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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21681
TRANSCRYPT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0801192
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4800 NW FIRST STREET, LINCOLN, NEBRASKA 68521
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (402) 474-4800
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 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 ____ NO X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Stock held by non-affiliates, based
upon the closing sale price of the Common Stock on February 28, 1997, as
reported on the Nasdaq National Market System, was approximately $35,879,735.
Shares of Common Stock held by each officer, director and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. Such determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 28, 1997, 9,283,078 shares of the Registrant's Common Stock were
outstanding.
The Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders,
to be filed within 120 days after the end of the fiscal year ended December 31,
1996, is incorporated herein by reference in Part III of this Report on Form
10-K.
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PART I
Discussions of certain matters contained in this Annual Report on Form
10-K may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"), and as
such, may involve risks and uncertainties. These forward-looking statements
relate to, among other things, expectations of the business environment in
which the Transcrypt International, Inc. ("Transcrypt" or the "Company")
operates, projections of future performance, perceived opportunities in the
market and statements regarding the Company's mission and vision. The
Company's actual results, performance and achievements may differ materially
from the results, performance and achievements expressed or implied in such
forward-looking statements. For a discussion of some of the factors that might
cause such a difference, see "ITEM 1. BUSINESS -- SUMMARY OF BUSINESS
CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
AND/OR STOCK PRICE."
ITEM 1. BUSINESS.
GENERAL
The Company designs and manufactures information security products
which prevent unauthorized access to sensitive voice and data communications.
The Company focuses on developing and providing information security products
for telecommunications markets, including the land mobile radio ("LMR"),
telephony and data security markets. The Company's products are based
primarily on a wide range of proprietary analog scrambling and digital
encryption technologies. The Company's core technologies offer a number of
significant benefits, including high levels of information security and sound
quality, high-speed, real-time data transmission, low power consumption, small
size and cost effective manufacturing.
INDUSTRY BACKGROUND
The electronic information security industry is comprised generally of
products designed to protect the transmission of voice and data communications
through both wireless and wireline mediums. Wireless communication devices
operate in specific, designated frequency bands, and include cellular
telephones, LMRs, pagers and the new personal communication services devices.
Relatively inexpensive radio scanners, available from many consumer electronics
stores, can intercept or be easily modified to intercept most types of analog
wireless voice transmissions. Without active electronic protection, many forms
of electronic communications are vulnerable to interception and theft. The
Company's information security products prevent unauthorized access to wireless
voice communications.
Today's information security industry originated from the need to
secure sensitive wireless military communications. By the late 1970s, the
availability, quality and cost of information security devices had improved
such that the use of these devices by non-military governmental users (i.e.,
law enforcement, fire, emergency medical and public safety personnel) and large
commercial users became economically and functionally feasible. Although a
variety of manufacturers introduced new products throughout this time period,
Motorola, Inc. ("Motorola") emerged as the leader in wireless voice
communications and a developer of limited analog information security products.
Initially, all electronic communications were transmitted in analog
format. Analog transmissions
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typically consist of a voice or other signal modulated directly onto a
continuous radio "carrier" wave. An analog transmission can be made secure by
"scrambling" or manipulating the original signal at the point of transmission
and reconstituting the original signal at the receiving end. By the late
1980s, accelerating use of wireless communications devices, such as LMRs and
cellular telephones, resulted in increased demand for limited radio spectrum.
In response to this demand, and enabled by the low-cost availability of digital
signal processors ("DSPs"), electronics manufacturers developed spectrally
efficient (i.e., low-bandwidth) digital communications devices. In digital
communications, an analog signal is "digitized," or converted into a series of
discrete information "bits" in the form of ones and zeroes prior to
transmission. Digital transmissions can be made secure by a process known as
"encryption," which involves the use of a mathematical algorithm to rearrange
the bit-stream prior to transmission and a decoding algorithm to reconstitute
the transmitted information back into its original form at the receiving end.
Land Mobile Radio Market
One of the earliest applications of information security technology
outside of the military was in protecting LMR voice communications. Land
mobile radios consist of hand-held or mobile (vehicle mounted) two-way radios
commonly used by public safety workers (e.g., police, fire and medical
emergency personnel), businesses (e.g., fleet operators, taxi dispatch,
construction and other commercial users) and a wide variety of United States
and foreign government agencies. A typical LMR system consists of one or more
base control stations networked with each other and with multiple mobile
(vehicle-mounted) or hand-held portable LMRs.
As with all other major forms of wireless communications devices, LMRs
transmit information in either analog or digital format, although the
substantial majority of LMRs currently in use operate in analog format only.
In 1995, as a result of increasing frequency spectrum capacity constraints, the
FCC mandated that all new LMR equipment utilize a more spectrally-efficient,
narrow-band (12.5 kHz) transmission system, which will effectively require all
LMR users to migrate to digital LMR systems. In response to this mandate, an
advisory body of the Association of Public Safety Communications Officials
International, Inc. ("APCO"), including a number of LMR manufacturers,
recommended an industry standard for digital LMR devices which would both meet
the requirements of the FCC mandate and provide solutions for several actual or
potential problems which increasingly troubled public safety LMR users. These
problems included: (i) the lack of interoperability, or the failure of existing
systems to communicate with other systems produced by the same or other
manufacturers; (ii) the lack of backwards compatibility between older analog
LMR systems and the new proposed digital LMR systems; and (iii) the
interception of sensitive public safety communications by third party
eavesdroppers. As a result, the APCO advisory body eventually promulgated an
open standard for digital LMR products, which has come to be known as the "APCO
25 standard."
In order to comply with the APCO 25 standard, a digital LMR system must
utilize a "common air interface" to achieve interoperability with other digital
systems, be compatible with existing analog LMR infrastructure and provide the
user with the ability to use advanced encryption technologies. Motorola, the
largest LMR manufacturer, played a significant role in the formulation of the
APCO 25 standard and has been a major proponent of its adoption by the LMR
public safety market. Certain competitive LMR system standards have been
proposed by other LMR manufacturers, primarily the "EDACS" standard proposed by
Ericsson, Inc. ("Ericsson"). Ericsson's EDACS standard is based on time
division multiple access technology, compared with the APCO 25 frequency
division multiple access technology. See "ITEM 1. BUSINESS -- INTELLECTUAL
PROPERTY."
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Telephony Market
Since its inception in 1983, cellular telephone service has grown
rapidly and become available to the substantial majority of the population of
the United States. Cellular telephone subscribers and revenues have grown
rapidly in recent years. The increased volume has raised significant new
security and privacy issues and an increased sensitivity to the potential risks
involved in intercepted signals. Unprotected cellular telephone transmissions
generally provide minimal or no security and allow eavesdropping by even casual
listeners with compatible scanners.
PRODUCTS AND CORE TECHNOLOGIES
The Company first entered the information security market in 1978 with
simple, transistor-based add-on scrambling modules for use in analog LMRs
employing basic single-inversion scrambling techniques, which the Company
marketed primarily to public safety agencies and international governments.
Since that time, the Company has further developed and improved upon its core
information security technologies, which the Company has implemented into its
scrambler modules, as well as in other types of products within the Company's
two major product families, LMR Security and Telephony Security. Such core
technologies currently include the following methods, listed in ascending order
of sophistication of security technique: (i) frequency inversion (inverting or
otherwise adjusting the phase of a signal based on a consistent method); (ii)
split-band transmission (spreading a signal across multiple channels); (iii)
rolling code transmission (incrementally stepping codes); (iv) hopping code
transmission (randomly setting codes based upon an algorithm); (v) frequency
hopping transmission (changing broadcast frequencies multiple times per second
based upon an algorithm); and (vi) digital encryption (encoding a digital
bit-stream based upon a mathematical encryption algorithm).
The Company typically charges higher prices for devices featuring more
advanced levels of security. Therefore, the types of end users at each level
of security tend to vary based upon the importance of the information for which
security is desired. Typical users of the most basic form of scrambler, the
frequency inversion scrambler, include taxi dispatchers, other types of
consumer businesses and football and other sports teams that need to provide
real-time secure communications between players and coaches. Typical users for
medium-level security devices include commercial and industrial users and
international customers for which an export license has not been obtained.
High-level scrambling devices are used primarily by public safety agencies and
federal government personnel.
As with all of the Company's information security products, the use of
scrambling equipment is required on both the transmitting and receiving sides
of communications in order to operate in secure mode. For example, in order to
achieve secure LMR communications, it would be necessary for both the
transmitting and receiving equipment, including hand-held and mobile devices
and base stations, to be equipped with one of the Company's scramblers, whether
as an add-on installation or in the form of one of the Company's complete LMRs.
In the Company's cellular telephony family, a scrambled cellular telephone may
communicate in secure mode only with another of the Company's secure cellular
telephones, a PBX interchange or cellular service provider that has installed
one of the Company's Voice Privacy Exchange Units, or a landline telephone
equipped with one of the Company's external desktop scrambling units. However,
all of the Company's products can be used in the clear, non-scrambled mode with
equipment that does not contain a Transcrypt security device.
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The Company offers a variety of add-on LMR scrambling products
featuring the Company's different core technologies and varying levels of
security. Add-on scramblers are available in two packages, a modular package
consisting of a circuit board that is designed to be permanently soldered into
existing circuitry, and a socket package designed to be installed in sockets
with standard pin configurations installed by OEM manufacturers. Motorola
currently stocks and sells directly one of the Company's socket modules
pursuant to an August 1995 agreement with the Company. Other products sold by
the Company are compatible with sockets of other OEM manufacturers, including
Icom America, Inc. and Kenwood Radio. The Company also produces modules that
add signaling features to OEM radios, including "man-down" (emergency signal
broadcast if radio position becomes horizontal), "stun-kill" (disables lost or
stolen radios remotely) and "over-the-air reprogramming" (changes encryption
and scrambling codes remotely). Sales of LMR related products accounted for
approximately 69% and 80% of total revenues in the fiscal years ended
December 31, 1996 and in 1995, respectively.
In August 1996, the Company introduced a complete hand-held digital LMR
complying with the APCO 25 "common air interface" standard and featuring the
Company's advanced core scrambling and digital encryption technologies. The
Company intends to introduce additional secure LMR models, including mobile
radios, in 1997. All of the Company's APCO 25 compliant "dual-mode" digital
radios are expected to be compatible and fully interoperable with older analog
radio systems, as well as optionally compatible with Motorola's proprietary
analog trunking technology (Smartnet(TM)) and proprietary digital encryption
algorithm. See "ITEM 1. BUSINESS -- SUMMARY OF CERTAIN FACTORS THAT MAY AFFECT
FUTURE RESULTS OF OPERATION AND/OR STOCK PRICE -- TRANSITION FROM ADD-ON TO
STAND-ALONE WIRELESS SECURITY PRODUCTS."
The Company's add-on scramblers for cellular telephones typically
consist of a modular circuit board designed to be permanently soldered into
existing telephone circuitry. The add-on scrambler product line includes a
model designed specifically for Motorola's MicroTAC(TM) telephones as well as a
"generic" scrambler for use in a variety of OEM cellular telephone equipment
and featuring advanced digital signal processing technology. Additionally, the
Company markets a complete, Transcrypt-branded, Motorola MicroTAC(TM) cellular
telephone upgraded to include the Company's advanced add-on scrambling modules.
The Company also provides Transcrypt-branded secure cellular telephones and
the Company's Voice Privacy Exchange Units to a regional Bell operating
company, which resells the telephones to its customers in one metropolitan area
and charges additional monthly fees for secure service. In the area of
landline telephone voice security, the Company has, since 1995, produced
landline scrambling and encryption devices for installation between the handset
and telephone base, which have been purchased primarily by overseas government
and corporate users.
The Company's plans to introduce in the future data security products
incorporating the Company's core digital encryption technologies, including the
real-time, high-speed digital encryption techniques originally developed for
the Company's digital radio products and landline encryption device. Data
security products under development include a "T1" network server capable of
performing high speed, real-time authentication and encryption/decryption for
up to 24 simultaneous computer users, an encrypted landline modem, an encrypted
cellular modem, an encrypted fax/modem PCMCIA card and a desktop facsimile
encryption device. The Company's data security products are in the initial
design and experimentation stage of development. No assurance can be given
that the Company will be able to successfully develop any of these products or,
if developed, that any such products will be commercially viable or result in
material sales by the Company.
CUSTOMERS
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The Company's customers use information security products in a variety
of situations involving differing security needs. For example, domestic and
international police forces typically have a medium to high need for security,
while military users which are often faced with hostile and determined threats,
and therefore typically have a high need for security. Purchasers of the
Company's products include public safety agencies and police forces, federal
government agencies, foreign governments, the military, cellular service
providers, LMR manufacturers and business and corporate users in finance,
manufacturing and media/entertainment, among other industries. Other than
Motorola, no customer accounted for more than 10% of aggregate sales during the
year ended December 31, 1996.
MOTOROLA RELATIONSHIP
The Company depends to a large extent on a number of significant
relationships with Motorola. Motorola has been one of the Company's largest
customers since 1994, and the Company believes that Motorola is likely to
account for a significant portion of the Company's sales in the near future.
Sales to Motorola totaled $2.2 million in 1996, $460,000 in 1995 and $2.0
million in 1994. Sales in 1996 consisted primarily of Motorola-labeled LMR
socket scrambling modules available for resale by Motorola as an accessory to
certain of Motorola's portable LMRs sold in North America. In August 1995, the
Company entered into a three-year supply agreement with Motorola's Radio
Products Americas Group to provide socket scrambler modules at fixed prices in
lots of 100 or more. Such agreement provides for minimum purchases by Motorola
of $3.7 million of socket scrambler modules during the 18-month period
beginning on April 1, 1996 (of which $2.1 million had been purchased as of
December 31, 1996), after which the agreement terminates in August 1998 or is
otherwise terminable at will by either party upon 60 days' prior notice.
Motorola is also a key manufacturer of electronic components used by
the Company, including microprocessors used in most of the Company's
scramblers, which are supplied to the Company through an electronics
wholesaler. In addition, Motorola has agreed to sell to the Company, at fixed
prices and upon the Company's request, radio frequency platforms for use
in various products. Purchases by the Company of Motorola components totaled
approximately $1.9 million in 1996 and $726,000 in 1995. Furthermore, pursuant
to a product sales agreement executed in June 1996 with Motorola, Motorola has
agreed to sell to the Company, upon the Company's request, original equipment
cellular telephones and related accessories from Motorola's MicroTAC(TM) line,
which the Company intends to resell equipped with the Company's DSP-based
encryption devices and labeled with the Transcrypt logo. Such agreement
specifies fixed prices for purchases of such equipment, and its original term
expires on December 31, 1997, after which it is terminable at will by either
party upon 30 days' prior notice. The Company has, as of December 31, 1996,
purchased $198,000 in cellular telephones from Motorola pursuant to such
agreement.
The Company has obtained from Motorola a royalty-bearing, irrevocable,
non-exclusive, worldwide license (the "IPR License") to manufacture products
containing certain proprietary LMR and digital encryption technology. The IPR
License includes rights to use Motorola's proprietary analog trunking technology
(Smartnet(TM)) and certain Motorola digital encryption algorithms in LMR
products. The digital encryption technology may also be incorporated into
certain other information security products. The IPR License was obtained
initially in August 1994 and was amended to cover a broader range of products in
June 1996. The IPR License provides for minimum royalty payments and per unit
payments in amounts which the Company believes are standard for the LMR
industry. See "ITEM 1. BUSINESS -- SUMMARY OF BUSINESS CONSIDERATIONS AND
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND/OR STOCK PRICE
- -- RELIANCE ON MOTOROLA."
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SALES, MARKETING AND DISTRIBUTION
The Company sells its products domestically through six sales
managers. Add-on products are sold domestically primarily to distributors,
OEMs and self-servicing end users, while complete radio products are sold
domestically primarily to end users. The Company is actively seeking to hire
an additional eight sales persons for radio sales in the United States. The
Company also markets its radio and other complete products to its existing
add-on customer base.
The Company conducts international sales through four sales managers,
each of whom focuses on specific regions of the world outside of the United
States. The majority of international sales are made by the sales managers in
conjunction with a Company-authorized distributor, which typically provides a
local contact and arranges for technical training in foreign countries.
International sales accounted for 49.0%, 71.4% and 57.3% of the Company's
revenues in the 1996, 1995 and 1994, respectively. International sales have
been, in most cases, denominated in U.S. dollars, and the Company seeks to
reduce the risks of payment in foreign sales by obtaining advance payment and
confirmed, irrevocable letters of credit.
The Company distributes its add-on information security products to
both end users in the LMR and telephony markets and to distributors, such as
LMR dealers, that resell the Company's products to end users. The Company has
sold its self-branded, complete, analog secure cellular telephone primarily
through distributors and cellular service resellers, and the Company intends in
the future to also sell such analog cellular telephone and the digital version
through cellular service providers.
Sales to public safety agencies and other governmental entities have
comprised a significant portion of the Company's total sales. Such sales often
involve competitive, open bidding characteristic of public sector procurement
programs. Under the Company's plan to sell stand-alone communication devices,
such as LMR units, to such types of customers, the Company will likely be
required to increase its participation in public bidding and procurement
processes. Among other requirements, suppliers of LMR units in quantity are
often required by public sector end-users issuing requests for bids to supply a
bond from an approved surety company at the time that the bid is submitted and
at the time that the contract is awarded. The availability of such bonds is
limited by a number of factors, including the applicant's financial condition
and operating results, the applicant's record for completing similar systems
contracts in the past and the extent to which the applicant has bonds in place
for other projects.
The Company's basic marketing strategy has been to increase market
awareness of the need for information security products and to convey the
technical capabilities of the Company's products. The Company conducts
promotions through a mix of print advertising, trade shows, direct mail
campaigns, press releases, technical articles, white paper publication,
periodic newsletters, training and presentation material, and distribution of
demonstration and loaner equipment, which are sometimes coordinated with
product launches and trade shows.
The Company provides toll-free telephone access for technical and
other calls, 24-hour voicemail and 24-hour emergency pager contact for
customers with technical or other problems. Product training, which includes
classes, seminars and video programs, is available at both the customer's site
and the Company's Lincoln facility. The Company offers a standard warranty on
all products, which covers parts and labor for a period of one year from
purchase, with an extended warranty service option available at an additional
cost.
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The Company installs, for a fee, all models of the Company's scrambler
modules into customers' LMRs and telephones. During 1996, the Company
performed installations in less than 10% of total units sold. Scrambler
modules not installed by the Company are generally installed by local radio and
cellular telephone dealers. The Company documents installation instructions
for its products in OEM devices ("application notes"), and has developed
application notes for more than 2,000 OEM products, including almost all
commercially available two-way radio models sold worldwide.
INTELLECTUAL PROPERTY
The Company presently holds seven registered copyrights, which cover
software containing algorithms for frequency hopping, scrambling and signaling
technologies for LMR and cellular telephony, and one domestic patent, which
covers continuous synchronization methods used in analog scrambling products.
The Company has also applied for nine additional domestic patents relating to
high-end scrambling techniques and methods of integrating after-market devices,
such as the Company's modules, into OEM products. These patent applications
were the result of the Company's expanded intellectual property program, which
is intended to enhance the patent protection afforded the Company's new and
advanced intellectual property rights. The Company also holds three registered
trademarks related to the "Transcrypt" name and product names.
In addition to copyright and patent laws, the Company relies on trade
secret law and employee and third-party non-disclosure agreements to protect
its proprietary intellectual property rights. Furthermore, the Company designs
its information security devices to render the underlying software and
processes difficult to reverse engineer, providing an additional level of
protection.
The information security and wireless communications industries in
which the Company sells its products are characterized by substantial
litigation and assertions of claims regarding patent and other intellectual
property rights. At various times over the last several years, most recently
in December 1996, Ericsson has notified the APCO 25 Project Steering Committee
and certain current and proposed manufacturers of APCO 25 products (including
the Company, Motorola and E.F. Johnson Co.) that it believes that products
complying with the APCO 25 standard will necessarily infringe various Ericsson
patents and that APCO 25 manufacturers must obtain licenses under such patents.
The Company does not believe that the APCO 25 standard or any of the Company's
products infringe the relevant Ericsson patents or any valid intellectual
property right of others based, in part, on reliance upon the advice of the
Company's patent counsel. However, there can be no assurance that Ericsson
will not continue to assert these or other claims of patent infringement or
other wrongful conduct against the APCO 25 standard, manufacturers of APCO 25
products, including the Company, or present or future products of the Company.
Further, there can be no assurance that any litigation which may be instituted
in the future by Ericsson or any other party alleging infringement of
intellectual property rights or other wrongful conduct will not have an adverse
effect upon the Company, including the imposition of monetary damages, expenses
of litigation, diversion of management and other resources and injunction
against continued manufacture, use or sale of certain processes or products.
Under the terms of a July 1993 Memorandum of Understanding (the "MOU")
among various manufacturers involved in the APCO 25 project, signatories to the
MOU (which include the Company, Ericsson, Motorola, E.F. Johnson Co., DVSI,
Cycomm Corporation and Glenayre Technologies, among others) are required to
make available to other signatories licenses to intellectual property rights
that are essential to the implementation of the APCO 25 standard on "fair and
reasonable terms." Ericsson has
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offered a license to the Company with regard to its allegedly infringed
patents, and has notified the Company that if it fails to negotiate a license
to such patents, Ericsson may take the position that the Company's right to
obtain any license from Ericsson under the MOU would be lost. If Ericsson were
successful in asserting infringement claims, there can be no assurance that a
license would be available from Ericsson under the MOU. To the Company's
knowledge, none of the signatories to the MOU have recognized the validity of
Ericsson's position.
RESEARCH AND DEVELOPMENT
Since December 1991, the Company has invested approximately $7.5
million in internal research and development related to its proprietary
advances in information security products. During 1996, the Company increased
research and development staffing to 31 individuals, including 24 engineers,
from 22 individuals, including 18 engineers. Research and development
personnel have expertise in various fields, including cryptography, analog
hardware, digital hardware, object-oriented software, RF design and mechanical
design. The research and development staff designs and develops products
incorporating digital signal processing, voice coding (including improved
multi-band excitation), encryption, spectral manipulation and rotation, systems
simulation and mixed signal scrambling. In 1995 and 1996, the Company's
research and development efforts increased significantly, as the Company
commenced development of APCO 25 compliant digital LMRs and expanded
development of secure telephony products. As a result, research and
development expenses increased to $2.2 million in 1996 and $2.0 million in 1995
from $1.2 million in 1994. In order to facilitate the Company's new product
line development plans, research and development staffing has been augmented
with additional expertise in the areas of data networking, communications
systems software, RF design, mechanical design, cryptography and digital signal
processing. The Company believes that its research and development efforts
have been, and continue to be, sufficient to support planned new products lines
and enhancements to existing product lines. Based on current projections,
management expects to continue to increase the Company's research and
development staff, primarily in the areas of radio, signal processing and
digital logic development.
MANUFACTURING AND SUPPLIERS
The Company manufactures all of its products at its facility in
Lincoln, Nebraska, mostly from commercially available subassemblies, parts and
components, such as integrated circuits, printed circuit boards, and plastic
and metal parts, manufactured by the Company and by outside suppliers. Certain
items manufactured by suppliers are made to the Company's specific design
criteria. The Company's manufacturing processes utilize principles that
conform to ISO 9001 standards, for which the Company received full
certification in December 1995. See "ITEM 2. PROPERTIES."
The Company obtains most of its electronic parts and components from
one principal distributor, Arrow/Schwebber Electronics Group. The distributor
stores several months' supply of basic components, such as resistors,
capacitors and connectors, on-site at the Company's manufacturing location on a
consignment basis, reducing the Company's inventory maintenance costs.
Additionally, certain high-end subassemblies, such as RF boards for use in
complete LMR units manufactured by the Company, are expected to be purchased
from other manufacturers such as Motorola.
GOVERNMENT REGULATION AND EXPORT CONTROLS
The Company's information security products are subject to export restrictions
administered by
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the National Security Agency, the Department of State and the Department of
Commerce, which permit the export of encryption products only with the required
level of export license. U.S. export laws also prohibit the export of
encryption products to a number of specified hostile countries. Although to
date the Company has been able to secure most required U.S. export licenses,
including for export to 108 countries since 1978, 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. Additionally, in certain foreign countries,
the Company's distributors are required to secure licenses or formal permission
before encryption products can be imported.
The Company's radio and cellular telephone products are subject to FCC
regulations and regulations of the telecommunications regulatory authority in
each country where the Company sells its products. These regulations are in
the form of general approval to sell products within a given country for
operation in a given frequency band, one-time equipment certification, and, at
times, local approval for installation. In the United States, all Transcrypt
wireless products are subject to FCC Part 15 rules on unlicensed spread
spectrum operation. In those countries that have accepted certain worldwide
standards, such as the FCC rulings or those from the European
Telecommunications Standards Institute, the Company has not experienced
significant regulatory issues in bringing its products to market. Approval in
these markets involves retaining local testing agencies to verify specific
product compliance. However, many developing countries, including certain
markets in Asia, have not fully developed or have no frequency allocation,
equipment certification or telecommunications regulatory standards.
Recently, the Clinton administration and the Congress have reviewed
federal export control policies related to encryption control products. On
November 15, 1996, President Clinton issued an Executive Order altering the
federal government's policies governing the export of encryption products, such
as those currently offered and proposed to be offered by the Company. The
Executive Order shifts jurisdiction for export controls on, and licensing of,
encryption technology from the Department of State to the Department of Commerce
and removes from the "munitions" list most encryption products. In addition,
the Executive Order establishes a key management control program, under which a
third party would hold "keys" to unlock encrypted information for legitimate law
enforcement and national security needs. As a result of the Executive Order,
certain products featuring digital encryption technology that had not previously
been exportable can now be exported, which may increase competition for
international sales of the Company's analog scrambling products. Under interim
regulations adopted in December 1996 by the Department of Commerce, during a
two-year transition period, non-key recoverable 56-bit digital encryption
products may be approved for export if the manufacturer commits to build and
market key recovery products and support key management infrastructure in the
future, and provide to the government interim reports detailing internal
development efforts. During the 104th Congress, legislation was introduced in
the House of Representatives and the Senate to ease export controls on
encryption products, but the Congressional sponsors of the legislation opposed
the key management component of the Administration's plan. Legislation was
introduced recently to allow export of encrypted material on a higher level than
that contemplated by the Executive Order and without mandatory key recovery
features, and additional bills to address export controls on encryption products
are expected to be introduced in the current 105th Congress. However,
management cannot predict whether such legislation will be enacted, what form it
will take or how the Executive Order or any such actual or proposed legislation
will impact international sales of the Company's products.
The FCC, through the Public Safety Wireless Advisory Committee, is
considering regulatory measures to facilitate a transition by public safety
agencies to a more competitive, innovative environment so that the agencies may
gain access to higher quality transmission, emerging technologies, and broader
9
<PAGE> 11
services, including interoperability. As part of this process, the FCC is
reviewing the current use of the public safety wireless spectrum, reallocation
of additional spectrum for public safety use, and use of commercial service
providers for additional public safety capacity. This FCC process could affect
products manufactured by the Company. Management cannot predict the outcome of
the FCC review or any specific changes in the spectrum or FCC policies, or any
potential effect on the Company's sales.
COMPETITION
The markets for information security and LMR products are highly
competitive. Significant competitive factors in these markets include product
quality and performance, including the effectiveness of security features and
the quality of the resulting voice or data signal, the development of new
products and features, price, name recognition and the quality and experience
of sales, marketing and service personnel. A number of companies currently
offer add-on scramblers for LMRs that compete with the Company's add-on
information security products, including Selectone Corp., Midian Electronics
Inc. and MX-COM Inc. Also, Motorola and Ericsson offer high-end, proprietary
digital encryption for their LMR products. Motorola and Transcrypt are
believed to be the only current suppliers of APCO 25 LMR products as of the
date of this Annual Report. Other anticipated manufacturers of digital LMRs
include E.F. Johnson Co., Garmin Industries, Relm Communications, Midland
Systems and Stanilite Pacific Ltd., all of which have announced intentions to
produce hand-held, mobile and/or infrastructure products meeting the APCO 25
standard. In addition, Ericsson has actively opposed the APCO 25 standard and
has promoted its "EDACS" system as an alternative standard for the public
safety marketplace. Cycomm International Inc./Privaphone and Motorola offer
add-on security products for cellular telephones. Competitors to the Company's
secure landline telephone products include AT&T Corporation/Datatek, Motorola,
Cycomm International Inc. and Cylink Corporation.
Competition in the data security market is dynamic and growing, as new
companies seek to provide solutions to network and Internet data security.
There are a number of different approaches to data security, including
"firewall" protection, privilege control, data encryption and user
identification and authentication. The Company expects that its planned data
security products will feature mostly data encryption and user authentication
features. Competitors in the data security market include Check Point Software
Technologies Ltd., Cylink Corporation, Secure Computing Corporation, Trusted
Information Systems, Inc., Raptor Systems, Inc. and Sun Microsystems, Inc., all
of which provide firewall solutions. ActivCard Inc., CryptoCard Inc., Digital
Pathways, Inc., Security Dynamics Technologies, Inc., Vasco Corporation and
Racal Electronics, Inc. provide remote authentication products.
Many of the Company's competitors have substantially greater
financial, technical, marketing, distribution and other resources, greater name
recognition and longer standing relationships with customers than the Company.
Competitors with greater financial resources are better able to engage in
sustained price reductions in order to gain market share. Any period of
sustained price reductions would have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that the Company will be able to compete successfully in the future
or that competitive pressures will not materially and adversely affect the
Company's financial condition and results of operations.
BACKLOG
The Company presently ships only a small amount of products against
backlog, due to the typically short manufacturing cycle of the Company's
products. As a result, backlog amounts have historically been
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<PAGE> 12
immaterial to the Company, and the Company does not believe that backlog
figures are necessarily indicative of actual sales for future periods.
However, to the extent that LMR sales increase as a percentage of the Company's
revenues, backlog may increase due to the generally longer manufacturing cycle
time required of its digital LMR products.
EMPLOYEES
At December 31, 1996, the Company had 84 full-time equivalent
employees, substantially all of whom are employed at the Company's Lincoln,
Nebraska facility. None of the Company's employees are covered by a collective
bargaining agreement. Management believes that its employee relations are
good.
SUMMARY OF BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS AND/OR STOCK PRICE
Discussions of certain matters contained in this Annual Report on Form
10-K may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"), and as
such, may involve risks and uncertainties. These forward-looking statements
relate to, among other things, expectations of the business environment in
which the Company operates, projections of future performance, perceived
opportunities in the market and statements regarding the Company's mission and
vision. The Company's actual results, performance and achievements may differ
materially from the results, performance or achievements expressed or implied
in such forward- looking statements. The following is a summary of some of the
important factors that could affect the Company's future results of operations
and/or its stock price, and should be considered carefully in evaluating the
Company.
Reliance on Motorola. Motorola is the Company's largest customer and
a key supplier. The Company's dependence on Motorola, both as a customer and
supplier, is expected to continue. Although the Company believes that its
relationship with Motorola is good, there can be no assurance that Motorola
will continue to purchase products from or supply components and technology to
the Company on the scale or at the prices that it now does. Any reduction of
the Company's contractual relations with Motorola or a decision by Motorola to
reduce purchases of the Company's products or to reduce or eliminate the
provision of components and technology to the Company would have a material
adverse effect on the Company.
Transition from Add-on to Stand-alone Wireless Security Products. The
Company has historically sold add-on products for use with LMRs and cellular
telephones manufactured by other companies. The Company recently introduced its
first stand-alone Transcrypt-branded LMRs and cellular telephones, and intends
to develop and place increasing emphasis on stand-alone products in the future.
This represents a fundamental change in the nature of the Company's products and
necessitates the development of new manufacturing and sales and marketing
strategies and capabilities. Furthermore, the end-user market for APCO 25 LMR
products began in 1996 and is still in the early stages of development.
Additionally, sales of LMR products are frequently made to public safety
agencies and other governmental entities, which are often subject to competitive
public bidding and procurement processes resulting in relatively long sales
cycles. There can be no assurance that the Company will be successful in making
the transition from add-on products to stand-alone products or that its new
position in the market will not cause other companies, with which it has
historically dealt, to discontinue or limit their dealings with the Company. In
addition, the transition to digital communications in the wireless
communications market generally could lead to a decrease in demand for
stand-alone add-on analog security modules, which accounted for approximately
73% of the Company's revenues in 1996.
Management of Growth. The Company has recently expanded and intends
to continue to expand the scope of its operations and the products which it
offers. Such expansion has resulted and will continue to result in an
expansion of the Company's facilities and work force. This growth can be
expected to place a significant strain on the Company's financial, managerial
and other resources.
11
<PAGE> 13
Competition. The information security and wireless communications
equipment industries, and the LMR market segment in particular, are highly
competitive. Most of the Company's competitors or potential competitors have
significantly greater financial, managerial, technical and marketing resources
than the Company. There can be no assurance that the Company will be able to
continue to compete effectively in its markets, that competition will not
intensify or that future competition will not have a material adverse effect on
the Company.
Rapidly Evolving Industry. The market for analog and digital
information security products is an emerging market and can be expected to
evolve rapidly in the future as a result of changing technology, industry
standards and customer requirements. The Company's ability to compete
effectively in this rapidly evolving industry will depend upon its ability to
anticipate and react to these changes in a timely manner.
Risks Associated with International Sales. International sales have
historically constituted and are expected to constitute in the future a large
percentage of the Company's revenues. International sales are subject to a
number of risks not found in domestic sales, including (i) unexpected changes
in regulatory requirements, (ii) tariffs and other trade barriers, (iii)
political and economic instability in foreign markets, (iv) difficulties in
establishing foreign distribution channels, (v) longer payment cycles, (vi)
uncertainty in the collection of accounts receivable, (vii) increased costs
associated with maintaining international marketing efforts, (viii) effects on
product competitiveness due to fluctuations in the value of the U.S. dollar and
(ix) difficulties in protecting intellectual property. The Company's products
are subject to export controls under U.S. law, which in some cases require the
approval of the National Security Agency and the Department of Commerce.
Dependence on Suppliers. Most of the Company's current and proposed
products require essential electronic components supplied by outside vendors.
Certain components may be available from only one supplier and may occasionally
be in short supply. The Company's inability to obtain key components could
result in lost sales, the need to maintain excessive inventory levels and
higher component costs, which could increase the cost of producing the
Company's products and result in a material adverse effect on the Company.
Regulatory Environment. Wireless communications and data encryption
products are subject to regulation by United States and foreign laws and
international treaties. The regulatory environment is inherently uncertain and
changes in the regulatory structure and laws and regulations can adversely
affect the Company and its customers.
Other Risks. From time to time, the Company details other risks with
respect to its businesses and/or financial results and condition in its filings
with the Commission.
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<PAGE> 14
ITEM 2. PROPERTIES.
The Company conducts its business primarily through a 43,500 square
foot two-story administrative and manufacturing facility located at 4800 NW 1st
Street, Lincoln, Nebraska, 68521, which is located in the University of
Nebraska Technology Park. The Company owns this facility and approximately 10
acres of surrounding land. The Company believes that its current and planned
facilities are adequate to meet its present and immediately foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in certain legal
proceedings arising in the normal course of its business. Management believes
that the outcome of these matters will not have a material adverse effect on
the Company. For discussion of an assertion by Ericsson that the APCO 25
standard infringes certain Ericsson patents, see "ITEM 1. BUSINESS --
INTELLECTUAL PROPERTY."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
ITEM 4(A) EXECUTIVE OFFICERS OF THE REGISTRANT.
In addition to the executive officers listed in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of the Company's 1996 fiscal year, which information is
incorporated herein by reference, the following persons are considered
executive officers of the Company:
RANDAL P. HANSEN, 33, joined the Company as Vice President of Finance
and Chief Financial Officer in August 1996. From January 1986 to August 1996,
he held numerous positions with KPMG Peat Marwick LLP, an international public
accounting firm, serving most recently as a Senior Audit Manager. Mr. Hansen
is a licensed Certified Public Accountant.
MICHAEL P. WALLACE, 35, joined the Company as Vice President of
Operations in February 1994. From December 1989 to February 1994, he served as
the Electric Card Assembly and Test Engineering Manager of Scientific Atlanta
Inc., a manufacturer and distributor of broadband communications products.
JOEL K. YOUNG, 32, joined the Company as Vice President of Engineering
in February 1996. From 1986 to January 1996, he held numerous positions with
the former AT&T Bell Laboratories, a telecommunications research company, and
specialized in signaling, network implementation and voice processing. He
served most recently as District Manager, AT&T Business Communication Services.
Mr. Young has been awarded five patents on various telecommunications systems
and techniques.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of the completion of the Company's initial public offering on
January 22, 1997, the Common Stock of the Company has been traded on The Nasdaq
Stock Market as a National Market issue under the symbol "TRII." Since
such time, Dain Bosworth Incorporated and Furman Selz LLC have made a market in
the Company's stock. The Company estimates that the number of stockholders of
record of the Company at February 28, 1997 was approximately 1,600.
The high and low sales prices for the Company's common stock for the
period from January 22, 1997 through February 28, 1997, as reported by The
Nasdaq Stock Market, Inc., was $10.50 and $8.00, respectively. To date, the
Company has not declared any cash dividends.
In connection with the merger of Transcrypt International, Ltd., a
Nebraska limited partnership (the "Partnership"), with and into the Company
effective June 30, 1996, pursuant to an Agreement of Merger between the
Partnership and the Company, the Company issued, in a transaction that was not
registered under the Securities Act of 1933, as amended (the "Act"), 5,175,434
shares (before giving effect to the 1.3106311-for-1 stock split effected by the
Company in November 1996) of its Common Stock, $0.01 par value, as consideration
for the merger.
In connection with the merger of Transcrypt International, Inc., a
Nebraska corporation ("Transcrypt Nebraska"), the former general partner of the
Partnership, with and into the Company effective September 30, 1996, pursuant to
an Agreement of Merger between Transcrypt Nebraska and the Company, the Company
issued, in a transaction that was not registered under the Act, 52,010 shares
(pre-split) of its Common Stock, $0.01 par value, as consideration for the
merger.
In September 1994, the Partnership issued 200,000 limited partnership
units for $5.00 per unit, or aggregate consideration of $1,000,000, to certain
of the limited partners of the Partnership.
The sales and issuances of securities in the transactions described
above were deemed to be exempt from registration under the Act in reliance upon
Section 4(2) of the Securities Act as transactions by an issuer not involving
any public offering. Appropriate legends were affixed to the securities issued
in connection with such transactions.
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<PAGE> 16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data of the Company is
qualified by reference to, and should be read in conjunction with, the
Consolidated Financial Statements and Notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included
elsewhere herein. The Consolidated Statements of Income (Loss) data for the
years ended December 31, 1996, 1995 and 1994 and the Consolidated Balance Sheet
data as of December 31, 1996 and 1995 are derived from, and are qualified by
reference to, the audited Consolidated Financial Statements of the Company
included elsewhere in this Form 10-K. The Consolidated Statements of Income
(Loss) data for the years ended December 31, 1993 and 1992 and the Consolidated
Balance Sheet data as of December 31, 1994, 1993 and 1992 are derived from
audited financial statements not included herein.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME (LOSS) DATA:
Revenues . . . . . . . . . . . . . . . . $ 13,775 $ 8,128 $ 9,155 $ 6,900 $ 4,974
Cost of sales . . . . . . . . . . . . . . 4,864 2,983 2,901 1,616 1,236
--------- --------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . 8,911 5,145 6,254 5,284 3,738
Operating expenses:
Research and development . . . . . . 2,234 1,953 1,180 1,138 963
Sales and marketing . . . . . . . . 2,103 2,109 1,590 982 656
General and administrative . . . . . 1,413 1,191 1,074 1,151 1,472
Amortization of intangible assets (1) 1,001 1,093 1,092 1,092 1,100
Special compensation expense (2) . . 5,568 -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses . . . 12,319 6,346 4,936 4,363 4,191
--------- --------- --------- --------- ---------
Income (loss) from operations (3) . . . . (3,408) (1,201) 1,318 921 (453)
Interest expense, net . . . . . . . . . . 131 137 111 133 143
Provision (benefit) for income taxes (4) (1,528) -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) (3) . . . . . . . . . . $ (2,011) $ (1,338) $ 1,207 $ 788 $ (596)
========= ========= ========= ========= =========
Income (loss) before pro forma taxes $ (3,539) $ (1,338)
Pro forma provision (benefit) for
income taxes (4) . . . . . . . . . . (1,393) (497)
--------- ---------
Pro forma net loss (3) . . . . . . . . . $ (2,146) $ (841)
========= =========
Pro forma net loss per share (3) (5) . . $ (0.31) $ (0.12)
========= =========
Shares used to compute net loss per share 6,969 6,969
(5) . . . . . . . . . . . . . . . . . . .
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . . $2,468 $1,684 $3,353 $1,726 $ 436
Total assets . . . . . . . . . . . . . . 13,981 7,523 9,627 7,908 7,741
Long-term debt and capitalized lease 2,632 1,847 2,164 2,035 2,552
obligations, net of current portion
Stockholders' equity . . . . . . . . . . 7,073 3,907 5,945 4,599 3,821
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
_____________________________
(1) Reflects the amortization of intangible assets related to the
acquisition of the Company's business in December 1991. These
intangible assets were fully amortized as of November 30, 1996, and
thus no such amortization expense will be incurred subsequent to
November 30, 1996. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- RESULTS OF
OPERATIONS -- Amortization of Intangible Assets."
(2) Represents a non-recurring, non-cash compensation expense of $5.4
million resulting from the vesting in September 1996 of 716,916 stock
options for 10 executive officers and key employees of the Company at
a weighted average exercise price of $1.81 per share, and the accrual
of a special compensation expense of $210,000 in September 1996, which
is payable to the Company's Chief Executive Officer.
(3) Excluding the special compensation expense of $5.6 million, income
(loss) from operations, net income (loss), pro forma net income (loss)
and pro forma net income (loss) per share would have been $2.2
million, $1.7 million, $1.6 million and $0.23, respectively, for 1996.
(4) Prior to June 30, 1996, the Company operated as a partnership. The
pro forma provision for income taxes reflects the provision for income
taxes as if the Company had been taxed as a Subchapter "C" corporation
under the Internal Revenue Code.
(5) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used
to compute pro forma net income (loss) per share.
The following table sets forth certain Consolidated Statements of
Income (Loss) information as a percentage of revenues during the periods
indicated:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . . . . . . 35.3 36.7 31.7
--------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . 64.7 63.3 68.3
Operating expenses:
Research and development . . . . . . . . . . . . . 16.2 24.0 12.9
Sales and marketing . . . . . . . . . . . . . . . 15.3 26.0 17.4
General and administrative . . . . . . . . . . . . 10.2 14.7 11.7
Amortization of intangible assets . . . . . . . . 7.3 13.4 11.9
Special compensation expense . . . . . . . . . . . 40.4 -- --
--------- --------- ---------
Total operating expenses . . . . . . . . . . 89.4 78.1 53.9
--------- --------- ---------
Income (loss) from operations . . . . . . . . . . . . . (24.7) (14.8) 14.4
Interest expense, net . . . . . . . . . . . . . . . . . 1.0 1.7 1.2
Provision (benefit) for income taxes . . . . . . . . . (11.1) -- --
--------- --------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . (14.6)% (16.5)% 13.2%
========= ========= =========
Income (loss) before pro forma income taxes . . . . . . (25.7) (16.5)
Pro forma provision (benefit) for income taxes . . . . (10.1) (6.1)
--------- ---------
Pro forma net loss . . . . . . . . . . . . . . . . . . (15.6)% (10.4)%
========= =========
</TABLE>
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<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion is intended to provide a better understanding
of the significant changes in trends relating to the Company's financial
condition and results of operations. Management's Discussion and Analysis
should be read in conjunction with the accompanying Consolidated Financial
Statements of the Company and related notes.
Discussions of certain matters contained under this caption may
constitute "forward-looking statements" for purposes of the Reform Act, which
involve certain risks and uncertainties. The Company's actual results may
differ materially from the results discussed in such forward- looking
statements. For a discussion of some of the factors that might cause such a
difference, see "ITEM 1. BUSINESS -- SUMMARY OF BUSINESS CONSIDERATIONS AND
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND/OR STOCK
PRICE."
OVERVIEW
The Company commenced operations in 1978 to manufacture and distribute
embedded voice privacy and specialized signaling add-on devices for LMR users.
In December 1991, an investor group led by John T. Connor, the Company's
current Chairman and Chief Executive Officer, acquired substantially all of the
assets of the Company and certain intellectual property rights held by the
Company's founders, creating intangible assets of approximately $5.5 million,
which the Company amortized on a straight-line basis over a 60-month period
ended November 30, 1996. Following the acquisition, management took steps to
diversify the Company's product lines and further exploit the Company's core
competencies in information security technologies.
In late 1993, the Company began marketing system-wide security
upgrades to large users of wireless communications, particularly foreign public
safety and government users. Primarily as a result of such sales to these
foreign customers, revenues in 1994 and 1995 generally increased while gross
margins were reduced by the lower unit prices associated with these larger
orders. The Company's gross margins were also negatively impacted during this
period by a worldwide shortage of surface-mount microprocessors of the type
used in the Company's add-on scrambling modules, which increased the Company's
component costs. In mid-1994, the Company began purchasing components from a
large electronics component distributor, which contributed to a gradual
improvement in the Company's access to such components and reduced component
costs.
In order to take advantage of the growing demand for digital
communications, in 1993 the Company started to invest in digital product and
technology research and development. In September 1994, the Company began
developing an APCO 25 compliant hand-held digital LMR. In connection with the
development of this new product, the Company hired 11 additional technical
personnel to focus on basic digital research and product development. In order
to help finance these additional research and development expenditures, in
September 1994, the Company raised $1.0 million through the sale of additional
equity to its existing equityholders. As a result of these development
efforts, the Company introduced a digital landline telephone encryptor in
October 1995 and an APCO 25 compliant digital hand-held radio in August 1996,
and plans to introduce additional digital products in 1997.
In 1995, the Company's growth was interrupted when the Company
experienced a reduction in
17
<PAGE> 19
annual revenues and profitability before amortization of intangible assets.
The Company believes that these results were primarily attributable to
management conflict over the future direction and control of the Company, which
led to a management restructuring commencing in the second quarter of 1995 that
resulted in the departure of five executive officers. The Company believes
that these factors diverted management attention from day-to-day operations,
which negatively impacted operating results, particularly in the first half of
1995. In addition, the Company incurred direct expenditures in 1995 of
approximately $305,000 in severance payments and recruiting and relocation
costs for new executives in connection with the restructuring.
The Company has benefited and continues to benefit from state tax
credits arising from a 1993 agreement with the State of Nebraska, which results
in annual state income tax credits through 1999. In addition, the Company
utilizes its foreign sales corporation subsidiary located in Guam to exempt
from income taxation a portion of the Company's foreign sales income. See
"Provision for Income Taxes."
RESULTS OF OPERATIONS
Revenues
The Company recognizes revenues upon shipment of products to its
customers. Revenues increased to $13.8 million in 1996 from $8.1 million in
1995. This increase was attributable primarily to revenues in 1996 associated
with several large new sales contracts, including the commencement of shipments
of socket scramblers to Motorola. The Company also began shipment of its first
stand-alone radio and cellular products in September 1996, which contributed to
the increase in 1996 revenue. In addition, revenues for 1995 were negatively
impacted due to management conflicts over the future direction and control of
the Company, which led to a management restructuring commencing in the second
quarter of 1995 and resulted in the departure of five senior executive
officers.
Revenues declined to $8.1 million in 1995 from $9.2 million in 1994,
due primarily to lower sales volumes in the first half of 1995, which
management believes resulted primarily from the internal management conflicts
discussed above.
International sales as a percentage of revenues were 49.0%, 71.4% and
57.3% in 1996, 1995 and 1994, respectively. The Company believes that the
proportion of international sales in 1995 was unusually high, reflecting large
sales to Egypt and Turkey and lower domestic sales. The Company anticipates
that international sales will continue to represent a significant portion of
revenues in the future, although domestic sales may increase as a percentage of
revenues in the future due to an increased marketing emphasis on domestic
sales, including scrambler sales to Motorola, and the introduction and expanded
marketing domestically of the Company's current and proposed digital radio
products in 1997.
Gross Profit
Cost of sales includes materials, labor, depreciation and overhead
costs associated with the production of the Company's products, as well as
shipping, royalty and warranty product costs. Gross profit increased to $8.9
million in 1996 from $5.1 million in 1995. In addition, gross margin increased
slightly to 64.7% in 1996 from 63.3% in 1995. The Company began shipment of
its first stand-alone products
18
<PAGE> 20
in September 1996, which generally have lower gross margins than add-on
products. To the extent that sales of stand-alone products increase in the
future relative to add-on product sales, gross margins are likely to decline.
Gross profit was $5.1 million in 1995 and $6.3 million in 1994. Gross
margin declined to 63.3% in 1995 from 68.3% in 1994, due primarily to lower
sales volumes during the first six months of 1995 without a comparable decline
in fixed overhead costs.
Research and Development
Research and development expenses consist primarily of the costs
associated with research and development personnel, materials and the
depreciation of research and development equipment and facilities. The Company
expenses all research and development costs as they are incurred. Research and
development expenses increased to $2.2 million in 1996 from $2.0 million in
1995. This increase was due primarily to expenses related to the continued
development of the Company's APCO 25 digital LMRs and the related development
of internal manufacturing capabilities for certain radio components. Research
and development expenses as a percentage of revenues decreased to 16.2% in 1996
from 24.0% in 1995, due to greater revenues in 1996. Research and development
expenses as a percentage of revenues were 12.9% in 1994. The Company
anticipates that it will continue to devote increased resources to research and
development during 1997 compared to 1996.
Research and development expenses increased to $2.0 million in 1995
from $1.2 million in 1994. This dollar increase was due primarily to the
commencement of development of the Company's APCO 25 compliant digital LMRs,
which began in September 1994, and the expanded development of telephone
security product lines.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and related
costs of sales personnel, including sales commissions and travel expenses, and
costs of advertising, public relations, seminars and trade show participation.
Sales and marketing expenses remained constant at $2.1 million in both 1996 and
1995, although the expense figure for 1995 includes severance payments and
recruiting and relocation costs for new sales executives related to the
Company's management restructuring. Sales and marketing expenses decreased as a
percentage of revenues to 15.3% in 1996 from 26.0% in 1995, due primarily to the
increase in revenues in 1996. The Company expects to increase its sales and
marketing expenditures during 1997 through the addition of direct sales and
marketing personnel, primarily to support the introduction of new products,
including digital radios.
Sales and marketing expenses increased to $2.1 million in 1995 from
$1.6 million in 1994. This increase was due primarily to an increase in
personnel and associated expenses relating to the development of international
markets and distribution channels. Sales and marketing expenses as a
percentage of revenues were 26.0% in 1995 and 17.4% in 1994. The percentage
increase from 1994 to 1995 was also due in part to the Company's lower revenues
in 1995.
General and Administrative
General and administrative expenses consist primarily of salaries and
other expenses associated
19
<PAGE> 21
with the Company's management, accounting, finance and administrative
functions. General and administrative expenses increased to $1.4 million in
1996 from $1.2 million in 1995. This increase was attributable primarily to
salaries, recruiting and relocation expenses associated with hiring several key
management employees and additional bad debt provisions for accounts
receivable reserves. The Company expects to incur additional increases in
general and administrative expenses in 1997 due to costs associated with
maintaining its status as a publicly-held company and upgrades to the Company's
management information systems. General and administrative expenses as a
percentage of revenues decreased to 10.2% in 1996 from 14.7% in 1995, due
primarily to the increase in revenues in 1996.
General and administrative expenses remained generally constant at
$1.2 million in 1995 and $1.1 million in 1994. General and administrative
expenses as a percentage of revenues were 14.7% in 1995 and 11.7% in 1994.
Amortization of Intangible Assets
Intangible assets consist primarily of the costs associated with the
acquisition of the Company's business in December 1991, including proprietary
technology licenses, non-competition agreements and goodwill. The Company
amortized these intangible assets on a straight-line basis over a 60-month
period ended November 30, 1996, which resulted in an amortization expense of
$1.0 in 1996 and $1.1 million in each of 1995 and 1994. These intangible
assets were fully amortized as of November 30, 1996, and thus no such
amortization expense will be incurred subsequent to November 30, 1996.
Special Compensation Expense
In September 1996, the Company incurred a non-recurring, non-cash
compensation expense of $5.4 million, resulting from the vesting in September
1996 of 716,916 stock options for 10 executive officers and key employees of
the Company at a weighted average exercise price of $1.81 per share, and a
special compensation expense of $210,000 payable to the Company's Chief
Executive Officer, for services rendered related to the original purchase in
1991. Excluding the special compensation expense of $5.6 million, income
(loss) from operations, net income (loss), pro forma net income (loss) and pro
forma net income (loss) per share for 1996 would have been $2.2 million, $1.7
million, $1.6 million and $0.23, respectively.
Interest Expense, Net
Net interest expense consists of interest expense, including amounts
payable on the Company's term loans and bank line of credit, net of interest
income earned on cash and investable funds. Net interest expense was $131,000,
$137,000 and $111,000 in 1996, 1995 and 1994, respectively.
Provision for Income Taxes
Prior to June 1996, the Company was organized as a partnership, and
therefore was not subject to income taxation except to the extent that its
earnings were attributed to its partners. The Company's benefit for income
taxes subsequent to reorganization as a corporation for the six-month period
ended December 31, 1996 was $(1.5) million, primarily resulting from a deferred
tax benefit of $(1.8) in connection with the stock option related special
compensation expense of $5.4 million.
20
<PAGE> 22
The Company benefits from state tax credits arising from a 1993
agreement with the State of Nebraska (the "Nebraska Agreement") to create at
least 30 new jobs and invest at least $3.0 million in new equipment prior to
December 31, 1999. This agreement results in annual state income tax credits
through 1999 of ten percent of the purchase price of new equipment and a refund
of Nebraska sales taxes (currently at a rate of 6.5%) paid on purchases of new
equipment during each year and, beginning on January 1, 1996, a credit of five
percent of the annual compensation paid to the new employees exceeding the base
year's aggregate compensation. The Company believes that sufficient tax
credits will be available through the life of the Nebraska Agreement to offset
the Company's expected Nebraska state income tax liability during such period.
In addition, the Company utilizes its foreign sales corporation ("FSC")
subsidiary located in Guam to exempt from income taxation a portion of the
Company's foreign sales income.
Recently Issued Accounting Standards
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation." SFAS No. 123 allows companies to continue the current
method of accounting for stock-based compensation plans under APB Opinion No. 25
or adopt the fair value based method contained in SFAS No. 123. The Company has
adopted SFAS No. 123 and has elected to provide disclosure of the relevant
information in the Notes to Consolidated Financial Statements.
21
<PAGE> 23
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited financial information
in dollars and as a percentage of revenues for the eight quarters ended
December 31, 1996. In the opinion of the Company's management, this
information has been prepared on the same basis as the audited Consolidated
Financial Statements appearing elsewhere in this Form 10-K and includes all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the unaudited results set forth herein. The operating results
for any quarter are not necessarily indicative of results for any subsequent
period or for the entire fiscal year.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . .. $ 1,460 $ 1,562 $ 2,336 $ 2,770
Cost of sales . . . . . . . . . . . . . . . . . . . .. 646 761 859 716
---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . .. 814 801 1,477 2,054
Operating expenses:
Research and development . . . . . . . . . . . .. 397 457 508 591
Sales and marketing . . . . . . . . . . . . . .. 509 411 535 654
General and administrative . . . . . . . . . . .. 285 265 258 383
Amortization of intangible assets (1) . . . . .. 273 280 277 263
Special compensation expense (2) . . . . . . . .. -- -- -- --
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . .. 1,464 1,413 1,578 1,891
---------- ---------- ---------- ----------
Income (loss) from operations (3) . . . . . . . . . .. (650) (612) (101) 163
Interest expense, net . . . . . . . . . . . . . . . .. 29 24 42 43
Provision (benefit) for income taxes (4) . . . . . .. -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) (3) . . . . . . . . . . . . . . . .. $ (679) $ (636) $ (143) $ 120
========== ========== ========== ==========
Income (loss) before pro forma taxes . . . . . . . .. $ (679) $ (636 $ (143) $ 120
Pro forma provision (benefit) for income taxes (252) (236) (53) 45
---------- ---------- ---------- ----------
Pro forma net income (loss) (3) . . . . . . . . . . .. $ (427) $ (400) (90) $ 75
========== ========== ========== ==========
Pro forma net income (loss) per share (3) (5) . . . .. $ (0.06) $ (0.06) $ (0.01) $ 0.01
========== ========== ========== ==========
Shares used to compute net income (loss)
per share (5) . . . . . . . . . . . . . . . . .. 6,969 6,969 6,969 6,969
========== ========== ========== ==========
Quarter Ended
-----------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . .. $ 2,580 $ 3,148 $ 3,547 $ 4,500
Cost of sales . . . . . . . . . . . . . . . . . . . .. 911 939 1,036 1,978
---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . .. 1,669 2,209 2,511 2,522
Operating expenses:
Research and development . . . . . . . . . . . .. 436 649 601 548
Sales and marketing . . . . . . . . . . . . . .. 431 404 671 597
General and administrative . . . . . . . . . . .. 350 345 357 361
Amortization of intangible assets (1) . . . . .. 276 270 273 182
Special compensation expense (2) . . . . . . . .. -- -- 5,568 --
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . .. 1,493 1,668 7,470 1,688
---------- ---------- ---------- ----------
Income (loss) from operations (3) . . . . . . . . . .. 176 541 (4,959) 834
Interest expense, net . . . . . . . . . . . . . . . .. 18 32 29 52
Provision (benefit) for income taxes (4) . . . . . .. -- -- (1,758) 230
---------- ---------- ---------- ----------
Net income (loss) (3) . . . . . . . . . . . . . . . .. $ 158 $ 509 $ (3,230) $ 552
========== ========== ========== ==========
Income (loss) before pro forma taxes . . . . . . . .. $ 158 $509 (4,988) $ 782
38 97 (1,758) 230
Pro forma provision (benefit) for income taxes ---------- ---------- ---------- ----------
Pro forma net income (loss) (3) . . . . . . . . . . .. $ 120 $41 $ (3,230) $ 552
========== ========== ========== ==========
Pro forma net income (loss) per share (3) (5) . . . .. 0.02 0.06 (0.46) 0.08
========== ========== ========== ==========
Shares used to compute net income (loss)
per share (5) . . . . . . . . . . . . . . . . .. 6,969 6,969 6,969 6,969
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As a percentage of revenues
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . . . . . 44.3 48.7 36.8 25.9
---------- ---------- ---------- ----------
Gross margin . . . . . . . . . . . . . . . . . . . . 55.7 51.3 63.2 74.1
Operating expenses:
Research and development . . . . . . . . . . . . 27.2 29.3 21.7 21.3
Sales and marketing . . . . . . . . . . . . . . 34.8 26.3 23.0 23.6
General and administrative . . . . . . . . . . . 19.5 17.0 11.0 13.8
Amortization of intangible assets (1) . . . . . 18.7 17.9 11.8 9.5
Special compensation expense (2) . . . . . . . . -- -- -- --
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . . 100.2 90.5 67.5 68.2
---------- ---------- ---------- ----------
Income (loss) from operations (3) . . . . . . . . . . (44.5) (39.2) (4.3) 5.9
Interest expense, net . . . . . . . . . . . . . . . . 2.0 1.5 1.8 1.6
Provision for income taxes (4) . . . . . . . . . . . -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) (3) . . . . . . . . . . . . . . . . (46.5)% (40.7)% (6.1)% 4.3%
========== ========== ========== ==========
As a percentage of revenues
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . . . . . 35.3 29.8 29.2 44.0
---------- ---------- ---------- ----------
Gross margin . . . . . . . . . . . . . . . . . . . . 64.7 70.2 70.8 56.0
Operating expenses:
Research and development . . . . . . . . . . . . 16.9 20.6 16.9 12.2
Sales and marketing . . . . . . . . . . . . . . 16.7 12.8 18.9 13.3
General and administrative . . . . . . . . . . . 13.6 11.0 10.1 8.0
Amortization of intangible assets (1) . . . . . 10.7 8.6 7.7 4.0
Special compensation expense (2) . . . . . . . . -- -- 157.0 --
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . . 57.9 53.0 210.6 37.5
---------- ---------- ---------- ----------
Income (loss) from operations (3) . . . . . . . . . . 6.8 17.2 (139.8) 18.5
Interest expense, net . . . . . . . . . . . . . . . . 0.7 1.0 0.8 1.1
Provision for income taxes (4) . . . . . . . . . . . -- -- (49.6) 5.1
---------- ---------- ---------- ----------
Net income (loss) (3) . . . . . . . . . . . . . . . . 6.1% 16.2% (91.0)% 12.3%
========== ========== ========== ==========
</TABLE>
22
<PAGE> 24
- -----------------
(1) Reflects the amortization of intangible assets related to the
acquisition of the Company's business in December 1991. These
intangible assets were fully amortized as of November 30, 1996, and
thus no such amortization expenses will be incurred subsequent to
November 30, 1996. See "-- RESULTS OF OPERATIONS -- Amortization of
Intangible Assets."
(2) Represents a non-recurring, non-cash compensation expense of $5.4
million resulting from the vesting in September 1996 of 716,916 stock
options for 10 executive officers and employees of the Company at a
weighted average exercise price of $1.81 per shares, and the accrual
of a special compensation expense of $210,000 in September 1996, which
is payable to the Company's Chief Executive Officer.
(3) Excluding the special compensation expense of $5.6 million, income
(loss) from operations, net income (loss), pro forma net income (loss)
and pro forma net income (loss) per share would have been $609,000,
$517,000, $517,000 and $0.07, respectively, for the three months ended
September 30, 1996.
(4) Prior to June 30, 1996, the Company operated as a partnership. The
pro forma provision for income taxes reflects the provision for income
taxes as if the Company had been taxed as a Subchapter "C" corporation
under the Internal Revenue Code.
(5) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used
to compute pro forma net income (loss) per share.
The Company historically has experienced, and in the future expects to
continue to experience, substantial variability in its revenues and
profitability from quarter to quarter. The level of revenues in a particular
quarter vary primarily based upon the timing of large purchase orders, due
principally to the seasonal nature of governmental budgeting processes and the
needs of competing budgetary concerns of its customers during the year. Other
factors which affect the level of revenues in a particular quarter include the
timing of the introduction of new products, general economic conditions, the
timing and mix of product sales and specific economic conditions in the
information security and wireless communications industries. In addition, due
to the buying patterns of the Company's federal and state agency customers,
revenues for the first quarter of the Company's fiscal year tend to be lower
than revenues for the fourth quarter of the preceding year. The Company
believes that its quarterly results are likely to vary for the foreseeable
future.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and met its capital
requirements primarily through cash flow generated from operations, short-term
borrowings, long-term debt and an additional capital investment from its
investors. The Company's operating activities generated cash of $377,000,
$55,000 and $2.9 million in 1996, 1995 and 1994, respectively. Cash provided
by operating activities in 1996 consisted primarily of a net loss plus
depreciation and amortization and the special compensation expense and an
increase in accounts payable and accrued expenses, offset in part by an
increase in accounts receivable, inventory and deferred tax assets. Cash
provided by operating activities in 1995 consisted primarily of a net loss plus
depreciation and amortization and an increase in accrued expenses, offset in
part by an increase in accounts receivable and a decrease in accounts payable.
Cash provided by operating activities in 1994 consisted primarily of net income
plus depreciation and amortization and a decrease in accrued expenses, offset
in part by increases in accounts receivable, inventory and prepaid and other
assets.
The deferred tax assets totaling $1.9 million (which resulted
primarily from the stock option related special compensation expense of $5.4
million incurred in September 1996) were 13.7% and 27.1% of total assets and
stockholders' equity, respectively, at December 31, 1996. Based on the current
level of taxable income, management believes that it is more likely than not
that future taxable income will be sufficient to fully utilize all deferred tax
assets recorded.
Cash used for investing activities, attributable primarily to capital
expenditures, totaled $2.5 million, $1.3 million and $1.7 million in 1996, 1995
and 1994, respectively. Capital expenditures
23
<PAGE> 25
consisted primarily of computer and networking equipment, office furniture and
manufacturing equipment and, in 1996 and 1994, expenses related to the
construction of the Company's Lincoln facility. In August 1996, the Company
began construction of a 21,000 square foot expansion of its existing Lincoln
facility at an estimated final cost of $1.0 million, primarily to accommodate
additional manufacturing capacity, which expansion was completed in the first
quarter of 1997. As of December 31, 1996, the Company had no material firm
commitments for capital expenditures, except a commitment to purchase
approximately $400,000 of office furniture and equipment related primarily to
the new premises, and the Company expects to purchase additional computer
equipment and replace its current management information system in 1997.
Financing activities, attributable primarily to cash provided by
borrowings on term loans and operating lines of credit and cash used for
partnership distributions, totaled $1.8 million, $(564,000) and $744,000 in
1996, 1995 and 1994, respectively. Financing activities have consisted
primarily of borrowings under and payments on an industrial development revenue
bond issue (the "IDR") arranged through the Nebraska Investment Finance
Authority, two term notes, an installment note secured by equipment and a bank
line of credit. Additionally, in September 1994, the Company received an
additional $1.0 million equity investment from existing investors to help the
Company finance the development of its APCO 25 digital radio project.
The IDR bears interest at a fixed rate of 6.25%, is non-amortizing and
matures in January 2004. At December 31, 1996, the outstanding principal
amount under the IDR was $850,000. Both of the term notes bear interest at the
bank's regional money market rate plus 0.5% and are secured by substantially
all of the Company's assets. At December 31, 1996, the outstanding principal
amounts under the two term notes were $251,000 and $376,000, respectively. The
installment note is secured specifically by equipment and bears interest at the
bank's national prime rate plus 0.5%. At December 31, 1996, the outstanding
principal amount under the installment note was $359,000. The bank line of
credit provides for working capital and capital advances not to exceed $4.0
million, with specific advances calculated based upon a percentage of eligible
inventories, accounts receivable and fixed assets. Interest is payable monthly
on the bank line at the bank's money market rate and is collateralized by
substantially all of the Company's assets. At December 31, 1996, the
outstanding principal amount under the bank line of credit was $1.8 million.
On January 25, 1997, the Company paid off all of the outstanding balances on
the two term notes, the installment note and the bank line of credit with
proceeds from the Company's initial public offering.
In November 1996, the Company obtained a $1.0 million construction
loan to fund the expansion of its existing Lincoln facility. Interest on the
loan is payable monthly at the bank's national money market rate plus 0.5%
(8.75% at December 31, 1996), with the principal balance maturing in August
1997. At February 28, 1997, the principal balance outstanding on the
construction loan was $892,000.
Prior to June 1996, the Company was organized as a partnership and, as
such, made distributions to its partners of $181,000, $700,000 and $861,000 in
the six months ended June 30, 1996 and in 1995 and 1994, respectively,
primarily to cover its partners' attributed tax liabilities. The Company
currently intends to retain earnings, if any, to support its growth strategy
and does not anticipate paying cash dividends in the foreseeable future.
The Company believes that cash generated from operations and the net
proceeds of $17.7 million from the sale of Common Stock in the Company's
initial public offering completed in January 1997, together with the Company's
cash, cash equivalents and lines of credit, will be sufficient to meet its
anticipated cash needs for working capital, capital expenditures and business
expansion plans at least through 1997.
24
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements included at page 27
of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
25
<PAGE> 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning directors and executive officers of the Company
is incorporated herein by reference from the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after the end
of the last fiscal year. For information concerning other executive officers
of the Company, see "ITEM 4(A). EXECUTIVE OFFICERS OF THE COMPANY."
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning executive compensation is incorporated herein
by reference from the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related transactions
with management and others is incorporated by reference from the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of the last fiscal year.
26
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are included in this report at the
page numbers indicated.
<TABLE>
<CAPTION>
1. Financial Statements Page No.
-------------------- --------
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheets as of F-2
December 31, 1996 and 1995
Consolidated Statements of Income (Loss) for the F-3
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity F-4
for the Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years ended F-5
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements F-6 to F-17
2. FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants S-1
Schedule III - Valuation and Qualifying Accounts and Reserves S-2
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in
the financial statements or notes thereto.
3. Exhibits
(i) Executive Compensation Plans and Arrangements:
The following is a summary of the Company's executive
compensation plans and arrangements which are required to be
filed as exhibits to this Report on Form 10-K:
1. Employment Agreement between the Company and John T.
Connor dated as of September 10, 1996 (incorporated
herein by reference to Exhibit 10.1 to the Company's
Form S-1 Registration No. 333-14351 declared
effective on January 22, 1997).
2. Employment Agreement between the Company and Jeffery
L. Fuller dated as of July 18, 1996 (incorporated
herein by reference to Exhibit 10.2 to the Company's
Form S-1 Registration No. 333-14351 declared
effective on January 22, 1997).
3. Form of Employment Agreement between the Company and
C. Eric Baumann, Michael P. Wallace and Joel K. Young
(incorporated herein by reference to
</TABLE>
27
<PAGE> 29
Exhibit 10.3 to the Company's Form S-1 Registration
No. 333-14351 declared effective on January
22, 1997).
4. Form of 1996 Stock Incentive Plan, together with
forms of stock option agreements (incorporated herein
by reference to Exhibit 10.4 to the Company's Form
S-1 Registration No. 333-14351 declared effective on
January 22, 1997).
(ii) Exhibit Index:
Exhibit
No. Description
3.1 Second Amended and Restated Certificate of Incorporation of the
Company filed on September 30, 1996 with the Secretary of State of the
State of Delaware (incorporated herein by reference to Exhibit 3.1 to
the Company's Form S-1 Registration No. 333-14351 declared effective
on January 22, 1997 (hereinafter "1997 Registration Statement")).
3.2 Amended and Restated Bylaws of the Company (incorporated herein by
reference to Exhibit 3.2 to 1997 Registration Statement).
3.3 Certificate of Merger of Transcrypt International, Ltd., a Nebraska
limited partnership, with and into the Company, filed on June 28,
1996 with the Secretary of State of the State of Delaware
(incorporated herein by reference to Exhibit 3.3 to 1997 Registration
Statement).
3.4 Certificate of Merger of Transcrypt International, Inc., a Nebraska
corporation, with and into the Company, filed on September 30, 1996
with the Secretary of State of the State of Delaware (incorporated
herein by reference to Exhibit 3.4 to 1997 Registration Statement).
4.1 Specimen Certificate for Common Stock (incorporated herein by
reference to Exhibit 4.1 to 1997 Registration Statement).
10.1 Employment Agreement between the Company and John T. Connor dated as
of September 10, 1996 (incorporated herein by reference to Exhibit
10.1 to 1997 Registration Statement).
10.2 Employment Agreement between the Company and Jeffery L. Fuller dated
as of July 18, 1996 (incorporated herein by reference to Exhibit 10.2
to 1997 Registration Statement).
10.3 Form of Employment Agreement between the Company and C. Eric Baumann,
Michael P. Wallace and Joel K. Young (incorporated herein by reference
to Exhibit 10.3 to 1997 Registration Statement).
10.4 Form of 1996 Stock Incentive Plan, together with forms of stock option
agreements (incorporated herein by reference to Exhibit 10.4 to 1997
Registration Statement).
10.5 Form of Indemnification Agreement between the Company and each
executive officer and director of the Company (incorporated herein by
reference to Exhibit 10.5 to 1997 Registration Statement).
10.6 License Agreement for APCO Project 25 Compliant Product between
Motorola, Inc. and the Company dated as of August 2, 1994
(incorporated herein by reference to Exhibit 10.6 to 1997 Registration
Statement).
10.7* Amendment, dated as of June 28, 1996, to License Agreement for APCO
Project 25 Compliant Product between Motorola, Inc. and the Company
dated as of August 2, 1994 (incorporated herein by reference to
Exhibit 10.7 to 1997 Registration Statement).
10.8 OEM Agreement between Motorola, Inc. and the Company dated as of
August 2, 1994 (incorporated herein by reference to Exhibit 10.8 to
1997 Registration Statement).
10.9* Amendment, dated as of July 15, 1996, to OEM Agreement between
Motorola, Inc. and the Company dated as of August 2, 1994
(incorporated herein by reference to Exhibit 10.9 to 1997 Registration
Statement).
10.10* Private Label/Supplier Agreement for Analog Scrambling Modules between
Motorola, Inc. and the Company dated as of August 8, 1995
(incorporated herein by reference to Exhibit 10.10 to 1997
Registration Statement).
10.11* Motorola Cellular Subscriber Products Sales Agreement, dated as of
June 13, 1996, by and between Motorola, Inc. and the Company
(incorporated herein by reference to Exhibit 10.11 to 1997
Registration Statement).
10.12 License Agreement for APCO Fed Project 25 Algorithm between Digital
Voice Systems, Inc. and the Company, dated as of August 14, 1995
(incorporated herein by reference to Exhibit 10.12 to 1997
Registration Statement).
10.13 Consigned Inventory Agreement between Arrow/Schweber Electronics Group
and the Company, dated as of June 22, 1994 (incorporated herein by
reference to Exhibit 10.13 to 1997 Registration Statement).
10.14 Nebraska Investment Finance Authority $850,000 Industrial Revenue Bond
(Transcrypt International, Ltd. Project), Series 1994, dated as of
January 15, 1994, and Note (incorporated herein by reference to
Exhibit 10.14 to 1997 Registration Statement).
10.15 Trust Indenture, dated as of January 15, 1994, for $850,000 Industrial
Revenue Bond (Transcrypt International, Ltd. Project), Series 1994,
between Nebraska Investment Finance Authority as Issuer and Norwest
Bank Nebraska, N.A. as Trustee (incorporated herein by reference to
Exhibit 10.15 to 1997 Registration Statement).
10.16 Loan Agreement, dated as of January 15, 1994, for $850,000 Industrial
Revenue Bond (Transcrypt International, Ltd. Project), Series 1994,
between Nebraska Investment Finance Authority as Issuer and the
Company (incorporated herein by reference to Exhibit 10.16 to 1997
Registration Statement).
10.17 Amended and Restated Loan Agreement, dated as of May 18, 1994, by and
between Norwest Bank Nebraska, N.A., and the Company (incorporated
herein by reference to Exhibit 10.17 to 1997 Registration Statement).
10.18 First Amendment, dated as of June 1, 1995, to Amended and Restated
Loan Agreement, dated as of May 18, 1994, by and between Norwest Bank
Nebraska, N.A., and the Company (incorporated herein by reference to
Exhibit 10.18 to 1997 Registration Statement).
10.19 Second Amendment, dated as of April 10, 1996, to Amended and Restated
Loan Agreement, dated as of May 18, 1994, by and between Norwest Bank
Nebraska, N.A., and the Company (incorporated herein by reference to
Exhibit 10.19 to 1997 Registration Statement).
10.20 Promissory Note, dated as of May 11, 1995, between West Gate Bank and
the Company (incorporated herein by reference to Exhibit 10.20 to 1997
Registration Statement).
10.21 RESERVED.
10.22 RESERVED.
10.23 RESERVED.
10.24 Form of Adoption Agreement for Nonstandardized 401(k) Profit Sharing
Plan (incorporated herein by reference to Exhibit 10.24 to 1997
Registration Statement).
10.25 Defined Contribution Master Plan and Trust Agreement of Norwest Bank
Nebraska, N.A., Master Plan Sponsor (incorporated herein by reference
to Exhibit 10.25 to 1997 Registration Statement).
10.26 Third Amendment, dated as of October 22, 1996, to Amended and Restated
Loan Agreement, dated as of May 18, 1994, by and between Norwest Bank
Nebraska, N.A., and the Company, together with Modification of Note
(incorporated herein by reference to Exhibit 10.26 to 1997
Registration Statement).
10.27 Fourth Amendment, dated as of November 19, 1996, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company, together with Commercial
Installment Note, dated November 19, 1996 (incorporated herein by
reference to Exhibit 10.27 to 1997 Registration Statement).
10.28 Construction Loan, dated November 15, 1996, by and between Norwest
Bank Nebraska, N.A., and the Company, together with related
documents.
10.29 Commercial Installment Note, dated January 9, 1997, related to Amended
and Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company.
10.30 Commercial Installment Note secured by equipment, dated December 23,
1996, by and between Norwest Bank Nebraska, N.A., and the Company,
together with Security Agreement.
11.1 Statement re: Computation of Per Share Earnings.
27.1 Financial Data Schedule.
* Confidential treatment has been granted as to a portion of this
exhibit.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
(c) Exhibits Required by Item 601 of Regulation S-K
See Item 14(a)(3) above.
(d) Additional Financial Statements
See page S-2 to this Annual Report on Form 10-K for Schedule III --
Valuation and Qualifying Accounts and Reserves.
28
<PAGE> 30
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 the 3rd day
of March, 1997.
TRANSCRYPT INTERNATIONAL, INC.
(Registrant)
By /s/ JOHN T. CONNOR
--------------------------------------
John T. Connor
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title
Date
/s/ JOHN T. CONNOR Chairman of the March 3, 1997
- ----------------------- Board and Chief Executive
John T. Connor Officer (Principal
Executive Officer)
/s/ RANDAL P. HANSEN Chief Financial March 3, 1997
- ----------------------- Officer (Principal
Randal P. Hansen Financial and Accounting
Officer)
/s/ TERRY L. FAIRFIELD Director March 3, 1997
- -----------------------
Terry L. Fairfield
/s/ JEFFERY L. FULLER Director March 3, 1997
- -----------------------
Jeffery L. Fuller
/s/ THOMAS E. HENNING Director March 3, 1997
- -----------------------
Thomas E. Henning
<PAGE> 31
Signature Title Date
/s/ THOMAS R. LARSEN Director March 3, 1997
- -----------------------
Thomas R. Larsen
/s/ THOMAS C. SMITH Director March 3, 1997
- -----------------------
Thomas C. Smith
/s/ THOMAS R. THOMSEN Director March 3, 1997
- -----------------------
Thomas R. Thomsen
/s/ WINSTON J. WADE Director March 3, 1997
- -----------------------
Winston J. Wade
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Transcrypt International, Inc.
We have audited the accompanying consolidated balance sheets of Transcrypt
International, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income (loss), changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Transcrypt
International, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Lincoln, Nebraska
February 3, 1997
F-1
<PAGE> 33
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 0 $ 291,712
Accounts receivable, net of allowance for doubtful accounts of
$430,251 and $181,659 in 1996 and 1995, respectively 4,215,403 1,923,441
Receivable - employees and affiliate 11,247 57,791
Inventory, net 2,261,381 1,119,763
Prepaid expenses 59,949 60,323
Deferred tax assets 196,234 0
------------ ------------
Total current assets 6,744,214 3,453,030
Property, plant and equipment, at cost, net of accumulated depreciation 4,907,438 3,066,740
Deferred tax assets 1,723,190 0
Intangible assets, net of accumulated amortization 38,137 1,002,860
Deferred initial public offering costs 568,049 0
------------ ------------
$ 13,981,028 $ 7,522,630
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 385,694 $ 0
Revolving line of credit 1,022,000 0
Current portion of capitalized lease obligations 13,803 15,570
Current portion of long-term debt 581,959 412,656
Obligations under noncompete agreements 0 340,000
Accounts payable 1,174,364 176,985
Income taxes payable 151,894 0
Accrued expenses 946,406 767,246
Deferred revenue 0 56,814
------------ ------------
Total current liabilities 4,276,120 1,769,271
Capitalized lease obligations, net of current portion 1,296 15,099
Long-term debt, net of current portion 1,838,646 1,831,493
Revolving line of credit 792,070 0
------------ ------------
6,908,132 3,615,863
------------ ------------
Commitments and contingencies (Note 10)
Stockholders' equity:
Partners' capital 3,906,767
Preferred stock, ($.01 par value; 3,000,000 shares authorized; none issued)
Common stock ($.01 par value; 19,400,000 voting shares authorized,
6,565,536 issued and outstanding; 600,000 nonvoting shares
authorized, 217,542 issued and outstanding) 67,831 0
Additional paid-in capital 9,683,381 0
Retained deficit (2,678,316) 0
------------ ------------
7,072,896 3,906,767
------------ ------------
$ 13,981,028 $ 7,522,630
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 34
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 13,775,597 $ 8,128,200 $ 9,155,164
Cost of sales 4,864,589 2,982,942 2,901,577
------------ ------------ ------------
Gross profit 8,911,008 5,145,258 6,253,587
Operating costs and expenses:
Research and development 2,233,753 1,953,068 1,179,540
Sales and marketing 2,102,753 2,109,393 1,589,632
General and administrative 1,412,856 1,190,751 1,074,408
Special compensation expense 5,568,250 0 0
Amortization of acquisition related expense 1,001,666 1,092,680 1,092,426
------------ ------------ ------------
Total operating costs and expenses 12,319,278 6,345,892 4,936,006
------------ ------------ ------------
Income (loss) from operations (3,408,270) (1,200,634) 1,317,581
Interest income 30,567 53,297 34,147
Interest expense (161,905) (190,403) (144,940)
------------ ------------ ------------
Income (loss) before income taxes (3,539,608) (1,337,740) 1,206,788
Provision (benefit) for income taxes (1,528,488) 0 0
------------ ------------ ------------
Net income (loss) $ (2,011,120) $ (1,337,740) $ 1,206,788
============ ============ ============
Pro forma information:
Loss before income taxes $ (3,539,608) $ (1,337,740)
Pro forma provision (benefit) for income taxes (1,393,209) (496,316)
------------ ------------
Pro forma net loss $ (2,146,399) $ (841,424)
============ ============
Pro forma net loss per share $ (.31) $ (.12)
============ ============
Weighted average common and common equivalent shares outstanding 6,968,712 6,968,712
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 35
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock
------------------------ Additional
Par Paid-in
Units Shares Value Capital
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 4,975,434 0 $ 0 $ 0
Additional investment 200,000 0 0 0
Distributions 0 0 0 0
Net income 0 0 0 0
---------- --------- ----------- -----------
Balance, December 31, 1994 5,175,434 0 0 0
Distributions 0 0 0 0
Net loss 0 0 0 0
---------- --------- ----------- -----------
Balance, December 31, 1995 5,175,434 0 0 0
Distributions 0 0 0 0
Net income (loss) 0 0 0 0
Issuance of stock in exchange
for units of the Predecessor (5,175,434) 5,175,434 51,754 4,341,208
Additional shares issued in
1.3106311-for-1 stock split
effected in the form of a
stock dividend 0 1,607,644 16,077 (16,077)
Special compensation - options
issued 0 0 0 5,358,250
---------- --------- ----------- -----------
Balance, December 31, 1996 0 6,783,078 $ 67,831 $ 9,683,381
========== ========= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Retained Partners'
Deficit Capital Total
----------- ----------- -----------
<C> <C> <C>
Balance, December 31, 1993 $ 0 $ 4,599,191 $ 4,599,191
Additional investment 0 1,000,007 1,000,007
Distributions 0 (861,482) (861,482)
Net income 0 1,206,788 1,206,788
----------- ----------- -----------
Balance, December 31, 1994 0 5,944,504 5,944,504
Distributions 0 (699,997) (699,997)
Net loss 0 (1,337,740) (1,337,740)
----------- ----------- -----------
Balance, December 31, 1995 0 3,906,767 3,906,767
Distributions 0 (181,001) (181,001)
Net income (loss) (2,678,316) 667,196 (2,011,120)
Issuance of stock in exchange
for units of the Predecessor 0 (4,392,962) 0
Additional shares issued in
1.3106311-for-1 stock split
effected in the form of a
stock dividend 0 0 0
Special compensation - options
issued 0 0 5,358,250
----------- ----------- -----------
Balance, December 31, 1996 $(2,678,316) $ 0 $ 7,072,896
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 36
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,011,120) $(1,337,740) $ 1,206,788
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Special compensation expense 5,358,250 0 0
Depreciation 615,112 532,288 350,188
Amortization 1,001,666 1,092,680 1,092,426
Loss (gain) on sale of fixed assets 5,526 (2,446) 42,449
Provisions for warranty, bad debt and inventory reserves 413,705 195,824 314,589
Deferred tax benefit (1,919,424) 0 0
Changes in:
Accounts receivable (2,540,554) (672,929) (63,090)
Related party receivables 46,544 (4,290) 44,571
Inventory (1,282,589) 82,850 (174,916)
Prepaid expenses and other assets 374 117,499 (125,026)
Accounts payable 570,339 (116,470) 10,794
Income taxes payable 151,894 0 0
Accrued expenses 23,960 264,010 195,147
Deferred revenue (56,814) (96,204) (35,394)
----------- ----------- -----------
Total adjustments 2,387,989 1,392,812 1,651,738
----------- ----------- -----------
Net cash provided by operating activities 376,869 55,072 2,858,526
----------- ----------- -----------
Cash flows from investing activities:
Issue notes receivable 0 (11,846) (1,833)
Payments received on note receivable 0 10,394 5,000
Proceeds from sale of fixed assets 30,833 37,089 591,084
Purchase of fixed assets (2,118,400) (1,029,471) (1,992,017)
Increase in patents and trademarks (36,943) (904) (2,993)
Payments under noncompete agreement (340,000) (340,000) (340,000)
----------- ----------- -----------
Net cash used in investing activities (2,464,510) (1,334,738) (1,740,759)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings on term loan and operating line of credit 2,398,867 1,016,000 2,363,000
Payments on term loan and operating line of credit (408,341) (866,708) (1,743,792)
Principal payments on capitalized leases (15,570) (13,377) (13,648)
Proceeds from issuance of partnership interests 0 0 1,000,007
Partnership distributions paid (181,001) (699,997) (861,482)
Bank overdraft 385,694 0 0
Deferred initial public offering costs (383,720) 0 0
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,795,929 (564,082) 744,085
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (291,712) (1,843,748) 1,861,852
Cash and cash equivalents, beginning of period 291,712 2,135,460 273,608
----------- ----------- -----------
Cash and cash equivalents, end of period $ 0 $ 291,712 $ 2,135,460
=========== =========== ===========
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized $ 162,649 $ 190,403 $ 137,481
Income taxes paid $ 293,700 $ 0 $ 0
Supplemental disclosure of noncash investing activities:
Additions to fixed assets included in accounts payable $ 173,769
Additions to deferred initial public offering costs included
in accounts payable and accrued liabilities $ 184,329
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 37
TRANSCRYPT INTERNATIONAL, INC. AND SBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed
in the preparation of these consolidated financial statements. Certain
prior period amounts have been reclassified to conform to the current
period presentation.
ORGANIZATION
Transcrypt International, Ltd. (the "Predecessor") was a limited
partnership formed in 1991 composed of the general partner, Transcrypt
International, Inc. (a Nebraska corporation) and various limited
partners. One percent of the profits or losses was allocated to the
general partner and the remaining 99% was allocated to the limited
partners based on their respective units of partnership interest.
Effective June 30, 1996, the assets and liabilities of the partnership
were merged tax-free into a Delaware corporation, Transcrypt
International, Inc. (the "Company"). Each respective partnership unit
was converted pro rata into common shares of the Company.
The Company is engaged in the design, manufacture and marketing of
information security products for the land mobile radio and cellular
telephone markets. The Company markets its products to customers
worldwide.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in the consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities less than 90 days as cash equivalents. The Company places
its temporary cash investments with high credit qualified financial
institutions.
INVENTORY
Inventory is recorded at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
F-6
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. The Company's
policy is to capitalize expenditures for major improvements and to
charge to operating expenses the cost of current maintenance and
repairs. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets. The cost and related accumulated
depreciation of assets retired or otherwise disposed of are eliminated
from the respective accounts at the time of disposition. Any resulting
gain or loss is included in current operating results. For the years
ended December 31, 1996, 1995 and 1994, $7,210, $0 and $28,776 of
interest expense was capitalized, respectively.
INTANGIBLE ASSETS
Intangibles are carried at cost less applicable amortization. Provision
for amortization of intangible assets is based upon the estimated
useful lives of the related assets and is computed using the
straight-line method. All intangible assets are being amortized over
five years. Management reviews intangible assets whenever events or
changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable.
INCOME TAXES
The Predecessor as a partnership was not subject to Federal or state
income taxes. Any tax liabilities arising from the Predecessor's
operations were the direct responsibility of the individual partners.
Deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates and laws applicable to the years in
which the differences are expected to reverse. Valuation allowances, if
any, are established when necessary to reduce deferred tax assets to
the amount that is more likely than not to be realized. Income tax
expense is comprised of the tax payable for the period and the change
during the period in deferred tax assets and liabilities.
PRO FORMA PROVISION FOR INCOME TAXES
The pro forma provision for income taxes reflects the provision for
income taxes as if the Company had been taxed as a C Corporation under
the Internal Revenue Code for the entire year. The actual provision for
income taxes for 1996 included in the consolidated statement of income
(loss) is reflective only of the results of operations for the period
that the Company was a C Corporation, July 1, 1996 through December 31,
1996.
REVENUE RECOGNITION
Revenues are recorded when products are shipped or services are
rendered. Costs associated with the installation and servicing of
equipment are charged to expense as incurred and allowances are
provided for returns. The Company defers income for prepayments of
significant initial engineering costs which are components of the
selling price of certain products sold. Also included in deferred
revenue are prepayments from foreign customers for which goods cannot
be shipped until certain export regulations are met.
F-7
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
EXPORT SALES
A significant portion of the Company's sales are made to customers
outside of the United States. Export sales are recorded and settled in
U.S. dollars. Total export sales by geographic area were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Europe $2,501,000 $2,464,000 $2,580,000
Middle East 1,831,000 2,276,000 1,692,000
Latin America 2,412,000 1,060,000 978,000
---------- ---------- ----------
$6,744,000 $5,800,000 $5,250,000
========== ========== ==========
</TABLE>
WARRANTY COSTS
The Company provides for warranty costs based on estimated future
expenditures that will be incurred under product guarantees and
warranties presently in force.
PRO FORMA NET INCOME (LOSS) PER SHARE
Pro forma net income (loss) per share is computed on the basis of the
weighted average number of partnership interest units outstanding
during the year converted into common shares on a one-to-one ratio,
adjusted for a stock dividend and including common stock equivalents.
<TABLE>
<S> <C>
Common stock 6,783,078
Common stock equivalents - stock options 185,634
---------
6,968,712
=========
</TABLE>
Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, options to purchase common stock granted with exercise
prices below the assumed initial public offering price per share during
the 12 months preceding the date of the initial filing of the
Registration Statement are included in the calculation of common
equivalent shares, using the treasury stock method, as if they were
outstanding for all periods presented.
STOCK SPLIT
On September 30, 1996, the Board of Directors and the shareholders
approved an increase in the Company's authorized common shares from 10
million to 20 million shares. On November 18, 1996, the Company
declared a 1.3106311-for-1 stock split in the form of a stock dividend.
All shares and per share information has been restated to reflect the
split.
F-8
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect carrying amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of
financial statement dates, as well as the reported revenues and
expenses for the years then ended. Actual results may differ from
management's estimates.
2. INVENTORY:
The following is a summary of inventory at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials and supplies, net of reserve for obsolescence
of $38,848 and $82,041 in 1996 and 1995, respectively $1,316,932 $ 879,587
Work in process 715,032 101,092
Finished goods 229,417 139,084
---------- ----------
$2,261,381 $1,119,763
========== ==========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land $ 150,000 $ 150,000
Building 1,302,388 1,302,388
Equipment 3,921,095 2,325,690
Leased equipment 74,329 74,329
Automobiles 31,598 64,647
Furniture and fixtures 396,362 371,160
Construction in progress 797,060 0
---------- ----------
6,672,832 4,288,214
Less accumulated depreciation and amortization 1,765,394 1,221,474
---------- ----------
$4,907,438 $3,066,740
========== ==========
</TABLE>
F-9
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Proprietary technology $3,355,630 $3,355,630
Noncompete agreements 1,700,000 1,700,000
Goodwill 290,516 290,516
Organization costs 116,910 116,910
Patents and trademarks 42,465 5,522
---------- ----------
5,505,521 5,468,578
Less accumulated amortization 5,467,384 4,465,718
---------- ----------
$ 38,137 $1,002,860
========== ==========
</TABLE>
5. REVOLVING LINES OF CREDIT:
The Company has a working capital revolving line of credit not to
exceed $2,000,000 calculated using a specified borrowing base of
eligible inventories and accounts receivable. In addition, the Company
has a second revolving capital line of credit not to exceed $1,000,000,
calculated using a specified borrowing base of certain eligible fixed
assets. Interest for both lines of credit is payable monthly at a
regional bank's national money market rate. The working capital line is
collateralized by substantially all the Company's assets and the
capital line is collateralized by certain fixed assets. At December 31,
1996, the Company had $1,022,000 outstanding on the working capital
line of credit and $792,070 on the capital line of credit. The capital
line of credit is due January 2002. In January 1997, the Company
increased the working capital revolving line of credit not to exceed
$3,000,000.
Average borrowings under the Company's lines of credit and the weighted
average interest rate during 1996 were $256,000 and 8.27%.
As described in Note 15, the revolving lines of credit were repaid
using a portion of the net proceeds from the initial public offering.
F-10
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. LONG-TERM DEBT:
Long-term debt at December 31, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C>
Term note payable to bank due in monthly installments of $18,141
including interest at 7.75% beginning in March 1993 until March 1996
when it can be adjusted to a specified rate of a regional bank (8.75%
at December 31, 1996). Principal is due in full in February 1998. The
note is collateralized by essentially all the assets of the Company in
addition to the personal guarantees of certain stockholders. $ 251,068 $ 437,358
Term note payable to bank due in monthly installments of $14,231
including interest at 8% beginning June 1994 until May 1996, when it
can be adjusted to a specified rate of a regional bank (8.75% at
December 31, 1996). Principal is due in full in May 1999. The note is
collateralized by essentially all the assets of the Company in
addition to personal guarantees of certain stockholders. 375,723 507,653
Installment note for equipment purchase payable to bank due in monthly
installments of $10,506 including daily adjusted interest at a
specified rate above the prime rate (8.25% at December 31, 1996). The
note is collateralized by specific equipment and inventory. The note
is guaranteed by a stockholder. 359,017 449,138
Industrial development revenue bonds payable to bank with quarterly
interest only payments beginning April 15, 1994 at 6.25% with
principal due on January 15, 2004. This note is collateralized by a
deed of trust. 850,000 850,000
Construction note payable to bank, due in August 1997, including
interest at 8.75% 584,797 0
---------------- --------------
2,420,605 2,244,149
Less current portion 581,959 412,656
---------------- --------------
$ 1,838,646 $ 1,831,493
================ ==============
</TABLE>
The agreements of the term notes payable and the revolving bank notes
payable discussed in Note 5 require, among other things, that the
Company maintain certain levels of working capital, net worth and
debt-to-equity ratios and limit capital expenditures, investments,
other indebtedness, distributions, mergers and acquisitions.
The construction note payable has been classified as long-term as the
Company has received a letter of intent to refinance the note through
issuance of industrial development revenue bonds upon completion of the
construction project on terms similar to the existing industrial
development revenue bonds payable.
As described in Note 15, the term and installment notes payable were
retired using a portion of the net proceeds from the initial public
offering.
F-11
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. OBLIGATIONS UNDER NON-COMPETE AGREEMENTS:
In connection with the purchase of the net assets of Transcrypt
International, Incorporated in 1991, the Company entered into
non-compete agreements with the former owners which called for the
Company to pay a total of $1,700,000 in consideration for the former
owners' agreement not to compete for a period of five years. The
remaining payments of $340,000 were paid in 1996.
8. INCOME TAXES:
The components of the provision (benefit) for income taxes for the
period ending December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Current $ 390,936
Deferred (1,919,424)
-----------
$(1,528,488)
===========
</TABLE>
The entire provision is comprised of federal taxes, as no state taxes
are expected to be paid as a result of various state incentive tax
credits for which the Company has qualified.
The Company's tax provision effective tax rate on pretax income (loss)
differs from U.S. federal statutory tax rate as follows:
<TABLE>
<S> <C> <C>
U.S. federal tax at statutory tax rate $(1,203,467) (34.00)%
Income taxable directly to partners of the Predecessor (226,847) (6.41)
Benefit of foreign sales corporation (52,969) (1.49)
Other (45,205) (1.28)
----------- ------
$(1,528,488) (43.18)%
=========== ======
</TABLE>
Temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities that give rise to deferred
income taxes at December 31, 1996 relate to the following:
<TABLE>
Deferred tax assets:
<S> <C>
Special compensation expense $1,821,805
Allowance for bad debts 146,285
Reserves for warranties and inventory obsolescence 38,136
Difference between tax and book liability accruals 11,813
----------
2,018,039
----------
Deferred tax liabilities:
Difference between tax and book depreciation 98,615
----------
Net deferred asset $1,919,424
==========
</TABLE>
Management believes it is more likely than not that future taxable
income will be sufficient to fully utilize all deferred tax assets
recorded.
F-12
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Payroll, bonuses and employee benefits $304,297 $211,193
Warranty reserve 73,316 64,455
Commissions 101,163 265,440
Special compensation expense 210,000 0
Other expenses 257,630 226,158
-------- --------
$946,406 $767,246
======== ========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
The Company has agreed to pay fees totaling $350,000 to its chairman
and chief executive officer for initiating the purchase of the net
assets of Transcrypt International, Incorporated in 1991. Payment is
contingent upon the original limited partners receiving capital
distributions equal to their original capital contributions or upon the
approval of the Board of Directors of the Company for the sale of
equity interests in the Company to the public. Payments of $70,000 have
been made as of December 31, 1995 and an additional payment of $70,000
was approved and paid during February 1996. These payments were
accounted for as a bonus and the officer has waived rights to receive
fees to the extent of such payments. The Board of Directors approved
the payment of the remaining $210,000 fees on September 30, 1996. These
remaining fees are included in special compensation expense in the
consolidated statements of income (loss). The $210,000 was paid in
February 1997.
In the normal course of its business activities, the Company is
required under a contract with foreign governmental authorities to
provide letters of credit that may be drawn upon if the Company fails
to perform under their contracts. The letters of credit, which expire
on various dates in 1997, have a total undrawn balance of $43,564 at
December 31, 1996.
The Company is involved in certain disputes as part of the ordinary
course of its business. Management believes that the ultimate
resolution of these disputes will not have a material adverse effect on
its financial position, results of operations or cash flows.
F-13
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. OPTION PLANS:
In January 1992, the Board of Directors approved a 1992 Partnership
Interest Option Plan which provided for the granting of up to 1,297,525
units of non-qualified interest options to certain officers and key
employees. Under the Plan, the exercise price for the options was the
fair market value at the date of grant as determined by the Board of
Directors. The term of each option granted will in no event exceed 10
years from the date of grant. Effective June 30, 1996, the unit options
were converted to stock options on a one to one ratio. No options were
exercisable under the Plan provisions until the Board of Directors
approved granting of all reserved options and full vesting of the
716,916 stock options on September 30, 1996. The vesting resulted in a
special compensation charge of $5,358,250 in the quarter ended
September 30, 1996.
Effective as of September 6, 1996, the Company established the 1996
Stock Incentive Plan (the "Plan"). Any employee, including any director
of the Company, and any nonemployee director or independent contractor
of the Company is eligible to be considered for the issuance of shares
of common stock, $0.01 par value per share, of the Company or of any
other class of security or right of the Company which is convertible
into common stock. The aggregate number of shares issued under the Plan
shall not exceed 1,200,000. The aforementioned 716,916 options have
been issued under the Plan, all of which are vested and compensation
recognized. The Plan provides that unless otherwise provided by the
Plan committee any stock option granted shall have an exercise price
not less than 100% of the market value of a share of common stock on
the date the option is granted and that the term of such option shall
be ten years from date of grant. In January 1997, the Company granted
stock options for an additional 325,000 shares, with an exercise price
equal to the price per share in the initial public offering.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Had compensation cost for the Company's stock option
plans been determined based on the fair value at the grant date for
awards in 1996 consistent with the provisions of SFAS No. 123, the
Company's pro forma net loss and pro forma loss per share would have
been as follows:
F-14
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. OPTION PLANS, CONTINUED:
<TABLE>
<S> <C>
Pro forma net loss - as reported $ (2,146,399)
Pro forma net loss - as adjusted under SFAS No. 123 (2,211,519)
Pro forma net loss per share - as reported (.31)
Pro forma net loss per share - as adjusted under SFAS No. 123 (.32)
</TABLE>
Fair value of the options was not determinable prior to September 30,
1996 when the Board of Directors approved full vesting of the
outstanding options.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for options vested in 1996:
<TABLE>
<S> <C>
Expected option life 9.0 years
Expected annual volatility 0%
Risk-free interest rate 6.50%
Dividend yield 0%
</TABLE>
The status of stock options under the Plan are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
--------- --------- -----------
<S> <C> <C> <C>
Balance at December 31, 1993 908,267 $ .77 -
Granted 53,081 1.67
Exercised 0
Forfeited 0
------- -------- -------
Balance at December 31, 1994 961,348 .82 -
Granted 27,523 3.05
Exercised 0
Forfeited (572,090) .87
------- -------- -------
Balance at December 31, 1995 416,781 .91 -
Granted 300,135 3.05
Exercised 0
Forfeited 0
------- -------- -------
Balance at December 31, 1996 716,916 $ 1.81 716,916
======= ======== =======
</TABLE>
F-15
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. OPTION PLANS, CONTINUED:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISABLE PRICES 1996 LIFE PRICE 1996 PRICE
------------------ -------------- ----------- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ .76 389,258 5.1 years $ .76 389,258 $ .76
$ 3.05 327,658 8.6 years 3.05 327,658 3.05
------------- ------- --------- -------- ------- --------
$.76 to $3.05 716,916 6.7 years $ 1.81 716,916 $ 1.81
============= ======= ========= ======== ======= ========
</TABLE>
12. BENEFIT PLANS:
The Company has a profit sharing plan which covers substantially all
employees. Contribution levels are determined by the Board of Directors
annually. Profit sharing expense approximated $60,000, $27,500 and
$45,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company also has a 401(k) plan which covers substantially all
employees. Participants may contribute up to 10% of their annual
compensation and the Company makes matching contributions of 25% of the
amount contributed by participants. Contributions may not exceed the
maximum allowable by law. Company contributions approximated $15,700,
$13,000 and $11,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
F-16
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. CONCENTRATIONS:
Sales to major customers totaling over $200,000 each were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Percent of total sales 50% 44% 49%
Number of major customers 12 7 6
Individual customers representing 10% or
more of consolidated sales in each year:
Motorola-Poland - - $2,044,350
Ministry of Interior-Egypt - $ 849,134 -
Motorola, Inc. $2,180,022 - -
</TABLE>
In addition, a substantial portion of the Company's revenue is from
customers in the governmental sector, both domestic and foreign. As of
December 31, 1996, approximately 53% of the Company's accounts
receivable were from seven customers. The Company's policy does not
require significant collateral or other security to support such
receivables, however, export sales are generally shipped against
prepayments or backed by irrevocable letters of credit confirmed by
U.S. banks.
In addition to being a major customer, Motorola is also a key
manufacturer of electronic components used by the Company. Purchases by
the Company from Motorola totaled approximately $1,878,000 and $726,000
in 1996 and 1995, respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of all financial instruments in the consolidated
balance sheets approximate fair values.
15. SUBSEQUENT EVENT:
On January 22, 1997, the Company completed an initial public offering
of 2,900,000 shares of common stock at a price of $8.00 per share. Of
the 2,900,000 shares offered, 2,500,000 shares were sold by the Company
and 400,000 were sold by certain of the Company's stockholders. The
Company's net proceeds from the offering, after underwriting
commissions and expenses, were approximately $17,700,000.
A portion of the Company's net proceeds from the offering was used to
retire the term and installment notes payable and the revolving lines
of credit. The remaining net proceeds are to be used for general
working capital purposes and to support the Company's growth and
business strategy.
F-17
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Transcrypt
International, Inc. is included on page F-1 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedule listed in the index on page 27 on this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Lincoln, Nebraska
February 3, 1997
S-1
<PAGE> 50
SCHEDULE III -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
beginning expenses to other Deductions at end
Description of period (Provisions) accounts (Write-offs) of period
----------- ---------- ------------ --------------------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Bad Debts for the:
Year Ended December 31, 1994........ $ 68,973 $139,059 0 $ 20,018 $188,014
Year Ended December 31, 1995........ 188,014 94,285 0 100,640 181,659
Year Ended December 31, 1996........ 181,659 288,596 0 40,004 430,251
Inventory Obsolescence Reserves for the:
Year Ended December 31, 1994........ $ 6,966 $168,309 0 $134,747 $ 33,562
Year Ended December 31, 1995........ 33,562 61,495 0 13,016 82,041
Year Ended December 31, 1996........ 82,041 127,650 0 171,343 38,848
</TABLE>
S-2
<PAGE> 51
EXHIBIT INDEX
Exhibit
No. Description
3.1 Second Amended and Restated Certificate of Incorporation of the
Company filed on September 30, 1996 with the Secretary of State of the
State of Delaware (incorporated herein by reference to Exhibit 3.1 to
the Company's Form S-1 Registration No. 333-14351 declared effective
on January 22, 1997 (hereinafter "1997 Registration Statement")).
3.2 Amended and Restated Bylaws of the Company (incorporated herein by
reference to Exhibit 3.2 to 1997 Registration Statement).
3.3 Certificate of Merger of Transcrypt International, Ltd., a Nebraska
limited partnership, with and into the Company, filed on June 28,
1996 with the Secretary of State of the State of Delaware
(incorporated herein by reference to Exhibit 3.3 to 1997 Registration
Statement).
3.4 Certificate of Merger of Transcrypt International, Inc., a Nebraska
corporation, with and into the Company, filed on September 30, 1996
with the Secretary of State of the State of Delaware (incorporated
herein by reference to Exhibit 3.4 to 1997 Registration Statement).
4.1 Specimen Certificate for Common Stock (incorporated herein by
reference to Exhibit 4.1 to 1997 Registration Statement).
10.1 Employment Agreement between the Company and John T. Connor dated as
of September 10, 1996 (incorporated herein by reference to Exhibit
10.1 to 1997 Registration Statement).
10.2 Employment Agreement between the Company and Jeffery L. Fuller dated
as of July 18, 1996 (incorporated herein by reference to Exhibit 10.2
to 1997 Registration Statement).
10.3 Form of Employment Agreement between the Company and C. Eric Baumann,
Michael P. Wallace and Joel K. Young (incorporated herein by reference
to Exhibit 10.3 to 1997 Registration Statement).
10.4 Form of 1996 Stock Incentive Plan, together with forms of stock option
agreements (incorporated herein by reference to Exhibit 10.4 to 1997
Registration Statement).
10.5 Form of Indemnification Agreement between the Company and each
executive officer and director of the Company (incorporated herein by
reference to Exhibit 10.5 to 1997 Registration Statement).
10.6 License Agreement for APCO Project 25 Compliant Product between
Motorola, Inc. and the Company dated as of August 2, 1994
(incorporated herein by reference to Exhibit 10.6 to 1997 Registration
Statement).
10.7* Amendment, dated as of June 28, 1996, to License Agreement for APCO
Project 25 Compliant Product between Motorola, Inc. and the Company
dated as of August 2, 1994 (incorporated herein by reference to
Exhibit 10.7 to 1997 Registration Statement).
10.8 OEM Agreement between Motorola, Inc. and the Company dated as of
August 2, 1994 (incorporated herein by reference to Exhibit 10.8 to
1997 Registration Statement).
10.9* Amendment, dated as of July 15, 1996, to OEM Agreement between
Motorola, Inc. and the Company dated as of August 2, 1994
(incorporated herein by reference to Exhibit 10.9 to 1997 Registration
Statement).
10.10* Private Label/Supplier Agreement for Analog Scrambling Modules between
Motorola, Inc. and the Company dated as of August 8, 1995
(incorporated herein by reference to Exhibit 10.10 to 1997
Registration Statement).
10.11* Motorola Cellular Subscriber Products Sales Agreement, dated as of
June 13, 1996, by and between Motorola, Inc. and the Company
(incorporated herein by reference to Exhibit 10.11 to 1997
Registration Statement).
10.12 License Agreement for APCO Fed Project 25 Algorithm between Digital
Voice Systems, Inc. and the Company, dated as of August 14, 1995
(incorporated herein by reference to Exhibit 10.12 to 1997
Registration Statement).
<PAGE> 52
10.13 Consigned Inventory Agreement between Arrow/Schweber Electronics Group
and the Company, dated as of June 22, 1994 (incorporated herein by
reference to Exhibit 10.13 to 1997 Registration Statement).
10.14 Nebraska Investment Finance Authority $850,000 Industrial Revenue Bond
(Transcrypt International, Ltd. Project), Series 1994, dated as of
January 15, 1994, and Note (incorporated herein by reference to
Exhibit 10.14 to 1997 Registration Statement).
10.15 Trust Indenture, dated as of January 15, 1994, for $850,000 Industrial
Revenue Bond (Transcrypt International, Ltd. Project), Series 1994,
between Nebraska Investment Finance Authority as Issuer and Norwest
Bank Nebraska, N.A. as Trustee (incorporated herein by reference to
Exhibit 10.15 to 1997 Registration Statement).
10.16 Loan Agreement, dated as of January 15, 1994, for $850,000 Industrial
Revenue Bond (Transcrypt International, Ltd. Project), Series 1994,
between Nebraska Investment Finance Authority as Issuer and the
Company (incorporated herein by reference to Exhibit 10.16 to 1997
Registration Statement).
10.17 Amended and Restated Loan Agreement, dated as of May 18, 1994, by and
between Norwest Bank Nebraska, N.A., and the Company (incorporated
herein by reference to Exhibit 10.17 to 1997 Registration Statement).
10.18 First Amendment, dated as of June 1, 1995, to Amended and Restated
Loan Agreement, dated as of May 18, 1994, by and between Norwest Bank
Nebraska, N.A., and the Company (incorporated herein by reference to
Exhibit 10.18 to 1997 Registration Statement).
10.19 Second Amendment, dated as of April 10, 1996, to Amended and Restated
Loan Agreement, dated as of May 18, 1994, by and between Norwest Bank
Nebraska, N.A., and the Company (incorporated herein by reference to
Exhibit 10.19 to 1997 Registration Statement).
10.20 Promissory Note, dated as of May 11, 1995, between West Gate Bank and
the Company (incorporated herein by reference to Exhibit 10.20 to 1997
Registration Statement).
10.21 RESERVED.
10.22 RESERVED.
10.23 RESERVED.
10.24 Form of Adoption Agreement for Nonstandardized 401(k) Profit Sharing
Plan (incorporated herein by reference to Exhibit 10.24 to 1997
Registration Statement).
10.25 Defined Contribution Master Plan and Trust Agreement of Norwest Bank
Nebraska, N.A., Master Plan Sponsor (incorporated herein by reference
to Exhibit 10.25 to 1997 Registration Statement).
10.26 Third Amendment, dated as of October 22, 1996, to Amended and Restated
Loan Agreement, dated as of May 18, 1994, by and between Norwest Bank
Nebraska, N.A., and the Company, together with Modification of Note
(incorporated herein by reference to Exhibit 10.26 to 1997
Registration Statement).
10.27 Fourth Amendment, dated as of November 19, 1996, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company, together with Commercial
Installment Note, dated November 19, 1996 (incorporated herein by
reference to Exhibit 10.27 to 1997 Registration Statement).
10.28 Construction Loan, dated November 15, 1996, by and between Norwest
Bank Nebraska, N.A., and the Company, together with related
documents.
10.29 Commercial Installment Note, dated January 9, 1997, related to Amended
and Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company.
10.30 Commercial Installment Note secured by equipment, dated December 23,
1996, by and between Norwest Bank Nebraska, N.A., and the Company,
together with Security Agreement.
11.1 Statement re: Computation of Per Share Earnings.
27.1 Financial Data Schedule.
* Confidential treatment has been granted as to a portion of this
exhibit.
<PAGE> 1
<TABLE>
<Caption
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
CONSTRUCTION [NORWEST BANKS LOGO] Commercial
LOAN Installment Note
--------------------------------------------------------------------------------------------------------------
Borrower's Name Date
Transcrypt International, Inc. 11-15-1996
--------------------------------------------------------------------------------------------------------------
Promise to Pay: For value received, the undersigned Borrower promises to pay to the order of
Norwest Bank Nebraska, National Association (the "Bank")
----------------------------------------------------------------------------------------------------
1919 Douglas Street Omaha, NE 68102 or such other place
as the Bank or the holder of this promissory note (the "Note") may designate, the principal sum of
One Million and 00/100 Dollars
----------------------------------------------------------------------------------------------------------------
($1,000,000.00), together with interest on the unpaid balance in accordance with the repayment terms set forth
below.
INTEREST: The Borrower will pay interest (calculated on the basis of actual days elapsed in a 360 day year) on
the unpaid principal balance at the following rate (the "Note Rate"):
[ ] an annual rate of %.
[X] an annual rate equal to 0.5000% above the Base Rate, floating.
[ ] an annual rate which, for any month hereafter, shall be equal to % the Base Rate in
effect on the last day of the preceding month, with an initial rate equal to %.
[ ] an annual rate .
If this [ ] is checked and the Note Rate is variable, the Note Rate shall at no time be less than an annual
rate of %, and shall at no time exceed an annual rate (if one is specified) of %. The interest
rate on this Note shall never exceed the maximum rate permitted by law.
*Base Rate* means the rate of interest established by Norwest Bank Nebraska, N.A. National Money Market Rate
from time to time as its "Prime" rate. "Due Date" means the maturity date on which all unpaid principal and
interest is scheduled to be repaid as stated in the Section entitled "Repayment Terms" or the date of the
acceleration of this Note, whichever is earlier.
REPAYMENT TERMS: Unless payable sooner as a result of its acceleration, the Borrower shall pay this Note as
follows:
[ ] FIXED INSTALLMENTS OF PRINCIPAL AND INTEREST. Principal and interest shall be paid together in
consecutive installments of $ each, beginning ,
and on the same day of each thereafter until ,
[ ] plus irregular installments as follows:
$ on ; $ on ; and
$ on . On , the entire unpaid balance of
principal and accrued but unpaid interest shall be due and payable. Each installment shall be applied first
to accrued interest and the balance to principal.
[X] FIXED PRINCIPAL PAYMENTS PLUS INTEREST. Principal only shall be paid:
[ ] in consecutive installments of $ each, beginning , and on
the same day of each thereafter until , plus a final
payment on , when the entire unpaid balance of principal shall become due and
payable.
[X] $1,000,000.00 on 8-15-1997; $ on ;
$ on ; $ on ;
$ on ; $ on ;
and in addition, interest shall be payable Monthly, beginning 12-01-1996, and on the same day of each
subsequent month.
LATE FEE: [ ] Each time that a scheduled payment is not paid when due or within days afterwards, the
Borrower will pay a late fee equal to [ ] $ ; [ ] % of the full amount of the
late payment; [ ] the lesser of $ or % of the full amount of the late payment.
[ ] ADDITIONAL INTEREST. Each time a scheduled payment is not paid when due or within days afterwards, the
Borrower will pay additional interest ("Additional Interest") which will begin accruing on the next calendar day
on the entire unpaid principal balance at an annual rate of % in excess of the Note Rate. The
Additional Interest will continue to accrue until all past due payments and any Additional Interest are paid
in full. Acceptance by the Bank of any late fee or Additional Interest shall not constitute a waiver of any
default hereunder.
PREPAYMENT: The Borrower may prepay this Note, at any time, in whole or in part, [X] without penalty [ ] provided
that at the time of prepayment the Borrower pays a prepayment penalty equal to % of the principal amount
prepaid. Any partial payment shall be applied against the principal portion of the installments due in inverse
order of maturity.
OTHER FEES: If this [ ] is checked, the undersigned shall pay to the Bank a nonrefundable: (Mark the applicable
fee type(s))
[ ] commitment fee of (Choose one) [ ] $ [ ] % of the Note Amount
[ ] facility fee of (Choose one) [ ] $ [ ] % of the Note Amount
[ ] documentation fee of (Choose one) [ ] $ [ ] % of the Note Amount
[ ] application and loan processing fee of (Choose one) [ ] $ [ ] % of the Note Amount
"Note Amount" means the principal amount of this Note, at the time this Note is signed.
ADDITIONAL TERMS: The terms set forth on the reverse are incorporated into and made a part of this Note.
LOAN PURPOSE: The Borrower certifies that the proceeds of this loan will be used for business or
agricultural purposes.
-----------------------------------------------------------------------------------------------------------------
SIGNATURES
-----------------------------------------------------------------------------------------------------------------
Signature Signature
X /s/ JOHN T. CONNOR X
-----------------------------------------------------------------------------------------------------------------
Name and Title (if applicable) Name and Title (if applicable)
John T. Connor, Chief Executive Officer
-----------------------------------------------------------------------------------------------------------------
Borrower's name Signature
Transcrypt International, Inc. X
-----------------------------------------------------------------------------------------------------------------
Address Name and Title (if applicable)
4800 NW 1st Street
-----------------------------------------------------------------------------------------------------------------
City, State, Zip code [ ] This Note is given as a replacement for, and
not in satisfaction of, Note Number ,
Lincoln, NE 68521 given by the Borrower and dated .
------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
ADDITIONAL TERMS
DEFAULT AND ACCELERATION: Upon the occurrence of any one or more of the
following events of default, or at any time thereafter unless such default is
cured, the Bank may at its option declare all unpaid principal, accrued
interest, fees and all other amounts payable under this Note to be immediately
due and payable, without notice or demand to the Borrower:
- - Default by the Borrower in the payment when due of any principal,
interest or other amounts due under this Note; or
- - The Borrower fails to perform or observe any term or covenant of this
Note or any related documents or perform any other agreement with the
Bank; or
- - The Borrower fails to perform or observe any agreement with any other
creditor that relates to indebtedness or contingent liabilities which
would allow the maturity of such indebtedness or obligation to be
accelerated; or
- - The Borrower changes its legal form of organization; or
- - If the holder of this Note at any time, in good faith, believes that
the undersigned will not be able to pay this Note when it is due; or
- - Any representation or warranty made by the Borrower in applying for
this loan is untrue in any material respect; or
- - A garnishment, levy or writ of attachment, or any local, state or
federal notice of tax lien or levy is served upon the Bank for the
attachment of property of the Borrower in the Bank's possession or
indebtedness owned to the Borrower by the Bank.
AUTOMATIC ACCELERATION: If, with or without the Borrower's consent, a
custodian, trustee or receiver is appointed for any of the Borrower's
properties or if a petition is filed by or against the Borrower under the
United States Bankruptcy Code, or if the Borrower is dissolved or liquidated
(if an entity), or dies (if an individual), the unpaid principal, accrued
interest and all other amounts payable under this Note will automatically
become due and payable without notice or demand.
WAIVER OF DEMAND, PRESENTMENT, NOTICE OF DISHONOR AND PROTEST: Each maker,
accommodation party, endorser or guarantor of this Note, and any other party
liable for its repayment, hereby severally waives demand, presentment, notice
of dishonor and protest.
AMENDMENT OR MODIFICATION OF TERMS: Any amendment or modification of this Note
must be in writing and signed by the party against whom enforcement of such
amendment or modification is sought. The Bank may also change any of the
repayment terms of this Note, including extensions of time and renewals, and
release or add any party liable on this Note, or agree to the substitution or
release of any security collateralizing this Note without notifying or
releasing from liability any maker, accommodation party, endorser or guarantor.
The Bank may suspend or waive any rights or remedies that it may have against
any person who may be liable for its repayment.
NO WAIVER OF DEFAULTS OR REMEDIES: No delay on the part of the Bank in the
exercise of any right or remedy shall operate as a waiver thereof. No single or
partial exercise by the Bank of any right or remedy shall preclude any further
exercise of that or any other right or remedy, and no waiver or indulgence by
the Bank of any default shall be effective unless in writing and signed by the
Bank.
SUBSEQUENT HOLDERS, MULTIPLE BORROWERS, AND GOVERNING LAW: Any reference to the
Bank in this Note shall be deemed to include any subsequent holder of this
Note. The undersigned Borrower, if more than one, shall be jointly and
severally liable hereunder and the term "Borrower" shall mean any one or more
of them. This Note will be governed by the substantive laws of the state where
the Bank's principal office is located, and any mortgage securing this Note
will be governed by the state where the real property subject to the Mortgage
is located.
ATTORNEYS' FEES: In the event the Bank is required to collect this Note
following its Due Date or the bankruptcy of any maker hereof, the Borrower will
pay to the Bank such further amounts as shall be sufficient to cover the costs
and expenses incurred in collecting this Note and liquidating any security or
guaranties given in support hereof, including reasonable attorneys' fees and
expenses required to take such actions in any court, including any bankruptcy
court.
FINANCIAL REPORTING: While any amounts are due under this Note, the Borrower
agrees to provide to the Bank annual financial statements and such other
financial information as the Bank may request.
ARBITRATION
AGREEMENT TO ARBITRATE: The Bank and Borrower agree to submit to binding
arbitration all claims, disputes and controversies (whether in tort, contract
or otherwise, except "core proceedings" under the U.S. Bankruptcy Code) arising
between themselves and their respective employees, officers, directors,
attorneys and other agents, which relate in any way without limitation to this
Note, including by way of example but not by way of limitation the negotiation,
collateralization, administration, repayment, modification, default,
termination and enforcement of the loans or credit evidenced by this Note.
RULES GOVERNING ARBITRATION AND SELECTION OF ARBITRATOR: Arbitration under this
Agreement will be governed by the Federal Arbitration Act and proceed in the
city where the Bank's principal office is located, or such other location as
the Bank and Borrower may agree in accordance with the American Arbitration
Association's commercial arbitration rules ("AAA Rules"). Arbitration will be
conducted before a single neutral arbitrator selected in accordance with AAA
Rules and who shall be an attorney who has practiced commercial law for at
least ten years.
STATUTES OF LIMITATION, PROCEDURAL ISSUES, COSTS AND FEES: The arbitrator will
determine whether an issue is arbitratable and will give effect to applicable
statutes of limitation. Judgment upon the arbitrator's award may be entered in
any court having jurisdiction. The arbitrator has the discretion to decide,
upon documents only or with a hearing, any motion to dismiss for failure to
state a claim or any motion for summary judgment. The arbitrator will award
costs and expenses in accordance with the provisions of this Note.
DISCOVERY: Discovery will be governed by the rules of civil procedure in effect
in the state where the Bank's principal office is located. Discovery must be
completed at least 20 days before the hearing date and within 180 days of the
commencement of arbitration. Each request for an extension and all other
discovery disputes will be determined by the arbitrator upon a showing that the
request is essential for the party's presentation and that no alternative means
for obtaining information are available during the initial discovery period.
EXCEPTIONS TO ARBITRATION: This Agreement does not limit the right of either
party to a) foreclose against real or personal property collateral; b) exercise
self-help remedies such as setoff or repossession; or c) obtain provisional
remedies such as replevin, injunctive relief, attachment or the appointment of a
receiver during the pendency or before or after any arbitration proceeding.
These exceptions do not constitute a waiver of the right or obligation of
either party to submit any dispute to arbitration, including those arising from
the exercise of these remedies.
<PAGE> 3
ENVIRONMENTAL INDEMNITY AGREEMENT
This Agreement is made and entered into this 19th day of November, 1996,
by and between TRANSCRYPT INTERNATIONAL, INC., a Delaware Corporation which has
its principal place of business in Lincoln, Nebraska ("Transcrypt") and NORWEST
BANK NEBRASKA, NATIONAL ASSOCIATION, a national banking association which has
its principal place of business in Omaha, Nebraska ("Norwest").
Recitals:
A. Transcrypt is the owner of the real estate described as Lot 1, Highlands
Coalition Second Addition, as surveyed, platted, and recorded in
Lancaster County, Nebraska (the "Property").
B. Norwest is loaning the principal sum of One Million Dollars
($1,000,000.00) to Transcrypt to finance the construction of certain
improvements to the Property, which such loan is evidenced by a
Promissory Note of even date executed and delivered by Transcrypt to
and in favor of Norwest (the "Note").
C. The Note is secured by a Deed of Trust and Construction Security
Agreement of even date covering the Property (the "Deed of Trust") under
which Transcrypt is Trustor and Norwest is Trustee and Beneficiary.
D. Norwest has required this Agreement in consideration of and as a
condition of the loan evidenced by the Note.
NOW, THEREFORE, in consideration of the foregoing Recitals, and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Transcrypt hereby agrees, covenants, and represents to Norwest as
follows:
1. For purposes of this Agreement, "Pollutant" shall mean any
pollutant, contaminant, solid waste, or hazardous or toxic waste, substance, or
material defined as such under the Resource Conservation and Recovery Act (42
U.S.C. Sections 6901, et seq.), the Comprehensive Environmental Response
Compensation and Liability Act (42 U.S.C. Sections 9601, et seq.), or any
other federal, state, or local environmental law, statute, code, rule,
regulation, order, decree, or ordinance.
2. Transcrypt represents and warrants that there is no Pollutant
above, in, on, under, or around the Property and that neither Transcrypt nor
any previous owner of the Property generated, used, had, managed, or released
any Pollutant above, in, on, under, or around the Property.
<PAGE> 4
3. Transcrypt warrants and covenants that it will not allow any
Pollutant to be above, in, on, under, or around the Property or to generate,
use, have, manage, release, or allow any Pollutant above, in, on, under, or
around the Property.
4. Transcrypt hereby agrees to indemnify and hold Norwest harmless
from any actions, claims, damages, liabilities, remedial action, costs,
attorney fees, damages, and civil and criminal penalties which may result from
or in connection with any Pollutant which is now or hereafter may be located
above, in, on, under, or around the Property. This indemnification shall
survive the termination of the Deed of Trust and the Note referenced in the
Recitals in this Agreement.
5. Transcrypt shall immediately notify Norwest in writing of any
proceeding or inquiry by any governmental authority with respect to any
Pollutant relating to the Property and immediately notify Norwest in writing of
any claims made or threatened by any third party relating to any damage, loss,
or injury resulting from any Pollutant relating to the Property. In the event
of any proceeding or inquiry by any governmental authority with respect to a
Pollutant relating to the Property, Transcrypt shall take such abatement,
corrective, remedial, or response action as may be required by law or by
direction or order of any governmental authority or court.
6. In the event Norwest reasonably suspects the presence of any
Pollutant above, in, on, under, or around the Property, or in the event of any
Event of Default under the Deed of Trust referred to in the Recitals to this
Agreement, Norwest may require Transcrypt, at the sole cost and expense of
Transcrypt, to employ a qualified independent environmental auditor, acceptable
to Norwest, to conduct an environmental audit of the Property to determine
whether there is any Pollutant above, in, on, under, or around the Property.
IN WITNESS WHEREOF, this instrument was executed on the date first set
forth above.
NORWEST BANK NEBRASKA, TRANSCRYPT INTERNATIONAL, INC.
NATIONAL ASSOCIATION
By: /s/ DeeAnn K. Wenger By: /s/ John T. Connor
-------------------------- ----------------------------
DeeAnn K. Wenger, Its: Chairman
Assistant Vice President ---------------------------
Corporate Banking Division
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<PAGE> 5
DEED OF TRUST
CONSTRUCTION SECURITY AGREEMENT
THIS DEED OF TRUST CONSTITUTES A CONSTRUCTION SECURITY AGREEMENT WITHIN THE
PURVIEW OF THE NEBRASKA CONSTRUCTION LIEN ACT, AND SECURES AN OBLIGATION WHICH
TRUSTOR INCURRED FOR THE PURPOSE OF MAKING AN IMPROVEMENT OF THE REAL ESTATE IN
WHICH THE SECURITY INTEREST IS GIVEN AND IS A CONSTRUCTION SECURITY
INTEREST.
THIS DEED OF TRUST and CONSTRUCTION SECURITY AGREEMENT ("Deed of
Trust") made this 19th day of November, 1996, among TRANSCRYPT INTERNATIONAL,
INC., whose mailing address is 4800 NW 1st Street, Lincoln, Nebraska 68521, as
Trustor; NORWEST BANK NEBRASKA, NATIONAL ASSOCIATION, a national banking
association, whose mailing address is 1919 Douglas Street, P.O. Box 3408,
Omaha, Nebraska 68103, as Trustee; and NORWEST BANK NEBRASKA, NATIONAL
ASSOCIATION, a national banking association, whose mailing address is 1919
Douglas Street, P.O. Box 3408, Omaha, Nebraska 68103, as Beneficiary:
W I T N E S S E T H:
That Trustor irrevocably grants, transfers, and assigns to Trustee IN
TRUST WITH POWER OF SALE all of Trustor's estate, right, title, and interest
in and to the real estate in Lancaster County, Nebraska, legally described as:
Lot 1, Highlands Coalition Second Addition, as surveyed,
platted, and recorded in Lancaster County, Nebraska
(the "Real Estate"), together with all interests which Trustor now has or may
hereafter acquire in and to the Real Estate and in and to:
(a) all easements and rights of way appurtenant thereto and all of
the state, right, title, interest, claim, and demand whatsoever
of Trustor in the Real Estate, either at law or in equity, now
or hereafter acquired;
(b) all structures, buildings, and improvements of every kind and
description now or at any time hereafter located or placed on
the Real Estate (the "Improvements");
(c) all fixtures now or hereafter located in, upon, or under the
Real Estate or the Improvements, or any part thereof, and used
or usable in connection with any present or future operation
thereof, and all additions thereto and replacements thereof;
<PAGE> 6
(d) all building materials and supplies now or hereafter placed on the
Real Estate or in the Improvements;
(e) all proceeds of the conversion, voluntary or involuntary, of any of
the foregoing into cash or liquidated claims, including, without
limitation, proceeds of insurance and condemnation awards; and
(f) all other or greater rights and interests of every nature in the
Real Estate and the Improvements and in the possession or use
thereof and income therefrom, whether now owned or subsequently
acquired by Trustor.
The property so conveyed hereunder is hereinafter referred to as the
"Trust Property."
FOR THE PURPOSE OF SECURING THE FOLLOWING (the "Obligations"):
A. Payment of the principal sum of One Million Dollars
($1,000,000.00), together with interest thereon (the "Loan"), as
evidenced by that certain Promissory Note dated of even date
herewith, in the principal amount of One Million Dollars
($1,000,000.00), executed and delivered by Trustor to Beneficiary
(the "Promissory Note").
B. Payment of late charges and other sums due under the terms of the
Promissory Note.
C. Performance, discharge of, and compliance with every debt,
obligation, covenant, and agreement of Trustor to Beneficiary (all
of which are collectively hereinafter called the "Loan Documents").
D. Payment of future advances to be made at the option of Beneficiary
and Trustor.
TO PROTECT THE SECURITY OF THIS DEED OF TRUST, TRUSTOR COVENANTS:
1. TITLE. That it is lawfully seized and possessed of a good and
indefeasible title and estate in the Real Estate and the other Trust Property,
and will forever warrant and defend the title thereto against the claims and
demands of all persons whomsoever; that it will, at its expense, maintain and
preserve the lien of this Deed of Trust as a third lien upon the Trust Property,
subject only to the following:
(a) Deed of Trust Construction Security Agreement executed by
Transcrypt International, Ltd., as Trustor, and Norwest Bank
Nebraska, N.A., as Trustee and Beneficiary, to secure the principal
sum of $850,000.00, dated
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<PAGE> 7
January 15, 1994, and filed January 31, 1994, as Instrument No.
94-5296 in the office of the Register of Deeds of Lancaster
County, Nebraska; and
(b) Deed of Trust executed by Transcrypt International, Ltd., as
Trustor, and Norwest Bank Nebraska, N.A., as Trustee and
Beneficiary, to secure the principal sum of $700,000.00, dated
May 18, 1994, and filed June 20, 1994, as Instrument No.
94-28725, in the office of the Register of Deeds of Lancaster
County, Nebraska.
2. MAINTENANCE. To keep the Trust Property in good condition and
repair; to complete or restore promptly and in good and workmanlike manner any
building which may be constructed, damaged, or destroyed thereon, and to pay,
when due, all claims for labor performed and materials furnished therefor and
for any alterations thereof; not to remove, demolish, or materially alter any
building, or the character or use thereof at any time thereon; not to drill or
extract nor permit the drilling for or extraction of oil, gas, or other
hydrocarbon substances or any mineral of any kind unless the written consent of
Beneficiary is first had and obtained; not to commit or permit any waste
thereof or any act upon the Trust Property in violation of law; to do all other
acts in a timely and proper manner which from the character or use of the Trust
Property may be reasonably necessary to protect and preserve the same, the
specific enumerations herein not excluding the general.
3. FIRE AND CASUALTY INSURANCE.
(a) To keep the Trust Property insured against loss or damage by
fire with extended coverage, vandalism, and malicious mischief
endorsement and business interruption insurance in an amount
acceptable to Beneficiary, and against such other risks or
hazards which, in the reasonable opinion of Beneficiary, should
be insured against (including, during any period of
construction, builder's risk insurance), to the amount of the
full insurable value thereof on a replacement cost basis with a
company or companies and in such form and with such endorsements
as may be approved or required by Beneficiary. Proceeds under
all such insurance shall be payable to Trustor and Beneficiary,
as their interests may appear, and all such insurance policies
shall be endorsed with a standard, noncontributory mortgagee's
clause in favor of Beneficiary and with a lender's loss payee
endorsement as to loss of rental income. Trustor shall also
carry public liability insurance in such form, amount, and with
such companies as to protect Beneficiary against any liability
incident to the use of or resulting from any incident occurring
in or about the Trust Property. Initially, such public liability
insurance shall provide for comprehensive general liability
coverage with limits of not less than $1,000,000.00 combined
single limit per occurrence for personal injury, death, and
property damage. However, such
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<PAGE> 8
amount shall be increased from time to time as Beneficiary may
hereafter require. Said policies or copies thereof, at
Beneficiary's request, shall be delivered to, and remain in
possession of, Beneficiary as further security for the faithful
performance of the Obligations, which delivery shall constitute
an assignment by Trustor to Beneficiary of all rights
thereunder, including all return premiums; to deliver to
Beneficiary a policy or policies renewing or extending any
expiring insurance with a receipt showing premiums paid at least
thirty (30) days before expiration. If Trustor fails to so
deliver any renewal policies, Beneficiary may procure such
insurance as it may elect and may make payment of premiums
thereon, which payment is reimbursable on demand. Neither
Trustee nor Beneficiary shall be responsible for obtaining or
maintaining such insurance. Beneficiary, from time to time, may
furnish to any insurance agency or company, or any other person,
any information contained in or extracted from any insurance
policy theretofore delivered to Beneficiary pursuant hereto, and
any information concerning the Loan. In no event, and whether or
not an Event of Default (as hereinafter defined) has occurred
hereunder, shall Beneficiary, by the fact of approving,
accepting, or obtaining such insurance, incur any liability for
the amount of such insurance, the form or legal sufficiency of
insurance contracts, solvency of insurers, or payment of losses
by insurers, and Trustor hereby expressly assumes full
responsibility therefor. Trustor shall give immediate written
notice of any loss to Beneficiary, and Beneficiary may, but is
not obligated to, make proof of loss if not made promptly by
Trustor. Said policies shall require sixty (60) days' prior
written notice of cancellation or modification by given to
Beneficiary.
(b) In case of any loss, the amount collected under any policy of
insurance on the Trust Property may, at the option of
Beneficiary, be applied by Beneficiary to satisfaction of any
Obligations and in such order and amount as Beneficiary may
determine; or said amount, or any portion thereof may, at the
option of Beneficiary, either be used in replacing or restoring
the Trust Property to a condition satisfactory to Beneficiary,
or said amount or any portion thereof, may be released to
Trustor. In any such event, neither Trustee nor Beneficiary
shall be obligated to see to the proper application thereof; nor
shall the amount so released or used by deemed a payment on any
Obligation. Such application, use, and/or release shall not cure
or waive any Event of Default or notice of default hereunder or
invalidate any act done pursuant to such notice. Any unexpired
insurance and all returnable insurance premiums shall inure to
the benefit of, and pass to, the purchaser of the Trust Property
covered thereby at any Trustee's sale or judicial foreclosure
sale held hereunder. If the Trust Property is sold pursuant to
the power of sale contained herein or pursuant to any decree of
foreclosure, all right, title, and interest of Trustor in and to
the proceeds of fire and other
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<PAGE> 9
insurance policies for damage prior to the sale, which proceeds
are not received prior to the date of said sale, shall belong to
Beneficiary.
4. TAXES AND OTHER SUMS DUE. To pay, satisfy, and discharge at
least ten (10) days before delinquency, any and all of the following sums:
(a) all general and special taxes and assessments and public charges
affecting or levied against the Trust Property;
(b) all encumbrances, charges, and liens, with interest, on the
Trust Property, or any part thereof, which are, or appear to
Beneficiary to be, prior to or superior hereto;
(c) all costs, fees, and expenses of this trust, whether or not
described herein;
(d) fees or charges for any statement regarding any Obligation in
any amount demanded by Beneficiary, not to exceed the maximum
amount allowed by law therefor at the time when such request is
made;
(e) such other charges as the Beneficiary may deem reasonable for
services rendered by Beneficiary and furnished at the request of
Trustor or any successor in interest to Trustor.
5. SUMS ADVANCED TO BEAR INTEREST. To pay immediately upon demand
any sums advanced or paid by Beneficiary or Trustee under any clause or
provision of this Deed of Trust. Any such sums, until so repaid, shall be
considered a portion of the Obligations secured hereby and bear interest from
the date advanced or paid at the same rate specified in the Promissory Note and
shall be secured by this Deed of Trust.
6. EVENTS OF DEFAULT. Upon the occurrence of any one of the
following (hereinafter an "Event of Default" or "default"), the payment of all
principal, interest, and any other sums due under the terms of the Promissory
Note shall, at the option of Beneficiary, be accelerated and such principal,
interest, and other sums shall immediately be due and payable without notice or
demand, and Beneficiary shall have the option to foreclose judicially or
extrajudicially through power of sale any and all liens securing the payment
thereof:
(a) Default in the payment of principal or interest under the
Promissory Note;
(b) Default in the payment of principal or interest under any of the
other Obligations;
(c) Any default under any of the other Loan Documents; or
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<PAGE> 10
(d) Trustor fails to keep or perform any of its agreements, undertakings,
obligations, covenants, or conditions under this Deed of Trust;
(e) Any default under the Amended and Restated Loan Agreement between Norwest
Bank Nebraska, N.A. and Transcrypt International, Ltd. dated May 18, 1994,
as amended by the First Amendment to Amended and Restated Loan Agreement
dated June 1, 1995, the Second Amendment to Amended and Restated Loan
Agreement dated April 10, 1996, the Third Amendment to Amended and Restated
Loan Agreement dated October 22, 1996, and the Fourth Amendment to Amended
and Restated Loan Agreement dated of even date with this Deed of Trust;
(f) Any default under the Environmental Indemnification Agreement of even date
with this Deed of Trust;
(g) Any warranty, representation, or financial statement made or furnished by
Trustor to Beneficiary is discovered to have been false in any material
respect when made or furnished; or
(h) Trustor shall:
(i) have an order for relief entered with respect to it under any law
relating to bankruptcy, insolvency, reorganization, or relief of
debtors ("Bankruptcy Law");
(ii) not pay, or admit in writing its inability to pay, its debts
generally as they become due;
(iii) make an assignment for the benefit of its creditors;
(iv) apply for, seek, consent to, or acquiesce in the appointment of a
receiver, custodian, trustee, examiner, liquidator, or similar
official for it or any of its property; or
(v) institute any proceedings seeking an order for relief under any
Bankruptcy Law, or a proceeding seeking to adjudicate it a bankrupt
or insolvent or seeking a dissolution, winding up, liquidation,
reorganization, arrangement, adjustment, or composition of it, or
its debts, under any Bankruptcy Law; or fail to file an answer or
other pleading denying the material allegations of any such
proceeding filed against it;
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<PAGE> 11
(i) Should it be discovered after the execution and delivery of this
Deed of Trust that there is a defect in the title to, or a lien
or encumbrance of any nature on the Real Estate or other Trust
Property described in the Loan Documents prior to the lien of
the Beneficiary evidenced by the Loan Documents, and not
disclosed in the policy of title insurance issued to the
Beneficiary insuring the priority of the Deed of Trust covering
the Real Estate, unless such defect is cured within thirty (30)
days after written notice of such defect from Beneficiary to
Trustor; or
(j) Should Trustor be divested of title to the Real Estate, or any
part thereof, of any interest therein, either voluntarily or
involuntarily; or
(k) If title to the Trust Property be subjected to any lien or
charge, whether superior or inferior to the lien of the Loan
Documents, voluntarily or involuntarily, contractual or
statutory, except as permitted by the Loan Documents, without
the prior written consent of Beneficiary in each such instance
first had and obtained, and if any such lien or charge is not
released of record within thirty (30) days following written
notice to Trustor; or
(l) If the Trust Property or any part thereof or beneficial interest
therein is sold, assigned, transferred, conveyed, encumbered,
hypothecated, mortgaged, or otherwise alienated by Trustor,
whether voluntarily or involuntarily, or by operation of law, in
either or any case without the prior written consent of
Beneficiary.
7. COMPLIANCE WITH LAWS, ETC. Trustor shall comply promptly and
fully with all present and future laws, ordinances, rules, and regulations and
any governmental authority having jurisdiction of or over the Trust Property or
any part thereof or any use of the Trust Property, including, without
limitation, laws, ordinances, rules, or regulations relating to asbestos,
petroleum products, or hazardous or toxic wastes or materials.
IT IS MUTUALLY AGREED THAT:
8. LITIGATION. Trustor shall defend this Deed of Trust in any
action or proceeding purporting to affect the Trust Property, whether or not it
affects the security hereof, or purporting to affect the rights or powers of
Beneficiary or Trustee, and shall file and prosecute all necessary claims and
actions to prevent or recover for any damage to or destruction of the Trust
Property, and either Trustee or Beneficiary is hereby authorized, without
obligation so to do, to commence, appear in, or defend any such action, whether
brought by or against Trustor, Beneficiary, or Trustee, or with or without suit,
to exercise or enforce any other right, remedy, or power available or conferred
hereunder, whether or not judgment be entered in any action or proceeding; and
Trustee or Beneficiary may appear or intervene in any action or proceeding, and
retain counsel therein; and take such
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<PAGE> 12
action therein as either may be advised and may settle, compromise, or pay the
same or any other claims and, in the behalf and for any of said purposes, may
expend and advance such sums of money as either may deem necessary. Whether or
not Trustor so appears or defends, Trustor on written demand, shall pay all
actual and reasonable costs and expenses of Beneficiary and Trustee, including
costs of evidence of title and attorneys' fees, in any such action or proceeding
in which Beneficiary or Trustee may appear by virtue of being made a party
defendant or otherwise and irrespective of whether the interest of Beneficiary
or Trustee in the Trust Property is directly questioned by such action,
including but not limited to any action for the condemnation or partition of the
Trust property.
9. CASUALTY AND CONDEMNATION. All sums due, paid, or payable to Trustor,
or any successor in interest of Trustor, whether by way of judgment, settlement,
or otherwise:
(a) for injury or damage to the Trust Property;
(b) in connection with any condemnation for public use or injury to the
Trust Property or any part thereof;
are hereby absolutely and irrevocably assigned and shall be paid to Beneficiary.
Beneficiary shall be entitled, at its option, to commence, intervene in,
appear in, and prosecute in its own name, any action or proceeding, or to make
any compromise or settlement, in connection with any such taking or damage.
Trustor agrees to execute such further assignments of any compensation, award,
damages, rights of action, and proceeds as Beneficiary may require.
All amounts received by Beneficiary pursuant to this Deed of Trust, in
connection with any condemnation for public use of, or injury to, the Trust
Property, may, at the option of the beneficiary, be applied by Beneficiary upon
any indebtedness secured hereby or other Obligation, and in such order and
amount as Beneficiary may determine; or said amount or any portion thereof, may
at the option of Beneficiary, be used in replacing or restoring the Trust
Property to a condition satisfactory to Beneficiary, or be released to Trustor,
to be applied, at the option of Beneficiary, upon any indebtedness secured
hereby. No such application, use, or release shall cure or waive any Event of
Default, or notice of default hereunder, or invalidate any act done pursuant to
such notices.
10. JUDICIAL FORECLOSURE OR TRUSTEE'S SALE ON DEFAULT.
(a) Upon the occurrence of one or more Events of Default, or default by
Trustor in the performance of any other covenant or agreement
hereunder, or any covenant or agreement under any Loan Document or
under any instrument or document now or hereafter executed by Trustor
to further secure payment
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<PAGE> 13
of and performance of the Obligations, Beneficiary may declare all
indebtedness secured hereby immediately due and payable and, at the
option of Beneficiary this Deed of Trust may be foreclosed in the
manner provided by law for the foreclosure of mortgages on real
property or, at the option of Trustee and Beneficiary, may be sold
in the manner provided in the Nebraska Trust Deeds Act, under the
power of sale conferred upon the Trustee hereunder.
(b) If the Trust Property is sold pursuant to the power of sale
conferred upon Trustee hereunder, Trustee shall cause to be filed
of record a written notice of default and election to sell the
Trust Property. After the lapse of such time as then may be
required by law following recordation of such notice of default,
and notice of sale having been given as then required by law,
Trustee, without demand on Trustor, shall sell the Trust Property,
either as a whole or in separate parcels, and in such order as it
or Beneficiary may determine, at public auction to the highest
bidder. Trustee may postpone the sale of all or any portion of the
Trust Property by public announcement at the time and place of
sale, and from time to time thereafter may postpone the sale by
public announcement at the time and place fixed by the preceding
postponement. Trustee shall deliver to such purchaser its deed
conveying any Trust Property so sold, but without any covenant or
warranty, express or implied. The recital in such deed of any
matters of fact or otherwise shall be conclusive proof of the
truthfulness thereof. Any person, including Trustor, Trustee, or
Beneficiary, may purchase at such sale. Trustee shall first apply
the proceeds of the Trustee's sale to the costs and expenses of
exercising the power of sale and of the sale, including the payment
of Trustee's fees actually incurred, and second to the payment of
any Obligations, and third to the payment of junior trust deeds,
mortgages, or other liens, and the balance, if any, to the person
or persons legally entitled thereto.
(c) Trustor agrees, for itself and any and all persons or concerns
claiming by, through, or under Trustor, that if it, or any one or
more of them, shall hold possession of the Trust Property, or any
part thereof, subsequent to the Trustee's or judicial sale
hereunder, it, or the parties so holding possession, shall become,
and be considered as, tenants at will of the purchaser or
purchasers at either such sale; and any such tenant failing or
refusing to surrender possession upon demand shall be guilty of
forcible detainer and shall be liable to such purchaser or
purchasers for reasonable rental of the Real Estate, and shall be
subject to eviction and removal, forcible or otherwise, with or
without process of law, and all damages which may be sustained by
any such tenant as a result thereof are hereby expressly waived.
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<PAGE> 14
11. SECURITY INTEREST IN FIXTURES. This Deed of Trust is also
intended to create, and Trustor does hereby grant to Beneficiary, a security
interest in any and all now owned and hereafter acquired fixtures now or
hereafter located on or used in connection with the Trust Property. Beneficiary
shall have, cumulative of all other rights and remedies of Beneficiary
hereunder, all of the rights and remedies of a secured party under the Nebraska
Uniform Commercial Code. Trustor hereby agrees to execute and deliver on demand
and hereby irrevocably constitutes and appoints Beneficiary the
attorney-in-fact of Trustor to execute and deliver and, if appropriate, to file
with the appropriate filing officer or officers such security agreements,
financing statements, continuation statements, or other instruments as
Beneficiary may request or require in order to perfect or continue the
perfection of the lien or security interest created hereby.
12. FIXTURE FINANCING STATEMENT. This Deed of Trust is intended to be
a financing statement with the purview of the Nebraska Uniform Commercial Code
with respect to those items of the Trust Property that constitute fixtures to
the Real Estate. The address of Trustor (Debtor) and Beneficiary (Secured
Party) are set forth on the first page of this Deed of Trust. This Deed of
Trust is to be filed for record in the office of the Register of Deeds of
Lancaster County, Nebraska, where the Real Estate is located. Trustor is the
record owner of the Real Estate.
13. SUBSTITUTION OF TRUSTEE. Beneficiary may, from time to time, by
instrument in writing, substitute a successor or successors to any Trustee
named herein or acting hereunder, which instrument, executed and acknowledged
by Beneficiary and recorded in the office of the Register of Deeds of Lancaster
County, Nebraska, shall be conclusive proof of proper substitution of such
Trustee or Trustees, who shall, without conveyance from the Trustee
predecessor, succeed to all its title, estate, rights, power, and duties.
14. NO WAIVER BY BENEFICIARY. No waiver by Beneficiary of any right
under this Deed of Trust shall be effective unless in writing. Any waiver by
Beneficiary of any right granted to Beneficiary under this Deed of Trust or of
any provision of this Deed of Trust as to any transaction or occurrence shall
not be deemed a waiver as to any future transaction or occurrence. By accepting
payment of any Obligation after its due date, or by making any payment or
performing any act on behalf of Trust or for which Trustor was obligated
hereunder, but failed to make or perform, or by adding any payment so made by
Beneficiary to the indebtedness secured hereby, Beneficiary does not waive its
right to require prompt payment when due of, or to require prompt performance
of, any Obligation, or to declare a default for failure so to pay or perform.
15. TIME OF THE ESSENCE. Time is of the essence in all Trustor's
obligations hereunder.
16. REMEDIES. No remedy herein provided shall be exclusive of any
other remedy herein or now or hereafter existing by law, but shall be
cumulative. Every power
-10-
<PAGE> 15
or remedy hereby given to trustee or Beneficiary, or to which either of them
may be otherwise entitled, may be exercised from time to time and as often as
may be deemed expedient by them, and either of them may pursue inconsistent
remedies. If Beneficiary holds any additional security for any Obligation, it
may enforce the sale thereof at its option, either before, contemporaneously
with, or after any sale is made hereunder, and on any default of Trustor,
Beneficiary may, at its option, offset against any indebtedness secured hereby,
and the Beneficiary is hereby authorized and empowered at its option, without
any obligation so to do, and without affecting the enforceability of any
Obligation, to apply toward the payment of any indebtedness of the Trustor to
the Beneficiary any and all sums of money of Trustor which Beneficiary may have
in its possession or under its control, including without limiting the
generality of the foregoing, any savings account, deposit, investment
certificate, escrow or trust funds.
17. ILLEGALITY. In the event that any provision or clause of this Deed
of Trust conflicts with applicable law, such conflict shall not affect other
provisions of this Deed of Trust which can be given effect without the
conflicting provision, and to this end the provisions of this Deed of Trust are
declared to be severable.
18. ADDRESS FOR MAILING NOTICES. Trustor hereby requests that a copy
of any notice of default and a copy of any notice of sale hereunder shall be
mailed to each person below at the address indicated:
If to Trustor: Mr. John T. Connor, Chairman of the Board
Transcrypt International, Inc.
4800 N.W. 1st Street
Lincoln, NE 68521-9918
If to Beneficiary Norwest Bank Nebraska, National Association
or Trustee: 1919 Douglas Street
P.O. Box 3408
Omaha, NE 68103
Attention: DeeAnn K. Wenger, Assistant Vice
President Corporate Banking Division
-11-
<PAGE> 16
IN WITNESS WHEREOF, this instrument was executed on the date first set
forth above.
TRUSTOR: TRUSTEE:
TRANSCRYPT INTERNATIONAL, INC. NORWEST BANK NEBRASKA,
NATIONAL ASSOCIATION
By: /s/ John T. Connor By: /s/ DeeAnn K. Wenger
--------------------------- ------------------------------
Its: Chairman DeeAnn K. Wenger,
-------------------------- Assistant Vice President
Corporate Banking Division
BENEFICIARY:
NORWEST BANK NEBRASKA,
NATIONAL ASSOCIATION
By: /s/ DeeAnn K. Wenger
------------------------------
DeeAnn K. Wenger,
Assistant Vice President
Corporate Banking Division
STATE OF NEBRASKA )
) ss.
COUNTY OF DOUGLAS )
The foregoing instrument was acknowledged before me this 19 day of
November, 1996, by John T. Connor, the Chairman of Transcrypt International,
Inc., a Delaware Corporation, on behalf of the corporation.
/s/ Stephanie Lampe
---------------------------------
Notary Public
- ----------------------------------------
GENERAL NOTARY-State of Nebraska [STAMP]
[SEAL] STEPHANIE LAMPE
My Comm. Exp. July 23, 1998
- ----------------------------------------
My commission expires 7/23/93
-12-
<PAGE> 17
STATE OF NEBRASKA )
) ss.
COUNTY OF DOUGLAS )
The foregoing instrument was acknowledged before me this 22 day of
November, 1996, by DeeAnn K. Wenger, Assistant Vice President of Norwest Bank
Nebraska, National Association, Trustee, on behalf of said bank.
- ----------------------------------------
GENERAL NOTARY-State of Nebraska [STAMP] /s/ Bobbi L. Chandler
[SEAL] BOBBI L. CHANDLER --------------------------------
My Comm. Exp. Feb. 16, 1997 Notary Public
- ----------------------------------------
My commission expires 2-16-97.
STATE OF NEBRASKA )
) ss.
COUNTY OF DOUGLAS )
The foregoing instrument was acknowledged before me this 22 day of
November, 1996, by DeeAnn K. Wenger, Assistant Vice President of Norwest Bank
Nebraska, National Association, Beneficiary, on behalf of said bank.
- ----------------------------------------
GENERAL NOTARY-State of Nebraska [STAMP] /s/ Bobbi L. Chandler
[SEAL] BOBBI L. CHANDLER --------------------------------
My Comm. Exp. Feb. 16, 1997 Notary Public
- ----------------------------------------
My commission expires 2-16-97.
<PAGE> 1
- --------------------------------------------------------------------------------
Commercial Note
[NORWEST BANKS LOGO]
- --------------------------------------------------------------------------------
Name Date
Transcrypt International, Inc. 01-09-1997
- --------------------------------------------------------------------------------
Choose one of the following
/ / On the earlier of demand or ; or /X/ on 05-31-1997; or
----------------------
/ / days after Date, the resulting choice being the "Due Date," which
--------
also means the date, if any, on which this note is accelerated.
For value received, the undersigned (if more than one, jointly, and severally)
promise(s) to pay to the order of
Norwest Bank Nebraska, National Association (the "Bank")
- ------------------------------------------------------------------
1919 Douglas Street
- --------------------------------------------------------------------------------
Omaha, NE 68102
- --------------------------------------------------------- or at any other place
designated at any time by the holder of this Note, in lawful money of the
United States of America, the principal sum of Three Million and 00/100
----------------------------------
- --------------------------------------------------------------------------------
Dollars ($ 3,000,000.00), or as much as has been disbursed and remains
----------------
outstanding on this Note at the Due Date, as is shown by the Bank's records,
together with interest (calculated on the basis of actual days elapsed in a
year of 360 days) on the unpaid principal of this Note from the Date until
---
this Note is fully paid, at the following rate:
/ / an annual rate of % (the "Note Rate").
------------
/X/ an annual rate equal to 0.00% in excess of the Base Rate, each change in the
----
interest rate to become effective on the day the corresponding change in the
Base Rate becomes effective (the "Note Rate").
/ / an annual rate equal to % in excess of the Base Rate, with an
---------
initial rate to be tied to the Base Rate in effect on the date this Note is
signed and the rate for each month thereafter to be tied to the Base Rate
in effect on the last day of the immediately preceding month (the "Note
Rate").
/ / an annual rate (the "Note Rate").
------------------------------------------
"Base Rate" means the rate of interest established by
Norwest Bank Nebraska, N.A. National Money Market Rate
- --------------------------------------------------------------------------------
from time to time as its "base" or "Prime" rate.
-----
If this / / is checked, the Note Rate shall never be less than % and shall
------
never be greater than %.
------
After the Due Date, the unpaid principal and interest on this Note shall bear
interest until paid at the rate of % per annum in excess of the Note Rate
------
in effect on the Due Date except that, if the Bank is located in Minnesota and
the original principal amount of this Note is less than $100,000.00, or the
Bank is located in North Dakota, this Note shall bear the same interest rate
after its Due Date as was in effect on the Due Date. The interest rate on this
Note shall never exceed the maximum rate permitted by law.
/ / Interest shall be payable on the Due Date.
/X/ Interest shall be payable Monthly, commencing 02-15-1997 and on the same day
------- ----------
of each succeeding month, and on the Due Date.
-----
If this / / is checked, if any payment required by this Note is not paid
within days after the payment is due, Borrower will make an additional
----
payment to the Bank of (Choose one) / / $ ; or / / %
------------------ ---------
of the amount of the late payment (the "Late Fee").
The undersigned may, at any time, prepay this Note, in whole or from time to
time in part: (Choose one)
/X/ without premium or penalty, upon written or telephonic notice to the Bank;
or,
/ / provided that, upon prepayment, the Bank will be entitled to receive a
prepayment penalty equal to % of the principal amount to be prepaid.
------
If this / / is checked, in addition, the undersigned shall pay to the Bank a
nonrefundable: (Mark the applicable fee type(s))
/ / commitment fee of (Choose one) / / $ / / % of the
--------------- -------
Note Amount
/ / facility fee of (Choose one) / / $ / / % of the
----------------- -------
Note Amount
/ / documentation fee of (Choose one) / / $ / / % of the
---------------- -------
Note Amount
/ / application and loan processing fee of (Choose one) / / $
------------------
/ / % of the Note Amount
-------
"Note Amount" means the principal amount of this Note, at the time this Note is
signed.
(Check if applicable)
/X/ The undersigned may borrow, prepay and reborrow under this Note until the
Due Date within the limits of this Note and subject to the terms and
conditions in any other agreement between the undersigned and the Bank.
/X/ Any advances made under this Note shall be at the sole discretion of the
Bank and the Bank is not obliged to make any advance.
THE REVERSE SIDE OF THIS NOTE CONTAINS IMPORTANT, ADDITIONAL PROVISIONS, ALL OF
WHICH ARE MADE A PART HEREOF.
The proceeds of this loan will be used for business or agricultural purposes
only.
- --------------------------------------------------------------------------------
Name By:
Transcrypt International, Inc. /s/ John T. Connor
-----------------------------
- ------------------------------------------ John T. Connor,
Street address Chief Executive Officer
--------------------------------
4800 NW 1st Street By:
- -------------------------------------------
City, State and Zip --------------------------------
Lincoln, NE 68521 --------------------------------
- -------------------------------------------
--------------------------------
<PAGE> 2
This Note shall be in default if:
1. payment is not paid when due;
2. any other debt owed by the undersigned to the Bank is not paid when
due;
3. a garnishment, summons or writ of attachment is issued against or
served on the Bank or any financial institution for the attachment of
any property of the undersigned in the Bank's or any other financial
institution's possession, or any indebtedness owing to the
undersigned;
4. any statement made to the Bank or information provided to the Bank
proves to be false in any material respect; or,
5. the holder of this Note at any time, in good faith, believes that the
undersigned will not be able to pay this Note when it is due.
If this Note is in default, the holder may, in its sole option, declare
this Note to be immediately due and payable, at which time this Note will be
immediately due and payable together with all unpaid interest accrued on this
Note and Late Fees, if any, without further notice or demand. If this Note is
payable on demand, nothing in the preceding sentence shall preclude or limit
the holder of this Note from demanding payment of this Note at any time and for
any reason. This Note shall become automatically due and payable (including all
unpaid interest accrued and Late Fees) without notice or demand should the
undersigned die (an individual) or should a petition be filed by or against the
undersigned under the United States Bankruptcy Code.
MISCELLANEOUS: The undersigned and each endorser and guarantor, if any, agrees:
1. "Bank," as used in this Note means the Bank and any subsequent
holder of this Note.
2. Unless prohibited by applicable law, if this Note is not paid when
due, the undersigned will pay all costs of collection, including,
without limitation, reasonable attorney's fees and legal expenses,
incurred by the holder of this Note.
3. Each provision whose box is checked is a part of this Note.
4. No single or partial exercise of the Bank of any right or remedy
shall preclude any other future exercise of such right or remedy or
the exercise of any other right or remedy.
5. This Note shall be governed by the substantive laws of the state
named as part of the Bank's address above.
WAIVER: If this Note is signed by any party who is not receiving any of the
proceeds of the loan evidenced by it, each such party and any other party
liable for payment of the debt evidenced by this Note waives demand,
presentment, notice of dishonor and protest of this Note, as such terms are
defined in the Uniform Commercial Code.
In addition, each such party consents to:
1. any extension or postponement of time of this Note's payment
without limit as to the number or duration of any such extension or
postponement;
2. any substitution, exchange or release of all or part of the
collateral securing this Note; and
3. the release or discharge of, or suspension of any rights and
remedies against, any person who may be liable for payment of the
debt evidenced by this Note.
If the Bank delays the exercise of any right or remedy it has, it can
exercise such right or remedy later. If the Bank grants a waiver or
indulgence of any default, the waiver or indulgence must be in writing
and the writing must be signed by the Bank. If the Bank grants a waiver,
it is for that occasion only. Acceptance by the Bank of any Late Fee
shall not constitute a waiver by the Bank of any past or future default
by the undersigned or of any right or remedy the Bank has.
ARBITRATION: The Bank and the undersigned agree to submit to binding arbitration
all claims, disputes and controversies (whether in tort, contract or
otherwise, except "core proceeding" under the U.S. Bankruptcy Code)
arising between themselves and their respective employees, officers,
directors, attorneys and other agents, which relate in any way without
limitation to this note, including but not limited to, the negotiation,
collateralization, administration, repayment, modification, default,
termination and enforcement of the loan or credit evidenced by this
Note.
Arbitration will be governed by the Federal Arbitration Act (if in
Colorado, shall be governed by Colorado law) and proceed in the city and
state named as part of the Bank's address or other mutually agreed upon
location in accordance with the American Arbitration Association's
commercial arbitration rules (the "AAA Rules"). Arbitration will be
conducted before a single neutral arbitrator selected in accordance with
AAA Rules and who shall be an attorney who has practiced commercial law
for at least ten (10) years. The arbitrator will determine whether an
issue is arbitratable and will give effect to applicable statutes of
limitation.
Judgment upon the arbitrator's award may be entered in any court having
jurisdiction. The arbitrator has the discretion to decide, upon
documents only or with a hearing, any pre-hearing motion similar to
motions to dismiss for failure to state a claim or motions for summary
judgment. Discovery will be governed by the Rules of Civil Procedure for
the state in which the Bank is located. Discovery must be completed at
least twenty (20) days before the hearing date and within one hundred
eighty (180) days of the commencement of arbitration. Each request for
an extension and all other discover disputes will be determined by the
arbitrator upon a showing that the request is essential for the party's
presentation and that no alternative means for obtaining information are
available during the initial discovery period.
The parties' agreement to arbitrate does not limit the right of either
party to (a) foreclosure against real or personal property collateral;
(b) exercise self-help remedies such as setoff or repossession; or (c)
obtain provisional remedies such as replevin, injunctive relieve,
attachment or the appointment of a receiver during the pendency or
before or after any arbitration proceeding. These exceptions do not
constitute a waiver of the right or obligation of either party to submit
any dispute to arbitration, including those arising from the exercise of
these remedies. The arbitrator will award costs and expenses in
accordance with the provisions of this Note.
<PAGE> 1
<TABLE>
<Caption
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[NORWEST Commercial
BANKS LOGO] Installment Note
--------------------------------------------------------------------------------------------------------------------
Borrower's Name Transcrypt International, Inc. Date
12-23-1996
--------------------------------------------------------------------------------------------------------------------
PROMISE TO PAY: FOR VALUE RECEIVED, the undersigned Borrower promises to pay to the order of
Norwest Bank Nebraska, National Association (the "Bank") at
----------------------------------------------------------------------------------------------
1919 Douglas Street Omaha, NE 68102 or such other place
------------------------------------------------------------------------------------------
as the Bank or the holder of this promissory note (the "Note") may designate, the principal sum of
Seven Hundred Ninety-Two Thousand Seventy and 88/100 Dollars
------------------------------------------------------------------------------------------------------
($792,070.88), together with interest on the unpaid balance in accordance with the repayment terms set forth below.
INTEREST: The Borrower will pay interest (calculated on the basis of actual days elapsed in a 360 day year) on the
unpaid principal balance at the following rate (the "Note Rate"):
[ ] an annual rate of %.
---------------
[X] an annual rate equal to 0.2500 % above the Base Rate, floating.
-------- -------
[ ] an annual rate which, for any month hereafter, shall be equal to % the Base Rate in
----------- ---------
effect on the last day of the preceding month, with an initial rate equal to %.
---------
[ ] an annual rate .
---------------------------------------------------------------------------------------------
If this [ ] is checked and the Note Rate is variable, the Note Rate shall at no time be less than an annual rate
of %, and shall at no time exceed an annual rate (if one is specified) of %. The interest rate
--------- --------
on this Note shall never exceed the maximum rate permitted by law.
"Base Rate" means the rate of interest established by Norwest Bank Nebraska, N.A. National Money Market Rate from
time to time as its "Prime" rate. "Due Date" means the maturity date on which all unpaid principal and interest is
scheduled to be repaid as stated in the Section entitled "Repayment Terms" or the date of the acceleration of this
Note, whichever is earlier.
REPAYMENT TERMS: Unless payable sooner as a result of its acceleration, the Borrower shall pay this Note as follows:
[X] FIXED INSTALLMENTS OF PRINCIPAL AND INTEREST. Principal and interest shall be paid together in 59 consecutive
----
installments of $ 16,250.55 each, Monthly beginning 01-15-1997, and on the same day of each month
---------- -----------
thereafter until 11-15-2001, [ ] plus irregular installments as follows:
------------
$ on ; $ on ; and
--------------------- ------------------------ -------------------- -----------------------
$ on . On 01-15-2002, the entire unpaid balance of principal
and accrued but unpaid interest shall be due and payable. Each installment shall be applied first to accrued
interest and the balance to principal.
[ ] FIXED PRINCIPAL PAYMENTS PLUS INTEREST. Principal only shall be paid:
[ ] in consecutive installments of $ each, beginning , and on
----- ---------------- -------------------------
the same day of each thereafter until , plus a final payment
--------------------- ---------------------------
on , when the entire unpaid balance of principal shall become due and payable.
-------------------------------
[ ] $ on ; $ on ;
---------------------- ---------------------- ---------------------- ----------------------
$ on ; $ on ;
---------------------- ---------------------- ---------------------- ----------------------
$ on ; $ on ;
---------------------- ---------------------- ---------------------- ----------------------
and in addition, interest shall be payable , beginning , and on the same day of
--------------- -------------
each subsequent .
------------------
LATE FEE: [ ] Each time that a scheduled payment is not paid when due or within days afterwards, the
------------
Borrower will pay a late fee equal to [ ] $ ; [ ] % of the full amount of the
---------------- ------------------
late payment; [ ] the lesser of $ or % of the full amount of the late payment.
---------------- -----------------
[ ] ADDITIONAL INTEREST. Each time a scheduled payment is not paid when due or within days afterwards, the
------
Borrower will pay additional interest ("Additional Interest") which will begin accruing on the next calendar day
on the entire unpaid principal balance at an annual rate of % in excess of the Note Rate. The Additional
-------
Interest will continue to accrue until all past due payments and any Additional Interest are paid in full.
Acceptance by the Bank of any late fee or Additional Interest shall not constitute a waiver of any default
hereunder.
PREPAYMENT: The Borrower may prepay this Note, at any time, in whole or in part, [X] without penalty [ ] provided
that at the time of prepayment the Borrower pays a prepayment penalty equal to % of the principal amount
--------
prepaid. Any partial payment shall be applied against the principal portion of the installments due in inverse
order of maturity.
OTHER FEES: If this [ ] is checked, the undersigned shall pay to the Bank a nonrefundable: (Mark the applicable
fee type(s))
[ ] commitment fee of (Choose one) [ ] $ [ ] % of the Note Account
-------------------- --------------------
[ ] facility fee of (Choose one) [ ] $ [ ] % of the Note Amount
-------------------- --------------------
[ ] documentation fee of (Choose one) [ ] $ [ ] % of the Note Amount
-------------------- --------------------
[ ] application and loan processing fee of (Choose one) $ [ ] [ ] % of the Note Amount
------------------- -------
"Note Amount" means the principal amount of this Note, at the time this Note is signed.
ADDITIONAL TERMS: The terms set forth on the reverse are incorporated into and made a part of this Note.
LOAN PURPOSE: The Borrower certifies that the proceeds of this loan will be used for business or agricultural
purposes.
--------------------------------------------------------------------------------------------------------------------
SIGNATURES
--------------------------------------------------------------------------------------------------------------------
Signature Signature
X /s/ REBECCA SCHULTZ X
--------------------------------------------------------------------------------------------------------------------
Name and Title (if applicable) Name and Title (if applicable)
Schultz, Rebecca, Treasurer
--------------------------------------------------------------------------------------------------------------------
Borrower's name Signature
Transcrypt International, Inc. X
--------------------------------------------------------------------------------------------------------------------
Address Name and Title (if applicable)
4800 NW 1st Street
--------------------------------------------------------------------------------------------------------------------
City, State, Zip code [ ] This Note is given as a replacement for, and not
in satisfaction of, Note Number ,
------------------
Lincoln, NE 68521 given by the Borrower and dated .
------------------
--------------------------------------------------------------------------------------------------------------------
Page 1 of 2
</TABLE>
<PAGE> 2
ADDITIONAL TERMS
DEFAULT AND ACCELERATION: Upon the occurrence of any one or more of the
following events of default, or at any time thereafter unless such default is
cured, the Bank may at its option declare all unpaid principal, accrued
interest, fees and all other amounts payable under this Note to be immediately
due and payable, without notice or demand to the Borrower:
- - Default by the Borrower in the payment when due of any principal, interest or
other amounts due under this Note; or
- - The Borrower fails to perform or observe any term or covenant of this Note or
any related documents or perform any other agreement with the Bank; or
- - The Borrower fails to perform or observe any agreement with any other creditor
that relates to indebtedness or contingent liabilities which would allow the
maturity of such indebtedness or obligation to be accelerated; or
- - The Borrower changes its legal form of organization; or
- - If the holder of this Note at any time, in good faith, believes that the
undersigned will not be able to pay this Note when it is due; or
- - Any representation or warranty made by the Borrower in applying for this loan
is untrue in any material respect; or
- - A garnishment, levy or writ of attachment, or any local, state or federal
notice of tax lien or levy is served upon the Bank for the attachment of
property of the Borrower in the Bank's possession or indebtedness owed to the
Borrower by the Bank.
AUTOMATIC ACCELERATION: If, with or without the Borrower's consent, a custodian,
trustee or receiver is appointed for any of the Borrower's properties, or if a
petition is filed by or against the Borrower under the United States Bankruptcy
Code, or if the Borrower is dissolved or liquidated (if an entity), or dies (if
an individual), the unpaid principal, accrued interest and all other amounts
payable under this Note will automatically become due and payable without
notice or demand.
WAIVER OF DEMAND, PRESENTMENT, NOTICE OF DISHONOR AND PROTEST: Each maker,
accommodation party, endorser or guarantor of this Note, and any other party
liable for its repayment, hereby severally waives demand, presentment, notice
of dishonor and protest.
AMENDMENT OF MODIFICATION OF TERMS: Any amendment or modification of this Note
must be in writing and signed by the party against whom enforcement of such
amendment or modification is sought. The Bank may also change any of the
repayment terms of this Note, including extensions of time and renewals, and
release or add any party liable on this Note, or agree to the substitution or
release of any security collateralizing this Note without notifying or
releasing from liability any maker, accommodation party, endorser or guarantor.
The Bank may suspend or waive any rights or remedies that it may have against
any person who may be liable for its repayment.
NO WAIVER OF DEFAULTS OR REMEDIES: No delay on the part of the Bank in the
exercise of any right or remedy shall operate as a waiver thereof. No single or
partial exercise by the Bank of any right or remedy shall preclude any further
exercise of that or any other right or remedy, and no waiver or indulgence by
the Bank of any default shall be effective unless in writing and signed by the
Bank.
SUBSEQUENT HOLDERS, MULTIPLE BORROWERS, AND GOVERNING LAW: Any reference to the
Bank in this Note shall be deemed to include any subsequent holder of this
Note. The undersigned Borrower, if more than one, shall be jointly and
severally liable hereunder and the term "Borrower" shall mean any one or more
of them. This Note will be governed by the substantive laws of the state where
the Bank's principal office is located, and any mortgage securing this Note
will be governed by the state where the real property subject to the Mortgage
is located.
ATTORNEY'S FEES: In the event the Bank is required to collect this Note
following its Due Date or the bankruptcy of any maker hereof, the Borrower will
pay to the Bank such further amounts as shall be sufficient to cover the costs
and expenses incurred in collecting this Note and liquidating any security or
guaranties given in support hereof, including reasonable attorneys' fees and
expenses required to take such actions in any court, including any bankruptcy
court.
FINANCIAL REPORTING: While any amounts are due under this Note, the Borrower
agrees to provide to the Bank annual financial statements and such other
financial information as the Bank may request.
ARBITRATION
AGREEMENT TO ARBITRATE: The Bank and Borrower agree to submit to binding
arbitration all claims, disputes and controversies (whether in tort, contract,
or otherwise, except "core proceedings" under the U.S. Bankruptcy Code) arising
between themselves and their respective employees, officers, directors,
attorneys and other agents, which relate in any way without limitation to this
Note, including by way of example but not by way of limitation the negotiation,
collateralization, administration, repayment, modification, default,
termination and enforcement of the loans or credit evidenced by this Note.
RULES GOVERNING ARBITRATION AND SELECTION OF ARBITRATOR: Arbitration under this
Agreement will be governed by the Federal Arbitration Act and proceed in the
city where the Bank's principal office is located, or such other location as
the Bank and Borrower may agree in accordance with the American Arbitration
Association's commercial arbitration rules ("AAA Rules"). Arbitration will be
conducted before a single neutral arbitrator selected in accordance with AAA
Rules and who shall be an attorney who has practiced commercial law for at
least ten years.
STATUTES OF LIMITATION, PROCEDURAL ISSUES, COSTS AND FEES: The arbitrator will
determine whether an issue is arbitratable and will give effect to applicable
statutes of limitation. Judgment upon the arbitrator's award may be entered in
any court having jurisdiction. The arbitrator has the discretion to decide,
upon documents only or with a hearing, any motion to dismiss for failure to
state a claim or any motion for summary judgment. The arbitrator will award
costs and expenses in accordance with the provisions of this Note.
DISCOVERY: Discovery will be governed by the rules of civil procedure in effect
in the state where the Bank's principal office is located. Discovery must be
completed at least 20 days before the hearing date and within 180 days of the
commencement of arbitration. Each request for an extension and all other
discovery disputes will be determined by the arbitrator upon a showing that the
request is essential for the party's presentation and that no alternative
means for obtaining information are available during the initial discovery
period.
EXCEPTIONS TO ARBITRATION: This Agreement does not limit the right of either
party to a) foreclose against real or personal property collateral; b) exercise
self-help remedies such as setoff or repossession; or c) obtain provisional
remedies such as replevin, injuctive relief, attachment or the appointment of
a receiver during the pendency or before or after any arbitration proceeding.
These exceptions do not constitute a waiver of the right or obligation of
either party to submit any dispute to arbitration, including those arising from
the exercise of these remedies.
<PAGE> 3
- -------------------------------------------------------------------------------
NORWEST BANKS Security
[LOGO] Agreement
- -------------------------------------------------------------------------------
Date 12-23-1996
<TABLE>
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBTOR Transcrypt International, Inc. Secured Party Norwest Bank Nebraska, National
Association
- -------------------------------------------------------------------------------------------------------
Business or
Residence 4800 NW 1st Street Address 1919 Douglas Street
Address
- -------------------------------------------------------------------------------------------------------
City, City,
State & Lincoln, NE 68521 State & Omaha, NE 68102
Zip Code Zip Code
- -------------------------------------------------------------------------------------------------------
</TABLE>
1. SECURITY INTEREST AND COLLATERAL. To secure the payment and performance of
each and every debt, liability and obligation of every type and description
which Debtor may now or at any time thereafter owe to Secured Party (whether
such debt, liability or obligation now exists or is hereafter created or
incurred, whether it is currently contemplated by the Debtor and Secured Party,
whether any documents evidencing it refer to this Security Agreement, whether
it arises with or without any documents (e.g., obligations to Secured Party
created by checking overdrafts), and whether it is or may be direct or
indirect, due or to become due, absolute or contingent, primary or secondary,
liquidated or unliquidated, or joint, several or joint and several; all such
debts, liabilities and obligations being herein collectively referred to as the
"Obligations"). Debtor hereby grants Secured Party a security interest (herein
called the "Security Interest") in the following property (herein called the
"Collateral") (check applicable boxes and complete information):
(a) INVENTORY
[ ] All inventory of Debtor, whether now owned or hereafter
acquired and wherever located;
(b) EQUIPMENT, FARM PRODUCTS AND CONSUMER GOODS:
[ ] All equipment of Debtor, whether now owned or hereafter
acquired, including but not limited to all present and
future machinery, vehicles, furniture, fixtures,
manufacturing equipment, farm machinery and equipment, shop
equipment, office and recordkeeping equipment, parts and
tools, and the goods described in any equipment schedule or
list herewith or hereafter furnished to Secured Party by
Debtor (but no such schedule or list need be furnished
in order for the security interest granted herein to be
valid as to all of Debtor's equipment).
[ ] All farm products of Debtor, whether now owned or hereafter
acquired, including but not limited to (i) all poultry and
livestock and their young, products thereof and produce
thereof, (ii) all crops, whether annual or perennial, and
the products thereof, and (iii) all feed, seed, fertilizer,
medicines and other supplies used or produced by Debtor in
farming operations, and (iv) any crop insurance payments and
any government farm support payments, including any
diversion or deficiency payments. The real estate concerned
with the above described crops growing or to grown is:
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
and the name of the record owner is:
-----------------------
[x] The following goods or types of goods:
Equipment on attached equipment list. Exhibit A.
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
(c) ACCOUNTS AND OTHER RIGHTS TO PAYMENT:
[ ] Each and every right of Debtor to the payment of money,
whether such right to payment now exists or hereafter
arises, whether such right to payment arises out of a sale,
loose or other disposition of goods or other property by
Debtor, out of a rendering of services by Debtor, out of a
loan by Debtor, out of the overpayment of taxes or other
liabilities of Debtor, or otherwise arises under any
contract or agreement, whether such right to payment is or
is not already earned by performance, and howsoever such
right to payment may be evidenced, together with all other
rights and interests (including all liens and security
interests) which Debtor may at any time have by law or
agreement against any account debtor or other obligor
obligated to make any such payment or against any of the
property of such account debtor or other obligor; all
including but not limited to all present and future debt
instruments, chattel papers, accounts, loans and obligations
receivable and tax refunds.
[ ] ------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
(d) GENERAL INTANGIBLES:
[ ] All general intangibles of Debtor, whether now owned or
hereafter acquired, including, but not limited to,
applications for patents, patents, copyrights, trademarks,
trade secrets, good will, tradenames, customers' lists,
permits and franchises, and the right to use Debtor's name.
Together with all substitutions and replacements for and products of any of the
foregoing property not constituting consumer goods and together with proceeds
of any and all of the foregoing property and, in the case of all tangible
Collateral, together with all accessions and, except in the case of consumer
goods, together with (i) all accessories, attachments, parts, equipment and
repairs now or hereafter attached or affixed to or used in connection with any
such goods, and (ii) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods.
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. DEBTOR REPRESENTS, WARRANTS
AND AGREES THAT:
(a) Debtor is [ ] an individual, [ ] a partnership,
[x] a corporation and, if Debtor is an individual, the Debtor's
residence is at the address of Debtor shown at the beginning of
this Agreement.
(b) The Collateral will be used primarily for [ ] personal, family
or household purposes, [ ] farming operations, [x] business
purposes.
(c) [ ] If any part or all of the tangible Collateral will become
so related to particular real estate as to become a fixture,
the real estate concerned is:
---------------------------------------------------------------
---------------------------------------------------------------
and the name of the record owner is:
--------------------------
(d) Debtor's chief executive office is located at
-----------------
---------------------------------------------------------------
or, if left blank, at the address of Debtor shown at the
beginning of this Agreement.
THIS AGREEMENT CONTAINS ADDITIONAL PROVISIONS SET FORTH ON PAGES 1 AND 2 HEREOF,
ALL OF WHICH ARE MADE A PART HEREOF.
Norwest Bank Nebraska, National Association Transcrypt International, Inc.
- ------------------------------------------- --------------------------------
Secured party's name Debtor's name
By By /s/ Rebecca L. Schultz
---------------------------------------- -----------------------------
DeeAnn K. Wenger, Assistant Vice Schultz, Rebecca, Treasurer
President
By
-----------------------------
Page 1 of 2
<PAGE> 4
ADDITIONAL PROVISIONS
3. ADDITIONAL REPRESENTATION, WARRANTIES AND AGREEMENTS. Debtor represents,
warrants and agrees that:
(a) Debtor has (or will have at the time Debtor acquires rights in
Collateral hereafter arising) absolute title to each item of Collateral free
and clear of all security interests, liens and encumbrances, except the
Security Interest, and will defend the Collateral against all claims or demands
of all persons other than Secured Party. Debtor will not sell or otherwise
dispose of the Collateral or any interest therein without the prior written
consent of Secured Party, except that until the occurrence of an Event of
Default and the revocation by Secured Party of Debtor's right to do so, Debtor
may sell any inventory constituting Collateral to buyers in the ordinary course
of business and use and consume any farm products constituting Collateral in
Debtor's farming operation. If Debtor is a corporation, this Agreement has been
duly and validly authorized by all necessary corporate action, and, if Debtor
is a partnership, the partner(s) executing this Agreement has (have) authority
to act for the partnership.
(b) Debtor will not permit any tangible Collateral to be located in any
state (and, if county filing is required, in any county) in which a financing
statement covering such Collateral is required to be, but has not in fact been,
filed in order to perfect the Security Interest.
(c) Each right to payment and each instrument, document, chattel paper
and other agreement constituting or evidencing Collateral is (or will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, set-off or counterclaim (other than those arising in the
ordinary course of business) of the account debtor or other obligor named
therein or in Debtor's records pertaining thereto as being obligated to pay
such obligation. Debtor will neither agree to any material modification or
amendment nor agree to any cancellation of any such obligation without Secured
Party's prior written consent, and will not subordinate any such right to
payment to claims of other creditors of such account debtor or other obligor.
(d) Debtor will (i) keep all tangible Collateral in good repair,
working order and condition, normal depreciation excepted, and will, from time
to time, replace any worn, broken or defective parts thereof; (ii) promptly pay
all taxes and other governmental charges levied or assessed upon or against any
Collateral or upon or against the creation, perfection or continuance of the
Security Interest; (iii) keep all Collateral free and clear of all security
interests, liens and encumbrances except the Security Interest; (iv) at all
reasonable times, permit Secured Party or its representatives to examine or
inspect any Collateral, wherever located, and to examine, inspect and copy
Debtor's books and records pertaining to the Collateral and its business and
financial condition and to discuss with account debtors and other obligors
requests for verifications of amounts owed to Debtor; (v) keep accurate and
complete records pertaining to the Collateral and pertaining to Debtor's
business and financial condition and submit to Secured Party such periodic
reports concerning the Collateral and Debtor's business and financial condition
as Secured Party may from time to time reasonably request; (vi) promptly notify
Secured Party of any loss of or material damage to any Collateral or of any
adverse change, known to Debtor, in the prospect of payment of any sums due on
or under any instrument, chattel paper, or account constituting Collateral;
(vii) if Secured Party at any time so requests (whether the request is made
before or after the occurrence of an Event of Default), promptly deliver to
Secured Party any instrument, document or chattel paper constituting
Collateral, duly endorsed or assigned by Debtor; (viii) at all times keep all
tangible Collateral insured against risks of fire (including so-called extended
coverage), theft, collision (in case of Collateral consisting of motor
vehicles) and such other risks and in such amounts as Secured Party may
reasonably request, with any loss payable to Secured Party to the extent of its
interest; (ix) from time to time execute such financing statements as Secured
Party may reasonably require in order to perfect the Security Interest and, if
any Collateral consists of a motor vehicle, execute such documents as may be
required to have the Security Interest properly noted on a certificate of
title; (x) pay when due or reimburse Secured Party on demand for all costs of
collection of any of the Obligations and all other out-of-pocket expenses
(including in each case all reasonable attorneys' fees) incurred by Secured
Party in connection with the creation, perfection, satisfaction, protection,
defense or enforcement of the Security Interest or the creation, continuance,
protection defense or enforcement of this Agreement or any or all of the
Obligations, including expenses incurred in any litigation or bankruptcy or
insolvency proceedings; (xi) execute, deliver or endorse any and all
instruments, documents, assignments, security agreements and other agreements
and writings which Secured Party may at any time reasonably request in order to
secure, protect, perfect or enforce the Security Interest and Secured Party's
rights under this Agreement; (xii) not use or keep any Collateral, or permit it
to be used or kept, for any unlawful purpose or in violation of any federal,
state or local law, statute or ordinance; (xiii) permit Secured Party at any
time and from time to time to send requests (both before and after the
occurrence of an Event of Default) to account debtors or other obligors for
verification of amounts owed to Debtor; and (xiv) not permit any tangible
Collateral to become part of or to be affixed to any real property without
first assuring to the reasonable satisfaction of Secured Party that the
Security Interest will be prior and senior to any agreement contained in this
Section 3(d), and if such failure shall continue for a period of ten calendar
days after Secured Party gives Debtor written notice thereof (or, in the case
of the agreements contained in clauses (viii) and (ix) of this Section 3(d),
immediately upon the occurrence of such failure, without notice or lapse of
time), Secured Party may (but need not) perform or observe such agreement on
behalf and in the name, place and stead of Debtor (or at Secured Party's
option, in Secured Party's own name) and may (but need not) take any and all
other actions which Secured Party may reasonably deem necessary to cure or
correct such failure (including, without limitation, the payment of taxes, the
satisfaction of security interests, liens or encumbrances, the performance of
obligations under contracts or agreements with account debtors or other
obligors, the procurement and maintenance of insurance, the execution of
financing statements, the endorsement of instruments, and the procurement of
repairs, transportation or insurance); and, except to the extent that the
effect of such payment would be to render any loans or forbearance of money
usurious or otherwise illegal under any applicable law. Debtor shall thereupon
pay Secured Party on demand the amount of all moneys expended and all costs and
expenses (including reasonable attorneys' fees) incurred by Secured Party in
connection with or as a result of Secured Party's performing or observing such
agreements or taking such actions, together with interest thereon from the
date expended or incurred by Secured Party at the highest rate then applicable
to any of the Obligations. To facilitate the performance or observance by
Secured Party of such agreements of Debtor, Debtor hereby irrevocably appoints
(which appointment is coupled with an interest) Secured Party, or its delegate,
as the attorney-in-fact of Debtor with the right (but not the duty) from time
to time to create, prepare, complete, execute, deliver, endorse or file, in the
name and on behalf of Debtor, any and all instruments, documents, financing
statements, applications for insurance and other agreements and writings
required to be obtained, executed, delivered or endorsed by Debtor under this
Section 3 and Section 4.
4. LOCK BOX, COLLATERAL ACCOUNT. If Secured Part so requests at any time
(whether before or after the occurrence of an Event of Default), Debtor will
direct each of its account debtors to make payments due under the relevant
account or chattel paper directly to a special lock box to be under the control
of Secured Party. Debtor hereby authorizes and directs Secured Party to deposit
into a special collateral account to be established and maintained with Secured
Party all checks, drafts and cash payments, received in said lock box. All
deposits in said collateral account shall constitute proceeds of Collateral and
shall not constitute payment of any Obligation. At its option, Secured Party
may, at any time, apply finally collected funds on deposit in said collateral
account to the payment of the Obligations in such order of application as
Secured Party may determine, or permit Debtor to withdraw all or any part of
the balance on deposit in said collateral account. If a collateral account is
so established, Debtor agrees that it will promptly deliver to Secured Party,
for deposit into said collateral account, all payments on accounts and chattel
paper received by it. All such payments shall be delivered to Secured Party in
the form received (except for Debtor's endorsement where necessary). Until so
deposited, all payments on accounts and chattel paper received by Debtor shall
be held in trust by Debtor for and as the property of Secured Party and shall
not be commingled with any funds or property of Debtor.
5. COLLECTION RIGHTS OF SECURED PARTY. Notwithstanding Secured Party's rights
under Section 4 with respect to any and all debt instruments, chattel papers,
accounts, and other rights to payment constituting Collateral (including
proceeds), Secured Party may, at any time (both before and after the occurrence
of an Event of Default) notify any account debtor, or any other person
obligated to pay any amount due, that such chattel paper, account or other
right to payment has been assigned or transferred to Secured Party for security
and shall be paid directly to Secured Party. If Secured Party so requests at
any time, Debtor will so notify such account debtors and other obligors in
writing and will indicate on all invoices to such account debtors or other
obligors that the amount due is payable directly to Secured Party. At any time
after Secured Party or Debtor gives such notice to an account debtor or other
obligor, Secured Party may (but need not), in its own name or in Debtor's name,
demand, sue for, collect or receive any money or property at any time payable
or receivable on account of, or securing, any such chattel paper, account, or
other right to payment, or grant any extension to, make any compromise or
settlement with or otherwise agree to waive, modify, amend or change the
obligations (including collateral obligations) of any such account debtor or
other obligor.
6. ASSIGNMENT OF INSURANCE. Debtor hereby assigns to Secured Party, as
additional security for the payment of the Obligations, any and all moneys
(including but not limited to proceeds of insurance and refunds of unearned
premiums) due or to become due under, and all other rights of Debtor under or
with respect to, any and all policies of insurance covering the Collateral, and
Debtor hereby directs the issuer of any such policy to pay any such moneys
directly to Secured Party. Both before and after the occurrence of an Event of
Default, Secured Party may (but need not), in its own name or in Debtor's name,
execute and deliver proofs of claim, receive all such moneys, endorse checks
and other instruments representing payment of such moneys, and adjust,
litigate, compromise or release any claim against the issuer of any such
policy.
7. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an
event of default under this Agreement (herein called "Event of Default"): (i)
Debtor shall fail to pay any or all of the Obligations when due or (if payable
on demand) on demand, or shall fail to observe or perform any covenant or
agreement herein binding on it; (ii) any representation or warranty by Debtor
set forth in this Agreement or made to Secured Part in any financial statements
or reports submitted to Secured Party by or on behalf of Debtor shall prove
materially false or misleading; (iii) a garnishment, summons or a writ of
attachment shall be issued against or served upon the Secured Party for the
attachment of any property of the Debtor or any indebtedness owing to Debtor;
(iv) Debtor or any guarantor of any Obligation shall (A) be or become insolvent
(however defined); or (B) voluntarily file, or have filed against it
involuntarily, a petition under the United States Bankruptcy Code; or (C) if a
corporation, partnership, or organization, be dissolved or liquidate or, if a
partnership, suffer the death of a partner or, if an individual, die; or (D) go
out of business; or (v) Secured Party shall in good faith believe that the
prospect of due and punctual payment or any or all of the Obligations is
impaired.
8. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of Default
under Section 7 and at any time thereafter, Secured Party may exercise any one
or more of the following rights and remedies: (i) declare all unmatured
Obligations to be immediately due and payable, and the same shall thereupon be
immediately due and payable, without presentment or other notice or demand;
(ii) exercise and enforce any or all rights and remedies available upon
default to a secured party under the Uniform Commercial Code, including but not
limited to the right to take possession of any Collateral, proceeding without
judicial process or by judicial process (without a prior hearing or notice
thereof, which Debtor hereby expressly waives), and the right to sell, lease or
otherwise dispose of any or all of the Collateral, and in connection therewith,
Secured Party may require Debtor to make the Collateral available to Secured
Party at a place to be designated by Secured Party which is reasonably
convenient to both parties, and if notice to Debtor of any intended disposition
of Collateral or any other intended action is required by law in a particular
instance, such notice shall be deemed commercially reasonable if give (in the
manner specified in Section 10) at least 10 calendar days prior to the date of
intended disposition or other action; (iii) exercise or enforce any or all other
rights or remedies available to Secured Party by law or agreement against the
Collateral, against Debtor or against any other person or property. Upon the
occurrence of the Event of Default described in Section 7(iv)(B), all
Obligations shall be immediately due and payable without demand or notice
thereof. Secured Party is hereby granted a nonexclusive, worldwide and
royalty-free license to use or otherwise exploit all trademarks, trade secrets,
franchises, copyrights and patents of Debtor that Secured Party deems necessary
or appropriate to the disposition of any Collateral.
9. OTHER PERSONAL PROPERTY. Unless at the time Secured party takes possession
of any tangible Collateral, or within seven days thereafter, Debtor gives
written notice to Secured Party of the existence of any goods, papers or other
property of Debtor, not affixed to or constituting a part of such Collateral,
but which are located or found upon or within such Collateral, describing such
property. Secured Party shall not be responsible or liable to Debtor for any
action taken or omitted by or on behalf of Secured Party with respect to such
property without actual knowledge of the existence of any such property or
without actual knowledge that it was located or to be found upon or within such
Collateral.
10. MISCELLANEOUS. This Agreement does not contemplate a sale of accounts, or
chattel paper. Debtor agrees that each provision whose box is checked is part
of this Agreement. This Agreement can be waived, modified, amended, terminated
or discharged, and the Security Interest can be released, only explicitly in a
writing signed by Secured Party. A waiver signed by Secured Party shall be
effective only in the specific instance and for the specific purpose given.
More delay or failure to act shall not preclude the exercise or enforcement of
any of Secured Party's rights or remedies. All rights and remedies of Secured
Party shall be cumulative and may be exercised singularly or concurrently, at
Secured Party's option, and the exercise or enforcement of any one such right
or remedy shall neither be a condition to nor bar the exercise or enforcement
of any other. All notices to be given to Debtor shall be deemed sufficiently
given if delivered or mailed by registered or certified mail, postage prepaid,
to Debtor at its address set forth above or at the most recent address shown on
Secured Party's records. Secured Party's duty of care with respect to
Collateral in its possession (as imposed by law) shall be deemed fulfilled if
Secured Party exercises reasonable care in physically safekeeping such
Collateral or, in the case of Collateral in the custody or possession of a
bailee or other third person, exercises reasonable care in the selection of the
bailee or other third person, and Secured Party need not otherwise preserve,
protect, insure or care for any Collateral. Secured Party shall not be
obligated to preserve any rights Debtor may have against prior parties, to
realize on the Collateral at all or in any particular manner or order, or to
apply any cash proceeds of Collateral in any particular order of application.
This Agreement shall be binding upon and inure to the benefit of Debtor and
Secured Party and their respective heirs, representatives, successors and
assigns and shall take effect when signed by Debtor and delivered to Secured
Party, and Debtor waives notice of Secured Party's acceptance hereof. Secured
Party may execute this Agreement if appropriate for the purpose of filing, but
the failure of Secured Party to execute this Agreement shall not affect or
impair the validity or effectiveness of this Agreement. A carbon, photographic
or other reproduction of this Agreement or of any financing statement signed by
the Debtor shall have the same force and effects as the original for all
purposes of a financing statement. Except to the extent otherwise required by
law, this Agreement shall be governed by the internal laws of the state named
as part of Secured Party's address above. If any provision or application of
this Agreement is held unlawful or unenforceable in any respect, such
illegality or unenforceability shall not affect other provisions or
applications which can be given effect, and this Agreement shall be construed
as if the unlawful or unenforceable provision or application had never been
contained herein or prescribed hereby. All presentations and warranties
contained in this Agreement shall survive the execution, delivery and
performance of this Agreement and the creation and payment of the Obligations.
If this Agreement is signed by more than one person as Debtor, the term
"Debtor" shall refer to each of them separately and to both or all of them
jointly; all such persons shall be bound both severally and jointly with the
other(s); and the Obligations shall include all debts, liabilities and
obligations owed to Secured Party by any Debtor solely or by both or several or
all Debtors jointly or jointly and severally, and all property described in
Section 1 shall be included as part of the Collateral, whether it is owned
jointly by both or all Debtors or is owned in whole or in party by one (or
more) of them.
<PAGE> 1
EXHIBIT 11.1
TRANSCRYPT INTERNATIONAL, INC.
CALCULATION OF PRO FORMA EARNINGS PER SHARE
For the Years Ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
PRO FORMA
---------
YEARS ENDED DECEMBER 31,
------------------------
1995 1996
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Pro forma net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (841) $(2,146)
Weighted average common and common equivalent shares outstanding . . 6,969 6,969
Pro forma net loss per share . . . . . . . . . . . . . . . . . . . . (.12) (.31)
CALCULATION OF PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING
NUMBER OF SHARES
----------------
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,783
Common Stock Equivalents - Stock Options(1) . . . . . . . . . . . . . . . . . 186
-----
Weighted Average Common and Common Equivalent Shares Outstanding . . . . . . . 6,969
=====
- ------------------------
</TABLE>
(1) Includes the effects of options to purchase 300,134 shares of Transcrypt
International, Inc. Common Stock with an exercise price of $3.05 per share.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83,
options to purchase common stock granted below the market price of the Common
Stock are included in the calculation of common equivalent shares, using the
treasury stock method, as if they were outstanding for all periods presented.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,645,654
<ALLOWANCES> 430,251
<INVENTORY> 2,261,381
<CURRENT-ASSETS> 6,744,214
<PP&E> 6,672,832
<DEPRECIATION> 1,765,394
<TOTAL-ASSETS> 13,981,028
<CURRENT-LIABILITIES> 4,276,120
<BONDS> 2,632,012
0
0
<COMMON> 67,831
<OTHER-SE> 7,005,065
<TOTAL-LIABILITY-AND-EQUITY> 13,981,028
<SALES> 13,775,597
<TOTAL-REVENUES> 13,775,597
<CGS> 4,864,589
<TOTAL-COSTS> 4,864,589
<OTHER-EXPENSES> 12,026,363
<LOSS-PROVISION> 292,915
<INTEREST-EXPENSE> 131,338
<INCOME-PRETAX> (3,539,608)
<INCOME-TAX> (1,528,488)
<INCOME-CONTINUING> (2,011,120)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,011,120)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
