reclassification adjustment for gains included in net loss, net of income taxes - (748,262) - -------------------------------------------------- Total comprehensive income (loss) $ (1,740,314) $ (1,640,542) $ 903,603 ================================================== Stockholders' Equity Shares of common stock: Beginning balance 1,294,541 1,283,238 1,273,703 Exercise of stock options - - 9,535 Issuance of shares to ESPP participants 17,612 11,303 - -------------------------------------------------- Ending balance 1,312,153 1,294,541 1,283,238 ================================================== Common stock at par value: Beginning balance $ 129,454 $ 128,324 $ 127,370 Exercise of stock options - - 954 Issuance of shares to ESPP participants 1,761 1,130 - -------------------------------------------------- Ending balance 131,215 129,454 128,324 -------------------------------------------------- Additional paid-in capital: Beginning balance 1,305,870 1,266,197 1,526,110 Exercise of stock options - - 87,735 Issuance of shares to ESPP participants 35,872 39,673 - Termination of ESOP - - (347,648) -------------------------------------------------- Ending balance 1,341,742 1,305,870 1,266,197 -------------------------------------------------- ESOP deferred compensation: Beginning balance - - (527,772) Principal payments on ESOP debt - - - Termination of ESOP - - 527,772 -------------------------------------------------- Ending balance - - - -------------------------------------------------- Accumulated other comprehensive items: Beginning balance - 422,000 - Available for sale investment, net - (422,000) 422,000 -------------------------------------------------- Ending balance - - 422,000 -------------------------------------------------- Retained earnings: Beginning balance 7,713,588 8,945,941 8,464,338 Issuance of stock grants (47,163) (13,811) - Net income (loss) (1,740,314) (1,218,542) 481,603 -------------------------------------------------- Ending balance 5,926,111 7,713,588 8,945,941 -------------------------------------------------- Treasury stock: Beginning balance (213,375) (241,861) (80,000) Termination of ESOP - - (180,124) Issuance of stock grants 94,765 28,486 18,263 -------------------------------------------------- Ending balance (118,610) (213,375) (241,861) -------------------------------------------------- Total stockholders' equity $ 7,280,458 $ 8,935,537 $10,520,601 ==================================================
The accompanying notes are an integral part of these consolidated financial statements. F-5 Notes to Consolidated Financial Statements (1) Company Operations Technical Communications Corporation incorporated in 1961 in Massachusetts, and its wholly-owned subsidiaries (the Company) operate in one industry segment: the design, development, manufacture, distribution and sale of communications security devices and systems worldwide. (2) Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, TCC Foreign Sales Corporation (FSC), a qualified foreign sales corporation, and TCC Investment Corporation, a Massachusetts Security Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. Liquidity Matters The Company's revenues have historically included significant transactions with foreign governments and other organizations. The Company expects this trend to continue. The timing of these transactions has in the past and will in the future impact the cash flow of the Company. Although the Company believes there are currently sufficient cash and available funds under the line of credit to meet its working capital needs, delays in the timing of significant transactions may cause the Company to reevaluate and adjust its operations. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include demand deposits at banks, and certificates of deposit and other investments (including mutual funds) readily convertible into cash. Cash equivalents are stated at cost, which approximates market value. Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful life of the asset. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in operations for the period. The cost of maintenance and repairs is charged to operations as incurred; significant renewals and betterments are capitalized. Capitalized Software Costs The Company sells software as a component of its communications systems. Certain computer software costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," and are reported at the lower of unamortized cost or net realizable value. Upon initial product release, these costs are amortized based upon the straight-line method, over three years. As of September 30, 2000, the Company had fully amortized its investments in capitalized software totaling $357,445. F-6 Notes to Consolidated Financial Statements (continued) Goodwill The Company acquired substantially all of the assets of Datotek, Inc. in May 1995. The excess purchase cost over net assets acquired is being amortized on a straight-line basis over 7 1/2 years. The Company assesses the future useful life of this asset whenever events or changes in circumstances indicate that the current useful life has diminished. The Company considers the future undiscounted cash flows of the acquired company in assessing the recoverability of this asset. If impairment has occurred the excess of carrying value over fair value is recorded as a loss. Recognition of Revenue The Company generally recognizes revenue upon shipment of products, except in the case of long-term contracts for which the revenue is recognized using the percentage-of-completion method. In 1998, the Company recorded a significant amount of deferred revenue due to customer billings in excess of the revenue recognized under the percentage of completion accounting method. The deferred revenue from 1998 was recognized in 1999. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based employee compensation using the intrinsic value method prescribed in Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Reclassification Certain reclassifications have been made to the prior years' consolidated financial statements to conform with the fiscal year 2000 presentation. Income Taxes The Company records income tax expense (benefit) in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," which requires the use of the asset/liability method in accounting for income taxes. 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. Warranty Costs The Company provides for warranty costs at the time of sale based upon historical experience. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. a)Cash and Cash Equivalents, Accounts Receivable and Accounts Payable - the carrying amount of these assets and liabilities on the Company's consolidated balance sheet approximates their fair value because of the short term nature of these instruments. b)Available for Sale Investment- the carrying amount of this asset on the Company's consolidated balance sheets equals the fair market value based on the market valuation with the difference between cost and market value, net of related tax effects, recorded in stockholders' equity as an unrealized gain on available for sale investment, which is included in "Accumulated Other Comprehensive Items". c)Line of Credit- the carrying amount of this liability on the Company's consolidated balance sheets approximates its fair value because of the short term nature of this instrument. F-7 Notes to Consolidated Financial Statements (continued) Earnings (Loss) per Share("EPS") In accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share," the Company presents both a "Basic" and a "Diluted" EPS. Basic EPS has been computed by dividing net income by a weighted average number of shares of common stock outstanding during the period. In computing diluted EPS, only stock options that are dilutive (those that reduce earnings per share) have been included in the calculation of EPS using the Treasury Stock Method. Exercise of outstanding stock options is not assumed if the result would be antidilutive, such as when a net loss is reported for the period or the option exercise price is greater than the average market price for the period presented. Fiscal Year-End Policy The Company 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 years 2000 and 1999 ended on September 30, 2000 and October 2, 1999 and each included 52 weeks, while the year ended October 3, 1998, included 53 weeks. Comprehensive Income During fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income". SFAS 130 established standards for the reporting and display of comprehensive income and its components. In general, comprehensive income combines net income and "other comprehensive income". Operating Segments During fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related Information". SFAS 131 establishes standards for the way that public companies report information about operating segments and geographic distribution of sales in financial statements. This Statement supercedes Statement of Financial Accounting Standards No. 14, " Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers. The Statement is effective for fiscal years beginning after December 15, 1997. The adoption of this Statement did not have a material effect on the Company's financial statements, as the Company has only one operating segment. Newly Issued Pronouncements In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition, presentation and disclosure in financial statements. Subsequently, the SEC has amended the implementation dates so that the Company is required to adopt the provisions of SAB No. 101 in the fourth quarter of 2001. We are currently reviewing the impact of SAB No. 101, but we believe that it will not materially affect the Company's results of operations or financial position. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities". The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. In June 1999, FASB issued Statement of Financial Accounting Standards No. 137 (SFAS 137), "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133--an amendment of FASB Statement No. 133". This Statement has delayed the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. In June 2000, SFAS No. 133 was amended by Statement of Financial Accounting Standards No. 138 (SFAS 138), "Accounting for Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. Management does not expect the adoption of these statements to have a material impact on its financial position or results of operations. F-8 Notes to Consolidated Financial Statements (continued) (3) Earnings (Loss) Per Share In accordance with SFAS No. 128, "Earnings Per Share", basic and diluted EPS were calculated as follows:
September 30, October 2, October 3, 2000 1999 1998 ---- ---- ---- Basic Net Income (Loss) $ (1,740,314) $ (1,218,542) $ 481,603 ------------------------------------------------ Weighted Average Shares Outstanding 1,289,523 1,264,626 1,281,924 Outstanding dilutive stock options with option price less than average market price - - 6,083 ------------------------------------------------ Adjusted Weighted Average Shares 1,289,523 1,264,626 1,288,007 ------------------------------------------------ Basic Earnings (Loss) Per Share $ (1.35) $ (0.96) $ 0.38 ------------------------------------------------ Diluted Earnings (Loss) Per Share $ (1.35) $ (0.96) $ 0.37 ------------------------------------------------
Outstanding potentially dilutive stock options which were not included in the above calculations for the respective fiscal years were as follows: 217,669 in 2000; 180,169 in 1999 and 138,316 in 1998. (4) Treasury Stock Transactions During fiscal years 2000, 1999 and 1998, 12,026, 3,500 and 2,865 shares, respectively, of Technical Communications Corporation Common Stock were granted to members of the Company's Board of Directors. The prices of shares issued in 2000 ranged from $3.00 to $6.00 per share. The price of shares issued in 1999 and 1998 were at a price per share of $4.00 and $6.38, respectively. All grants were made at the current market value on the date of grant and were issued from the Company's Treasury Stock. The Company terminated its ESOP on October 1, 1997, and accounted for this termination in the manner specified in AICPA Statement of Position (SOP) 93-6, Employers' Accounting for Employee Stock Ownership Plans. Specifically, the Company transferred the remaining 23,543 shares that had not been allocated to participants to Treasury Stock and valued the transaction at the fair market value of the shares at the October 1, 1997 reacquisition date. (5) Stock Options At the February 1992 Annual Meeting of Stockholders, the Company adopted the Technical Communications Corporation 1991 Stock Option Plan (the SOP Plan) to replace a previous, expired plan. The Company reserved 250,000 shares of common stock for issuance to employees at prices not less than the fair market value on the date of grant. At the February 1997 Annual Meeting of Stockholders, the Company increased the reserve for shares under the SOP Plan to 350,000. Options under this plan generally expire ten years from the date of grant and are exercisable in cumulative annual increments commencing one year after the date of grant. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which sets forth a fair-value based method of recognizing stock- based compensation expense. As permitted by SFAS 123, the Company has elected to continue to apply Accounting Principles Board Opinion No. 25 to account for its stock-based employee compensation plans. Had compensation for awards in fiscal years 1998 through 2000 under the Company's stock-based compensation been determined based on the fair value at the grant dates consistent with the method set forth under SFAS 123, the effect on the Company's net income (loss) and earnings (loss) per share would have been as follows:
September 30, October 2, October 3, 2000 1999 1998 Net income (loss) As reported $(1,740,314) $(1,218,542) $ 481,603 Pro forma $(1,887,120) $(1,549,036) $ 296,646 Basic earnings (loss) per common share As reported $ (1.35) $ (0.96) $ 0.38 Pro forma $ (1.46) $ (1.22) $ 0.26
F-9 Notes to Consolidated Financial Statements (continued) Because the method prescribed by SFAS 123 has not been applied to options granted prior to September 1, 1994, the resulting pro forma compensation expense may not be representative of the amount to be expensed in future years. Pro forma compensation expense for options granted is reflected over the vesting period; future pro forma compensation expense may be greater as additional options are granted. The fair value of each option granted was estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 6.31%, 4.86%, and 4.08% for 2000, 1999, and 1998, respectively, expected life equal to 5 years, expected volatility of 122%, 85% and 100% in 2000, 1999 and 1998, respectively, and an expected dividend yield of 0%. A summary of the Company's stock option activity is as follows:
September 30. October 2, October 3, 2000 1999 1998 -------------------- ----------------------- ----------------------- Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Options outstanding, beginning of year 256,074 $5.91 144,399 $7.79 261,155 $10.14 Options granted Option Price = Fair Market Value 19,000 $6.53 114,000 $3.91 106,369 $6.58 Option Price * Fair Market Value - - - Option Price ** Fair Market Value 8,000 $5.10 7,000 $3.40 - Options exercised - - (3,100) $4.00 Options forfeited (28,000) $8.43 (9,325) $8.61 (220,025) $9.57 ------- ------ -------- Options outstanding, end of year 255,074 $5.65 256,074 $5.91 144,399 $7.79 Options exercisable 209,149 $5.40 193,924 $5.45 69,029 $8.12 Weighted average fair value per share of options granted during the year $5.44 $2.73 $4.65
The following summarizes certain data for options outstanding at September 30, 2000:
Weighted Weighted Average Average Remaining Range of Number of Exercise Contractual Exercise Prices Shares Price Life --------------- ------ ----- ---- Options outstanding, end of year: $ 1.68- $ 5.00 142,000 $ 4.06 7.9 $ 5.01- $10.00 91,294 $ 6.56 7.0 $10.01- $15.00 20,160 $12.04 5.1 $15.01- $16.75 1,620 $15.80 2.4 ------- 255,074 $ 5.66 7.3 Options exercisable: $ 1.68- $ 5.00 129,000 $ 4.11 $ 5.01- $10.00 66,069 $ 6.52 $10.01- $15.00 11,860 $11.81 $15.01- $16.75 1,620 $15.80 ------- 209,149 $ 5.40
(6) Inventories
Inventories consist of the following: September 30, October 2, 2000 1999 Finished goods $ 622,003 $ 655,167 Work in process 1,181,510 216,072 Raw materials and supplies 1,648,891 2,164,698 --------------- ---------------- Total inventories $ 3,452,404 $ 3,035,937 --------------- ----------------
F-10 Notes to Consolidated Financial Statements (continued) (7) Equipment and Leasehold Improvements Equipment and leasehold improvements consist of the following:
September 30, October 2, Estimated 2000 1999 Useful Life Engineering and manufacturing equipment $2,489,172 $2,330,876 3-8 years Demonstration equipment 842,568 779,732 3 years Furniture and fixtures 1,127,373 1,089,112 3-8 years Automobiles 24,385 24,385 3 years Remaining term Leasehold improvements 416,117 416,117 of lease ------------------------------------------- Total equipment and leasehold improvements $4,899,615 $4,640,222 3-8 years -------------------------------------------
(8) Other Accrued Liabilities Other accrued liabilities consist of the following:
September 30, October 2, 2000 1999 Reserve for product warranty $ 92,996 $ 240,462 Professional service fees 95,008 176,803 Sales representative commissions 38,595 131,075 Customer support agreements 44,000 147,700 Income taxes payable - 3,735 Other 165,003 171,161 ---------------------------------- Total other accrued liabilities $ 435,602 $ 870,936 ----------------------------------
(9) Debt In August 2000, the Company successfully negotiated a new $5 million asset-based credit facility with Coast Business Credit ("Coast"). The line carries an interest rate of prime plus 1/2% (10.0% at September 30, 2000). This revolving line of credit is collateralized by substantially all the assets of the Company and requires no compensating balances. There is one financial covenant associated with the line, which calls for a minimum net tangible worth starting at $6,250,000 and increasing over time based on certain criteria. The amount of borrowings is limited to a percentage of certain accounts receivable and inventory balances. At September 30, 2000 the Company was in default of the net worth covenant. Subsequently, Coast waived the default and modified the agreement to reduce the minimum net worth requirement for the future and added an interest coverage ratio requirement. In addition, Coast has suspended the Company's ability to request loans, of up to $500,000, against inventory balances. The line matures in August 2003. The Company believes this new credit facility, as amended will meet its current credit needs and its need for the foreseeable future. Previously the Company had a $5,000,000 revolving line of credit with Wainwright Bank and Trust Company at an interest rate of the bank's base rate plus 1/2 of 1%. This line of credit was secured by a pledge of substantially all the assets of the Company. This line matured on May 1, 2000 and was not renewed. As of September 30, 2000, the Company has outstanding standby letters of credit, which were supported by the line of credit amounting to $20,879. Wainwright Bank has agreed to honor these standby letters of credit until they mature on December 31, 2000. (10)Leases The Company leases its headquarters under an operating lease. The Company has renewed the lease on its headquarters located in Concord, Massachusetts through December 31, 2002. Future minimum lease payments amount to $171,216 in fiscal 2001, $171,216 in fiscal 2002 and $42,804 in fiscal 2003. The Company also retains an option to purchase the building at fair market value, but not to exceed $2,262,000, exercisable at the end of the lease term, if elected. Annual rental expense amounted to $161,492 in fiscal year 2000, $157,182 in fiscal year 1999 and $155,300 in fiscal year 1998. F-11 Notes to Consolidated Financial Statements (continued) During 1998, the Company entered into a capital lease for computer equipment in the amount of $20,370, an additional $3,850 was added to the lease in fiscal 1999 (accumulated depreciation amounted to $19,542 at September 30, 2000). This asset is included in the Engineering and Manufacturing Equipment category of the Company's equipment and leasehold improvements. The lease term is for three years and contains a bargain purchase option, which may be exercised upon lease expiration. Minimum annual principal payments amount to $6,241 in 2001. (11) Income Taxes
The provision (benefit) for income taxes consists of the following: September 30, October 2, October 3, 2000 1999 1998 Current: Federal $(117,470) $ (109,625) $ 29,629 State 3,235 (213,184) 26,706 ------------------- ------------------ ------------------- Total current taxes (114,235) (322,809) 56,335 ------------------- ------------------ ------------------- Deferred: Federal 231,446 (46,142) 111,641 State 56,165 (37,228) (7,442) ------------------- ------------------ ------------------- Total deferred taxes 287,611 (83,370) 104,199 ------------------- ------------------ ------------------- Total provision (benefit) $ 173,376 $ (406,179) $ 160,534 ------------------- ------------------ -------------------
The provisions for income taxes are different from those that would be obtained by applying the statutory federal income tax rate to earnings before income taxes due to the following:
September 30, October 2, October 3, 2000 1999 1998 Tax at U.S. statutory rate $ (532,759) $ (552,405) $ 220,210 Benefit of Foreign Sales Corp. - - (74,269) State income taxes, net of Federal benefit 39,204 (165,272) 12,714 Other (147,352) (665) 32,933 Prior year under accrual (156,765) - - Transfer of long-term liability to deferred tax asset (359,229) - - Increase (reduction) in valuation allowance 1,330,277 312,163 (31,054) ------------------ ------------------- ------------------- Total provision (benefit) $ 173,376 $ (406,179) $ 160,534 ------------------ ------------------- -------------------
Deferred income taxes consist of the following:
September 30, October 2, 2000 1999 NOL Carryforward $ 1,532,480 $ 639,884 Goodwill 73,211 35,890 Inventory reserve 422,716 588,479 Warranty reserve 29,218 96,834 Payroll related accruals 25,875 42,529 Tax credits 181,232 179,489 Other 129,074 132,479 ------------------- ------------------- Total 2,393,806 1,715,584 Less: valuation allowance (2,236,306) (906,029) ------------------- ------------------- Total $ 157,500 $ 809,555 ------------------- -------------------
F-12 Notes to Consolidated Financial Statements (continued) The valuation allowance relates to uncertainty with respect to the Company's ability to realize its deferred tax assets. Refundable income taxes represent estimated refunds from the Federal government from carryback claims. All refunds from 1999 were received in fiscal 2000. Additionally the Company received a refund in fiscal 2000 related to prior years which is recorded as a current benefit. As of September 30, 2000 the Company has available tax loss carryforwards for federal income tax purposes of $3,000,000, which expire in 2019. The Company also has available tax loss carryfowards for state income tax purposes of $5,100,000, which expire in 2004. (12) Employee Benefit Plans The Company has a qualified, contributory, trusteed profit sharing plan covering substantially all employees. The Company's policy is to fund contributions as they are accrued. The contributions are allocated based on the employee's proportionate share of total compensation. The Company's contributions to the plan are determined by the Board of Directors and are subject to other specified limitations. There were no Company profit sharing contributions during fiscal 2000, 1999 or 1998. However, the Board of Directors approved a corporate match of 25 cents per dollar of the first 6% of each participant's contributions to the plan. The Company's matching contributions were $36,091, $39,094 and $37,700 in 2000, 1999 and 1998, 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. No bonuses were earned and accrued under the plan in 2000, 1999 or 1998. On November 17, 1989, the Company established the Technical Communications Corporation Employees' Stock Ownership Trust (the "Trust") for the benefit of its employees. At its August 27, 1997 meeting, the Board of Directors voted to terminate the Employee Stock Ownership Plan effective October 1, 1997. Actual termination of the Company's ESOP was effected in fiscal 1998 by transferring all remaining shares that had not been allocated to participants to Treasury Stock. (13) Business, Credit and Off-Balance Sheet Risks The Company is exposed to a number of business risks. These include, but are not limited to, concentration of its business among a relatively small number of customers, technological change (which can cause obsolescence of the Company's products and inventories), actions of competitors (some of whom have access to considerably greater financial resources than the Company), cancellation of major contracts (either before or after award), variations in market demand, the loss of key personnel, etc. The Company attempts to protect itself in various ways against such risks, but its success cannot be guaranteed. At September 30, 2000 and October 2, 1999, the Company was contingently liable under open standby letters of credit totaling $20,879 and $67,476, respectively. These letters of credit were issued in the ordinary course of business to secure the Company's performance under contracts with its customers. These letters of credit expire as provided for in the contracts, unless exercised or renewed. To date, no letters of credit have been exercised. The Company does not expect to incur any loss associated with these letters of credit. As of September 30, 2000, management believes it has no significant concentrations of credit risk due to placement of its cash equivalents with high-credit-quality financial institutions, and the fact that the majority of its foreign trade receivables are secured by letters of credit or foreign credit insurance. (14) Related Party Transactions On November 19, 1998, the Company reached agreement on the settlement of shareholder litigation initiated by Philip Phalon and Dr. Mahmud Awan, which had been pending in Middlesex County, Massachusetts Superior Court since February 1998. The settlement agreement and standstill agreement executed by the Company and members of the opposition group that had filed a Form 13D (the 13D Group) in the settlement of the above described litigation set forth mutual full releases as to the litigation and also include provisions requiring (i) the Company to reimburse the 13D Group's expenses in payments aggregating $395,000, all of which has been paid as of September 30, 2000, (ii) the dissolution of the 13D Group (Note: members of the 13D Group filed an amendment to their Form 13D dissolving the 13D Group in January 1999) and (iii) the former proxy contestants to abide by certain standstill provisions until October 1, 2000. F-13 Notes to Consolidated Financial Statements (continued) (15) Major Customers and Export Sales In fiscal 2000, the Company had two customers, representing 41% (21% and 20%) of net sales. In fiscal 1999, the Company had three customers, representing 60% (32%, 17% and 11%) of net sales. In fiscal 1998, the Company had two customers representing 71% (54% and 17%) of net sales. A breakdown of net sales is as follows:
September 30, October 2, October 3, 2000 1999 1998 Domestic $ 2,446,083 $1,239,275 $ 1,631,459 Foreign 3,128,025 5,194,408 12,224,322 ------------ -------------- -------------- Total Sales $5,574,108 $6,433,683 $13,855,781 -----------------------------------------------------------------------------------------------------
A summary of foreign sales by geographic area follows:
September 30, October 2, October 3, 2000 1999 1998 North America (excluding the U.S.) 3.9% 1.0% 0.1% Central and South America 8.3% 1.0% 5.0% Europe 22.0% 14.2% 4.2% Mid-East and Africa 55.1% 82.6% 84.4% Far East 10.7% 1.2% 6.3%
(16) Legal Matters The Company was the defendant in GERARD v. TECHNICAL COMMUNICATIONS CORPORATION, ET AL., filed in the Superior Court of the Commonwealth of Massachusetts in 1999. This case arose from disputes concerning the hiring and termination of Roland Gerard, former president of the Company. The Complaint alleges state law claims for breach of contract, wrongful termination, and civil conspiracy. During the fiscal year 2000 the Company settled this lawsuit. An earlier complaint brought by Mr. Gerard in the Federal court, which included the state claims, and a federal securities claim was dismissed in July 1999; the securities claims were dismissed with prejudice. (17) Sale of Investment in Visual Network, Inc. Common Stock During 1999, the Company sold its investment in Visual Network, Inc. common stock. The Company recognized a gain on the sale of $1,151,172 on a cost basis of $250,800. The Company's investment in Visual Network's Common Stock followed the merger of Net2Net into Visual Networks, Inc. on May 15, 1998. This investment was carried as an available-for-sale investment in the October 3, 1998 balance sheet, at market value. At October 3, 1998, the market value of the investment was $900,800, giving rise to an unrealized gain of $650,000 ($422,000 net of tax effects) when compared to the $250,800 cost. Net2Net's President was Stephen McCalmont, son of Arnold McCalmont, a former director and former Chairman of Technical Communications Corporation, and brother of James McCalmont, another former Director of the Company. Both of these gentlemen, in addition to Herbert A. Lerner, a former director and former Treasurer of the Company, were also investors in Net2Net Corporation. F-14
___________________________________________________________________________________________________________ Selected Quarterly Financial Data (Unaudited) For the years ended September 30, 2000 and October 2, 1999: First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal 2000 January 1, 2000 April 1, 2000 July 1, 2000 September 30, 2000 - ---------------------------------------------------------------------------------------------------------- Net sales $ 2,253,403 $ 1,381,050 $ 744,010 $ 1,195,645 Gross profit 1,443,068 678,906 310,449 765,252 Net (loss) income 106,687 (418,109) (703,517) (725,375) Net (loss) income per share Basic $ .08 $ (.32) $ (.54) $ (.57) Diluted $ .08 $ (.32) $ (.54) $ (.57) First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal 1999 January 2, 1999 April 3, 1999 July 3, 1999 October 2, 1999 - --------------------------------------------------------------------------------------------------------- Net sales $ 1,071,356 $ 1,247,336 $ 1,361,671 $ 2,753,320 Gross profit 689,806 714,414 670,818 1,230,154 Net income (loss) (988,388) 147,100 (593,927) 216,673 Net income (loss) per share/(1)/ Basic $ (.79) $ .12 $ (.47) $ .17 Diluted $ (.79) $ .12 $ (.47) $ .17 - -------------------------------------------------------------------------------------------------------------------
(1) As a result of a miscalculation of weighted average shares during each of the first three quarters of 1999, net income (loss) per share was misstated in the 10Q filings. Quarterly earnings (loss) amounts were understated in amounts ranging from $.01 to $.04 and year to date amounts from $.04 to $.07. The corrected amounts are reflected in the table above. F-15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Technical Communications Corporation: We have audited the accompanying consolidated balance sheet of Technical Communications Corporation and subsidiaries as of September 30, 2000, and the related consolidated statements of operations, cash flows, and comprehensive income (loss) and stockholders' equity for the year 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 audit. The consolidated balance sheet of Technical Communications Corporation and subsidiaries, as of October 2, 1999, and the related consolidated statements of operations, cash flows, and comprehensive income (loss) and stockholders' equity as of and for the years ended October 2, 1999 and October 3, 1998, were audited by other auditors whose report dated November 5, 1999, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2000 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Technical Communications Corporation and subsidiaries, as of September 30, 2000, and the consolidated results of their operations and their consolidated cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. /s/ Grant Thornton LLP Boston, Massachusetts November 7, 2000 F-16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Technical Communications Corporation: We have audited the accompanying consolidated balance sheets of Technical Communications Corporation (a Massachusetts corporation) and subsidiaries as of October 2, 1999 and the related consolidated statements of operations, cash flows, and comprehensive income (loss) and stockholders' equity for the years ended October 2, 1999 and October 3, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Technical Communications Corporation and subsidiaries as of October 2, 1999 and the results of their operations and their cash flows for the years ended October 2, 1999 and October 3, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Boston, Massachusetts November 5, 1999 S-1 Technical Communications Corporation Schedule II
Valuation and Qualifying Accounts Balance at Additions Deductions Balance at Beginning Charged to from End of year Expense Reserves of year Allowance for doubtful accounts: Year Ended September 30, 2000 $ 70,000 -- -- $ 70,000 Year Ended October 2, 1999 70,000 -- -- 70,000 Year Ended October 3, 1998 25,000 $ 187,075 $ 142,075 70,000
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE TO THE CONSOLIDATED FINANCIAL STATEMENTS To the Shareholders and Board of Directors of Technical Communications Corporation: Board of Directors Technical Communications Corporation In connection with our audit of the consolidated financial statements of Technical Communications Corporation referred to in our report dated November 7, 2000, which is included in the annual report to security holders and incorporated by reference in Part II of this form, we have also audited Schedule II as it relates to the year ended September 30, 2000. In our opinion, this schedule presents fairly, in all material respects, the 2000 information required to be set forth therein. /s/ Grant Thornton LLP Boston, Massachusetts November 7, 2000 To the Shareholders and Board of Directors of Technical Communications Corporation: We have audited, in accordance with generally accepted auditing standards, the supplemental schedule of Valuation and Qualifying Accounts as of and for the years ended October 2, 1999 and October 3, 1998, listed as Schedule II above, and have issued our report thereon dated November 5, 1999. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements as of and for the years ended October 2, 1999 and October 3, 1998, taken as a whole. The supplemental schedule to the consolidated financial statements listed as Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This supplemental schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data as of and for the years ended October 2, 1999 and October 3, 1998, required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP Boston, Massachusetts November 5, 1999 EX-10.3 2 0002.txt LOAN AND SECURITY AGREEMENT DATED 7/31/2000 - -------------------------------------------------------------------------------- LOAN AND SECURITY AGREEMENT by and between Technical Communications Corporation and COAST BUSINESS CREDIT, a division of Southern Pacific Bank Dated as of July 31, 2000 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- 1. DEFINITIONS.......................................................................... 1 2. CREDIT FACILITIES.................................................................... 6 2.1 Loans......................................................................... 6 2.2 Letters of Credit............................................................. 7 3. INTEREST AND FEES.................................................................... 7 3.1 Interest...................................................................... 7 3.2 Fees.......................................................................... 7 4. SECURITY INTEREST.................................................................... 7 5. CONDITIONS PRECEDENT................................................................. 8 5.1 Status of Accounts at Closing................................................. 8 5.2 Minimum Availability.......................................................... 8 5.3 Landlord Waiver............................................................... 8 5.4 Intentionally Deleted......................................................... 8 5.5 Executed Agreement............................................................ 8 5.6 Opinion of Borrower's Counsel................................................. 8 5.7 Priority of Coast's Liens..................................................... 8 5.8 Insurance..................................................................... 8 5.9 Borrower's Existence.......................................................... 8 5.10 Organizational Documents...................................................... 8 5.11 Taxes......................................................................... 8 5.12 Due Diligence................................................................. 8 5.13 Other Documents and Agreements................................................ 9 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER............................ 9 6.1 Existence and Authority....................................................... 9 6.2 Name; Trade Names and Styles.................................................. 9 6.3 Place of Business; Location of Collateral..................................... 9 6.4 Title to Collateral; Permitted Liens.......................................... 9 6.5 Maintenance of Collateral..................................................... 10 6.6 Books and Records............................................................. 10 6.7 Financial Condition, Statements and Reports................................... 10 6.8 Tax Returns and Payments; Pension Contributions............................... 10 6.9 Compliance with Law........................................................... 10 6.10 Litigation.................................................................... 10 6.11 Use of Proceeds............................................................... 10 7. RECEIVABLES.......................................................................... 10 7.1 Representations Relating to Receivables....................................... 10 7.2 Representations Relating to Documents and Legal Compliance.................... 11 7.3 Schedules and Documents relating to Receivables............................... 11 7.4 Collection of Receivables..................................................... 11 7.5 Remittance of Proceeds........................................................ 11 7.6 Disputes...................................................................... 11 7.7 Returns....................................................................... 12 7.8 Verification.................................................................. 12 7.9 No Liability.................................................................. 12 8. ADDITIONAL DUTIES OF THE BORROWER.................................................... 12 8.1 Financial and Other Covenants................................................. 12 8.2 Insurance..................................................................... 12 8.3 Reports....................................................................... 12 8.4 Access to Collateral, Books and Records....................................... 12 8.5 Negative Covenants............................................................ 13 8.6 Litigation Cooperation........................................................ 14 8.7 Further Assurances............................................................ 14 9. TERM................................................................................. 14 9.1 Maturity Date................................................................. 14 9.2 Early Termination............................................................. 14 9.3 Payment of Obligations........................................................ 14 10. EVENTS OF DEFAULT AND REMEDIES....................................................... 15 10.1 Events of Default............................................................. 15 10.2 Remedies...................................................................... 16 10.3 Standards for Determining Commercial Reasonableness........................... 17 10.4 Power of Attorney............................................................. 18 10.5 Application of Proceeds....................................................... 19 10.6 Remedies Cumulative........................................................... 19 11. GENERAL PROVISIONS................................................................... 19 11.1 Interest Computation.......................................................... 19 11.2 Application of Payments....................................................... 20 11.3 Charges to Accounts........................................................... 20 11.4 Monthly Accountings........................................................... 20 11.5 Notices....................................................................... 20 11.6 Severability.................................................................. 20 11.7 Integration................................................................... 20 11.8 Waivers....................................................................... 20 11.9 No Liability for Ordinary Negligence.......................................... 21 11.10 Amendment..................................................................... 21 11.11 Time of Essence............................................................... 21 11.12 Attorneys' Fees, Costs and Charges............................................ 21 11.13 Benefit of Agreement.......................................................... 21 11.14 Publicity..................................................................... 21 11.15 Paragraph Headings; Construction.............................................. 22 11.16 Governing Law; Jurisdiction; Venue............................................ 22 11.17 Mutual Waiver of Jury Trial................................................... 22
-i- Exhibit 10.3 Coast Loan and Security Agreement Borrower: Technical Communications Corporation Address: 100 Domino Drive Concord, Massachusetts 01742 Date: July 31, 2000 THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST BUSINESS CREDIT, a division of Southern Pacific Bank ("Coast"), a California corporation, with offices at 12121 Wilshire Boulevard, Suite 1400, Los Angeles, California 90025, and the borrower named above (the "Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall for all purposes be deemed to be a part of this Agreement, and the same is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 1 below). 1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Account Debtor" means the obligor on a Receivable or General Intangible. -------------- "Affiliate" means, with respect to any Person, a relative, partner, --------- shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. "Audit" means to inspect, audit and copy Borrower's books and records and ----- the Collateral. "Borrower" has the meaning set forth in the introduction to this Agreement. -------- "Borrower's Address" has the meaning set forth in the introduction to this ------------------ Agreement. "Business Day" means a day on which Coast is open for business. ------------ "Change of Control" shall be deemed to have occurred at such time as (i) a ----------------- change in two or more of the current three executive officers of Borrower, being the Chief Executive Officer, the Chief Financial Officer and the Executive Vice- president in charge of operations, or (ii) a change in 50% or more of the current board members of Borrower or (iii) if Technical Communications Corporation ceases to own 100% of the issued shares of TCC Investment Corporation and TCC Foreign Sales Corporation. "Closing Date" means date of the initial funding under this Agreement. ------------ "Coast" has the meaning set forth in the introduction to this Agreement. ----- "Code" means the Uniform Commercial Code as adopted and in effect in the ---- State of California from time to time. "Collateral" has the meaning set forth in Section 4 hereof. ---------- "Credit Limit" means the maximum amount of Loans that Coast may make to ------------ Borrower pursuant to the amounts and percentages shown on the Schedule to this Agreement. "Default" means any event which with notice or passage of time or both, ------- would constitute an Event of Default. "Deposit Account" has the meaning set forth in Section 9105 of the Code or --------------- any successor section. Coast Business Credit Loan and Security Agreement =============================================================================== "Dollars or $" means United States dollars. ------- - "Early Termination Fee" means the amount set forth on the Schedule that --------------------- Borrower must pay Coast if this Agreement is terminated by Borrower or Coast pursuant to Section 9.2 hereof. "Eligible Foreign Receivables" means Receivables arising from Borrower's ---------------------------- customers located outside the United States which Coast otherwise approves for borrowing in its sole discretion, reasonably exercised. Without limiting the foregoing, Coast will consider the following in determining the eligibility of such receivables: (i) whether the Borrower's goods are shipped backed by an irrevocable letter of credit satisfactory to Coast (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Coast and is directly drawable by Coast, or (ii) whether the Borrower's customer is a large or rated company having a verifiable credit history, or (iii) whether Borrower's customer is a foreign subsidiary of a customer of Borrower that is a company that was formed and has its primary place of business within the United States, or (iv) whether Borrower's customer is a large foreign corporation, or (v) whether Borrower's customer is a foreign company with a Dun & Bradstreet rating, or (vi) whether Borrower's goods are shipped to a company that has credit insurance acceptable to Coast in its discretion. "Eligible Inventory" means Inventory which Coast, in its sole judgment, ------------------ reasonably exercised, deems eligible for borrowing, based on such considerations as Coast may from time to time deem appropriate. Without limiting the fact that the determination of which Inventory is eligible for borrowing is a matter of Coast's discretion, Inventory which does not meet the following requirements will not be deemed to be Eligible Inventory: Inventory which (i) consists of raw material or finished goods, in good, new and salable condition which is not perishable, not obsolete or unmerchantable, and is not comprised of work in process, packaging materials or supplies; (ii) meets all applicable governmental standards; (iii) has been manufactured in compliance with the Fair Labor Standards Act; (iv) conforms in all respects to the warranties and representations set forth in this Agreement; (v) is at all times subject to Coast's duly perfected, first priority security interest; and (vi) is situated at a one of the locations set forth on the Schedule. "Eligible Receivables" means Receivables and Eligible Foreign Receivables -------------------- arising in the ordinary course of Borrower's business from the sale of goods or rendition of services, which Coast, in its sole judgment, shall deem eligible for borrowing, based on such considerations as Coast may from time to time deem appropriate. Eligible Receivables shall not include the following: (a) Receivables that the Account Debtor has failed to pay within 90 days (120 days for otherwise eligible government receivables and Eligible Foreign Receivables) of invoice date or Accounts with selling terms of more than 30 days; (b) Receivables owed by an Account Debtor or its Affiliates where twenty five percent (25%) or more of all Receivables owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above; (c) Receivables with respect to which the Account Debtor is an employee, Affiliate, or agent of Borrower; (d) Receivables with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the Account Debtor may be conditional; (e) Receivables, other than Eligible Foreign Receivables, that are not payable in Dollars or with respect to which the Account Debtor: (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any State thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Receivable is supported by an irrevocable letter of credit satisfactory to Coast (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Coast and is directly drawable by Coast, or (z) the Receivable is covered by credit insurance in form and amount, and by an insurer, satisfactory to Coast; (f) Receivables with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality 2 Coast Business Credit Loan and Security Agreement =============================================================================== of the United States (exclusive, however, of Accounts with respect to which Borrower has complied, to the satisfaction of Coast, with the Assignment of Claims Act, 31 U.S.C. "3727), or (ii) any State of the United States (exclusive, however, of Receivables owed by any State that does not have a statutory counterpart to the Assignment of Claims Act); (g) Receivables with respect to which the Account Debtor is a creditor of Borrower, has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to the Receivables; (h) Receivables with respect to an Account Debtor whose total obligations owing to Borrower exceed twenty five percent (25%) of all Eligible Receivables, to the extent of the obligations owing by such Account Debtor in excess of such percentage, provided that for a maximum period of 90 days, the "25%" limitation is increased to "50%". The increase to 50% may be reinstituted by Coast on an account by account basis at Coast's discretion, and upon approval of Coast's senior loan committee, such approval to be within Coast's business judgment, reasonably exercised; (i) Receivables with respect to which the Account Debtor is subject to any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation proceeding, or becomes insolvent, or goes out of business; (j) Receivables the collection of which Coast, in its reasonable credit judgment, believes to be doubtful by reason of the Account Debtor's financial condition; (k) Receivables with respect to which the goods giving rise to such Receivable have not been shipped and billed to the Account Debtor, the services giving rise to such Receivable have not been performed and accepted by the Account Debtor, or the Receivable otherwise does not represent a final sale; (l) Receivables with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other state that requires a creditor to file a Business Activity Report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless Borrower has, to the extent required, qualified to do business in New Jersey, Minnesota, Indiana, West Virginia, or such other states, or has filed a Notice of Business Activities Report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or is exempt from such filing requirement; and (m) Receivables that represent progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services, unless Coast has received either a no offset letter acceptable to Coast in its discretion or Borrower provides documentation satisfactory to Coast in its discretion assuring that the billing is a final billing. "Equipment" means all of Borrower's present and hereafter acquired --------- machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and other goods (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located. "Event of Default" means any of the events set forth in Section 10.1 of ---------------- this Agreement. "GAAP" means generally accepted accounting principles as in effect from ---- time to time in the United States, consistently applied. "General Intangibles" means all general intangibles of Borrower, whether ------------------- now owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, Deposit Accounts, investment property, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter 3 Coast Business Credit Loan and Security Agreement =============================================================================== arising therefrom, all claims of Borrower against Coast, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). "Inventory" means all of Borrower's now owned and hereafter acquired goods, --------- merchandise or other personal property, wherever located, to be furnished under any contract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit, and including without limitation all farm products), and all materials and supplies of every kind, nature and description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, documents of title and other documents representing any of the foregoing. "Inventory Loans" means the Loans described in Section 2(b) of the --------------- Schedule. "Investment Property" has the meaning set forth in Section 9115 of the Code ------------------- as in effect as of the date hereof or any successor section thereto. "Letter of Credit" has the meaning set forth in Section 2.2 hereof. ---------------- "Letter of Credit Sublimit" has the meaning set forth in Section 2.2 ------------------------- hereof. "Loan Documents" means this Agreement, the agreements and documents listed -------------- on Section 5 of the Schedule, and any other agreement, instrument or document executed in connection herewith or therewith. "Loans" has the meaning set forth in Section 2.1 hereof. ----- "Material Adverse Effect" means a material adverse effect on (i) the ----------------------- business, assets, condition (financial or otherwise) or results of operations of Borrower or any subsidiary of Borrower or any guarantor of any of the Obligations, (ii) the ability of Borrower or any guarantor of any of the Obligations to perform its obligations under this Agreement (including, without limitation, repayment of the Obligations as they come due) or (iii) the validity or enforceability of this Agreement or any other agreement or document entered into by any party in connection herewith, or the rights or remedies of Coast hereunder or thereunder. "Maturity Date" means the date that this Agreement shall cease to be ------------- effective, as set forth on the Schedule, subject to the provisions of Section 9.1 and 9.2 hereof. "Maximum Dollar Amount" has the meaning set forth in Section 2 of the --------------------- Schedule. "Minimum Monthly Interest" has the meaning set forth in Section 3 of the ------------------------ Schedule. "Obligations" means all present and future Loans, advances, debts, ----------- liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Coast, whether evidenced by this Agreement or any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Coast in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorneys' fees (including attorneys' fees and expenses incurred in bankruptcy), expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agreement between Borrower and Coast. "Permitted Liens" means the following: --------------- (a) purchase money security interests in specific items of Equipment; 4 Coast Business Credit Loan and Security Agreement =============================================================================== (b) leases of specific items of Equipment; (c) liens for taxes not yet payable; (d) additional security interests and liens consented to in writing by Coast, which consent shall not be unreasonably withheld; (e) security interests being terminated substantially concurrently with this Agreement; (f) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent; (g) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (a) or (b) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; or (h) liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods. Coast will have the right to require, as a condition to its consent under subparagraph (d) above, that the holder of the additional security interest or lien sign an intercreditor agreement on Coast's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of Coast, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement. "Person" means any individual, sole proprietorship, general partnership, ------ limited partnership, limited liability partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. "Prime Rate" means the actual "Reference Rate" or the substitute therefor ---------- of the Bank of America NT & SA whether or not that rate is the lowest interest rate charged by said bank. If the Prime Rate, as defined, is unavailable, "Prime Rate" shall mean the highest of the prime rates published in the Wall Street Journal on the first business day of the applicable month, as the base rate on corporate loans at large U.S. money center commercial banks. "Receivable Loans" means the Loans described in Section 2(a) of the ---------------- Schedule. "Receivables" means all of Borrower's now owned and hereafter acquired ----------- accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, documents, securities accounts, security entitlements, commodity contracts, commodity accounts, investment property and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party. "Renewal Date" shall mean the Maturity Date if this Agreement is renewed ------------ pursuant to Section 9.1 hereof, and each anniversary thereafter that this Agreement is renewed pursuant to Section 9.1 hereof. "Renewal Fee" means the fee that Borrower must pay Coast upon renewal of ----------- this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the Schedule. "Solvent" means, with respect to any Person on a particular date, that on ------- such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does 5 Coast Business Credit Loan and Security Agreement =============================================================================== not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Tangible Net Worth" means consolidated Shareholder's equity plus ------------------ subordinated debt otherwise permitted hereunder, less, goodwill, patents, ---- trademarks, copyrights, franchises, formulas, leasehold interests, leasehold improvements, non-compete agreements, engineering plans, deferred tax benefits, organization costs, prepaid items and any other assets of Borrower that would be treated as intangible assets on Borrower's balance sheet prepared in accordance with GAAP. "Term Loan" means the Loans described in Section 2(c) of the Schedule. --------- "Other Terms" All accounting terms used in this Agreement, unless ----------- otherwise indicated, shall have the meanings given to such terms in accordance with GAAP. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 2. CREDIT FACILITIES. 2.1 Loans. Coast will make loans to Borrower (the "Loans"), in amounts and in percentages to be determined by Coast in its good faith discretion, up to the Credit Limit, provided no Default or Event of Default has occurred and is continuing. In addition, Coast may create reserves against or reduce its advance rates based upon Eligible Receivables or Eligible Inventory without declaring a Default or an Event of Default if it determines that there has occurred a Material Adverse Effect. 2.2 Letters of Credit. At the request of Borrower, Coast may, in its sole discretion, arrange for the issuance of letters of credit for the account of Borrower (collectively, "Letters of Credit"), by issuing guarantees to the issuer of the letter of credit or by other means. All Letters of Credit shall be in form and substance satisfactory to Coast in its sole discretion. The aggregate face amount of all outstanding Letters of Credit from time to time shall not exceed the amount shown on the Schedule (the "Letter of Credit Sublimit"), and shall be reserved against Loans which would otherwise be available hereunder. Borrower shall pay all bank charges for the issuance of Letters of Credit. Any payment by Coast under or in connection with a Letter of Credit shall constitute a Loan hereunder on the date such payment is made. Each Letter of Credit shall have an expiry date no later than thirty (30) days prior to the Maturity Date. Borrower hereby agrees to indemnify, save, and hold Coast harmless from any loss, cost, expense, or liability, including payments made by Coast, expenses, and reasonable attorneys' fees incurred by Coast arising out of or in connection with any Letters of Credit. Borrower agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guarantied by Coast and opened for Borrower's account or by Coast's interpretations of any Letter of Credit issued by Coast for Borrower's account, and Borrower understands and agrees that Coast shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto. Borrower understands that Letters of Credit may require Coast to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify and hold Coast harmless with respect to any loss, cost, expense, or liability incurred by Coast under any Letter of Credit as a result of Coast's indemnification of any such issuing bank. The provisions of this Agreement, as it pertains to Letters of Credit, and any other present or future documents or agreements between Borrower and Coast relating to Letters of Credit are cumulative. 3. INTEREST AND FEES. 3.1 Interest. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the last day of the month. Interest may, in Coast's discretion, be charged to 6 Coast Business Credit Loan and Security Agreement =============================================================================== Borrower's loan account, and the same shall thereafter bear interest at the same rate as the other Loans. Regardless of the amount of Obligations that may be outstanding from time to time, Borrower shall pay Coast Minimum Monthly Interest during the term of this Agreement with respect to the Receivable Loans and the Inventory Loans in the amount set forth on the Schedule. 3.2 Fees. Borrower shall pay Coast the fee(s) shown on the Schedule, which are in addition to all interest and other sums payable to Coast. All fees shall be deemed fully earned on the Closing Date and are nonrefundable. 4. SECURITY INTEREST. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to Coast a security interest in all of Borrower's interest in the following, whether now owned or hereafter acquired, and wherever located: All Receivables, Inventory, Equipment, Investment Property, and General Intangibles, including, without limitation, all of Borrower's Deposit Accounts, and all money, and all property now or at any time in the future in Coast's possession (including claims and credit balances), and all proceeds of any of the foregoing (including proceeds of any insurance policies, proceeds of proceeds, and claims against third parties), all products of any of the foregoing, and all books and records related to any of the foregoing (all of the foregoing, together with all other property in which Coast may now or in the future be granted a lien or security interest, is referred to herein, collectively, as the "Collateral"). 5. CONDITIONS PRECEDENT. The obligation of Coast to make the Loans is subject to the satisfaction, in the sole discretion of Coast, at or prior to the first advance of funds hereunder, of each, every and all of the following conditions: 5.1 Status of Accounts at Closing. No accounts payable shall be due and unpaid ninety (90) days past its due date except for such accounts payable being contested in good faith in appropriate proceedings and for which adequate reserves have been provided. 5.2 Minimum Availability. Borrower shall have minimum availability immediately following the initial funding in the amount set forth on the Schedule. 5.3 Landlord Waiver. Coast shall have received duly executed landlord waivers and access agreements in form and substance satisfactory to Coast, in Coast's sole and absolute discretion, and, when deemed appropriate by Coast, in form for recording in the appropriate recording office, with respect to all leased locations where Borrower maintains any inventory or equipment, provided that if Coast makes the initial advance without receipt of a landlord waiver, it will reserve an amount equal to three months rent until such waiver is received in recordable form. 5.4 Intentionally Deleted. 5.5 Executed Agreement. Coast shall have received this Agreement duly executed and in form and substance satisfactory to Coast in its sole and absolute discretion. 5.6 Opinion of Borrower's Counsel. Coast shall have received an opinion of Borrower's counsel, in form and substance satisfactory to Coast in its sole and absolute discretion. 5.7 Priority of Coast's Liens. Coast shall have received the results of "of record" searches satisfactory to Coast in its sole and absolute discretion, reflecting its Uniform Commercial Code filings against Borrower indicating that Coast has a perfected, first priority lien in and upon all of the Collateral, subject only to Permitted Liens. 5.8 Insurance. Coast shall have received copies of the insurance binders or certificates evidencing Borrower's compliance with Section 8.2 hereof, including lender's loss payee endorsements. 5.9 Borrower's Existence. Coast shall have received copies of Borrower's articles or certificate of incorporation and all amendments thereto, and a Certificate of Good Standing, each certified by the Secretary of State of the state of Borrower's organization, and dated a recent date prior to the Closing Date, and Coast shall have received Certificates of Foreign Qualification for Borrower from the Secretary of State of each state 7 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- wherein the failure to be so qualified could have a Material Adverse Effect. 5.10 Organizational Documents. Coast shall have received copies of Borrower's By-laws and all amendments thereto, and Coast shall have received copies of the resolutions of the board of directors of Borrower, authorizing the execution and delivery of this Agreement and the other documents contemplated hereby, and authorizing the transactions contemplated hereunder and thereunder, and authorizing specific officers of Borrower to execute the same on behalf of Borrower, in each case certified by the Secretary or other acceptable officer of Borrower as of the Closing Date. 5.11 Taxes. Coast shall have received evidence from Borrower that Borrower has complied with all tax withholding and Internal Revenue Service regulations, in form and substance satisfactory to Coast in its sole and absolute discretion. 5.12 Due Diligence. Coast shall have completed its due diligence with respect to Borrower. 5.13 Other Documents and Agreements. Coast shall have received such other agreements, instruments and documents as Coast may require in connection with the transactions contemplated hereby, all in form and substance satisfactory to Coast in Coast's sole and absolute discretion, and in form for filing in the appropriate filing office, including, but not limited to, those documents listed in Section 5 of the Schedule. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. In order to induce Coast to enter into this Agreement and to make Loans, Borrower represents and warrants to Coast as follows, and Borrower covenants that the following representations will continue to be true, and that Borrower will at all times comply with all of the following covenants: 6.1 Existence and Authority. Borrower is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a Material Adverse Effect. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (a) have been duly and validly authorized, (b) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), and (c) do not violate Borrower's articles or certificate of incorporation or Borrower's by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (d) do not constitute grounds for acceleration of any material indebtedness or obligation under any material agreement or instrument which is binding upon Borrower or its property. 6.2 Name; Trade Names and Styles. The name of Borrower set forth in the heading to this Agreement is its exact legal name. Listed on the Schedule are all prior names of Borrower and all of Borrower's present and prior trade names. Borrower shall give Coast thirty (30) days' prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name. 6.3 Place of Business; Location of Collateral. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Borrower will give Coast at least thirty (30) days' prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower's Address or one of the locations set forth on the Schedule. 6.4 Title to Collateral; Permitted Liens. Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased by Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Coast now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Coast and the Collateral against all claims of others. None of the Collateral now is or will be affixed to any real property in such a 8 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- manner, or with such intent, as to become a fixture. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever requested by Coast, use its best efforts to cause such third party to execute and deliver to Coast, in form acceptable to Coast, such waivers and subordinations as Coast shall specify, so as to ensure that Coast's rights in the Collateral are, and will continue to be, superior to the rights of any such third party. Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. 6.5 Maintenance of Collateral. Borrower will maintain the Collateral in good working condition, and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise Coast in writing of any material loss or damage to the Collateral. 6.6 Books and Records. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with GAAP. 6.7 Financial Condition, Statements and Reports. All financial statements now or in the future delivered to Coast have been, and will be, prepared in conformity with GAAP (except, in the case of unaudited financial statements, for the absence of footnotes and subject to normal year-end adjustments) and now and in the future will fairly reflect the financial condition of Borrower, at the times and for the periods therein stated. Between the last date covered by any such statement provided to Coast and the date hereof, there has been no Material Adverse Effect. Borrower is now and will continue to be Solvent. 6.8 Tax Returns and Payments; Pension Contributions. Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state and local law, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Coast in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. As of the date hereof, Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic deposit of all payroll taxes payable by Borrower. 6.9 Compliance with Law. To the best of Borrower's knowledge, Borrower has complied, and will comply, in all material respects, with all provisions of all material foreign, federal, state and local laws and regulations relating to Borrower, including, but not limited to, the Fair Labor Standards Act, and those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and environmental matters. 6.10 Litigation. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which may result, either separately or in the aggregate, in a Material Adverse Effect. Borrower will promptly inform Coast in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving an amount set forth on the Schedule. 9 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- 6.11 Use of Proceeds. All proceeds of all Loans shall be used solely for lawful business purposes. Borrower is not purchasing or carrying any "margin stock" (as defined in Regulation G of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any "margin stock" or to extend credit to others for the purpose of purchasing or carrying any "margin stock." 7. RECEIVABLES. 7.1 Representations Relating to Receivables. Borrower represents and warrants to Coast as follows: Each Receivable with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, represent an undisputed bona fide existing unconditional obligation of the Account Debtor created by the sale, delivery and acceptance of goods or the rendition of services in the ordinary course of Borrower's business. 7.2 Representations Relating to Documents and Legal Compliance. Borrower represents and warrants to Coast as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower's books and records are and shall be genuine and in all respects what they purport to be. All sales and other transactions underlying or giving rise to each Receivable shall fully comply with all applicable laws and governmental rules and regulations. All signatures and indorsements on all documents, instruments, and agreements relating to all Receivables are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms. 7.3 Schedules and Documents relating to Receivables. Borrower shall deliver to Coast via facsimile, unless otherwise directed by Coast, at such locations and at such intervals as Coast may request, transaction reports and loan requests, schedules of Receivables, and schedules of collections, all on Coast's standard forms; provided, however, that Borrower's failure to execute and deliver the same shall not affect or limit Coast's security interest and other rights in all of Borrower's Receivables, nor shall Coast's failure to advance or lend against a specific Receivable affect or limit Coast's security interest and other rights therein. Loan requests received after 10:30 A.M. Los Angeles, California time, will not be considered by Coast until the next Business Day. Together with each such schedule, or later if requested by Coast, Borrower shall furnish Coast with copies (or, at Coast's request, originals) of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to Coast an aged accounts receivable trial balance in such form and at such intervals as Coast shall request. In addition, Borrower shall deliver to Coast the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables, upon receipt thereof and in the same form as received, with all necessary indorsements, all of which shall be with recourse. Borrower shall also provide Coast with copies of all credit memos as and when requested by Coast. 7.4 Collection of Receivables. Borrower shall have the right to collect all Receivables, unless and until an Event of Default has occurred. Borrower shall hold all payments on, and proceeds of, Receivables in trust for Coast, and Borrower shall deliver all such payments and proceeds to Coast within one (1) Business Day after receipt by Borrower, in their original form, duly endorsed to Coast, to be applied to the Obligations in such order as Coast shall determine. Coast may, in its discretion, require that all proceeds of Collateral be deposited by Borrower into a lockbox account, or such other "blocked account" as Coast may specify, pursuant to a blocked account agreement in such form as Coast may specify. Coast or its designee may, at any time, notify Account Debtors that Coast has been granted a security interest in the Receivables. 7.5 Remittance of Proceeds. All proceeds arising from the disposition of any Collateral shall be delivered to Coast within one (1) Business Day after receipt by Borrower, in their original form, duly endorsed to Coast, to be applied to the Obligations in such order as Coast shall determine. Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower's other funds or property, but will hold 10 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- such proceeds separate and apart from such other funds and property and in an express trust for Coast. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. 7.6 Disputes. Borrower shall notify Coast promptly of all disputes or claims relating to Receivables. Borrower shall not forgive (completely or partially), compromise or settle any Receivable for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (a) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm's length transactions, which are reported to Coast on the regular reports provided to Coast; (b) no Default or Event of Default has occurred and is continuing; and (c) taking into account all such discounts settlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit. Coast may, at any time after the occurrence of an Event of Default, settle or adjust disputes or claims directly with Account Debtors for amounts and upon terms which Coast considers advisable in its reasonable credit judgment and, in all cases, Coast shall credit Borrower's Loan account with only the net amounts received by Coast in payment of any Receivables. 7.7 Returns. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower in the ordinary course of its business, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount. In the event any attempted return occurs after the occurrence of any Event of Default, Borrower shall (a) hold the returned Inventory in trust for Coast, (b) segregate all returned Inventory from all of Borrower's other property, (c) conspicuously label the returned Inventory as subject to Coast's security interest, and (d) immediately notify Coast of the return of any Inventory, specifying the reason for such return, the location and condition of the returned Inventory, and on Coast's request deliver such returned Inventory to Coast. 7.8 Verification. Coast may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of Borrower or Coast or such other name as Coast may choose. 7.9 No Liability. Coast shall not under any circumstances be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall Coast be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to a Receivable. Nothing herein shall, however, relieve Coast from liability for its own gross negligence or willful misconduct. 8. ADDITIONAL DUTIES OF THE BORROWER. 8.1 Financial and Other Covenants. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule. 8.2 Insurance. Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Coast, in such form and amounts as Coast may reasonably require, and Borrower shall provide evidence of such insurance to Coast, so that Coast is satisfied that such insurance is, at all times, in full force and effect. All liability insurance policies of Borrower shall name Coast as an additional insured, and all property casualty and related insurance policies of Borrower shall name Coast as a loss payee thereon and Borrower shall cause a lender's loss payee endorsement in form reasonably acceptable to Coast. Upon receipt of the proceeds of any such insurance, Coast shall apply such proceeds in reduction of the Obligations as Coast shall determine in its sole discretion, except that, provided no Default or Event of Default has occurred and is continuing, Coast shall release to Borrower insurance proceeds with respect to Equipment totaling less than the amount set forth in Section 8 of the Schedule, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the insurance proceeds were paid. Coast may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, Coast may, but is not obligated to, obtain the same at 11 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- Borrower's expense. Borrower shall promptly deliver to Coast copies of all reports made to insurance companies. 8.3 Reports. Borrower, at its expense, shall provide Coast with the written reports set forth in Section 8 of the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as Coast shall from time to time reasonably specify. 8.4 Access to Collateral, Books and Records. At reasonable times but not less frequently than quarterly and on one (1) Business Day's notice, Coast, or its agents, shall have the right to perform Audits. Coast shall take reasonable steps to keep confidential all confidential information obtained in any Audit, but Coast shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The Audits shall be at Borrower's expense and the charge for the Audits shall be Seven Hundred Fifty Dollars ($750) per person per day (or such higher amount as shall represent Coast's then current standard charge for the same), plus reasonable out-of-pocket expenses. Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower's books or records at any location other than Borrower's Address, without first notifying Coast of the same and obtaining the written agreement from such accounting firm, service bureau or other third party to give Coast the same rights with respect to access to books and records and related rights as Coast has under this Loan Agreement. Borrower shall also take all necessary steps to assure that this material accounting and software, systems and applications, and those of its accounting firm, service bureau or any other third party vendor or supplier, will on a timely basis, adequately and completely address the Year 2000 Problem in all material aspects. 8.5 Negative Covenants. Borrower shall not, without Coast's prior written consent, do any of the following: (a) merge or consolidate with another entity, except in a transaction in which (i) the owners of the Borrower hold at least fifty percent (50%) of the ownership interest in the surviving entity immediately after such merger or consolidation, and (ii) the Borrower is the surviving entity; (b) acquire any assets, except (i) in the ordinary course of business, or (ii) in a transaction or a series of transactions not involving the payment of an aggregate amount in excess of the amount set forth in Section 8 of the Schedule; (c) enter into any other transaction outside the ordinary course of business; (d) sell or transfer any Collateral, except for the sale of finished Inventory in the ordinary course of Borrower's business, and except for the sale of obsolete or unneeded Equipment in the ordinary course of business; (e) store any Inventory or other Collateral with any warehouseman or other third party; (f) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; (g) make any loans of any money or other assets, except (i) advances to customers or suppliers in the ordinary course of business, (ii) travel advances, employee relocation loans and other employee loans and advances in the ordinary course of business, and (iii) loans to employees, officers and directors for the purpose of purchasing equity securities of the Borrower; (h) incur any debts, outside the ordinary course of business, which would have a Material Adverse Effect; (i) guarantee or otherwise become liable with respect to the obligations of another party or entity; (j) pay or declare any dividends or distributions on the ownership interests in Borrower (except for dividends or distributions payable solely in stock form of ownership interests in Borrower); (k) make any change in Borrower's capital structure which would have a Material Adverse Effect; or 12 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- (l) dissolve or elect to dissolve. Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default is continuing or would occur as a result of such transaction. 8.6 Litigation Cooperation. Should any third-party suit or proceeding be instituted by or against Coast with respect to any Collateral or relating to Borrower, Borrower shall, without expense to Coast, make available Borrower and its officers, employees and agents and Borrower's books and records, to the extent that Coast may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 8.7 Further Assurances. Borrower agrees, at its expense, on request by Coast, to execute all documents and take all actions, as Coast, may deem reasonably necessary or useful in order to perfect and maintain Coast's perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement. Without limiting the foregoing, such documents and actions may include, without limitation, Borrower's cooperation with Coast (i) in obtaining a control agreement in form and substance satisfactory to Coast in its discretion with respect to Collateral consisting of Deposit Accounts, Investment Property, letter of credit rights and electronic chattel paper and (ii) in notifying a third party in possession of Collateral of Coast's security interest and obtaining an acknowledgement from the third party that it is holding the Collateral for the benefit of Coast. 9. TERM. 9.1 Maturity Date. This Agreement shall continue in effect until the Maturity Date; provided that the Maturity Date shall automatically be extended, and this Agreement shall automatically and continuously renew, for successive additional terms of one year each, unless one party gives written notice to the other, not less than one hundred twenty (120) days prior to the Maturity Date or the next Renewal Date, that such party elects to terminate this Agreement effective on the Maturity Date or such next Renewal Date. If this Agreement is renewed under this Section 9.1, Borrower shall pay to Coast a Renewal Fee in the amount shown in Section 3 of the Schedule. The Renewal Fee shall be due and payable on the Renewal Date and thereafter shall bear interest at a rate equal to the rate applicable to the Receivable Loans. 9.2 Early Termination. This Agreement may be terminated prior to the Maturity Date as follows: (a) by Borrower, effective three (3) Business Days after written notice of termination is given to Coast; or (b) by Coast at any time after the occurrence of an Event of Default, without notice, effective immediately. If this Agreement is terminated by Borrower or by Coast under this Section 9.2, Borrower shall pay to Coast an Early Termination Fee in the amount shown in Section 3 of the Schedule. The Early Termination Fee shall be due and payable on the effective date of termination and thereafter shall bear interest at a rate equal to the rate applicable to the Receivable Loans. 9.3 Payment of Obligations. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Without limiting the generality of the foregoing, if on the Maturity Date, the Renewal Date, or on any earlier effective date of termination, there are any outstanding Letters of Credit issued by Coast or issued by another institution based upon an application, guarantee, indemnity or similar agreement on the part of Coast, then on such date Borrower shall provide to Coast cash collateral in an amount equal to the face amount of all such Letters of Credit plus all interest, fees and costs due or to become due in connection therewith, to secure all of the Obligations relating to said Letters of Credit, pursuant to Coast's then standard form cash pledge agreement. Notwithstanding any termination of this Agreement, all of Coast's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that, without limiting the fact that Loans are subject to the discretion of Coast, Coast may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Coast, nor shall any such termination relieve Borrower of any Obligation to Coast, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, Coast shall promptly 13 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- deliver to Borrower termination statements, requests for reconveyances and such other documents as may be required to fully terminate Coast's security interests. 10. EVENTS OF DEFAULT AND REMEDIES 10.1 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and Borrower shall give Coast immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Coast by Borrower or any of Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading and results in a Material Adverse Effect; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit; or (d) Borrower shall fail to deliver the proceeds of Collateral to Coast as provided in Section 7.5 above, or shall fail to give Coast access to its books and records or Collateral as provided in Section 8.4 above, or shall breach any negative covenant set forth in Section 8.5 above; or (e) Borrower shall fail to comply with the financial covenants (if any) set forth in the Schedule or shall fail to perform any other non- monetary Obligation which by its nature cannot be cured; or (f) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within seven (7) Business Days after the date due; or (g) Any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within ten (10) days after the occurrence of the same; unless the same is either fully protected by insurance assigned to Coast without a reservation of rights or is fully bonded including any interest and penalties; or (h) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (i) Borrower breaches any material contract or obligation, which has or may reasonably be expected to have a Material Adverse Effect; or (j) Dissolution, termination of existence, insolvency or business failure of Borrower or any guarantor of any of the Obligations; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (k) the commencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is (i) not timely controverted, or (ii) not cured by the dismissal thereof within forty five (45) days after the date commenced; or (l) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (m) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or 14 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- (n) Borrower or any guarantor of any of the Obligations makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations, other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (o) Except as permitted under Section 8.5(a), Borrower shall suffer or experience any Change of Control without Coast's prior written consent, which consent shall be in the discretion of Coast in the exercise of its reasonable business judgment; or (p) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (q) there shall be any Material Adverse Effect. Coast may cease making any Loans or extending any credit hereunder during any of the above cure periods. 10.2 Remedies. Upon the occurrence, and during the continuance, of any Event of Default, Coast, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Coast without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as Coast deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Coast seek to take possession of any of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Coast retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Coast at places designated by Coast which are reasonably convenient to Coast and Borrower, and to remove the Collateral to such locations as Coast may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Coast shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge. Coast is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Coast's benefit; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time Coast obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to 15 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Coast shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as Coast deems reasonable, or on Coast's premises, or elsewhere and the Collateral need not be located at the place of disposition. Coast may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes Coast to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Coast's sole discretion, to grant extensions of time to pay, compromise claims and settle Receivables and the like for less than face value; and (h) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All attorneys' fees, expenses, costs, liabilities and obligations incurred by Coast (including attorneys' fees and expenses incurred in connection with bankruptcy) with respect to the foregoing shall be due from the Borrower to Coast on demand. Coast may charge the same to Borrower's loan account, and the same shall thereafter bear interest at the same rate as is applicable to the Receivable Loans. Without limiting any of Coast's rights and remedies, from and after the occurrence of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional three percent per annum. 10.3 Standards for Determining Commercial Reasonableness. Borrower and Coast agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (a) Notice of the sale is given to Borrower at least five (5) days prior to the sale, and, in the case of a public sale, notice of the sale is published at least five (5) days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (b) Notice of the sale describes the collateral in general, non- specific terms; (c) The sale is conducted at a place designated by Coast, with or without the Collateral being present; (d) The sale commences at any time between 8:00 a.m. and 6:00 p.m. Los Angeles, California time; (e) Payment of the purchase price in cash or by cashier's check or wire transfer is required; and (f) With respect to any sale of any of the Collateral, Coast may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. Coast shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. 10.4 Power of Attorney. Borrower grants to Coast an irrevocable power of attorney coupled with an interest, authorizing and permitting Coast (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but Coast agrees to exercise the following powers in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that Coast may, in its sole discretion, deem advisable in order to perfect and maintain Coast's security interest in the Collateral, or in order to exercise a right of Borrower or Coast, or in order to fully consummate all the transactions 16 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- contemplated under this Agreement, and all other present and future agreements; (b) Execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Coast's Collateral or in which Coast has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Coast's possession; (e) Endorse all checks and other forms of remittances received by Coast; (f) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) Grant extensions of time to pay, compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give Coast the same rights of access and other rights with respect thereto as Coast has under this Agreement; and (k) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other present or future agreements. Any and all sums paid and any and all costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast (including attorneys' fees and expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be added to and become part of the Obligations, and shall be payable on demand. Coast may charge the foregoing to Borrower's loan account and the foregoing shall thereafter bear interest at the same rate applicable to the Receivable Loans. In no event shall Coast's rights under the foregoing power of attorney or any of Coast's other rights under this Agreement be deemed to indicate that Coast is in control of the business, management or properties of Borrower. Borrower shall pay, indemnify, defend, and hold Coast and each of its officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein, and with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). Borrower shall have no obligation to any Indemnified Person hereunder with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. 17 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- 10.5 Application of Proceeds. All proceeds realized as the result of any sale of the Collateral shall be applied by Coast first to the costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Coast shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Coast for any deficiency. If, Coast, in its sole discretion, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Coast shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Coast of the cash therefor. 10.6 Remedies Cumulative. In addition to the rights and remedies set forth in this Agreement, Coast shall have all the other rights and remedies accorded a secured party in equity, under the Code, and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Coast and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Coast of one or more of its rights or remedies shall not be deemed an election, nor bar Coast from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Coast to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been indefeasibly paid and performed. 11. GENERAL PROVISIONS. 11.1 Interest Computation. In computing interest on the Obligations, all checks, wire transfers and other items of payment received by Coast (including proceeds of Receivables and payment of the Obligations in full) shall be deemed applied by Coast on account of the Obligations three (3) Business Days after receipt by Coast of immediately available funds, and, for purposes of the foregoing, any such funds received after 10:30 AM Los Angeles, California time, on any day shall be deemed received on the next Business Day. Coast shall be entitled to charge Borrower's account for such three (3) Business Days of "clearance" or "float" at the rate(s) set forth in Section 3 of the Schedule on all checks, wire transfers and other items received by Coast, regardless of whether such three (3) Business Days of "clearance" or "float" actually occur, and shall be deemed to be the equivalent of charging three (3) Business Days of interest on such collections. This across-the-board three (3) Business Day clearance or float charge on all collections is acknowledged by the parties to constitute an integral aspect of the pricing of Coast's financing of Borrower. Coast shall not, however, be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to Coast in its sole discretion, and Coast may charge Borrower's loan account for the amount of any item of payment which is returned to Coast unpaid. 11.2 Application of Payments. Subject to Section 7.5 hereof, all payments with respect to the Obligations may be applied, and in Coast's sole discretion reversed and re-applied, to the Obligations, in such order and manner as Coast shall determine in its sole discretion. 11.3 Charges to Accounts. Coast may, in its discretion, require that Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's Loan account, in which event they will bear interest from the date due to the date paid at the same rate applicable to the Loans. 11.4 Monthly Accountings. Coast shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by Coast), unless Borrower notifies Coast in writing to the contrary within thirty (30) days after each account is rendered, describing the nature of any alleged errors or omissions. 11.5 Notices. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, facsimile or certified mail return receipt requested, addressed to Coast or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. Notices to Coast shall be directed to the Commercial Finance Division, to the attention of 18 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- the Division Manager or the Division Credit Manager. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, faxed (at time of confirmation of transmission), or at the expiration of one (1) Business Day following delivery to the private delivery service, or two (2) Business Days following the deposit thereof in the United States mail, with postage prepaid. 11.6 Severability. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 11.7 Integration. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and Coast and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith. 11.8 Waivers. The failure of Coast at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between Borrower and Coast shall not waive or diminish any right of Coast later to demand and receive strict compliance therewith. Any waiver of any Default shall not waive or affect any other Default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to Coast shall be deemed to have been waived by any act or knowledge of Coast or its agents or employees, but only by a specific written waiver signed by an authorized officer of Coast and delivered to Borrower. Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Coast on which Borrower is or may in any way be liable, and notice of any action taken by Coast, unless expressly required by this Agreement. 11.9 No Liability for Ordinary Negligence. Neither Coast, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Coast shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of Coast, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Coast, but nothing herein shall relieve Coast from liability for its own gross negligence or willful misconduct. 11.10 Amendment. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of Coast. 11.11 Time of Essence. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement. 11.12 Attorneys' Fees, Costs and Charges. Borrower shall reimburse Coast for all reasonable attorneys' fees (including attorneys' fees and expenses incurred pursuant to bankruptcy) and all filing, recording, search, title insurance, appraisal, audit, and other costs incurred by Coast, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any attorneys' fees and costs (including attorneys' fees and expenses incurred pursuant to bankruptcy) Coast incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Coast's security interest in, the Collateral; and otherwise represent Coast in any litigation relating to Borrower. If either Coast or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its costs and attorneys' fees (including 19 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- attorneys' fees and expenses incurred pursuant to bankruptcy), including (but not limited to) attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. Borrower shall also pay Coast's standard charges for returned checks and for wire transfers, in effect from time to time. All attorneys' fees, costs and charges (including attorneys' fees and expenses incurred pursuant to bankruptcy) and other fees, costs and charges to which Coast may be entitled pursuant to this Agreement may be charged by Coast to Borrower's loan account and shall thereafter bear interest at the same rate as the Receivable Loans. 11.13 Benefit of Agreement. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Coast; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Coast, and any prohibited assignment shall be void. No consent by Coast to any assignment shall release Borrower from its liability for the Obligations. Coast may assign its rights and delegate its duties hereunder without the consent of Borrower. Coast reserves the right to syndicate all or a portion of the transaction created herein or sell, assign, transfer, negotiate, or grant participations in all or any part of, or any interest in Coast's rights and benefits hereunder. In connection with any such syndication, assignment or participation, Coast may disclose all documents and information which Coast now or hereafter may disclose all documents and information which Coast now or hereafter may have relating to Borrower or Borrower's business, provided that the recipient of the information agrees, in writing, to keep such information confidential. To the extent that Coast assigns its rights and obligations hereunder to a third Person, Coast thereafter shall be released from such assigned obligations to Borrower to the extent that such obligations are to be performed after such assignment. 11.14 Publicity. Subject to Borrower's written consent not to be unreasonably withheld, Coast is hereby authorized, at its expense, to issue appropriate press releases and to cause a tombstone to be published announcing the consummation of this transaction and the aggregate amount thereof. 11.15 Paragraph Headings; Construction. Paragraph headings are only used in this Agreement for convenience. Borrower and Coast acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. The term "including", whenever used in this Agreement, shall mean "including (but not limited to)". This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Coast or Borrower under any rule of construction or otherwise. 11.16 Governing Law; Jurisdiction; Venue This Agreement and all acts and transactions hereunder and all rights and obligations of Coast and Borrower shall be governed by the internal laws of the State of California, without regard to its conflicts of law principles. As a material part of the consideration to Coast to enter into this Agreement, Borrower (a) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at Coast's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Los Angeles County; (b) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (c) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 11.17 Mutual Waiver of Jury Trial BORROWER AND COAST EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. 20 Coast Business Credit Loan and Security Agreement - -------------------------------------------------------------------------------- BORROWER: Technical Communications Corporation By /s/ Carl H. Guild, Jr. ------------------------------------ President or Vice President COAST: COAST BUSINESS CREDIT, a division of Southern Pacific Bank By /s/ Richard Banovitz ------------------------------------ Title: V P Underwriting -------------------------------- 21 ================================================================================ Coast SCHEDULE TO LOAN AND SECURITY AGREEMENT Borrower: Technical Communications Corporation Address: 100 Domino Drive Concord, Massachusetts 01742 Date: July 31, 2000 This Schedule forms an integral part of the Loan and Security Agreement between Coast Business Credit, a division of Southern Pacific Bank, and the above- borrower of even date.
======================================================================================================================= SECTION 2. CREDIT FACILITIES Section 2.1 - Credit Limit: Loans in a total amount at any time outstanding to Borrower and to the Subsidiaries not to exceed the lesser of a total of Five Million Dollars ($5,000,000) at any one time outstanding (the "Maximum Dollar Amount"), or the sum of (a) and (b) below: (a) Receivable Loans in an amount not to exceed 85%/1/ of the amount of Borrower's Eligible Receivables (as defined in Section 1 of the Agreement), plus ---- (b) Inventory Loans in an amount not to exceed the lesser of: (1) 10% as to raw material, 20% as to sub-assemblies, 15% as to general dynamics and 15% as to integrated circuits, of the value of Borrower's Eligible Inventory (as defined in Section 1 of the Agreement, calculated at the lower of cost or market value and determined on a first in, first out basis), or (2) Five Hundred Thousand Dollars ($500,000). Section 2.2 - Letter of Credit One Million Dollars ($1,000,000) Sublimit:
_________________________ /1/ If dilution of the accounts, as determined by Coast is 5% or more, the advance rate shall be reduced to not exceed 80%. S-1 Coast Business Credit Schedule to Loan and Security Agreement - --------------------------------------------------------------------------------
=================================================================================================================== SECTION 3 - INTEREST AND FEES Section 3.1 - Interest Rate: A rate equal to the Prime Rate plus 0.50% per annum, calculated on the basis of a 360-day year for the actual number of days elapsed. The interest rate applicable to all Loans shall be adjusted monthly effective as of the first day of each month, and the interest to be charged for each month shall be based on the highest Prime Rate in effect during said month, but in no event shall the rate of interest charged on any Loans in any month be less than 9% per annum. Section 3.1 - Minimum $N.A. per month. Monthly Interest: Section 3.2 - Loan Fee: 0.50% of the Maximum Dollar Amount due on the Closing Date, 0.50% of the Maximum Dollar Amount due on the first day of the second year of this Agreement and 0.25% of the Maximum Dollar Amount due on the first day of the third year of this Agreement. All fees will be fully earned on the Closing Date and will be non refundable. Section 3.2 - Facility Fee: $5,000, per quarter, payable on the Closing Date (prorated for any partial quarter at the beginning of the term of this Agreement) and continuing on the first day of each quarter thereafter. Section 3.2 - Letter of Credit 0.50% of all outstanding Letters of Credit per calendar month, plus bank Fees: charges and fees. Section 3.2 - Unused Line With respect to each fiscal month, or portion thereof during the term of Fee: this Agreement, Borrower shall unconditionally pay to Coast a fee equal to 0.75% per annum of the difference between the Maximum Dollar Amount and the average daily outstanding balance of the Loans during such month, or portion thereof ("Unused Line Fee"), which fee shall be calculated and --------------- payable monthly, in arrears, and shall be due and payable, commencing on the first Business Day of the Borrower's first month following the Closing Date and continuing on the first Business Day of each month thereafter. Section 9.1 - Renewal Fee: 0.50% of the Maximum Dollar Amount beginning in year 4. Section 9.2 - Early An amount equal to four percent (4%) of the Maximum Dollar Amount (as Termination defined in the Schedule), if termination occurs on or before the first Fee: anniversary of the effective date of this Agreement; three percent (3%) of the Maximum Dollar Amount, if termination occurs after the first anniversary and on or before the second anniversary of the effective date of this Agreement; and two percent (2%) of the Maximum Dollar Amount, if termination occurs at any time after the second anniversary of the effective date of this Agreement. ===================================================================================================================
SECTION 5 - CONDITIONS PRECEDENT S-2 Coast Business Credit Schedule to Loan and Security Agreement - -------------------------------------------------------------------------------- =========================================================================================================================== Section 5.2 - Minimum $500,000 at funding Availability: Section 5.14 - Other 1. Secured Continuing Guaranty of TCC Investment Corporation and TCC Documents and Foreign Sales Corporation; Agreements: 2. UCC-1 financing statements, fixture filings and termination statements; 3. Security Agreements (including those covering copyrights, patents and trademarks); and 4. Such other documents as Coast may request. Section 5.15 - Other 1. Borrower shall have no accounts payable more than 90 days past due as Conditions: of the Closing Date; 2. All taxes shall be current; 3. Coast shall have a perfected first priority security interest on all assets, tangible and intangible, including, without limitation, all intellectual property (except for Permitted Liens). All copyrights and copyrightable material shall be registered with the United States Copyright Office with first priority liens granted to Coast; 4. All collections shall be remitted through a lockbox approved by Coast. All bank accounts shall be subject to a control agreement in favor of Coast; 5. Coast to be named as a loss payee for the Reliance Insurance Group policy; 6. The Reliance Insurance Group Credit Insurance Policy is to be amended to remove exceptions for bankruptcy/insolvency and to otherwise permit the assignment of the policy to Coast, all in form acceptable to Coast in its discretion; 7. All licenses of Borrower shall be assigned to Coast; 8. Borrower shall have provided to Coast a letter stating the broker fee due in connection with the Coast lending transaction with an acknowledgment that Borrower is solely responsible for paying such fee; 9. Borrower shall have not less than $2 million in cash balances in its bank and brokerage accounts; and 10. Borrower shall have a Tangible Net Worth of not less than $6,250,000. ===========================================================================================================================
SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS Section 6.2 - Prior Names of None. Borrower: Section 6.2 - Prior Trade None. Names of Borrower: Section 6.2 - Existing Trade None. Names of Borrower: Section 6.3 - Other Locations None. and Addresses: S-3 Coast Business Credit Schedule to Loan and Security Agreement - -------------------------------------------------------------------------------- and Addresses: Section 6.10 - Material None. Adverse Litigation: Section 6.10 - Future Claims Borrower will promptly inform Coast in writing of any claim, proceeding, and Litigation: litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of Fifty Thousand Dollars ($50,000) or more, or involving One Hundred Thousand Dollars ($100,000) or more in the aggregate. ==================================================================================================================
S-4 Coast Business Credit Schedule to Loan and Security Agreement - -------------------------------------------------------------------------------- SECTION 8 - ADDITIONAL DUTIES OF BORROWER Section 8.1 - Other 1. Borrower shall at all times have a Tangible Net Worth of not less than Provisions and $6,250,000 from the Closing Date through and including September 29, 2000, Covenants: $6,500,000 from September 30, 2000 through and including December 30, 2000, $6,800,000 beginning December 31, 2000 and thereafter, increasing quarterly by 70% of Borrower's net income based on a trailing six months. In no event shall such increase exceed 70% of Borrower's net income on an annualized basis during any fiscal year of Borrower; 2. Borrower shall pay all taxes when due; 3. Each month, Borrower shall advise Coast in writing of all copyrights and copyrightable material which has not been registered with the United States Copyright Office and of all modifications to all then existing copyrights; 4. The Receivable owing from the Maryland Procurement Office ("MPO") will only be considered for eligibility if the following conditions have been satisfied: (a) Borrower provides Coast with an affidavit executed by Borrower's CEO, Carl Guild, Jr., insuring and certifying to the authenticity of all information submitted to Coast that relates to the MPO Receivable, and (b) Borrower provides Coast with the following information regarding its relationship with MPO: (i) the date the relationship with MPO initiated; (ii) certain information relating to the relationship between Borrower and MPO including the length of each contract and the names and telephone numbers of MPO contacts; (iii) certain information relating to the performance of existing contracts including invoice numbers, invoice dates, job or "task" numbers, invoice types (i.e. time and material), invoice amounts, corresponding payment amounts and dates and unpaid invoice balances, and (iv) a 12-month payment history comprise of daily shipments, invoice dates and amounts and corresponding payment dates and amounts; and (v) all other information as Coast may reasonably request from time to time. 5. Borrower shall at all times maintain cash balances of at least $2 million. If the cash balances fall below $2 million, the reporting criteria otherwise set forth in this Agreement may be modified at the option of Coast and the advance rates against Eligible Receivables and Inventory may be reduced at the discretion of Coast (such discretion to be exercised in Coast's reasonable business judgment). 6. Borrower agrees to cause all letters of credit in favor of Borrower to otherwise be assigned to Coast with Coast named as the beneficiary thereof. Section 8.2 - Insurance: Subject to the limitations set forth in Section 8.2 of the Agreement, Coast shall release to Borrower insurance proceeds with respect to Equipment totaling less than Fifty Thousand Dollars ($50,000).
S-5 Coast Business Credit Schedule to Loan and Security Agreement - -------------------------------------------------------------------------------- Section 8.3 - Reporting: Borrower shall provide Coast with the following: 1. Monthly Receivable agings (including progress/milestone billing), aged by invoice date and by customer in alphabetical order, within five (5) days after the end of each month together with a monthly deferred revenue listing to be sorted by customer in alphabetical order. 2. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers within five (5) days after the end of each month. 3. Monthly perpetual inventory reports for the Inventory valued on a first-in, first-out basis at the lower of cost or market (in accordance with GAAP) or such other inventory reports as are reasonably requested by Coast, all within ten (10) days after the end of each month. 4. Monthly internally prepared financial statements and 10Q reports, as soon as available, and in any event within thirty (30) days after the end of each month. 5. Quarterly internally prepared financial statements, as soon as available, and in any event within forty-five (45) days after the end of each fiscal quarter of Borrower. 6. Quarterly customer lists, including customer name, address, and phone number. 7. Annual financial statements and 10K reports, as soon as available, and in any event within ninety (90) days following the end of Borrower's fiscal year, containing the unqualified opinion of, and certified by, an independent certified public accountant acceptable to Coast. Section 8.5 Negative Two Hundred Thousand Dollars ($200,000). Covenants (Acquired Assets):
================================================================================ SECTION 9 - TERM Section 9.1 - Maturity Date: The last Business Day of the month three (3) years from the Closing Date, subject to automatic renewal as provided in Section 9.1 of the Agreement, and early termination as provided in Section 9.2 of the Agreement.
S-6 EX-10.4 3 0003.txt AMENDMENT TO LOAN & SECURITY AGREEMENT DATED 12/28 Exhibit 10.4 AMENDMENT TO LOAN AND SECURITY AGREEMENT ---------------------------------------- This AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment") dated as of this 29th day of December 2000, between TECHNICAL COMMUNICATIONS CORPORATION ("Borrower") and COAST BUSINESS CREDIT, a division of Southern Pacific Bank ("Coast"), is made in reference to the following facts: A. Borrower previously entered into a Loan and Security Agreement with Coast dated July 31, 2000 (as amended, the "Loan Agreement") and related documents in connection therewith (as each may be amended, supplemented, replaced or modified from time to time, the "Loan Documents"). Terms used herein, unless otherwise defined herein, shall have the meanings set forth in the Loan Agreement. B. Borrower has caused an Event of Default under Section 8.1 of the Loan Agreement as a result of the failure of Borrower to comply with the Tangible Net Worth requirements under the Loan Agreement. C. Borrower has requested, among other things, that Coast waive the Event of Default and modify the Tangible Net Worth requirements under the Loan Agreement. D. Coast is willing to amend the Loan Agreement and waive the Event of Default on the terms and subject to the conditions set forth in this Amendment. NOW THEREFORE, in consideration of the foregoing and the terms and conditions hereof, the parties do hereby agree as follows, effective as of the date set forth above: 1. Limited Waiver. Subject to the terms and conditions of this -------------- Amendment, Coast hereby waives the Event of Default under Section 8.1 of the Loan Agreement due to the failure of Borrower to maintain Tangible Net Worth of not less than $6,500,000 as of September 30, 2000. The foregoing waiver is a one-time waiver only and not a continuing waiver, and shall apply only to the matters and time period specifically set forth in this Amendment. Without limiting the generality of the foregoing, this waiver shall not apply to any future failure by Borrower to comply with the terms of the Loan Agreement referenced above or any other term therein. 2. Tangible Net Worth. The first paragraph of Section 8.1 of the ------------------ Schedule is hereby amended in full and restated as follows: "Tangible Net Worth: Beginning December 31, 2000, Borrower shall at all times have a Tangible Net Worth of not less than $4,688,513 from December 31, 2000 through and including March 30, 2001, $4,790,633 from March 31, 2001 through and including June 29, 2001, $5,633,740 from June 30, 2001 through and including September 28, 2001, $5,969,418 beginning September 29, 2001 and thereafter, increasing quarterly by 70% of Borrower's net income based on a trailing six months. In no event shall such increase exceed 70% of Borrower's net income on an annualized basis during any fiscal year of Borrower." 3. Interest Coverage Ratio. Section 8.1 of the Schedule is hereby ----------------------- amended by adding a new paragraph 7 as follows: "7. Borrower shall at all times maintain a ratio of (a) EBIT (as defined below) to (b) interest expense of not less than 1.25 to 1.00, measured quarterly on a trailing 12-month basis beginning March 31, 2001. 'EBIT' means, in any fiscal period, Borrower's net income (other than extraordinary or non- recurring items of Borrower for such period), plus (i) the amount of all ---- interest expense and income tax expense of Borrower for such period, and plus or minus (as the case may be) (ii) any other non-cash charges which have been added or subtracted, as the case may be, in calculating Borrower's net income for such period." 4. Inventory Loans. The parties hereto agree that until such time --------------- that Coast notifies Borrower in writing to the contrary Borrower, in its sole discretion, shall have no right to request Inventory Loans under Section 2.1(b) of the Schedule or otherwise and Coast shall be under no obligation to provide Inventory Loans. Any Inventory Loans outstanding on the date hereof are fully due and payable on the date hereof together with accrued but unpaid interest thereon. 5. Amendment Fee. In addition to all other fees and charges, ------------- Borrower hereby agrees to pay Coast an amendment fee of $30,000, fully earned and payable on the date hereof. 6. Reaffirmation. Except as modified by the terms herein, the Loan ------------- Agreement and the other Loan Documents remain in full force and effect. If there is any conflict between the terms and provisions of this Amendment and the terms and provisions of the Loan Agreement or the other Loan Documents, the terms and provisions of this Amendment shall govern. 7. Counterparts. This Amendment may be executed in one or more ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 8. Governing Law. This Amendment shall be governed by and construed ------------- according to the laws of the State of California. 9. Attorneys' Fees; Costs. Borrower agrees to pay, on demand, all ---------------------- attorneys' fees and costs incurred in connection with the negotiation, documentation and execution of this Amendment. If any legal action or proceeding shall be commenced at any time by any party to this Amendment in connection with its interpretation or enforcement, the prevailing party or parties in such action or proceeding shall be entitled to reimbursement of its reasonable attorneys' fees and costs in connection therewith, in addition to all other relief to which the prevailing party or parties may be entitled. 10. Jury Trial Waiver. BORROWER AND COAST EACH WAIVE ALL RIGHTS TO ----------------- TRIAL BY JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OF THEM AGAINST THE OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THE LOAN DOCUMENTS, THIS AMENDMENT, THE OBLIGATIONS, 2 THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY BORROWER OR COAST, OR, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN BORROWER AND COAST. "Borrower" "Coast" TECHNICAL COMMUNICATIONS COAST BUSINESS CREDIT, CORPORATION a division of Southern Pacific Bank By: /s/ Carl H. Guild Jr. By: /s/ Lawrence J. Placek ---------------------------- ------------------------------------- Name: Carl H. Guild Jr. Name: Lawrence J. Placek -------------------------- ----------------------------------- Title: President and CEO Title: Sr Vice President ------------------------- ---------------------------------- Each of the undersigned hereby acknowledges and consents to the foregoing Amendment and confirms and agrees that the Continuing Guaranty executed by it in favor of Coast shall remain in full force and effect in accordance with its terms. TCC INVESTMENT CORPORATION TCC FOREIGN SALES CORPORATION By: /s/ Carl H. Guild Jr. By: /s/ Carl H. Guild Jr. ----------------------------- ----------------------------------- Its: President Its: President ----------------------------- ----------------------------------- 3 EX-21 4 0004.txt LIST OF SUBSIDIARIES Exhibit 21 List of Subsidiaries: TCC Foreign Sales Corporation TCC Investment Corporation EX-23.1 5 0005.txt CONSENT OF GRANT THORNTON LLP Exhibit 23.1 Consent of Grant Thornton LLP CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated November 7, 2000 accompanying the consolidated financial statements included in the Annual Report of Technical Communications Corporation on Form 10-K for the year ended September 30, 2000. We hereby consent to the incorporation by reference of said report in the Registration Statements pertaining to the Technical Communications Corporation 1991 Stock Option Plan (Form S-8 No. 33-46890) and the 1995 Employee Stock Purchase Plan (Form S-8 N0. 33-34443). /s/ Grant Thornton LLP Boston, Massachusetts December 28, 2000 EX-23.2 6 0006.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.2 Consent of Arthur Andersen LLP Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation by reference of our reports dated November 5, 1999, included in Technical Communication's Corporation's Annual Report on Form 10-K for the year ended October 2, 1999, into the Company's previously filed Registration Statement No. 33-46890 on Form S-8 and Registration Statement No. 33-34443 on Form S-8. It should be noted that we have not audited any financial statements of the company subsequent to October 2, 1999 or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP Boston, Massachusetts December 28, 2000 EX-27 7 0007.txt FINANCIAL DATA SCHEDULE
5 12-MOS SEP-30-2000 OCT-03-1999 SEP-30-2000 3,121,617 0 433,742 70,000 3,452,403 7,365,242 4,899,615 4,330,748 8,402,717 1,122,253 0 0 0 131,215 7,149,249 8,402,717 5,574,108 5,785,047 2,376,433 2,376,433 5,031,116 0 2,305 (1,566,938) 173,376 (1,740,314) 0 0 0 (1,740,314) (1.35) (1.35)
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