<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
TRANSCRYPT INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3663 47-0801192
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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------------------------
4800 NW 1ST STREET
LINCOLN, NEBRASKA 68521
(402) 474-4800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JEFFERY L. FULLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
4800 NW 1ST STREET
LINCOLN, NEBRASKA 68521
(402) 474-4800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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WILLIAM T. QUICKSILVER, ESQ. HOWARD S. LANZNAR, ESQ.
ALAN E. MORELLI, ESQ. ROBERT J. BRANTMAN, ESQ.
ALLEN Z. SUSSMAN, ESQ. KATTEN MUCHIN & ZAVIS
MANATT, PHELPS & PHILLIPS, LLP 525 WEST MONROE STREET
11355 WEST OLYMPIC BOULEVARD CHICAGO, ILLINOIS 60661
LOS ANGELES, CALIFORNIA 90064 (312) 902-5200
(310) 312-4000
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------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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======================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value....... 4,600,000 $83,950,000 $25,440
======================================================================================================
</TABLE>
(1) Includes 600,000 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 12, 1997
4,000,000 SHARES
[TRANSCRYPT LOGO]
COMMON STOCK
Of the 4,000,000 shares of Common Stock, par value $.01 per share ("Common
Stock"), of Transcrypt International, Inc. (the "Company") offered hereby,
2,000,000 shares are being offered by the Company and 2,000,000 shares are being
offered by certain of the Company's stockholders (the "Selling Stockholders").
See "Principal and Selling Stockholders." The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholders.
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "TRII." On September 10, 1997, the last reported sale price of the
Common Stock was $18.25 per share. See "Price Range of Common Stock."
------------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF
THE COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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=====================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- -----------------------------------------------------------------------------------------------------
Per Share.................... $ $ $ $
- -----------------------------------------------------------------------------------------------------
Total(3)..................... $ $ $ $
=====================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deduction of expenses payable by the Company estimated at $800,000.
(3) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to 184,481 additional shares of Common Stock
from the Company and 415,519 additional shares of Common Stock from the
Selling Stockholders, on the same terms and conditions as set forth above,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Stockholders will be $ ,
$ , $ and $ , respectively. See "Underwriting."
The shares are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by Underwriters, and subject to
various prior conditions, including the right to reject orders in whole or in
part. It is expected that delivery of shares will be made against payment
therefor at the offices of Furman Selz LLC in New York, New York on or about
, 1997.
FURMAN SELZ
MONTGOMERY SECURITIES
DAIN BOSWORTH
INCORPORATED
------------------------------
The date of this Prospectus is , 1997.
<PAGE> 3
[DESCRIPTION OF GATEFOLD
Seven photographs with Transcrypt International Logo on top center and a
simple picture of a Globe at bottom center. Looking left to right, top to
bottom: Picture 1 is of a radio base station cabinet reading "Radio Systems";
Picture 2 is of 2 hand held land mobile radios ("LMR") reading "Specialized
Radio"; Picture 3 is of 4 LMRs and an add-on board reading "Land Mobile Radio
Security"; Picture 4 is of a computer with a land line data scrambler reading
"Data Security"; Picture 5 is of a "Cryptophone" cellular telephone and a land
line telephone with scrambler attached reading "Telephony Voice Privacy";
Picture 6 is of a woman sitting at a dispatch terminal reading "Radio System
Solution"; Picture 7 is of a man seated at a desk and speaking on a telephone
reading "Secure Office Solutions."]
[DESCRIPTION OF INSIDE FRONT COVER
Background is the detail of a circuit board, desktop computer keyboard and
cellular telephone. Foreground is two arrows, one from top and one from bottom,
meeting at Transcrypt International Logo in center. Upper right reads
"Solutions," lower left reads "Technology."]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND THE SELLING
GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET SYSTEM IN ACCORDANCE WITH RULE 103 OF
REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, included elsewhere in this Prospectus. Each prospective
investor is urged to read this Prospectus in its entirety. Unless otherwise
indicated, the information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. Unless the context otherwise provides, all
references to the "Company" include Transcrypt International, Inc., its
predecessor entities and E.F. Johnson Company, on a Pro Forma combined basis;
all references to "Transcrypt" refer to Transcrypt International, Inc.; and all
references to "E.F. Johnson" refer to E.F. Johnson Company. In addition to the
historical information contained herein, certain statements in this Prospectus
constitute "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"), and as such, may involve risks and
uncertainties. The Company's actual results may differ significantly from those
discussed herein. Factors that might cause such a difference include, but are
not limited to, those discussed under the caption "Risk Factors." See "Risk
Factors -- Forward-Looking Statements."
THE COMPANY
The Company is a leading manufacturer of information security products and
wireless communications products and systems. The Company designs and
manufactures information security products which prevent unauthorized access to
sensitive voice and data communications. These products are based on a wide
range of analog scrambling and digital encryption technologies and are sold
principally to the land mobile radio ("LMR"), telephony and data security
markets. The Company manufactures a wide range of wireless communications
products and systems principally for the LMR market. Typical end users of the
Company's products include state, local and foreign government agencies,
including police and other public safety departments, and industrial and
commercial organizations such as taxi fleets, railroads and construction and oil
and gas companies.
The Company's objective is to leverage its expertise in information
security and digital communications technologies to provide new and expanded
business solutions for the telecommunications industry. The Company's strategy
to accomplish its objective includes the following elements: developing new
products based on its existing core technologies; offering complete, stand-alone
secure communications solutions; fostering key strategic relationships; and
exploring strategic acquisitions. The Company's expertise in both analog and
digital information security, including the ability to provide "dual mode"
analog and digital security in the same product, provides a competitive
advantage as communications products migrate from analog to digital technology.
The Company is also using its technology expertise to transition from supplying
principally "add-on" information security components for installation in
products manufactured by others to also providing complete, stand-alone secure
communications systems. For example, in August 1996, the Company introduced a
hand-held LMR which is compatible with "APCO 25," a recently adopted industry
standard for digital LMRs. The Company is also developing a complete secure APCO
25 compliant LMR system incorporating this product. The Company intends to
continue developing key strategic relationships in the areas of distribution,
marketing and technology licensing, and exploring strategic acquisitions to
complement and support the Company's products and technologies.
THE E.F. JOHNSON ACQUISITION
As part of its growth strategy, in July 1997 the Company expanded its
presence in the wireless communications market by acquiring E.F. Johnson Company
("E.F. Johnson"), an established provider of products and systems for the LMR
market. The Company acquired the capital stock of E.F. Johnson for $436,000 in
cash and 832,465 shares of Common Stock. Through its E.F. Johnson subsidiary,
the Company designs, develops, manufactures and markets stationary LMR
transmitters/receivers (base stations and repeaters) and mobile and portable
radios. The Company markets its LMR products and systems principally in two
broad markets: business and industrial ("B&I") users and public safety and other
governmental users.
3
<PAGE> 5
Management believes that the E.F. Johnson acquisition has benefitted the
Company by accelerating the implementation of its growth strategy. As a
significant participant in the LMR market, E.F. Johnson provides the Company
with a broad line of LMR products and systems and a platform to leverage its
information security and digital technologies. E.F. Johnson also provides the
Company with a significantly expanded distribution network in domestic and
overseas markets and with additional manufacturing capacity to support increased
sales of information security and wireless communications products. Furthermore,
the acquisition has provided the Company with additional research and
development resources, particularly in radio frequency ("RF") technology and
other technologies which management believes may provide further expansion
opportunities.
In December 1991, the Company acquired the business of its predecessor,
which was founded in 1978. The Company's principal offices are located at 4800
NW 1st Street, Lincoln, Nebraska 68521, and its telephone number is (402)
474-4800.
THE OFFERING
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Common Stock offered by the Company.......... 2,000,000 shares
Common Stock offered by the Selling
Stockholders............................... 2,000,000 shares
Common Stock outstanding after the
offering(1)................................ 12,210,543 shares
Use of proceeds to the Company............... Reduction of bank indebtedness; facilities
expansion and improvement; working capital;
potential acquisitions; and general corporate
purposes.
Nasdaq National Market symbol................ TRII
</TABLE>
- ---------------
(1) Excludes 1,075,533 shares of Common Stock reserved for issuance upon
exercise of options outstanding as of the date of this Prospectus under the
Company's stock option plan, at a weighted average exercise price of $4.39
per share, and an aggregate of 124,467 shares available for future issuance
thereunder. Includes 95,000 shares to be issued upon the exercise of options
by a Selling Stockholder, John T. Connor, which shares are being offered
hereby. "Management -- 1996 Stock Incentive Plan" and "Principal and Selling
Stockholders."
4
<PAGE> 6
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
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PRO FORMA(1)
-----------------------------
SIX MONTHS YEAR ENDED SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30, DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- ---------------- ------------ --------------
1992 1993 1994 1995 1996 1996 1997 1996 1997
------ ------ ------ ------- ------- ------ ------- ------------ --------------
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STATEMENTS OF INCOME
(LOSS) DATA:
Revenues.............. $4,974 $6,900 $9,155 $ 8,128 $13,776 $5,728 $10,278 $ 92,188 $ 37,964
Gross profit.......... 3,738 5,284 6,254 5,145 8,911 3,878 6,413 37,254 16,479
Amortization of
intangible assets... 1,100 1,092.. 1,092 1,093 1,001 546 -- 1,401 200
Income (loss) from
operations before
special compensation
expense............. (453) 921 1,318 (1,201) 2,160 718 2,094 (19,743) (444)
Special compensation
expense(2).......... -- -- -- -- 5,568 -- -- 5,568 --
Income (loss) from
operations.......... (453) 921 1,318 (1,201) (3,408) 718 2,094 (25,311) (444)
Net income (loss)..... $ (596) $ 788 $1,207 $(1,338) $(2,011) $ 667 $ 1,658 $(18,572) $ (1,321)
PRO FORMA TAX CALCULATION:
Income (loss) before taxes and Pro Forma taxes........... $(3,539) $ 667 $ 2,330 $(28,139) $ (2,001)
Pro Forma and provision (benefit) for income taxes(3).... (1,393) 134 672 (9,567) (680)
Pro Forma and net income (loss).......................... $(2,146) $ 533 $ 1,658 $(18,572) $ (1,321)
Pro Forma and net income (loss) per share(4)............. $ (0.31) $ 0.08 $ 0.17 $ (2.38) $ (0.13)
Shares used to compute Pro Forma and net income (loss)
per share(4)........................................... 6,969 6,969 9,596 7,801 10,428
</TABLE>
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AS OF JUNE 30, 1997
-----------------------------------
PRO FORMA AS
PRO ADJUSTED
ACTUAL FORMA(5) (5)(6)
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BALANCE SHEET DATA:
Working capital....................................................... $21,277 $ 1,692 $ 13,255
Total assets.......................................................... 31,851 76,376 95,939
Current maturities of long-term debt and capitalized lease
obligations......................................................... 159 14,311 --
Long-term debt and capitalized lease obligations, net of current
portion............................................................. 2,850 4,558 4,558
Stockholders' equity.................................................. 26,441 28,191 62,065
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(1) Represents the results of operations as if the acquisition of E.F. Johnson
had occurred on January 1, 1996. See "Selected Financial Data of E.F.
Johnson Company", "Pro Forma Financial Data", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of E.F. Johnson appearing elsewhere in
this Prospectus.
(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. See "Management -- 1996 Stock
Incentive Plan" and "Management -- Employment Agreements."
(3) 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.
(4) 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 and net income (loss) per share.
(5) Represents the balance sheet as if the acquisition of E.F. Johnson had
occurred on June 30, 1997. See "Selected Financial Data of E.F. Johnson
Company", "Pro Forma Financial Data", "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of E.F. Johnson appearing elsewhere in this Prospectus.
(6) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered
by the Company hereby (at the assumed offering price of $18.25 per share)
after deducting underwriting discounts and commissions and estimated
offering expenses, and the receipt and application of the net proceeds
therefrom. Also reflects the issuance of 95,000 shares upon exercise of
stock options by a Selling Stockholder. See "Use of Proceeds" and
"Capitalization."
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully by prospective investors in evaluating
the Company and its business before purchasing any of the shares of Common Stock
offered hereby.
RISKS RELATED TO THE E.F. JOHNSON ACQUISITION
Transcrypt acquired E.F. Johnson, effective July 31, 1997, with the
expectation that the acquisition will result in benefits to the consolidated
company. However, the process of integrating and rationalizing management,
administrative organizations, facilities, management information systems and
other aspects of operations, while managing a larger and geographically expanded
entity, presents a significant challenge to the management of the Company. There
can be no assurance that the integration process will be successful or that the
anticipated benefits of the acquisition will be fully realized. In addition, the
integration of certain operations will require substantial dedication of the
Company's management resources, which may distract attention from the day-to-day
business of the Company. The difficulties of integration may be increased by the
necessity of coordinating geographically separated organizations, integrating
personnel with disparate business backgrounds and combining different corporate
cultures. Integrating the two companies has caused the Company to incur certain
additional expenses, and there can be no assurance that there will not continue
to be substantial costs associated with the integration process or that the
integration process will not result in decreased sales or loss of management
personnel of the combined companies. The inability of management to integrate
the operations of the two companies successfully would have a material adverse
effect on the Company.
Additionally, E.F. Johnson has recently experienced significant financial
difficulties prior to its acquisition by Transcrypt. E.F. Johnson incurred a net
loss of $26.5 million in 1996 (including $13.5 million in nonrecurring charges)
and a net loss of $5.4 million in the first six months of 1997. E.F. Johnson may
continue to incur losses, which may deplete or impair the Company's cash
reserves and negatively impact the Company's borrowing capacity. Furthermore,
E.F. Johnson incurred significant past due accounts payable prior to its
acquisition by Transcrypt, which has affected the availability and delivery of
components for certain of E.F. Johnson's products. Although Transcrypt has
reduced these payables in part, it is uncertain whether these vendors may
continue to delay shipments. A number of vendors have also increased prices and
terms, including requiring cash in advance. Finally, the Company may be
susceptible to unknown contingent liabilities, financial claims or lawsuits from
customers and vendors of E.F. Johnson, among others, any of which could have a
material adverse effect on the Company. To compensate the Company in the event
of breaches of certain representations and warranties, the prior owners of E.F.
Johnson have delivered to the Company a $500,000 cash bond and personal
guarantees for an additional $500,000. However, the Company is unable to predict
whether these amounts would be adequate to cover any unknown liabilities of E.F.
Johnson.
COMPETITION
The information security and wireless communications equipment industries,
and the LMR market segment in particular, are highly competitive. Competition in
the sale of stand-alone and digital products, which the Company expects to
account for an increasing percentage of its business, is more intense than for
add-on and analog products. In addition, other wireless communication
technologies, including cellular telephone, paging, specialized mobile radio
("SMR"), satellite communications and personal communication services ("PCS")
currently compete and are expected to compete in the future with certain of the
Company's stand-alone products. Many of the Company's competitors or potential
competitors have significantly greater financial, managerial, technical and
marketing resources than the Company. Accordingly, 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. In addition, there can be no assurance
that new competitors will not arise and begin to compete in the markets for the
Company's products. See "Business -- Competition."
6
<PAGE> 8
Motorola and Ericsson hold a dominant position in the market for wireless
communication products, especially in the LMR and cellular telephone market
segments. In North America, Motorola and Ericsson are the leading providers of
LMR equipment. While the Company believes that it is the third largest supplier
in the North American LMR equipment market, its share of such market is
relatively small in comparison to Motorola and Ericsson. In addition to
providing equipment to the industry, Motorola is one of the largest SMR
operators in the United States. Motorola and Ericsson have financial, technical,
marketing, sales, manufacturing, distribution and other resources substantially
greater than those of the Company, and have entrenched market positions in
certain segments of the North American LMR market. Certain of the Company's
competitors, including Motorola and Ericsson, have established trade names,
trademarks, patents and other intellectual property rights and substantial
technological capabilities.
The Company believes that the wireless communications equipment industry is
undergoing a period of consolidation which may involve the acquisition or merger
of some of the significant manufacturers of these types of products and a
concentration of market share in a relatively few companies. There can be no
assurance that consolidations in the industry would not result in the
strengthening of the Company's existing competitors or the creation of new
competitors, some of which may have significantly greater financial, managerial,
technical and marketing resources than the Company.
RELIANCE ON MOTOROLA
Motorola is one of the Company's largest customers and a key supplier. On a
Pro Forma combined basis, the Company's sales to Motorola amounted to $1.3
million and $1.6 million, respectively, during the first half of 1997 and in
1996, and the Company purchased an aggregate of $1.4 million and $4.6 million,
respectively, in components from Motorola during these periods. In addition, the
Company relies on Motorola to provide MicroTAC(TM) and StarTAC(TM) cellular
telephones for resale by the Company as an upgraded, secure cellular telephone.
The Company's dependence on Motorola, both as a customer and supplier, is
expected to continue. The Company also is dependent on continuing access to
certain proprietary Motorola intellectual property used in the products of both
Transcrypt and E.F. Johnson. 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. Internal decisions or allocations of
resources within Motorola could lead to reduced purchases of the Company's
products or to the modification or discontinuation of components used in the
Company's products. In addition, the Company may increasingly be perceived by
Motorola as a competitor, particularly in light of its acquisition of E.F.
Johnson. This perception could impact Motorola's willingness to do business with
the Company. Although the Company has certain contractual relationships with
Motorola, both as a customer and a supplier, most of these agreements are
subject to termination in certain circumstances and expire by their terms within
one to ten years. 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 could have a material adverse effect on the Company. See
"Business -- Motorola Relationship."
TRANSITION FROM ADD-ON TO STAND-ALONE PRODUCTS
Prior to the third quarter of 1996, the Company sold almost exclusively
add-on products, such as scrambling modules, for use with LMRs and cellular
telephones manufactured by other companies. The Company's acquisition of E.F.
Johnson has resulted in an increased concentration of the Company's sales on
stand-alone products, as E.F. Johnson manufactures exclusively stand-alone
products. In general, add-on products carry higher gross margins than
stand-alone products. To the extent that sales of stand-alone products increase
in the future relative to add-on product sales, the Company's gross margins are
likely to decline compared to historical levels. In addition, in connection with
its entry into the stand-alone market, the Company is offering to certain of its
customers extended credit terms on those products. These terms present increased
risks of, among other things, delayed or reduced collection of accounts
receivable.
7
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TRANSITION FROM ANALOG TO DIGITAL PRODUCTS
The Company believes that the LMR and cellular telephone markets will in
the future migrate from analog to digital equipment, due primarily to bandwidth
capacity constraints and the perception that digital transmissions are more
secure than analog transmissions. As a result, the Company is seeking to upgrade
many of the LMR products of E.F. Johnson to be compatible with digital LMR
communications standards, including APCO 25. However, there can be no assurance
that the Company will be able to effect this transition on a timely basis or
that E.F. Johnson's digital products will compete successfully in the LMR
marketplace. The failure of E.F. Johnson's products to compete successfully in
the marketplace would have a material adverse effect on the Company. In
addition, a significant delay in the marketplace acceptance of digital LMR
communications standards could result in decreased sales of the Company's APCO
25 products. Furthermore, the transition from analog to digital communications
could result in a decrease in demand for the Company's add-on security modules,
as customers may perceive digital communications to be more secure than
communications using analog devices.
MANAGEMENT OF GROWTH
The Company recently consummated the acquisition of E.F. Johnson, and may
in the future continue to expand the scope of its operations and the products
which it offers through additional acquisitions of complementary businesses,
products or technologies. The Company's growth 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. To manage growth effectively, the Company will
need to continue to improve and upgrade its operational, financial and
management information systems, and to attract, train, motivate, manage and
retain key executives and employees. In addition, if the Company were to
identify one or more additional acquisition candidates in the future, there is
no assurance that the Company would be able to integrate the acquired business,
products or technologies into the Company's existing business and operations,
that the integration would not cause an excessive diversion of management time
and resources or that the acquisition would not require that the Company issue
additional equity securities to help finance such transaction. See
"Business -- The Company's Strategy."
RAPIDLY EVOLVING MARKETS
The information security and wireless communications products markets in
which the Company competes are rapidly evolving and can be expected to further
evolve in the future as a result of changing technology, industry standards and
customer requirements. The Company's ability to compete effectively will depend
upon its ability to anticipate and react to these changes in a timely manner.
The development of new technologies by existing or future competitors may place
the Company at a competitive disadvantage by rendering some or all of the
Company's existing or new products obsolete. The Company has invested heavily in
the introduction of LMR products that comply with the APCO 25 standard. The
Company believes that the APCO 25 standard will be accepted in the public safety
and government markets, however, some manufacturers have adopted and actively
support other digital LMR transmission standards for the public safety
marketplace. The widespread acceptance of one or more other standards in the
public safety market would have a material adverse effect on the Company. See
"Business -- Competition" and "Business -- Industry Overview."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
International sales constituted approximately 39.3% and 31.5% of the
Company's revenues on a Pro Forma combined basis in the six months ended June
30, 1997 and the year ended December 31, 1996, respectively. International sales
are subject to a number of risks not found in domestic sales, including
unexpected changes in regulatory requirements, tariffs and other trade barriers,
political and economic instability in foreign markets, difficulties in
establishing foreign distribution channels, longer payment cycles, uncertainty
in the collection of accounts receivable, increased costs associated with
maintaining international marketing efforts and difficulties in protecting
intellectual property. In particular, the Company has begun to offer financing
for the purchase of its products by certain international customers, which
presents increased
8
<PAGE> 10
risks of, among other things, delayed or reduced collection of accounts
receivable. Because most of the Company's foreign sales are denominated in U.S.
dollars, fluctuations in the value of international currencies relative to the
U.S. dollar may also affect the price, competitiveness and profitability of the
Company's products sold in international markets. Furthermore, the uncertainty
of monetary exchange values has caused, and may in the future cause, some
foreign customers to delay new orders or delay payment for existing orders. Some
of the Company's products, particularly in the information security area, are
subject to export controls under U.S. law, which in most cases requires the
approval of the National Security Agency and the Department of Commerce in order
to ship internationally. There can be no assurance that such approvals will be
available to the Company or its products in the future in a timely manner or at
all or that the federal government will not revise its export policies or the
list of products and countries for which export approval is required. The
Company's inability to obtain required export approvals would adversely affect
the Company's international sales, which would have a material adverse effect on
the Company. In addition, foreign companies not subject to United States export
restrictions may have a competitive advantage in the international information
security market. Recently, President Clinton issued an Executive Order removing
most encryption products from the "munitions" list and transferring jurisdiction
over the export of such products from the Department of State to the Department
of Commerce. The Executive Order allows the export of products featuring digital
encryption technology that previously could not be exported, which may increase
competition for international sales of the Company's analog scrambling products.
In response to industry opposition to the President's Executive Order and
implementing interim regulations, Members of Congress have introduced
legislation which would aggressively expand the ability of U.S. companies to
export encryption products. The Company cannot predict the impact of the
Executive Order on the international market for its products. See
"Business -- Government Regulation and Export Controls."
RELIANCE ON PUBLIC SECTOR MARKETS
Public safety agencies and other governmental entities comprise a
significant portion of the Company's current and anticipated customer base.
Because many governmental customers purchase through dealers, the Company cannot
determine the percentage of its products that are ultimately sold to
governmental agencies. However, the Company believes that domestic and
international governments are the end users of most of its products. As the
transition in the Company's product line from add-on to stand-alone products
progresses and as competition for such sales intensifies, the Company expects
that it will increasingly be subject to competitive bidding requirements for
sales to governmental customers, which can be expected to result in lower prices
and longer sales cycles with resulting lower margins. These bidding procedures
often include the posting of bonds. Any inability by the Company to obtain
requisite bonds would prevent the Company from bidding on LMR systems contracts,
which could have a material adverse effect on the Company. See
"Business -- Sales and Marketing."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon a number of key
employees. The loss of the services of one or more of these key employees or the
Company's inability to attract and retain other qualified employees could have a
material adverse effect on the Company. With the exception of policies covering
John T. Connor and Jeffery L. Fuller, the Company's Chairman and Chief Executive
Officer, respectively, the Company does not maintain any key-person life
insurance policies. The Company believes that its future success will depend in
part on its ability to attract, motivate and retain highly skilled engineering,
technical, managerial and marketing personnel. Competition for such personnel is
intense and the Company competes in the market for such personnel against
numerous companies, including larger, more established companies with
significantly greater financial resources than the Company. There can be no
assurance that the Company will be successful in attracting, motivating or
retaining such personnel. See "Management."
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
9
<PAGE> 11
short supply. For example, in late 1993 and early 1994, there was a shortage of
certain Motorola surface-mount microprocessors, which resulted in a substantial
increase in the cost of these components. 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 have a material adverse effect on the Company.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced and expects to continue to experience quarterly
variations in revenues and net income as a result of many factors, including the
timing of customer orders, the timing of the introduction of new products, mix
of product sales and general economic conditions. Due to the buying patterns of
governmental customers, revenues for the first quarter tend to be lower than
revenues for the fourth quarter of the preceding year. Purchases of equipment by
governmental customers are also frequently characterized by long sales cycles
and timing fluctuations. In addition, the Company's expansion has resulted and
will result in the future in significant fixed costs that will be recognized
before any related revenues are realized, which could adversely affect the
Company's quarterly operating results. While the Company maintains a moderate
backlog for wireless communications products as a result of its acquisition of
E.F. Johnson, the Company has not historically maintained a significant backlog
for its products and does not maintain a significant backlog for information
security products. As a result, the Company is dependent upon the receipt of
current customer orders for its information security products. Any deferral of
customer purchasing decisions or delays in shipments can produce significant
variations in the Company's quarterly results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations" and "Business -- Backlog."
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. Such changes could make existing or planned products of the Company
obsolete or unsaleable in one or more markets, which could have a material
adverse effect on the Company. See "-- Risks Associated with International
Sales" and "Business -- Government Regulation and Export Controls."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF THIRD-PARTY CLAIMS
OF INFRINGEMENT
The Company currently holds a number of domestic and international patents
and has on file applications for additional patents. Although the Company
assesses the advisability of patenting any technological development, it has
historically relied, in the information security area, primarily on copyright
and trade secret law and employee and third party non-disclosure agreements to
protect its proprietary intellectual property and rights. The protection
afforded by such means may not be as complete as patent protection. In addition,
the laws of some countries do not protect trade secrets. There are limitations
on the availability of patent protection as a means to protect the Company's
products. Even when patent protection can be obtained, there are often
limitations on the enforceability of such patent rights. The inability of the
Company to preserve all of its proprietary intellectual property and rights
could have a material adverse effect on the Company.
In addition, 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 and Motorola) 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. 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
10
<PAGE> 12
of APCO 25 products, including the Company, or present or future products of the
Company, or that Ericsson would license its technology to the Company or other
manufacturers. 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. See "Business -- Intellectual Property."
CONCENTRATION OF OWNERSHIP
Upon completion of this offering, the Company's principal stockholders (5%
or greater ownership) will own beneficially, in the aggregate, approximately 30%
of the Company's outstanding Common Stock (assuming no exercise of the
Underwriters' over-allotment option). These stockholders will have the ability
to influence the outcome of all corporate actions requiring stockholder approval
and the election of the Company's directors. See "Principal and Selling
Stockholders."
POSSIBLE VOLATILITY OF SHARE PRICE
Market prices for securities of technology companies tend to be highly
volatile. The trading price of the Common Stock may fluctuate widely in response
to quarterly variations in operating results, announcements of technical
innovations or new products by the Company or companies in the same or closely
related fields, changes in financial estimates by securities analysts, the
operating and stock price performance of other companies that investors may deem
comparable to the Company, general stock market and economic conditions, and
other events or factors which may be unrelated to the operating performance of
the Company.
DILUTION
Purchasers of shares of Common Stock in this offering will suffer immediate
and substantial dilution in the net tangible book value per share of Common
Stock of $14.72 per share, assuming an offering price per share of $18.25. See
"Dilution."
UNALLOCATED NET PROCEEDS
The Company has not yet identified specific uses for a substantial portion
of the estimated net proceeds from this offering. Pending the identification of
such uses, the Company expects that it will invest the net proceeds in
short-term investment grade, interest-bearing instruments and use a portion of
the net proceeds for working capital, repayment of certain long-term debt and
general corporate purposes. The Company will have discretion in the use and
investment of such proceeds. See "Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
12,210,543 shares of Common Stock, of which the 2,000,000 shares offered hereby
by the Company and the 2,000,000 shares offered hereby by the Selling
Stockholders will, subject to certain exceptions, be freely tradable without
restriction or registration under the Securities Act of 1933, as amended (the
"Securities Act"). Of the remaining shares outstanding, 4,327,273 shares of
Common Stock are "restricted" securities under the Securities Act, which the
Company believes are subject to volume limitations on resale until at least June
30, 1998. All of the Company's directors, officers and optionees have agreed not
to sell any Common Stock for a period of 180 days after this offering without
the consent of Furman Selz LLC. An aggregate of 1,200,000 shares of Common Stock
have been reserved for issuance under the Company's 1996 Stock Incentive Plan.
As of the date of this Prospectus, an aggregate of 706,533 shares of Common
Stock were issuable upon the exercise of vested stock options granted by the
Company and an aggregate of 369,000 shares were subject to issuance upon the
exercise of granted but unvested stock options. The Company has filed a
registration statement on Form S-8 under the Securities Act covering the
1,200,000 shares of Common Stock reserved for issuance under the Company's 1996
Stock Incentive Plan. Future sales of a substantial number of shares of Common
11
<PAGE> 13
Stock, or the perception that such sales could occur, could have a material
adverse effect on the prevailing market price for the Company's Common Stock.
See "Shares Eligible for Future Sale" and "Management -- 1996 Stock Incentive
Plan."
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, forecasts and projections
regarding the anticipated benefits of the restructuring of the Company and the
future performance of Transcrypt and E.F. Johnson, expectations of the business
environment in which the Company operates, perceived opportunities in the market
and statements regarding the Company's strategy, constitute "forward-looking
statements" within the meaning of the Reform Act. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: the timing of the full implementation of the
Company's restructuring program for E.F. Johnson, the effects of the
restructuring program on the customers, vendors and employees of Transcrypt and
E.F. Johnson, business conditions generally, the state of the overall economy,
development of the markets for the Company's products, including the domestic
digital LMR market, availability of third-party compatible products, other
competitive factors, and the other factors referenced in this Prospectus,
including, without limitation, under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the results of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered by
the Company hereby, after deducting underwriting discounts and commissions and
estimated offering expenses, are estimated to be $33.8 million ($37.0 million if
the Underwriters' over-allotment option is exercised in full). The Company will
not receive any proceeds from the sale of shares by the Selling Stockholders.
See "Principal and Selling Stockholders."
The Company intends to use approximately $15.0 million of the net proceeds
of this offering to reduce existing bank debt, including a revolving credit
facility and a term facility. At August 31, 1997, the revolving credit facility
and the term facility had outstanding balances of $7.7 million and $2.9 million,
respectively. These facilities bear interest at a rate of 1.75% over the prime
rate announced by CoreStates Bank, N.A. (currently 8.5%) and mature October 31,
1997.
Approximately $8.0 million of the net proceeds will be used to finance the
expansion of the Company's manufacturing and administrative facilities. These
projects include: (i) $2.0 million for an additional administrative and
manufacturing building in Lincoln, Nebraska; (ii) $2.4 million for the purchase
of the Waseca, Minnesota manufacturing facility; (iii) $600,000 for factory
modernization at the Waseca facility; and (iv) $3.0 million of additional
capital expenditures.
The balance of the net proceeds to be received by the Company are expected
to be used for working capital and general corporate purposes, and may include
the acquisitions of, or investments in, complementary businesses, products or
technologies. Although the Company frequently reviews potential acquisition and
investment opportunities, there are no current plans or agreements with respect
to any such transaction, and no portion of the net proceeds has been allocated
for any particular acquisition or investment.
The amounts actually expended by the Company for any of these purposes may
vary significantly depending on a number of factors, including future revenue
growth, the amount of cash generated by the Company's operations and the
progress of the Company's development efforts. Pending such uses, the Company
intends to invest the net proceeds of this offering in short-term,
investment-grade, interest-bearing securities.
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company is quoted on Nasdaq under the symbol
"TRII." The Company completed its initial public offering in January 1997 at a
price of $8.00 per share. The following table sets forth the high and low
closing prices for the Common Stock at or for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Year Ending December 31, 1997:
First Quarter (beginning January 22, 1997)......... $10.06 $ 7.00
Second Quarter..................................... $14.75 $ 6.75
Third Quarter (through September 10, 1997)......... $18.50 $10.00
</TABLE>
The closing price of the Common Stock on September 10, 1997 was $18.25 per
share. As of June 30, 1997 there were approximately 105 record holders of the
Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital
stock. 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. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997, on a Pro Forma basis to reflect the acquisition of E.F. Johnson by the
Company and on a Pro Forma as-adjusted basis to reflect the E.F. Johnson
acquisition and the sale of 2,000,000 shares of Common Stock offered by the
Company at an assumed offering price of $18.25 per share and the application of
estimated net proceeds therefrom as described in "Use of Proceeds." This table
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
----------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED (2)
------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current maturities of long-term debt and $ 159 $14,311 --
capitalized lease obligation (3).................
Long-term debt and capitalized lease obligations 2,850 4,558 $ 4,558
(less current portion) (3).......................
Stockholders' equity:
Preferred Stock, $0.01 par value, 3,000,000 -- -- --
shares authorized, none issued and
outstanding (4).............................
Common Stock, $0.01 par value, 19,400,000 93 101 122
voting shares authorized, 9,898,001 issued
and outstanding, actual; 600,000 non-voting
shares authorized, 217,542 issued and
outstanding, actual; voting shares issued
and outstanding, as adjusted; 217,542 non-
voting shares issued and outstanding, as
adjusted (4)................................
Additional paid-in capital (5)................ 27,368 37,360 71,213
Retained deficit (5).......................... (1,020) (9,270) (9,270)
------- ------- -------
Total stockholders' equity............... 26,441 28,191 62,065
------- ------- -------
Total capitalization............................... $29,450 $47,060 $ 66,623
======= ======= =======
</TABLE>
- ---------------
(1) Pro Forma, giving effect to the acquisition of E.F. Johnson by Transcrypt as
of June 30, 1997.
(2) Pro Forma as adjusted, giving effect to the acquisition of E.F. Johnson, the
consummation of this offering at an assumed offering price of $18.25 per
share, the exercise of 95,000 options by a Selling Stockholder, which shares
are being offered hereby and the application of the proceeds therefrom as
described in "Use of Proceeds," each as of June 30, 1997. Total debt
reflects repayment of an estimated $15.0 million in debt from net offering
proceeds.
(3) See Notes 5 and 6 of Notes to Consolidated Financial Statements of
Transcrypt and Notes 7 and 8 of Notes to Consolidated Financial Statements
of E.F. Johnson.
(4) Shares issued and outstanding excludes 1,075,533 shares of Common Stock
reserved for issuance upon exercise of options outstanding as of the date of
this Prospectus under the Company's stock option plan, at a weighted average
exercise price of $4.39 per share, and an aggregate of 124,467 shares
available for future issuance thereunder. See "Management -- 1996 Stock
Incentive Plan" and Note 11 of Notes to Consolidated Financial Statements of
Transcrypt.
(5) Reflects 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. See "Management -- 1996 Stock
Incentive Plan" and "Management -- Employment Agreements."
14
<PAGE> 16
DILUTION
The net tangible book value of the Company as of June 30, 1997, on a Pro
Forma basis giving effect to the acquisition of E.F. Johnson, was $9.3 million
or approximately $0.91 per share. Pro Forma net tangible book value per share is
determined by dividing the Company's Pro Forma net tangible book value (total
tangible assets less total liabilities) by the 10,210,543 shares of Common Stock
outstanding, excluding 611,533 shares reserved for issuance upon exercise of
vested stock options (which includes the effect of the issuance of 95,000 shares
upon the exercise of options by a Selling Stockholder). Pro Forma net tangible
book value dilution per share represents the difference between the amount per
share paid by purchasers of shares of Common Stock in the offering and the Pro
Forma net tangible book value per share of Common Stock immediately after
completion of the offering. After giving effect to the sale by the Company of
the 2,000,000 shares of Common Stock offered by the Company in this offering at
an assumed public offering price of $18.25 per share and the application of the
estimated net proceeds therefrom, the Pro Forma net tangible book value of the
Company as of June 30, 1997 would have been $43.1 million or $3.53 per share.
This represents an immediate increase in net tangible book value of $2.62 per
share to existing stockholders and an immediate dilution in net tangible book
value of $14.72 per share to the purchasers of Common Stock in the offering, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.............. $ 18.25
Net tangible book value per share as of June 30, $ 0.91
1997(1).......................................
Increase in net tangible book value per share 2.62
attributable to new investors.................
--------
Net tangible book value per share after offering..... 3.53
--------
Dilution per share to new investors.................. $ 14.72
========
</TABLE>
- ---------------
(1) Includes 95,000 shares to be issued upon the exercise of options by a
Selling Stockholder which shares are being offered hereby.
The foregoing table assumes no exercise of the Underwriters' over-allotment
option or of any outstanding stock options to purchase Common Stock of the
Company.
The following table sets forth, on a Pro Forma basis as of June 30, 1997,
the difference in the number of shares purchased from the Company, the total
consideration paid and the average price per share paid by the Company's
existing stockholders and the new investors in this offering. The calculations
in this table with respect to shares of Common Stock to be purchased by new
investors in this offering reflect the assumed public offering price of $18.25
per share, before deducting the underwriting discounts and commissions.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........... 10,210,543 83.5% $37,436,323 51.3% $ 3.72
New investors(1)................... 2,000,000 16.5% 36,500,000 48.7 18.25
---------- ----- ---------- ----- ------
Total.................... 12,210,543 100.0% $73,936,323 100.0% $ 6.06
========== ===== ========== ===== ======
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 8,115,543 shares or 67.0% (or 62.6%
if the Underwriters' over-allotment option is exercised in full) of the
total number of shares of Common Stock to be outstanding after this
offering, and will increase the number of shares to be purchased by new
investors to 4,000,000, or 33.0% (or 37.4% if the Underwriters'
over-allotment option is exercised in full) of the total shares of Common
Stock to be outstanding. See "Principal and Selling Stockholders."
The foregoing tables and calculations exclude 1,075,533 shares of Common
Stock (which includes the 95,000 shares to be issued upon exercise of options)
reserved for issuance upon exercise of options outstanding as of the date of
this Prospectus under the Company's stock option plan, at a weighted average
exercise price of $4.39 per share, and an aggregate of 124,467 shares available
for future issuance thereunder. See "Management -- 1996 Stock Incentive Plan"
and Note 11 of Notes to Consolidated Financial Statements of Transcrypt.
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
OF TRANSCRYPT INTERNATIONAL, INC.
The following selected historical financial data of Transcrypt is qualified
by reference to and should be read in conjunction with the Consolidated
Financial Statements of Transcrypt 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, 1994, 1995, and 1996 and the Consolidated Balance
Sheet data as of December 31, 1995 and 1996 are derived from, and are qualified
by reference to, the audited Consolidated Financial Statements of Transcrypt
included elsewhere in this Prospectus. 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, 1992, 1993, and 1994 are derived from
audited financial statements not included herein. The Consolidated Statements of
Income (Loss) data for the six-month periods ended June 30, 1996 and 1997, and
the Consolidated Balance Sheet data as of June 30, 1997, are derived from
unaudited financial statements that include all adjustments (consisting of
normal recurring adjustments and accruals) that the Company considers necessary
for a fair presentation of the consolidated financial data included herein, in
accordance with generally accepted accounting principles. The Consolidated
Statement of Income (Loss) for the six months ended June 30, 1997, is not
necessarily indicative of the results for the entire fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME (LOSS) DATA:
Revenues........................................... $ 4,974 $ 6,900 $ 9,155 $ 8,128 $ 13,776 $ 5,728 $ 10,278
Cost of sales...................................... 1,236 1,616 2,901 2,983 4,865 1,850 3,865
------ ------ ------ ------ ------- ------ -------
Gross profit....................................... 3,738 5,284 6,254 5,145 8,911 3,878 6,413
Operating expenses:
Research and development......................... 963 1,138 1,180 1,953 2,234 1,085 1,316
Sales and marketing.............................. 656 982 1,590 2,109 2,103 835 1,965
General and administrative....................... 1,472 1,151 1,074 1,191 1,413 694 1,038
Amortization of intangible assets................ 1,100 1,092 1,092 1,093 1,001 546 --
Special compensation expense(1).................. -- -- -- -- 5,568 -- --
------ ------ ------ ------ ------- ------ -------
Total operating expenses....................... 4,191 4,363 4,936 6,346 12,319 3,160 4,319
------ ------ ------ ------ ------- ------ -------
Income (loss) from operations...................... (453) 921 1,318 (1,201) (3,408) 718 2,094
Interest expense, net.............................. 143 133 111 137 131 51 (236)
Provision (benefit) for income taxes............... -- -- -- -- (1,528) -- 672
------ ------ ------ ------ ------- ------ -------
Net income (loss).................................. $ (596) $ 788 $ 1,207 $(1,338) $ (2,011) $ 667 $ 1,658
====== ====== ====== ====== ======= ====== =======
Income (loss) before Pro Forma taxes............... $ (3,539) $ 667 $ 2,330
Pro Forma and provision (benefit) for taxes(2)..... (1,393) 134 672
------- ------ -------
Pro Forma and net income (loss).................... $ (2,146) $ 533 $ 1,658
======= ====== =======
Pro Forma and net income (loss) per share(3)....... $ (0.31) $ 0.08 $ 0.17
======= ====== =======
Shares used to compute Pro Forma and net income
(loss) per share(3).............................. 6,969 6,969 9,596
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................................... $ 436 $1,726 $3,353 $1,684 $ 2,468 $ 21,277
Total assets...................................................... 7,741 7,908 9,627 7,523 13,981 31,851
Long-term debt and capitalized lease obligations, net of current
portion......................................................... 2,552 2,035 2,164 1,847 2,631 2,850
Stockholders' equity.............................................. 3,821 4,599 5,945 3,907 7,073 26,441
</TABLE>
- ---------------
(1) 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. See "Management -- 1996 Stock
Incentive Plan" and "Management -- Employment Agreements."
(2) 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.
(3) 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 and net income (loss) per share.
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
OF E.F. JOHNSON COMPANY
The following selected consolidated historical financial data of E.F.
Johnson 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 Operations data for the years ended
December 31, 1994, 1995, and 1996 and the Consolidated Balance Sheet data as of
December 31, 1995 and 1996 are derived from, and are qualified by reference to,
the audited Consolidated Financial Statements of E.F. Johnson included elsewhere
in this Prospectus. The Consolidated Statements of Operations data for the years
ended December 31, 1993 and the Consolidated Balance Sheet data as of December
31, 1992, 1993, and 1994 are derived from audited financial statements not
included herein. The Consolidated Statements of Operations data for the year
ended December 31, 1992 (Pro Forma) and the six-month periods ended June 30,
1996 and June 29, 1997, and the Consolidated Balance Sheet data as of June 29,
1997, are derived from unaudited financial statements that include all
adjustments (consisting of normal recurring adjustments and accruals) that the
Company considers necessary for a fair presentation of the consolidated
financial data included herein, in accordance with generally accepted accounting
principles. The Consolidated Statement of Operations for the six months ended
June 29, 1997, is not necessarily indicative of the results for the entire
fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, --------------------
---------------------------------------------------- JUNE 30, JUNE 29,
1992(1) 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues..................................... $86,663 $88,083 $99,240 $88,932 $ 78,966 $43,166 $28,223
Cost of sales................................ 52,460 48,964 60,349 60,630 50,623 26,717 18,157
------- ------- ------- ------- ------- ------- -------
Gross profit................................. 34,203 39,119 38,891 28,302 28,343 16,449 10,066
Operating expenses:
Research and development................... 6,741 6,554 7,534 8,118 8,401 3,888 2,938
Selling, general and administrative........ 25,070 26,072 28,284 32,107 29,201 14,816 11,215
Nonrecurring items(2)...................... 770 -- 890 (7,479) 13,521 -- (1,017)
------- ------- ------- ------- ------- ------- -------
Total operating expenses............ 32,581 32,626 36,708 32,746 51,123 18,704 13,136
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations................ 1,622 6,493 2,183 (4,444) (22,780) (2,255) (3,070)
Interest expense, net........................ 2,542 2,235 2,668 4,105 3,694 1,736 2,282
Provision (benefit) for income taxes......... -- 1,623 (578) -- -- -- --
Extraordinary item, net of taxes............. -- (742) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................ $ (920) $ 1,893 $ 93 $(8,549) $(26,474) $(3,991) $(5,352)
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------------------------------------- JUNE 29,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $10,959 $14,552 $15,441 $25,723 $(24,009) $(25,165)
Total assets...................................... 44,978 51,245 65,876 73,858 42,752 36,133
Long-term debt and capitalized lease obligations,
net of current portion.......................... 19,267 21,832 27,401 32,681 1,802 1,708
Shareholders' equity (deficit).................... 2,390 3,643 3,096 (6,814) (34,566) (40,571)
</TABLE>
- ---------------
(1) E.F. Johnson was acquired from Arkla, Inc. on July 31, 1992. The selected
results of operations for the year ended December 31, 1992 represent a Pro
Forma presentation as if the acquisition had occurred on January 1, 1992.
(2) E.F. Johnson incurred the following nonrecurring items:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------- JUNE 29,
1992 1993 1994 1995 1996 1997
---- ---- ----- ------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gain on sale of Division......................................... $(8,343) $ (2,152)
Write down of assets............................................. $11,618
Loss on sale of capital leases................................... 750
Employee severance costs......................................... 762 375
Costs related to initial public offering not consummated......... $ 630
Costs incurred to acquire minority shares........................ 298
Costs incurred in debt refinancing not consummated............... 105
Gain from refund of real estate taxes paid in prior years........ (203)
Restructuring costs.............................................. $770
Other nonrecurring costs......................................... 60 102 1,528 385
---- ---- ----- ------- ------- ------
Total nonrecurring items (income) expense................ $770 $ 890 $(7,479) $13,521 $ (1,017)
==== ==== ===== ======= ======= ======
</TABLE>
17
<PAGE> 19
PRO FORMA FINANCIAL DATA
The following unaudited Pro Forma Condensed Combined Balance Sheet as of
June 30, 1997 and unaudited Pro Forma Condensed Combined Income Statements for
the six months ended June 30, 1997 and for the year ended December 31, 1996
illustrate the effect of the acquisition of E.F. Johnson (the "Acquisition") as
if the Acquisition had occurred on June 30, 1997 for the Pro Forma Condensed
Combined Balance Sheet and as of January 1, 1996 for the Pro Forma Condensed
Combined Income Statements, after giving effect to the merger-related
adjustments described in the respective accompanying notes. The Acquisition will
be accounted for under the purchase method of accounting. Under this method of
accounting, the purchase price will be allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the closing.
These Pro Forma Condensed Combined Financial Statements should be read in
conjunction with the historical financial statements of Transcrypt and E.F.
Johnson which are set forth elsewhere herein.
The Pro Forma Condensed Combined Financial Statements are presented for
comparative purposes only and are not intended to be indicative of actual
results had the transactions occurred as of the dates indicated above nor do
they purport to indicate results which may be attained in the future. The Pro
Forma Condensed Combined Financial Statements reflect the best estimate of the
allocation of the purchase price as of the date of this Prospectus. Due to
operating losses incurred by E.F. Johnson between the "as of" date of the Pro
Forma financial statements and the transaction date, the ultimate value of
goodwill is expected to increase substantially. It is the Company's intention to
more fully evaluate the acquired assets and, as a result, the allocation of the
acquisition costs among the tangible and intangible assets acquired may change.
Consequently, the final Pro Forma Combined amounts will differ from those set
forth in the Pro Forma Condensed Combined Financial Statements.
18
<PAGE> 20
TRANSCRYPT INTERNATIONAL, INC. PRO FORMA CONDENSED
COMBINED BALANCE SHEET (1) (UNAUDITED)
AS OF JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
TRANSCRYPT/
E.F. JOHNSON
TRANSCRYPT E.F. JOHNSON PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $12,699 $ 76 $ (436)(5) $ 12,339
Accounts receivable, net............................... 7,923 8,460 (461)(3) 15,922
Inventory.............................................. 2,718 11,173 13,891
Other current assets................................... 498 2,330 (723)(7) 2,105
------- --------- --------- ---------
TOTAL CURRENT ASSETS............................ 23,838 22,039 (1,620) 44,257
PROPERTY, PLANT & EQUIPMENT, NET......................... 6,222 6,233 12,455
OTHER ASSETS:
Intangible assets, net................................. -- 5,618 (837)(4) 4,781
Goodwill............................................... -- -- 2,610(4) 2,610
Deferred tax asset..................................... 1,713 -- 9,863(10) 11,576
Other assets........................................... 78 2,243 (1,624)(7) 697
------- --------- --------- ---------
TOTAL OTHER ASSETS.............................. 1,791 7,861 10,012 19,664
------- --------- --------- ---------
$31,851 $ 36,133 $ 8,392 $ 76,376
======= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................... $ 159 $ 24,152 $ (10,000)(12) $ 14,311
Accounts payable....................................... 1,193 10,061 (677)(7) 10,966
(461)(3)
850(6)
Technology and license purchase payable................ -- 3,552 3,552
431(4)
4,045(8)
Other current liabilities.............................. 1,208 9,439 (1,387)(12) 13,736
------- --------- --------- ---------
TOTAL CURRENT LIABILITIES....................... 2,560 47,204 (7,199) 42,565
LONG-TERM DEBT AND LEASE OBLIGATIONS..................... 2,850 1,708 4,558
OTHER LIABILITIES:
Other liabilities...................................... -- 1,062 1,062
Payable to related parties............................. -- 4,078 (4,078)(7) --
------- --------- --------- ---------
TOTAL OTHER LIABILITIES......................... -- 5,140 (4,078) 1,062
Series A Preferred Stock................................. -- 11,200 (11,200)(11) --
Class B Preferred Stock.................................. -- 11,452 (11,452)(11) --
------- --------- --------- ---------
-- 22,652 (22,652) --
------- --------- --------- ---------
STOCKHOLDERS' EQUITY:
Common Stock........................................... 93 38 8(11) 101
(38)(13)
Paid in capital........................................ 27,368 828 9,992(11) 37,360
12,652(11)
(13,480)(13)
Retained earnings...................................... (1,020) (41,437) (8,250)(9) (9,270)
9,863(10)
2,408(7)
11,387(12)
17,779(13)
------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY............................... 26,441 (40,571) 42,321 28,191
------- --------- --------- ---------
$31,851 $ 36,133 $ 8,392 $ 76,376
======= ========= ========= =========
</TABLE>
See accompanying notes to the Pro Forma Condensed Combined Balance Sheet.
19
<PAGE> 21
TRANSCRYPT INTERNATIONAL, INC. PRO FORMA CONDENSED
COMBINED INCOME STATEMENT(1) (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TRANSCRYPT/
E.F. JOHNSON E.F. JOHNSON
TRANSCRYPT HISTORICAL PRO FORMA PRO FORMA
HISTORICAL(2) (2) ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues......................... $10,278 $28,223 $ (537)(14) $ 37,964
Costs of sales................... 3,865 18,157 (537)(14) 21,485
------- ------- -------- -------
Gross profit................... 6,413 10,066 -- 16,479
Operating expenses:
Research and development....... 1,316 2,938 4,254
Selling, general and
administrative.............. 3,003 11,215 (732)(16) 13,486
Nonrecurring items............. -- (1,017) -- (1,017)
Goodwill amortization.......... -- -- 200(17) 200
------- ------- -------- -------
Total operating
expenses............. 4,319 13,136 (532) 16,923
------- ------- -------- -------
Income (loss) from operations.... 2,094 (3,070) (532) (444)
Other income (expense):
Interest, net.................. 236 (2,282) 489(15) (1,557)
------- ------- -------- -------
Income (loss) before tax......... 2,330 (5,352) 1,021 (2,001)
Provision (benefit) for income
taxes.......................... 672 -- (1,352)(18) (680)
------- ------- -------- -------
Net income (loss)................ $ 1,658 $(5,352) $ 2,373 $ (1,321)
======= ======= ======== =======
Income (loss) per share.......... $ 0.17 $ (0.13)
======= =======
Number of common and common
equivalent shares issued and
outstanding.................... 9,596 832(19) 10,428
</TABLE>
See accompanying notes to the Pro Forma Condensed Combined Income Statement.
20
<PAGE> 22
TRANSCRYPT INTERNATIONAL, INC. PRO FORMA CONDENSED
COMBINED INCOME STATEMENT (1) (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TRANSCRYPT/
E.F. JOHNSON
TRANSCRYPT E.F. JOHNSON PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues......................... $13,776 $ 78,966 $ (554)(14) $ 92,188
Costs of sales................... 4,865 50,623 (554)(14) 54,934
------- ------- -------- -------
Gross profit................... 8,911 28,343 -- 37,254
------- ------- -------- -------
Operating expenses:
Research and development....... 2,234 8,401 10,635
Selling, general and
administrative.............. 3,516 29,201 (1,277)(16) 31,440
Special compensation expense... 5,568 -- 5,568
Nonrecurring items............. -- 13,521 13,521
Goodwill and other
amortization................ 1,001 -- 400(17) 1,401
------- ------- -------- -------
Total operating
expenses............. 12,319 51,123 (877) 62,565
------- ------- -------- -------
Loss from operations............. (3,408) (22,780) (877) (25,311)
Other income (expense):
Interest, net.................. (131) (3,694) 997(15) (2,828)
------- ------- -------- -------
Loss before tax.................. (3,539) (26,474) 1,874 (28,139)
Provision (benefit) for income
taxes.......................... (1,528) -- (8,039)(18) (9,567)
------- ------- -------- -------
Net loss......................... $(2,011) $ (26,474) $ 9,913 $(18,572)
======= ======= ======== =======
Loss per share................... $ (0.29) $ (2.38)
======= =======
Number of common and common
equivalent shares issued and
outstanding.................... 6,969 832(19) 7,801
</TABLE>
See accompanying notes to the Pro Forma Condensed Combined Income Statement.
21
<PAGE> 23
NOTES TO TRANSCRYPT INTERNATIONAL, INC. PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
1. The Pro Forma financial data do not give effect to any potential cost
savings and synergies that could result from the Acquisition. The Pro Forma
Condensed Combined Balance Sheet reflects the write-off of intangible assets
consisting of in-process research and development ("R&D") projects of $8.3
million related to the Acquisition, the gain of $11.4 million from the
forgiveness of debt, the gain of $2.4 million from the forgiveness of net
payables due to the former common shareholders and the recording of net deferred
tax assets of $9.9 million. The effect of these transactions have not been
reflected in the accompanying Pro Forma Condensed Combined Income Statements as
they are of a non-recurring nature. The Pro Forma data are not necessarily
indicative of the operating results or financial position that would have
occurred had the Acquisition been consummated at the dates indicated, nor
necessarily indicative of future operating results or financial position.
2. These columns represent historical results of operations and financial
position. The six month period for E.F. Johnson is as of and ended June 29,
1997.
CONDENSED COMBINED BALANCE SHEET AS OF JUNE 30, 1997:
3. To eliminate receivables and payables attributable to the intercompany
transactions between Transcrypt and E.F. Johnson.
4. This adjustment reflects the excess of cost over net tangible assets
acquired. For purposes of allocating the acquisition costs among the various
assets acquired, Transcrypt has tentatively considered the carrying value of
substantially all of the acquired assets to approximate their fair value, with
the excess of such acquisition costs being attributed to in-process R&D
in-process (research and development projects in-process) and goodwill. The
following is a summary of the adjustment to goodwill and other intangibles:
<TABLE>
<S> <C>
Purchased in-process R&D.............................. $ 8,250,000
Write-off of purchased in-process R&D................. $(8,250,000)
Goodwill.............................................. $ 2,610,000
Goodwill is being amortized over a 15-year life.
The determination of the purchase price is as follows:
Issuance of common shares of Transcrypt............. $10,000,000
Cash................................................ 436,000
Net assets acquired................................. (7,826,000)
-----------
Goodwill............................................ $ 2,610,000
==========
</TABLE>
Operating losses of approximately $3.4 million due primarily to working
capital constraints incurred by E.F. Johnson from the date of the Pro Forma
financial statements until the acquisition date of July 31, 1997 will increase
the ultimate amount of goodwill recorded to approximately $6.0 million. Net
assets acquired are after fair value adjustments of $1.3 million.
5. To record the use of cash to purchase the E.F. Johnson common stock
outstanding for $436,000.
6. Reflects liabilities incurred for transaction costs, such as investment
advisory, legal and accounting fees, related to the Acquisition.
7. To eliminate the receivable and payable attributable to transactions
between E.F. Johnson and the former common shareholders of E.F. Johnson, which
are forgiven as part of the Acquisition, resulting in a gain on extinguishment
of debt of $2.4 million.
8. To record a reserve for costs related to plans Transcrypt has
formulated for the restructuring of E.F. Johnson's operations subsequent to the
Acquisition, including severance and relocation costs.
9. Write-off of intangible assets consisting of in-process R&D projects of
$8.3 million. (See Note 1.)
22
<PAGE> 24
NOTES TO TRANSCRYPT INTERNATIONAL, INC. PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. To record net deferred tax assets of E.F. Johnson that are deemed more
likely than not to be realized.
11. Represents the issuance of 832,465 shares of Transcrypt Common Stock,
valued at $10 million as of the Acquisition Date to purchase the E.F. Johnson
preferred stock outstanding with a carrying value of $22.7 million.
12. To record forgiveness of $10 million of subordinated debt and related
accrued interest payable of $1.4 million in accordance with the Acquisition
Agreement.
13. To eliminate the equity of E.F. Johnson.
CONDENSED COMBINED INCOME STATEMENT FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996:
14. To eliminate the revenues and corresponding costs attributable to the
intercompany transactions between Transcrypt and E.F. Johnson.
15. To eliminate the interest expense attributable to the senior
subordinated debt forgiven in accordance with the Acquisition Agreement.
16. To eliminate the management fees and expenses incurred by E.F. Johnson
to its common shareholders.
17. To record amortization for the effect of the goodwill acquired in the
Acquisition based upon the expected goodwill of approximately $6.0 million. (See
Note 4.)
18. To record the tax effect of the Pro Forma consolidated entity at the
marginal tax rate of 34%.
19. Pro Forma per share data are based on the number of Transcrypt common
and common equivalent shares that would have been outstanding had the
Acquisition occurred on the earliest date presented.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus, including the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from those discussed herein. Factors
that might cause such a difference include, but are not limited to, those
discussed under the caption "Risk Factors." See "Risk Factors -- Forward-Looking
Statements." The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere herein.
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, 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 ending 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 order to take advantage of the growing demand for digital
communications, in 1993 the Company began investing 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 additional technical
personnel and, in September 1994, the Company raised $1.0 million through the
sale of equity to its existing equityholders. As a result of these efforts, the
Company introduced many voice and data security products including 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 the balance of 1997 and 1998.
On July 31, 1997, the Company acquired the outstanding shares of capital
stock and certain indebtedness of E.F. Johnson. In exchange, the Company paid
cash consideration of $436,000 and issued 832,465 shares of Common Stock. The
Company is implementing a restructuring program for E.F. Johnson, including an
approximate 25% reduction in E.F. Johnson's workforce effected in August 1997, a
review and phase-out of low margin products and services, the consolidation of
E.F. Johnson's corporate headquarters with that of Transcrypt, the elimination
of duplicative sales, marketing and personnel expenses, the improvement of
vendor relationships and the implementation of stringent cash management
policies and expense controls. Management expects that this program will result
in significant cost savings; however, management can not predict when, if at
all, such savings can be achieved, and the effect of such reductions. See "Risk
Factors -- Risks Related to the E.F. Johnson Acquisition."
In connection with its acquisition of E.F. Johnson, the Company estimates
that it created an intangible asset totaling $6.0 million at closing, which
amount will be amortized by the Company on a straight-line basis over 15 years
beginning in August 1997. Also, as a result of the acquisition, the Company's
interest expense will increase in the future due to approximately $16.0 million
in indebtedness of E.F. Johnson as of June 30, 1997. The Company intends to
substantially reduce this indebtedness with a portion of the proceeds from this
offering. See "Use of Proceeds." Transcrypt's historical gross margins have been
significantly higher than E.F. Johnson's gross margins for similar periods due
primarily to Transcrypt's historical emphasis on add-on products, which
generally carry higher margins than stand-alone products. The Company expects
that, as a result of the acquisition of E.F. Johnson and the expected increase
in volume of stand-alone products relative to add-on products, the Company's
overall gross margins will likely decline in the future compared to Transcrypt's
historical gross margins. The Company also estimates that it will incur a
write-off in the third quarter of 1997 of in-process research and development
costs in connection with the acquisition of E.F. Johnson totaling approximately
$8.3 million.
24
<PAGE> 26
RESULTS OF OPERATIONS -- TRANSCRYPT
The following table sets forth, for Transcrypt, certain Consolidated
Statements of Income (Loss) information as a percentage of revenues during the
periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 31.7 36.7 35.3 32.2 37.6
----- ----- ----- ----- -----
Gross profit....................................... 68.3 63.3 64.7 67.7 62.4
Operating expenses:
Research and development......................... 12.9 24.0 16.2 18.9 12.8
Sales and marketing.............................. 17.4 26.0 15.3 14.6 19.1
General and administrative....................... 11.7 14.7 10.2 12.1 10.1
Amortization of intangible assets................ 11.9 13.4 7.3 9.5 --
Special compensation expense..................... -- -- 40.4 -- --
----- ----- ----- ----- -----
Total operating expenses................. 53.9 78.1 89.4 55.2 42.0
----- ----- ----- ----- -----
Income (loss) from operations...................... 14.4 (14.8) (24.7) 12.5 20.4
Interest expense, net.............................. 1.2 1.7 1.0 0.9 (2.3)
Provision (benefit) for income taxes............... -- -- (11.1) -- 6.5
----- ----- ----- ----- -----
Net income (loss).................................. 13.2% (16.5)% (14.6)% 11.6% 16.1%
===== ===== ===== ===== =====
Income (loss) before Pro Forma income taxes........ (25.7)% 11.6% 22.7%
Pro Forma and provision (benefit) for income
taxes............................................ (10.1) 2.4 6.5
----- ----- -----
Pro Forma and net income (loss).................... (15.6)% 9.3% 16.1%
===== ===== =====
</TABLE>
Revenues
Transcrypt recognizes revenues upon shipment of products to its customers.
Revenues increased to $10.3 million during the first six months of 1997,
compared to $5.7 million during the same period in 1996. These increases were
attributable primarily to additional revenues associated with several large new
sales contracts in 1997 in both Transcrypt's core security and LMR product
lines. Sales of Transcrypt's products grew in the first six months of 1997 in
all of its major product categories, including core security products for the
LMR and cellular telephone markets (particularly in international markets) as
well as Transcrypt's stand-alone LMR products.
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. Transcrypt also began shipment of its first stand-alone
radio and cellular products in September 1996, which contributed to the increase
in 1996 revenues. In addition, revenues for 1995 were negatively impacted due to
management conflicts over the future direction and control of Transcrypt, 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, this
decrease was attributable 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 for the six months ended
June 30, 1997 were 67.3%, compared to 44.8% for the same period in 1996. Sales
of items for export to several large customers accounted for the increase in the
first half of 1997. International sales as a percentage of revenues were 49.0%,
71.4% and 57.3% in 1996, 1995 and 1994, respectively. Transcrypt believes that
the proportion of international sales in 1995 was unusually high, reflecting
large sales to Egypt and Turkey and lower domestic sales. Transcrypt
25
<PAGE> 27
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 Transcrypt's increased marketing
emphasis on domestic sales, including the expanded marketing domestically of
Transcrypt's digital radio products. In addition, domestic sales as a percentage
of revenues may also increase in the future as a result of the acquisition of
E.F. Johnson in July 1997, due to E.F. Johnson's historically greater emphasis
on domestic sales.
Gross Profit
Cost of sales includes materials, labor, depreciation and overhead costs
associated with the production of Transcrypt's products, as well as shipping,
royalty and warranty product costs. Gross profit increased to $6.4 million
(62.4% gross margin) for the first six months of 1997, compared to $3.9 million
(67.7% gross margin) for the same period in 1996. Transcrypt began shipment of
its first stand-alone products in September 1996. Shipments of Transcrypt's
stand-alone LMR and cellular telephone products, which generally have lower
gross margins than add-on modules and other products, continued to be strong
during the first six months of 1997 and increased relative to total sales. To
the extent that sales of stand-alone products increase in the future relative to
sales of add-on products, gross margins likely will continue to decline.
Gross profit increased to $8.9 million (64.7% gross margin) in 1996 from
$5.1 million (63.3% gross margin) in 1995. Gross profit was $6.3 million (68.3%
gross margin) in 1994. Gross margin declined in 1995 relative to 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 costs associated
with research and development personnel, materials and the depreciation of
research and development equipment and facilities. Research and development
expenses increased to $1.3 million for the first six months of 1997 from $1.1
million for the first six months of 1996 due to the addition of new members of
the engineering staff. However, research and development expenses as a
percentage of sales decreased to 12.8% for the first six months of 1997,
compared to 18.9% for the comparable period in 1996, due to greater revenues in
1997. The Company also estimates that it will incur a write-off in the third
quarter of 1997 of in-process research and development costs in connection with
the acquisition of E.F. Johnson totaling approximately $8.3 million.
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 Transcrypt'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 increased to $2.0 million in 1995 from $1.2 million in
1994. Research and development expenses as a percentage of revenues were 12.9%
in 1994. This dollar increase was due primarily to the commencement of
development of Transcrypt'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, bad debt provisions and trade show
participation. Sales and marketing expenses increased to $2.0 million (19.1% of
sales) for the first six months of 1997, compared to $835,000 (14.6% of sales)
for the same period in 1996. The increase in 1997 was due primarily to the
addition of direct sales personnel and associated expenses, increased
participation in advertising and tradeshows, and an additional bad debt
provision for accounts receivable reserves of $570,000 for the first six months
of 1997. The additional bad debt provision was related to an overall increase in
Transcrypt's accounts receivables to $8.7 million at June 30, 1997 from $4.6
million at December 31, 1996. Transcrypt expects to continue its increased
commitment to sales and marketing during 1997 through the
26
<PAGE> 28
addition of direct sales and marketing personnel, primarily to support the
introduction of new products, including digital LMRs.
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, due primarily to the increase in
revenues in 1996. 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 Transcrypt's lower revenues in 1995.
General and Administrative
General and administrative expenses consist primarily of salaries and other
expenses associated with Transcrypt's management, accounting, finance and
administrative functions. General and administrative expenses increased to $1.0
million for the first six months of 1997, compared to $694,000 for the same
period in 1996. These increases were attributable primarily to the addition of
several administrative employees and costs associated with becoming, and
maintaining its status as, a publicly-held company in 1997. Transcrypt expects
to continue to incur additional general and administrative expenses in 1997 due
to its publicly-held status and upgrades to its management information systems.
General and administrative expenses as a percentage of revenues declined to
10.1% for the first six months of 1997, compared to 12.1% for the same period in
1996, due primarily to increased revenues in 1997.
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.
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
In connection with Transcrypt's purchase of all of the outstanding shares
of capital stock of E.F. Johnson effective July 31, 1997, Transcrypt estimates
that it created $6.0 million of goodwill at closing, which amount will be
amortized by Transcrypt on a straight-line basis over 15 years beginning in
August 1997, resulting in a non-cash charge of approximately $400,000 on an
annual basis. Intangible assets for the fiscal years prior to 1997 consisted
primarily of the costs associated with the acquisition of Transcrypt's business
in December 1991, including proprietary technology licenses, non-competition
agreements and goodwill. Transcrypt 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 million in 1996 and $1.1 million in
each of 1995 and 1994. These intangible assets were fully amortized as of
November 30, 1996.
Special Compensation Expense
In September 1996, Transcrypt 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
Transcrypt at a weighted average exercise price of $1.81 per share, and a
special compensation expense of $210,000 payable to Transcrypt's Chairman during
1996 for services rendered related to the Company's acquisition of its business
in December 1991. Excluding the special compensation expense of $5.6 million,
income from operations, net income, Pro Forma net income and Pro Forma net
income per share for 1996 would have been $2.2 million, $1.7 million, $1.6
million and $0.23, respectively.
27
<PAGE> 29
Net Interest Income or Expense
Net interest income consists of interest income earned on cash and
investable funds, net of interest expense related to amounts payable on
Transcrypt's term and installment loans and bank lines of credit. Net interest
income was $236,000 for the first six months of 1997, compared to a $51,000
interest expense for the first six months of 1996. The increase in net interest
income in the 1997 period is attributable to the repayment of certain debt
during 1997 and an increase in interest income due to investment of a portion of
the net proceeds from Transcrypt's initial public offering in interest-bearing
instruments. 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, Transcrypt 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. Transcrypt converted from a
partnership to a "C" corporation effective June 30, 1996. Pro Forma net income
and Pro Forma net income per share calculations reflect a Pro Forma provision
for income taxes as if Transcrypt had been taxed as a "C" corporation in the
first six months of 1996. Transcrypt's provision for income taxes for the six
months ended June 30, 1997 was $672,000, compared to a Pro Forma provision for
income taxes of $135,000 for the six months ended June 30, 1996. Transcrypt's
benefit for income taxes for the year ended December 31, 1996 was $(1.5)
million, primarily resulting from a deferred tax benefit of $(1.8) million in
connection with the stock option related special compensation expense of $5.4
million.
Transcrypt 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. Transcrypt believes that sufficient tax credits will be
available through the life of the Nebraska Agreement to offset Transcrypt's
expected Nebraska state income tax liability during such period. In addition,
Transcrypt utilizes its foreign sales corporation ("FSC") subsidiary located in
Guam to exempt from income taxation a portion of Transcrypt's foreign sales
income.
RESULTS OF OPERATIONS -- E.F. JOHNSON
The following table sets forth, for E.F. Johnson, certain Consolidated
Statements of Operations information as a percentage of revenues during the
periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ---------------------
------------------------- JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................. 60.8 68.2 64.1 61.9 64.3
----- ----- ----- ----- -----
Gross profit................................... 39.2 31.8 35.9 38.1 35.7
Operating expenses:
Research and development..................... 7.6 9.1 10.6 9.0 10.4
Selling, general and administrative.......... 28.5 36.1 37.0 34.3 39.7
Nonrecurring items........................... 0.9 (8.4) 17.1 -- (3.6)
----- ----- ----- ----- -----
Total operating expenses............. 37.0 36.8 64.7 43.3 46.5
Income (loss) from operations.................. 2.2 (5.0) (28.8) (5.2) (10.9)
Interest expenses, net......................... 2.7 4.6 4.7 4.0 8.1
Provision (benefit) for income taxes........... (0.6) -- -- -- --
----- ----- ----- ----- -----
Net income (loss).............................. 0.1% (9.6)% (33.5)% (9.2)% (19.0)%
===== ===== ===== ===== =====
</TABLE>
28
<PAGE> 30
Revenues
Revenues decreased to $28.2 million in the first six months ended June 29,
1997 from $43.2 million in the six months ended June 30, 1996. The 1996 period
included $5.4 million of revenues for divisions of E.F. Johnson that were sold
in January 1996 and 1997. The remaining decrease is attributable to a $4.2
million decrease in sales of systems in North America, a $3.5 million decrease
in overall International Business and a $1.9 million decrease in the overall
North American Business & Industrial Business.
Revenue decreased to $79.0 million in 1996 from $88.9 million in 1995.
Revenue attributable to the Components Division that was sold in January 1996
was $0.8 million in 1996 and $15.5 million in 1995. Excluding the revenue from
the sold Components Division, overall revenue increased to $78.2 million in 1996
from $73.4 million in 1995. This $4.8 million increase is attributable to a
$10.9 million increase in sales of systems in North America, a $3.2 million
increase in Data Telemetry Products (this division was sold January 1997), a
$1.1 million increase in EFJ Services (this Division was discontinued
approximately at the time of Transcrypt's acquisition of E.F. Johnson), a $6.8
million decrease in the International Business, and a $3.6 million decrease in
the North American Business & Industrial Business.
International sales as a percentage of revenues were 29.1% and 27.1% during
the six-month periods ended June 30, 1997 and 1996, respectively, and 28.4% and
32.9% in 1996 and 1995, respectively.
Gross Profit
Cost of sales includes materials, labor, depreciation and overhead costs
associated with the production of E.F. Johnson's products, as well as shipping
costs. Gross profit decreased to $10.1 million in the six months ended June 29,
1997 from $16.4 million in the six months ended June 30, 1996. Gross margins
decreased to 35.7% in the six months ended June 30, 1997 from 38.1% in the same
period in 1996.
Gross profit remained constant at $28.3 million in 1996 and in 1995.
However, gross margins increased to 35.9% in 1996 from 31.8% in 1995, due
primarily to a change in product mix and an increased provision for surplus and
obsolete inventory products.
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. Research and development expenses decreased
to $2.9 million in the six months ended June 29, 1997 from $3.9 million in the
six months ended June 30, 1996, due primarily to a 23% reduction in engineering
staff necessitated by working capital constraints. Research and development
expenses as a percentage of revenues increased to 10.4% from 9.0% over this
period, due to lower revenues in the six months ended June 30, 1997.
Research and development expenses increased to $8.4 million in 1996 from
$8.1 million in 1995, due primarily to a $0.4 million increase in expenses for
the Data Telemetry Division, which was sold in January 1997. Research and
development expenses as a percentage of revenues increased to 10.6% from 9.1%
over this period, due to a decrease in revenue and an increase in research and
development expenses in 1996 compared to 1995.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses consist primarily of
salaries and related costs of selling and administrative personnel, including
sales commissions, travel expenses, cost of advertising, public relations, legal
and professional services and depreciation and amortization of SG&A assets. SG&A
expenses decreased to $11.2 million in the six months ended June 29, 1997 from
$14.8 million in the six months ended June 30, 1996, due primarily to a $2.0
million decrease in selling and marketing expenses resulting from a 28.7%
reduction in staff during this period and a decrease in selling expenses due to
a decrease in revenue. System training and support costs decreased by $400,000
as a result of lower systems sales volume and administrative expenses decreased
by $500,000. SG&A expenses related to divisions that were sold was $800,000
during the six months ended June 30, 1996, compared to $100,000 for the six
months June 30, 1997.
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<PAGE> 31
SG&A expenses as a percentage of revenues increased to 39.7% from 34.3% over
this period, due to lower revenues during the 1997 period.
SG&A expenses decreased to $29.2 million in 1996 from $32.1 million in
1995, due primarily to a $2.7 million provision for losses on accounts
receivable in 1995 compared to a $500,000 provision in 1996. SG&A expenses
related to divisions that were sold was $2.1 million in 1995, compared to $1.1
million in 1996. Also selling and marketing expenses increased by $1.0 million
in 1996 compared to 1995 and administrative expenses decreased by $0.7 million
during this period. SG&A expenses as a percentage of revenue increased to 37.0%
in 1996 from 36.1% in 1995, due to lower revenues during 1996.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited financial information in
dollars and as a percentage of revenues for Transcrypt for the six quarters
ended June 30, 1997. 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 Prospectus 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, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 2,580 $3,148 $ 3,547 $4,500 $ 4,728 $5,550
Cost of sales........................... 911 939 1,036 1,978 1,632 2,233
------ ------ ------ ------ ------ ------
Gross profit............................ 1,669 2,209 2,511 2,522 3,096 3,317
Operating expenses:
Research and development.............. 436 649 601 548 633 683
Sales and marketing................... 431 404 671 597 1,086 879
General and administrative............ 350 345 357 361 478 559
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 2,197 2,121
------ ------ ------ ------ ------ ------
Income (loss) from operations(3)........ 176 541 (4,959) 834 899 1196
Interest expense, net................... 18 32 29 52 (76) (159)
Provision for income taxes(4)........... -- -- (1,758) 230 292 380
------ ------ ------ ------ ------ ------
Net income (loss)(3).................... $ 158 $ 509 $(3,230) $ 552 $ 683 $ 975
====== ====== ====== ====== ====== ======
Income (loss) before Pro Forma taxes.... $ 158 $ 509 $(4,988) $ 782 $ 975 $1,355
Pro Forma and provision (benefit) for
income taxes.......................... 38 97 (1,758) 230 292 380
------ ------ ------ ------ ------ ------
Pro Forma and net income (loss)(3)...... $ 120 $ 412 $(3,230) $ 552 $ 683 $ 975
====== ====== ====== ====== ====== ======
Pro Forma and net income (loss) per
share(3)(5)........................... $ 0.02 $ 0.06 $ (0.46) $ 0.08 $ 0.07 $ 0.10
====== ====== ====== ====== ====== ======
Shares used to compute net income (loss)
per share(5).......................... 6,969 6,969 6,969 6,969 9,178 9,877
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 35.3 29.8 29.2 44.0 34.5 40.2
----- ----- ------ ----- ----- -----
Gross margin............................ 64.7 70.2 70.8 56.0 65.5 59.8
Operating expenses:
Research and development.............. 16.9 20.6 16.9 12.2 13.4 12.3
Sales and marketing................... 16.7 12.8 18.9 13.3 23.0 15.8
General and administrative............ 13.6 11.0 10.1 8.0 10.1 10.1
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 46.5 38.2
----- ----- ------ ----- ----- -----
Income (loss) from operations(3)........ 6.8 17.2 (139.8) 18.5 19.0 21.6
Interest expense, net................... 0.7 1.0 0.8 1.2 (1.6) (2.9)
Provision for income taxes(4)........... -- -- (49.6) 5.1 6.25 6.8
----- ----- ------ ----- ----- -----
Net income (loss)(3).................... 6.1% 16.2% (91.0)% 12.3% 14.4% 17.6%
===== ===== ====== ===== ===== =====
</TABLE>
30
<PAGE> 32
- ---------------
(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 "-- 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. See "Management -- 1996 Stock
Incentive Plan" and "Management -- Employment Agreements."
(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 expects to continue
experiencing, 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 may 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. See "Risk Factors -- Fluctuations in
Quarterly Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations and met its capital
requirements primarily through cash flow generated from operations, short-term
borrowings, long-term debt and an initial public offering completed on January
22, 1997. Transcrypt's operating activities used cash of $2.3 million in the
first six months of 1997, and generated cash of $1.3 million in the same period
of 1996. Cash used in operating activities in the first six months of 1997
consisted primarily of increases in accounts receivable and inventory, offset in
part by net income plus depreciation and an increase in accrued expenses. Cash
provided by operating activities in the first half of 1997 consisted primarily
of net income plus depreciation and amortization and a decrease in accounts
receivable, offset in part by a decrease in accrued expenses.
In connection with its entry into the stand-alone product market, the
Company is offering to certain of its customers extended credit terms on these
types of products. Such credit terms will likely result in increased cash used
in operating activities in the future.
Cash used for investing activities, attributable primarily to capital
expenditures in the first six months of 1997 and capital expenditures and
payments for non-compete agreements for the first six months of 1996, totaled
$1.6 million and $761,000, respectively. Capital expenditures consisted
primarily of computer and networking equipment, office furniture and
manufacturing equipment for both six month periods and expenses related to the
expansion of the Company's Lincoln facility during the second quarter of 1997.
In May 1997, the Company completed construction, begun in August 1996, of the
21,000 square foot expansion of its existing Lincoln facility, primarily to
accommodate additional manufacturing capacity. As of June 30, 1997, the Company
had no additional firm commitments for capital expenditures, although the
Company expects to commence construction related to a further expansion of its
facilities in the fourth quarter of 1997. See "Use of Proceeds."
The deferred tax assets totaling $2.0 million (which resulted primarily
from the stock option related special compensation expense of $5.4 million
incurred in September 1996) were 6.4% and 7.7% of total assets
31
<PAGE> 33
and stockholders' equity, respectively, at June 30, 1997. Based upon 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.
The Company's financing activities have consisted primarily of borrowings
under and payments on an industrial development revenue bond issue ("IDR"), term
and installment notes payable, a construction loan, bank lines of credit and
proceeds from an initial public offering completed in January 1997. Such
activities generated $16.6 million, net and used $388,000, net during the first
half of 1997 and the first half of 1996, respectively.
The Company's two term notes were secured by substantially all of the
Company's assets, with interest payable at the bank's regional money market rate
plus 0.5%. The installment note was secured by identifiable equipment and bore
interest at the bank's national prime rate plus 0.5%. The bank lines of credit
provided 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
at the bank's money market rate and is collateralized by substantially all of
the Company's assets. The Company paid off all of the outstanding balances on
the two term notes, the installment note and the bank lines of credit on January
27, 1997.
At June 29, 1997 the Company had outstanding $152,000 on its working
capital line of credit, which bore an interest rate of 8.5% at such date,
payable monthly. The line of credit renews annually and the outstanding balance
is payable on May 31 of each year.
The Company had outstanding on its IDR at December 31, 1996 a principal
amount of $850,000, which bore a fixed interest rate of 6.25%, was
non-amortizing and was scheduled to mature in January 2004. On March 25, 1997,
the $850,000 IDR and the Company's construction note payable of $870,000 were
repaid through the issuance of a new IDR totaling $2,850,000. The new IDR is due
in annual principal payments of $140,000 plus interest at a variable rate (4.5%
at June 30, 1997) from March 1, 1998 through March 1, 2007, increasing to annual
principal payments plus interest at a variable rate of $145,000 from March 1,
2008 through March 1, 2016, with the remaining principal and accrued interest
due on March 1, 2017. At June 30, 1997, the remaining net proceeds of $650,000
(net of debt offering costs and the aforementioned repayments) were held in
escrow for the Company pending the completion of the Company's construction
project and related purchases of certain fixed assets.
In connection with the Company's acquisition of E.F. Johnson effective July
31, 1997, the Company delivered an irrevocable letter of credit with a face
amount of $1.6 million on June 12, 1997 to provide additional collateral under a
surety bond issued by one of E.F. Johnson's bonding companies, and on July 22,
1997, the Company delivered an irrevocable standby letter of credit with a face
amount of $436,000 to one of E.F. Johnson's lenders to provide additional
collateral under certain indebtedness incurred by E.F. Johnson. Both letters of
credit are for a term of one year but are automatically extended annually by the
issuing bank unless otherwise notified by the Company.
As a result of the acquisition of E.F. Johnson, E.F. Johnson's revolving
credit line and term loan will be reflected as liabilities on the Company's
balance sheet. The term loan is secured by the machinery and equipment of E.F.
Johnson. As of June 29, 1997, E.F. Johnson had $10.8 million outstanding on the
revolving line with an interest rate of 175 basis points over the CoreStates
Bank, N.A. prime rate (8.5% at June 30, 1997) and $3.1 million outstanding on
the term loan, with a maturity in October 31, 1997 and an interest rate of 175
basis points over the CoreStates prime rate. The Company intends to refinance
the balances remaining outstanding on the revolving credit line and term loan
after anticipated repayments of part of such indebtedness from the net proceeds
of this offering. In the event that these amounts are not repaid from the
proceeds of the offering, the Company intends to refinance the entire
indebtedness. Management is currently negotiating the terms of such refinancing
with various financial institutions. At June 29, 1997, E.F. Johnson also had a
capital lease secured by land and buildings with a principal balance of $1.9
million outstanding. In connection with the acquisition of E.F. Johnson by the
Company, one of E.F. Johnson's lenders which was also a preferred stockholder of
E.F. Johnson agreed to cancel a 9.79% senior subordinated note due July 31, 1997
with a principal amount of $10.0 million and any accrued and unpaid interest
thereon.
32
<PAGE> 34
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.
Payables to vendors of E.F. Johnson amounted to $11.9 million upon the
Company's acquisition of E.F. Johnson on July 31, 1997. Management believes that
this level of trade payables was significantly higher than that normally
associated with E.F. Johnson's business as a result of decisions by E.F.
Johnson's prior management to defer payments to vendors. The Company is in the
process of working out scheduled payment terms with certain of the vendors.
Therefore, the Company's net cash flow is expected to be negative in the near
future as payables are worked out and brought to normal levels.
The Company believes that cash generated from operations and the net
proceeds from the sale of Common Stock by the Company in this offering, 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 through at least 1998.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 eliminates the presentation of primary and fully diluted earnings per share
("EPS") and requires presentation of basic and diluted EPS. The principal
difference between primary and basic EPS is that common stock equivalents are
not included in the weighted average number of shares outstanding used in the
computation of basic EPS. Diluted EPS is computed similarly to fully diluted
EPS. SFAS 128 is effective for periods ending after December 15, 1997, including
interim periods, and required restatements of all prior-period EPS data. Early
adoption is not permitted. Management has not yet determined the impact that
this statement will have on the Company.
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BUSINESS
GENERAL
The Company is a leading manufacturer of information security products and
wireless communications products and systems. The Company designs and
manufactures information security products which prevent unauthorized access to
sensitive voice and data communications. These products are based on a wide
range of analog scrambling and digital encryption technologies and are sold
principally to the land mobile radio, telephony and data security markets. The
Company manufactures a wide range of wireless communications products and
systems principally for the LMR market. Typical end users of the Company's
products include state, local and foreign governmental agencies, including
police and other public safety departments, and industrial and commercial
organizations such as taxi fleets, railroads and construction and oil and gas
companies.
The Company's objective is to leverage its expertise in information
security and digital communications technologies to provide new and expanded
business solutions for the telecommunications industry. The Company's expertise
in both analog and digital information security, including the ability to
provide "dual mode" analog and digital security in the same product, provides a
competitive advantage as communications products migrate from analog to digital
technology. The Company is also using its technology expertise to transition
from supplying principally "add-on" information security components for
installation in products manufactured by others to also providing complete,
stand-alone secure communications systems. For example, in August 1996, the
Company introduced a hand-held LMR which is compatible with "APCO 25," a
recently adopted industry standard for digital LMRs. The Company is also
developing a complete secure APCO 25 compliant LMR system incorporating this
product. The Company intends to continue developing key strategic relationships
in the areas of distribution, marketing and technology licensing and exploring
strategic acquisitions to complement and support the Company's products and
technologies.
In July 1997, the Company expanded its presence in the wireless
communications market by acquiring E.F. Johnson Company, an established provider
of products and systems for the LMR market. Through its E.F. Johnson subsidiary,
the Company designs, develops, manufactures and markets stationary LMR
transmitters/receivers (base stations or repeaters) and mobile and portable
radios. The Company sells its LMR products and systems principally in two broad
markets: B&I users and public safety and other governmental users.
Management believes that the E.F. Johnson acquisition has benefited the
Company by accelerating the implementation of its growth strategy. As a
significant participant in the LMR market, E.F. Johnson provides the Company
with a broad line of LMR products and systems and a platform of products to
leverage its information security and digital technologies. E.F. Johnson also
provides the Company with a significantly expanded distribution network in
domestic and overseas markets and with additional manufacturing capacity to
support increased sales of information security and wireless communications
products. Furthermore, the acquisition has provided the Company with additional
research and development resources, particularly in RF technology and other
technologies which management believes will provide further expansion
opportunities.
INFORMATION SECURITY INDUSTRY
Overview
The electronic information security industry is generally comprised of
products designed to protect the transmission of voice and data communications
through both wireless and wireline mediums. Without such protection, many forms
of electronic communications, such as LMR and cellular telephone conversations
and remote data communications, are vulnerable to interception and theft.
The 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 (such as law enforcement,
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fire, emergency medical and other public safety personnel) and large commercial
users (such as railroads, construction and oil companies) became economically
and functionally feasible.
Initially, all electronic communications were transmitted in analog format.
Analog transmissions 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.
The Company believes that the demand for voice security products is growing
due to a global increase in the use of wireless voice products and an increasing
public awareness of the security limitations of existing wireless products.
Wireless communication devices operate in specific, designated frequency bands,
and include cellular telephones, land mobile radios, 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. The Company
believes that public safety officers in particular, significant users of LMR
products, are concerned with the interception of their sensitive radio
conversations by eavesdroppers such as members of the press and criminals. In
addition, the recent interception and publication of supposedly private cellular
telephone conversations of public figures, as well as the widespread theft of
cellular telephone services through telephone "cloning," has increased public
awareness of the need for cellular security. As a result of these factors, the
Company believes that the demand for voice information security products will
continue to grow in the foreseeable future.
Manufacturers of information security products such as the Company
typically charge 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
transportation companies. Typical users for medium-level security devices
include business and industrial users and international customers for which an
export license is not required. High-level scrambling devices are used primarily
by public safety agencies and federal government personnel and international
customers who have obtained the required export license.
Land Mobile Radio Security Market
One of the earliest applications of information security technology outside
of the military was in protecting LMR voice communications. LMRs consist of
hand-held or mobile (vehicle mounted) two-way radios and a typical LMR system
consists of one or more base control stations networked with each other and with
multiple mobile 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, APCO recommended an industry standard for digital
LMR devices which would both meet the requirements of the FCC mandate and
provide solutions for 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
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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."
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" system proposed by Ericsson. Ericsson's
EDACS system is based on time division multiple access technology, compared with
the APCO 25 frequency division multiple access technology. The Company believes
that the APCO 25 standard is the only "open" (i.e., non-proprietary) digital LMR
transmission standard currently in use or proposed.
Telephony Security Market
Since its inception in 1983, cellular telephone service has grown rapidly
and become available to most of the population of the United States. According
to International Data Corporation, the U.S. cellular subscriber base is
projected to grow from approximately 40 million subscribers in 1996 to
approximately 57 million subscribers by 2000. 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 wireless
transmissions generally provide minimal or no security and allow eavesdropping
by even casual listeners with compatible scanners. The Company believes that
growth in the cellular telephony market, together with increasing awareness of
the ease of interception of cellular telephone calls, will lead to increasing
demand for cellular telephone voice security products.
Data Security Market
The Company believes that the demand for secure methods of transmitting
data electronically is growing and will continue to grow in the future. The
Company believes that during the past decade, the volume of sensitive,
proprietary information has grown significantly, along with the number of
reported incidents and severity of information theft and corporate espionage. In
addition, the shift from mainframe to distributed computing and the
proliferation of local-area networks ("LANs"), servers and interconnected LANs
or wide-area networks has raised significant new access and security issues.
While the client/server environment and availability of modem-based connections
has enabled information sharing from remote locations, the increased number of
access points into computer networks has generally made such networks
increasingly vulnerable. Individuals have been able to exploit system weaknesses
to gain unauthorized access to networks, data transmissions and individual
computers, and have at times used such access to alter or steal data or, in some
instances, to launch destructive attacks on stored information. The Company
expects that these factors will contribute to continued expansion in the data
security market.
WIRELESS COMMUNICATIONS INDUSTRY
Overview
The mobile wireless communications industry began in the mid-1930s when
police departments began using LMR systems to enable immediate communication
between headquarters and officers patrolling the community. As other public
safety agencies and commercial enterprises recognized the benefit of immediate
communications with their field personnel, as technological advances made LMR
systems more affordable, and as increasing amounts of spectrum were allocated
for LMR use, LMR dispatch service expanded beyond its traditional police and
fire applications to become an integral communications service for a variety of
government and commercial enterprises. Today, in addition to dispatch-oriented
LMR service, many other forms of mobile wireless communication technologies have
emerged and are continuing to be developed to meet the varied communication
needs of an increasingly mobile society, including paging, cellular telephone
and personal communication services. According to data published by Motorola,
the world-wide LMR installed base grew from approximately 33 million units in
1992 to 45 million units in 1995.
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Business and Industrial Systems Market
Business and industrial users include large commercial, industrial and
other private enterprises, such as utility and construction companies, oil
companies, railroads and universities which require rapid communications among
personnel spread out over relatively large geographic areas. While many B&I LMR
users purchase and operate entire systems for their own use, a large segment of
the B&I market consists of specialized mobile radio ("SMR") operators such as
NEXTEL Corp. and Centennial Communications, and their customers. SMR operators
build and lease private LMR systems on a for-profit basis and sell airtime to
end-users whose mobile communication needs can be served by renting or
purchasing subscriber units as opposed to purchasing an entire system, or who
are unable to obtain an FCC license to operate their own system. Traditionally,
end-users of SMR services have included taxi fleets, smaller construction
companies and delivery service companies. Currently, many SMR operators in the
larger metropolitan markets have begun to offer more consumer-oriented,
cellular-like SMR services.
There are two general types of LMR systems serving business and industrial
users, conventional and trunked, both of which operate on the specific frequency
bands allocated for such types of systems by the FCC. Conventional LMR systems
utilize a single channel to transmit and receive information. All users have
unrestricted access, similar to a "party" telephone line, and the user must
monitor the system and wait until the channel is unoccupied, which is a
relatively inefficient and unsecure system compared to trunked systems. Trunked
systems (including the Company's LTR products) combine multiple channels so that
when a user begins transmitting, an unoccupied channel is automatically
selected.
The development of trunked LMR systems and the allocation of additional
frequency spectrum in the 1970s triggered significant growth in LMR use for
business and industrial applications. In recent years, technological
developments by E.F. Johnson (included in its LTR products) and others have
enabled trunked LMR systems to be "networked," which involves multiple "sites"
linked together through a switch to provide extended geographic coverage. In
addition, many trunked subscriber units are also capable of functioning as
mobile telephones, communicating with wireline and cellular telephones through
interconnections to the public switched telephone network.
Public Safety and Other Government Users Market
Public safety and other government users includes state and local agencies,
such as law enforcement, fire and emergency medical personnel, and military and
non-military federal governmental agencies. Many of these users operate LMR
equipment which complies with specifications established by APCO, while the
remainder operate mostly conventional and non-APCO trunked LMRs. The most widely
used APCO standard is the APCO 16 standard established in 1979, which includes
specifications for 800 MHz transmission, analog voice modulation and a trunking
protocol for using the frequency spectrum. In 1988, E.F. Johnson entered the
market for APCO 16 products with its MultiNet(TM) system.
In response to increasing frequency spectrum capacity constraints and
resulting FCC bandwidth limitations, the APCO body and a number of LMR
manufacturers began in 1993 to develop the standards for a digital LMR system
known as APCO 25, which would meet the requirements of the FCC and also provide
solutions for several problems which troubled public safety LMR users. Although
public safety agencies are not currently required by the FCC or APCO to purchase
APCO 25 compliant LMR systems or otherwise adopt the APCO 25 standard, the
Company believes that APCO 25 compatibility will be one of the key purchasing
factors for public safety and other government LMR users. Furthermore, as LMR
users upgrade their existing APCO 16 systems to comply with the FCC-imposed
bandwidth limitations, the Company expects that demand for APCO 25 compliant LMR
systems will increase, due in part to the fact that APCO 25 systems are
backwardly compatible with much of the older APCO 16 equipment, allowing early
adopters of the APCO 25 standard to purchase new equipment without replacing
entire older systems.
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THE COMPANY'S STRATEGY
The Company believes that its expertise in information security and digital
wireless communications provides it with a competitive advantage as users of
communications products migrate from analog to digital technology. The Company's
objective is to leverage its expertise in information security and digital
communications technologies to provide new and expanded business solutions for
the telecommunications industry. The Company's strategy to accomplish its
objective includes the following elements:
Develop New Products Based on Existing Core Technologies. The Company has
developed or has acquired the rights to core technologies for scrambling analog
and encrypting digital signals in a variety of ways, most of which can be
adapted readily to new applications. This enables the Company to bring new
products to market quickly and with relatively low development costs. For
example, in August 1996, the Company was one of the first manufacturers to offer
a hand-held APCO 25 compliant LMR, which was developed in part using the
Company's core technologies. In April 1997, the Company introduced a product to
provide secure data transmission using the encryption technology developed for
the APCO 25 LMR and the Company's landline encryption device. The Company
believes that its core technologies, its application of those technologies and
its ability to create new products efficiently have provided, and will continue
to provide, a competitive advantage in responding to emerging markets for analog
and digital information security.
Offer Complete Secure Product Solutions. Until recently, the Company's
products consisted primarily of devices designed to be added to communications
products produced by other manufacturers. The Company intends to expand its
product lines to include more complete, stand-alone secure communications
solutions. The Company believes that providing complete solutions will allow it
to compete for larger orders than can be obtained for add-on products. The
Company is developing a secure, APCO 25 compliant LMR system based on its
Stealth 25 hand-held LMR and is developing digital base stations and repeaters
compatible with E.F. Johnson's APCO 16 analog system, MultiNet(TM).
Additionally, the Company provides Transcrypt-branded secure cellular telephones
and Voice Privacy Exchange Units to a regional Bell operating company, which
offers secure cellular service in one metropolitan area. The Company also is
developing data security products, which allow the Company to extend its high
speed, real-time encryption technology into the growing data security market.
Foster Key Strategic Relationships. The Company has entered into and
intends to continue to develop key strategic relationships with regard to
distribution, marketing and technology licensing. The Company plans to enhance
existing and identify new distribution channels for its information security
products and recently introduced radio products. For example, in August 1995,
the Company entered into an agreement to provide socket scrambler modules to
Motorola for resale under Motorola's name. In addition, the Company has licensed
key technologies from companies such as Motorola and Digital Voice Systems,
Inc., which have enabled the Company to integrate multiple advanced technologies
into its add-on products and its existing and proposed line of digital radios.
For example, the Company has licensed from Motorola the rights to use Motorola's
proprietary analog APCO 16 trunking technology (SmartNet(TM)) and certain
proprietary Motorola digital encryption algorithms in its LMR products, which
the Company anticipates will allow it to sell its products in additional
markets. The Company believes that these and future strategic relationships will
be important to both the Company's new product development and future growth.
Explore Strategic Acquisitions. The information security and wireless
industry is comprised primarily of a relatively small number of companies
comparable in size to the Company and several large competitors, such as
Motorola and Ericsson. The Company believes that, as the migration from analog
to digital technology progresses and the industry expands and evolves, there
will continue to be consolidation among the current competitors. Consequently,
the Company reviews opportunities to acquire businesses and technologies that
will complement its products and core technologies and expand its existing
customer base and manufacturing capability. In July 1997, the Company acquired
E.F. Johnson as a part of this strategy. The Company may consider future
acquisitions, although there are no current plans or agreements with respect to
any such transaction.
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THE E.F. JOHNSON ACQUISITION
The Company completed its acquisition of E.F. Johnson on July 31, 1997. The
Company undertook the E.F. Johnson acquisition due to its belief that the
acquisition will provide the Company with several strategic benefits consistent
with its overall business strategies, including the following:
Expanded Product Offerings. The E.F. Johnson acquisition will significantly
expand the Company's product line with the addition of E.F. Johnson's broad line
of LMR products. While Transcrypt produced information security products and
hand-held LMRs to complement LMR systems prior to the acquisition, it may now
manufacture and market entire LMR systems to end-users. Management believes that
the acquisition provides a platform for continued penetration by the Company
into the APCO 25 and LMR systems markets. Furthermore, the E.F. Johnson
acquisition will enable the Company to upgrade and strengthen E.F. Johnson's
product line by, among other things, integrating its digital technology and
encryption techniques into E.F. Johnson's products.
Convert E.F. Johnson's APCO 16 Analog Trunked Products into APCO 25 Digital
Products. The Company has developed or has acquired the rights to core
technologies for the development of APCO 25 digital radio products. The Company
has launched projects that will convert current E.F. Johnson analog-based APCO
16 MultiNet(TM) products for use in mobile LMRs, base stations and repeaters.
This project, expected to be completed in early 1998, will allow the Company to
manufacture and sell a complete line of APCO 25 digital radio products. The
Company intends to leverage the existing APCO 16 customer base and systems
implementation experience of E.F. Johnson to gain additional sales to the
existing, but migrating, APCO 16 market along with the emerging digital APCO 25
market.
Expanded Distribution Channels. The E.F. Johnson acquisition significantly
expands the distribution capabilities of the Company both domestically and
internationally. E.F. Johnson has domestic and international direct sales forces
and a network of more than 700 dealers in the U.S. and abroad. E.F. Johnson has
been in business since 1923 and, on average, the dealers have been carrying E.F.
Johnson products for more than 30 years. The "E.F. JOHNSON" brand name is well
recognized in the LMR industry. The Company intends to utilize E.F. Johnson's
reputation and distribution network to market Transcrypt's information security
and complete wireless communication products.
Increased Manufacturing Capacity. The addition of the E.F. Johnson
manufacturing facility in Waseca, Minnesota will provide for increased
manufacturing capacity. The Waseca factory is approximately 250,000 square feet
(180,000 of which is utilized directly by E.F. Johnson) and has extensive
testing capabilities and quality control procedures. As part of its integration
of E.F. Johnson, the Company intends to upgrade and automate the manufacturing
processes at the Waseca facility by investing substantial capital, which should
result in improved manufacturing efficiencies and product quality. The Company
believes that this facility provides the Company with the necessary capacity to
accommodate substantial growth in sales volume.
Experienced Research and Development Team. E.F. Johnson employs 44 research
and development engineers with broad experience in RF technology, computer
architecture, switch architecture, networking and software and hardware designs.
In addition, E.F. Johnson employs 14 systems applications design, manufacturing
and customer service engineers. E.F. Johnson's expertise in RF systems
engineering and the design of large LMR systems complements the Company's
abilities in digital signal processing, voice coding and encryption. Management
believes that the expanded team is equipped to extend and enhance the Company's
product offerings by coupling advanced digital technology into complete,
networked radio systems.
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CURRENT INFORMATION SECURITY PRODUCTS
The following table summarizes certain information concerning the Company's
principal information security products:
CURRENT LMR SECURITY PRODUCTS
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION / SECURITY LEVEL LIST PRICE
- -------------------------------------------------------------------------------- -------------
<S> <C> <C>
MODULAR ADD-ON SCRAMBLERS
SC20-400 Scrambler............... Single inversion scrambler / LOW $124
SC20-410 Scrambler............... Rolling code scrambler / MED $249
SC20-430 Scrambler............... Hopping code scrambler / MED $399
SC20-460 Scrambler............... Hopping code scrambler / HIGH $535-599
SC20-480 Scrambler............... Hopping code w/ synch / HIGH $599
SC20-500 Scrambler............... DSP-based scrambler /VERY HIGH $699
SOCKET SCRAMBLERS
350 OEM Scrambler................ Plug-in version of SC20-460/ HIGH $280
316 OEM Scrambler................ Plug-in version of SC20-460/ HIGH $200
460 OEM Scrambler................ Plug-in version of SC20-460/ HIGH $280
416 OEM Scrambler................ Plug-in version of SC20-460/ HIGH $275
SIGNALING
TR20-200 Series.................. RF signaling modules
TR20-800 Series.................. Complex signaling modules H$59-399
TR20-900 Series.................. Special man-down modules
APCO 25 DIGITAL RADIOS
Hand-held Stealth 25 Radio....... Digital radio / VERY HIGH $2,250-4,650
</TABLE>
CURRENT TELEPHONY SECURITY PRODUCTS
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION / SECURITY LEVEL LIST PRICE
- -------------------------------------------------------------------------------- -------------
<S> <C> <C>
CELLULAR SECURITY
Crypto Phone..................... Hopping code scrambler / HIGH $700-1,500
MicroTAC Scrambler - PX.......... Hopping code scrambler / HIGH $370-500
Mobile Scrambler - CX............ Hopping code scrambler / HIGH $250-380
DSP Scrambler GSU................ DSP-based scrambler/ VERY HIGH $370-500
Elite Scrambler.................. DSP-based scrambler/ VERY HIGH $500-700
LANDLINE SECURITY
Crypto Phone..................... DSP-based desktop phone/ VERY HIGH $1,095-1,295
LX30-33X0........................ Landline scrambler / HIGH $740-925
LX40-33X0........................ DSP-based landline scrambler/ VERY HIGH $1,095-1,295
VOICE PRIVACY EXCHANGE UNIT...... DSP-based PBX/switch / VERY HIGH $7,495
DME 9600/9603.................... DSP-based landline encryptor / VERY HIGH $1,495-1,995
</TABLE>
Transcrypt 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 it 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, including its copyrighted Crypto Voice Plus(R)
technology, which the Company believes provide high levels of information
security and sound quality, high (real-time) data transmission rates and low
power consumption. The Company believes that its core technologies provide it
with a competitive advantage in the information security marketplace. The
Company has implemented its core technologies into its scrambler modules and
other types of products within
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the Company's two major information security 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).
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.
Land Mobile Radio Security
The Company offers a variety of add-on LMR scrambling products featuring
the Company's 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).
In August 1996, the Company introduced a 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. In April 1997, the
Company introduced additional secure LMR models. The Company plans to introduce
in the fourth quarter of 1997 mobile radios that transmit in analog format for
the existing analog market. All of the Company's APCO 25 radios contain as
standard features the Company's voice scrambling and/or digital encryption
technology. 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 with Motorola's proprietary analog APCO 16 trunking
technology (SmartNet(TM)) and proprietary digital encryption algorithm. The
Company believes that such backward compatibility with Motorola's APCO 16
trunking technology will provide early adopters of the APCO 25 standard, such as
the federal government and many public safety agencies, with the ability to
purchase new equipment without replacing entire older systems.
Telephony Security
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 has
recently begun marketing complete, Transcrypt-branded, Motorola MicroTAC(TM) and
StarTAC(TM) cellular telephones upgraded to include the Company's advanced add-
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on scrambling modules. The Company believes that offering cellular telephone
security through a complete telephone product offers certain advantages over
add-on scrambler sales, such as presenting the customer with a single vendor,
overcoming customer resistance to surrendering their telephones during
installations and allowing the Company to market cellular security directly to
cellular service providers. 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.
CURRENT WIRELESS COMMUNICATIONS PRODUCTS
The following table summarizes certain information concerning the Company's
principal wireless communications products:
CURRENT BUSINESS & INDUSTRIAL
WIRELESS PRODUCTS
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION LIST PRICE
- ----------------------------------------- ------------------------------- ----------------
<S> <C> <C>
PORTABLE LMRS
7500 Series $300
7510/7540.............................. Conventional
Lynx $1,100-1,700
5876................................... Conventional
5877................................... Conventional and trunked SMR
Avenger $900-1,100
Avenger SI - 815X...................... Conventional and trunked SMR
Viking CX - 818X....................... Conventional and trunked SMR
Chameleon $1,000-1,150
Viking CL - 856/7X..................... Conventional and trunked SMR
MOBILE LMRS
Challenger $500-1,550
716X................................... Conventional
718X................................... Conventional and trunked SMR
Gator/Tiger $700-1,400
860X/861X.............................. Conventional and trunked SMR
863X/864X.............................. Conventional and trunked SMR
Viking/Summit $900-1,950
Viking GT - 965/7X..................... Conventional and trunked SMR
Viking HT - 965/7X..................... Conventional and trunked SMR
9800 Series $600-1,400
984X Low Tier.......................... Conventional
984/8/9X Mid Tier...................... Conventional and trunked SMR
REPEATERS
CR $4,000-5,000
1010................................... Conventional
1010................................... Conventional and trunked SMR
11X0................................... Conventional
Viking/Summit $7,500-12,500
Viking VX (200X)....................... Conventional
Viking VX (200X)....................... Conventional and trunked SMR
INFRASTRUCTURE
2000 Series $15,000-50,000
Control/Switch LTR..................... Trunked SMR
3000 Series $15,000-500,000
Control/Switch LTR..................... Trunked SMR
</TABLE>
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<PAGE> 44
CURRENT PUBLIC SAFETY AND
OTHER GOVERNMENT WIRELESS PRODUCTS
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION LIST PRICE
- ------------------------ -------------------------------------------- ------------------
<S> <C> <C>
PORTABLE LMRS
Avenger $900-1,300
Avenger SI - 815X..... Conventional and APCO 16 (MultiNet)
Viking CR - 818X...... Conventional and APCO 16 (MultiNet)
Chameleon $1,000-1,600
Viking CL - 856/7X.... Conventional and trunked SMR
Viking CM - 858/9X.... Conventional and APCO 16 (MultiNet)
Stealth $1,500-3,200
Stealth 25............ Conventional and APCO 16 (SmartNet)/APCO 25
Phantom............... Conventional and APCO 16 (SmartNet)
MOBILE LMRS
Viking/Summit $900-3,400
Summit - 975/7X....... Conventional and APCO 16 (MultiNet)
9800 Series $1,000-1,600
984/8X High Tier...... Conventional and APCO 16 (MultiNet)
REPEATERS
Viking/Summit $7,500-15,000
Summit................ Conventional and APCO 16 (MultiNet)
INFRASTRUCTURE
2000 Series $15,000-500,000
Control/Switch MN..... APCO 16 (MultiNet)
3000 Series $15,000-1 million
Control/Switch MN..... APCO 16 (MultiNet)
</TABLE>
The Company's wireless communications products are sold by the Company
primarily to LMR dealers and SMR operators and are used by B&I concerns and
public safety and other government users desiring point to multi-point
communications. Most of these products are sold through the Company's E.F.
Johnson subsidiary under the E.F. Johnson brand name. While there is overlap
between the types of products sold to B&I public safety and other and government
users, the following discussion summarizes the Company's products typically sold
to these types of users.
Business and Industrial Users
The Company serves the B&I user market primarily with its LTR and
conventional LMR product lines. The Company's conventional LMR product line is
sold into all of the LMR markets which the Company serves. Management believes
that significant conventional product niche markets continue to exist in the LMR
market for products with value added technology, such as signaling protocols,
security features and scrambling technology. The Company expects that it will
focus in these segments of the overall LMR market with these conventional
products in the future.
The Company's LTR product line incorporates E.F. Johnson's LTR trunking
protocols and include sub-audible signaling, which automatically selects a clear
or unoccupied channel, open architecture which is compatible with other analog
products, and transmission trunking which holds a channel for up to 20 seconds
of "hang time" after a transmission to allow for a reply.
The Company's products for the SMR market include mobile and portable
radios and repeaters, along with other infrastructure to provide a complete SMR
system. The Company targets smaller regional SMR operators who offer a
combination of dispatch and interconnect services and the traditional local SMR
43
<PAGE> 45
operators and dealers who serve local businesses primarily with dispatch
service. In serving this market, the Company relies heavily on its network of
dealers, many of whom are authorized by the Company as service centers and
provide installation, maintenance, repair and warranty service. The Company
believes that the end-users of these products value the low cost of point to
multi-point communications, flexibility of networking and support and
responsiveness of the Company and its dealers.
Public Safety and Other Government Users
The Company serves public safety and other government users primarily with
its APCO 16 MultiNet(TM) analog and APCO 25 digital product lines. The APCO 16
MultiNet(TM) was built upon the success of the E.F. Johnson LTR trunking
protocol. The Company believes that its MultiNet(TM) system, which links
together multiple sites for wide-area coverage, is a highquality, cost-effective
alternative to comparable APCO 16 systems produced by other manufacturers for
the same reasons as for the LTR product line, except that the Company utilizes a
proprietary architecture. The Company's system also offers many features
specifically designed for public safety users, such as emergency queuing, over
8,000 unique identification codes, automatic subscriber identification and five
levels of priority access. The Company provides a broad line of MultiNet(TM)
products, including repeaters, radio network terminals, system management
modules, duplex subscriber units, dispatcher consoles, audio and data link and
related accessories. E.F. Johnson's MultiNet(TM) systems are sold both
domestically and internationally.
PRODUCTS UNDER DEVELOPMENT
Consistent with the Company's development efforts for its existing
products, the Company designs new products around common core scrambling and
encryption technologies utilizing common signal processing platforms and
circuitry. Using this approach, the Company can generally incorporate
improvements in core technologies into its new products more quickly and with
relatively lower development costs compared to developing entire products
separately. The following discussion contains a summary of the Company's
principal products under 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.
LMR Security
The Company plans to introduce in the fourth quarter of 1997 additional LMR
models containing security features, including radios in the APCO 16 and APCO 25
configurations. See "-- Products Under Development -- Wireless Communications."
The Company is also developing an add-on LMR encryption module for use in OEM
equipment that would utilize the digital encryption standard called "DES." This
module will utilize the widely recognized DES algorithm for encoding
transmissions. The Company's analog radios, as well as its SmartNet(TM)
compatible radio, are, as of the date of this Prospectus, in the customer beta
test stage of development, as is the DES scrambler. The remaining LMR security
products under development are in the design and experimentation stage. From
time to time, the Company also has under development a number of custom security
modules, including those incorporating custom encryption and scrambling
algorithms.
Telephony Security
In January 1997, the Company began shipping in commercial quantities a
complete Transcrypt-branded Motorola StarTAC(TM) cellular telephone upgraded to
include the Company's advanced add-on scrambling modules. The Company intends to
introduce, in early 1998, a complete secure digital cellular telephone featuring
built-in digital encryption technology. The Company also plans to introduce
various other products in 1997, including a network server capable of
encryption/decryption for up to 24 simultaneous voice users, a scrambling
module, based on the DES encryption technology, for cellular telephone users and
five new landline security products. These products will be included in the
"Secure Office" suite of products. As of the date of this Prospectus, the
Company's "Secure Office" network server and DES analog scrambling module
44
<PAGE> 46
are in the final stages of product development, while the remaining telephony
security products under development are in the design and experimentation stage.
Data Security
The Company's planned data security products are expected to incorporate
real-time, high-speed digital encryption techniques originally developed for the
Company's digital radio products and landline encryption device (DME 9600).
Future data security products are expected to consist of a 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 desktop facsimile encryption devices. The Company plans on introducing
shortly a complete array of products that will allow for a company-wide security
solution called "Secure Office," which will be based on security products
employing real time, high speed encryption. The Secure Office will provide
combined voice and data security over shared facilities. The products will
consist of a switch solution for a LAN and PBX which will communicate with
computer modems, fax machines, cellular telephones, digitally encrypted landline
telephones and other LANs and PBXs at different locations. Communications will
be secured with proprietary encryption and scrambling algorithms. The Company
believes that alliances or acquisitions in this area could, in the future, allow
for rapid expansion in this growing marketplace.
Wireless Communications
The Company plans to introduce in the fourth quarter of 1997 additional
models of its hand-held digital LMRs containing different features, as well as a
line of mobile digital LMRs, all of which will comply with the APCO 25 standard.
The Company also plans to introduce in the fourth quarter additional mobile
radio models that transmit in analog format (e.g., APCO 16 and conventional
LMRs) for the existing analog market. All of these radios will contain as
standard features the Company's voice scrambling and/or digital encryption
technology. Such radios will be compatible and fully interoperable with older
analog LMRs, and some of the radios will offer compatibility with Motorola's
proprietary analog APCO 16 trunking technology (SmartNet(TM)) and Motorola's
digital encryption algorithms. Through E.F. Johnson, the Company is preparing to
manufacture both analog and digital LMR infrastructure and expects that base
stations and repeaters will be available by the Company as part of an integrated
system or stand alone equipment. The Company is also developing a trunked LMR
system known as "LTR-Net", that utilizes the Company's LTR trunking system in a
wide-area configuration, allowing linked communications over a much larger
geographic area than a single trunked system.
45
<PAGE> 47
CUSTOMERS
The following is a representative list of customers, directly or through
distributors, of the Company's information security and wireless communications
products. Other than Motorola, no customer accounted for more than 10% of
Transcrypt's aggregate sales during the six months ended June 30, 1997.
REPRESENTATIVE CUSTOMERS
STATE AND CITY PUBLIC SAFETY
Arizona Department of Public Safety
California Department of Justice
City of Carlsbad (New Mexico)
City of Jacksonville, Florida
City of Seattle
Delaware State Patrol
Hennepin County Sheriff (Minnesota)
Martin County, Florida
Iowa State Highway Patrol
Los Angeles Police Department
Michigan State Police
New York City Police Department
Oklahoma State Bureau of Narcotics
Vernal Police Department (Utah)
Washington State Department of Transportation
FEDERAL GOVERNMENT
Air Force
Army
Border Patrol
Customs Service
Department of Agriculture
Department of Defense
Department of Fish and Wildlife
Department of the Interior
Department of the Treasury
Drug Enforcement Agency
Federal Bureau of Investigation
National Forest Service
National Security Agency
Navy
Secret Service
White House Security
INTERNATIONAL
Australian Navy
Brazilian Presidential Security
Canadian Border Patrol
City of Edmonton, Alberta
Columbian Army
Egyptian National Police
German National Police
Hong Kong Police Force
London Metropolitan Police Force
Polish Border Guard
Portuguese National Police
Puerto Rico National Fire Department
Royal Canadian Mounted Police
Russian Ministry of Internal
Affairs
Turkish National Police
Vietnam Ministry of Interior
CELLULAR SERVICE PROVIDERS
AirTouch Communica-
tions, Inc.
AT&T Corporation
Bell Atlantic/NYNEX
Bell Mobility (Canada)
GTE MobileNet Service
GTE/Contel Cellular
Furst Group Inc.
Sprint Corporation
BUSINESS AND INDUSTRIAL
Amoco Oil Company
B.F. Goodrich, Inc.
Centennial Communications
Conoco Inc.
Exxon Oil Co.
Harris Corporation
Loral Terracom
Marathon Oil Co.
NEXTEL Corp.
Pillsbury Co.
Pitencrieff Communications
Salomon Brothers Inc
Shell Oil Co.
Union Pacific Railroad
LMR MANUFACTURERS
Allied Signal Corp.
Ericsson, Inc.
Glenayre Co.
Icom America, Inc.
Kenwood Radio Corp.
Maxon, Inc.
Midland International
Motorola, Inc.
Stanilite Pacific Ltd.
SEA Inc.
Yaesu USA, Inc.
MEDIA/ENTERTAINMENT
ABC News
Charlotte Observer
Time Warner Inc.
Walt Disney Co.
Warner Bros. Entertainment
46
<PAGE> 48
SALES AND MARKETING
The Company is in the process of merging the sales and marketing staffs of
Transcrypt and E.F. Johnson. However, the Company intends in the near term to
keep small discrete sales staffs for each of the companies and their respective
products, except with regard to APCO 25 products, which are being marketed by a
combined sales and marketing staff. The following discussion summarizes the
current sales and marketing approaches of each of Transcrypt and E.F. Johnson:
Transcrypt
Transcrypt sells its add-on products domestically through sales managers
primarily to distributors, OEMs and self-servicing end users, while complete
radio products are sold domestically primarily to end users. Transcrypt also
intends to market its radio and other complete products to its existing add-on
customer base. Transcrypt is actively seeking to hire additional sales personnel
for radio sales in the United States.
Transcrypt conducts international sales through sales managers each of whom
focus 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 approximately 67% and 49% of Transcrypt's revenues in the six
months ended June 30, 1997 and in 1996, respectively. International sales have
been, in most cases, denominated in U.S. dollars, and Transcrypt seeks to reduce
the risks of payment in foreign sales by obtaining advance payment and
confirmed, irrevocable letters of credit. See "Risk Factors -- Risks Associated
with International Sales."
Transcrypt 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 these products to end users. In 1996, sales of information security
products to distributors totaled 78% of aggregate domestic sales and 90% of
aggregate international sales. To date, Transcrypt 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.
Transcrypt's basic marketing strategy has been to increase market awareness
of the need for information security products and to convey the technical
capabilities of its products. Transcrypt 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.
E.F. Johnson
E.F. Johnson's sales and marketing functions are organized into two
separate direct sales forces, one which focuses on the North American market and
the other which focuses on the international market. For North American sales,
E.F. Johnson utilizes a direct sales force of account executives and sales
managers who sell its products primarily in the APCO market and to larger
dealers and SMR operators, and telemarketing personnel who sell primarily to
smaller dealers and SMR operators. E.F. Johnson sells its products and systems
internationally through a specialized international direct sales force.
International sales are made primarily in United States currency, and are
generally made in advance of shipment or secured by confirmed irrevocable
letters of credit.
LTR and conventional LMR products are sold primarily to an extensive
network of approximately 600 independently owned and operated dealers, some of
which are also SMR operators. The dealers typically carry other competitive
product lines as well. These products are distributed internationally primarily
through a network of approximately 100 dealers and distributors located in more
than 45 countries. Many of E.F. Johnson's dealers also are authorized as service
centers and provide installation, maintenance, repair and warranty service. On
average, these dealers have been carrying E.F. Johnson products for more than 30
years. In 1996, E.F. Johnson's top ten dealers accounted for approximately 22%
of its dealer sales. E.F. Johnson provides comprehensive dealer support,
including cooperative advertising programs, advertising materials, sales
training, service training and technical support.
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<PAGE> 49
The majority of stand-alone LMR product sales to both commercial and
governmental purchasers involves soliciting and responding to "requests for
proposals," commonly referred to as "RFPs." The RFP process for system sales has
a relatively long cycle time -- from proposal requirements to contract award is
typically at least one year, and installation and acceptance may take up to
another year. Suppliers of LMR systems are often required by public sector
end-users issuing RFPs 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.
CUSTOMER SERVICE
Transcrypt 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. Transcrypt 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.
Transcrypt installs, for a fee, all models of its scrambler modules into
customers' LMRs and telephones. 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 and
has developed these instructions for more than 2,000 OEM products, including
almost all commercially available two-way radio models sold worldwide.
E.F. Johnson's customer service group provides worldwide after-sales
service and support, including technical support through a toll-free telephone
number, on-site technical personnel for repairs and applications issues, 24-hour
turnaround for spare parts and extensive product training. Product training
includes classes, seminars and video programs available at both the customer's
site and E.F. Johnson's manufacturing facility. Such training provides
assistance to the end-user in the use, operation and application of E.F.
Johnson's LMR products and systems, and trains other end-users and dealers to
perform network programming changes and preventive maintenance and repair to
E.F. Johnson's products and systems. E.F. Johnson's LMR products and systems are
generally sold with a two-year warranty which covers parts and labor in North
America and only parts internationally. Broader warranty and service coverage is
provided in certain instances to private systems customers on a contractual
basis, usually for an additional charge.
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 information security product
sales in the near future. Sales to Motorola consist primarily of
Motorola-labeled LMR socket scrambling modules available for resale by Motorola
as an accessory to certain of Motorola's portable LMRs sold worldwide.
Motorola is also a key manufacturer of electronic components used by the
Company, including microprocessors and components used in most of the Company's
scramblers and LMRs, which are supplied to the Company through an electronics
wholesaler. Furthermore, pursuant to a product sales agreement executed in June
1996, 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, including StarTAC(TM) telephones, which the Company resells
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 June 30, 1997, purchased $550,000 in cellular telephones from Motorola
pursuant to such agreement. The Company may also purchase from Motorola base
stations, repeaters and other LMR infrastructure components in order to fulfill
systems contracts requiring compatibility with these devices.
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<PAGE> 50
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 that the
Company believes will be important to the success of certain of the Company's
existing and proposed APCO 25 compliant LMR products. The IPR License includes
rights to use Motorola's proprietary analog APCO 16 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. The Transcrypt IPR License provides for a fee of $1.8 million, of
which $200,000 was paid in September 1996 and $200,000 will be paid in September
1997.
E.F. Johnson, prior to its acquisition by the Company, obtained a license
of certain proprietary technology from Motorola relating to the development of
APCO 25 compliant digital LMRs. This license covered infrastructure and other
APCO 25 technology. E.F. Johnson's license calls for payment of $5.0 million to
Motorola, of which E.F. Johnson has paid $2.0 million to date. Subsequent to the
acquisition, Motorola has agreed to reduce E.F. Johnson's payment obligations by
$1.8 million and to expand the coverage of Transcrypt's license to SmartNet(TM)
to cover E.F. Johnson's products.
In addition to the direct benefits of the IPR License to the Company's APCO
25 development efforts, the Company believes that sales of its APCO 25 digital
LMR products have been, and expects that such sales will in the foreseeable
future be, substantially dependent upon Motorola's dominant position as a market
leader in the APCO 25 marketplace. Motorola is the largest manufacturer of APCO
25 compliant LMR products and has been the principal public supporter of the
APCO 25 digital transmission standard for the LMR market. Any reduction in such
support could lead to reduced demand for APCO 25 compliant LMR systems
generally.
INTELLECTUAL PROPERTY
Transcrypt 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.
Transcrypt has also applied for 11 additional domestic patents, relating to
high-end scrambling and encryption techniques and methods of integrating
after-market devices, such as the Company's modules, into OEM products. These
patent applications were the result of Transcrypt's expanded intellectual
property program, which is intended to enhance the patent protection afforded
the Company's new and advanced intellectual property rights. Transcrypt also
holds three registered trademarks related to the "Transcrypt" name and product
names. In addition to the rights held by Transcrypt, E.F. Johnson currently
holds 15 U.S. patents, 20 pending applications for U.S. patents, 10 patents in
foreign countries and 9 pending applications for patents in foreign countries.
These patents and applications cover a broad range of technologies, including
trunking protocols and a high speed data interface for LMR communications.
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, prior to its acquisition by the Company) 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
49
<PAGE> 51
Ericsson patents or any valid intellectual property right of others. The Company
has received an opinion of its patent counsel, Zarley, McKee, Thomte, Voorhees &
Sease, P.L.C., to the effect that, although patent infringement issues involve
inherent legal and factual uncertainties, in their opinion the Company's
products which comply with the APCO 25 standard do not infringe the patents
cited by Ericsson to date. 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, DVSI, Cycomm Corporation,
Glenayre Technologies and E.F. Johnson, prior to its acquisition by the Company,
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 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. See "Risk
Factors -- Limited Protection of Intellectual Property Rights; Risk of
Third-Party Claims of Infringement."
RESEARCH AND DEVELOPMENT
The Company has a research and development staff of 93 individuals,
including 52 engineers. Research and development efforts are organized along the
Company's two main product lines, information security and wireless
communications products. As part of the integration of E.F. Johnson's research
and development team with Transcrypt's research and development efforts, the
Company has focused significantly on integrating technologies in order to
provide new advanced products, taking advantage of the competencies of each of
the engineering staffs of Transcrypt and E.F. Johnson. For example, the combined
staffs are working on projects to integrate digital signal processing technology
into the E.F. Johnson radio systems, with the objective of expediting the
availability of a complete digital radio system interoperable with MultiNet(TM),
SmartNet(TM) and APCO Project 25. Other integration work underway relates to the
incorporation of Transcrypt's encryption technology into E.F. Johnson's radio
systems and the integration of E.F. Johnson's switching technologies into
Transcrypt's telephony products.
Information Security
Research and development personnel in the information security area 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. 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. 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.
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Wireless Communications
The wireless communications research and development organization is
located at E.F. Johnson's manufacturing facility. Research and development
personnel in the wireless communication area have expertise in RF technology,
computer architecture, switch architecture, networking, software and hardware
designs. Ongoing engineering efforts are focused on adding advanced features to
existing product lines and developing new, innovative system platforms.
Crossdisciplinary planning groups involving marketing, manufacturing and
engineering are used for product planning and definition. Present research and
development efforts are involved in upgrading existing product lines, including
the development of next generation repeaters and mobile radios for the Company's
principal product lines. This organization also has a staff of systems
applications design, manufacturing and customer service engineers that focuses
on design and implementation of custom radio systems.
MANUFACTURING
The Company's manufacturing operation consists of procurement of
commercially available subassemblies, parts and components, such as integrated
circuits, printed circuit boards and plastic and metal parts and their assembly
into finished products. Certain components and subassemblies are manufactured to
the Company's specific design criteria. All components and subassemblies are
inspected for mechanical and electrical compliance to Company specifications in
order to ensure high yield and high quality.
The Company manufactures all of its wireless communications products (other
than APCO 25 compliant products) at its Waseca, Minnesota facility. The Company
manufactures all of its information security products and APCO 25 compliant LMRs
at its facility in Lincoln, Nebraska. The Company's manufacturing processes at
its Lincoln facility have been certified as conforming to the "ISO 9001"
manufacturing standard.
The Company believes that its current manufacturing facility in Waseca
provides sufficient capacity to meet its needs at that location. The Company is
planning to expand its Lincoln facility during the fourth quarter of 1997 to
house additional administrative and manufacturing capacity. The Company believes
that this planned expansion and its existing facilities will be sufficient for
the Company's needs in the foreseeable future.
MATERIALS AND SUPPLIERS
Information Security
The Company obtains most of its electronic parts and components from one
principal distributor, Arrow/Schwebber Electronics Group. The Company believes
that concentrating its purchases through one principal distributor lowers the
Company's procurement costs and enhances its ability to control the quality of
these components and subassemblies. 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. See "Risk Factors -- Dependence on Suppliers."
Wireless Communications
Certain components and subassemblies used in the Company's wireless
communications products are presently available only from a single supplier or a
limited group of suppliers. To date, the Company has been able to obtain
adequate supplies of all components and subassemblies in a timely manner from
existing sources. Currently, Motorola is the sole supplier of a majority of the
semiconductors used in certain of the Company's LMR products. Although
historically E.F. Johnson has not experienced a disruption of Motorola's supply
of this product, disruption or termination of Motorola's supply of this product
would have a material adverse effect on the Company's operations.
With respect to other electronic parts, components and subassemblies, the
Company believes that alternative sources could be obtained to supply these
products, if necessary. Nevertheless, a prolonged inability
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to obtain certain components and subassemblies could impair customer
relationships and could have an adverse effect on the Company's operating
results. See "Risk Factors -- Dependence on Suppliers."
GOVERNMENT REGULATION AND EXPORT CONTROLS
Information Security
The Company's information security products are subject to export
restrictions administered by 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 105 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. Based on the Company's
prior experience in securing export approvals, the Company believes that it
maintains good relations with federal government agencies with jurisdiction over
its products. 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.
In November 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. The Department of Commerce is preparing draft proposed
final regulations similar to the interim regulations, but the timing for
issuance of the proposed regulations remains unclear.
In response to industry opposition to the President's Executive Order and
the interim regulations, Members of Congress have taken aggressive steps to
further expand exports of encryption products. In the 105th Congress,
legislation has been introduced in the House and Senate to eliminate "key"
controls imposed by the Administration on encryption exports. In the House of
Representatives, legislation eliminating the "key" recovery system and other
controls may be considered by the House of Representatives during the fall of
1997. This bill would lift many remaining controls on encryption exports,
including the Administration's "key" management requirement. President Clinton
opposes the House legislation and similar measures introduced in the Senate, on
the grounds that the bill's provisions eliminating the key recovery system would
seriously compromise national security, among other things, and may veto the
measure if enacted.
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In the Senate, the Administration is negotiating with Members of the Senate
Commerce Committee on the details of a different proposal that would also revise
the Administration's encryption technology export policy, but less drastically
than the House bill. Under the terms of the Commerce Committee bill, exporters
would be able to sell more powerful encryption products than those allowed under
the interim regulations. In addition, the federal government would determine on
a case by case basis whether law enforcement or national security issues warrant
possible government access to the encryption codes. However, it is unclear as of
the date of this Prospectus whether such negotiations will progress further.
Management cannot predict whether any legislation easing export controls will be
enacted, what form it will take or how the Executive Order or any such
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
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.
Wireless Communications
The construction, operation and acquisition of wireless communications
systems, as well as certain aspects of the performance of mobile communications
products are regulated by the FCC under the Communications Act of 1934, as
amended (the "Communications Act"), and the FCC's rules and policies adopted
thereunder. The FCC's regulations are highly technical and subject to change.
E.F. Johnson believes it and its products are in material compliance with all
FCC rules and policies.
The majority of the systems operated by E.F. Johnson's customers must
comply with the rules and regulations governing what has traditionally been
characterized as "private radio" or private carrier communications systems.
Licenses are issued to use frequencies on either a shared or exclusive basis,
depending upon the frequency band in which the system operates. Some of the
channels designated for exclusive use are employed on a for-profit basis; others
are used to satisfy internal communications requirements. Most SMR systems in
operation today use 800 MHz channels. Within the top 50 metropolitan markets,
900 MHz frequencies licensed for exclusive use systems have been made available
to both SMR and non-SMR licensees. Additional channels designated for exclusive
use were made available in the 220 MHz band for both commercial and
non-commercial systems.
Generally, SMR licenses are issued for five year terms, initially in blocks
of five channels, and may be renewed upon showing compliance with FCC rules and
may be revoked for cause. Such licenses typically are subject to channel
"loading" or usage requirements, such as loading a minimum of 70 subscriber
units for each channel within the initial five year term. If an SMR licensee
fails to meet its loading requirements in an area where existing applications
are pending on a wait list, the FCC may cancel the license, in whole or in part,
or deny a request to renew or expand the license. Other than loading
requirements, private systems are subject to similar restrictions. For example,
licenses for private systems are also issued for five year terms, may be renewed
upon showing compliance with FCC rules and may be revoked for cause.
E.F. Johnson also offers products in bands below 800 MHz where channels are
shared by multiple users in the same geographic area. In this "shared" or
conventional spectrum, there is no requirement for loading the channel to any
particular level in order to retain use of the frequencies. These channels are
generally used by entities satisfying traditional dispatch requirements in,
among others, the transportation and services industries.
The FCC is considering a number of regulatory changes that could affect the
mobile communications industry and E.F. Johnson's business. However, the
regulatory environment is inherently uncertain and changes in the regulatory
structure and laws and regulations can adversely affect the Company and its
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customers. Such changes could make existing or planned products of the Company
obsolete or unsaleable in one or more markets, which could have a material
adverse effect on the Company.
COMPETITION
Information Security
The markets for information security 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. The Company and Motorola are believed to be the only current
suppliers of APCO 25 LMR products as of the date of this Prospectus. Other
anticipated manufacturers of digital LMRs include Garmin Industries, Relm
Communications, Midland Systems and ADI, 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. See "-- Intellectual Property." 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.
Wireless Communications
In North America, Motorola and Ericsson are the leading providers of LMR
equipment. While the Company believes that it is the third largest supplier in
the North American LMR equipment market, its share of such market is relatively
small in comparison to Motorola and Ericsson. The remainder of the North
American LMR equipment market is divided among a large number of suppliers. The
Company competes in the wireless communications market on the basis of price,
technology and the flexibility, support and responsiveness which the Company
believes it and its dealers provide. Motorola and Ericsson have financial,
technical, marketing, sales, manufacturing, distribution and other resources
substantially greater than those of the Company, entrenched market positions in
certain segments of the North American LMR market in which the Company is active
and established trade names, trademarks, patents and other intellectual property
rights and substantial technological capabilities. Within the North American SMR
market, the Company's competitors include Motorola, Ericsson, Uniden America
Corporation ("Uniden"), Kenwood U.S.A. Corp., ICOM America, Inc. ("ICOM") and
Midland International Corp. The Company believes that cellular
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telephones and personal communication services devices provide, to some extent,
the same functionality as SMRs and other LMRs and, as such, may compete with the
Company's products. The Company believes that the international wireless
communications market is fragmented, with Motorola and Ericsson the dominant
suppliers. The Company also competes with Uniden and Hitachi Denshi, Ltd. in
Asia.
BACKLOG
The Company presently ships only a small amount of information security
products against backlog, due to the typically short manufacturing cycle of
these products. As a result, backlog amounts have historically been immaterial
to the Company, and the Company does not believe that backlog figures are
necessarily indicative of actual sales for future periods. As of June 30, 1997,
E.F. Johnson's backlog was $18.4 million. Management believes this amount was
elevated as a result of E.F. Johnson's inability to procure certain parts and
components from suppliers immediately prior to its acquisition by the Company
due to E.F. Johnson's difficult financial position at that time. However, due to
the generally longer manufacturing cycle time required for the production of
complete wireless communication products, the Company's overall backlog
subsequent is expected to be larger in the future compared to historical levels.
PROPERTIES
The Company occupies 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
expects to commence Phase 3 construction of additional administrative and
manufacturing facilities at its Lincoln, Nebraska campus in the fourth quarter
of 1997. In addition, the Company occupies a 250,000 square foot manufacturing
facility located on a 20 acre site in Waseca, Minnesota, pursuant to a sale and
lease back arrangement at a current annual sum of approximately $400,000,
subject to certain adjustments, with such annual sum increasing during the term
of the lease. This arrangement is scheduled to expire on July 31, 2002 and
includes an option by the Company to purchase the premises through October 1997.
The Company intends to exercise this option. See "Use of Proceeds." E.F. Johnson
formerly maintained its corporate headquarters in a leased facility located in
Burnsville, Minnesota. E.F. Johnson also leases additional sales and service
facilities in Hong Kong and Miami, Florida. The Company believes that its
current and planned facilities are adequate to meet its present and immediately
foreseeable needs.
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 "Risk Factors -- Limited Protection of
Intellectual Property Rights; Risk of Third-Party Claims of Infringement" and
"Business -- Intellectual Property."
EMPLOYEES
At August 31, 1997, the Company had 501 full-time equivalent employees,
including 104 at the Company's Lincoln, Nebraska facility, 312 at the Company's
Waseca, Minnesota facility, 58 at E.F. Johnson's former corporate headquarters
and approximately 27 field sales people, sales managers or staff located in the
sales territories in which they serve. The Company also utilizes temporary
employees when necessary to manage fluctuations in demand. None of the Company's
employees are covered by a collective bargaining agreement. Management believes
its employee relations are good.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
the date of this Prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- -------------------------- ---- -----------------------------------------------------
<S> <C> <C>
John T. Connor(1)(4)...... 53 Chairman of the Board of Directors
Jeffery L. Fuller(1)...... 43 President, Chief Executive Officer, Chief Operating
Officer and Director
Scott R. Bocklund......... 40 Senior Vice President of Finance and Chief Financial
Officer
William L. Fox............ 40 Senior Vice President of Sales and Business
Development
C. Eric Baumann........... 31 Vice President of Sales and Distribution
Frederick G. Hamer........ 53 Vice President of International Sales
Michael P. Wallace........ 36 Vice President of Operations
Joel K. Young............. 32 Vice President of Marketing and Engineering
Terry L. 48 Director (Vice Chairman of the Board of Directors)
Fairfield(1)(2)(4)......
Thomas E. Henning(3)...... 44 Director
Thomas R. Larsen(3)....... 53 Director
Thomas C. Smith(1)(3)..... 52 Director
Thomas R. Thomsen(2)(4)... 62 Director
Winston J. Wade(2)........ 58 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
(4) Member of the Nominating Committee.
John T. Connor led the investor group which purchased the Company from its
founder in 1991. Mr. Connor has served as Chairman of the Board of Directors of
the Company since its inception in December 1991 through the present and served
as Chief Executive Officer of the Company from December 1991 through July 1997.
From 1969 to June 1991, he held numerous senior management positions with
Deloitte & Touche LLP, an international accounting, tax and consulting firm, and
its predecessor firm, Touche Ross & Co., including National Director of Tax,
Associate Managing Partner, Mid-Atlantic Regional Managing Partner and member of
the management committee and Board of Directors.
Jeffery L. Fuller has served as the Company's President and Chief Operating
Officer since July 1995 and Chief Executive Officer since July 1997, and has
served as a director of the Company since July 1996. Mr. Fuller has served for
over 20 years in managerial positions at various wireless communications product
manufacturers, including Motorola, General Electric Mobile Radio Communications,
Inc. and Icom America, Inc. From January 1990 to July 1995, he held several
management positions with E.F. Johnson, serving most recently as Vice President
North American Sales and executive officer in charge of the North American
business unit.
Scott R. Bocklund joined the Company from E.F. Johnson as Senior Vice
President of Finance and Chief Financial Officer in July 1997. From October 1992
through July 1997, he served as Vice President, Finance for E.F. Johnson, and
has held other positions with E.F. Johnson since September 1989.
William L. Fox has served as the Company's Senior Vice President of Sales
and Business Development since August 1997. From March 1995 to July 1997, he
served as President of Real Estate Listing Service Corporation, an electronic
real estate listing service, and as President of Fox Consulting Corporation, an
outsourced services provider for the real estate industry. From February 1994 to
March 1995, he served as
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Manager of Strategic Services Consulting at KPMG Peat Marwick. From January 1992
to January 1994, he served as Project Manager for IBM China/Hong Kong.
C. Eric Baumann has served as the Company's Vice President of Sales and
Distribution since November 1996, and from January to November 1996 served as
Vice President of Sales and Marketing. From November 1995 to January 1996, he
served as the Vice President of Sales. From January 1990 to November 1995, he
held numerous positions at E.F. Johnson, serving most recently as Director North
American Sales and Telemetry.
Frederick G. Hamer joined the Company from E.F. Johnson as Vice President
of International Sales in July 1997. From October 1992 through July 1997, he
served as Vice President, International for E.F. Johnson, and from 1983 through
October 1992 he served as Vice President, Sales and Distribution for E.F.
Johnson.
Michael P. Wallace 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 joined the Company as Vice President of Engineering in
February 1996, and became Vice President of Marketing and Engineering in June
1997. From 1986 to January 1996, he held numerous positions with AT&T and the
former AT&T Bell Laboratories, telecommunications research companies, and
specialized in signaling, network implementation and voice processing. He served
most recently as District Manager, AT&T Business Communications Services. Mr.
Young has been awarded five patents on various telecommunications systems and
techniques.
Terry L. Fairfield has served as a director of the Company since December
1991. Since 1987, he has served as President and Chief Executive Officer of the
University of Nebraska Foundation, a nonprofit corporation. Mr. Fairfield also
serves as a director of Aliant Communications Inc., a Nasdaq listed, public
telecommunications company.
Thomas E. Henning was appointed to serve the remaining term as director for
Harold S. Myers, a former director of the Company who passed away in December
1996. Mr. Henning previously served as director of the Company from February
1993 through July 1996. Mr. Henning has, since February 1995, served as
President, Chief Executive Officer and director of The Security Mutual Life
Insurance Company, a life insurance, annuity and pension products company, and
also serves as a director of National Bank of Commerce, a subsidiary of First
Commerce Bancshares, Inc., a publicly-held, exchange-listed bank holding
company. From March 1990 to February 1995, Mr. Henning served as President and
Chief Operating Officer of The Security Mutual Life Insurance Company.
Thomas R. Larsen has served as a director of the Company since October 1995
and was originally appointed director as a representative of John Kuijvenhoven
and affiliates, principal stockholders of the Company. Mr. Larsen has been a
certified public accountant since 1975 and is currently President and Chief
Executive Officer of Larsen, Bryant & Porter, CPAs, P.C., a public accounting,
tax and consulting firm. Mr. Larsen is also a director of Smith Hayes Trust,
Inc., a mutual fund management company.
Thomas C. Smith has served as a director of the Company since October 1995
and was originally appointed director as a representative of the Farm Bureau
Insurance Company, a principal stockholder of the Company. Since December 1985,
he has been Chairman of the Board of Directors and President of Consolidated
Investment Corporation, the parent company of Smith Hayes Financial Services
Corporation, a financial services firm, and Conley Smith Inc., a registered
investment advisor. Mr. Smith is the chairman of both subsidiaries and President
of Smith Hayes Financial Services Corporation. He is also a director of the
Nebraska Research and Development Authority and First Mid-America Finance
Corporation.
Thomas R. Thomsen has served as a director of the Company since July 1995.
Since August 1995, he has served as Chairman of the Board of Directors and Chief
Executive Officer of Lithium Technology Corporation ("LTC"), a public company
that manufactures rechargeable batteries. Mr. Thomsen has served as a director
of LTC since February 1995. In January 1990, Mr. Thomsen retired as President of
AT&T Technologies, after holding numerous senior management positions including
director of Sandia Labs, Lucent Technologies,
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ATT Credit Corp. and Oliveti Inc. Mr. Thomsen also serves as a director of the
University of Nebraska Technology Park.
Winston J. Wade has served as a director of the Company since July 1996.
Since December 1996, he has served as Chief Executive Officer and Chief
Operating Officer of Binariang-Malaysia, a joint venture of U.S. West
International. From February to December 1996, he served as managing director of
BPL U.S. West Cellular in India. From 1963 to 1996, he held various positions
with Northwestern Bell, AT&T and U.S. West Communications. Mr. Wade also serves
as a director of the University of Nebraska Foundation.
The Board of Directors is divided into three classes, each of whose members
serve for a staggered three-year term. The Class I directors, Class II directors
and Class III directors serve until the annual meeting of the Company's
stockholders to be held in 2000, 1998 and 1999, respectively, and until their
respective successors are duly elected and have qualified or until their earlier
resignation or removal. The Board consists of two Class I directors (Messrs.
Larsen and Wade), three Class II directors (Messrs. Fuller, Thomsen and Smith)
and three Class III directors (Messrs. Connor, Henning and Fairfield). Executive
officers of the Company are appointed by the Board of Directors and serve at the
discretion of the Board. There are no familial relationships between any of the
directors or executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has four committees: an Audit Committee, a
Compensation Committee, a Nominating Committee and an Executive Committee. The
Audit Committee, comprised of Messrs. Henning, Smith and Larsen, oversees
actions taken by the Company's independent auditors and reviews the Company's
internal accounting controls. The Compensation Committee, comprised of Messrs.
Fairfield, Thomsen and Wade, is responsible for determining the Company's
compensation policies and administering the Company's compensation plans and
1996 Stock Incentive Plan. The Compensation Committee also reviews the
compensation levels of the Company's employees and makes recommendations to the
Board regarding changes in compensation. The Nominating Committee, comprised of
Messrs. Fairfield, Connor and Thomsen, recommends to the Board of Directors
nominees for election to the Board. The Executive Committee, comprised of
Messrs. Connor, Fuller, Fairfield and Smith, has the power to act on behalf of
the Board of Directors on matters pertaining to the day-to-day operations of the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Messrs.
Fairfield, Thomsen and Wade, none of whom has been or is an officer or employee
of the Company. No interlocking relationship exists between any member of the
Compensation Committee and any member of any other company's board of directors
or compensation committee.
DIRECTOR COMPENSATION
The members of the Company's Board of Directors are reimbursed for
out-of-pocket and travel expenses incurred in attending Board meetings. The
Company pays to each director who is not employed by the Company, subject to a
limitation of $5,000 plus expenses per calendar year, $1,000 for each board
meeting attended and $400 for each committee meeting attended.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation contains provisions that limit
the liability of its directors for monetary damages arising from a breach of
their fiduciary duty as directors to the fullest extent permitted by Delaware
law. Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has also entered into indemnification agreements with its
directors and
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officers. The indemnification agreements may require the Company, among other
things, to indemnify its directors and officers against certain liabilities that
may arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceedings against them as
to which they could be indemnified.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
EXECUTIVE COMPENSATION
The following table shows the compensation earned by or paid to, for
services rendered in 1996 and 1995 (or for such shorter period that the
individual was employed by the Company), the Company's Chief Executive Officer
during such years and the other executive officers who received salary and bonus
at a rate in excess of $100,000 in such years (collectively, the "Named
Executive Officers"). No other executive officer received salary and bonus at a
rate in excess of $100,000 from the Company during 1996.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------------------------ COMPENSATION ALL OTHER
BONUS ------------ COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR SALARY (1) OTHER ANNUAL OPTIONS # (8)
- ------------------------------- ----- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John T. Connor................. 1996 $172,885 $50,000 $210,000(3) -- $ 8,716
Chairman of the Board(2) 1995 169,808 86,830 -- -- 4,760
Jeffery L. Fuller.............. 1996 $156,923 $35,000 -- -- $ 1,440
President, Chief Executive
Officer(2), Chief
Operating 1995 66,346(4) 14,840 -- 163,829 25,066
Officer and Director
C. Eric Baumann................ 1996 $103,000 $ 2,000 $ 58,254(6) -- $ 14,705
Vice President of Sales 1995 15,054(5) 3,168 154(6) 32,766 --
and Distribution
Joel K. Young.................. 1996 $ 88,461(7) $ 2,000 -- 32,766 $ 36,852
Vice President of Engineering
</TABLE>
- ---------------
(1) Bonuses listed were earned during indicated year and paid during the
following year.
(2) Mr. Connor served as Chief Executive Officer through July 1997 and Mr.
Fuller served in this position from July 1997 through the present.
(3) Represents remaining amount due to Mr. Connor for deferred fees payable
under his employment contract.
(4) Represents salary at the rate of $150,000 per year beginning in July 1995.
(5) Represents salary at the rate of $103,000 per year beginning in November
1995.
(6) Represents sales commissions earned by Mr. Baumann.
(7) Represents salary at the rate of $100,000 per year beginning in February
1996.
(8) Represents contributions to the Company's 401(k) Profit Sharing & Savings
Plan, moving allowances and personal use of Company-owned automobiles.
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<PAGE> 61
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted to
the Named Executive Officers during 1996.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
PERCENT OF ASSUMED ANNUAL
NUMBER OF TOTAL RATE OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM (2)
OPTIONS EMPLOYEES PRICE PER EXPIRATION --------------------
NAME GRANTED(1) IN 1995 SHARE DATE 5% 10%
- ------------------------- ---------- ---------- --------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Joel K. Young............ 32,766 66.7% $3.05 02/01/06 $62,849 $159,273
</TABLE>
- ---------------
(1) Options vest 20% per year, at the end of each year, for five years
commencing on the date of grant.
(2) The amounts shown are hypothetical gains based on the indicated assumed
rates of appreciation of the Common Stock, compounded annually over a
ten-year period and assuming a market value of the Common Stock on the date
of grant of $3.05 per share. Actual gains, if any, on stock option exercises
are dependent on the future performance of the Common Stock and overall
stock market conditions. There can be no assurance that the Common Stock
will appreciate at any particular rate or at all in future years.
The following table sets forth the number and value of stock options held
by the Named Executive Officers at December 31, 1996. No stock options granted
to the Named Executive Officers were exercised during 1996.
FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END AT YEAR-END (1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------------------------------- ------------------------- -------------------------
<S> <C> <C>
John T. Connor................................. 389,257 / -- $2,817,056 / --
Jeffery L. Fuller.............................. 163,829 / -- $ 810,632 / --
C. Eric Baumann................................ 32,766 / -- $ 162,127 / --
Joel K. Young.................................. 32,766 / -- $ 162,127 / --
</TABLE>
- ---------------
(1) The Company's initial public offering of its Common Stock was completed in
January 1997. Therefore, solely for purposes of this table, the fair market
value per share of Common Stock at December 31, 1996 is assumed to be the
offering price per share in the initial public offering or $8.00.
1996 STOCK INCENTIVE PLAN
Effective as of September 6, 1996, the Company established the 1996 Stock
Incentive Plan (the "Plan"), in order to enable the Company to attract, retain
and motivate its employees, non-employee directors and independent contractors
by providing for or increasing the proprietary interests of such employees, non-
employee directors and independent contractors in the Company. The Company's
stockholders approved the Plan on September 18, 1996. Any person, including any
director of the Company, who is an employee of the Company or any of its
subsidiaries (an "Employee"), and any non-employee director (a "Non-Employee
Director") or independent contractor of the Company (an "Independent
Contractor," or, together with the Employees and the Non-Employee Directors, the
"Eligible Persons") is eligible to be considered for the issuance of (i) shares
of Common Stock, $0.01 par value per share, of the Company or of any other class
of security of the Company which is convertible into shares of the Company's
Common Stock ("Shares") or (ii) a right or interest with an exercise or
conversion privilege at a price related to the Common Stock or with a value
derived from the value of the Common Stock, which right or interest may, but
need not, constitute a "Derivative Security," as such term is defined in Rule
16a-1 promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as such Rule may be amended from time to time.
Effective as of June 30, 1996, the Company converted from a limited
partnership form of organization to a Subchapter "C" corporation (the
"Reorganization"). Pursuant to the Reorganization, the Company assumed all of
the outstanding options (the "Partnership Options") to acquire limited
partnership interests in
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<PAGE> 62
the Company's predecessor (the "Partnership"), which were granted pursuant to
the terms of the Partnership's 1992 Partnership Interest Option Plan (the
"Partnership Option Plan"), with each Partnership Option becoming an option to
acquire the same number of shares of Common Stock of the Company at the same
exercise price and on the same terms and conditions as set forth in the
Partnership Option Agreement entered into with the optionee. As a result of this
arrangement, the Company issued an aggregate of 716,916 options under the Plan
in the Reorganization in exchange for Partnership Options, all of which are
vested.
Grants made pursuant to the Plan are not restricted to any specified form
or structure and may include, without limitation, sales or bonuses of stock,
restricted stock, stock options, reload stock options, stock purchase warrants,
other rights to acquire stock, securities convertible into or redeemable for
stock, stock appreciation rights, limited stock appreciation rights, phantom
stock, dividend equivalents, performance units or performance shares, and a
grant made pursuant to the Plan may consist of one such security or benefit, or
two or more of them in tandem or in the alternative.
With certain exceptions regarding "performance based compensation" as
defined under Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"), the aggregate number of Shares which may be granted during any
calendar year to any one Eligible Person shall not exceed 400,000.
Subject to certain adjustment provisions under the Plan, the aggregate
number of Shares issued and issuable pursuant to all incentive stock options
granted under the Plan shall not exceed 1,200,000. Such maximum number does not
include the number of Shares subject to the unexercised portion of any incentive
stock option granted under the Plan that expires or is terminated. As of August
31, 1997, there were outstanding options to purchase 1,075,533 shares of Common
Stock with a weighted average exercise price of $4.39 per share.
The Plan will be administered by one or more committees of the Board of
Directors (any such committee, the "Committee") or, if no Committee is
designated by the Board of Directors, the Plan shall be administered by the
Board of Directors and all references herein to the Committee shall refer to the
Board of Directors. The Committee shall consist of (i) two or more directors,
each of whom is a "non-employee director" (as such term is defined in Rule 16b-3
promulgated under the Exchange Act, as such Rule may be amended from time to
time), (ii) with respect to any grant that is intended to qualify as
"performance based compensation" under Section 162(m) of the Code, the Committee
shall consist of two or more directors, each of whom is an "outside director"
(as such term is defined under Section 162(m) of the Code), and (iii) with
respect to any other grant, the Committee shall consist of one or more directors
(any of whom also may be an Eligible Person who has been granted or is eligible
to be granted Shares under the Plan).
Subject to the provisions of the Plan, the Committee is authorized to
determine which persons are Eligible Persons and to which of such Eligible
Persons, if any, and when Shares, options or other performance awards shall be
granted, the terms and conditions of any grant, including the number of Shares
subject thereto and the circumstances under which the award will become
exercisable or vested or are forfeited or expire. The Committee is also
authorized to interpret and construe the Plan and adopt, amend and rescind rules
and regulations relating to administration of the Plan.
The Plan provides that unless otherwise provided by the Committee in the
written agreement evidencing the award, the terms of any stock option granted
under the Plan shall provide (i) that the exercise price thereof shall not be
less than 100% of the market value of a share of Common Stock on the date the
option is granted, (ii) that the term of such option shall be ten years from the
date of grant, (iii) that, upon an Employee ceasing to be employed by the
Company for any reason other than death or disability, or a Non-Employee
Director ceasing to be a Non-Employee Director of the Company, an option shall
not become exercisable to an extent greater than it could have been exercised on
the date the Employee's employment by the Company, or the Non-Employee
Director's incumbency, as the case may be, ceased, and (iv) that the option
shall expire ninety (90) days after the Employee ceases to be employed with the
Company or a Non-Employee Director ceases to be a Non-Employee Director of the
Company.
Pursuant to the Plan, the Committee is permitted to allow or require the
recipient of any award under the Plan, including any Eligible Person who is a
director or officer of the Company, to pay the purchase price of
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<PAGE> 63
the Shares or other property issuable pursuant to such award, or such
recipient's tax withholding obligation with respect to such issuance, or both,
in whole or in part, by any one or more of the following means: the delivery of
cash; the delivery of other property deemed acceptable by the Committee; the
delivery of previously owned shares of capital stock of the Company (including
"pyramiding") or other property; a reduction in the amount of Shares or other
property otherwise issuable pursuant to such award; or the delivery of a
promissory note of the Eligible Person or of a third party, the terms and
conditions of which shall be determined by the Committee.
If the outstanding securities of the class then subject to this Plan are
increased, decreased or exchanged for or converted into cash, property or a
different number or kind of shares or securities, or if cash, property or shares
or securities are distributed in respect of such outstanding securities, in
either case as a result of a reorganization, merger, consolidation,
recapitalization, restructuring, reclassification, dividend (other than a
regular, quarterly cash dividend) or other distribution, stock split, reverse
stock split, spin-off or the like, or if substantially all of the property and
assets of the Company are sold, then, unless the terms of such transaction shall
provide otherwise, the Committee shall make appropriate and proportionate
adjustments in (i) the number and type of shares or other securities or cash or
other property that may be acquired pursuant to awards theretofore granted under
this Plan and the exercise or settlement price of such awards, and (ii) the
maximum number and type of shares or other securities that may be issued
pursuant to such awards thereafter granted under this Plan. The foregoing
adjustments shall be applied to any awards or Incentive Stock Options only to
the extent permitted by Sections 162(m) and 422 of the Code, respectively.
Pursuant to the Plan, the Board of Directors may amend or terminate the
Plan at any time and in any manner; provided, however, that no such amendment or
termination shall deprive the recipient of any award theretofore granted under
this Plan, without the consent of such recipient, of any of his or her rights
thereunder or with respect thereto; provided, further, that if an amendment to
the Plan would affect the Plan's compliance with Rule 16b-3 under the Exchange
Act or Section 422 or 162(m) or other applicable provisions of the Code, the
amendment shall be approved by the Company's stockholders to the extent required
to comply with Rule 16b-3 under the Exchange Act, Sections 422 and 162(m) of the
Code, or other applicable provisions of or rules under the Code.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with John T. Connor, the
Company's Chairman, for a term beginning on July 23, 1997 and ending December
31, 1999. The agreement sets forth a base salary of $200,000 per year and
provides for an annual bonus to be determined by the Board of Directors. The
agreement provides for certain benefits to Mr. Connor, including paid vacations,
pension benefits, qualified profit-sharing plans, employee group insurance and
disability insurance. The agreement includes a Noncompete Agreement, which is
effective during the term of the agreement.
The Company entered into an employment agreement with Jeffery L. Fuller,
the Company's President and Chief Executive Officer, for a term beginning July
31, 1997 and ending on December 31, 1999. The agreement sets forth a base salary
of $200,000 per year and provides for an annual bonus in an amount to be
determined by the Board of Directors, provided the Company meets or exceeds
certain performance objectives provided to the Board of Directors. Mr. Fuller is
entitled, at a minimum, to receive a bonus of 20% of his quarterly salary if the
Company meets its quarterly sales goals and an additional 20% if the Company
meets its quarterly profit goals. The agreement also provides for certain
benefits to Mr. Fuller, including paid vacations, pension benefits, qualified
profit-sharing plans, employee group insurance and disability insurance. The
agreement includes a Noncompete Agreement, which is effective during the term of
the agreement.
On September 30, 1996, the Company entered into employment agreements with
C. Eric Baumann, Michael P. Wallace and Joel K. Young, each of whom is a Company
Vice President. Each of these agreements sets forth base salaries and provide
for annual bonuses to be determined by the Board of Directors, and provide for
certain benefits, including paid vacations, pension benefits, qualified
profit-sharing plans, employee group insurance and disability insurance. The
term of these employment agreements continues for
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<PAGE> 64
two years, unless otherwise terminated pursuant to the terms of the agreements.
Each of these individuals has entered into a Noncompete Agreement effective
during the term of each individual's employment agreement.
On July 29, 1997, the Company entered into employment agreements with Scott
R. Bocklund, the Company's Senior Vice President of Finance and Chief Financial
Officer, and Fred Hamer, the Company's Vice President International. On July 28,
1997, the Company entered into an employment agreement with William L. Fox, the
Company's Senior Vice President of Sales and Business Development. Each of these
agreements sets forth base salaries. The employment agreements of Messrs.
Bocklund and Fox provide for an annual bonus based upon revenue and net income
achievements of the Company. Mr. Hamer's employment agreement provides for
payment of commissions if the Company's quarterly plans are achieved. All of
these agreements provide for certain benefits, including paid vacations, pension
benefits, qualified profit-sharing plans, employee group insurance and
disability insurance. The term of the employment agreements of Messrs. Bocklund
and Hamer expires July 31, 1998. The term of Mr. Fox's employment agreement
expires August 18, 1998. Each of these individuals has entered into a Noncompete
Agreement effective during the term of each individual's employment agreement.
401(K) PROFIT SHARING & SAVINGS PLAN
In July 1992, the Company established the Transcrypt International
Employees Profit Sharing & Savings Plan (the "Benefit Plan"). The Benefit Plan
consists of a 401(k) eligible savings plan, which is intended to comply with
Sections 401(a) and 401(k) of the Code and the applicable provisions of the
Employee Retirement Income Security Act of 1974, and a profit sharing plan.
Amounts contributed to the Benefit Plan are held under a trust intended to be
exempt from income tax pursuant to Section 501(a) of the Code. Employees of the
Company that have completed at least one year of service are eligible to
participate in the profit sharing plan and employees that have completed six
months of service are eligible to participate in the 401(k) eligible savings
plan. Participating employees are entitled to make pre-tax contributions to
their 401(k) accounts, subject to certain maximum annual limits imposed by law
($9,500 in 1996), and certain other limitations. The Company may elect to make a
discretionary contribution to the Benefit Plan each year. Employees are always
fully vested in their own contributions, and the Company's contributions vest in
participating employees over a six-year period at 20% per year beginning in the
second year. Distributions generally are payable in a lump-sum after retirement,
disability or death and, in certain circumstances, upon termination of
employment with the Company for other reasons. The Company has accrued
contributions to the Benefit Plan (including the 401(k) eligible savings plan
and profit sharing plan) of $65,450 in the six months ended June 30, 1997 and
paid $40,500 in 1995.
CERTAIN TRANSACTIONS
On January 15, 1994, the Company borrowed from the Nebraska Investment
Finance Authority ("NIFA") $850,000 in proceeds through the issuance of
Industrial Development Revenue Bonds, Series 1994, issued pursuant to a Trust
Indenture by and between NIFA and Norwest Bank of Nebraska, N.A., as trustee. In
connection with the borrowing, the Company executed a non-amortizing promissory
note under which the principal is due in a balloon payment in January 2004. The
note bears interest at a rate of 6.25% per annum, with interest due quarterly on
July 15, October 15, January 15 and April 15 of each year. The note is secured
by a Deed of Trust and Construction Security Agreement from the Company to the
trustee. The Company has used the proceeds from the NIFA borrowing to finance
the construction of its existing Lincoln facility. The bonds were privately
placed with Security National Bank of Superior, which is owned and controlled by
certain stockholders of the Company, including the Estate of Harold S. Myers,
David C. Myers and Steven Wright. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
In November 1993, the Company entered into a transaction with the
University of Nebraska Foundation ("UNF") in which the Company sold its then
existing facility to UNF and purchased from UNF approximately 10 acres of land
in the University of Nebraska Technology Park, which is being developed by UNF.
In the transaction, the Company transferred land and improvements valued at
$525,000 to UNF and
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<PAGE> 65
received from UNF $450,000 in cash and land valued at $75,000. The Company has
since constructed its current headquarters and manufacturing facility on the
land acquired from UNF. The value of the property sold by the Company in the
transaction was based upon an appraisal. The Company believes that the price it
paid for the land acquired in the transaction was approximately equal to UNF's
cost, and that such price was favorable to the Company as a result of UNF's
desire to induce the Company to become the first technology company to locate in
the University of Nebraska Technology Park. UNF owns 15.6% of the outstanding
Common Stock of the Company and Terry L. Fairfield, President and Chief
Executive Officer of UNF, is a director of the Company. The determination of the
values used in this transaction was made for the Company by Mr. Connor.
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<PAGE> 66
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of August
31, 1997 and as adjusted to reflect the sale of shares offered pursuant to this
Prospectus, by (i) each person (or group of affiliated persons) known by the
Company to be the beneficial owner of more than five percent of the Company's
Common Stock, (ii) each director, (iii) each Named Executive Officer, (iv) all
executive officers and directors as a group, and (v) each Selling Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OWNED AFTER
OFFERING(1)(2) OF OFFERING(1)(2)(3)
------------------- SHARES -------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
John T. Connor(5)............................ 1,895,785 18.0% 95,000(4) 1,705,785 13.6%
4800 NW 1st Street
Lincoln, Nebraska 68521
Janice K. Connor(6).......................... 1,506,528 14.9% 95,000 1,316,528 10.9%
4800 NW 1st Street
Lincoln, Nebraska 68521
University of Nebraska Foundation............ 1,106,622 10.9% 230,338 876,284 7.2%
1111 Lincoln Mall, Suite 200
P.O. Box 82555
Lincoln, Nebraska 68501-2555
First Commerce Bancshares, Inc.(7)........... 681,692 6.7% -- 681,692 5.6%
NBC Center, 3rd Floor
13th & O Streets
Lincoln, Nebraska 68508
Farm Bureau Insurance Company................ 605,898 6.0% 605,898 -- --
5400 University Avenue
Des Moines, Iowa 50265
NorAm Energy Corp. .......................... 457,856 4.5% 457,856 -- --
1111 Louisiana Street, 43rd Floor
Houston, Texas 77002
Estate of Harold S. Myers.................... 391,299 3.9% 91,299 300,000 2.5%
635 South 14th Street, Suite 320
Lincoln, Nebraska 68508
Intek Diversified Corporation................ 374,609 3.7% 374,609 --
351 North Albany Road
Moorestown, New Jersey 08057
The Security Mutual Life Insurance Company... 340,972 3.4% 50,000 290,972 2.4%
200 Centennial Mall North
Lincoln, Nebraska 68508
Jeffery L. Fuller(8)......................... 163,829 1.6% -- 163,829 1.3%
C. Eric Baumann(8)........................... 32,766 * -- 32,766 *
Joel K. Young(8)............................. 32,766 * -- 32,766 *
Thomas R. Larsen............................. -- -- -- -- --
Terry L. Fairfield(9)........................ -- -- -- -- --
Thomas E. Henning............................ 3,000 * -- 3,000 *
Thomas C. Smith.............................. 1,800 * -- 1,800 *
Thomas R. Thomsen(8)......................... 6,553 * -- 6,553 *
Winston J. Wade(8)(9)........................ 6,553 * -- 6,553 *
All executive officers and directors as a
group (14 persons)......................... 2,175,818 20.2% -- 1,985,818 15.5%
</TABLE>
65
<PAGE> 67
- ---------------
* Less than 1%.
(1) Shares of Common Stock issuable upon exercise of stock options currently
exercisable, or exercisable within 60 days of the date of this offering,
are deemed outstanding for computing the percentage of the person or entity
holding such securities but are not outstanding for computing the
percentage of any other person or entity. Except as indicated by footnote,
and subject to community property laws where applicable, the persons named
in the table above have sole voting and investment power, if any, with
respect to all shares of Common Stock shown as beneficially owned by them.
(2) Percentage ownership is based on 10,115,543 shares of Common Stock
outstanding prior to this offering and 12,210,543 shares of Common Stock
outstanding after this offering.
(3) Assumes that the Underwriters' over-allotment option is not exercised.
(4) Does not include shares which may be used to cover over-allotments, if any.
If the Underwriters exercise their over-allotment option in full, the
following Selling Stockholders will be selling the indicated number of
additional shares: John T. Connor (99,629 shares), Janice K. Connor (99,628
shares), University of Nebraska Foundation (169,662 shares), Jeffery L.
Fuller (25,000 shares), Joel K. Young (5,000 shares), Michael P. Wallace
(5,000 shares), C. Eric Baumann (5,000 shares), Stephen Cass (5,000 shares)
and Rebecca T. Schultz (1,600 shares).
(5) Includes 714,033 shares prior to the Offering and 619,033 shares after the
Offering which are held of record by Janice K. Connor and 95,358 shares
held by or in trust for other members of the Connor family, of which Mr.
Connor disclaims beneficial ownership, and 389,257 shares prior to the
Offering and 294,257 shares after the Offering which are issuable upon the
exercise of stock options that are exercisable within 60 days of the date
of this Prospectus.
(6) Includes 697,137 shares held of record by John T. Connor and 95,358 shares
held by or in trust for other members of the Connor family, of which Mrs.
Connor disclaims beneficial ownership.
(7) Shares of Common Stock owned by First Commerce Bancshares, Inc. include
217,542 shares of Non-Voting Common Stock. Pursuant to the Company's
Certificate of Incorporation, upon the disposition of the Non-Voting Common
Stock by First Commerce Bancshares, Inc., voting rights will be restored to
these shares. See "Description of Capital Stock."
(8) Consists of shares issuable upon the exercise of stock options that are
exercisable within 60 days of the date of this Prospectus.
(9) Does not include shares held by the University of Nebraska Foundation, for
which Mr. Fairfield serves as President and Chief Executive Officer and for
which Mr. Wade serves as director.
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<PAGE> 68
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $0.01 par value, and 3,000,000 shares of Preferred Stock, $0.01
par value. At August 31, 1997, there were 10,115,543 shares of Common Stock
outstanding, held of record by approximately 105 record holders.
COMMON STOCK
Holders of Common Stock (other than the Non-Voting Common Stock) are
entitled to one vote per share in all matters to be voted on by the
stockholders. Subject to preferences that may be applicable to any Preferred
Stock outstanding at the time, holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of the Company's liabilities and the liquidation
preference, if any, of any outstanding shares of Preferred Stock. Holders of
Common Stock have no preemptive rights and no rights to convert their Common
Stock into any other securities, and there are no redemption provisions with
respect to such shares. All of the outstanding shares of Common Stock are fully
paid and non-assessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future. Of the 20,000,000 shares of Common Stock
authorized by the Company's Certificate of Incorporation, 600,000 shares have
been authorized for issuance as Non-Voting Common Stock, of which 217,542 shares
were outstanding at June 30, 1997. All of the shares of Non-Voting Common Stock
were issued to a bank holding company which is restricted from owning more than
five percent of the voting Common Stock of the Company. Pursuant to the
Company's Certificate of Incorporation, upon the disposition of the outstanding
Non-Voting Common Stock by such stockholder, its subsidiaries or affiliates, or
any of their successors, the voting rights will be restored to these shares.
PREFERRED STOCK
The Board of Directors has the authority, without any further vote or
action by the stockholders, to issue up to 3,000,000 shares of Preferred Stock
from time to time in one or more series, to establish the number of shares to be
included in each such series, to fix the designations, preferences, limitations
and relative, participating, optional or other special rights and qualifications
or restrictions of the shares of each series, and to determine the voting
powers, if any of, such shares. The issuance of Preferred Stock could adversely
affect, among other things, the rights of existing stockholders or could delay
or prevent a change in control of the Company without further action by the
stockholders. The issuance of Preferred Stock could decrease the amount of
earnings and assets available for distribution to holders of Common Stock. In
addition, any such issuance could have the effect of delaying, deferring or
preventing a change in control of the Company and could make the removal of the
present management of the Company more difficult. The Company has no current
plans to issue any Preferred Stock.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Certain provisions of Delaware law and the Company's Certificate of
Incorporation could make more difficult the acquisition of the Company by means
of a tender offer, a proxy contest or otherwise and the removal of incumbent
officers and directors. These provisions are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to first negotiate
with the Company. The Company believes that the benefits of increased protection
of the Company's potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure the Company
outweigh the disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals could result in an improvement of their
terms.
The Company will be subject to the provisions of Section 203 of the
Delaware law. In general, this section prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an
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<PAGE> 69
"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's voting
stock. This provision may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders.
The Company's Certificate of Incorporation provides that, as of the date
following the effectiveness of this offering, the Board of Directors will be
divided into three classes, with staggered three-year terms. As a result, only
one class of directors will be elected at each annual meeting of stockholders of
the Company, with the other classes continuing for the remainder of their
three-year terms. The classification of the Board of Directors makes it more
difficult for the Company's stockholders to replace the Board of Directors, as
well as for another party to obtain control of the Company by replacing the
Board of Directors. Since the Board of Directors has the power to retain and
discharge officers of the Company, these provisions could also make it more
difficult for existing stockholders or another party to effect a change in
management. In addition, beginning on the date following the effectiveness of
this offering, the Company will not have cumulative voting rights in the
election of its directors and, accordingly, holders of more than 50% of the
shares voting will be able to elect all of the directors as each class of
directors' terms expires. See "Risk Factors -- Control by Existing
Stockholders."
The Company's Certificate of Incorporation provides that stockholder action
can be taken only at an annual or special meeting of stockholders and may not be
taken by written consent. The Certificate of Incorporation provides that special
meetings of stockholders can be called only by the Company's Board of Directors,
Chairman of the Board, President or Chief Executive Officer, or at the written
request of holders of not less than 25% of the voting shares. The Bylaws set
forth an advance notice procedure with regard to the nomination, other than by
or at the direction of the Board of Directors, of candidates for election as
directors and with regard to business to be brought before an annual meeting of
stockholders of the Company. The Company's Certificate of Incorporation provides
that the Board of Directors is authorized to amend the Bylaws only by the
affirmative vote of 60% or more of the entire Board of Directors, and the
Company's stockholders may amend the Bylaws only upon the affirmative vote of
the holders of 75% or more of the voting shares. In addition, the Company's
Certificate of Incorporation provides that certain articles of the Certificate
of Incorporation may be amended only upon the affirmative vote of the holders of
75% or more of the voting shares, including articles containing provisions
dealing with, among other things: (i) the ability of the Board of Directors to
establish a rights plan without specific approval of the stockholders; (ii) the
aforementioned voting requirements for amending the Bylaws; (iii) the size and
classification of the Board of Directors; (iv) the directors' indemnification
contained in the Certificate of Incorporation; (v) the duty of care of the
directors set forth in the Certificate of Incorporation; and (vi) the denial of
cumulative voting and stockholder action by written consent and the procedures
for calling special meetings.
Additionally, the Certificate of Incorporation authorizes the Board of
Directors to create and issue rights to purchase shares of the Company's
authorized but unissued capital stock or other securities. The Board is
authorized to determine, with respect to such rights, (i) the initial exercise
price; (ii) period for exercise; (iii) adjustment provisions in the event of a
business combination, reorganization or other transaction; (iv) redemption
provisions; and (v) provisions which deny exercise privileges to rights holders
who own at least a specified percentage of the outstanding capital stock of the
Company or which cause such rights to become void. The Board has not created or
issued any such rights and has no present intention to do so.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is Norwest
Bank Minnesota, N.A.
68
<PAGE> 70
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time. Upon
completion of this offering, the Company will have outstanding 12,210,543 shares
(12,441,624 shares assuming the full exercise of the Underwriters'
over-allotment option) of Common Stock, assuming no exercise of options granted
under the Company's 1996 Stock Incentive Plan. Of these shares, the 2,000,000
shares offered hereby by the Company and the 2,000,000 shares offered hereby by
the Selling Stockholders (2,184,481 shares and 2,415,519 shares, respectively,
assuming the Underwriters' over-allotment option is exercised in full) will be
freely tradeable without restriction under the Securities Act, unless purchased
by "affiliates" of the Company, as that term is defined for purposes of Rule 144
promulgated under the Securities Act (i.e., directors, officers and 10% or
greater stockholders). Of the remaining 8,210,543 shares (7,841,624 shares
assuming the full exercise of the Underwriters' over-allotment option),
3,883,270 shares are freely tradeable without restriction under the Securities
Act and 4,327,273 shares (3,958,354 shares assuming the Underwriters'
over-allotment option is exercised in full) are "restricted" securities under
the Securities Act (the "Restricted Shares"). Of the Restricted Shares,
1,411,528 are deemed to be held by "affiliates" of the Company.
None of the Restricted Shares may be sold in the public market unless
registered under the Securities Act or upon qualification under an exemption
from registration under Rules 144 or 701 promulgated under the Securities Act.
Under Rule 144 as currently in effect, any person (or persons whose shares are
aggregated), including an affiliate of the Company, who has beneficially owned
Restricted Shares for at least one year (including in certain circumstances the
holding period of a prior owner except an affiliate), and any person who is an
affiliate of the Company whose shares are not restricted securities, is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) one percent of the number of shares of Common Stock then
outstanding (approximately 122,105 shares immediately following this offering),
or (ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale. The
Company believes, under interpretations of Rules 144 and 145 under the
Securities Act, that the holding period applicable to 4,284,000 of the
Restricted Shares began on June 30, 1996, while the holding period applicable to
the remaining 43,273 of the Restricted Shares began on September 30, 1996.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
As of August 31, 1997, an aggregate of 706,533 shares of Common Stock were
issuable upon the exercise of vested stock options under the Company's 1996
Stock Incentive Plan and an aggregate of 369,000 shares were subject to issuance
upon the exercise of granted but unvested stock options. An aggregate of
1,200,000 shares of Common Stock have been reserved for issuance under the
Company's 1996 Stock Incentive Plan. In addition, the Company has filed a
registration statement on Form S-8 under the Securities Act covering the
1,200,000 shares of Common Stock reserved for issuance under the Company's 1996
Stock Incentive Plan. Accordingly, shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to affiliates
of the Company and the lock-up agreements described below, be available for sale
in the open market, subject to applicable vesting restrictions on stock options.
All directors, officers and holders, and selling stockholders of stock
options issued by the Company have entered into contractual "lock-up" agreements
providing that they will not offer, sell, pledge, contract to sell, grant any
option to purchase or otherwise dispose of any Common Stock, nor any options,
warrants or other securities convertible into or exercisable or exchangeable for
Common Stock, whether now owned or hereafter acquired, or in any manner transfer
all or a portion of the economic consequences associated with their ownership of
the Common Stock of the Company, for a period of 180 days after the effective
date of this offering, without the prior written consent of Furman Selz LLC. As
a result of these contractual restrictions, shares subject to lock-up agreements
will not be saleable until the agreements expire.
69
<PAGE> 71
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives
Furman Selz LLC, Montgomery Securities and Dain Bosworth Incorporated have
severally agreed to purchase from the Company and the Selling Stockholders the
following respective numbers of shares of Common Stock at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------- ----------------
<S> <C>
Furman Selz LLC....................................
Montgomery Securities..............................
Dain Bosworth Incorporated.........................
---------
Total.................................... 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share
to certain other dealers. After the public offering, the public offering price
and other selling terms may be changed by the Representatives of the
Underwriters.
The Company and certain Selling Stockholders have granted the Underwriters
an option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to 600,000 additional shares of Common Stock, at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by it shown in the above table bears to 4,000,000, and the
Company and such Selling Stockholders will be obligated, pursuant to the option,
to sell such shares to the Underwriters. The Underwriters may exercise such
option only to cover over-allotments, if any, made in connection with the sale
of the Common Stock offered hereby. If purchased, the Underwriters will offer
such additional shares on the same terms as those on which the 4,000,000 shares
of Common Stock are being offered.
In connection with this offering, certain Underwriters may engage in
passive market making transactions in the Common Stock on the Nasdaq National
Market immediately prior to the commencement of sales in this offering in
accordance with Rule 103 of Regulation M. Passive market making consists of
displaying bids on the Nasdaq National Market limited by the bid prices of
independent market makers and making purchases limited by such prices and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified period and
must be discontinued when such limit is reached. Passive market making may
stabilize the market price of the Common Stock at a level above that which might
otherwise prevail and, if commenced, may be discontinued at any time.
Subject to applicable limitations, the Underwriters, in connection with
this offering, may place bids for or make purchases of the Common Stock in the
open market or otherwise, for long or short account, or cover short positions
incurred, to stabilize, maintain or otherwise affect the price of the Common
Stock, which may be higher than the price that might otherwise prevail in the
open market. There can be no assurance that the price of the Common Stock will
be stabilized, or that stabilizing, if commenced, will not be discontinued at
any time. Subject to applicable limitations, the Underwriters may also place
bids or make purchases on behalf of the underwriting syndicate to reduce a short
position created in connection with this offering. The Underwriters are not
required to engage in these activities and may end these activities at any time.
70
<PAGE> 72
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act.
The Company and each of its directors and executive officers and certain of
its security holders, who in the aggregate will hold, following this offering,
1,416,328 shares of Common Stock and options to purchase 917,427 shares of
Common Stock, have agreed that they will not directly or indirectly, without the
prior written consent of Furman Selz LLC, offer, sell, offer to sell, contract
to sell, or otherwise dispose of any shares of Common Stock for a period of 180
days after the date of this Prospectus, except that the Company may issue, and
grant options to purchase, shares of Common Stock under its current stock option
and purchase plans and other currently outstanding options. In addition, the
Company may issue shares of Common Stock in connection with any acquisition of
another company if the terms of such issuance provide that such Common Stock
shall not be resold prior to the expiration of the 180-day period referenced in
the preceding sentence.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Manatt, Phelps & Phillips, LLP, Los Angeles, California. Certain
legal matters will be passed upon for the Underwriters by Katten Muchin & Zavis,
Chicago, Illinois.
The reference in this Prospectus set forth under the caption "Business --
Intellectual Property" to the opinion of Zarley, McKee, Thomte, Voorhees &
Sease, P.L.C., patent counsel for the Company, has been authorized by such
counsel and is included herein in reliance upon such counsel's authority as
experts on patent law.
EXPERTS
The financial statements of Transcrypt International, Inc. as of December
31, 1996 and 1995 and for each of the three years in the period ended December
31, 1996 included in this Prospectus have been audited by Coopers & Lybrand
L.L.P., independent auditors, as stated in their report, which is included
herein, and have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The consolidated financial statements of E.F. Johnson Company as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 included in this Prospectus have been so included in reliance
on the report (which contains an explanatory paragraph relating to E.F. Johnson
Company's ability to continue as a going concern as described in Note 1 to the
financial statements) of Price Waterhouse LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
71
<PAGE> 73
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement," which term shall include all amendments, exhibits, annexes and
schedules thereto) pursuant to the Securities Act, including the rules and
regulations promulgated thereunder, with respect to the shares of Common Stock
offered hereby. This Prospectus, which constitutes part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. All of these documents
may be inspected without charge at the public reference facilities maintained by
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such materials may be obtained from the Public Reference Section of
the Commission located at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The Commission maintains a World Wide Web site
at http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith, files reports, proxy or
information statements and other information with the Commission. Such reports,
proxy statements and other information can be inspected and copies may be
obtained from the sources indicated. In addition, the Company's Common Stock is
traded on the Nasdaq National Market, and the Company's reports, proxy or
information statements and other information may be inspected at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
72
<PAGE> 74
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
TRANSCRYPT INTERNATIONAL, INC.
Report of Independent Accountants................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997...... F-3
Consolidated Statements of Income (Loss) for the Years Ended December 31, 1994, 1995
and 1996 and the Six Months Ended June 30, 1996 and 1997......................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996 and the Six Months ended June 30, 1997.......... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995
and 1996 and the Six Months Ended June 30, 1996 and 1997......................... F-6
Notes to Consolidated Financial Statements.......................................... F-8
E.F. JOHNSON COMPANY
Report of Independent Accountants................................................... F-17
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 29, 1997...... F-18
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995
and 1996 and the Six Months Ended June 30, 1996 and June 29, 1997................ F-19
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended
December 31, 1994, 1995 and 1996 and the Six Months Ended June 30, 1996 and June
29, 1997......................................................................... F-20
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995
and 1996 and the Six Months Ended June 30, 1996 and June 29, 1997................ F-21
Notes to Consolidated Financial Statements.......................................... F-22
</TABLE>
F-1
<PAGE> 75
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, 1995 and 1996, 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, 1995 and 1996, 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-2
<PAGE> 76
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1995 1996 1997
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 291,712 $ 0 $12,699,287
Accounts receivable, net of allowance for doubtful
accounts of $181,659, $430,251 and $737,584,
respectively.................................... 1,923,441 4,215,403 7,923,373
Receivable -- employees and affiliate.............. 57,791 11,247 0
Inventory, net..................................... 1,119,763 2,261,381 2,718,157
Prepaid expenses................................... 60,323 59,949 176,430
Deferred tax assets................................ 0 196,234 320,287
----------- ---------- -----------
Total current assets....................... 3,453,030 6,744,214 23,837,534
Property, plant and equipment, at cost, net of
accumulated depreciation........................... 3,066,740 4,907,438 6,221,616
Deferred tax assets.................................. 0 1,723,190 1,713,190
Intangible assets, net of accumulated amortization... 1,002,860 38,137 39,722
Deferred initial public offering costs............... 0 568,049 0
Other assets......................................... 0 0 39,158
----------- ---------- -----------
$7,522,630 $13,981,028 $31,851,220
=========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft..................................... $ 0 $ 385,694 $ 0
Revolving line of credit........................... 0 1,022,000 152,000
Current portion of capitalized lease obligations... 15,570 13,803 6,893
Current portion of long-term debt.................. 412,656 581,959 0
Obligations under noncompete agreements............ 340,000 0 0
Accounts payable................................... 176,985 1,174,364 1,193,043
Income taxes payable............................... 0 151,894 52,496
Accrued expenses................................... 767,246 946,406 1,155,920
Deferred revenue................................... 56,814 0 0
----------- ---------- -----------
Total current liabilities.................. 1,769,271 4,276,120 2,560,352
Capitalized lease obligations, net of current
portion............................................ 15,099 1,296 0
Long-term debt, net of current portion............... 1,831,493 1,838,646 2,850,000
Revolving line of credit............................. 0 792,070 0
----------- ---------- -----------
3,615,863 6,908,132 5,410,352
----------- ---------- -----------
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 as of December 31, 1996 and
9,065,536 issued and outstanding as of June 30,
1997; 600,000 nonvoting shares authorized,
217,542 issued and outstanding)................. 0 67,831 92,831
Additional paid-in capital......................... 0 9,683,381 27,368,089
Retained deficit................................... 0 (2,678,316) (1,020,052)
----------- ---------- -----------
3,906,767 7,072,896 26,440,868
----------- ---------- -----------
$7,522,630 $13,981,028 $31,851,220
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 77
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND FOR THE SIX MONTHS
ENDED
JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX-MONTH SIX-MONTH
-------------------------------------- PERIOD ENDED PERIOD ENDED
1994 1995 1996 JUNE 30, 1996 JUNE 30, 1997
---------- ----------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues......................... $9,155,164 $ 8,128,200 $13,775,597 $ 5,727,829 $ 10,277,993
Cost of sales.................... 2,901,577 2,982,942 4,864,589 1,849,747 3,864,889
---------- ----------- ----------- ---------- -----------
Gross profit................ 6,253,587 5,145,258 8,911,008 3,878,082 6,413,104
Operating costs and expenses:
Research and development....... 1,179,540 1,953,068 2,233,753 1,084,618 1,315,789
Sales and marketing............ 1,589,632 2,109,393 2,102,753 835,122 1,965,212
General and administrative..... 1,074,408 1,190,751 1,412,856 694,311 1,037,460
Special compensation expense... 0 0 5,568,250 0 0
Amortization of acquisition
related expense............. 1,092,426 1,092,680 1,001,666 546,340 0
---------- ----------- ----------- ---------- -----------
Total operating costs and
expenses.................. 4,936,006 6,345,892 12,319,278 3,160,391 4,318,461
---------- ----------- ----------- ---------- -----------
Income (loss) from operations.... 1,317,581 (1,200,634) (3,408,270) 717,691 2,094,643
Interest income.................. 34,147 53,297 30,567 24,614 317,642
Interest expense................. (144,940) (190,403) (161,905) (75,109) (81,772)
---------- ----------- ----------- ---------- -----------
Income (loss) before income
taxes.......................... 1,206,788 (1,337,740) (3,539,608) 667,196 $ 2,330,513
Provision (benefit) for income
taxes.......................... 0 0 (1,528,488) 0 672,249
---------- ----------- ----------- ---------- -----------
Net income (loss)................ $1,206,788 $(1,337,740) $(2,011,120) $ 667,196 $ 1,658,264
========== =========== =========== ========== ===========
Pro forma information:
Income (loss) before pro forma
income taxes................ $(1,337,740) $(3,539,608) $ 667,196 $ 2,330,513
Pro forma and provision
(benefit) for income
taxes....................... (496,316) (1,393,209) 134,645 672,249
----------- ----------- ---------- -----------
Pro forma and net income
(loss)...................... $ (841,424) $(2,146,399) $ 532,551 $ 1,658,264
=========== =========== ========== ===========
Pro forma and net income (loss)
per share................... $ (.12) $ (.31) $ 0.08 $ 0.17
=========== =========== ========== ===========
Weighted average common and
common equivalent shares
outstanding................. 6,968,712 6,968,712 6,968,712 9,596,406
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 78
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL
PAR PAID-IN RETAINED PARTNERS'
UNITS SHARES VALUE CAPITAL DEFICIT CAPITAL TOTAL
---------- --------- ------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993........... 4,975,434 0 $ 0 $ 0 $ 0 $ 4,599,191 $ 4,599,191
Additional investment................ 200,000 0 0 0 0 1,000,007 1,000,007
Distributions........................ 0 0 0 0 0 (861,482) (861,482)
Net income........................... 0 0 0 0 0 1,206,788 1,206,788
---------- ---------- ------- ---------- ----------- ----------- -----------
Balance, December 31, 1994........... 5,175,434 0 0 0 0 5,944,504 5,944,504
Distributions........................ 0 0 0 0 0 (699,997) (699,997)
Net loss............................. 0 0 0 0 0 (1,337,740) (1,337,740)
---------- ---------- ------- ---------- ----------- ----------- -----------
Balance, December 31, 1995........... 5,175,434 0 0 0 0 3,906,767 3,906,767
Distributions........................ 0 0 0 0 0 (181,001) (181,001)
Net income (loss).................... 0 0 0 0 (2,678,316) 667,196 (2,011,120)
Issuance of stock in exchange for
units of the Predecessor........... (5,175,434) 5,175,434 51,754 4,341,208 0 (4,392,962) 0
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) 0 0 0
Special compensation -- options
issued............................. 0 0 0 5,358,250 0 0 5,358,250
---------- ---------- ------- ---------- ----------- ----------- -----------
Balance, December 31, 1996........... 0 6,783,078 67,831 9,683,381 (2,678,316) 0 7,072,896
---------- ---------- ------- ---------- ----------- ----------- -----------
(Unaudited)
Issuance of common stock........... 0 2,500,000 25,000 17,684,708 0 0 17,709,708
Net income......................... 0 0 0 0 1,658,264 0 1,658,264
---------- ---------- ------- ---------- ----------- ----------- -----------
Balance, June 30, 1997............. 0 9,283,078 $92,831 $27,368,089 $(1,020,052) $ 0 $26,440,868
========== ========== ======= ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 79
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD
YEAR ENDED DECEMBER 31, SIX-MONTH ENDED
--------------------------------------- PERIOD ENDED JUNE 30,
1994 1995 1996 JUNE 30, 1996 1997
----------- ----------- ----------- ------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............. $ 1,206,788 $(1,337,740) $(2,011,120) $ 667,196 $ 1,658,264
----------- ----------- ----------- ---------- -----------
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Special compensation
expense.................. 0 0 5,358,250 0 0
Depreciation............... 350,188 532,288 615,112 316,467 341,714
Amortization............... 1,092,426 1,092,680 1,001,666 615,890 0
Loss (gain) on sale of
fixed assets............. 42,449 (2,446) 5,526 8,590 0
Provisions for warranty,
bad debt and inventory
reserves................. 314,589 195,824 413,705 50,842 924,562
Deferred tax benefit....... 0 0 (1,919,424) 0 (114,053)
Changes in:
Accounts receivable........ (63,090) (672,929) (2,540,554) (145,880) (4,267,597)
Related party
receivables.............. 44,571 (4,290) 46,544 0 11,247
Inventory.................. (174,916) 82,850 (1,282,589) (14,995) (514,807)
Prepaid expenses and other
assets................... (125,026) 117,499 374 (156,848) (105,234)
Accounts payable........... 10,794 (116,470) 570,339 (8,866) (367,015)
Income taxes payable....... 0 0 151,894 0 (131,881)
Accrued expenses........... 195,147 264,010 23,960 (55,159) 256,517
Deferred revenue........... (35,394) (96,204) (56,814) (2,192) 0
----------- ----------- ----------- ---------- -----------
Total adjustments..... 1,651,738 1,392,812 2,387,989 607,849 (3,966,547)
----------- ----------- ----------- ---------- -----------
Net cash provided by
operating
activities.......... 2,858,526 55,072 376,869 1,275,045 (2,308,283)
----------- ----------- ----------- ---------- -----------
Cash flows from investing
activities:
Issue notes receivable........ (1,833) (11,846) 0 0 0
Payments received on note
receivable................. 5,000 10,394 0 0 0
Proceeds from sale of fixed
assets..................... 591,084 37,089 30,833 0 0
Purchase of fixed assets...... (1,992,017) (1,029,471) (2,118,400) (540,798) (1,572,357)
Increase in patents and
trademarks................. (2,993) (904) (36,943) 0 0
Payments under noncompete
agreement.................. (340,000) (340,000) (340,000) (170,000) 0
----------- ----------- ----------- ---------- -----------
Net cash used in
investing
activities.......... (1,740,759) (1,334,738) (2,464,510) (760,798) (1,572,357)
----------- ----------- ----------- ---------- -----------
</TABLE>
F-6
<PAGE> 80
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD
YEAR ENDED DECEMBER 31, SIX-MONTH ENDED
--------------------------------------- PERIOD ENDED JUNE 30,
1994 1995 1996 JUNE 30, 1996 1997
----------- ----------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing
activities:
Issuance of industrial
development revenue
bonds...................... 0 0 0 0 2,850,000
Payment of industrial
development revenue
bonds...................... 0 0 0 0 (850,000)
Debt issuance costs of
industrial development
revenue bonds.............. 0 0 0 0 (75,493)
Borrowings on term loan and
operating line of credit... 2,363,000 1,016,000 2,398,867 0 0
Payments on term loan and
operating line of credit... (1,743,792) (866,708) (408,341) (206,970) (3,236,738)
Principal payments on
capitalized leases......... (13,648) (13,377) (15,570) 0 0
Proceeds from issuance of
partnership interests...... 1,000,007 0 0 0 0
Partnership distributions
paid....................... (861,482) (699,997) (181,001) (181,001) 0
Bank overdraft................ 0 0 385,694 0 (385,694)
Deferred initial public
offering costs............. 0 0 (383,720)
Proceeds from IPO, net........ 0 0 0 0 18,277,852
----------- ----------- ----------- ---------- -----------
Net cash provided by
(used in) financing
activities.......... 744,085 (564,082) 1,795,929 (387,971) 16,579,927
----------- ----------- ----------- ---------- -----------
Net increase (decrease) in cash
and cash equivalents.......... 1,861,852 (1,843,748) (291,712) 126,276 12,699,287
Cash and cash equivalents,
beginning of period........... 273,608 2,135,460 291,712 291,712 0
----------- ----------- ----------- ---------- -----------
Cash and cash equivalents, end
of period..................... $ 2,135,460 $ 291,712 $ 0 $ 417,988 $12,699,287
=========== =========== =========== ========== ===========
Supplemental disclosures of cash
flow information:
Interest paid, net of amounts
capitalized................ $ 137,481 $ 190,403 $ 162,649 $ 76,132 $ 72,547
Income taxes paid............. $ 0 $ 0 $ 293,700 $ 6,500 $ 885,700
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-7
<PAGE> 81
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
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.
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, 1994, 1995 and 1996, $28,776, $0 and
$7,210 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.
F-8
<PAGE> 82
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Europe................................. $2,580,000 $2,464,000 $2,501,000
Middle East............................ 1,692,000 2,276,000 1,831,000
Latin America.......................... 978,000 1,060,000 2,412,000
---------- ---------- ----------
$5,250,000 $5,800,000 $6,744,000
========== ========== ==========
</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.
F-9
<PAGE> 83
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition as of June 30, 1997 and the results of operations and
cash flows for the six months ended June 30, 1996 and 1997, as presented in the
accompanying unaudited condensed consolidated financial statements.
2. INVENTORY
The following is a summary of inventory at June 30, 1997, December 31, 1996
and 1995:
<TABLE>
<CAPTION>
JUNE 30,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Raw materials and supplies, net of reserve for
obsolescence
of $82,041, $38,848 and $96,879, respectively........ $ 879,587 $1,316,932 $1,531,905
Work in process........................................ 101,092 715,032 536,044
Finished goods......................................... 139,084 229,417 650,208
---------- ---------- ----------
$1,119,763 $2,261,381 $2,718,157
========== ========== ==========
</TABLE>
F-10
<PAGE> 84
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Land................................................ $ 150,000 $ 150,000
Building............................................ 1,302,388 1,302,388
Equipment........................................... 2,325,690 3,921,095
Leased equipment.................................... 74,329 74,329
Automobiles......................................... 64,647 31,598
Furniture and fixtures.............................. 371,160 396,362
Construction in progress............................ 0 797,060
---------- ----------
4,288,214 6,672,832
Less accumulated depreciation and amortization.... 1,221,474 1,765,394
---------- ----------
$3,066,740 $4,907,438
========== ==========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<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.............................. 5,522 42,465
---------- ----------
5,468,578 5,505,521
Less accumulated amortization..................... 4,465,718 5,467,384
---------- ----------
$1,002,860 $ 38,137
========== ==========
</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-11
<PAGE> 85
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1996 and June 30, 1997 consists of
the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <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................ $ 437,358 $ 251,068 $ 0
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...................................... 507,653 375,723 0
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..................................... 449,138 359,017 0
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 0
Industrial development revenue bonds payable to bank
due in annual principal payments of $140,000, plus
interest at a variable rate (4.5% at June 30,
1997) starting March 1, 1998 through March 1,
2007, increasing to annual principal payments of
$145,000 due March 1, 2008 through March 1, 2016
with the remaining principal and accrued interest
due March 1, 2017................................. 0 0 2,850,000
Construction note payable to bank, due in August
1997, including interest at 8.75%................. 0 584,797 0
---------- ---------- ----------
2,244,149 2,420,605 2,850,000
Less current portion.............................. 412,656 581,959 0
---------- ---------- ----------
$1,831,493 $1,838,646 $2,850,000
========== ========== ==========
</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-12
<PAGE> 86
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
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>
<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>
<S> <C>
Deferred tax assets:
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.
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Payroll, bonuses and employee benefits................. $211,193 $304,297
Warranty reserve....................................... 64,455 73,316
Commissions............................................ 265,440 101,163
Special compensation expense........................... 0 210,000
Other expenses......................................... 226,158 257,630
-------- --------
$767,246 $946,406
======== ========
</TABLE>
F-13
<PAGE> 87
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-14
<PAGE> 88
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. OPTION PLANS (CONTINUED)
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:
<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 ears
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
-------- ----- -------
Granted............................................... 276,600 $8.00 --
Exercised............................................. 0
Forfeited............................................. 0
-------- ----- -------
Balance at June 30, 1997 (Unaudited).................... 993,516 $3.53 716,916
======== ===== =======
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISABLE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
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>
F-15
<PAGE> 89
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $45,000, $27,500 and $60,000 for
the years ended December 31, 1994, 1995 and 1996, 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 $11,000, $13,000 and $15,700 for the years ended
December 31, 1994, 1995 and 1996, respectively.
13. CONCENTRATIONS
Sales to major customers totaling over $200,000 each were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- -------- ----------
<S> <C> <C> <C>
Percent of total sales.......................... 49% 44% 50%
Number of major customers....................... 6 7 12
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 $726,000 and $1,878,000 in 1995 and 1996,
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-16
<PAGE> 90
REPORT OF INDEPENDENT ACCOUNTANTS
May 2, 1997
To the Board of Directors
and Shareholders of
E.F. Johnson Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity (deficit) and
redeemable preferred stock and of cash flows present fairly, in all material
respects, the financial position of E.F. Johnson Company and its subsidiaries at
December 31, 1996 and 1995 and the 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. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company is in default under several debt
arrangements, has suffered recurring losses from operations and has a capital
deficiency. These factors raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
F-17
<PAGE> 91
E.F. JOHNSON COMPANY
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 29,
1995 1996 1997
------------ -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................... $ 86 $ 176 $ 76
Trade accounts receivable, net of allowance for
doubtful accounts of $2,699, $1,320 and $1,432,
respectively........................................ 13,929 9,468 8,460
Receivable from sale of assets......................... 14,159 799 229
Receivables from related parties....................... 286 463 463
Inventories............................................ 17,996 13,240 11,173
Prepaid expenses and other current assets.............. 1,498 2,106 1,638
------- ------- -------
Total current assets........................... 47,954 26,252 22,039
Property, plant and equipment, net....................... 10,095 7,040 6,233
Intangible assets, net................................... 12,877 6,170 5,618
Receivables from related parties......................... 1,748 1,624 1,624
Other assets............................................. 1,184 1,666 619
------- ------- -------
Total assets................................... $ 73,858 $ 42,752 $ 36,133
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt................... $ 2,902 $ 11,623 $ 24,152
Debt in default subject to acceleration................ 13,864
Accounts payable....................................... 9,096 10,551 10,061
Technology and license purchase payables............... 1,408 3,604 3,552
Advance billings....................................... 2,888 3,586 3,063
Accrued compensation and benefits...................... 2,344 2,642 2,107
Other accrued expenses................................. 3,593 4,391 4,269
------- ------- -------
Total current liabilities...................... 22,231 50,261 47,204
------- ------- -------
Long-term liabilities:
Long-term debt......................................... 32,681 1,802 1,708
Payable to related parties............................. 1,693 2,767 4,078
Technology and license purchase payables............... 3,205
Other.................................................. 142 490 1,062
------- ------- -------
Total long-term liabilities.................... 37,721 5,059 6,848
------- ------- -------
Total liabilities.............................. 59,952 55,320 54,052
------- ------- -------
Commitments and contingencies
Redeemable Series A preferred stock, $100 par value,
80,000 shares authorized, issued and outstanding, at
liquidation value...................................... 10,240 10,880 11,200
Redeemable Series I Class B preferred stock, $.01 par
value, 2,000,000 shares authorized, 925,850 Series I
shares, issued and outstanding, at liquidation value... 10,480 11,118 11,452
Shareholders' equity (deficit):
Common stock, $.01 par value, 10,000,000 shares
authorized, 3,800,000 shares issued and
outstanding......................................... 38 38 38
Additional paid-in capital............................. 828 828 828
Retained deficit....................................... (7,680) (35,432) (41,437)
------- ------- -------
Total shareholders' equity (deficit)........... (6,814) (34,566) (40,571)
------- ------- -------
Total liabilities, redeemable preferred stock
and shareholders' equity (deficit)........... $ 73,858 $ 42,752 $ 36,133
======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-18
<PAGE> 92
E.F. JOHNSON COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
YEAR ENDED DECEMBER 31, JUNE JUNE
-------------------------------- 30, 29,
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................ $99,240 $88,932 $ 78,966 $43,166 $28,223
Cost of sales............................ 60,349 60,630 50,623 26,717 18,157
-------- ------- ------- ------- -------
Gross profit............................. 38,891 28,302 28,343 16,449 10,066
-------- ------- ------- ------- -------
Operating expenses:
Selling, general and administrative.... 28,284 32,107 29,201 14,816 11,215
Research and development............... 7,534 8,118 8,401 3,888 2,938
Nonrecurring items (see note 14)....... 890 (7,479) 13,521 (1,017)
-------- ------- ------- ------- -------
Total operating expenses....... 36,708 32,746 51,123 18,704 13,136
Income (loss) from operations............ 2,183 (4,444) (22,780) (2,255) (3,070)
-------- ------- ------- ------- -------
Other income (expense):
Interest expense....................... (3,075) (4,505) (3,924) (1,854) (2,407)
Interest income........................ 407 400 230 118 125
-------- ------- ------- ------- -------
Total other income (expense)... (2,668) (4,105) (3,694) (1,736) (2,282)
-------- ------- ------- ------- -------
Net loss before income tax............... (485) (8,549) (26,474) (3,991) (5,352)
Income tax benefit....................... 578
-------- ------- ------- ------- -------
Net (loss) income........................ $ 93 $(8,549) $(26,474) $(3,991) $(5,352)
======== ======= ======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-19
<PAGE> 93
E.F. JOHNSON COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
AND REDEEMABLE PREFERRED STOCK
(THOUSANDS OF DOLLARS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK SHAREHOLDERS' EQUITY (DEFICIT)
------------------------------------ -------------------------------------------------------
SERIES A SERIES I CLASS B COMMON STOCK ADDITIONAL RETAINED
---------------- ----------------- ------------------ PAID-IN EARNINGS
SHARES STOCK SHARES STOCK SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------- ------- ------- --------- ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.... 80,000 $ 8,960 3,800,000 $ 38 $1,069 $ 2,536 $ 3,643
Accrued preferred stock
dividends................... 640 (640) (640)
Net income.................... 93 93
------ ------- ------- ------- --------- --- ------ -------- --------
Balance at December 31, 1994.... 80,000 9,600 3,800,000 38 1,069 1,989 3,096
Series I Class B issuance..... 925,850 $10,000
Preferred stock issuance
costs....................... (241) (241)
Accrued preferred stock
dividends................... 640 480 (1,120) (1,120)
Net loss...................... (8,549) (8,549)
------ ------- ------- ------- --------- --- ------ -------- --------
Balance at December 31, 1995.... 80,000 10,240 925,850 10,480 3,800,000 38 828 (7,680) (6,814)
Accrued preferred stock
dividends................... 640 638 (1,278) (1,278)
Net loss...................... (26,474) (26,474)
------ ------- ------- ------- --------- --- ------ -------- --------
Balance at December 31, 1996.... 80,000 $10,880 925,850 $11,118 3,800,000 $ 38 $ 828 $ (35,432) $(34,566)
====== ======= ======= ======= ========= === ====== ======== ========
(UNAUDITED)
Accrued preferred stock
dividends................... 320 334 (653) (653)
Net loss...................... (5,352) (5,352)
------ ------- ------- ------- --------- --- ------ -------- --------
Balance at June 29, 1997........ 80,000 $11,200 925,850 $11,452 3,800,000 $ 38 $ 828 $ (41,437) $(40,571)
====== ======= ======= ======= ========= === ====== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-20
<PAGE> 94
E.F. JOHNSON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
YEAR ENDED DECEMBER 31, JUNE JUNE
---------------------------- 30, 29,
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income....................................... $ 93 $(8,549) $(26,474) $(3,991) $(5,352)
Adjustments to reconcile net (loss) income to net cash
used by operating activities:
Depreciation and amortization........................ 4,647 6,539 5,819 2,800 2,201
Loss from write down of long-term assets............. 6,000
Provision for losses on accounts receivable.......... 59 2,734 466 276 227
Gain on sale of Division............................. (8,343) (2,154)
Loss on sale of property............................. 39 51 40 6
Changes in components of working capital, net of
effect of sale of Division:
Receivables.......................................... (5,546) 3,456 3,994 (2,657) (202)
Inventories.......................................... (4,307) (1,639) 4,757 (839) 1,746
Prepaid expenses and other current assets............ (50) (662) (610) (913) 460
Accounts payable..................................... 4,765 1,982 1,455 (3,440) (490)
Advance billings..................................... 2,888 698 (884) (522)
Accrued liabilities.................................. (855) (1,286) 1,098 1,400 (842)
------ ------ ------- ------- ------
Net cash used by operating activities................ (1,155) (2,829) (2,757) (8,242) (4,928)
------ ------ ------- ------- ------
Cash flows from investing activities:
Capital expenditures.................................... (3,430) (3,557) (1,480) (758) (961)
Proceeds from sale of property.......................... 86 136 43 14 3
Receipt of proceeds from sale of assets................. 14,659 13,159 4,112
Purchase of intangible assets........................... (986) (4,007) (1,669) (118) (52)
Change in other assets.................................. 620 39 (1,781) (415) 1,273
------ ------ ------- ------- ------
Net cash provided (used) by investing activities..... (3,710) (7,389) 9,772 11,882 4,375
------ ------ ------- ------- ------
Cash flows from financing activities:
Net increase (decrease) in debt......................... 4,706 6,972 (7,947) (3,260) (858)
Proceeds from issuance of preferred stock, net.......... 1,913
Change in amount to/from related parties................ 153 1,342 1,022 (354) 1,311
------ ------ ------- ------- ------
Net cash (used) provided by financing activities..... 4,859 10,227 (6,925) (3,614) 453
------ ------ ------- ------- ------
Increase (decrease) in cash during the year............... (6) 9 90 26 (100)
Cash -- beginning of year................................. 83 77 86 86 176
------ ------ ------- ------- ------
Cash -- end of year....................................... $ 77 $ 86 $ 176 $ 112 $ 76
====== ====== ======= ======= ======
Supplemental cash flow information:
Cash paid for interest.................................. $ 3,045 $ 4,253 $ 3,472 $ 1,846 $ 1,418
Income tax refund....................................... $ (124) $ (336) $ (509) $ (402) $ 1
Supplemental schedule of non-cash activity:
Liabilities incurred in exchange for purchased
technology......................................... $ 5,922 $ 913 $ -- $ -- $ --
Preferred stock issued for license and technology
rights............................................. $ -- $ 4,630 $ -- $ -- $ --
Preferred stock issued in payment of accounts
payable............................................ $ -- $ 3,216 $ -- $ -- $ --
</TABLE>
See accompanying notes to the consolidated financial statements.
F-21
<PAGE> 95
E.F. JOHNSON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 1. DESCRIPTION OF BUSINESS AND ORGANIZATION
Operations
E.F. Johnson Company (the Company) is a leading provider of wireless
communications products and systems to the private two-way land mobile radio
(LMR) industry. The Company designs, develops, manufactures and markets
stationary transmitters/receivers (base stations or repeaters) and mobile and
portable radio transceivers. The Company offers an extensive line of such
products, including "conventional," "trunked" and "networked" systems, which are
used in a broad range of applications by numerous industrial and commercial
organizations, ranging from taxi fleets to large oil and gas refineries, and
state and local government agencies, including public safety departments such as
police departments.
Ability to Continue as a Going Concern
The Company is presently in default under several debt agreements and will
be required to restructure these obligations and possibly seek additional
financing. In addition, the Company has experienced recurring losses and as of
December 31, 1996 has a retained deficit of $35,432 and a working capital
deficit of $24,009. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
assets or liabilities that might result if the Company is unable to continue as
a going concern.
Management is currently pursuing additional equity and attempting to
restructure existing debt agreements. However, there is no assurance that these
efforts will be successful.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated balance sheet includes the accounts of the Company and its
wholly owned subsidiaries E.F. Johnson International, Inc. and E.F. Johnson
Communications, Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
Sales are recorded as products are shipped and services are rendered with
the exception of system sales which are generally recognized based upon
performance criteria and customer acceptance. For system sales with extended
delivery dates, sales and cost of sales are recognized under the
percentage-of-completion method as costs are incurred. Profits expected to be
realized on contracts are based on the Company's estimates of total sales value
and costs at completion. These estimates are reviewed and revised periodically
throughout the lives of the contracts, and adjustments to profits resulting from
such revisions are recorded in the accounting period in which the revisions are
made.
F-22
<PAGE> 96
E.F. JOHNSON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market, cost being
determined by the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method over the
estimated useful lives which range from three to fifteen years.
Retirement Benefits
The Company has a defined contribution qualified retirement savings and
profit-sharing plan which covers all of its employees. The Company's
profit-sharing contributions are discretionary. No profit-sharing contributions
were authorized in 1994, 1995, 1996 and 1997. The Company's contributions to the
retirement savings plan are based on specified levels of employee contributions
subject to certain overall salary limitations. Company contributions were
approximately $271, $298 and $253 for the years ended December 31, 1994, 1995
and 1996, respectively. Company contributions were approximately $131 and $116
for the six months ended June 30, 1996 and June 29, 1997, respectively.
The Company does not currently provide postretirement healthcare benefits.
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition as of June 29, 1997 and the results of operations and
cash flows for the six months ended June 30, 1996 and June 29, 1997 as presented
in the accompanying unaudited consolidated financial statements.
NOTE 3. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 29,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and purchased
components......................... $ 6,118 $ 5,365 $ 5,120
Work-in-process...................... 2,792 1,974 1,001
Finished goods....................... 9,086 5,901 5,052
------- ------- -------
$17,996 $13,240 $11,173
======= ======= =======
</TABLE>
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 29,
1995 1996 1997
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Land.............................. $ 34 $ 34 $ 34
Buildings and improvements........ 3,099 3,238 3,253
Machinery and equipment........... 18,382 19,166 19,678
-------- -------- --------
21,515 22,438 22,965
Less: Accumulated depreciation.... (11,420) (15,398) (16,732)
-------- -------- --------
$ 10,095 $ 7,040 $ 6,233
======== ======== ========
</TABLE>
F-23
<PAGE> 97
E.F. JOHNSON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 4. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
At December 31, 1995 and 1996 and June 29, 1997, property, plant and
equipment includes $1.3 million (net of depreciation of $683), $1.1 million (net
of deprecation of $883 and $1.0 million (net of depreciation of $983),
respectively, of buildings and improvements under a capital lease.
NOTE 5. INTANGIBLE ASSETS
Intangible assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 29,
1995 1996 1997
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Technology............................................ $ 9,900 $ 5,100 $ 5,100
Licenses.............................................. 2,756 663 663
Loan origination fees................................. 1,765 1,765 1,765
Software.............................................. 1,731 2,523 2,523
-------- -------- ---------
16,152 10,051 10,051
Less: Accumulated amortization........................ (3,275) (3,881) (4,433)
-------- -------- ---------
$ 12,877 $ 6,170 $ 5,618
======== ======== =========
</TABLE>
Amortization of intangibles is provided on a straight line basis over
estimated useful lives ranging from three to ten years. The Company assesses
potential impairment of its intangible assets based on anticipated undiscounted
cash flows from operations. During 1996 the Company wrote-off $5,858 of
intangibles primarily related to discontinued product lines and a reassessment
of the value of certain technology purchased in prior years.
NOTE 6. BILLINGS ON UNCOMPLETED CONTRACTS IN EXCESS OF INCURRED COSTS
Amounts included in the financial statements which relate to billings on
uncompleted contracts in excess of incurred costs are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 29,
1995 1996 1997
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Costs incurred on uncompleted contracts............... $ 1,472 $ 16,867 $ 22,350
Profits on uncompleted contracts...................... 645 9,596 13,444
-------- -------- ---------
2,117 26,463 35,794
Less: Progress payments............................... (5,005) (29,886) (37,658)
-------- -------- ---------
$ (2,888) $ (3,423) $ (1,864)
======== ======== =========
Included in the balance sheet:
Recoverable costs and accrued profits not yet
billed........................................... $ 163 $ 1,199
Advanced billings................................... $ (2,888) (3,586) (3,063)
-------- -------- ---------
$ (2,888) $ (3,423) $ (1,864)
======== ======== =========
</TABLE>
Recoverable costs and accrued profits include direct costs of
manufacturing, installation, project management, engineering, and allocable
manufacturing overhead costs.
F-24
<PAGE> 98
E.F. JOHNSON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 7. DEBT
Debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 29,
1995 1996 1997
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revolving credit line, maximum borrowings
determined periodically against contractual
percentages of accounts receivable and
inventory........................................ $ 16,743 $ 11,331 $ 10,755
Bank term loan, secured by machinery and
equipment........................................ 6,650 3,933 3,133
Senior subordinated note due July 31, 1997,
interest payable semi-annually on January 31 and
July 31, interest at 9.79% per annum............. 10,000 10,000 10,000
Subordinated debentures, due in quarterly
installments beginning January 1, 1994 through
October 31, 1996, interest rate of 20.51%........ 64
Capital lease obligation, due in monthly principal
and interest installments of $42 through July
1996, thereafter, increasing to $52 through July
31, 2002, with payments first applied to
interest, effective interest rate of 22.1% per
annum, secured by land and building.............. 2,092 1,996 1,900
Other capital lease obligation..................... 34 29 72
-------- -------- --------
35,583 27,289 25,860
Less: Current portion based on scheduled
repayments....................................... (2,902) (11,623) (24,152)
Debt in default subject to acceleration....... -- (13,864) --
-------- -------- --------
Long-term debt..................................... $ 32,681 $ 1,802 $ 1,708
======== ======== ========
</TABLE>
On March 3, 1995, the Company refinanced its existing revolving credit line
and term loan arrangements with the same financial institution (Senior
Creditor). The amended Financing Agreements (Agreements) increased the Company's
maximum credit facility from $20,000 to $35,000 and provide for borrowings at
1.75% over the bank's prime rate. The Agreements include a fee of 2% on the
unused portion of $30,000 of the facility. The term loan requires scheduled
monthly principal payments of $117 through February 1998 and a final payment of
$2,306 due on March 3, 1998. The balance outstanding under the revolver is due
on March 3, 1998 and therefore as of June 29, 1997 all amounts outstanding under
this agreement are included in current maturities of long-term debt.
The revolving credit line, bank term loan and capital lease agreements
include certain covenants and restrictions including minimum net worth and
working capital requirements. The Company is also prohibited from paying
dividends under its credit facility, except that the holders of Preferred Stock
are entitled to receive cumulative cash dividends if and when declared by the
Board of Directors of the Company. The Company was not in compliance with these
covenants for the year ended December 31, 1996. According to the terms of the
Agreements, the creditor has the right to make all the outstanding amounts under
the Agreements due and payable, the right to appropriate, set off and apply to
the payment of outstanding amounts all collateral under the Agreements. As of
May 2, 1997 creditor had not made the outstanding amounts under the Agreements
due and payable.
In addition, the Company failed to make its semi-annual interest payments
of $490 due July 31, 1996 and January 31, 1997 with the holder of the $10,000
Senior subordinated note (the Note). On April 15, 1997, the creditor gave the
Company and the Senior Creditor notice under the default terms of the Note
agreement and
F-25
<PAGE> 99
E.F. JOHNSON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 7. DEBT (CONTINUED)
has accelerated all outstanding principal of the Note. The creditor can take
action, including the initiation of legal proceedings, to collect outstanding
amounts 159 days after it has given notice to the Senior Creditor.
The Company has failed to make scheduled payments under the terms of some
of its Technology agreements. The total amounts due under these agreements are
included in Technology and license purchase payable on the Company's balance
sheet.
Scheduled maturities of debt (without regard to possible acceleration of
payments due to covenant defaults) at December 31, 1996, are approximately as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
----------------------------------------------------------- -------
<S> <C>
1997....................................................... $11,623
1998....................................................... 14,125
1999....................................................... 319
2000....................................................... 393
2001....................................................... 490
Thereafter................................................. 339
-------
$27,289
=======
</TABLE>
NOTE 8. LEASE OBLIGATIONS
The Company leases certain buildings and improvements under an arrangement
which is accounted for as a capital lease. The lease requires monthly
installments ranging from $33 to $52, including an effective average annual
interest rate of 22.1% through July 31, 2002. The Company also leases various
equipment, automobiles and buildings under operating leases. Rent expense for
the years ended December 31, 1994, 1995 and 1996 was $876, $1,109 and $1,354,
respectively. Rent expense for the six months ended June 30, 1996 and June 29,
1997 was $548 and $428, respectively. Future minimum rental payments under
noncancelable lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL OPERATING
------------------------------------------------- ------- ---------
<S> <C> <C>
1997............................................. $ 644 $ 655
1998............................................. 635 394
1999............................................. 628 288
2000............................................. 625 220
2001............................................. 625 236
Thereafter....................................... 364 11
------- ------
Total minimum lease payments..................... 3,521 $ 1,804
======
Less: Amount representing interest............... (1,496)
-------
Present value of future minimum long-term capital
lease payments (see Note 7).................... $ 2,025
=======
</TABLE>
NOTE 9. REDEEMABLE PREFERRED STOCK
Series A
The terms of the preferred stock provide that, subject to certain
limitations, the holders of the shares may exchange any or all of such shares
for senior subordinated notes of the Company upon the occurrence of certain
events. The notes, if issued, would mature on the fifth anniversary of the date
of issuance and otherwise
F-26
<PAGE> 100
E.F. JOHNSON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 9. REDEEMABLE PREFERRED STOCK (CONTINUED)
have the same terms as the Company's Senior Subordinated Notes. Notes issued in
exchange for shares would be stated at a principal amount equal to the
liquidation value of the shares exchanged.
Dividends on the preferred stock accrue cumulatively on a daily basis at a
rate of 8% per annum. To the extent the dividends are not paid, unpaid dividends
are added to the liquidation value of any shares which is equal to the sum of
one hundred dollars per share, plus any accrued but unpaid dividends. The
preferred shares are carried on the consolidated balance sheet at liquidation
value, including accumulated dividends.
All or any portion of the outstanding shares of Preferred Stock may be
redeemed at the Company's option, at any time, for a redemption price of $100
per share plus accrued and unpaid dividends. In addition, up to 30,000
outstanding shares of Preferred Stock may be redeemed at the Company's option
for a redemption price of $50 per share plus accrued and unpaid dividends, at
any time after the Company has satisfied certain specified conditions. As of
December 31, 1996, the Preferred Stock is valued at its $100 per share
redemption value because not all conditions have been satisfied. If the
conditions for redemption of shares at $50 per share were fulfilled, the
recorded amount of preferred stock would be reduced by $1.5 million with a
corresponding increase to additional paid-in capital.
Series I Class B
In March 1995, the Company issued 925,850 shares of Series I Class B
Preferred Stock, $.01 par value per share at $10.80 per share. Simultaneous with
this issuance, the Company purchased from the preferred shareholder technology
and license rights for $4,630, settled an outstanding accounts payable balance
of $3,216 due the preferred shareholder and received cash proceeds of $2,154.
The Company incurred $241 of stock issuance costs in conjunction with this
transaction.
The terms of the Series I Class B preferred stock allow the holders of the
shares to exchange any or all such shares for common stock of the Company at a
conversion rate of one to one. Dividends accrue cumulatively on a daily basis at
the rate of 6% per annum. To the extent dividends are not paid, unpaid dividends
are added to the liquidation value of any shares which are equal to the sum of
the issuance price plus any accrued but unpaid dividends. Through December 31,
1996, no dividends have been declared or paid. The preferred shares are carried
on the consolidated balance sheet at liquidation value, including accumulated
dividends.
All or any portion of the outstanding shares of the Series I Class B
preferred stock may be redeemed at the Company's option, at any time, for a
redemption price equal to the then current liquidation value. The Company must
redeem the stock upon the earlier occurrence of March 14, 2005, the closing of
an underwritten public offering of the Company's common stock or the sale or
transfer of more than fifty percent of the Company's common stock.
F-27
<PAGE> 101
E.F. JOHNSON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 10. SHAREHOLDERS' EQUITY
Stock Options
The 1993 Incentive Stock Option Plan (the Plan) provides for the issuance
to employees of up to 200,000 shares of the Company's common stock at exercise
prices determined by the Option Committee. The Plan provides for the issuance of
both incentive stock options and non-qualified options. Options issued under the
Plan generally vest in equal installments over a five year period and expire ten
years from the date of grant. A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
INCENTIVE OPTION PRICE AVERAGE
STOCK RANGE PER EXERCISE
OPTIONS SHARE PRICE
--------- ------------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1993.......................... 182,518 $1.00 - $9.00 $2.33
Granted................................................. -- -- --
Canceled................................................ (39,943) 1.00 - 9.00 7.01
-------
Outstanding at December 31, 1994.......................... 142,575 1.00 - 2.00 1.02
Granted................................................. 98,870 3.85 - 7.71 5.51
Canceled................................................ (68,430) 1.00 - 7.71 1.42
-------
Outstanding at December 31, 1995.......................... 173,015 1.00 - 7.71 3.43
Granted................................................. 135,310 3.85 3.85
Canceled................................................ (120,790) 1.00 - 7.71 4.04
-------
Outstanding at December 31, 1996.......................... 187,535 $1.00 - $7.71 $3.34
=======
(UNAUDITED)
Granted................................................. 43,000 1.00 1.00
Canceled................................................ (32,575) 1.00 - 3.85 2.13
-------
Outstanding at June 29, 1997.............................. 197,960 $1.00 - $7.71 $3.03
=======
Exercisable at June 29, 1997.............................. 68,374 $1.00 - $7.71 $2.96
=======
</TABLE>
As permitted by Financial Accounting Standards (FAS) No. 123, "Accounting
for Stock-Based Compensation," the Company applies Accounting Principles Board
(APB) Opinion No. 25 and related interpretations in accounting for its stock
option plans and, accordingly, does not recognize compensation expense related
thereto. If the Company had elected to recognize compensation expense based on
the fair value of the options granted at grant date as prescribed by FAS No.
123, net loss would not have been materially impacted.
Warrants
On July 31, 1992, the Company issued to the holder of the senior
zero-coupon note a warrant to purchase a total of 670,700 shares of the
Company's common stock at $.075 per share. The warrant expires on July 31, 1997.
The number and kind of securities purchasable upon the exercise of the warrant
and the warrant purchase price are subject to adjustments upon the occurrence of
certain events, including stock dividends, stock splits or combinations,
reclassifications and mergers. The warrant was valued at fair market value at
the date of issuance which resulted in a debt discount and a contribution to
capital of $107.
On March 14, 1995, the Company issued the holder of the Series I Class B
preferred stock a warrant to purchase up to 291,790 shares of the Company's
common stock. The exercise price is the fair market value of the Company's
common stock on the date the warrant is exercised. The warrant expires on the
earlier of
F-28
<PAGE> 102
E.F. JOHNSON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
March 14, 2005, the redemption of the Series I Class B preferred stock or the
date of an initial public offering of the Company's stock.
NOTE 11. INCOME TAXES
The Company provides income taxes using the liability method under
Financial Accounting Standard No. 109, "Accounting for Income Taxes."
At December 31, 1996, the Company had approximately $231 of available
general business credit carryforwards, $18 of minimum tax credit carryforward,
$8.9 million of tax benefit from federal net operating loss carryforwards, and
tax effected benefit of net temporary differences of $5 million available to
offset taxable income in the future. A valuation allowance has been established
for the entire net tax benefit of approximately $14 million as realization is
not assured.
The future tax benefits related to tax credit carryforwards expire in 1997.
The amount of these tax credit carryforwards are subject to final verification
related to the tax status of the predecessor. The net operating loss
carryforward begins to expire in 2009.
In fiscal 1994, the Company incurred a loss before taxes for financial
reporting and tax return purposes. For tax return purposes, the loss was carried
back to recover income taxes paid in prior years. A tax benefit of $578 has been
recognized in the 1994 statement of operations to the extent of this recovery of
taxes paid in prior years.
NOTE 12. RELATED PARTY TRANSACTIONS
Management Agreement
The Company has a management agreement with a company controlled by
significant shareholders. The agreement automatically renews on December 31 for
consecutive one year terms unless either party gives thirty days notice. The
management agreement provides for a fee of $60 per month for the period November
1, 1993 to June 30, 1994, $70 per month through June 1996 and $100 per month
thereafter.
Shareholder Transactions
The Company incurred fees payable to significant shareholders for their
execution of noncompete agreements related to the sale of the Components
Division, personally guaranteeing performance bonds and personally guaranteeing
over advances on the Company's line of credit. These fees totaled $1,693, $1,074
and $1,251 during 1995 and 1996 and the six months ended June 29, 1997,
respectively, and are included within amounts payable to related parties on the
balance sheet. In 1996, approximately $1 million of these fees related to
performance guarantees and were included in nonrecurring costs in the statement
of operations.
In October 1993, the Company loaned an aggregate of $1.5 million to two of
its shareholders. The notes bear interest at 2.5% over prime and are secured by
the shareholders' respective interest in Viking Partners, the sole shareholder
of Viking Mobile Communications, Inc. (VMC) (see below). The principal on each
of the notes is due November 1, 1998 and is included within amounts receivable
from related parties on the balance sheet. Interest income for 1996, 1995 and
1994 was $70, $172 and $148, respectively.
Viking Mobile Communications
In June 1993, the Company entered into a lease arrangement with VMC, a
corporation controlled by significant shareholders of the Company. Under the
rental agreement, the Company has agreed to lease sites
F-29
<PAGE> 103
E.F. JOHNSON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
to VMC which are appropriate for the installation of two-way land mobile radio
communication systems for 800 MHz SMR service and to install and service such
systems. Systems leased to VMC under this agreement qualify as sales-type
leases. Sales during the year ended December 31, 1994 approximated $49.
No new leases were entered into during 1995, 1996 and 1997. As of December
31, 1996, the lease receivable of $175 is recorded as a net receivable from
related party in the Company's balance sheet and is due with interest over the
period through 1999.
The balance due as of December 31, 1996 includes $106 of payments in
arrears. Scheduled payments in 1997 have not been made. A shareholder of the
Company has guaranteed VMC's remaining obligations under the agreement.
The Company agreed to accept the return of certain previously leased
equipment from VMC during 1996. The returns resulted in losses to the Company of
$76 and $264 recorded in 1996 and 1995, respectively.
Automated Dispatch Solutions (formerly RadioSoft, Inc.)
In March 1995, the Company entered into an agreement with Automated
Dispatch Solutions, a corporation controlled by significant shareholders of the
Company. Under the terms of the agreement, Automated Dispatch Solutions provides
the Company with sales leads and purchases product from the Company. Automated
Dispatch Solutions purchased $96 and $106, respectively, of product from the
Company during 1996 and 1995, respectively. The Company paid Automated Dispatch
Solutions $150 in sales lead fees during 1995. The Company had a receivable of
$57, from Automated Dispatch Solutions at December 31, 1995.
Viking Dispatch Services, Inc.
In June 1995, the Company entered into an agreement with Viking Dispatch
Services, Inc. (VDS), a corporation controlled by significant shareholders of
the Company. Under terms of this agreement, the Company will reimburse VDS up to
$200 for attorneys' fees and regulatory expenses and VDS will purchase a minimum
of $2 million of equipment from the Company by June 1997.
During 1995 the Company reimbursed VDS $72 in legal and regulatory
expenses. No equipment has been purchased by VDS from the Company through June
29, 1997.
Securicor
During the year ended December 31, 1995, purchases from Securicor, a
preferred shareholder (see Note 9), were $1,418. During the year ended December
31, 1995, the Company recorded sales of $2,379, to Securicor. During the year
ended December 31, 1994, the Company had $2,493 of purchases from Securicor.
F-30
<PAGE> 104
E.F. JOHNSON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 13. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment. Foreign sales were as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
YEARS ENDED DECEMBER 31, JUNE JUNE
------------------------------- 30, 29,
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
South America..................... $ 6,143 $13,425 $ 6,715 $ 1,752 $ 2,359
Central America and Caribbean..... 5,527 6,089 2,018 1,504 2,945
Far East.......................... 8,548 5,670 9,990 6,209 1,579
Middle East....................... 1,211 707 242 129 1,151
Europe............................ 451 394 175 39 44
Other............................. 680 2,983 3,289 2,076 127
------- ------- ------- ------- -------
$22,560 $29,268 $22,429 $11,709 $ 8,205
======= ======= ======= ======= =======
</TABLE>
NOTE 14. NONRECURRING ITEMS
The Company incurred the following nonrecurring items:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
YEARS ENDED DECEMBER 31, JUNE JUNE
----------------------------- 30, 29,
1994 1995 1996 1996 1997
----- ------ -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gain on sale of Division................... $8,343 $ 2,152
Write down of assets....................... $(11,618)
Loss on sale of capital leases............. (750)
Employee severance costs................... (762) (375)
Costs related to initial public offering
not consummated.......................... $(630)
Costs incurred to acquire minority
shares................................... (298)
Costs incurred in debt refinancing not
consummated.............................. (105)
Gain from refund of real estate taxes paid
in prior years........................... 203
Other nonrecurring costs................... (60) (102) (1,528) (385)
----- ------ -------- ------- -------
Total nonrecurring (expense)
income......................... $(890) $7,479 $(13,521) $ 0 $ 1,017
===== ====== ======== ======= =======
</TABLE>
Effective December 29, 1995, the Company sold the net assets of its
Components Division for proceeds of $15,159 and recorded a gain on the sale of
$8,343. Total revenues and divisional contribution before allocation of
corporate costs, interest expense and income taxes from the Division were
approximately $15.5 million and $4.2 million, respectively, during 1995 and
$13.8 million and $3.6 million, respectively, during 1994. Write down of assets
during 1996, primarily related to discontinued product lines and reassessment of
the value of certain technology purchased in prior years and includes $5,858 of
intangible assets, $4,771 of inventory, and $989 of fixed assets and other.
NOTE 15. SUBSEQUENT EVENT
Sale of Data Telemetry Division
Effective January 15, 1997 the Company sold the net assets of its Data
Telemetry Division for net proceeds of $3,841 and recorded a gain on the sale of
$2,154. Additionally, advance payments of $2,168 were received for products and
services to be provided. The sale and advance payment proceeds were used to
repay $5,785 of borrowings under the revolving credit line and $100 of principal
on the bank term loan. Total
F-31
<PAGE> 105
E.F. JOHNSON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
revenues and divisional contribution before allocation of corporate costs,
interest expense and income taxes from this Division were approximately $8.7
million and $1.5 million, respectively, during 1996.
Acquisition by Transcrypt International, Inc. (Unaudited)
On July 31, 1997 Transcrypt International, Inc. (Transcrypt) acquired the
Company for cash of $436 and the issuance of 832,465 shares of Transcrypt common
stock with an approximate market value of $10 million. In conjunction with the
acquisition by Transcrypt, certain creditors of the Company agreed to settlement
of liabilities due to them. As a result, senior subordinated debt and related
accrued interest of $11.4 million and a net payable due to related parties of
$2.4 million were extinguished in conjunction with Transcrypt's acquisition.
F-32
<PAGE> 106
[DESCRIPTION OF INSIDE BACK COVER
Picture of a caliper holding a Model Globe. Upper left reads "The Measure
of Communications Technology," lower right has Transcrypt Logo.]
<PAGE> 107
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THIS DATE.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 6
Use Of Proceeds............................ 13
Price Range of Common Stock................ 13
Dividend Policy............................ 13
Capitalization............................. 14
Dilution................................... 15
Selected Consolidated Financial Data of
Transcrypt International, Inc............ 16
Selected Consolidated Financial Data of
E.F. Johnson Company..................... 17
Pro Forma Financial Data................... 18
Management's Discussion And Analysis Of
Financial Condition And Results Of
Operations............................... 24
Business................................... 34
Management................................. 56
Certain Transactions....................... 63
Principal and Selling Stockholders......... 65
Description Of Capital Stock............... 67
Shares Eligible for Future Sale............ 69
Underwriting............................... 70
Legal Matters.............................. 71
Experts.................................... 71
Additional Information..................... 72
Index To Consolidated Financial
Statements............................... F-1
</TABLE>
------------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
4,000,000 SHARES
[TRANSCRYPT LOGO]
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
FURMAN SELZ
MONTGOMERY SECURITIES
DAIN BOSWORTH
INCORPORATED
, 1997
======================================================
<PAGE> 108
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth estimates of those costs and expenses to be
incurred by the Registrant in connection with the offering of the securities
being registered hereby, all of which are estimated except for the SEC
registration, NASD and Nasdaq National Market listing fees.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 25,440
NASD fee.......................................................... 8,895
Nasdaq National Market listing fee................................ *
Underwriters' nonaccountable expense allowance.................... *
Blue Sky filing fees and expenses................................. *
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Registrar and transfer agent fees................................. *
Miscellaneous..................................................... *
--------
Total................................................... $800,000
========
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Delaware law, the directors and officers of the Registrant are
entitled, under certain circumstances, to be indemnified by the Registrant
against all expenses and liabilities incurred or imposed upon them as a result
of suits brought against them as such directors and officers, if they act in
good faith and in a manner they reasonably believe to be in or not opposed to
the best interests of the Registrant, and, with respect to any criminal action
or proceeding, have no reasonable cause to believe their conduct was unlawful,
except that no indemnification shall be made against expenses in respect of any
claim, issue or matter as to which they shall have been adjudged to be liable to
the Registrant, unless and only to the extent that the court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, they
are fairly and reasonably entitled to be indemnified for such expenses which
such court shall deem proper. Any such indemnification may be made by the
Registrant only as authorized in each specific case upon a determination by the
stockholders or disinterested directors that indemnification is proper because
the indemnitee has met the applicable statutory standard of conduct.
Article Eight of the Registrant's Second Amended and Restated Certificate
of Incorporation, as amended, provides that a director shall not be liable to
the Registrant or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Registrant or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under the Delaware statutory provisions making
directors personally liable for unlawful dividends or unlawful stock repurchases
or redemptions or (iv) for any transaction from which the director derived an
improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law. The Company has
also entered into indemnification agreements with its directors and officers.
The indemnification agreements may require the Company, among other things, to
indemnify its directors and officers against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature) and to advance
their expenses incurred as a result of any proceedings against them as to which
they could be indemnified.
II-1
<PAGE> 109
The Registrant maintains a standard policy of officers' and directors'
liability insurance.
The Underwriting Agreement, a copy of which is filed as Exhibit 1.1 hereto,
provides for the indemnification of directors, officers, employees, agents and
controlling persons of the Registrant by the Underwriters under certain
circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) In connection with the Registrant's acquisition of E.F. Johnson Company
effective July 31, 1997, the Registrant issued to NorAm Energy Corp. and Intek
Diversified Corporation , stockholders of E.F. Johnson, 457,856 and 374,609
shares, respectively, of the Registrant's Common Stock in transactions that were
not registered under the Securities Act of 1933, as amended (the "Act"). The
issuances of such shares were exempt from registration under the Act in reliance
upon Section 4(2) of the Act as transactions by an issuer not involving any
public offering.
(b) In connection with the merger of Transcrypt International, Ltd., a
Nebraska limited partnership (the "Partnership"), with and into the Registrant
effective June 30, 1996, pursuant to an Agreement of Merger between the
Partnership and the Registrant, the Registrant issued, in a transaction that was
not registered under the Act, 5,175,434 (pre-split) shares 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 Registrant effective September 30, 1996, pursuant
to an Agreement of Merger between Transcrypt Nebraska and the Registrant, the
Registrant issued, in a transaction that was not registered under the Act,
52,010 shares of its Common Stock, $0.01 par value, as consideration for the
merger.
(c) 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------------ ----------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement.
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 "January 1997 Registration Statement")).
3.2 Amended and Restated Bylaws of the Company (incorporated herein by reference
to Exhibit 3.2 to the January 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 the January 1997 Registration Statement).
</TABLE>
II-2
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------------ ----------------------------------------------------------------------------
<S> <C>
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 the January 1997 Registration Statement).
4.1 Form of Common Stock certificate (incorporated herein by reference to
Exhibit 4.1 to the January 1997 Registration Statement).
4.2 Registration Rights Agreement, dated as of July 31, 1997, by and among NorAm
Energy Corp., Intek Diversified Corporation and the Company (incorporated
herein by reference to Exhibit 4.1 to the Company's Current Report on Form
8-K (File No. 0-21681) filed with the Commission on August 14, 1997).
5.1* Opinion of Manatt, Phelps & Phillips, LLP.
10.1 RESERVED.
10.1.1 Employment Agreement between the Company and John T. Connor dated as of July
31, 1997.
10.2 RESERVED.
10.2.1 Employment Agreement between the Company and Jeffery L. Fuller dated as of
July 31, 1997.
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 the January 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 the January
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 the January 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 the January 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 the
January 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 the January 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 the January 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 the January 1997 Registration
Statement).
10.10.1** Second Amendment, dated March 31, 1997, to 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 10.10.1 to
the Company's Quarterly Report on Form 10-Q for the Quarter Ended March 31,
1997, File No. 0-21681 (hereinafter "1Q 1997 Form 10-Q")).
</TABLE>
II-3
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------------ ----------------------------------------------------------------------------
<S> <C>
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 the January 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 the January 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 the January 1997 Registration Statement).
10.14-10.16 RESERVED.
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 the January 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
the January 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
the January 1997 Registration Statement).
10.20-10.23 RESERVED.
10.24 Form of Adoption Agreement for Nonstandardized 401(k) Profit Sharing Plan
(incorporated herein by reference to Exhibit 10.24 to the January 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 the January 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 the January 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 the January 1997 Registration Statement).
10.27.1 Fifth Amendment, dated as of March 1, 1997, 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 10.27.1
to the 1Q 1997 Form 10-Q).
10.28 Construction Loan, dated November 15, 1996, by and between Norwest Bank
Nebraska, N.A., and the Company, together with related documents
(incorporated herein by reference to Exhibit 10.28 to the Company's Annual
Report on Form 10-K for the Year Ended December 31, 1996, File No. 0-21681
(hereinafter "1996 Form 10-K")).
</TABLE>
II-4
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------------ ----------------------------------------------------------------------------
<S> <C>
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 (incorporated herein by reference to
Exhibit 10.29 to the 1996 Form 10-K).
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 (incorporated herein by reference to Exhibit 10.30 to the
1996 Form 10-K).
10.31 Nebraska Investment Finance Authority $2,850,000 Variable Rate Demand
Industrial Development Revenue Bond (Transcrypt International, Inc.
Project), Series 1997, dated as of March 25, 1997 (incorporated herein by
reference to Exhibit 10.31 to the 1Q 1997 Form 10-Q).
10.32 Trust Indenture, dated as of March 1, 1997, for $2,850,000 Variable Rate
Demand Industrial Development Revenue Bond (Transcrypt International, Inc.
Project), Series 1997, between Nebraska Investment Finance Authority as
Issuer and Norwest Bank Nebraska, N.A. as Trustee (incorporated herein by
reference to Exhibit 10.32 to the 1Q 1997 Form 10-Q).
10.33 Loan Agreement, dated as of March 1, 1997, for $2,850,000 Variable Rate
Demand Industrial Development Revenue Bond (Transcrypt International, Inc.
Project), Series 1997, between Nebraska Investment Finance Authority as
Issuer and the Company (incorporated herein by reference to Exhibit 10.33 to
the 1Q 1997 Form 10-Q).
10.34 Agreement of Lease, dated as of July 31, 1992, between Greene Street Capital
Corporation, as landlord, and E.F. Johnson Company (Waseca property lease).
10.35*** License Agreement for APCO 25 compliant product and certain intellectual
property rights between Motorola, Inc. and E.F. Johnson Company dated as of
October 14, 1994, and amendments thereto.
10.36 License Agreement, dated as of January 15, 1997, between E.F. Johnson
Company and Johnson Data Telemetry Corporation.
10.37 Accounts Financing Agreement, dated as of July 31, 1992, between Congress
Financial Corporation and E.F. Johnson Company, together with Supplements
and Amendments thereto.
10.38 Second Amended and Restated Term Promissory Note, dated as of March 3, 1995,
between Congress Financial Corporation and E.F. Johnson Company.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Price Waterhouse LLP.
23.3* Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1).
23.4* Consent of International Data Corporation.
23.5 Consent of Zarley, McKee, Thomte, Voorhees & Sease, P.L.C.
24.1 Power of Attorney (see Page II- ).
</TABLE>
- ---------------
* To be filed by amendment.
** Confidential treatment has previously been granted by the Securities and
Exchange Commission as to a portion of this exhibit.
*** Confidential treatment has been requested as to a portion of this exhibit.
(b) FINANCIAL STATEMENT SCHEDULES:
Schedule II -- Valuation and Qualifying Accounts
II-5
<PAGE> 113
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.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide the underwriters in
this offering (the "Underwriters") at the closing specified in the applicable
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions referenced in Item 14 of this Registration Statement
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes:
(1) That for the purposes of determining any liability under the Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 114
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Lincoln, Nebraska, on
this 12th day of September, 1997.
TRANSCRYPT INTERNATIONAL, INC.
By: /s/ JEFFERY L. FULLER
------------------------------------
Jeffery L. Fuller
President, Chief Executive Officer
and Director (Principal Executive
Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Jeffery L. Fuller and Scott R.
Bocklund, and each of them, acting individually, as his attorney-in-fact, each
with full power of substitution, for him in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all amendments
to said Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -------------------
<S> <C> <C>
/s/ JOHN T. CONNOR Chairman of the Board of September 12, 1997
- --------------------------------------------- Directors
John T. Connor
/s/ JEFFERY L. FULLER President, Chief Executive September 12, 1997
- --------------------------------------------- Officer and Director
Jeffery L. Fuller (Principal Executive
Officer)
/s/ SCOTT R. BOCKLUND Senior Vice President of September 12, 1997
- --------------------------------------------- Finance and Chief Financial
Scott R. Bocklund Officer (Principal Financial
and Accounting Officer)
/s/ TERRY L. FAIRFIELD Director September 12, 1997
- ---------------------------------------------
Terry L. Fairfield
/s/ THOMAS E. HENNING Director September 12, 1997
- ---------------------------------------------
Thomas E. Henning
/s/ THOMAS R. LARSEN Director September 12, 1997
- ---------------------------------------------
Thomas R. Larsen
</TABLE>
II-7
<PAGE> 115
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -------------------
<S> <C> <C>
/s/ THOMAS C. SMITH Director September 12, 1997
- ---------------------------------------------
Thomas C. Smith
/s/ THOMAS R. THOMSEN Director September 12, 1997
- ---------------------------------------------
Thomas R. Thomsen
/s/ WINSTON J. WADE Director September 12, 1997
- ---------------------------------------------
Winston J. Wade
</TABLE>
II-8
<PAGE> 116
TRANSCRYPT INTERNATIONAL, INC.
SCHEDULE II -- 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>
E.F. JOHNSON COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(THOUSANDS OF DOLLARS)
<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................ $ 419 $ 59 0 $ 288 $ 190
Year Ended December 31, 1995................ 190 2,734 0 225 2,699
Year Ended December 31, 1996................ 2,699 466 0 1,845 1,320
Inventory Obsolescence Reserves for the:
Year Ended December 31, 1994................ $1,343 $ 335 0 $ 851 $ 827
Year Ended December 31, 1995................ 827 1,548 0 906 1,469
Year Ended December 31, 1996................ 1,469 4,199 0 205 5,463
</TABLE>
<PAGE> 117
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE NO.
------------ -------------------------------------------------------------------- ------------
<S> <C> <C>
1.1* Form of Underwriting Agreement......................................
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 "January 1997
Registration Statement"))...........................................
3.2 Amended and Restated Bylaws of the Company (incorporated herein by
reference to Exhibit 3.2 to the January 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 the January 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 the January 1997 Registration
Statement)..........................................................
4.1 Form of Common Stock certificate (incorporated herein by reference
to Exhibit 4.1 to the January 1997 Registration Statement)..........
4.2 Registration Rights Agreement, dated as of July 31, 1997, by and
among NorAm Energy Corp., Intek Diversified Corporation and the
Company (incorporated herein by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K (File No. 0-21681) filed with
the Commission on August 14, 1997)..................................
5.1* Opinion of Manatt, Phelps & Phillips, LLP...........................
10.1 RESERVED.
10.1.1 Employment Agreement between the Company and John T. Connor dated as
of July 31, 1997....................................................
10.2 RESERVED.
10.2.1 Employment Agreement between the Company and Jeffery L. Fuller dated
as of July 31, 1997.................................................
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 the January 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 the January 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 the January 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 the January
1997 Registration Statement)........................................
</TABLE>
<PAGE> 118
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE NO.
------------ -------------------------------------------------------------------- ------------
<S> <C> <C>
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 the January 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
the January 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 the January
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 the January
1997 Registration Statement)........................................
10.10.1** Second Amendment, dated March 31, 1997, to 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 10.10.1 to the Company's Quarterly Report on
Form 10-Q for the Quarter Ended March 31, 1997, File No. 0-21681
(hereinafter "1Q 1997 Form 10-Q"))..................................
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 the January
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 the January
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 the January 1997
Registration Statement).
10.14-10.16 RESERVED.
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 the January
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 the January 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 the January 1997 Registration
Statement)..........................................................
10.20-10.23 RESERVED.
10.24 Form of Adoption Agreement for Nonstandardized 401(k) Profit Sharing
Plan (incorporated herein by reference to Exhibit 10.24 to the
January 1997 Registration Statement)................................
</TABLE>
<PAGE> 119
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE NO.
------------ -------------------------------------------------------------------- ------------
<S> <C> <C>
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 the January 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 the January 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 the January 1997
Registration Statement).............................................
10.27.1 Fifth Amendment, dated as of March 1, 1997, 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 10.27.1 to the 1Q 1997 Form 10-Q)..............
10.28 Construction Loan, dated November 15, 1996, by and between Norwest
Bank Nebraska, N.A., and the Company, together with related
documents (incorporated herein by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the Year Ended December 31,
1996, File No. 0-21681 (hereinafter "1996 Form 10-K"))..............
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
(incorporated herein by reference to Exhibit 10.29 to the 1996 Form
10-K)...............................................................
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 (incorporated herein by reference
to Exhibit 10.30 to the 1996 Form 10-K).............................
10.31 Nebraska Investment Finance Authority $2,850,000 Variable Rate
Demand Industrial Development Revenue Bond (Transcrypt
International, Inc. Project), Series 1997, dated as of March 25,
1997 (incorporated herein by reference to Exhibit 10.31 to the 1Q
1997 Form 10-Q).....................................................
10.32 Trust Indenture, dated as of March 1, 1997, for $2,850,000 Variable
Rate Demand Industrial Development Revenue Bond (Transcrypt
International, Inc. Project), Series 1997, between Nebraska
Investment Finance Authority as Issuer and Norwest Bank Nebraska,
N.A. as Trustee (incorporated herein by reference to Exhibit 10.32
to the 1Q 1997 Form 10-Q)...........................................
10.33 Loan Agreement, dated as of March 1, 1997, for $2,850,000 Variable
Rate Demand Industrial Development Revenue Bond (Transcrypt
International, Inc. Project), Series 1997, between Nebraska
Investment Finance Authority as Issuer and the Company (incorporated
herein by reference to Exhibit 10.33 to the 1Q 1997 Form 10-Q)......
10.34 Agreement of Lease, dated as of July 31, 1992, between Greene Street
Capital Corporation, as landlord, and E.F. Johnson Company (Waseca
property lease).....................................................
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE NO.
------------ -------------------------------------------------------------------- ------------
<S> <C> <C>
10.35*** License Agreement for APCO 25 compliant product and certain
intellectual property rights between Motorola, Inc. and E.F. Johnson
Company dated as of October 14, 1994, and amendments thereto........
10.36 License Agreement, dated as of January 15, 1997, between E.F.
Johnson Company and Johnson Data Telemetry Corporation..............
10.37 Accounts Financing Agreement, dated as of July 31, 1992, between
Congress Financial Corporation and E.F. Johnson Company, together
with Supplements and Amendments thereto.............................
10.38 Second Amended and Restated Term Promissory Note, dated as of March
3, 1995, between Congress Financial Corporation and E.F. Johnson
Company.............................................................
23.1 Consent of Coopers & Lybrand L.L.P. ................................
23.2 Consent of Price Waterhouse LLP.....................................
23.3* Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1).........
23.4* Consent of International Data Corporation...........................
23.5 Consent of Zarley, McKee, Thomte, Voorhees & Sease, P.L.C...........
24.1 Power of Attorney (see Page II- )...................................
</TABLE>
- ---------------
* To be filed by amendment.
** Confidential treatment has previously been granted by the Securities and
Exchange Commission as to a portion of this exhibit.
*** Confidential treatment has been requested as to a portion of this exhibit.
<PAGE> 1
EXHIBIT 10.1.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Employment Agreement") is entered into
as of the 23rd day of July, 1997, between JOHN T. CONNOR (the "Employee") and
TRANSCRYPT INTERNATIONAL, INC., a Delaware corporation (the "Company").
The Company wishes to employ the Employee as Chairman of the Company on
the terms set forth in this Employment Agreement, and the Employee wishes to
accept such employment on such terms and this agreement hereby cancels the
agreement of September 10, 1991 as amended May 3, 1997.
THEREFORE, in consideration of the mutual promises set forth herein, it
is mutually agreed between the parties as follows:
Section 1. EMPLOYMENT AND TERM. The Company hereby employs the Employee
and the Employee hereby accepts employment as Chairman of the Company on the
terms of this Employment Agreement, commencing as of July 23, 1997 and
continuing until December 31, 1999 unless terminated earlier in accordance with
the provisions of Section 5 hereof.
Section 2. DUTIES AND AUTHORITY. The Employee's duties shall be as
determined by the Board of Directors.
Section 3. COMPENSATION.
(a) Base Salary. The Employee will receive a base salary
during the term of this Employment Agreement of $200,000 per year
("Base Salary"), which shall be payable in approximately equal biweekly
installments. Base salary will be subject to annual review and can be
increased with concurrence of the Board of Directors.
(b) Bonus. The Employee shall receive a quarterly bonus based
on 20% of his salary for meeting or exceeding the quarterly sales goal
and a 20% of his salary for meeting or exceeding quarterly profit goal.
The goals are based upon Board approved sales and profit plans.
(c) Additional Benefits. The Employee will also receive such
additional employee benefits as the Company may from time to time make
available to its executive officers, including paid vacations, pension
benefits, qualified profit-sharing plans, employee group insurance,
disability insurance and personal life insurance premium not to exceed
$1,800. Benefits will be at least equal to those received as of the
date of this Employment Agreement.
(d) Withholdings. All payments made to the Employee pursuant
to this Employment Agreement shall be reduced by all required federal,
state and local withholdings for taxes and similar charges and by all
contributions or
1
<PAGE> 2
payments required to be made by the Employee in connection with any
employee benefit plan maintained by the Company.
(e) It is further understood that as a part of the management
transition plan the Chairman will spend three to four days a week in
the office with availability at off site locations.
Section 4. REIMBURSEMENT FOR EXPENSES. The Employee is expected to
incur certain expenses on behalf of the Company for travel, promotion,
telephone, entertainment and similar items. The Company will reimburse the
Employee for all ordinary, necessary and reasonable amounts of such expenses
incurred by the Employee, which amounts shall be payable promptly upon receipt
of reasonable written documentation signed by the Employee itemizing such
expenses.
Section 5. EARLY TERMINATION OF TERM; SEVERANCE PAYMENT. This
Employment Agreement shall terminate prior to the date of termination set forth
in Section 1 above upon the first to occur of:
(a) the determination by the Board of Directors that the
Employee has become disabled and shall not be able to continue his
service to the Company; or
(b) the Employee's death; or
(c) the Employment Agreement is terminated by the Company by
reason of the Employee's continuing willful neglect of his duties under
this Employment Agreement, the theft or misappropriation of the
company's assets by the Employee or fraud of the Employee under the
Company.
Section 6. RESTRICTIVE COVENANT. The Employee shall execute,
concurrently with this Employment Agreement, a Noncompete Agreement in the form
attached hereto as Exhibit "A".
Section 7. COMPANY OPTION PLAN. Within one year from the date of this
Agreement, the Company shall adopt a new Option Plan in which the Employee shall
participate on the terms and conditions approved by the Board of Directors. The
provisions of the old Option Plan dated December 1995 will remain in effect.
Section 8. AMENDMENTS. No change, modification, waiver, discharge,
amendment or addition to this Employment Agreement shall be binding unless it is
in writing and signed by the Company and the Employee.
Section 9. ENTIRE AGREEMENT. This Employment Agreement contains the
entire understanding and agreement between the Company and the Employee and
supersedes any prior agreements between them pertaining to the Employee's
employment with the Company. There are no representations, warranties, promises,
covenants or understandings between the Company and the Employee with respect to
such employment other than those expressly set forth in this Employment
Agreement.
2
<PAGE> 3
This Employment Agreement takes precedence over other conflicting agreements
with Employee.
Section 10. GOVERNING LAW. This Employment Agreement shall be governed
by the substantive laws of the State of Nebraska.
Section 11. NONASSIGNABILITY; SUCCESSORS. The obligations of the
Employee under this Employment Agreement are not assignable by him. Except as
provided in the immediately preceding sentence, this Employment Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
successors.
Section 12. NOTICES. Any notice required to be given in writing by any
party to this Employment Agreement may be personally delivered or mailed by
registered or certified mail to the last known address of the party to be
notified. Any such notice personally delivered shall be effective upon delivery
and any such notice mailed shall be effective four business days after the date
of mailing, by registered or certified mail with postage prepaid to the last
known address of the party to be notified.
Section 13. SEVERABILITY. The invalidity or unenforceability of any
particular provision of this Employment Agreement shall not affect the other
provisions of this Employment Agreement, and this Employment Agreement shall be
construed in all respects as if such invalid or unenforceable provision were
omitted.
Section 14. HEADINGS. The section and other headings contained in this
Employment Agreement are for reference purposes only and shall not affect the
interpretation of this Employment Agreement.
Section 15. CONSTRUCTION. Whenever required by the context, references
to the singular shall include the plural, and the masculine gender shall include
the feminine gender.
IN WITNESS WHEREOF, the Company has caused this Employment Agreement to
be executed on its behalf and the Employee has signed his name hereto, effective
as of the date first written above.
TRANSCRYPT INTERNATIONAL, INC.
a Delaware corporation
By: /s/ TERRY L. FAIRFIELD
----------------------------------
Printed Name Terry L. Fairfield
-------------------------
Its Chairman, Compensation Committee
----------------------------------
/s/ JOHN T.CONNOR
-------------------------------------
JOHN T.CONNOR, Employee
3
<PAGE> 4
EXHIBIT "A"
NONCOMPETE AGREEMENT
TRANSCRYPT INTERNATIONAL, INC., a Delaware corporation (the "Company")
(for the purposes of this Noncompete Agreement, the term "Company" shall include
affiliates of Transcrypt International, Inc.) and JOHN T. CONNOR ("Employee")
agree as follows:
1 . In consideration of the Company employing Employee as set forth in
that certain Employment Agreement (the "Agreement") of even date hereto executed
by and among the Company and Employee, Employee hereby agrees to adhere to the
following terms and conditions:
Employee expressly covenants and agrees that at not time during the
effective time of the Agreement will it for itself or on behalf of any
other person, partnership, firm, association or corporation in any
territory in which the Employee is acting pursuant to the Agreement (1)
open or operate a business which would be a competitor of the Company,
(2) act as an employee, agent, advisor or consultant of any then
existing competitor of the Company, (3) solicit or accept business from
any of the Company's competitors, unless authorized by the Company, (4)
divert any business from the Company by influencing or attempting to
influence any present customers or the Company or (5) attempt to attract
any supplier away from the Company or use its information regarding the
Company's suppliers in any way which would detrimentally affect the
Company. Employee further covenants and agrees that for two years
following the termination of the Agreement, whether such termination is
voluntary or involuntary, he will not for himself or on behalf of any
other person, partnership, firm, association or corporation in any
territory in which the Company has done business during the 12 months
immediately prior to the Agreement's termination (1) directly or
indirectly solicit or accept business from any of the Company's present
customers or customers it serviced in said territory within the last 12
months of the effective term of the Agreement (2) divert any business
from the Company by influencing or attempting to influence any present
customers of the Company or (3) attempt to attract any supplier away
from the Company or use its information regarding the Company's
suppliers in any way which would detrimentally affect the Company.
2. By signing this agreement, Employee expressly acknowledges that the
territorial limitations, duration and scope of this agreement are fair and
reasonable. This Noncompete Agreement shall survive the termination of the
Agreement.
3. Employee further agrees that the Company shall be entitled to
maintain proceedings in any court of competent jurisdiction, either at law or in
equity, for any breach of this agreement by Employee to enforce the specific
performance of this
4
<PAGE> 5
agreement and/or to obtain damages for any breach thereof, and without regard to
any or all remedies sought by the Company, the Company shall be entitled to
recover reasonable attorney's fees incurred in enforcing this agreement.
4. This agreement supersedes any prior agreement between the Employee
and the Company pertaining to the subject hereof. In the event that any portion
of this agreement is declared invalid or illegal by final judgment of any court
of competent jurisdiction, the remainder of this agreement shall remain in full
force and effect, notwithstanding the invalidity or illegality of the other
portion.
5. This agreement shall be governed by the laws of the State of
Nebraska.
6. This agreement may be executed in duplicate counterparts, each of
which shall be deemed to be an original, and all of which shall constitute one
in the same agreement.
IN WITNESS WHEREOF, the parties have caused this agreement to be
executed as of the 23rd day of July, 1997.
TRANSCRYPT INTERNATIONAL, INC.
a Delaware corporation
By: /s/ TERRY L. FAIRFIELD
----------------------------------
Printed Name Terry L. Fairfield
-------------------------
Its Chairman, Compensation Committee
----------------------------------
/s/ JOHN T.CONNOR
-------------------------------------
JOHN T.CONNOR, Employee
5
<PAGE> 1
EXHIBIT 10.2.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Employment Agreement") is entered into
as of the 31st of July, 1997, between JEFFERY L. FULLER (the "Employee") and
TRANSCRYPT INTERNATIONAL, INC., a Delaware corporation (the "Company").
The Company wishes to employ the Employee as President and Chief
Executive Officer of the Company on the terms set forth in this Employment
Agreement, and the Employee wishes to accept such employment on such terms.
THEREFORE, in consideration of the mutual promises set forth herein, it
is mutually agreed between the parties as follows:
Section 1. EMPLOYMENT AND TERM. The Company hereby employs the Employee
and the Employee hereby accepts employment as President and Chief Executive
Officer of the Company on the terms of this Employment Agreement, commencing as
of the date hereof and continuing until December 31, 1999 unless terminated
earlier in accordance with the provisions of Section 5 hereof.
Section 2. DUTIES AND AUTHORITY. The Employee's duties shall be as
determined by the Board of Directors and Chairman of the Board of Directors.
Section 3. COMPENSATION.
(a) Base Salary. The Employee will receive a base salary
during the term of this Employment Agreement of $200,000 per year
("Base Salary"), which shall be payable in approximately equal biweekly
installments. Base salary will be subject to annual review and can be
increased with concurrence of the Board of Directors.
(b) Bonus. The Employee shall receive an annual bonus in an
amount to be determined by the Company's Board of Directors if the
Company meets or exceeds the projections of the Company's performance
set forth in the Strategic Plan distributed quarterly to the Board of
Directors. At a minimum, Employee shall receive a quarterly bonus equal
to 20% of his salary if the Company meets its quarterly sales goal and
20% of his salary if the Company meets quarterly profit goal. Such
bonus shall be due and payable on or before the 30th day following the
close of the Company's quarter.
(c) Additional Benefits. The Employee will also receive such
additional employee benefits as the Company may from time to time make
available to its executive officers, including paid vacations, pension
benefits, qualified profit-sharing plans, employee group insurance,
disability insurance and personal life insurance premium not to exceed
Rate sheet presently quoted per transcrypt obtained policy from Mass
Mutual. Benefits will be at least equal to those received as of the
date of this Employment Agreement.
1
<PAGE> 2
(d) Withholdings. All payments made to the Employee pursuant
to this Employment Agreement shall be reduced by all required federal,
state and local withholdings for taxes and similar charges and by all
contributions or payments required to be made by the Employee in
connection with any employee benefit plan maintained by the Company.
Section 4. REIMBURSEMENT FOR EXPENSES. The Employee is expected to
incur certain expenses on behalf of the Company for travel, promotion,
telephone, entertainment and similar items. The Company will reimburse the
Employee for all ordinary, necessary and reasonable amounts of such expenses
incurred by the Employee, which amounts shall be payable promptly upon receipt
of reasonable written documentation signed by the Employee itemizing such
expenses.
Section 5. EARLY TERMINATION OF TERM. This Employment Agreement shall
terminate prior to the date of termination set forth in Section 1 above upon the
first to occur of:
(a) the determination by the Board of Directors that the
Employee has become disabled and shall not be able to continue his
service to the Company; or
(b) the Employee's death; or
(c) the Employment Agreement is terminated by the Company by
reason of the Employee's continuing willful neglect of his duties under
this Employment Agreement, the theft or misappropriation of the
company's assets by the Employee or fraud of the Employee under the
Company.
Section 6. RESTRICTIVE COVENANT. The Employee shall execute,
concurrently with this Employment Agreement, a Noncompete Agreement in the form
attached hereto as Exhibit "A". "On File"
Section 8. AMENDMENTS. No change, modification, waiver, discharge,
amendment or addition to this Employment Agreement shall be binding unless it is
in writing and signed by the Company and the Employee.
Section 9. ENTIRE AGREEMENT This Employment Agreement contains the
entire understanding and agreement between the Company and the Employee and
supersedes any prior agreements between them pertaining to the Employee's
employment with the Company. There are no representations, warranties, promises,
covenants or understandings between the Company and the Employee with respect to
such employment other than those expressly set forth in this Employment
Agreement.
2
<PAGE> 3
This Employment Agreement takes precedence over other conflicting agreements
with Employee.
Section 10. GOVERNING LAW. This Employment Agreement shall be governed
by the substantive laws of the State of Nebraska.
Section 11. NONASSIGNABILITY; SUCCESSORS. The obligations of the
Employee under this Employment Agreement are not assignable by him. Except as
provided in the immediately preceding sentence, this Employment Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
successors.
Section 12. NOTICES. Any notice required to be given in writing by any
party to this Employment Agreement may be personally delivered or mailed by
registered or certified mail to the last known address of the party to be
notified. Any such notice personally delivered shall be effective upon delivery
and any such notice mailed shall be effective four business days after the date
of mailing, by registered or certified mail with postage prepaid to the last
known address of the party to be notified.
Section 13. SEVERABILITY. The invalidity or unenforceability of any
particular provision of this Employment Agreement shall not affect the other
provisions of this Employment Agreement, and this Employment Agreement shall be
construed in all respects as if such invalid or unenforceable provision were
omitted.
Section 14. HEADINGS. The section and other headings contained in this
Employment Agreement are for reference purposes only and shall not affect the
interpretation of this Employment Agreement.
Section 15. CONSTRUCTION. Whenever required by the context, references
to the singular shall include the plural, and the masculine gender shall include
the feminine gender.
IN WITNESS WHEREOF, the Company has caused this Employment Agreement to
be executed on its behalf and the Employee has signed his name hereto, effective
as of the date first written above.
TRANSCRYPT INTERNATIONAL, INC.
a Delaware corporation
By: /s/ TERRY L. FAIRFIELD
----------------------------------
Printed Name Terry L. Fairfield
-------------------------
Its Chairman, Compensation Committee
----------------------------------
/s/ JEFFERY L. FULLER
-------------------------------------
JEFFERY L. FULLER, Employee
3
<PAGE> 4
EXHIBIT "A"
NONCOMPETE AGREEMENT
TRANSCRYPT INTERNATIONAL, INC., a Delaware corporation (the "Company")
(for the purposes of this Noncompete Agreement, the term "Company" shall include
affiliates of Transcrypt International, Inc.) and JEFFERY L. FULLER ("Employee")
agree as follows:
1 . In consideration of the Company employing Employee as set forth in
that certain Employment Agreement (the "Agreement") of even date hereto executed
by and among the Company and Employee, Employee hereby agrees to adhere to the
following terms and conditions:
Employee expressly covenants and agrees that at not time during the
effective time of the Agreement will it for itself or on behalf of any
other person, partnership, firm, association or corporation in any
territory in which the Employee is acting pursuant to the Agreement (1)
open or operate a business which would be a competitor of the Company,
(2) act as an employee, agent, advisor or consultant of any then
existing competitor of the Company, (3) solicit or accept business from
any of the Company's competitors, unless authorized by the Company, (4)
divert any business from the Company by influencing or attempting to
influence any present customers or the Company or (5) attempt to attract
any supplier away from the Company or use its information regarding the
Company's suppliers in any way which would detrimentally affect the
Company. Employee further covenants and agrees that for two years
following the termination of the Agreement, whether such termination is
voluntary or involuntary, he will not for himself or on behalf of any
other person, partnership, firm, association or corporation in any
territory in which the Company has done business during the 12 months
immediately prior to the Agreement's termination (1) directly or
indirectly solicit or accept business from any of the Company's present
customers or customers it serviced in said territory within the last 12
months of the effective term of the Agreement (2) divert any business
from the Company by influencing or attempting to influence any present
customers of the Company or (3) attempt to attract any supplier away
from the Company or use its information regarding the Company's
suppliers in any way which would detrimentally affect the Company.
2. By signing this agreement, Employee expressly acknowledges that the
territorial limitations, duration and scope of this agreement are fair and
reasonable. This Noncompete Agreement shall survive the termination of the
Agreement.
3. Employee further agrees that the Company shall be entitled to
maintain proceedings in any court of competent jurisdiction, either at law or in
equity, for any breach of this agreement by Employee to enforce the specific
performance of this
4
<PAGE> 5
agreement and/or to obtain damages for any breach thereof, and without regard to
any or all remedies sought by the Company, the Company shall be entitled to
recover reasonable attorney's fees incurred in enforcing this agreement.
4. This agreement supersedes any prior agreement between the Employee
and the Company pertaining to the subject hereof. In the event that any portion
of this agreement is declared invalid or illegal by final judgment of any court
of competent jurisdiction, the remainder of this agreement shall remain in full
force and effect, notwithstanding the invalidity or illegality of the other
portion.
5. This agreement shall be governed by the laws of the State of
Nebraska.
6. This agreement may be executed in duplicate counterparts, each of
which shall be deemed to be an original, and all of which shall constitute one
in the same agreement.
IN WITNESS WHEREOF, the parties have caused this agreement to be
executed as of the 23rd day of July, 1997.
TRANSCRYPT INTERNATIONAL, INC.
a Delaware corporation
By: /s/ TERRY L. FAIRFIELD
----------------------------------
Printed Name Terry L. Fairfield
-------------------------
Its Chairman, Compensation Committee
----------------------------------
-------------------------------------
JEFFERY L. FULLER, Employee
5
<PAGE> 1
EXHIBIT 10.34
AGREEMENT OF LEASE
Between
GREENE STREET, CAPITAL CORPORATION
as Landlord
and
E.F. JOHNSON COMPANY
as Tenant
for premises located at
299 Johnson Avenue
and
206 2nd Avenue S.W.
Waseca, Minnesota
Dated: As of July 31, 1992
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
Article Page
- ------- ----
<S> <C> <C>
I. Demised Premises - Term of Lease..................................... 1
II. Rent .............................................................. 2
III. Use of Premises; Environmental Matters............................... 6
IV. Taxes and Impositions................................................ 8
V. Insurance............................................................ 13
VI. Right to Perform Covenants of Tenant................................. 19
VII. Repairs and Maintenance.............................................. 19
VIII. Compliance with Orders and Ordinances................................ 24
IX. Changes and Alterations.............................................. 26
X. Discharge of Liens................................................... 29
XI. Access to Premises by Landlord....................................... 31
XII. Assignment and Subletting............................................ 32
XIII. No Waste............................................................. 37
XIV. Damage or Destruction................................................ 37
XV. Condemnation......................................................... 38
XVI. Indemnification...................................................... 41
XVII. Mortgage Subordination............................................... 45
XVIII. Signs .............................................................. 48
XIX. Conditional Limitations - Default Provisions......................... 49
XX. Surrender - Personal Property........................................ 55
XXI. Quiet Enjoyment...................................................... 56
XXII. Certificates......................................................... 56
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
XXIII. Remedies - Waiver.................................................... 57
XXIV. Force Majeure........................................................ 58
XXV. Notices.............................................................. 59
XXVI. Broker .............................................................. 60
XXVII. Non-Liability of Landlord............................................ 61
XXVIII. Recording of Lease................................................... 62
XXIX. Holding Over......................................................... 62
XXX. Excavation of Adjoining Premises..................................... 63
XXXI. Miscellaneous........................................................ 64
XXXII. Termination Right.................................................... 65
XXXIII. Purchase Option...................................................... 66
</TABLE>
<PAGE> 4
THIS LEASE, made as of the ___ day of July 1992 between GREENE STREET
CAPITAL CORPORATION, a Delaware corporation, with offices at 114 Greene Street,
New York, New York 10012, hereinafter called "Landlord," and E.F. JOHNSON
COMPANY, a Minnesota corporation, with an address c/o Weksel Davies & Co., Inc.,
777 Third Avenue, New York, NY 10017, hereinafter called "Tenant".
W I T N E S S E T H:
In consideration of the covenants, conditions and agreements
hereinafter contained, Landlord and Tenant mutually agree as follows:
ARTICLE I
Demised Premises - Term of Lease
Section 1.1. Demised Premises. Landlord hereby leases to Tenant and
Tenant hereby takes and hires from Landlord, subject to the terms of this Lease,
those two improved parcels of real property commonly known and designated as 206
2nd Avenue SW, and that single parcel of real property commonly known and
designated as 299 Johnson Avenue, Waseca, Minnesota, all of which are legally
described on Exhibit A attached hereto and made a part hereof, together with all
improvements situated, lying and being thereon and all related contract and
other intangible rights conveyed to Landlord pursuant to the Purchase and Sale
Agreement for Improved Real
<PAGE> 5
Property Between Tenant, as Seller, and Landlord, as Buyer, of even date
herewith (collectively, the "Demised Premises"); SUBJECT, HOWEVER, to the
matters set forth in Exhibit B annexed hereto and made a part hereof (the
"Permitted Title Exceptions").
Section 1.2. Term. Landlord leases the Demised Premises to Tenant for a
term of One Hundred Twenty (120) months plus the balance of the month in which
the Commencement Date occurs (referred to herein as the "Term") commencing the
date hereof (the "Commencement Date") and ending on July 31, 2002 (the
"Expiration Date"), unless sooner terminated as hereinafter provided.
ARTICLE II
Rent
Section 2.1. Basic Rent. Tenant shall pay Landlord an annual basic rent
during the Term (hereinafter called "Basic Rent") as follows:
(a) Commencing on the Commencement Date through and including July 31,
1995, Three Hundred Ninety-nine Thousand Nine Hundred Ninety-nine and 96/100
Dollars ($399,999.96), payable in equal monthly installments of Thirty-three
Thousand Three Hundred Thirty-three and 33/100 Dollars ($33,333.33) each.
(b) Commencing on August 1, 1995 through and including July 31, 1996,
Four Hundred Ninety-nine Thousand Nine Hundred Ninety-two Dollars ($499,992),
payable in equal monthly
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<PAGE> 6
installments of Forty-one Thousand Six Hundred sixty-six Dollars ($41,666) each.
(c) Commencing on August 1, 1996 through and including the Expiration
Date, Six Hundred Twenty-four Thousand Nine Hundred Ninety-six Dollars
($624,996) per annum, payable in equal monthly installments of Fifty-two
Thousand Eighty-three Dollars ($52,083) each.
Tenant covenants and agrees to pay to Landlord all Basic Rent due
hereunder in lawful money of the United States in advance on the first day of
each calendar month during the term hereof, together with Additional Rent as
hereinafter set forth, without any deduction, offset or abatement whatsoever.
All amounts due from Tenant to Landlord under this Lease shall be paid by good
and sufficient check (subject to collection) to Landlord at the address set
forth on the first page of this Lease. The annual Basic Rent payable on account
of any partial calendar month during the term, if any, shall be prorated. On the
Commencement Date, Tenant shall make the Basic Rent payment due for that portion
of the month of July, 1992 occurring within the Term and for the month of
August, 1992.
Section 2.2. Net Lease. The parties intend that the Basic Rent shall
be paid to Landlord absolutely net and that except as otherwise expressly
provided herein, all costs, expenses and obligations of every kind and nature
whatsoever relating to the Demised Premises or the Tenant's use or occupancy
thereof accruing after the Commencement Date shall be
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<PAGE> 7
paid by Tenant, including but not limited to real estate taxes, assessments,
water and sewer charges, utility charges and all other charges or expenses of
any nature whatsoever, and Tenant covenants and agrees to indemnify, defend and
hold harmless Landlord from and against all such costs, fees, expenses and
obligations, excluding, however, Landlord's income and franchise taxes.
Section 2.3. Additional Rent; Late Payment. In addition to Basic Rent,
all other payments to be made hereunder by Tenant to Landlord, and all payments
made by Landlord an behalf of Tenant, and all of Landlord's costs (including,
without limitation, reasonable attorneys' fees) incurred in connection with
enforcing this Lease shall be defined as and deemed for the purpose of securing
the collection thereof to be "Additional Rent" hereunder, whether or not
designated as such, and shall be due and payable as set forth herein; and
Landlord shall have the same rights and remedies upon Tenant's failure to pay
the same as for the non-payment of Basic Rent.
If Tenant shall fail to pay Basic Rent or any Additional Rent within
five (5) days after the same shall be due and same shall remain unpaid five (5)
days following notice from Landlord thereof ("Late Payment Notice"), Tenant
shall pay Landlord a service charge in an amount equal to 4% of the past due
payment of Basic Rent or Additional Rent, to reimburse Landlord for its
administrative and other cost and expenses incurred on account of Tenant's late
payment, and shall also
- 4 -
<PAGE> 8
pay Landlord interest on any such past due payment from the due date of such
Basic Rent or Additional Rent at a rate equal to the lesser of (i) four percent
(4%) above the prime rate as announced from time to time by Citibank, N.A. in
New York,, New York, or (ii) the highest legal rate of interest (the "Overdue
Rate"). If Tenant shall make any payment of Basic Rent or Additional Rent late,
so as to incur service and interest charges pursuant to the immediately
preceding sentence, two (2) times in any successive 12-month period during the
Term, from and after such second late payment interest on all future late
payments of Basic Rent or Additional Rent during the succeeding 12-month period
shall accrue from the due date and the service charge during the succeeding
12-month period shall be due and payable for any payment of Basic Rent or
Additional Rent paid more than five (5) days after the same shall be due
irrespective of whether Landlord gives Tenant a Late Payment Notice.
Landlord, at its election, shall have the right (but not the
obligation) after ten (10) days prior notice to Tenant (except for emergencies
or to prevent the loss of any interest of Landlord in the Demised Premises, in
which case no notice shall be necessary) to pay for or perform any act that
requires the expenditure of any sums of money by reason of the failure or
neglect of Tenant to perform any of the provisions of this Lease within the
period provided herein, and in the event Landlord shall at its election pay such
sums or perform such
- 5 -
<PAGE> 9
acts requiring the expenditure of moneys, Tenant shall reimburse and pay
Landlord, upon demand, all such reasonable sums together with interest at the
Overdue Rate, which shall be deemed for the purpose of securing the collection
thereof to be Additional Rent hereunder and payable by Tenant as such.
Section 2.5. No Setoff or Abatement. Except to the extent specifically
set forth in this Lease, no setoff against or abatement or reduction of rent,
charges or other compensation shall be claimed by or allowed to Tenant, or any
persons claiming under it, under any circumstances, whether for inconvenience,
discomfort, interruption of business, or otherwise, arising from the making of
alterations, changes, additions, improvements or repairs to the Demised Premises
or improvements located thereon by virtue or because of any present or future
governmental laws, ordinances, requirements, orders, directions, rules or
regulations or by virtue or arising from, and during, the restoration of the
Demised Premises after the destruction or damage thereof by fire or other cause
or the taking or condemnation of any portions thereof or arising from any other
cause or reason.
ARTICLE III
Use of Premises; Environmental Matters
Section 3.1. Use. Tenant shall not use the Demised Premises in
violation of applicable Requirements (as defined in Section 8.1).
- 6 -
<PAGE> 10
Except to the extent required in connection with the operation of the
Demised Premises and reasonable amounts of materials required in connection with
Tenant's present business activities at the Demised Premises (each of which
shall be stored, used, treated and disposed of in compliance with all
Environmental Laws), Tenant shall not and shall not permit any Subtenants to,
use any portion of the Demised Premises for the storage, treatment, disposal,
warehousing or distribution of any flammables, explosives, or radioactive
materials, asbestos-containing materials, hazardous or toxic materials,
gasoline, waste, or other petroleum products, soil or water pollution, hazardous
wastes, toxic substances, corrosive materials, potentially or allegedly
carcinogenic substances, substances alleged or believed to result in
reproductive toxicity, or similar substances or materials, including without
limitation, any substances or materials defined as hazardous, toxic or
environmentally unsafe under any governmental law, regulation or ordinance.
Tenant shall not, and shall not permit any subtenants to, commit any acts or
omissions which would give rise to liability under any Environmental Law. Tenant
will not suffer any act to be done or any condition to exist thereon or any part
thereof or any article to be brought thereon, which may be dangerous, unless
safeguarded as required by law, or which may, in law, constitute a nuisance,
public or private, or which may make void or voidable any insurance then in
force with respect thereto.
- 7 -
<PAGE> 11
Tenant will not use or allow the Demised Premises or any part thereof
to be used or occupied for any unlawful purpose or in violation of any
certificate of occupancy or certificate of compliance, if any, covering or
affecting the use of the Demised Premises or any part thereof.
ARTICLE IV
Taxes and Impositions
Section 4.1. Payment By Tenant. Except to the extent otherwise
provided in Section 4.2 hereof, Tenant covenants and agrees to pay all of the
following items: general and special real estate taxes and other taxes
(including without limitation, any personal property taxes, sales taxes, use
taxes, taxes based upon the receipt of rent and the like), assessments, water
and sewer rents, rates and charges, excises, levies, license and permit fees,
fines, penalties and other governmental charges and any interest or costs with
respect thereto, charges for any easement or agreement maintained for the
benefit of the Demised Premises, and charges for public and private utilities
(including, without limitation, gas, electricity, light, heat, air-conditioning,
power and telephone and other communication services), and any other federal,
state or local governmental charges, general and special, ordinary and
extraordinary, foreseen and unforeseen, and which during the Term may be
- 8 -
<PAGE> 12
assessed, levied, confirmed, imposed upon, or grow or become due and payable out
of or in respect of, or charged with respect to, or become a lien on the Demised
Premises, or the sidewalks or streets in front of or adjoining the Demised
Premises, or any other appurtenances of the Demised Premises, or any personal
property, equipment, systems or other facility used in the operation thereof, or
any use or occupancy thereof, or any document to which Tenant is a party
creating or transferring an interest or estate in the Demised Premises (all such
items being herein called "Impositions"); each such Imposition or installment
thereof during the term of this Lease to be paid not later than the day before
any fine, penalty, interest or cost may be added thereto or imposed by law for
the non-payment thereof. If, by law, any Imposition may at the option of the
taxpayer be paid in installments (whether or not interest shall accrue on the
unpaid balance of such Imposition), Tenant may exercise the option to pay the
same in such installments. Landlord covenants and agrees to: (A) give Tenant
prompt notice of the amount and payment due date of any Imposition following
Landlord's receipt of any notice thereof; and (B) cause any mortgagee of all or
any part of the Demised Premises to allow Tenant to pay Impositions in
installments.
Section 4.2. Exclusions. Nothing herein contained shall require Tenant
to pay municipal, state or federal income, inheritance, estate, succession,
transfer, or gift taxes of
- 9 -
<PAGE> 13
Landlord, or any corporate franchise tax imposed upon Landlord or any corporate
successor of Landlord.
Section 4.3. Apportionment. Any Imposition relating to a fiscal period
which includes both a period prior to the Commencement Date and a period
following the Commencement Date shall be paid in full by Tenant. Any imposition
relating to a fiscal period which includes both a period prior to the Expiration
Date and a period following the Expiration Date or earlier consensual
termination date shall be apportioned and adjusted between Landlord and Tenant
so that Landlord shall only be responsible in respect to that portion of such
Impositions which bears the same ratio to the full Impositions that the part of
the fiscal period which falls after the Expiration Date or earlier consensual
termination date bears to the entire fiscal period. The Tenant's responsibility
shall apply to the remainder of the Impositions.
Section 4.4. Right to Contest. Tenant shall have the exclusive right,
at its own expense, to contest the amount or validity, in whole or in part, of
any Imposition by appropriate proceedings diligently conducted in good faith,
but only after payment of such Imposition unless such payment would operate as a
bar to such contest or in Tenant's reasonable determination interfere materially
with the prosecution thereof, in which event payment of such Imposition shall be
postponed if, and only so long as:
- 10 -
<PAGE> 14
(1) neither the Demised Premises nor any part thereof would by reason
of such postponement or deferment be, in the reasonable judgment of Landlord, in
immediate danger of being forfeited or lost; and
(2) If requested by Landlord, Tenant shall have deposited with Landlord
the amount so contested and unpaid, together with all interest and penalties in
connection therewith, and all charges that may or might be assessed against or
become a charge on the Premises or any part thereof in such proceedings.
Upon the termination of any such proceedings, it shall be the
obligation of Tenant to pay the amount of such Imposition, or part thereof, as
finally determined in such proceedings, the payment of which may have been
deferred during the prosecution of such proceedings, together with any costs,
fees (including counsel fees), interest, penalties or other liabilities in
connection therewith, and, upon such payment, Landlord shall return, with
interest, any amount deposited with it with respect to such Imposition as
aforesaid, provided, however, that Landlord shall, if requested by Tenant,
disburse said moneys on deposit with it directly to the imposing authority to
whom such Imposition is payable. If, at any time during the continuance of such
proceedings, Landlord shall deem the amount deposited as aforesaid insufficient,
Tenant shall, upon demand, make an additional deposit as aforesaid of such
-11-
<PAGE> 15
additional sums as Landlord may reasonably request, and upon failure of Tenant
so to do, the amount theretofore deposited may be applied by Landlord to the
payment, removal and discharge of such Imposition, and the interest and
penalties in connection therewith and any costs, fees (including counsel fees)
or other liability accruing in any such proceedings, and the balance, if any,
shall be returned to Tenant and the deficiency, if any, shall be paid by Tenant
to Landlord on demand.
Section 4.5. Refunds. Tenant shall have the exclusive right to seek a
reduction in the valuation of the Demised Premises assessed for tax purposes and
to prosecute any action or proceeding in connection therewith. Tenant shall be
authorized to collect any tax refund of any tax paid by Tenant obtained by
reason thereof and to retain the same subject to Tenant's obligation to pay to
Landlord its pro-rata share thereof pursuant to the provisions of Section 4.3
hereof.
Section 4.6. Joining In Proceedings. Landlord shall not be required to
join in any proceedings referred to in Sections 4.4 or 4.5 hereof unless the
provisions of any law, rule or regulation at the time in effect shall require
that such proceedings be brought by and/or in the name of Landlord or any owner
of the Land, in which event Landlord shall join in such proceedings or permit
the same to be brought in its name. Landlord shall not ultimately be subject to
any liability for the payment of any costs or expenses in connection with any
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such proceedings, and Tenant will indemnify and save harmless Landlord from any
such costs and expenses.
Section 4.7. Landlord's Cooperation. Landlord agrees that whenever
Landlord's cooperation is required in any of the proceedings brought by Tenant
as aforesaid, Landlord will reasonably cooperate therein, provided same shall
not entail any cost or expense to Landlord.
Section 4.8. Evidence of Non-Payment. Any certificate, advice or bill
of the appropriate official designated by law to make or issue the same, or to
receive payment of any Imposition, of non-payment of such Imposition, shall be
prima facie evidence that such Imposition is due and unpaid at the time of the
making or issuance of such certificate, advice or bill, at the time or date
stated therein.
ARTICLE V
Insurance
Section 5.1. Tenant's Insurance. (a) Tenant at its sole cost and
expense shall procure and maintain in full force and effect throughout the term
of this Lease general comprehensive public liability insurance (including
automobile liability insurance) against claims for bodily injury, death and/or
property damage occurring upon, in, about or adjacent to the Demised Premises or
on, in or about any easement or appurtenances or any part thereof. All such
insurance shall be
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written an any "occurrence" basis and shall include (without limiting the
generality of the foregoing) coverage for continual or repeated exposure to
conditions which result in bodily injury or property damage neither expected nor
intended from the standpoint of the insured. All such insurance shall afford
protection to the limit of not less than $5,000,000 with respect to bodily
injury or death to any one person and to the limit of not less than $2,000,000
for damage to property. The foregoing limits shall be increased in the event
that Landlord, in its reasonable judgment, shall determine that the amounts of
insurance are inadequate to pay any claims that may be brought under the
foregoing policies.
(b) During the Term, Tenant shall keep all Improvements insured against
loss or damage by an "all-risk" insurance policy insuring against risks usually
covered by insurance policies carried by institutional owners for similarly
situated properties similar to the Demised Premises (including earthquake, fire,
lightning, windstorm, tornado, hail, explosion, riot and civil commotion and
other casualties usually covered by customary extended coverage) in a minimum
amount equal to their "full replacement value". The term "full replacement
value" as used herein shall mean one hundred (100%) of the actual replacement
cost, including debris removal, exclusive, however, of cost of excavation,
foundation and footings below the basement floor. Such full replacement value
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shall be ascertained from time to time at Tenant's expense (but not more
frequently than once during any two (2) year period) at the request of Landlord,
by the insurance carrier then insuring the Improvements or, at Landlord's
option, by an independent appraiser who shall be acceptable to Landlord. Tenant
shall also maintain steam boiler and machinery insurance, with limits of not
less than $1,000,000, if there is a boiler or pressure object or similar
equipment in the Demised Premises.
(c) All insurance policies shall provide that (1) Landlord (including
any single managing agent, from time to time, of the property constituting the
Demised Premises) and Tenant are additional or named insureds, as applicable,
and upon request of Landlord, the holders of any mortgages and the lessors under
any ground or underlying leases affecting the Building shall be added as
additional insureds; and (2) such policies will not be cancelled or materially
changed without at least thirty (30) days' prior written notice to Landlord and
the holders of any mortgages and the lessors under any ground or underlying
leases. The Tenant shall use all reasonable best efforts to obtain insurance
policies which shall provide that: (1) the interest of the Landlord shall be
insured regardless of any breach or violation by Tenant of any warranties,
declarations or conditions contained in such policies; (2) the interest of the
Landlord therein shall not be invalidated by
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the use or operation of the Demised Premises for purposes which are not
permitted by such policies, nor by any foreclosure or other proceedings relating
to the Demised Premises, nor by change in title to or ownership of the Demised
Premises; and (3) if any premium or installment is not paid when due, or if such
insurance would lapse or be cancelled, terminated or materially changed for any
reason whatsoever, the insurers will promptly notify Landlord and any such
lapse, cancellation, termination or change shall not be effective as to the
Landlord for thirty days after receipt of such notice and the insurers shall
permit Landlord to pay such premium or installment. Appropriate certification
shall be made to the Landlord by each insurer with respect to the foregoing
matters. Any such insurance may be carried under blanket policies maintained by
the Lessee so long as such policies otherwise comply with the provisions of this
Article V. Such policies are to be written by a company having a general policy
holder's rating or equivalent of not less than A and a rating or equivalent in
financial size of Category X as rated in the most current "Best's" insurance
reports and authorized and licensed to issue such policies in the State where
the Demised Premises is located. Tenant shall deliver to Landlord certificates
of insurance and proof of full payment of the premiums therefor on the
Commencement Date of this Lease. At all times during the term of this Lease when
any insurance policy is obtained or renewed, Tenant shall deliver to Landlord
certificates of all
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insurance required hereunder and proof that same have been fully paid for and
are in full force and effect. On any default by Tenant in obtaining or
delivering any such policy or policies or failure to pay the charges therefor,
then Landlord (on not less than three (3) business days' notice to Tenant
unless the Demised Premises would become uninsured prior to the expiration of
such three (3) business day period), in addition to its other rights and
remedies, may secure or pay the charges for any such certificates, and Tenant
shall pay to Landlord as Additional Rent all sums expended by Landlord therefor.
(d) No act shall be done in or about the Demised Premises that causes a
cancellation of any insurance policy covering the Building or any part thereof
or any of its contents. Tenant shall not, without the prior written consent of
Landlord, use any apparatus, machinery or device in or about the Demised
Premises that will overload the Building or any portion thereof.
(e) The insurance required under Section 5.1 may be effected under a
blanket policy or policies covering the Demised Premises and other property and
assets not constituting a part of the Demised Premises, provided that any such
blanket policy shall, in any case, comply in all other respects with the
requirements of this Article V and provided further that such policy(ies) shall
provide for a reserved amount thereunder (as evidenced by certificate(s) of
insurance delivered to Landlord hereunder on the Commencement Date) with respect
to
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the Demised Premises so as to assure that the amount of insurance required by
this Section 5.1(b) will be available notwithstanding any losses with respect to
other properties or assets covered by such blanket policy(ies).
Section 5.2. Waiver of Subrogation. Landlord and Tenant hereby each
release the other party, and such other party's shareholders, agents, employees,
officers, directors and authorized representatives, from any claims such
releasing party may have for personal injury or death, damage to the Demised
Premises, personal property, improvements and alterations of either party in or
about the Demised Premises, to the extent any such liability is covered by any
fire, casualty or other policy of insurance insuring such party or all or any
part of the Demised Premises. Landlord and Tenant shall each cause their
respective insurance policies required to be carried under this Lease to provide
that the insurer waives all right to recovery by way of subrogation against the
other, its shareholders, agents, employees, officers, directors and authorized
representatives.
Section 5.3. Primary Coverage. All insurance required under this Lease
shall be primary as to Landlord and in the event of loss shall be
non-contributing with any other insurance maintained by Landlord.
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ARTICLE VI
Right to Perform Covenants of Tenant
Section 6.1. Landlord's Performance. If Tenant shall at any time fail
to perform any act on its part to be performed hereunder, then within ten (10)
days after service of notice by Landlord (except in the case of an emergency, in
which case no advance notice shall be required), Landlord may, but shall not be
obligated to, may make any other payment or perform any other act on the part of
Tenant to be made and performed as provided in this Lease, in such manner and to
such extent as Landlord may reasonably deem desirable, and in exercising any
such rights, to pay necessary and incidental costs and expenses, employ counsel
and incur and pay reasonable attorneys' fees. All sums so paid by Landlord and
all necessary and incidental costs and expenses in connection with the
performance of any such act by Landlord, together with interest thereon at the
Overdue Rate from the date of the making of such expenditure by Landlord, shall
be deemed Additional Rent hereunder and, except as otherwise in this Lease
expressly provided, shall be payable to Landlord an demand.
ARTICLE VII
Repairs and Maintenance
Section 7. 1. Tenant's Repairs. Tenant has leased the Demised Premises
from Landlord after a full and complete
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examination of its physical condition, as well as the title thereto and
knowledge of its present uses and the uses permitted and not permitted under the
provisions of this Lease or under applicable laws. Tenant accepts the Demised
Premises in the condition or state in which it now is without any representation
or warranty, express or implied, in fact or by law, by Landlord and without
recourse to Landlord, as to the title thereto, the nature, physical condition or
usability thereof or the use or uses to which the Demised Premises or any part
thereof may be put. Except as otherwise provided in the immediately following
paragraph, Landlord shall not be required to furnish any services or facilities
or to make any repairs or alterations in or to the Demised Premises at any time
during the Term and Tenant hereby assumes the full and sole responsibility for
the condition, construction, operation, repair, demolition, replacement,
maintenance and management of the Demised Premises, including but not limited to
the performance of all burdens running with the Land as of the date hereof.
Tenant, at its sole cost and expense, shall take good care of the
Demised Premises and shall keep the same in good order and condition, and shall
make all structural and non-structural repairs of any nature whatsoever,
interior and exterior, ordinary as well as extraordinary, foreseen as well as
unforeseen. Notwithstanding the foregoing, Landlord shall
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make all repairs or replacements of any nature whatsoever required to the
Demised Premises and any improvements constructed thereon if necessitated solely
by reason of the gross negligence or intentional acts of Landlord, or its
employees, officers, invitees, contractors or agents. If Landlord shall be
required to make any repairs or replacements to the Demised Premises pursuant to
the immediately preceding sentence, Landlord shall promptly commence such work
following notice of the need therefor, and diligently prosecute same to
completion, subject, however, to the provisions of Section 24.1 hereof. All
repairs and replacements made by Tenant shall be at least equal in quality and
class to the original work, and Tenant shall use only new building supplies or
materials. With respect to any act, operation, omission, or condition that may
be out of compliance with, in violation of, or otherwise giving rise to
liability or potential liability under any Environmental Law, Tenant shall, and
shall cause its Subtenants to, implement all measures necessary or required to
eliminate such act, operation, omission or condition as a source of liability or
potential liability.
Tenant shall keep and maintain all portions of the Demised Premises
adjoining the same in a clean and orderly condition and shall keep all sidewalks
and parking areas part of or adjoining the Demised Premises free of
accumulations of dirt, rubbish, snow and ice. All improvements and alterations
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and all equipment and fixtures made or installed by the Tenant (excluding
Tenant's movable fixtures and trade equipment) shall immediately upon completion
or installation thereof be and become the property of Landlord without payment
therefor by Landlord, and shall be surrendered to Landlord upon the expiration
of this Lease. Notwithstanding the immediately preceding sentence, Tenant shall
have the right from time to time or at the end of the Term to remove any of
Tenant's trade fixtures, provided Tenant repairs any damage to the Demised
Premises resulting therefrom. Tenant shall at its own expense procure, maintain
in effect, and comply with all conditions of any and all permits, licenses, and
other governmental and regulatory approvals required for Tenant's use of the
Premises, including, without limitation, discharge of (appropriately treated)
materials or wastes into or through any storm drains or sewers serving the
Demised Premises. Except as discharged into the storm drains or sewer in strict
accordance and conformity with all applicable Environmental Laws, Tenant shall
cause any and all Hazardous Material (as hereinafter defined) removed from the
Demised Premises to be removed and transported solely by duly licensed haulers
to duly licensed facilities for final disposal of such materials and wastes.
Upon expiration or earlier termination of the term of the Lease, Tenant shall
cause all Hazardous Materials to be removed from the Demised Premises and to be
transported for use, storage, or disposal in
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accordance and compliance with all applicable Environmental Laws; provided,
however, that Tenant shall not take any remedial action in response to the
presence of any Hazardous Material in or about the Demised Premises, nor enter
into any settlement agreement, consent decree, or other compromise in respect to
any claims relating to any Hazardous Material in any way connected with the
Demised Premises without first notifying Landlord of Tenant's intention to do so
and affording Landlord ample opportunity to appear, intervene, or otherwise
appropriately assert and protect Landlord's interest with respect thereto.
Landlord agrees to promptly respond to any request made by Tenant pursuant to
the preceding sentence.
Section 7.2. "As Is". Landlord shall not be required to furnish any
service or facilities or to make any repairs or alterations in or to the Site.
Tenant hereby takes same "as is" and assumes the full and sole responsibility
for the condition, operation, repair, replacement, appearance, maintenance and
management thereof. Landlord shall have no liability to Tenant, nor shall
Tenant's covenants and obligations under this Lease be reduced or abated in any
manner whatsoever, by reason of any inconvenience, annoyance, interruption on
injury to business arising from Landlord's making any repairs or changes which
Landlord is required or permitted by this Lease, or required by law, to make in
or to any portion of the Site or Improvements, unless due solely to Landlord's
gross negligence.
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ARTICLE VIII
COMPLIANCE WITH ORDERS AND ORDINANCES
Section 8.1. Compliance. Tenant shall at all times and in all respects
comply with all Environmental Laws. Tenant, at its sole cost and expense, shall
promptly comply with all present and future laws, ordinances, orders, rules,
regulations and requirements of all federal, state, country and municipal
governments and appropriate departments, commissions, boards and officers
thereof, and the orders, rules and regulations of the local Board of Fire
Underwriters, or any other body exercising similar functions, foreseen or
unforeseen, ordinary as well as extraordinary, and whether or not the same
require structural repairs or alterations, which may be applicable to the
Demised Premises, the sidewalks, curbs and vaults, if any, adjoining the Demised
Premises or to the use or manner of use of the Demised Premises (collectively,
"Requirements"). Tenant shall likewise observe and comply with the requirements
of all policies of public liability, fire and all other policies of insurance at
any time in force with respect to the Demised Premises.
Section 8.2. Protest. Tenant shall have the right, following ten (10)
days' prior written notice to Landlord (unless such time delay shall prejudice
Tenant's right to contest), to contest by appropriate legal proceedings
prosecuted diligently and in good faith, without cost or
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expense to Landlord, the validity or application of any Requirements. If
compliance therewith may legally be held in abeyance without incurring any lien,
charge, or liability of any kind that could result in loss of title to the
Demised Premises or Tenant's leasehold interest in the Demised Premises, and
without subjecting Tenant or Landlord or their respective employees, officers,
directors or shareholders to any criminal liability of whatever nature for
failure to comply therewith, Tenant may postpone compliance therewith until the
final determination of any such proceedings, provided that all such proceedings
shall, in Landlord's reasonable judgment, be prosecuted with all due diligence
and dispatch. Before commencement of any contest or challenge by Tenant, Tenant
shall indemnify Landlord against all liability for damages, interest, penalties
and expenses (including reasonable attorneys' fees and expenses), resulting from
or incurred in connection with such contest or non-compliance. Tenant shall not
stay its compliance with any Requirement if such non-compliance or contest shall
result in or constitute a default under any institutional mortgage of the fee of
the Demised Premises. Tenant shall keep Landlord apprised of the status of any
such proceedings.
Before commencement of any contest or challenge by Tenant, upon request
by Landlord Tenant shall procure and deliver to Landlord, at Tenant's expense,
either (i) the bond of a surety company satisfactory to Landlord, which bond
shall
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be in form and substance satisfactory to Landlord, and shall be in an amount at
least equal to one hundred percent (100%) of the cost of compliance (as
estimated by a reputable contractor designated by Landlord), and shall indemnify
Landlord against the cost thereof and against all liability for damages,
interest, penalties and expenses (including reasonable attorneys' fees and
expenses), resulting from or incurred in connection with such contest or
non-compliance, or (ii) other security satisfactory to Landlord in its sole
discretion, the interest on which shall be paid to Tenant if the security
remains intact.
ARTICLE IX
Changes and Alterations
Section 9.1. Consent Required. Tenant shall make no alteration, change
or addition, structural or otherwise (whether or not Tenant is required by law
or this Lease to make same), to the Demised Premises without the prior written
consent of the Landlord, which consent shall not be unreasonably withheld with
respect to non-structural alterations. Tenant, however, shall not be required
to obtain Landlord's consent prior to the installation of Tenant's trade
fixtures or operating equipment or Tenant alterations, changes or improvements
which do not have an aggregate cost (with respect to any series of related
improvements) exceeding
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$25,000 and which do not materially affect the Improvements' structure, systems
or exterior aesthetics. Prior to the installation of any alterations as to which
Landlord's consent is required, Tenant shall submit to Landlord any relevant
space plans and mechanical drawings of the proposed alterations as well as
updates on the work in progress, and "as-built" plans and specifications upon
completion. Alterations shall be diligently performed in a good and workmanlike
manner, using new materials and equipment at least equal in quality and class to
original installations of the Demised Premises. Alterations requiring Landlord's
consent shall be performed by contractors first reasonably approved in writing
by Landlord.
Prior to making any repairs requiring Landlord's consent and requesting
Landlord's consent thereto, change or addition, Tenant shall deliver to Landlord
(a) detailed plans, specifications of the proposed repair or alteration and an
itemized estimate of cost; (b) the written consent of the holders of any
institutional mortgage to which this Lease may be subordinate, when such consent
is required by the terms of any such mortgage: (c) the written consent, if
required, of any issuer of any fire, liability or other insurance required to be
maintained hereunder to keep such policies in full force and effect; and (d) all
necessary permits and certificates for the commencement and prosecution of
permitted alterations and for final approval thereof.
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Section 9.2. Insurance. In connection with any work of any nature
performed to the Demised Premises by Tenant, the contractors employed or
retained by Tenant for any alteration, change or addition shall and will take
out and carry, at their own cost and expense, full workmen's compensation
insurance with respect to any work upon such repairs, alteration, change or
addition, as well as any other insurance as may then be required by law, and the
original policies for such workmen's compensation and other insurance, and
certificates thereof naming Landlord as insured, shall be delivered to Landlord
prior to commencement of any work and, on request, at reasonable intervals
thereafter during the work and shall refer specifically to such alterations.
During the performance of any alterations the estimated cost of which exceeds
$10,000, Tenant shall maintain "all risk-builder's risk" insurance and such
other insurance customarily obtained by prudent persons in connection with the
construction of alterations. Prior to commencing any such alterations, Tenant
shall deliver to Landlord a certificate from the insurance carrier for the
afore-described insurance, showing Landlord as named insureds and evidencing
that the required insurance is in full force and effect and the premiums
therefor are fully paid.
Section 9.3. Bond. Before proceeding with any repairs or any permitted
alteration that will cost more than One Hundred Thousand Dollars ($100,000) as
estimated by a
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reputable contractor designated by Landlord, Tenant shall obtain and deliver to
Landlord either (i) a performance bond and a labor and materials payment bond
(issued by a corporate surety licensed to do business in the state where the
Demised Premises is located), each in an amount equal to one hundred twenty-five
percent (125%) of such estimated cost and in form reasonably satisfactory to
Landlord, or (ii) such other security as shall be reasonably satisfactory to
Landlord, the interest on which shall be paid to Tenant, if the security remains
intact.
ARTICLE X
Discharge of Liens
Section 10.1. Liens Prohibited. Tenant will not create or permit to
be created or to remain, and will discharge, any lien, encumbrance or charge
levied on account of any Imposition or any mechanic's, laborer's or
materialman's or environmental lien or any mortgage, conditional sale, title
retention agreement or chattel mortgage, or otherwise) which might be or become
a lien, encumbrance or charge upon the Demised Premises or any part thereof or
the income therefrom. Tenant will not suffer any other matter or thing whereby
the estate, rights and interest of Landlord in the Demised Premises or any part
thereof might by impaired; provided that any Imposition may, after the same
becomes a lien on the Demised
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Premises, be paid or contested in accordance with Article IV hereof and any
mechanic's, laborer's or materialman's lien may be discharged in accordance with
Section 10.2 hereof.
Section 10.2. Mechanic's Liens. If any mechanic's, laborer's or
materialman's lien shall at any time be filed against the Demised Premises or
any part thereof, Tenant, within twenty (20) days of the notice of the filing
thereof, will cause the same to be discharged of record by payment, deposit,
bond or order of a court of competent jurisdiction. If Tenant shall fail to take
action as required herein within the period aforesaid, then, in addition to any
other right or remedy, Landlord may, but shall not be obligated to, discharge
the same either by paying the amount claimed to be due or by procuring the
discharge of such lien by deposit or by bonding proceedings, and in any such
event Landlord shall be entitled, if Landlord so elects, to compel the
prosecution of an action for the foreclosure of such lien by the lienor and to
pay the amount of the judgment in favor of the lienor with interest, costs and
allowances. Any amount so paid by Landlord and all costs and expenses incurred
by Landlord in connection therewith, together with interest thereon at the
Overdue Rate from the respective dates of Landlord's making of the payment or
incurring of the cost and expense, shall constitute Additional Rent payable by
Tenant under this Lease and shall be paid by Tenant to Landlord on demand.
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Section 10.3. No Consent by Landlord. Nothing contained in this Lease
shall be deemed or construed in any way as constituting the consent or request
of Landlord, express or implied, by inference or otherwise, to any contractor,
subcontractor, laborer or materialman for the performance of any labor or the
furnishing of any materials for any specific improvement, alteration to or
repair of the Demised Premises or any part thereof, nor as giving Tenant any
right, power or authority to contract for or permit the rendering of any
services or the furnishing of any materials that would give rise to the filing
of any lien against the Demised Premises or any part thereof.
ARTICLE XI
Access to Premises by Landlord
Section 11.1. Landlord's Access. Landlord and its authorized
representatives shall have the right to enter the Demised Premises at all
reasonable times on reasonable advance notice (except in the case of an
emergency in which case no notice shall be required) for the purpose of:
(a) Inspecting the same.
(b) Making any repairs, alterations, additions or improvements in or to
the Demised Premises required to be made by Landlord pursuant to Section 7.1
hereof. Landlord shall be entitled to take such materials into and upon the
Demised
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Premises that may be required in connection therewith, without any liability to
Tenant and without any reduction of Tenant's obligations hereunder.
(c) Exhibiting the Demised Premises for the purposes of sale or
mortgage or, during the final two years of the Term, lease.
Section 11.2. Re-entry. If Tenant has removed substantially all of its
property from and abandoned the Demised Premises at any time during the last
twelve (12) months of the Term, Landlord may from and after such twelve (12)
month date, with twenty (20) days' notice to Tenant (during which time Tenant
does not dispute the fact that it has abandoned the Demised Premises), enter the
Demised Premises and alter, renovate or decorate the same without liability to
Tenant and without reducing or otherwise affecting Tenant's obligations
hereunder.
ARTICLE XII
Assignment and Subletting
Section 12.1. Assignment. Tenant may not assign this Lease without the
prior written consent of Landlord, which consent may be withheld or delayed in
Landlord's sole discretion (except in connection with the sale, merger or
reorganization of all or substantially all of Tenant's assets occurring after
the 60th month of the Term provided that after
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such sale, merger or reorganization of the successor has a net worth computed in
accordance with generally accepted accounting practices at least equal to the
net worth of Tenant as of the Commencement Date, in which case such consent
shall not be unreasonably withheld). Notwithstanding any such consent, no
assignment of this Lease shall be valid or effective unless:
(a) At the time of the assignment, this Lease is in full force and
effect and Tenant is not in default hereunder beyond applicable notice and cure
periods.
(b) The assignment is duly executed and acknowledged, in proper form
for recording, and an executed counterpart thereof shall be delivered to
Landlord together with Tenant's request for Landlord's consent to the
assignment.
(c) The assignee unconditionally assumes, in the instrument of
assignment, the due performance and observance of all of the terms, covenants
and conditions of Tenant under this Lease to be performed and observed from and
after the effective date of the assignment.
Any assignment which violates any provision of this Section 12.1 shall
be deemed a prohibited assignment and as such, shall be null and void.
Notwithstanding the assignment of this Lease in accordance with the
foregoing, Tenant shall remain liable at all times for the performance of all
terms and obligations imposed on Tenant under the Lease with the same force and
effect as though there had been no assignment.
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Section 12.2. Sublease. Tenant shall not sublet all or any part of the
Demised Premises without the prior written consent of Landlord, which consent
may be withheld or delayed in Landlord's sole discretion. Notwithstanding the
immediately preceding sentence, Landlord agrees not to unreasonably withhold its
consent to a sublet of all or part of the Demised Premises to an Affiliate (as
hereinafter defined) of Tenant. As used herein, "Affiliate" shall mean: (i) any
entity that directly or indirectly controls, is controlled by, is under common
control with, or owns a fifty percent (50%) or greater interest in, Tenant; (ii)
any entity in which Tenant owns a fifty percent (50%) or greater interest,
either directly or indirectly, or (iii) any entity which has acquired all or
substantially all of the assets of Tenant by merger, consolidation, purchase or
other transfer. Tenant shall have the right to sublet any portion of the Demised
Premises without Landlord's consent to any entity they may purchase a division
of Tenant provided that such sublease relates only to that portion of the
Demised Premises then being used by such division, Tenant shall remain primarily
liable under this Lease with respect to the sublet portion of the Demised
Premises, and Tenant shall give Landlord written notice of such sublease within
ten (10) days of its effective date, together with a copy of the sublease
agreement. Notwithstanding such consent or any sublease not requiring Landlord's
consent pursuant to
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the immediately preceding sentence, however, no sublease shall be valid or
effective unless:
(a) At the time of such sublease, this Lease is in full force and
effect and Tenant is not in default hereunder beyond applicable notice and cure
periods.
(b) The sublease is duly executed and acknowledged and an executed
counterpart thereof is delivered to Landlord together with Tenant's request for
Landlord's consent to the sublease.
(c) Any sublease and any renewal, extension or modification thereof
shall contain a provision (self-operative and without further instruments of
subordination) that it is subject and subordinate to (i) this Lease and any
amendments or modifications hereof, and (ii) any and all mortgages to which this
Lease is or may in the future be subject, or which are now or may hereafter
become a lien upon the Demised Premises, and to all renewals, modifications,
consolidations, replacements and extensions thereof.
Any sublease which violates any provision of this Section 12.2 shall be
deemed a prohibited sublet and as such, shall be null and void. Landlord hereby
approves the present Sublease in effect for a portion of the Demised Premises
with Enscan, Inc. dated February 28, 1992.
Section 12.3. Consideration Due Landlord.
(a) Notwithstanding anything in this Lease to the contrary, if this
Lease is assigned or the Demised Premises
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sublet to any person or entity pursuant to the provisions of the Bankruptcy
Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"), any and all monies
or other consideration payable or otherwise to be delivered in connection
therewith shall be paid or delivered to Landlord, shall be and remain the
exclusive property of Landlord and shall not constitute property of Tenant or of
the estate of Tenant within the meaning of the Bankruptcy Code. Any and all
monies or other considerations constituting Landlord's property under the
preceding sentence not paid or delivered to Landlord shall be held in trust for
the benefit of Landlord and be promptly paid or delivered to Landlord. Any
person or entity to which this Lease is assigned or the Demised Premises sublet
pursuant to the provisions of the Bankruptcy Code shall be deemed without
further act or deed to have assumed all of the obligations arising under this
Lease on and after the date of such assignment or subleasing. Any such assignee
or sublessee shall upon demand execute and deliver to Landlord an instrument
confirming such assumption.
(b) Adequate assurance of future performance by an assignee expressly
permitted under the Bankruptcy Code shall be deemed to mean the deposit of cash
or an unconditional letter of credit from a commercial bank in an amount equal
to twelve (12) months' Basic Rent plus an amount equal to all Additional Rent
paid or payable by Tenant for the twelve (12) months
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preceding the year in which the assignment is intended to be effective, which
deposit shall be held by Landlord for the balance of the Term, without interest,
as security for the full performance of all of Tenant's obligations under this
Lease.
ARTICLE XIII
No Waste
Section 13.1. No Waste. Tenant will not suffer, permit or commit any
waste or damage, nuisance, disfigurement or injury to the Demised Premises.
ARTICLE XIV
Damage or Destruction
Section 14.1. Damage or Destruction.
(a) In the event of any casualty resulting in damage or destruction to
the Demised Premises Tenant shall promptly give written notice thereof to
Landlord.
(b) In the event that, at any time during the Term, the Demised
Premises shall be destroyed or damaged by virtue of an event which is within the
coverage of the "all risk" or other insurance policies required to be carried by
Tenant in accordance with the terms of this Lease (an "insurable casualty"),
then Tenant at its own cost and expense (and regardless of the sufficiency of
the insurance proceeds) shall cause the same to be repaired, rebuilt, restored
and replaced
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(collectively, the "restoration") as soon thereafter as reasonably possible to
the same (or similar) condition existing immediately prior thereto.
Section 14.2. Uninsurable Casualty. In the event that at any time
during the Term the Demised Premises shall be destroyed by virtue of an event
which is not an insurable casualty, Tenant shall make restoration at Tenant's
sole cost and expense (and notwithstanding that there are no insurance proceeds)
pursuant to the provisions of Section 14.1 and Article IX.
Section 14.3. No Surrender. No destruction of or damage to the Demised
Premises or any part thereof by fire or any other casualty shall permit Tenant
to surrender this Lease or relieve Tenant from its liability to pay the full
Basic Rent, Additional Rent and other charges payable under this Lease or from
any of its other obligations hereunder, and Tenant waives any rights now or
hereafter conferred upon it by statute or otherwise to quit or surrender this
Lease or the Demised Premises or any part thereof, or to any suspension,
diminution, abatement or reduction of Basic Rent and Additional Rent on account
of any such destruction or damage.
Section 14.4. Environmental. With respect to any liability or alleged
liability arising under any Environmental Law, Tenant shall give and shall cause
its Subtenants to give, timely and proper notice and shall undertake any other
measures
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necessary to ensure that it obtains any indemnification, defense, contribution
or reimbursement that may be available for such liability or alleged liability.
ARTICLE XV
Condemnation
Section 15.1. Awards. In the event that the Demised Premises, or any
part thereof, shall be taken in condemnation proceedings or by exercise of any
right of eminent domain, Landlord shall be entitled to collect from any
condemnor the entire award that may be made in any such proceedings, without
deduction therefrom for any estate hereby vested in or owned by Tenant. Except
as set forth below, no such condemnation shall affect or diminish any of
Tenant's obligations under this Lease. Tenant shall execute any and all further
documents that may be required in order to facilitate collection by Landlord of
any and all such awards. Tenant, in cooperation with Landlord, shall have the
right to appear in any condemnation proceedings for the purposes of protecting
Tenant's interest hereunder provided Tenant's appearance does not reduce or
diminish Landlord's award.
Section 15.2. Taking. If less than all or substantially all, but more
than 25% of the aggregate improved acreage of the Demised Premises shall be
taken in condemnation or by right of eminent domain (a "Condemnation"), and as a
result thereof Tenant reasonably determines that it will be
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unable to operate within the Demised Premises notwithstanding Landlord's work to
restore the remainder of the Demised Premises to a complete architectural unit,
Tenant may terminate this Lease by written notice delivered to Landlord not
later than thirty (30) days following the vesting of title in the condemning
authority. Time shall be of the essence with respect to said 30-day period. If
this Lease is not terminated by Tenant as herein provided, all of the net award
(less Landlord's reasonable expenses in recovering same) received by Landlord
shall be used to make a complete architectural unit of the Demised Premises.
Section 15.3. Adjustment of Rent. If a portion of the Demised Premises
shall be taken in a Condemnation, and this Lease shall continue, then Basic Rent
and Additional Rent, from and after the date of vesting of title in the
condemnor of the part so taken, shall be adjusted to a just and appropriate
Basic Rent and Additional Rent, according to the nature and extent of the
taking. If the parties, within sixty (60) days from the date of such vesting of
title, cannot agree to, or arrive at, the new Basic Rent and Additional Rent,
the issue with-respect thereto shall be submitted for arbitration by one
arbitrator acceptable to both Landlord and Tenant pursuant to the rules of the
American Arbitration Association, or if not in existence, any successor entity,
and Basic Rent and Additional Rent so fixed shall thereupon become the Basic
Rent and
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Additional Rent payable hereunder by Tenant for the balance of the term of this
Lease. If Landlord and Tenant are unable to agree upon a single arbitrator in
accordance with the immediately preceding sentence, Landlord and Tenant shall
each select a single arbitrator who shall then appoint a third arbitrator who
shall determine the new Basic Rent and Additional Rent. Pending final resolution
of the adjusted Basic Rent and Additional Rent, Tenant shall continue to pay the
full Basic Rent and Additional Rent payable hereunder had no Condemnation
occurred; provided, however, that after such determination, Landlord shall
credit (or, if the Term shall end prior to such credit being applied, repay)
Tenant against Basic Rent and Additional Rent then coming due with an amount
equal to the excess of any Basic Rent and Additional Rent paid by Tenant for
such period over the amount of the Basic Rent and Additional Rent for such
period as so reduced.
ARTICLE XVI
Indemnification
Section 16.1. Indemnity. Tenant will indemnify and save harmless
Landlord, its employees, officers, directors, agents, representatives and
shareholders, against and from all liabilities, obligations, damages, penalties,
claims, costs, charges and expenses, including attorneys' fees, which may be
imposed upon or incurred by or asserted against any of such
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indemnified parties by reason of any of the following occurring during the term
of this Lease;
(a) any work or thing done in, on or about the Demised Premises, or any
part thereof, which is the obligation of Tenant;
(b) any use, non-use, possession, occupation, condition, operation,
maintenance or management of the Demised Premises or any part thereof or any
street, alley, sidewalk, curb, vault, passageway or space adjacent thereto;
(c) any negligence on the part of Tenant or any of its agents,
contractors, servants, employees, sub-tenants, licensees or invitees;
(d) any accident, injury or damage to any person or property occurring
in, or on the Demised Premises or any part thereof or any street, alley,
sidewalk, curb, vault, passageway or space adjacent thereto;
(e) any failure on the part of Tenant to perform or comply with any of
the covenants, agreements, terms or conditions contained in this Lease, or any
sublease, on its part to be performed or complied with; and
(f) any Environmental Liability (as hereinafter defined).
In case any action or proceeding is brought against Landlord by reason
of any such claim, Tenant upon written notice from Landlord will at Tenant's
expense resist or defend such action or proceeding by counsel approved by
Landlord in
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writing, such approval not to be unreasonably withheld. Any indemnification by
Tenant herein may be met by insurance maintained by Tenant for such purposes.
The foregoing indemnity shall survive the expiration or earlier termination of
the Term of this Lease.
The term "Environmental Liability" shall mean any and all losses,
liabilities, obligations, penalties, claims, litigation, demands, defenses,
costs, judgments, suits, proceedings, damages (including consequential and
punitive damages), disbursements or expenses of any kind or nature whatsoever
(including attorneys' fees and disbursements and expenses incurred in
investigating, defending against or prosecuting any litigation, claim or
proceeding) which may at any time be imposed upon, incurred by or asserted or
awarded against Landlord, as applicable, or any other Indemnitee in connection
with or arising from (a) the presence in, on, under, or about the Demised
Premises, or any discharge or release in or from the Demised Premises of any
Hazardous Material (as hereinafter defined) or Tenant's use, analysis, storage,
transportation, disposal, release, threatened release, discharge, or generation
of any Hazardous Material to, in, on, under, about, or from the Demised Premises
(including, without limitation, the groundwater or any surrounding areas) during
the Term or any subsurface Hazardous Materials that existed under the Land prior
to the Commencement Date which may seep or flow therefrom; (b) any violation or
claim of violation by
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Tenant or any subtenant of the Demised Premises or assignee of Tenant's rights
under this Lease of any Environmental Laws (as hereinafter defined) relating to
the Demised Premises; or (c) the imposition of any lien for damages caused by or
the recovery of any costs for any remedial actions required by any governmental
authority or court order to be performed on the Demised Premises or any other
property as a result of the occurrence of any event described in subsection (a)
or (b) of this sentence.
The term "Environmental Laws" means all federal, state or local laws,
ordinances, requirements and regulations (including consent decrees and
administrative orders) or duties under the Common Law relating to health,
safety, industrial hygiene, waste disposal, or the protection of the
environment, including, without limitation: the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the federal
Superfund Amendments and Reauthorization Act of 1986, the federal Resource
Conservation and Recovery Act of 1976, the federal Clean Air Act, the federal
Water Pollution Control Act and federal Clean Water Act of 1977, the federal
Insecticide, Fungicide and Rodenticide Act, the federal Pesticide Act of 1978,
the federal Toxic Substances Control Act, the federal Safe Drinking Water Act,
the federal Hazardous Materials Transportation Act, and all amendments thereto
and regulations adopted and publications promulgated pursuant thereto. The term
"Hazardous Materials" means all oil and
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petroleum products, asbestos, polychlorinated biphenyls, urea formaldehyde, and
all other materials now or hereafter classified as hazardous or toxic under any
Environmental Law.
16.2 Survival of obligations. Anything to the contrary in this
Agreement notwithstanding, the covenants of Landlord contained in this Article
XVI shall remain in full force and effect after and survive the expiration or
termination of this Lease.
16.3 Insuring of obligations. To effectuate the purposes of this
Article XVI, Tenant will provide for and insure, in the liability policies
required in Article V hereof, not only its own liability in respect of the
matters therein mentioned but also the liability pursuant to this Article
(excluding, however, the matters in 16.1(f)).
ARTICLE XVII
Mortgage Subordination
Section 17.1. Lease Subordination. Subject to all of the provisions of
this Article, this Lease is subject and subordinate to all institutional
mortgages which are now or may hereafter become a lien upon the Demised Premises
and to all renewals, modifications, consolidations, replacements and extensions
thereof; provided, however, Tenant shall have the right to receive any casualty
insurance proceeds and such rights shall govern any contrary provisions
contained in any
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such institutional mortgages. Such subordination shall only be effective if the
mortgagee agrees that Tenant shall not be disturbed hereunder and its interest
under this Lease shall not be affected in the event of a foreclosure or
termination of the mortgage, provided Tenant is not then in default of any of
its obligations hereunder beyond applicable notice and cure periods. The above
subordination provision shall be self-operative and no further instrument of
subordination shall be required; however, Tenant shall promptly execute,
acknowledge and deliver such other written instruments reasonably requested by
Landlord or the mortgagee of any such mortgage or any of their respective
successors in interest to evidence such subordination provided such agreements
provide Tenant with the non-disturbance rights described in this Section 17.1.
Section 17.2. No Termination. If any act or omission of Landlord would
give Tenant the right, immediately or after lapse of a period of time, to cancel
or terminate this Lease, or to claim a partial or total eviction, Tenant shall
not exercise such right (a) until it has given written notice of such act or
omission to Landlord and any mortgagee whose name and address shall previously
have been furnished to Tenant, and (b) until a reasonable period for remedying
such act or omission shall have elapsed following the giving of such notice and
following the time when such superior mortgagee
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shall have become entitled under such superior mortgage to remedy the same
(which reasonable period shall in no event be less than the period to which
Landlord would be entitled under this Lease or otherwise, after similar notice,
to effect such remedy), provided such superior mortgagee shall with due
diligence give Tenant notice of intention to, and commence and continue to,
remedy such act or omission.
Section 17.3. Attornment. If any superior mortgagee shall succeed to
the rights of Landlord under this Lease, whether through possession or
foreclosure action or delivery of a new lease or deed, then at the request of
the party so succeeding to Landlord's rights ("Successor Landlord"), and upon
the Successor Landlord's written agreement to accept Tenant's attornment, Tenant
shall attorn to and recognize such Successor Landlord as Tenant's landlord under
this Lease and shall promptly execute and deliver any instrument that the
Successor Landlord may reasonably request to evidence such attornment. Upon such
attornment this Lease shall continue in full force and effect as a direct lease
between the Successor Landlord and Tenant upon all of the terms, conditions and
covenants as are set forth in this Lease except that the Successor Landlord
shall not (a) be liable for any previous act or omission of Landlord under this
Lease; (b) be subject to any offset, not expressly provided for in this Lease,
which theretofore shall have accrued to Tenant against
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Landlord; or (c) be bound by any previous modification of this Lease or by any
previous prepayment of more than one month's Basic Rent or Additional Rent
except for amounts due under the last sentence of Section 15.3, unless such
modification or prepayment shall have been expressly approved in writing by a
superior mortgagee through or by reason of which the Successor Landlord shall
have succeeded to the rights of Landlord under this Lease.
Section 17.4 Modifications Required. If any then present or prospective
superior institutional mortgagee shall require any modification(s) of this
Lease, Tenant shall promptly execute and deliver to Landlord such instruments
effecting such modification(s) as Landlord shall reasonably request, provided
that such modification(s) do not adversely affect in any material respect any
of Tenant's rights under this Lease.
ARTICLE XVIII
Signs
Section 18.1. Tenant, at its expense, shall have the right to place
signs upon the Demised Premises and an the roof of any improvements constructed
upon the Demised Premises provided that any sign shall comply with all
Requirements. Tenant shall maintain the same at its expense, shall be liable for
and shall hold Landlord harmless from any damage to the
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Demised Premises and any injury to any person caused by reason of any sign, and
shall, at its expense, remove all signs upon the termination of the Lease and
repair all damage to the Demised Premises resulting from same.
ARTICLE XIX
Conditional Limitations - Default Provisions
Section 19.1. Default. If at any time during the term of this Lease:
(a) Tenant shall file a petition commencing a voluntary proceeding
under any chapter of the Bankruptcy Code, be adjudicated an insolvent, file a
petition seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar arrangement under any present
or future statute, law, rule or regulation, or file an answer admitting the
material allegations of a petition filed against it in any such proceeding,
consent to the filing of such a petition or acquiesce in the appointment of a
trustee, receiver, custodian or other similar official for it or all or any
substantial part of its assets or properties, or take any action looking to its
dissolution or liquidation; or an order for relief against Tenant shall have
been entered under any chapter of the Bankruptcy Code, or if a decree or order
by a court having jurisdiction in the premises shall have been entered approving
as properly filed a petition seeking
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reorganization, arrangement, readjustment, liquidation, dissolution or similar
relief against Tenant under any present or future statute, law, rule or
regulation, which is not dismissed within sixty (60) days, or
(b) any trustee, receiver, custodian or other similar official shall be
appointed for Tenant or for all or any substantial part of its assets or
properties, without Tenant's consent, and such appointment shall not be vacated
within sixty (60) days of such appointment or an order, judgment or decree shall
be entered against Tenant and shall continue in effect for any period of ten
(10) consecutive days without a stay of execution, or any execution or writ or
process shall be issued under any action or proceeding against Tenant whereby
Tenant's business or use of the Demised Premises is restrained, enjoined or
prohibited, or
(c) Tenant shall make an assignment for the benefit of its creditors,
generally not pay its debts as they become due or admit in writing its inability
to pay its debts as they become due, then, upon the expiration of the time
periods set forth in Sections 19.1(a)-(c), this Lease shall terminate and
Tenant shall vacate the premises, surrender same to Landlord and pay all sums
due hereunder without any further act or deed on the part of Landlord and
without any notice to Tenant. The word "Tenant" as used in this Section 19.1
shall be deemed to
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mean Tenant herein named, or, in the event of an assignment or sublet of this
Lease in accordance with the provisions of Article XII, such word shall be
deemed also to mean the assignee or sublessee in possession of the Demised
Premises.
Section 19.2. Liquidated Damages. If this Lease shall terminate
pursuant to the provisions of Section 19.1, Landlord shall be entitled to
receive from Tenant, as liquidated damages, an amount equal to the maximum
amount allowed by statute or rule of law in effect at the time when and
governing the proceeding in which such damages are to be proved, whether or not
such amount be greater than an amount otherwise allowed under this Article.
Section 19.3. Termination. If Tenant shall:
(a) fail to make payment of any Basic Rent or Additional Rent when the
same becomes due and payable and such default shall continue for a period of ten
(10) days after notice by Landlord to Tenant, or
(b) be in default in the performance of any of the other terms,
covenants and conditions of this Lease and such default shall not have been
remedied within twenty (20) days after notice by Landlord to Tenant specifying
such default, or, where such default reasonably cannot be remedied within such
period of twenty (20) days, if Tenant shall not have commenced the remedying
thereof within such period and shall not be proceeding with due diligence to
remedy it, then,
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Landlord, at its election, may terminate this Lease on five (5) days'
notice to Tenant and upon such termination Tenant shall quit and surrender the
Demised Premises to Landlord.
Section 19.4. Re-entry. If this Lease shall terminate pursuant to the
provisions of this Article XIX, Landlord may re-enter and resume possession of
the Demised Premises and remove all persons and property therefrom either by
summary proceedings or by a suitable action or proceeding, at law or in equity,
without being liable for any damage therefor.
Section 19.5. Damages. If this Lease shall terminate pursuant to the
provisions of this Article or by summary proceedings, Landlord shall have no
obligation to mitigate its damages, and shall be entitled to recover from Tenant
as damages:
(a)(i) an amount equal to all expenses incurred by Landlord in
recovering possession of the Demised Premises and in connection with the
reletting thereof, including the cost of repairing, renovating or remodeling the
Demised Premises, and any broker's commissions; (ii) the cost of performing any
work required to be done by Tenant under this Lease, and all damages resulting
from Tenant's default in performing such work; and (iii) the cost of placing the
Demised Premises in the same condition as that in which Tenant is required to
surrender them
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to Landlord, which amounts shall be due and payable by Tenant to Landlord at
such time or times as they shall have been incurred; and
(b) an amount equal to the Basic Rent and Additional Rent less the net
rent collected by Landlord an reletting the entire Demised Premises or any part
thereof, which amount shall be due and payable at the same time at which the
Basic Rent and Additional Rent would have become due and payable had this Lease
not terminated. Tenant consents that Landlord shall be entitled to institute
separate actions or suits or proceedings for the recovery of such amount or
amounts, and Tenant hereby waives the right to enforce or assert the rule
against splitting a cause of action as a defense thereto and shall not interpose
any non-compulsory counterclaim in any such action(s).
(c) Landlord, at its election, which shall be exercised by the service
of a notice an Tenant, may collect from Tenant, and Tenant shall pay in lieu of
the sums becoming due under the provisions of subsection (b) after the service
of such notice, an amount equal to the difference between the Basic Rent and
Additional Rent required to be paid by Tenant under this Lease (from the date of
the service of such notice to the end of the term of this Lease which had been
in force immediately prior to any termination effected under this Article), and
the then fair and reasonable rental value of the Demised Premises for the same
period as determined by Landlord.
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Section 19.6. Waiver. If and to the extent permitted by law, Tenant,
for itself and for all persons claiming through or under it, hereby waives any
and all rights which are or may be conferred upon Tenant by any present or
future law to redeem the Demised Premises after a warrant to dispossess shall
have been executed or after judgment in an action of ejectment shall have been
made and entered.
Section 19.7. Definitions. The words "re-enter" and "re-entry," as
used in this Article XIX, are not restricted to their technical legal meanings.
Section 19.8. Proof of Value. If the Demised Premises or any part
thereof be relet by Landlord for the unexpired Term or any part thereof, by
reason of termination of this Lease, before presentation of proof in connection
with a claim for liquidated damages to any court, the amount of rent reserved
upon such reletting shall be deemed prima facie to be the fair and reasonable
rental value for the part or the whole of the premises so relet during the term
of the reletting.
Section 19.9. Notice Waived. Tenant hereby waives the service of any
notice in writing by Landlord of its intention to re-enter, except as otherwise
provided in this Lease.
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ARTICLE XX
Surrender - Personal Property
Section 20.1. Surrender. Tenant shall an the last day of the Term or
upon any earlier termination of this Lease, or upon any re-entry by Landlord
upon the Demised Premises pursuant to Article XIX, surrender and deliver the
Demised Premises to Landlord without delay and in good order, condition and
repair, reasonable wear and tear excepted, free and clear of all lettings and
occupancies, and of all liens and encumbrances, other than those, if any,
created or consented to by Landlord.
Section 20.2. Personalty. Any personal property of Tenant which shall
remain in the Demised Premises after the termination of this Lease and the
removal of Tenant from the Demised Premises may, at the option of Landlord, be
deemed to have been abandoned by Tenant and either may be retained by Landlord
as its property or be disposed of, without accountability, in such manner as
Landlord may see fit, but if disposed of by removal from the Demised Premises,
Tenant shall pay Landlord the costs and expenses thereby incurred.
Section 20.3. Survival. The provisions of this Article XX shall survive
termination of this Lease.
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ARTICLE XXI
Quiet Enjoyment
Section 21.1. Quiet Enjoyment. Tenant, subject to the terms of this
Lease, upon paying the Basic Rent and Additional Rent and performing the terms,
covenants and conditions of this Lease, shall peaceably and quietly have, hold,
occupy, possess and enjoy the Demised Premises during the Term of this Lease
without hindrance by anyone claiming by, through or under Landlord.
ARTICLE XXII
Certificates
Section 22.1. Certificates. Each party shall, at its expense, at any
time and from time to time, within ten (10) days after request by the other
party, deliver a written instrument to the other party or to a person, firm or
corporation specified by the other party, duly executed and acknowledged,
certifying:
(a) that this Lease is unmodified and in full force and effect, or if
there has been any modification, that the same is in full force and effect, as
modified, and stating any such modification;
(b) whether or not to the best of such party's knowledge there are any
then existing set-offs or defenses against the enforcement of any of the terms,
agreements, covenants, conditions and limitations of this Lease and any
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modification thereof upon the part of Tenant to be performed or complied with,
and if so, specifying the same;
(c) the dates to which Basic Rent, Additional Rent and other charges
hereunder have been paid;
(d) to the best of such party's knowledge, the existence of any default
hereunder, and if so, a description of the default, and whether or not any event
has occurred which, with the giving of notice or the passing of time or both,
would constitute a default hereunder, and if so, specifying each such default;
and
(e) such other information concerning this Lease as the other party may
reasonably request.
Any statement delivered by either party pursuant to this Article XXII
shall be deemed to be a representation and warranty which may be relied upon by
the other party and by others with whom the other party may be dealing,
regardless of independent investigation.
ARTICLE XXIII
Remedies - Waiver
Section 23.1. Remedies Cumulative. The specific remedies to which
Landlord or Tenant may resort under the provisions of this Lease are cumulative
and are not intended to be exclusive of any other remedies or means of redress
to which it may be lawfully entitled in case of any breach or threatened
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breach by the other of any of the terms, covenants and conditions of this Lease.
Section 23.2. No Waiver. No delays or omission by either party hereto
to exercise any right or power accruing upon any non-compliance or default by
the other party with respect to any of the terms of this Lease shall impair any
such right or power or be construed to be a waiver thereof, except as otherwise
herein provided. A waiver by either of the parties hereto of any of the
covenants, conditions or agreements hereof to be performed by the other shall
not be construed to be a waiver of any succeeding breach thereof or of any other
covenant, condition or agreement herein contained. Receipt by Landlord of
payment by Tenant of any sum of money payable by Tenant in accordance with this
Lease shall not be construed to be a waiver of any of the terms of this Lease.
ARTICLE XXIV
Force Majeure
Section 24.1. Force Majeure. Except for Tenant's obligation to pay
Basic Rent and Additional Rent, the time for Landlord or Tenant, as the case may
be, to perform any of its respective obligations hereunder shall be extended if
and to the extent that the performance thereof shall be prevented due to
strikes, lockouts, acts of God, enemy action, civil commotions, warlike
operations, invasions, rebellions,
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hostilities, governmental regulations or controls, inability to obtain labor or
materials despite due diligence, unavoidable casualty or other causes beyond the
control of the party (except inability to obtain financing) whose performance is
required. Except as expressly provided to the contrary, the obligations of
Tenant hereunder shall not be affected, impaired or excused, nor shall Landlord
have any liability whatsoever to Tenant, (a) because Landlord is unable to
fulfill, or is delayed in fulfilling, any of its obligations under this Lease
due to any of the matters set forth in the first sentence of this Article XXIV,
or (b) because of any failure or defect in the supply, quality or character of
electricity, water, or any other utility or service furnished to the Demised
Premises for any reason.
ARTICLE XXV
Notices
Section 25.1. Notices. All notices, demands, requests, offers and
acceptances shall be in writing and shall be deemed sufficiently given if
delivered personally including, without limitation, overnight delivery service
and facsimile transmission (if actually received) or sent by certified mail,
return receipt requested, postage prepaid, addressed to the appropriate party at
its address first hereinabove stated, except as otherwise specifically stated in
this Lease.
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Duplicate copies of all notices to Tenant shall be simultaneously sent to
Proskauer Rose Goetz & Mendelsohn, 1585 Broadway, New York, NY 10036 Attn:
Robert A. Cantone, Esq. Duplicate copies of all notices to Landlord shall be
simultaneously sent to Willkie Farr & Gallagher, One Citicorp Center, 153 East
53rd Street, New York, NY 10022, Attn: Yaacov M. Gross, Esq., and to Arthur
Lipper, 4 Sycamore Lane, White Plains, NY 10605. Either party may at any time
change its address for the aforementioned purposes by notice thereof given to
the other party in the same manner. The time of giving of such notice, demand,
request, offer and acceptance shall be deemed to be the time when same is (i)
personally delivered to the party for which. it is intended (ii) the next
business day if sent by overnight courier, or (iii) the date received if sent by
certified mail.
ARTICLE XXVI
Broker
Section 26.1. No Broker. Landlord and Tenant each represents and
warrants to the other that no broker or finder has acted on its behalf in
connection with this Lease or the transactions contemplated hereby. Each party
agrees to indemnify and hold and save the other harmless from any claim or
demand for commission or other compensation by any broker, finder or similar
agent claiming to have been employed by or on behalf of such party.
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ARTICLE XXVII
NON-LIABILITY OF LANDLORD
SECTION 27.1. NOTICE OF TRANSFER. The term "Landlord" as used herein
means the owner of the Demised Premises, and in the event of the sale,
assignment or transfer by such owner of its interest in the Demised Premises,
the Landlord shall promptly give notice of the fact to Tenant setting forth the
name and address of the transferee, and thereupon the owner selling, assigning
or transferring its interest herein shall be released and discharged as Landlord
herein from all liabilities and obligations thereafter accruing and thereupon
all such liabilities and obligations shall be binding upon the transferee.
SECTION 27.2. NON-LIABILITY. Neither Landlord nor any partner, joint
venturer, director, officer, agent, servant or employee of Landlord shall be
liable to Tenant for any loss, injury or damage to Tenant, or to its property,
unless the cause of such injury, damage or loss was the gross negligence or
willful misconduct of Landlord, its agents, contractors, shareholders, servants
or employees. Further, neither Landlord nor any partner, joint venturer,
director, officer, agent, servant or employee of Landlord shall be liable for
any damage caused by other tenants or persons (except as otherwise provided in
the immediately preceding sentence) in, upon or
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about the Demised Premises, or caused by operations in construction of any work.
Landlord's total liability under this Lease shall in all events be limited to
Landlord's interest in the Demised Premises or, if applicable, net proceeds
derived from the sale thereof.
ARTICLE XXVIII
RECORDING OF LEASE
SECTION 28.1 MEMORANDUM. Tenant shall not record this Lease. However,
at the request of either party, the other party shall promptly execute,
acknowledge and deliver a memorandum of lease with respect to this Lease
sufficient for recording, which memorandum shall specifically refer to the
Purchase Option. Such memorandum shall not be deemed to change or otherwise
offset any of the obligations or provisions of this Lease. Whichever party
records a memorandum of lease shall pay all recording costs and expenses,
including any taxes that are due upon recording.
ARTICLE XXIX
HOLDING OVER
SECTION 29.1. HOLD OVER. If Tenant shall hold over after the expiration
of the Term, such tenancy shall be deemed a month-to-month tenancy unless
otherwise agreed, which tenancy may be terminated pursuant to applicable state
law. During such Tenancy, Tenant agrees to pay to Landlord the greater of
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(x) the fair market rental value for the Demised Premises, as reasonably
determined by Landlord, and (y) two times the Basic Rent and Additional Rent
payable during the last full month of the Term, and to be bound by all of the
terms, covenants and conditions herein specified, so far as applicable. If
Landlord shall not give written consent to a hold over by Tenant, such tenancy
may be terminated pursuant to applicable state law, and until Tenant has vacated
the Demised Premises it shall pay to Landlord rent computed in accordance with
the immediately preceding sentence.
ARTICLE XXX
EXCAVATION OF ADJOINING PREMISES
SECTION 30.1. ACCESS. If any excavation shall be made upon the Demised
Premises or any other parcel of land near the Demised Premises, or shall be
authorized to be made, Tenant shall at Landlord's request afford, to the person
causing or authorized to cause such excavation, license to enter upon the
Demised Premises for the purpose of doing such work as is reasonably necessary
to preserve the walls of the Demised Premises from injury or damage and to
support them by proper foundations without any claim for damages or indemnity
against Landlord or diminution or abatement of Basic Rent and Additional Rent.
Any such work shall be performed, if practicable, in a manner so as to minimize
disruption of Tenant's use and enjoyment of the Demised Premises.
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ARTICLE XXXI
Miscellaneous
Section 31.1. Headnotes. The headnotes, captions or table of contents
in this Lease are inserted only as a matter of convenience and for reference and
in no way define, limit or describe the scope or intent of this Lease or in any
way affect this Lease.
Section 31.2. Modifications. This Lease contains the entire agreement
between the parties and any executory agreement hereafter made shall be
ineffective to change, modify, waive, abandon or discharge it, in whole or in
part, unless it is in writing and signed by the party against whom enforcement
thereof is sought. This Lease cannot be changed, waived, abandoned or terminated
orally.
Section 31.3. Obligations and Covenants. All agreements, obligations
and undertakings of either of the parties to this Lease shall be deemed to be
covenants whether or not so denominated in this Lease.
Section 31.4. Governing Law and Validity of Provisions. This Lease
shall be construed and enforced in accordance with the laws of the State of
Minnesota. If any provision of this Lease or the application thereof, to any
extent, be unenforceable, the remainder of this Lease shall not be affected
thereby, and each provision hereof shall be valid and be enforced to the fullest
extent permitted by law.
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Section 31.5. Successors and Assigns. The terms, covenants, conditions,
provisions and agreements in this Lease shall bind and inure to the benefit of
Landlord and Tenant and their respective successors and permitted assigns.
Section 31.6. Tenant's Liability for Payments. Any liability for
payments hereunder (including, without limitation, Additional Rent) shall
survive the expiration of the Term or earlier termination of this Lease.
Section 31.7. Request for Landlord's Consent. If Tenant shall request
Landlord's consent and Landlord shall fail or refuse to give its consent, Tenant
shall not be entitled to any damages for any withholding by Landlord of its
consent; Tenant's sole remedy shall be an action for specific performance or
injunction, and such remedy shall be available only in those cases where
Landlord has expressly agreed in writing not to unreasonably withhold its
consent or where, as a matter of law, Landlord may not unreasonably withhold its
consent.
ARTICLE XXXII
Termination Right
Tenant acknowledges and agrees that Landlord shall have the
unrestricted right to terminate this Lease at any time following the sixtieth
(60th) month of the Term in connection with any bona-fide sale or other
transfer of the Demised Premises to an unrelated third party upon One Hundred
Eighty
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(180) days' prior written notice to Tenant, and upon the termination date
designated by Landlord in such early termination notice the Term shall expire as
fully and completely as though said early termination date were the Expiration
Date. Upon the request of Landlord, Tenant shall enter into a recordable
agreement terminating this Lease, which agreement shall have been recorded by
Landlord at its sole cost and expense.
ARTICLE XXXIII
Purchase Option
Provided that Tenant shall not be in monetary default (unless Landlord
is paid all actual damages incurred in connection with any such default at or
prior to any closing under this Article XXXIII) of any of the terms, covenants
and conditions of this Lease, at any time during the Term through the expiration
of the forty-second (42nd) full month of the Term (the "Option Period"), Tenant
shall have the option (the "Purchase Option") to purchase the Demised Premises
at a purchase price equal to the difference between (x) Four Million Dollars
($4,000,000), and (y) the aggregate Basic Rent and any condemnation awards
received by Landlord under this Lease through and including the date of closing
of title. Tenant may exercise the Purchase Option by delivering to Landlord at
least thirty (30) days' prior written notice of its intention to exercise the
Purchase Option, which notice must be given prior
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to the expiration of the Option Period, as to which time period time shall be of
the essence. As a condition to closing, Tenant shall pay all costs and expenses
of any nature incurred by Landlord in connection with the exercise of the
Purchase Option by Tenant and transfer of the Demised Premises to Tenant,
including but not limited to reasonable attorneys' fees, recording fees,
transfer taxes and all other expenses (excluding any of Landlord's income
taxes). The transfer of the Demised Premises to Tenant shall be made by
corporate special warranty deeds (equivalent to a New York bargain and sale deed
with covenants against grantor's acts), subject to no liens in addition to the
Permitted Title Exceptions other than those created or consented to by Tenant,
and shall otherwise be on an "as-is" basis, without any representation or
warranty
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made by Landlord as to any other matter relating to the Demised Premises,
including but not limited to their physical condition.
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease
as of the day and year above written.
LANDLORD:
GREENE STREET CAPITAL CORPORATION
[SEAL]
By: [sig]
-------------------------------------
Title: President
----------------------------------
TENANT:
E.F. JOHNSON COMPANY
[SEAL]
By: [sig]
-------------------------------------
Title:
----------------------------------
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<PAGE> 72
EXHIBIT A
Legal Description
<PAGE> 73
LEGAL DESCRIPTION
PARCEL A (New Plant)
Tract 1:
Commencing at a point on the Westerly right of way line of the Chicago and
North Western Transportation Company (formerly Minneapolis and St. Louis
Railroad Company) 816.41 feet North
00(degrees)58' West of point of intersection of said right of way line with
the South line of Section 18, Township 107 North, Range 22 West, which
point of intersection is 638.2 feet South 89(degrees)53.5' West of the
Southeast corner of said Section 18, and running thence 432.77 feet South
89(degrees)52.5' West, thence 507.03 feet North 0(degrees)14.5' West
parallel with the West line of Southeast Quarter of the Southeast Quarter
of said Section 18 to the North line of said Southeast Quarter of Southeast
Quarter of said Section 18, thence 426.35 feet North 89(degrees)52.5' East
along the North line of said Southeast Quarter of Southeast Quarter of said
Section 18 to the Westerly right of way line of said railroad, thence 507.8
feet South 0(degrees)58' East to the point of beginning; except the North
10 feet thereof, said bearings being assumed and based on the Westerly
right of way line of said railroad being South 0(degrees)58' East;
AND
Commencing at a point on the Westerly right of way line of the Chicago and
North Western Transportation Company (formerly Minneapolis and St. Louis
Railroad Company) 816.41 feet North 0(degrees)58' West of point of
intersection of said right of way line with the South line of Section 18,
Township 107 North, Range 22 West, which point of intersection is 638.2
feet South 89(degrees)53.5' West of the Southeast corner of said Section
18, and running thence South 89(degrees)52.5' West to the West line of the
Southeast Quarter of said Section 18, thence South along said West line to
the South line of said Section 18, thence East along the South line of
said Section 18 to the Westerly right of way line of said railroad, thence
Northerly along said Westerly right of way line of said railroad to the
point of beginning; except the South 50 feet thereof.
Tract 2:
That part of the Southeast Quarter of the Southeast Quarter of Section
18, Township 107 North, Range 22 West, bounded and described as follows:
Beginning at a point on the South line of 10th Avenue Southwest (formerly
San Gail Road), a distance 50 feet Westerly, measured at right angles,
from the center line of the main tract of the Chicago and North Western
Transportation Company (formerly Minneapolis and St. Louis Railroad
Company), as said main tract centerline was originally located and
established across said Section 18, thence Southerly parallel with said
original main trace centerline, a distance of 790 feet, thence Easterly at
right angles to the last described course, a distance of 25 feet, more or
less, to a point distant 25 feet Westerly, measured at right angles, from
the centerline of the main tract of said railroad, as said main tract is
now located, thence Northerly parallel with said last described main tract
centerline, a distance of 790 feet, more or less, to a point on the South
line of said 10th Avenue Southwest, thence Westerly along said South line
of 10th Avenue Southwest, a distance of 25 feet, more or less, to the point
of beginning.
Tract 3:
Beginning at the center of the Southeast Quarter of Section 18, Township
107 North, Range 22 West, thence South on the North and South center line
of said Southeast Quarter a distance of 110
<PAGE> 74
feet; thence East a distance of 33 feet; thence Northeast a distance of
140.2 feet to the East and West center line of said Southeast Quarter,
thence West to the point of beginning a distance of 118 feet, except the
North 10 feet thereof, which North 10 feet has heretofore been conveyed
to the City of Waseca on May 14, 1955, by deed filed of record in the
office of the Register of Deeds in and for Waseca County on May 15,
1955, in Book K of Quit Claim Deeds, page 539.
Tract 4:
The West 18 acres of the Southeast Quarter of the Southeast Quarter of
Section 18, Township 107 North, Range 22 West, lying West of the Chicago
and North Western Transportation Company (formerly the Minneapolis and
St. Louis Railroad Company) tracks: except the North 10 feet and the
South 50 feet thereof, and also excepting those properties described as
Tracts 1, 2 and 3 immediately hereinabove.
Tract B (Parking Lot):
Lot 8, except the West 33 feet thereof, Block 1, Auditor's Replat of
Ward's Addition, originally Clear Lake City, to the Village of Waseca,
Minnesota, according to the Plat thereof on file and of record in the
office of the Register of Deeds in and for Waseca County, Minnesota.
Parcel C (Old Plant)
Tract 1:
Lot 1, Block 7, Trowbridge's Addition to the Village, now City, of
Waseca, Minnesota, according to the Plat thereof on file and of record
in the office of the Register of Deeds in and for Waseca County,
Minnesota.
Tract 2:
Lot 8, Block 7, Trowbridge's Addition to the Village, now City, of
Waseca, according to the Plat thereof on file and of record in the
office of the Register of Deeds in and for Waseca County, Minnesota.
Tract 3:
The West 1/2 of Lot 2, Block 3, Original Plat of the Village, now City,
of Waseca, Minnesota, according to the Plat thereof on file and of
record in the office of the Register of Deeds in and for Waseca County,
Minnesota.
Tract 4:
The East 1/2 of Lot 2, Block 3, Original Plat of the Village, now City,
of Waseca County, Minnesota, according to the Plat thereof on file and
of record in the office of the Register of Deeds in and for Waseca
County, Minnesota.
<PAGE> 75
Tract 5:
The West 67 feet of the East 100 feet of Lots 3 and 4 in Block 3 and
the West 50 feet of Lots 3 and 4, in Block 3, Original Plat of the
Village, now City, of Waseca, Minnesota, according to the Plat
thereof on file and of record in the office of the Register of Deeds
in and for Waseca County, Minnesota.
PARCEL D (Old Armstrong Building)
All of Block 22 of Auditor's Addition to Barney's Addition in the
City of Waseca, Minnesota, except the East 191 feet thereof,
according to the Plat thereof on file and of record in the office of
the County Recorder in and for Waseca County, Minnesota.
AND
The West 44 feet of the North 50 feet of the East 191 feet of Block
22 of Auditor's Addition to Barney's Addition to the City of Waseca,
Minnesota, and being in the Southeast Quarter of the Northeast
Quarter of Section 18 in Township 107 North of Range 22 West, Waseca
County, Minnesota.
<PAGE> 76
EXHIBIT B
---------
Title Exceptions
<PAGE> 77
SCHEDULE B
NOTE: THIS IS A PRO FORMA POLICY
File Number Policy Number
This policy does not insure against loss or damage by reason of the following:
1. Rights of tenants as tenants only under unrecorded leases as follows:
E.F. Johnson Company - Enscan, Inc. lease of___________________
Greene Street Capital Corporation - E.F. Johnson Company lease
of July ___, 1992.
SEE ADDENDUM ATTACHED HERETO FOR ADDITIONAL EXCEPTIONS
<PAGE> 78
CONTINUATION OF SCHEDULE B:
NEW PLANT, PARCEL A, TRACT 4:
2. As to Parcel A, Tracts 1 (Second Paragraph), 3 and 4 are subject to an
existing highway (Fourth Street Southwest, City of Waseca) on the West
side thereof. See survey made for E.F. Johnson Company by C.D. Hosfield,
registered professional engineer and land surveyor, as to part of the
Southeast Quarter of the Southeast Quarter of Section 18, Township 107
North, Range 22 West.
OLD PLANT, PARCEL C, TRACT 1:
3. Easement to the City of Waseca dated May 2, 1929 and filed June 1, 1929,
recorded in Book S of Miscellaneous, on page 91, for the construction of
a sanitary sewer running east/west through the center of Lot 1, Block 7,
Trowbridge's Addition to the City of Waseca.
4. Easement to the City of Waseca as created in Quit Claim Deed dated
January 16, 1979 and filed January 23, 1979, recorded in Book R of Quit
Claim Deeds, on page 66, for sanitary sewer purposes, covering the South
10 feet of Lot 1, Block 7, Trowbridge's Addition to the City of Waseca.
OLD PLANT, PARCEL C, TRACT 2:
5. Easement to the City of Waseca as created in Quit Claim Deed dated
January 15, 1979 and filed January 23, 1979, recorded in Book R of Quit
Claim Deeds, on page 66, for sanitary sewer purposes, covering the North
10 feet of Lot 8, Block 7, Trowbridge's Addition to the City of Waseca.
OLD PLANT, PARCEL C, TRACT 3:
6. Easement to the City of Waseca dated July 17, 1929 and filed August 24,
1929, recorded in Book S of Miscellaneous, on page 167, for the
construction and maintenance of a sanitary sewer, its course being
described as South through the west side of Lot 2 to the middle of said
lot and thence east through the center of said Block 3 to the east side
of said block and thence through the center of Block 3 of the Original
Plat of Waseca, Minnesota.
7. Easement to the City of Waseca as created in Quit Claim Deed dated
January 16, 1979 and filed January 23, 1979, recorded in Book A of Quit
Claim Deeds, on page 65, for sanitary sewer purposes, covering the South
10 feet of Lot 2, Block 3, Original Plat of the City of Waseca.
OLD PLANT, PARCEL C, TRACT 4:
8. Easement to the City of Waseca dated June 17, 1929 and filed June 8,
1929, recorded in Book S of Miscellaneous, on page 95, for the
construction and maintenance of a sewer, over, through and upon the E
1/2 of Lot 2, Block 3, of the Original Plat of the City of Waseca,
Minnesota.
9. Easement to the City of Waseca as created in Quit Claim Deed dated
January 16, 1979 and filed January 23, 1979, recorded in Book R of Quit
Claim Deeds, on page 66, for a sanitary sewer easement on the South 10
feet of Lot 2, Block 3, Original Plat of the City of Waseca.
OLD PLANT, PARCEL C, TRACT 5:
<PAGE> 79
10. Basement to the City of Waseca as created in Quit Claim Deed dated January
16, 1979 and filed January 23, 1979, recorded in Book R of Quit Claim
Deeds, on page 66, for sanitary sewer easement on the North 10 feet of Lot
3, Block 3, Original Plat of the City of Waseca.
PARCEL D (Old Armstrong Building)
11. Well and Pipeline Easement as created in Warranty Deed dated July 1, 1942
and filed July 15, 1942, recorded in Book 37 of Deeds, on page 488, for the
well located on the 60 feet West of the East 87 feet of the North 50 feet
on the East 191 feet of Block 22 of Auditor's Addition to Barney's Addition
to the City of Waseca, Minnesota.
12. Joint Well Agreement dated July 1, 1942 and filed May 17, 1949, recorded in
Book 4 of Miscellaneous, on page 217, regarding the well and pipeline as
described in Paragraph 19 hereinabove.
13. REAL ESTATE TAXES DUE AND PAYABLE IN THE YEAR 1992 IN THE AMOUNT OF
$265,374.00 AND SUBSEQUENT YEARS.
NOTE: First half 1992 real estate taxes are all paid.
Second half taxes can be paid on or before October 15, 1992,
without penalty.
14. SPECIAL ASSESSMENTS HEREAFTER LEVIED.
NOTE: There remains an unpaid balance of special assessments due on the
following parcels: (This amount is the balance due after the
installment certified over for payment with the real estate taxes
due and payable in 1992.
PARCEL ID NO. 17-018-2200: $20,211.24
PARCEL ID NO. 17-126-0290: 132.91
<PAGE> 1
EXHIBIT 10.35
All sections marked with two asterisks ("**") reflect portions which have been
redacted. The unredacted exhibit has been filed separately with the Securities
and Exchange Commission as part of a request for confidential treatment.
LICENSE AGREEMENT
THIS AGREEMENT is entered into as of this 14th day of October, 1994 by and
between. Motorola, Inc., a Delaware corporation having an office at 1303 East
Algonquin Road, Schaumburg, IL 60196 ("Motorola"), and E.F. Johnson Company, a
Minnesota corporation having an office at 438 Gateway Boulevard, Burnsville, MN
55337 ("EFJ").
RECITALS
WHEREAS, both Motorola and EFJ are in the business of designing,
manufacturing and selling, among other things, two-way land mobile radio
products and systems;
WHEREAS, Motorola has developed and is manufacturing a proprietary
frequency division multiplexed (FDM) digital trunked two-way land mobile radio
system known as ASTRO(R) for use in the public safety communication market;
WHEREAS, the Associated Public Safety Communication Officers, Inc.
("APCO"), the National Association of State Telecommunications Directors
("NASTD") and certain agencies of the Federal government have established the
APCO Project 25 Steering Committee for the purpose of selecting various elements
of a public safety system advanced technology standard for interoperable digital
public safety radio communications;
WHEREAS, Motorola, EFJ and certain other companies have entered into a
Memorandum of Understanding dated January 24, 1992 (the "APCO 25 MOU"), pursuant
to which, among other things, Motorola has agreed to license certain of its
essential intellectual property rights from which the APCO Project 25 Standard
directly derives or the infringement of which could not be avoided for the
implementation of the APCO 25 Standard to EFJ and such other companies;
WHEREAS, Motorola and EFJ have committed to support Project 25 and to be
active advocates therefor in APCO and the Telecommunications Industry
Association ("TIA") proceedings, as well as in the marketplace;
WHEREAS, EFJ is presently developing a digital two-way land mobile radio
system, and Motorola and EFJ believe EFJ is particularly qualified to become an
alternate source of ASTRO(R) Products (including products that are compatible
with the APCO Project 25 Standard);
WHEREAS, EFJ desires to use Motorola's ASTRO(R) technology as the
foundation for its next generation FDM digital two-way radio product line; and
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<PAGE> 2
WHEREAS, EFJ desires to purchase Finished Products from Motorola for
resale, to purchase Component Products from Motorola to incorporate into FDM
digital two-way radio products of EFJ's own manufacture, and to license from
Motorola certain intellectual property rights related to ASTRO(R) Products and
to obtain certain other rights from Motorola, all as may be necessary or useful
as a supplier of FDM digital two-way radio products; and
WHEREAS, Motorola desires to sell and license such products and rights to
EFJ, all upon the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS.
The capitalized terms used herein shall have the meanings assigned to them
in this Article I, and shall include the singular as well as the plural:
1.1 "Affiliate" shall mean a corporation, company, partnership, joint
venture or other entity that is directly or indirectly under common control of a
party hereto, including a Subsidiary or parent company of such party.
1.2 "Agreement" shall mean this Agreement between EFJ and Motorola and
shall include Appendixes A through C attached hereto.
1.3 "APCO Project 25 Standard" shall mean the family of EIA/TIA documents
in the 102 series starting with TSB102 Project 25 System & Standard Definition.
1.4 "ASTRO(R)" constitutes a Motorola registered trademark for a digital
radio communication system.
1.5 "ASTRO(R) Products" shall mean the Motorola ASTRO(R) product line as of
the date of this Agreement and for a period of two (2) years thereafter,
including the products, Infrastructure, Subscriber Units, accessories and parts
listed on the DNUP, all Updates and ASTRO(R) Technology Modifications to such
products, and all modifications, enhancements and improvements to the current
ASTRO(R) product line required for compliance with the APCO Project 25 Standard.
1.6 "ASTRO(R) Technology Modifications" shall mean modifications to the
fundamental technology implemented to the ASTRO(R) Products that are required to
cause compliance with the APCO Project 25 Standard (for
-2-
<PAGE> 3
example, modulation, frame structure, signaling protocol, and signaling content
affecting compliance with the APCO Project 25 Standard). It is understood and
agreed by the Parties that Updates, features (for example, items relating to
product differentiation) and other product functionality and enhancements) do
not constitute ASTRO(R) Technology Modifications.
1.7 "Chip Sets" shall mean a Motorola kit (model number to be determined)
which includes the single package integrated circuits provided by Motorola for
use in Subscriber Units and which are identified by Motorola OMPAC part number
part kit on Appendix C.
1.8 "Component Products" shall mean Chip Sets (including subsequent
follow-on proprietary integrated circuits) subassemblies, and such other
components as are compatible with ASTRO(R) Products, including by way of example
and not limitation, measuring and testing equipment, tools and jigs.
1.9 "Delivered Technology" shall mean the information, including
confidential and trade secret information (in whatever form) as provided by
Motorola to EFJ, including but not limited to information necessary to allow EFJ
to manufacture, use, sell, service, and support ASTRO(R) Products, which
information shall be of sufficient kind and in sufficient detail so as to allow
EFJ to design enhancements, modifications, and differentiations with respect to
such ASTRO(R) Products. Such information shall specifically include, but is not
limited to, the following items of ASTRO(R) software in executable object code
form and with an Application Programmer's Interface ("API") if then available:
VSELP (vocoder methodology), the over-the-air interface, the SmartNet(R) digital
trunking protocols, DES encryption, and Motorola's DSP and radio operating
system. In the event an API is not available for any such software, then
Motorola shall substitute therefor the relevant and available software
requirements, structured analysis, structured design, pseudo code and source
code sufficient to permit EFJ to utilize such software in the manner
contemplated above. The parties understand and recognize that some information
regarding IMBE vocoding may not be available for provision by Motorola to EFJ,
due to contractual limitations imposed on Motorola by Digital Voice Systems,
Inc., the latter being the source for the IMBE vocoding information.
1.10 "DNUP" shall mean Motorola's published domestic net user price list
for ASTRO(R) Products in effect as of the date of this Agreement.
1.11 "Effective Date" shall mean the date on which this Agreement is fully
executed by authorized representatives of the parties hereto.
1.12 "FCC" shall mean the Federal Communications Commission.
-3-
<PAGE> 4
1.13 "Finished Products" shall mean ASTRO(R) Products, in finished form,
manufactured by or for Motorola, which ASTRO(R) Products may, or may not,
include any of Motorola's trademarks, such as the "ASTRO" trademark.
1.14 "Infrastructure" shall mean Motorola's ASTRO(R) Product stationary
transmitter/receivers (which may be base stations or repeaters), radio network
terminals or switches, antennas, controllers, system management modules,
consoles, voters and other such equipment manufactured by or for Motorola.
1.15 "Licensed Products" shall mean non-cellular FDM digital two-way radio
communications products that use Delivered Technology, either alone or in
conjunction with: ASTRO(R) Technology Modifications; or Updates, including both
infrastructure components and subscriber units.
1.16 "Motorola Patents" shall mean all present and future issued patents
(both as issued by the United States and other countries, and regardless of when
issued), which patents are owned and controlled by Motorola, provided, however,
that "Motorola Patents" shall not include any patents that claim innovations
related to materials used in semiconductor manufacturing, semiconductor
structures, and semiconductor manufacturing processes.
1.17 "Net Sales" shall mean gross billings (exclusive of federal, state or
local excise, sales or use taxes, freight charges, cost of packing, insurance,
or other transportation charges) for direct sales, leasing or other disposal by
EFJ to customers pursuant to an arms length transaction, less returns, provided
that such charges or costs are separately invoiced or are readily determinable
in accordance with generally accepted accounting principles.
1.18 "Object Code Software" shall mean the computer software programs
which Motorola will deliver to EFJ only in linkable object code and not in
source code, including, without limitation, the Radio Operating Software/Virtual
Radio Interface Software (also known as the "ROS/VRIS" software).
1.19 "Purchase Order" shall mean an offer by EFJ to purchase Finished and
Component Products using its standard purchase order form (the terms and
conditions of which shall not apply to any sales hereafter), setting forth
identification of the Finished and Component Products to be purchased by product
name and model or part numbers, quantities, transmitter and receiver
frequencies, if applicable, unit prices, requested shipment dates and ship-to
addresses.
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1.20 "Subscriber Units" shall mean Motorola's ASTRO(R) Product mobile radio
transceivers and portable transceivers.
1.21 "Subsidiary" shall mean a corporation, company, or other entity more
than fifty percent (50%) of whose outstanding shares or securities (representing
the right to vote for the election of directors or other managing authority)
are, now or hereafter, owned or controlled, directly or indirectly by a party
hereto, but such corporation, company, or other entity shall be deemed to be a
Subsidiary only so long as such ownership or control exists.
1.22 "Update" shall mean information regarding modifications to an item of
Delivered Technology that has been made by Motorola or EFJ to correct an error
in such item which is reflected as an error in the associated Licensed Product
or the testing thereof. The form of the information shall be sufficient to allow
the recipient to implement such Update.
ARTICLE II. PURCHASE AND SUPPLY
2.1 Agreement of Purchase and Sale.
(a) Finished Products. On the terms and subject to the conditions set
forth herein, Motorola agrees to sell, and EFJ agrees to purchase, for the term
of this Agreement, the Finished Products, in such quantities as EFJ may order
from time to time as follows: Motorola shall only be obligated to sell relabeled
ASTRO(R) mobile radios, repeaters, and system infrastructure to EFJ for a period
of three (3) years (or, in the case of portable radios, for a period of seven
(7) years) from the Effective Date; and provided further, that, for the term of
this Agreement, Motorola shall be obligated to sell to EFJ such ASTRO(R) mobile
or portable radios and repeaters as EFJ may order from time to time as
additions, support or maintenance of ASTRO(R) Product systems sold by EFJ prior
to the end of such three (3) year period, provided, however, that Motorola shall
have the right to discontinue any particular Finished Product provided Motorola
provides sufficient written notice of at least one (1) year to EFJ so as:
(i) to allow EFJ to execute a lifetime buy of the affected Finished
Product; and/or
(ii) should Motorola be replacing the affected Finished Product with a
next generation Finished Product, to allow EFJ to purchase the next
generation Finished Product at comparable pricing.
Motorola further agrees that for a period of twelve (12) months from the date of
the first shipment of Finished Product Subscriber Units to EFJ but in no event
longer than 18 months from the Effective Date Motorola shall
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not provide or permit private labeling or branding of ASTRO(R) Product
Infrastructure for sale in the United States by any entity other than EFJ.
To seek compatibility and rapid market entries, EFJ agrees that for the first
three years of this Agreement, it shall not purchase its supply requirements of
Finished Product Subscriber Units excluding peripheral and accessories, from a
third party. Motorola acknowledges and agrees that EFJ may manufacture such
products for resale during such period.
(b) Component Products. On the terms and subject to the conditions set
forth herein, Motorola agrees to sell, and EFJ agrees to purchase, Component
Products in such quantities as EFJ may order from time to time, provided,
however, that Motorola shall have the right to discontinue any particular
Component Product provided Motorola provides sufficient written notice of at
least one (1) year to EFJ so as:
(i) to allow EFJ to execute a lifetime buy of the affected Component
Product; and/or
(ii) should Motorola be replacing the affected Component Product with
a next generation Component Product, to allow EFJ to design in to their
product the next generation Component Product.
2.2 Forecasts. Within one hundred eighty (180) days from the date hereof,
EFJ shall provide Motorola with a twelve (12) month forecast for each of EFJ's
anticipated quarterly purchases of Finished Products and Component Products.
Such forecasts shall be updated quarterly on a rolling basis for the next twelve
(12) month period, which updated forecasts shall be delivered to Motorola by the
end of each quarterly period. Such forecasts shall be used for the purpose of
facilitating Motorola's manufacturing schedules only and shall not be deemed to
be firm purchase orders or to create any minimum quantity purchase or supply
commitment on the part of EFJ or Motorola.
2.3 Purchase Orders; Lead Times. EFJ shall purchase Finished and Component
Products by submitting Purchase Orders to Motorola by mail or facsimile
transmission. Acceptance of an order shall only be upon the term and conditions
of this Agreement. Motorola agrees to provide to EFJ its Land Mobile Products
Sector's published monthly Shipping Schedule which lists current order lead
times for Finished Products. Should EFJ wish to order, or obtain an official
quoted delivery for an order, which quantity is greater than that to which the
standard lead times as listed on the Shipping Schedule apply, then Motorola will
provide a written quote of delivery schedule for the quantity requested in the
same manner as is provided to other customers.
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2.4 Purchase Price.
(a) Finished Products. The unit prices for Finished Products shall be as
set forth on Appendix B attached hereto.
(b) Component Products. The unit prices for Component Products shall be as
set forth on Appendix C attached hereto.
2.5 Shipment and Delivery: Title. The Finished and Component Products shall
be delivered F.O.B. Motorola's domestic shipping facilities. EFJ shall pay the
actual freight charges applicable to purchases hereunder. Motorola reserves the
right to make deliveries in installments and this Agreement shall be severable
as to such installments. Claims for shipment shortage shall be deemed waived
unless presented to Motorola in writing within forty-five (45) days from the
date of receipt of each shipment. Good title and risk of loss to the Finished
and Component Products sold hereunder shall pass to EFJ at the F.O.B. point.
Motorola shall retain and EFJ hereby grants Motorola a security interest in the
rights and possession in the Products until EFJ makes full payment. EFJ agrees
to cooperate in whatever manner necessary to assist Motorola in perfecting of
said security interest by completing the UCC-1 and such other security as
Motorola may from time to time reasonably request.
2.6 Payment. EFJ shall pay for the Finished and Component Products
purchased hereunder at Motorola's offices at 1301 E. Algonquin Road, Schaumburg,
Illinois 60196 or at such other place as Motorola may designate in writing.
Motorola shall provide its invoice either concurrently with or following
delivery of the Finished and Component Products. EFJ shall pay said invoice by
the thirtieth (30th) day of the month that immediately follows the month during
which Motorola delivers such invoice. Service charges at the lesser of one and
one-half percent per month, or the maximum rate allowed by law may be invoiced
on accounts more than thirty (30) days past due and shall be due and payable
upon receipt of such invoice.
2.7 Taxes. The prices set forth in this Agreement are exclusive of any
federal, state or local excise, sales, use, property, retailer's occupation or
similar taxes. If any such tax is determined to be applicable to the purchase of
the Finished and Component Products hereunder, EFJ shall be responsible for the
payment of such taxes.
2.8 Unlabeled Finished Products.
(a) For a supplemental charge as set forth in attached Appendix A, Motorola
agrees, upon EFJ's request, to provide the Finished Products to
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EFJ without any external marks, names, insignia, logos or other similar
designations (excluding any required patent or FCC markings or designations)
identifying Motorola or indicating that such products are ASTRO(R) Products or
are manufactured by or for Motorola, unless otherwise required by law. The
parties agree that EFJ may place its marks, names, insignia, logos or other
similar designations on the Finished Products prior to resale, lease or other
disposition of the Finished Products.
(b) Motorola has the right to ship Finished Products to EFJ, which Finished
Products do not include any Motorola trademarks. To the extent that Motorola
removes Motorola trademarks from Finished Products by Motorola's own choice and
without instruction from EFJ, the cost of removing such trademarks shall be
borne by Motorola, provided that such costs shall not include, under any
circumstances, the addition of any EFJ trademarks.
2.9 Limited Warranty.
(a) Motorola warrants to EFJ and the original EFJ customer that the
Finished and Component Products which are shipped by Motorola will be free from
defects in material and workmanship under normal use and service for a period of
thirteen (13) months from the date of original shipment. Defective Finished and
Component Products or parts thereof will be repaired or replaced, free of
charge, for the full warranty period but the labor and travel costs to repair or
replace non-movable installed products or parts thereof will be provided, free
of charge, only for 120 days from the date of shipment. Freight charges to and
from the Motorola warranty service location shall at all times be EFJ's
responsibility.
(b) In the event of a defect during the applicable warranty periods above,
EFJ shall have the option of providing the warranty labor service itself or
requesting that Motorola provide such labor service in the manner described
above. In the event EFJ decides to provide the warranty labor service, Motorola
agrees to provide replacement parts, free of charge, for the full warranty
period. Motorola's repair or replacement of the product or part thereof shall be
the full extent of Motorola's liability, and EFJ's exclusive remedy, for breach
of the warranty. Travel and associated expenses of EFJ are not covered by these
warranties.
(c) THIS WARRANTY DOES NOT COVER defects or damage to the Finished and
Component Products resulting from: (i) use in other than their normal and
customary manner; (ii) misuse, accident or neglect; (iii) improper disassembly,
testing, operation, maintenance, installation, adjustment, alteration, repair or
any modification by EFJ or any other person without the prior written consent of
Motorola; (iv) Motorola's compliance with EFJ's design specifications and
instructions.
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(d) THIS WARRANTY DOES NOT COVER frequency sensitive components, towers,
vidicon tubes, test equipment and batteries, which are excluded but may carry
their own separate warranties. Non-Motorola manufactured equipment is excluded
from this warranty (unless bearing a Motorola Part Number in the form of an
alpha-numeric number) but such excluded equipment may be subject to a warranty
provided by such equipment manufacturers), a copy(ies) of which will be supplied
to EFJ on written request.
(e) All warranty labor service performed by Motorola will be provided at a
Motorola-owned service location within the United States.
(f) This express warranty is extended to EFJ and the original EFJ customer
only and only to those acquiring Finished and Component Products solely for
commercial, agricultural or governmental use.
THIS WARRANTY AND THOSE REFERENCED HEREIN ARE GIVEN IN LIEU OF ALL OTHER
WARRANTIES RELATING TO THE FINISHED AND COMPONENT PRODUCTS, EXPRESS OR IMPLIED,
WHICH ARE SPECIFICALLY EXCLUDED INCLUDING, WITHOUT LIMITATION, IMPLIED
WARRANTIES OF MERCHANT ABILITY AND FITNESS FOR A PARTICULAR PURPOSE. AS EACH
SYSTEM IS UNIQUE, MOTOROLA DISCLAIMS LIABILITY FOR RANGE, COVERAGE OR OPERATION
OF THE SYSTEM AS A WHOLE. IN NO EVENT SHALL MOTOROLA BE LIABLE FOR INCIDENTAL OR
CONSEQUENTIAL DAMAGES.
2.10 Spare Parts for Finished Products.
(a) Within sixty (60) days after the date hereof, Motorola shall provide
EFJ with a list of spare module and component parts (including part number,
description and price) which Motorola will make available to EFJ for EFJ's
servicing, repair and maintenance of the Finished Products. Any purchase order
issued by EFJ for such spare modules and component parts shall be subject to the
terms and conditions contained in this Agreement.
(b) Motorola agrees to maintain a reasonable supply of spare parts for the
Finished Products to support EFJ's anticipated spare parts requirements for a
period of ten (10) years for infrastructure products and for a period of seven
(7) years for subscriber products from the date of Motorola's last shipment of
Finished Products hereunder.
2.11 End User Sales,
EFJ agrees that during the term of this Agreement, for sales in the United
States, that it shall only sell and transfer title to Finished
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Products directly to end user customers, except where EFJ is a subcontractor to
a prime contractor to an end user customer.
Article III. Transfer of Deliverables and Other Information
3.1 Transfer of Delivered Technology. Upon the Effective Date, to
facilitate EFJ's ability to exercise the licenses granted hereunder, and further
to facilitate EFJ's manufacture of Licensed Products for resale, Motorola shall
continue the transfer of the Delivered Technology. Motorola shall use reasonable
efforts to complete such transfer as soon as possible. Any and all system design
configuration and implementation shall be EFJ's responsibility solely.
3.2 Updates. Each party shall furnish Updates to the other party, except
those Updates which are primarily manufacturing enhancements, within thirty (30)
days after correction of the error is established.
3.3 Material Defects. Notwithstanding the foregoing Section 3.2, in the
event that during the term of this Agreement, either party discovers any
material defect in a Licensed Product such that the Licensed Product does not
meet the data sheet specification for the Licensed Product for customers, such
party shall inform the other party of such defect within thirty (30) days of
such discovery.
3.4 Modifications. During the term of this Agreement, the parties shall
exchange with one another information regarding ASTR0(R) Technology
Modifications within thirty (30) days after its first shipment of products
reporting such modifications. At a minimum, such information shall include the
technical information that the disclosing party itself uses to implement the
ASTRO(R) Technology Modifications.
3.5 Software Warranty. For the first one (1) year following its initial
shipment, Motorola warrants that, when used as contemplated by this Agreement,
its software as provided to EFJ pursuant to this Agreement will be free from
reproducible defects that cause a material variance from its published
specification. This warranty may be extended by EFJ to EFJ's customers, in which
event the warranty period shall begin running upon delivery of the software to
the customer. Upon being notified by EFJ of a claim under this warranty,
Motorola shall investigate the claim and shall:
(a) in the event the defect shall be readily discoverable and resolvable,
promptly provide EFJ with a correction;
(b) in the event the defect shall not be readily discoverable and/or shall
not be readily resolvable, promptly provide EFJ with
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information regarding Motorola's investigation of the defect and
Motorola's plan to resolve the defect; or
(c) in the event the defect shall not be reproducible, Motorola shall be
entitled to charge EFJ with actual time and costs incurred by Motorola
while attempting to reproduce the reported defect, provided, however, that
EFJ shall be entitled, without cost, to one-half hour of actual time for
each identifiable defect regardless of whether the defect shall later be
found to be reproducible, and in the event that EFJ shall be charged for
actual time and costs pursuant to this section for a particular defect,
and it shall later be demonstrated that the particular defect is in fact
reproducible, then EFJ shall be entitled to a refund of the assessed
charges.
(d) The foregoing shall be the full extent of Motorola's liability, and
EFJ's only remedy under the Software warranty, except as provided in
Sections 12.2 and 12.3.
Article IV, Technical Assistance
4.1 Training: Technology, Product Service and Support Training. For three
(3) years from the Effective Date, EFJ shall have the right, subject to the
reasonable approval of Motorola as to scheduling, of access to up to three
Motorola engineers to receive technical assistance and training relating to the
Delivered Technology as well as product service and support training. Motorola
will make said engineers available to provide such technical assistance and
training, as well as other assistance to EFJ for the general purpose of this
Agreement, at no additional cost to EFJ. EFJ may request written information
relating, to any Delivered Technology discussed or otherwise considered, and
Motorola shall promptly provide EFJ with such information if it is reasonably
available. EFJ will pay all of its own travel expenses incurred in connection
with the visits provided for in this Section 4.1(a). All visits pursuant to this
Section shall be coordinated through the Documentation Managers for each party.
Motorola shall be available, during normal business hours, to respond by
telephone to a reasonable number of inquiries by EFJ.
4.2 Additional Resources. In addition to the technical personnel resources
provided for in Section 4.1 above, to execute the scope of this Agreement it is
anticipated that Motorola will provide the equivalency of up to twelve
additional man years of resources to EFJ for up to the next three calendar
years, This access to Motorola's technical community shall be provided through
the 3 aforementioned Motorola employees. In addition, in order to assist EFJ's
internal product development effort, Motorola shall make available to EFJ its
ASTRO(R) Product training courses on a custom basis at mutually convenient dates
and locations.
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4.3 Rules on Premises. Representatives and personnel of each party, during
the time they are present on the premises of the other party, shall be subject
to all rules and regulations prevailing on such premises. Each party shall be
responsible for the payment of all compensation and expenses of its respective
representatives and personnel. None of the representatives or personnel of
either party shall be considered, for any reason to be an employee of the other.
4.4 Custom Software Services. Beyond the scope of this Agreement, upon
receiving EFJ's request, Motorola shall provide a quote, in accordance with
Appendix A2, for custom software services for EFJ, to modify and enhance the
Object Code Software upon EFJ's request, and deliver the modifications and
enhancements to EFJ.
4.5 Mutual Indemnification. Each party agrees that if (i) any of its
employees, (ii) any of its authorized agents, or (iii) any authorized legal
representative of the persons referred to in clauses (i) or (ii) ("Claimant")
shall present any claim or institute any suit or action against the other party
hereto, or its directors, officers, agents or employees, for any physical
property damage or personal injury, including death, arising out of the
performance of this Agreement, the party employing or authorizing the Claimant
shall defend and indemnify the other party, and its directors, officers, agents
and employees, against any and all such claims, suits or actions.
4.6 Source Code. Both parties recognize that source code is a particularly
sensitive and valuable form of information. Pursuant to this Agreement, when an
appropriate Application Programmer's Interface does not exist for a given item
of ASTRO(R) software executable object code that Motorola has delivered to EFJ
under this Agreement, EFJ has the right to receive corresponding source code
from Motorola. Both parties understand and agree that the total quantity of
source code that EFJ could potentially review under this Agreement is large, and
that appropriate safeguards are necessary in order to ensure that Motorola's
source code is properly used and cared for.
All requests for source code shall be made within three (3) years of when
Motorola first makes the corresponding object code available, and shall be made
in writing by, and shall be coordinated and scheduled through, the Documentation
Managers identified in Section 8.1 below. When making a written request for
source code, EFJ shall indicate in that writing whether the identified source
code is going to be reviewed for potential use, or is going to be actually used
in the near-term to facilitate product differentiation. Motorola shall not be
required to provide to EFJ during any ninety (90) day period more source code
than EFJ shall be able to usefully assimilate within that ninety (90) day period
of time. When EFJ receives source code to review for potential use, EFJ shall,
within
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ninety (90) days of receiving access to the Source code, either: (a) return the
source code; or (b) provide Motorola with a written statement indicating that
EFJ will make near-term actual use of the source code to facilitate product
differentiation. When holding Motorola source code, in addition to observing the
general requirements set forth in Article VIII regarding the handling of
confidential information, EFJ shall additionally number all copies of the source
code, and shall maintain a written record of the location of the original and
all copies at all times. When returning source code to Motorola, EFJ shall
indicate in writing that the original and all copies have either been returned
or destroyed.
Article V. Compensation
5.1 Support for APCO Project 25. In partial consideration of the licenses
and rights granted to EFJ hereunder, EFJ agrees to cooperate and to work
together with Motorola to support the APCO Project 25 Standard, including but
not limited to making joint proposals in support of the Standard when
appropriate.
5.2 Non refundable payment. In partial consideration of the licenses and
rights granted to EFJ hereunder, EFJ agrees to pay to Motorola a nonrefundable
sum of five million dollars ($5,000,000) in calendar installments as follows:
$1 Million within 45 days of the Effective Date of this contract;
$2.5 Million by June 30, 1995; and
$1.5 Million by December 31, 1995.
5.3 Royalty. (a) In further partial consideration of the licenses and
rights granted to EFJ hereunder, EFJ agrees to pay Motorola a continuing royalty
of ** of EFJ's or its Subsidiary's Net Sales of EFJ Licensed Products
(exclusive of Finished Products provided by Motorola to EFJ) during the period
starting on the date of EFJ's first commercial shipment of Licensed Products
until ten (10) years thereafter.
(b) Following the period set forth in Section 5.3(a), in further partial
consideration of the licenses and rights granted to EFJ hereunder, EFJ agrees to
pay Motorola a continuing royalty of ** of EFJ's or its Subsidiary's Net Sales
of EFJ Licensed Products (exclusive of Finished Products provided by Motorola to
EFJ) for a second ten (10) year period.
(c) Licensed Products shall be considered as used, sold, leased, or
otherwise disposed of, as the case may be, when either billed out, delivered,
shipped or mailed to customers.
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5.4 Record Keeping: Inspection Rights. With respect to the royalty set
forth in this Article V, EFJ shall keep full, clear and accurate records with
respect to Licensed Products subject to royalty. These records shall be retained
for a period of three (3) years from date of payment notwithstanding the
expiration or other termination of this Agreement. Motorola shall have the
right, through a mutually agreed upon independent certified public accountant
and at its expense, to examine and audit, not more than once a year, and during
normal business hours, all such records and such other records and accounts as
may under recognized accounting practices contain information bearing upon the
amount of royalty payable to Motorola under this Agreement. Prompt adjustment
shall be made by whichever party is in arrears to compensate for any errors or
omissions disclosed by such examination or audit. Neither such right to examine
and audit nor the right to receive such adjustment shall be affected by any
statement to the contrary appearing on checks or otherwise, unless such
statement appears in a letter signed by both parties, expressly waiving such
right to examine and audit.
5.5 Payments, Within sixty (60) days after the end of each semiannual
period ending on June 30th or December 31st, commencing with the semiannual
period ending December 31, 1994 and continuing thereafter until all royalties
payable hereunder shall have been reported and paid, EFJ shall furnish to
Motorola a statement in suitable form certified by an authorized officer showing
all Licensed Products subject to royalties which were sold, leased, or otherwise
disposed of during such semiannual period, and the amount of royalty payable
thereon. If no products subject to royalty have been sold, leased, or otherwise
disposed of, that fact shall be shown on such statement. Also, within such sixty
(60) days EFJ shall pay to Motorola the royalties payable hereunder for such
semiannual period. Motorola and EFJ will determine the form of the statement
prior to submission of the first such statement.
5.6 Excluded Products. Notwithstanding the above, royalty payment shall
not be due on the sale of any Finished Products that are purchased from Motorola
by EFJ.
Article VI. Licenses
6.1 Motorola Grant of Rights to EFJ.
(a) Patent License. Motorola hereby grants to EFJ a non-exclusive,
non-assignable, royalty-bearing license, without the right to sublicense except
as otherwise specifically provided for herein, under Motorola's Patents to use
Delivered Technology, ASTRO(R) Technology Modifications, and Updates to make, to
have made, use, and sell, lease, or otherwise dispose of Licensed Products. This
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license is limited to those Motorola Patent claims that cover the use and/or
practice of the deliverables that are provided by Motorola to EFJ in the
Delivered Technology, ASTRO(R) Technology Modifications, and Updates.
(b) Copyright and Trade Secret License. Motorola hereby grants to EFJ a
non-exclusive, non-assignable, royalty-bearing license, without the right to
sublicense except as otherwise specifically provided for herein, under
Motorola's copyrights and trade secret rights to use, copy, prepare derivative
works of, distribute, sell, lease, or otherwise dispose of the Delivered
Technology, ASTRO(R) Technology Modifications, and Updates when designing,
making, using, and selling Licensed Products. The provisions of this Section
6.1(b) are granted subject to the confidentiality obligations as set forth
herein, including those provisions set forth below in Article VIII.
(c) License Provisos.
i) The license of Article VI specifically includes the right to reverse
engineer the Delivered Technology, ASTRO(R) Technology Modifications,
and Updates, provided such reverse engineering is in support of EFJ's
efforts to use, design, manufacture, sell, and support Licensed
Products, and the results of any such reverse engineering effort are
used only for the purpose of using, designing, manufacturing, selling,
and supporting Licensed Products. When exercising this right to reverse
engineer, EFJ shall continue to maintain all of Motorola's Confidential
Information (as defined below) in confidence in accordance with the
provisions of Article VIII of this Agreement. Notwithstanding the
above, to the extent that Motorola shall deliver to EFJ any object code
that implements IMBE vocoding, EFJ shall not have the right to reverse
engineer such object code.
ii) When exercising its right under this Article VI, EFJ shall:
a) ensure that Motorola's Confidential Information (as defined
below) remains protected by informing the manufacturer of the
confidential nature of such information and of Motorola's rights in
such information, and by requiring the manufacturer to sign a
confidentiality agreement having confidentiality terms at least as
restrictive as those contained in this Agreement;
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b)not use a manufacturer that is itself a radio manufacturer unless
Motorola shall first provide its permission in writing to EFJ; and
c)not have made outside the U.S. any software based product or
component unless Motorola shall first provide its permission in
writing to EFJ.
iii) The license of Article VI specifically includes the right to transfer
to end users or customers a sublicense to use Licensed Products that the
end user acquires from EFJ, but excludes any right to otherwise sublicense
any of the other rights provided herein.
iv) The license of Article VI specifically includes the right to copy,
prepare derivative works of, publish, use, and distribute end user
documentation as is provided by Motorola to EFJ, subject to the
limitations on use of Motorola's trademarks as set forth below in Section
6.1(c)(vi).
v) The license of Article VI specifically excludes any rights to any
maskworks.
vi) The license of Article VI specifically excludes any right to use any
of Motorola's trademarks, including the ASTRO(R) trademark, without
Motorola's previously obtained written authorization on a case-by-case
basis, which written authorization is signed by an officer of Motorola.
viii) The license of Article VI does not include the right to manufacture,
use, or sell IMBE vocoding. Motorola's right to include IMBE vocoding in
Motorola's products is provided to Motorola by Digital Voice Systems,
Inc., and Motorola has no right to sublicense such rights to EFJ, except
to the extent that EFJ receives a right to use and sell Finished Products
as obtained from Motorola that include IMBE vocoding.
ix) EFJ shall use reasonable good faith efforts, in consultation with
Motorola, to implement a software protection program designed to protect,
among other things, Licensed Products that include Motorola-provided
software.
x) EFJ agrees that subscriber units, base stations, and repeaters
manufactured by or for it under the license of Article VI will be
interoperable with the common air interface last delivered by
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Motorola to EFJ for ASTRO(R) Products and/or the APCO Project 25 Standard.
xi)Under the license of Article VI, EFJ also has the right to manufacture
and (or, to the extent obtained from Motorola) offer for sale to an
end-user customer products that are compatibly interoperable with
Motorola's analog Smartnet family of trunked radio systems or Motorola's
analog Securenet family of systems that include Motorola proprietary
encryption capability, provided the end-user customer specifically
requires that products as provided by EFJ to the end-user customer be
compatible with both the digital radio system and a Motorola-provided
analog radio system.
6.2 EFJ Grant of Rights to Motorola.
(a) Patent License. EFJ hereby grants to Motorola a non-exclusive,
non-assignable, royalty-free license, without the right to sublicense except as
otherwise specifically provided for herein, under EFJ's patents to make (but not
to have made any software driven product or component), use, and sell, lease, or
otherwise dispose of:
i) the Delivered Technology;
ii) Motorola developed products that incorporate EFJ-provided ASTRO(R)
Technology Modifications and Updates, provided, however, that such license
shall not include items relating to product differentiation or product
functionality that are not required for compliance with the APCO Project
25 Standard or correction of an error in the corresponding product; or
iii) Motorola-provided ASTRO(R) Technology Modifications and Updates,
provided, however, that such license shall not include items relating to
product differentiation or product functionality that are not required for
compliance with the APCO Project 25 Standard or correction of an error in
the corresponding product; or
iv) Motorola developed products that incorporate EFJ developed technology
that is essential for over-the-air compatible operation with an EFJ system
when such compatibility requires both such EFJ developed essential
technology and technology that has been licensed to EFJ under Section 6.1
of this Agreement.
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(b) Copyright and Trade Secret License. EFJ hereby grants to Motorola a
non-exclusive, non-assignable, royalty-free license, without the right to
sublicense except as otherwise specifically provided for herein, under EFJ's
copyrights and trade secret rights to use, copy, prepare derivative works of,
distribute, sell, lease, or otherwise dispose of EFJ-provided ASTRO(R)
Technology Modifications and Updates when designing, making, using, and selling
Licensed Products. The provisions of this Section 6.2(b) are provided subject to
the confidentiality obligations as set forth herein, including those provisions
set forth below in Article VIII.
(c) License Provisos.
i) This license specifically includes the right to reverse engineer
EFJ-provided ASTRO(R) Technology Modifications and Updates, provided
such reverse engineering is in support of Motorola's efforts to use,
design, manufacture, and support Licensed Products, and the results
of any such reverse engineering effort are used only for the purpose
of using, designing, manufacturing, selling, and supporting Licensed
Products. When exercising this right to reverse engineer, Motorola
shall continue to maintain all of EFJ's Confidential Information (as
defined below) in confidence in accordance with the provisions of
Article VIII of this Agreement.
ii) When exercising its right under this Article VI, Motorola shall:
a) ensure that EFJ's Confidential Information (as defined
below) remains protected by informing the manufacturer of the
confidential nature of such information and of EFJ's rights in
such information, and by requiring the manufacturer to sign a
confidentiality agreement having confidentiality terms at
least as restrictive as those contained in this Agreement;
and
b) not use a manufacturer that is itself a radio manufacturer
unless EFJ shall first provide its permission in writing to
Motorola.
iii) The license of Article VI specifically includes the right to
transfer a sublicense to use to the end users of Licensed Products,
but excludes any right to otherwise sublicense any of the other
rights provided herein.
iv) The license of Article VI specifically excludes any rights to
any maskworks.
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<PAGE> 19
v) The license of Article VI specifically excludes any right to use
any of EFJ's trademarks without EFJ's previously obtained written
authorization on a case-by-case basis, which written authorization
is signed by an officer of EFJ.
vi) Under the license of Article VI, Motorola also has the right to
manufacture and (or, to the extent obtained from EFJ) offer for
sale to an end-user customer products that are compatibly
interoperable with EFJ's analog Multi-Net family of trunked radio
systems, provided the end-user customer specifically requires that
products as provided by Motorola to the end-user customer be
compatible with both the digital radio system and an EFJ-provided
analog radio system.
Article VII, Term, Termination and Assignability
7.1 Term. This Agreement shall remain in effect for twenty (20) years from
the Effective Date, provided, however, the rights and obligations of Article
2.1(b), Article 2.9, Article 2.10(b), Article 12.2(c), Article 12.3(c), Article
12.3(d), Article VI, and Article VIII shall continue.
7.2 Cure.
(a) If either party shall at any time commit a major breach in the
performance of any of its obligations under Article II (which obligations shall
include the payment of any monies due thereunder), and the defaulting party
shall not cure the major breach within ninety (90) days after written notice
from the complaining party to the defaulting party specifying the nature of the
major breach, then the complaining party shall have the right to withhold future
performance under Article 2.1(a) and 2.8.
(b) If either party shall at any time commit a major breach in the
performance of any of its obligations under Article VIII, and the defaulting
party shall not cure the major breach within ninety (90) days after written
notice from the complaining party to the defaulting party specifying the nature
of the major breach, then the complaining party shall have the right to withhold
future performance under Article 3.1, 3.2, and 3.4.
7.3 Default Under Section 5.2. If EFJ shall fail to pay Motorola any
undisputed amount due under Section 5.2 of this Agreement, and such failure to
pay shall continue for ninety (90) days after written notice from Motorola to
EFJ, specifying the nature of the default under Section 5.2, then Motorola shall
have the right to cancel this Agreement by giving written notice of cancellation
to EFJ. If such notice of
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<PAGE> 20
cancellation is given, this Agreement shall terminate on the thirtieth (30th)
day after such notice is given. EFJ shall have the right to cure any such
failure to pay up through but not after the date of termination. In the event of
a cure of the failure to pay, such cure shall be considered as effective
retroactively to the date of such failure to pay.
7.4 Dissolution or Liquidation. This Agreement is personal to each of the
parties hereto, and either party shall have the right to cancel this Agreement
by giving written notice of cancellation to the other party at any time upon or
after: 1) the filing by the other party of a petition commencing a proceeding
with respect to itself in bankruptcy or insolvency; 2) any adjudication by a
court of competent jurisdiction that the other party is bankrupt or insolvent;
3) the appointment of a receiver for all or substantially all of the property of
the other party which appointment shall remain in effect for 180 days; or 4) the
making by the other party of any assignment or attempted assignment of this
Agreement for the benefit of creditors. Upon the giving of such notice of
cancellation this Agreement shall be terminated forthwith.
7.5 Assignment an Bankruptcy. This Agreement is personal to each of the
parties hereto and if this Agreement is assigned pursuant to the bankruptcy
code, any and all monies and other consideration of the assignment shall be
payable directly to Motorola and will be the property of Motorola and not the
property of EFJ or the estate of EFJ.
7.6 Change of Control,
(a) In the event a change of control of EFJ occurs and control is held,
directly or indirectly by any of the following companies, or combination
thereof:
Telefonaktiebolaget LM Ericsson,
Alcatel Alsthom Compagnie Generale D' Electricite,
Alcatel Cit S.A.,
Hitachi, Ltd.,
Philips Electronics N.V.,
Toshiba Corporation,
Matsushita Electric Industrial Co., Ltd.,
Matsushita Electric Works, Ltd.,
NEC Corporation, or
Matra, S.A.;
then Motorola has the right to immediately terminate this agreement.
(b) In the event a change of control of EFJ occurs and control is held,
directly or indirectly by any third party manufacturer in the telecommunications
industry, other than those listed in (a) above, Motorola shall have the right to
cancel this Agreement at any time thereafter upon giving twelve (12) months
written notice thereof to
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<PAGE> 21
EFJ and/or the third party and, upon the giving of such notice of cancellation,
this Agreement shall terminate in accordance therewith.
(c) For purposes of this Section "control" means;
(i) that the controlling entity owns, directly or indirectly, stock
or other interest in EFJ representing more than fifty percent of the
aggregate stock or other interest entitled to vote for the election
of directors or other decisions reserved to a vote by owners of such
stock or other interests; or
(ii) that the controlling entity has the power to direct the
management or policies of EFJ, directly or indirectly, whether
through the ownership of voting securities, by contract, merger, or
acquisition of assets of EFJ, or otherwise.
7.7 No Assignment. This Agreement and any rights or licenses granted
herein are personal to each party and shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that except as otherwise permitted herein, neither party
shall assign any of its rights or privileges hereunder without the prior written
consent of the other party. Any attempted assignment in derogation of the
foregoing shall be null and void and shall be considered a material breach.
7.8 Effects of Termination.
(a) If this Agreement is terminated by Motorola under 7.3, 7.4, or 7.6, any
Delivered Technology, ASTRO(R) Technology Modifications, and Updates previously
transferred to EFJ shall be returned to Motorola forthwith, and all licenses
granted to either party under Article VI shall terminate; providing however,
that sublicenses granted to customers or end users of Licensed Products shall
continue indefinitely. Both parties hereto shall agree, and hereby do agree, and
shall cause their respective Subsidiaries and affiliates, to hold all
Confidential Information (as defined herein) in confidence under the terms and
conditions set forth herein in Article VIII.
(b) Notwithstanding any provision contained herein to the contrary, no
termination of this Agreement, by expiration or otherwise, shall release either
party from any of its obligations then accrued hereunder, including obligations
to furnish statements, to pay compensation, and to permit the inspections of
records, files and books of account.
7.9 Delay. No failure or delay on the part of either party in exercising
its right of termination hereunder for any one or more causes
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<PAGE> 22
shall be construed to prejudice its right of termination for such or for any
other or subsequent cause.
Article VIII. Confidentiality
8.1 Document Managers. Each party shall designate one or more
Documentation Managers. The responsibility of the Documentation Managers for
each party will be to control the exchange of information between the parties,
and to monitor within their company the distribution of information received
from the other party to those who have a need to know such information. The
Documentation Managers for each party shall also arrange conferences and
visitations between personnel of the respective parties, maintain pertinent
records and the like, and acknowledge the receipt from the other party of all
information.
The initial Documentation Manager for Motorola shall be Eric Ziolko, and the
initial Documentation Manager for EFJ shall be Tom Stanton.
Disclosures of information by one party to the other party pursuant to this
Agreement shall be made by the Documentation Manager for the disclosing party to
the Documentation Manager for the receiving party.
8.2 Marking of Confidential Information. Information in tangible form which
is confidential to a party hereto will contain an appropriate legend, such as
"Motorola Confidential Proprietary" or "EFJ Confidential Information". If such
disclosure is orally and/or visually made, it shall be identified at the time of
disclosure as being confidential and shall be summarized in a written resume
within twenty (20) days following such disclosure. The resume will specifically
point out that which is confidential in sufficient detail to allow the receiving
party to identify that information deemed to be confidential. Such resume will
also contain an appropriate legend as set forth above. When such disclosure is
in graphic form or in the form of a computer program or database, it shall be
identified as confidential by a label with an appropriate legend or by notice of
the confidential nature of the information appearing in machine-readable form in
the program or database. Any information delivered in accordance with the
foregoing procedures shall be deemed "Confidential Information" of the party
delivering such information.
8.3 Term of Confidentiality. Except as provided hereinafter, for a period
of ten (10) years from the date of receipt of the Confidential Information of
the disclosing party, as measured from the date of first receipt under this
Agreement, not exceeding three (3) years from the date of expiration of this
Agreement, the receiving party agrees to use the same care and discretion to
avoid disclosure, publication, or dissemination of received Confidential
Information outside the receiving
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<PAGE> 23
party as the receiving party employs with similar information of its own which
it does not desire to publish, disclose, or disseminate. If the Confidential
Information of the disclosing party was first received under any other agreement
previously entered into by the parties relating to the subject matter of this
Agreement, the period of confidentiality shall be as specified in this
Agreement.
8.4 Permitted Disclosures. Disclosure, by a party hereto, of any
Confidential Information of the other party shall not be precluded if such
disclosure is:
(a) in response to a valid order of a court or other governmental body;
provided, however, that the responding party shall notify the other party and
that the responding party shall first have made a good faith effort to obtain a
protective order requiring that the information and/or documents so disclosed be
used only for the purpose for which the order was issued; or
(b) otherwise required by law; or
(c) necessary to establish its rights under this Agreement, provided that
appropriate protections are taken to ensure the continuing confidentiality of
the Confidential Information.
8.5 Exclusions. The obligations specified in this Article VIII. will not
apply to any Confidential Information of a party hereto, that:
(a) is already in the possession of the receiving party without obligation
of confidence;
(b) is independently developed by the receiving party;
(c) is or becomes publicly available without breach of this Agreement;
(d) is or becomes available to the receiving party on a non-confidential
basis from a source, other than the disclosing party or its authorized
representatives, which the receiving party reasonably believes not to be
prohibited from disclosing such Confidential Information by a contractual, legal
or fiduciary obligation;
(e) is released for disclosure by the disclosing party with its written
consent; or
(f) is inherently disclosed in the use, lease, sale or other distribution
of any product or service licensed hereunder, or normal and essential
documentation therefor, by or for the receiving party.
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<PAGE> 24
8.6 Ownership of Materials. It is expressly understood that any drawings,
blueprints, descriptions, or other papers, resumes, documents, tapes, or any
other media, and all copies or derivatives thereof, shall remain the property of
the disclosing party, and the receiving party is authorized to use those
materials only within the scope of the licenses herein granted. Notwithstanding
the period of confidentiality set forth in Section 8.3 the receiving party may
not transfer such material or any portion thereof to a third party unless
otherwise permitted pursuant to this Agreement.
Article IX. Inventions
9.1 Motorola Inventions. All discoveries, improvements, inventions, and
trade secrets, made in the performance of this Agreement solely by Motorola
personnel shall be the sole and exclusive property of Motorola, subject to the
licenses granted herein, and Motorola shall retain any and all rights to file
any patent applications thereon.
9.2 EFJ Inventions. All discoveries, improvements, inventions, and trade
secrets, made in the performance of this Agreement solely by EFJ personnel shall
be the sole and exclusive property of EFJ, subject to the licenses granted
herein, and EFJ shall retain any and all rights to file any patent applications
thereon.
9.3 Joint Inventions. All discoveries, improvements, inventions, and trade
secrets made in the performance of this Agreement jointly by EFJ personnel and
Motorola personnel, shall be the property jointly of EFJ and Motorola, each
party having an equal and undivided one-half (1/2) interest therein.
9.4 Patent Applications for Joint Inventions. In the case of each
discovery, improvement or invention jointly owned by EFJ and Motorola in
accordance with Section 9.3, Motorola shall have the first right of election to
file patent applications in the United States and other countries. Motorola
shall notify EFJ in writing, at the earliest practicable date, whether or not,
and in which countries of the world, Motorola elects to file such patent
application. EFJ shall have the right to file patent applications on such
discovery, improvement or invention in all other countries. Each party, at its
own expense, shall cooperate fully with the filing party as may be necessary for
the proper preparation, filing and prosecution of each such patent application
and the maintenance, renewal and defense of each patent covering such discovery,
improvement or invention. The expense for preparing, filing and prosecuting each
joint application, and for issuance of the respective patent shall be borne by
the party which prepares and files the application. Where such joint
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<PAGE> 25
application for patent is filed by either party in a country which requires the
payment of annual taxes or annuities on a pending application or on an issued
patent, the filing party, prior to filing, shall notify the other party,
requesting the other party to indicate whether it will agree to pay one-half
(1/2) of such annual taxes or annuities. If, within sixty (60) days after
receiving such notice, the non-filing party fails to assume in writing the
obligation to pay its one-half (1/2) share of such annual taxes or annuities, or
if either party subsequently fails, within sixty (60) days of demand, to
continue such payments, it shall forthwith relinquish to the other party,
providing said other party continues such payments, its right, title and
interest to such foreign application and patent, subject, however, to retention
of a paid-up, non-exclusive, nonassignable and irrevocable license, without the
right to grant sub licenses, in favor of the relinquishing party and its
Subsidiaries, to make, have made, use, lease, sell, or otherwise dispose of
apparatus and/or use or practice any methods under said application and patent.
9.5 Abandonment of Applications. In the event that the filing party shall
determine to abandon, or otherwise not to prosecute, any jointly owned patent
application, or not to maintain, defend or renew any jointly owned patent, it
shall notify the other party thereof, in writing, at the earliest practicable
date, and such other party shall have the right, at its expense, to prosecute
such application or to take up such maintenance or defense, or prosecute such
renewal, as the case may be. The filing party agrees, at the other party's
expense, to cooperate fully with the other party to assist the other party in
obtaining, maintaining, defending and renewing such patent right hereunder.
Thenceforth, the party exercising its right under this Section 9.5 shall be
deemed "the filing party" for purposes of Sections 9.4 and 9.5.
9.6 Rights to Joint Inventions. Each party shall have the right to grant
non-exclusive licenses under each jointly owned patent application or patent,
provided that it shall have fulfilled its obligation, if any, to pay its share
of taxes or annuities imposed on such pending application or patent on any terms
and conditions that it desires; and such party shall retain any consideration
that it may receive therefor without having to account to the other joint owner.
Each party consents to the granting of such non-exclusive licenses by the other
party, and agrees not to assert any claim with respect to any such patent or
application licensed by the other party against the licensee or licensees
thereunder for the terms of any such license.
Article X. Prohibited Subject Matter
Under no circumstances shall the parties hereto exchange or discuss with
one another any matter which is not relevant to the performance of this
Agreement.
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<PAGE> 26
Article XI. Publication
All notices to third parties and all other publicity concerning the terms
and conditions of this Agreement shall be jointly planned and coordinated by the
parties. Neither of the parties shall act unilaterally in this regard without
the prior written approval of the other party, which approval shall not
unreasonably be withheld; provided, however, that nothing herein will prohibit
any party from issuing any such release or public announcement or from filing
such reports or other data and information as such party determines to be
required by law, rule or regulation applicable to it, in which case the party
making such determination will use reasonable efforts to give the other party
notice in advance of any such release or filing.
Article XII. General Provisions
12.1 Complete Agreement. This Agreement, and the schedules attached hereto
and made a part hereof, embody the entire understanding of the parties with
respect to the subject matter contained herein and shall supersede all previous
communications, representations or understandings, or agreements either oral or
written, between the parties relating to the subject matter hereof. No amendment
or modification of this Agreement shall be valid or binding upon the parties
unless signed by their respective, duly authorized officers.
12.2 Limitations on Warranties. Nothing contained in this Agreement shall
be construed as:
(a) conferring any rights to use in advertising, publicity, or other
marketing activities any name, trademark, or other designation of either party
hereto, including any contraction, abbreviation, or simulation of any of the
foregoing, provided such restriction shall not apply to device identification
numbers and descriptions and each party hereto agrees not to use the existence
of this Agreement in any marketing activity without the express written approval
of the other party; or
(b) conferring by implication, estoppel, or otherwise upon either party
hereunder any license or other right except the licenses and rights expressly
granted hereunder to a party hereto; or
(c) a warranty or representation that the manufacture, sale, lease, use, or
other disposition of any products that are manufactured by other than Motorola
using Delivered Technology, Motorola-provided ASTRO(R) Technology Modification,
or Updates will be free from infringement of
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<PAGE> 27
third party patents, provided, however, that if promptly notified in writing,
Motorola will defend any claim against EFJ that alleges that U.S. patents,
copyrights, or trade secrets of another have been infringed solely by:
i) Motorola's unaltered software as provided to EFJ as Delivered
Technology, provided, however, that this indemnity shall not apply
to the IMBE vocoder to the extent that the vocoder technology as
included with Delivered Technology shall be based on information
provided by Digital Voice Systems, Inc.;
ii) Motorola's unaltered software as provided to EFJ as an ASTRO(R)
Technology Modification or Update, provided, however, that this
indemnity shall not apply with respect to third party patents that
are identified as essential to the APCO Project 25 Standard steering
committee; and
iii) EFJ software authored by EFJ, provided:
- such EFJ software is substantially based upon and functionally
substitutes for at least one of Delivered Technology,
Motorola-provided ASTRO(R) Technology Modifications, or
Motorola-provided Updates; and
- the claim of infringement would exist regardless of whether
the EFJ software or the corresponding Motorola software, for
which the EFJ software is a substitute, were used by EFJ, and EFJ
would otherwise be indemnified by Motorola for use of such
corresponding Motorola software;
and Motorola will save and hold EFJ harmless from any judgment,
damages, awards, or reasonably incurred expenses, including
reasonable attorney's fees arising out of any such claim (excluding,
however, any such attorney's fees as are incurred subsequent to
Motorola providing notice to EFJ that Motorola is assuming control
of such defense).
Upon Motorola's request, EFJ agrees to reasonably assist in any defense and
surrender control of the suit to Motorola. Motorola may elect, at any time, to
modify or replace such software with equivalent non-infringing items, obtain the
right to continue using the software or, if these remedies are not reasonably
available, to accept return of such software and to refund to EFJ a
corresponding reimbursement that is pro-rated with respect to the term of this
Agreement; or
(d) a warranty that the recipient party will successfully manufacture
products based upon the Delivered Technology transferred hereunder including
technical assistance; or
(e) an obligation to bring or prosecute actions or suits against third
parties for infringement, or to secure and/or maintain any of its intellectual
property rights; or
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(f) limiting the rights which a party has outside the scope of this
Agreement; or
(g) permission to disclose the terms and conditions of this Agreement to
any third party without the written permission and consent of the other party,
which consent shall not be unreasonably withheld, except as otherwise required
by law.
12.3 Representations and Warranties. Motorola and EFJ hereby make the
following representations:
(a) The terms and conditions of this Agreement do not violate any provision
of either party's bylaws, charter or any other agreement to which either is a
party or by which either is bound.
(b) Each transferor warrants that the items of Delivered Technology,
Updates, and ASTRO(R) Technology Modifications transferred hereunder shall be
substantially the same as those then used by the transferor in its own
manufacturing operation.
(c) Motorola hereby represents that the Delivered Technology does not
infringe the valid copyright of any third party, and contains, no unauthorized
confidential information belonging to any third party.
(d) If promptly notified in writing, Motorola will defend any claim against
EFJ that alleges that U.S. patents, copyrights, or trade secrets of another have
been directly infringed by Motorola's Finished Products or Components and will
save and hold EFJ harmless from any judgment, damages, awards, or reasonably
incurred expenses, including reasonable attorney's fees arising out of any such
claim (excluding, however, any such attorney's fees as are incurred subsequent
to Motorola providing notice to EFJ that Motorola is assuming control of such
defense). Upon Motorola's request, EFJ agrees to reasonably assist in any
defense and surrender control of the suit to Motorola. Motorola may elect, at
any time, to modify or replace products with equivalent non-infringing items,
obtain the right to continue using the products or, if these remedies are not
reasonably available, to accept return of the products. Without limiting any
other terms and conditions in this Agreement, Motorola shall have no liability
for infringement that arises from any modification of Motorola's Finished
Products or Components by EFJ or at EFJ's instruction.
(e) Without limiting the foregoing provisions in Sections 12.2(c), 12.3(b),
(c), and (d) NEITHER PARTY MAKES ANY WARRANTY AS TO THE ACCURACY, SUFFICIENCY,
OR SUITABILITY FOR THE OTHER'S USE OF ANY INFORMATION OR ASSISTANCE PROVIDED
HEREUNDER FOR THE MANUFACTURE, OR THE YIELD FROM THE MANUFACTURE THEREOF, OR FOR
THE QUALITY OF SUCH PRODUCT MADE THEREBY.
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(f) NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT, UNDER NO CIRCUMSTANCES
SHALL EITHER PARTY BE RESPONSIBLE TO THE OTHER FOR ANY INDIRECT, CONSEQUENTIAL,
OR INCIDENTAL DAMAGES.
12.4 Notices. Except as otherwise provided for herein, all notices required
or permitted to be given hereunder shall be in writing (including telegraphic
communication) and shall be sent by registered mail (return receipt requested
and postage prepaid), facsimile, overnight or two-day courier or delivered in
person and shall be addressed as follows:
If to Motorola:
MOTOROLA, INC.
1303 E. Algonquin Road
Schaumburg, Illinois 60196
Attn: Vice President of Patents,
Trademarks and Licensing
Telecopier Number: (708) 576-3750
If to EFJ:
E.F. JOHNSON COMPANY
438 Gateway Boulevard
Burnsville, Minnesota 55337
Attn: General Counsel
Telecopier Number: (612) 882-5689
Either party may change its address by a notice given to the other party in the
manner set forth above. Mailed notices given as herein provided shall be
considered to have been given seven (7) days after the mailing thereof,
telegraphic or facsimile shall be considered to have been given on the day sent,
overnight or two-day courier sent notices shall be considered to have been given
three (3) days after sending, and delivered in person notices shall be
considered to have been given on the day of delivery.
12.6 Force Majeure. Anything contained in this Agreement to the contrary
notwithstanding, the performance of the obligations of the parties hereto shall
be subject to all laws, both present and future, of any
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government having jurisdiction over a party hereto, and to orders, regulations,
directions, or requests of any such government, or any department, agency, or
corporation thereof, and to any contingencies resulting from war, acts of public
enemies, strikes or other labor disturbances, fires, floods, acts of God, or any
causes of like or different kind beyond the control of the parties. The parties
hereto shall be excused from any failure to perform or any delay in the
performance of any obligation hereunder to the extent such failure or delay is
caused by any such law, order, regulation, direction, request, or contingency.
12.7 No Waiver. Any failure or delay on the part of either party in the
exercise of any right or privilege hereunder shall not operate as a waiver
thereof, nor shall any single or partial exercise of any such right or privilege
preclude other or further exercise thereof or of any other right or privilege.
12.8 Severability. Should any provision of this Agreement become invalid
or unenforceable, this will not affect the validity of the other provisions
which shall remain in full force and effect.
12.9 Export. Each party agrees not to export or re-export, or cause to be
exported or re-exported, any technical data (including any Delivered Technology
received hereunder), or the direct product of such technical data, to any
country to which, under the laws of the United States of America, either party
is or may be prohibited from exporting its technology or the direct product
thereof.
12.10 Headings. The captions used in this Agreement are for convenience
only and are not to be used in interpreting the rights and obligations of the
parties under this Agreement.
12.11 Other Documents. The parties agree to execute all documents and
instruments and take such actions as may be reasonably requested by a party
hereto, and which are reasonably within the party's reasonable ability to
accomplish, in order to effect and carry out the purposes and intent of this
Agreement, and the transactions contemplated herein.
12.12 FCC. Type Acceptance and Other Governmental Matters. Motorola agrees
to provide EFJ with such assistance as EFJ may reasonably request to assist EFJ
in obtaining all necessary FCC type acceptances for Finished Products, Component
Products and Licensed Products and any additional type acceptance, certificates,
permission or authority from the United States Office of Export Administration
and any other applicable domestic of foreign governmental agencies to export
such products to locations outside the United States. Notwithstanding the
foregoing, EFJ is solely responsible for obtaining any licenses or other
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<PAGE> 31
authorizations required by the FCC or any other federal, state or local
governmental agency.
12.13 CHOICE OF LAW. THE APPLICABLE LAW GOVERNING ANY CAUSE OF ACTION
ARISING OUT OF THIS AGREEMENT, OR THE PERFORMANCE BY EITHER PARTY HERETO, SHALL
BE GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS, U.S.A.
12.14 Independent Contractor. Nothing contained herein, or done in
pursuance of this Agreement, shall constitute the parties as entering upon a
joint venture or shall constitute either party hereto the agent for the other
party for any purpose or in any sense whatsoever.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of
the dates below written.
MOTOROLA, INC. E. F. JOHNSON COMPANY
By:/s/ MERCER L. GILMORE By: /S/ JEFFERY L. FULLER
------------------------------- --------------------------------------
Signature Signature
Name: MERCER L. GILMORE Name: JEFFERY L. FULLER
--------------------------- -----------------------------------
Vice-President - Marketing and
Title: Exec. V.P. President, CMPS Title: North American Sales
--------------------------- -----------------------------------
Date: 10/14/94 Date: 10/14/94
--------------------------- ----------------------------------
By: /s/ JAMES W. GILLMAN
----------------------------
Signature
James W. Gillman
Vice President, Patents
Trademarks and Licensing
Date: 11/14/94
--------------------------
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APPENDIX A
Supplemental Charges
1a. Tooling Costs to Private Label an Astro Saber Portable
<TABLE>
<CAPTION>
LINE CHANGES DESCRIPTION TOOLING MANPOWER ASSUMED NOT
ITEM (000's) (MANMTH) TO CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
RADIOS ONLY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1.1.0 Housing Appearance ** ** internal configuration
or housing
1.1.1 PTT Bazel & ham Appearance ** ** button locators
1.1.2 PTT paddle Appearance ** **
1.1.3 Monitor & Ratt buttons Appearance ** ** button locators
1.1.4 Vehicle Adapter must use
VA ADDERs (line 5.1.0) result of above see 5.1.0 below
1.1.5 Radio tray must use Shipp'g
case ADDER (line 1.8.1) result of above see 1.8.1 below
--------------------------------------------------------------------------------------------------------------------
RADIO 1.2.0 Baseplate Appearance ** ** Transceiver attachment
to baseplate
1.2.1 Contacts Appearance ** ** B+ mounting point
(to accommodate
transceiver)
1.2.2 Latch Appearance ** **
1.2.3 Seals result of above ** **
1.2.4 Battery hag must use Batt'y
Hsg ADDER (line 2.1.0) result of above see 2.1.0 below
--------------------------------------------------------------------------------------------------------------------
1.3.0 Model I grill Appearance ** Locations of display,
buttons, speaker,
mic
1.3.1 Felt result of above ** ** " " "
--------------------------------------------------------------------------------------------------------------------
1.4.0 Model II grill Appearance ** Locations of display,
buttons, speaker,
mic
1.4.1 Keypad(1) Appearance ** ** " " "
1.4.2 Felt result of above ** ** " " "
--------------------------------------------------------------------------------------------------------------------
1.5.0 Model III grill Appearance ** Locations of display,
buttons, speaker,
mic
1.5.1 Keypads(2) Appearance ** ** " " "
1.5.2 Felt result of above ** ** " " "
--------------------------------------------------------------------------------------------------------------------
1.6.0 Control Top Appearance ** ** Location & design of
Rt bushing &
Rt switching
1.6.1 Label Appearance ** **
1.6.2 Knobs (Volume Frequency Appearance ** ** Switches, Switch
A/B Secure) locations &
mounting
--------------------------------------------------------------------------------------------------------------------
1.7.0 Antennas
1.7.1 ...Helicals (1 UHF, 2 VHF's) Appearance ** **
1.7.2 ...Whips (1 800, 1 UHF) Appearance ** **
1.7.3 ...Dipole (1 800) Appearance ** **
1.7.4 ...Quarterwave (1 800) Appearance ** **
--------------------------------------------------------------------------------------------------------------------
1.8.0 Shipping Case & manuals
1.8.1 ...Radio tray result of batt'y ** **
& housing
1.8.2 ...Manual, User Appearance ** **
1.8.3 ...Manual Service Appearance ** **
--------------------------------------------------------------------------------------------------------------------
1.9.0 Accessory Connector ass'y
1.9.1 ADDER OPTION 1: APPEARANCE ONLY
1.9.2 ...Univ'l conn plate Appearance ** ** Contact location &
internal design
1.9.3 ...Rt Contact Appearance ** ** Contact location &
internal design
1.9.4 ...Control Top (add'l costs) Appearance ** ** Acc'y retain'g method,
feature for VA
conformance
1.9.5 ADDER OPTION 2: FUNCTION & APPEARANCE
1.9.6 ...Acc'y retain'g features Funct'n & Appearance ** **
1.9.7 ...Flex, acc'y conn result of above ** ** B+ & transceiver
accessory pickup
design
1.9.8 ...Radio's acc'y connector result of above ** **
1.9.9 ...Conn for cable-type acc'ys
must use Cable ADDER
(line 6.1.0) see 6.1.0 below
1.9.10 ...Vehicle Adapter must use
VA ADDER's (line 5.3.0) result of above see 5.3.0 below
- ------------------------------------------------------------------------------------------------------------------------------------
2.1.0 Battery housing Appearance ** ** Charging contact
locations do not
move
BATTERY 2.1.1 Bottom cover result of above ** **
2.1.2 Flex circuit result of above ** ** Charging contact
locations do not
move
2.1.3 Chargers must use CHGR ADDER's
(lines 3.1.0 & 4.1.0) result of above see 3.1, 4.1 below
2.1.4 Vehicle Adapter must use
VA ADDER (line 5.1.0) result of above see 5.1.0 below
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
ACCESSORIES
- ------------------------------------------------------------------------------------------------------------------------------------
3.1.0 ADDER OPTION 1: POCKET ONLY as a result of battery changes
Single 3.1.1 ...Charger pocket result of battery ** ** Use Aztec version
Charg'r changes charger
3.2.0 ADDER OPTION 2: APPEARANCE OF CHARGER HOUSING
3.2.1 ...Charger housing Appearance ** ** Use Aztec version
charger
- ------------------------------------------------------------------------------------------------------------------------------------
4.1.0 ADDER OPTION 1: POCKET ONLY as a result of battery changes
Multi 4.1.1 ...Charger pocket result of battery ** ** All but pocket design
Charg'r changes remains the same
4.2.0 ADDER OPTION 2: APPEARANCE OF CHARGER HOUSING
4.2.1 ...Charger housing Appearance ** **
- ------------------------------------------------------------------------------------------------------------------------------------
5.1.0 ADDER OPTION 1: POCKET ONLY as a result of battery & housing changes
Vehicle 5.1.1 ...VA pocket result of batt'y & ** ** New pocket fits within
Adapter housing constraints of
VA housing
5.1.2 ...VA face plate result of batt'y & ** ** Keypad & display
housing remain the same
5.1.3 ...VA radio locator result of batt'y & ** ** Mating parts don't
housing require changes
5.2.0 ADDER OPTION 2: APPEARANCE OF VEHICLE ADAPTER
5.2.1 ...VA housing Appearance ** ** Assembly does not
change
5.2.2 ...VA keypad Appearance ** ** Circuit board does
not change
5.3.0 ADDER OPTION 3: VA ACCESSORY CONNECTOR as a result of radio acc'y conn changes
5.3.1 ...VA accessory connector result of acc'y conn Must be quoted
5.3.2 ...VA Rt connector result of acc'y conn Must be quoted
5.3.3 ...VA connector circuit board result of acc'y conn Must be quoted
- ------------------------------------------------------------------------------------------------------------------------------------
6.1.0 ADDER OPTION 1: REDESIGN OF ACCESSORY CABLE CONNECTOR
6.1.1 ...Connector housing Must be quoted
6.1.2 ...Connector plate Must be quoted
6.1.3 ...Retaining method Must be quoted
6.2.0 Microphone housing Appearance ** ** Same microphone
internals
Cable-type 6.2.1 ...cover Appearance ** ** Same microphone
Acc'ys 6.2.2 ...PTT paddle Appearance ** ** internals
(mic's, etc) 6.2.3 ...Lapel clip Appearance ** **
6.2.4 ...strain relief Appearance ** **
6.2.5 ...labels Appearance ** **
6.3.0 Keyloaders
6.3.1 ...keyloading cable see ADDER Option ** **
(line 6.1)
6.3.2 ...keyload adapter (Hirose) see ADDER Option ** **
(line 6.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Carry 7.1.0 Standard belt loop Appearance ** **
cases 7.1.1 Swivel version Appearance ** **
- ------------------------------------------------------------------------------------------------------------------------------------
B. Clip 8.1.0 Clip Appearance ** **
8.1.1 Bracket Appearance ** **
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Approv'ls 9.1.0 Radio -- FM, Military Standards, FCC, etc. ** **
9.1.1 Accessory -- UL, Military Standards ** **
- ------------------------------------------------------------------------------------------------------------------------------------
RADIO TOTAL: ** **
ACCESSORY TOTAL ** **
</TABLE>
License Agreement Between Motorola & EFJ 10/14/94
<PAGE> 34
APPENDIX A
Supplemental Changes
1b. Tooling Costs to Private Label an Astro Spectra Mobile
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Tooling Manpower
Changes Description (x1000) (mm) Not changed
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mid power Chassis (casting) Appearance ** ** Mounting trunion, circuit boards, shields,
---------------------------------------------------------- heat sink attachment, location of antenna,
dash/remote Covers(2) Appearance ** ** power, and accessory connectors
----------------------------------------------------------
mount Heat sink (casting) Appearance ** **
----------------------------------------------------------
Front plate ....
Radios (remote mount only) Appearance ** **
-------------------------------------------------------------------------------------------------------------------------
High power Chassis (casting) Appearance ** ** Mounting plate, circuit boards, shields,
---------------------------------------------------------- location of antenna, power and accessory
remote mount Cover Appearance ** ** connectors
----------------------------------------------------------
Handle (casting) Appearance ** **
- --------------------------------------------------------------------------------------------------------------------------------
Front cover Appearance ** ** Display, microphone connector shape and
---------------------------------------------------------- location, board retainer, control head
Buttons Appearance, ** ** attachment, mounting trunion
location
----------------------------------------------------------
Dash Mount Knobs Appearance, ** **
location
----------------------------------------------------------
W4 Lightpipe Function ** **
----------------------------------------------------------
Circuit board Function ** **
----------------------------------------------------------
Keypad Function ** **
----------------------------------------------------------
Lens & weld fixturing Appearance ** **
-------------------------------------------------------------------------------------------------------------------------
Front cover Appearance ** ** Display, microphone connector shape and
---------------------------------------------------------- location, board retainer, control head
Buttons .... (change Appearance, ** ** attachment, mounting trunion
not needed if W4 is location
Dash Mount changed)
W5 ----------------------------------------------------------
Lightpipe Function ** **
----------------------------------------------------------
Circuit board Function ** **
----------------------------------------------------------
Keypad Function ** **
----------------------------------------------------------
Lens & weld fixturing Appearance ** **
-------------------------------------------------------------------------------------------------------------------------
Front cover.... Appearance ** ** Display, microphone connector shape and
(change not needed if board retainer, control head attachment,
W5 is changed mounting trunion
----------------------------------------------------------
Buttons .... (change Appearance, ** **
not needed if W4 or location
W5 is changed)
----------------------------------------------------------
Dash Mount Lightpipe .... Function ** **
(change not needed
W7 if W5 is changed)
----------------------------------------------------------
Circuit board Function ** **
----------------------------------------------------------
Control Keypad .... (change Function ** **
Heads not needed if W5
is changed)
----------------------------------------------------------
Lens .... (change Appearance ** **
not needed if W5
is changed)
-------------------------------------------------------------------------------------------------------------------------
Remote Mount Same as W4 dash plus Appearance ** ** Display, microphone connector shape and
W4 back cover ______ location, board retainer, control head
Back cover attachment, mounting trunion
--------------------------------------------------------------------------------------------------------------------------
Remote Mount Same as W5 or W7 Appearance ** ** Display, microphone connector shape and
W5 &/or W7 dash plus back cover attachment, mounting trunion
____ Back cover
--------------------------------------------------------------------------------------------------------------------------
Front cover Appearance ** ** Display, microphone connector shape and
---------------------------------------------------------- location, board retainer, control head
Back cover Appearance ** ** attachment, mounting trunion
----------------------------------------------------------
Buttons .... (change Appearance, ** **
not needed if other location
Remote Mount C/H is changed)
----------------------------------------------------------
W9 Lightpipe Function ** **
----------------------------------------------------------
Circuit board Function ** **
----------------------------------------------------------
Keypad Function ** **
----------------------------------------------------------
Lens Appearance ** **
- --------------------------------------------------------------------------------------------------------------------------------
Mic Logo only Appearance ** ** Cord, internal electronics, connectors
----------------------------------------------------------
Housings (2) & grill Appearance ** **
- --------------------------------------------------------------------------------------------------------------------------------
Remote Logo only Appearance ** ** Cable, internal electronics, connectors,
Speaker ----------------------------------------------------------
Housings (2) Appearance ** ** mounting bracket
----------------------------------------------------------------------------------------------------------
Siren Logo only Appearance ** ** Internal electronics, connectors, mounting
PA ---------------------------------------------------------- hardware
Chassis & weld Appearance ** **
fixturing
----------------------------------------------------------
Cover Appearance ** **
- --------------------------------------------------------------------------------------------------------------------------------
Dash Mount Power Appearance ** ** Connectors
----------------------------------------------------------------------------------------------------------
Remote Power, high Appearance ** ** Connectors
Mount ----------------------------------------------------------
Cables Power, mid Appearance ** **
----------------------------------------------------------
Siren Appearance ** **
----------------------------------------------------------
Control head Appearance ** **
- ---------------------------------------------------------------------------------------------------------------------------------
Manuals User Appearance ** **
Service Appearance ** **
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
License Agreement Between Motorola & EFJ 10/14/94
<PAGE> 35
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Appendix A - 1.c Tooling Costs to Private Label an Astro Quantar/Quantro,
- ---------------------------------------------------------------------------------------------------------------------
Quantar Receiver, Astro-TAC Comparator, Astro DIU
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Description Tooling ($K) Staff months Comments
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
HARDWARE
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Quantar/Quantro chassis 1 included below Screened on painted sheet metal
- ---------------------------------------------------------------------------------------------------------------------
Quantar satellite receiver 1 3 Screened on painted sheet metal
- ---------------------------------------------------------------------------------------------------------------------
Astro-TAC comparator 1 included above Screened on painted sheet metal
- ---------------------------------------------------------------------------------------------------------------------
Infra cabinet doors (each) 1 1 Different sizes available - screen on painted sht mtl
- ---------------------------------------------------------------------------------------------------------------------
DIU 1 3 Pad printed on plastic housing - my guess
- ---------------------------------------------------------------------------------------------------------------------
Central controller 1 2 Screened on cabinet and plate attached
- ---------------------------------------------------------------------------------------------------------------------
Remote controller 1 2 Plate attached to cabinet
- ---------------------------------------------------------------------------------------------------------------------
Series II console furniture Screened on painted sheet metal
- ---------------------------------------------------------------------------------------------------------------------
Series II CRT console Screened on painted sheet metal
- ---------------------------------------------------------------------------------------------------------------------
Series II CRT computer
- ---------------------------------------------------------------------------------------------------------------------
Trunking user terminal
- ---------------------------------------------------------------------------------------------------------------------
Trunking user keyboard
- ---------------------------------------------------------------------------------------------------------------------
SIMS II CRT
- ---------------------------------------------------------------------------------------------------------------------
SIMS II computer
- ---------------------------------------------------------------------------------------------------------------------
System watch computer
- ---------------------------------------------------------------------------------------------------------------------
Zone watch CRT
- ---------------------------------------------------------------------------------------------------------------------
Zone watch computer
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
SCREEN SOFTWARE
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Console screens 4 Includes FPP, CRT, CTL and testing
- ---------------------------------------------------------------------------------------------------------------------
System watch 1 Estimate
- ---------------------------------------------------------------------------------------------------------------------
Trunking zone manager 1 Estimate
- ---------------------------------------------------------------------------------------------------------------------
Trunking SIMS manager 1 Estimate
- ---------------------------------------------------------------------------------------------------------------------
RSS screens (per part number) 1
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
NOTE: This list is incomplete. Motorola agrees to complete this list and to provide pricing
on a fair and reasonable basis consistent with the methodologies used in developing the prices
and staff months (to be charged at ** per year) listed above.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
License Agreement Between Motorola and EFJ 10/14/94
<PAGE> 36
APPENDIX A
Supplemental Charges
2. Custom Software Services per section 4.4
The cost per engineer shall be ** per year. EFJ shall allow Motorola
sufficient time to identify and assign additional engineers from the time of
written notification by EFJ of the requirement as follows:
1 to 3 Engineers, 3 Months
4 to 8 Engineers, 6 Months
9 to 12 Engineers, 9 Months
License Agreement Between Motorola & EFJ 10/14/94
<PAGE> 37
APPENDIX B
Finished Products Pricing
All Astro products listed on the following Motorola R01 pricebook pages:
Astro Quantar/Quantro Conventional Section 5.0, pages 37-37H dated 12/15/93
Base Stations and Repeaters, Acces- (page 37, 37B, 37C, 37D dated 7/20/94)
sories and options.
To be sold at the following discounts from the current DNUP price as of the date
of order receipt:
800 MHz versions, **
150 MHz and 450 MHz versions:
1st 50 units in total, **
2nd 50 units in total, **
3rd 50 units in total, **
all units thereafter, **.
* - NOTE: The pages published to date do NOT include trunking products. The same
discount levels will apply when these are added.
<TABLE>
<S> <C>
Astro Quantar Conventional Receivers Section 5.0, pages 38-38A dated 12/15/93
Astro-TAC Digital Voting Comparator Section 5.0, pages 39-39A dated 12/15/93
Astro Digital Interface Unit Section 5.0, pages 40-40A dated 12/15/93
and other Astro Infrastructure To Be Determined.
</TABLE>
To be sold at a ** discount from the current DNUP price as of the date of
order receipt.
* - NOTE: The pages published to date do NOT include trunking products. The same
discount levels will apply when these are added.
License Agreement Between Motorola & EFJ 10/14/94
<PAGE> 38
APPENDIX B
Finished Products Pricing
All Astro products listed on the following Motorola RO1 pricebook pages:
<TABLE>
<S> <C>
Astro Digital Saber Portable Series, Section 5.0, pages 35-35M dated 12/15/93
Accessories and Options. (page 35J dated 5/1/94)
Astro Digital Spectra Mobile Series Section 5.0, pages 36-36N dated 12/15/93
Accessories and Options. (page 36D dated 5/1/94; 36L dated
dated 2/1/94)
</TABLE>
To be sold at the following discounts from the current DNUP price as of the date
of order receipt based on the annual quantity purchased:
<TABLE>
<S> <C>
Annual Quantity Discount
25 minimum - 100 **
100 - 500 **
500 - 1000 **
1000 - 1500 **
1500 - 2000 **
Greater then 2000 **
</TABLE>
*- NOTE: The pages published to date do NOT include trunking products. The same
discount levels will apply when these are added.
License Agreement Between Motorola & EFJ 10/14/94
<PAGE> 39
APPENDIX C
Chip Sets (includes Kits) Pricing
The following Astro kits:
<TABLE>
<S> <C> <C>
Astro Digital Saber Portable kits NTN7749B - Vocon board **
NLD8892B - VHF RF board **
NLE4244C2 - UHF RF board **
NUF6411 B - 800 MHz RF board **
Astro Digital Spectra Mobile kits HLN6458B - Vocon board **
HRN6014A - VHF RF board **
HRN6020A - UHF RF board **
HRN6019A - 800 MHz RF board **
</TABLE>
Five year price validity to be reviewed every 6 months. Price not to rise
greater than the wholesale price index. Will entertain learning curve price
reductions.
The following Astro integrated circuits:
<TABLE>
<S> <C>
ADSIC - P/N 5105457W19 **
ABACUS - P/N 5105457W20 **
SLIC IV - P/N 5105457W06 **
FRAC-N - P/N 5105625U31 **
STATION DSP GLUE CHIP - P/N 5184625T05 **
DES (NON XL) ENCRYPTION CHIP - P/N 5183977M69 **
ENCRYPTION ASIC OR RISC CHIP - UNDEVELOPED AT THIS TIME*
</TABLE>
* -- Price will have to be negotiated when part is available. Motorola will give
EFJ software to program either part.
The following connectors will be made available to EFJ as required:
Encryption module mating connector
FLASHport mating connector
Five year price validity to be reviewed every 6 months. Price not to rise
greater than the wholesale price index. Will entertain learning curve price
reductions.
License Agreement Between Motorola & EFJ 10/14/94
<PAGE> 40
[EF JOHNSON LETTERHEAD]
July 27, 1995
Mr. Wayne Leland
Motorola, Inc.
1301 East Algonquin Road
Schaumburg, IL 60196-1078
VIA FEDERAL EXPRESS
RE: LICENSE AGREEMENT BETWEEN MOTOROLA, INC. ("MOTOROLA") AND
E.F. JOHNSON COMPANY ("EFJ") DATED OCTOBER 14, 1994 (THE
"LICENSE AGREEMENT")
Dear Wayne:
As you know, Section 5.2 of the License Agreement requires EFJ to pay
Motorola $5,000,000. To date, EFJ has paid Motorola the first installment of
$1,000,000. As a result of negotiations over the last several weeks, EFJ and
Motorola have agreed that Section 5.2 of the License Agreement is amended to
require EFJ's payment of the remaining $4,000,000, without any interest, service
or late payment charges, according to the following revised schedule:
1. $720,000 payable in twelve monthly payments of $60,000 due on the first
day of each month commencing September 1, 1995 and continuing on each
consecutive month thereafter to and including August 1, 1996; and
2. One final payment of $3,280,000 due on August 31, 1996.
Except as amended herein, the License Agreement shall remain in full force
and effect.
Please acknowledge Motorola's acceptance and agreement to this amendment
to the License Agreement by signing both originals of this amendment below.
After signing, please return one of the originals to me for our files.
E.F. Johnson Company
By: [SIG]
---------------------------
Title: President and CEO
Agreed to and Accepted:
Motorola, Inc.
By: [SIG]
--------------------------------------
Sr. Vice Pres. & General Manager
Title: Radio Network Solutions Group, Land
--------------------------------------
Mobile Product Sector
<PAGE> 41
SECOND AMENDMENT
THIS SECOND AMENDMENT is dated and effective as of September 27, 1995,
between Motorola, Inc., a Delaware corporation ("Motorola"), and E.F. Johnson
Company, a Minnesota corporation ("EFJ").
RECITALS
WHEREAS, Motorola and EFJ entered into that certain License Agreement
dated October 14, 1994, which was subsequently amended by agreement dated July
27, 1995 (the "First Amendment", said License Agreement and First Amendment
being hereinafter referred to as the "Agreement"); and
WHEREAS, the parties desire to amend the Agreement as set forth below.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration the receipt and sufficiency of which the parties hereby
acknowledge, the parties agree as follows:
1. Section 5.3(a) of the Agreement is hereby amended by deleting the words
"**" in the third line of such Section and substituting the words "**".
2. Section 5.3(b) of the Agreement is hereby deleted in its entirety.
3. Appendix B to the Agreement is hereby deleted in its entirety and
superseded and replaced by the revised Appendix B attached hereto and
incorporated herein by reference.
4. If EFJ fails to pay any of the installments due under the First
Amendment and any such failure continues for more than thirty (30) days after
EFJ receives Motorola's written notice of non-payment, the amendments to Section
5.3 (a) and (b) and Appendix B of the Agreement set forth herein shall terminate
as of the expiration of such thirty (30) day period and be replaced by the terms
contained in the Agreement prior to the date hereof.
5. Except as expressly modified in this Second Amendment, the terms,
conditions and provisions of the Agreement shall remain in full force and
effect. Each party hereby represents that the individual signing below has all
necessary power, authority and approvals to execute and deliver this Second
Amendment.
IN WITNESS WHEREOF, this Second Amendment is executed by the parties as of
the date set forth above.
MOTOROLA, INC. E.F. JOHNSON COMPANY
By [SIG] By [SIG]
--------------------------------- -----------------------------------
Its Sr. Vice Pres. & General Its Pres.
----------------------------- -----------------------------------
Manager Radio Network Solutions
Group, Land Mobile Products
Sector
<PAGE> 42
APPENDIX B
Finished Products Pricing
All Astro products listed on the following Motorola R01 pricebook pages:
<TABLE>
<S> <C>
Astro Quantar/Quantro Conventional Section 5.0, pages 37-37H dated 12/15/93
Base Stations and Repeaters, Acces- (page 37, 37B, 37C, 37D dated 7/20/94)
sories and options.
</TABLE>
To be sold at the following discounts from the current DNUP price as of the date
of order receipt:
800 MHz versions, **
150 MHz and 450 MHz versions
1st 50 units in total, **
2nd 50 units in total, **
3rd 50 units in total, **
all units thereafter, **.
* - NOTE: The pages published to date do NOT include trunking products. The same
discount levels will apply when these are added.
<TABLE>
<S> <C>
Astro Quantar Conventional Receivers Section 5.0, pages 38-38A dated 12/15/93
Astro-TAC Digital Voting Comparator Section 5.0, pages 39-39A dated 12/15/93
Astro Digital Interface Unit Section 5.0, pages 40-40A dated 12/15/93
and other Astro Infrastructure To Be Determined.
</TABLE>
To be sold at a ** discount from the current DNUP price as of the date of
order receipt.
* - NOTE: The pages published to date do NOT include trunking products. The same
discount levels will apply when these are added.
License Agreement Between Motorola & EFJ 10/14/94
<PAGE> 43
APPENDIX B
Finished Products Pricing
Astro products listed on the following Motorola R01 pricebook pages:
<TABLE>
<S> <C>
Astro Digital Spectra Mobile Series Section 5.0, pages 36-36N dated 12/15/93
Accessories and Options (page 36D dated 5/1/94; 36L dated 2/1/94)
</TABLE>
To be sold at the following discounts from the current DNUP price as of the date
of order receipt based on the annual quantity purchased:
<TABLE>
<CAPTION>
Annual Quantity Discount
--------------- --------
<S> <C>
25 minimum - 100 **
100 - 500 **
500 - 1000 **
1000 - 1500 **
1500 - 2000 **
Greater than 2000 **
</TABLE>
<TABLE>
<S> <C>
Astro Digital Saber Portable Series Section 5.0, pages 35-35M dated 12/15/93
Accessories & Options (page 35J dated 5/1/94)
</TABLE>
To be sold at a ** discount from the DNUP price as of the date of order
receipt regardless of quantity purchased.
* - NOTE: The pages published to date do NOT include trunking products. The same
discount levels will apply when these are added.
License Agreement Between Motorola & EFJ 10/1 4/94,
<PAGE> 44
[EFJohnson LETTERHEAD]
WILLIAM WEKSEL
Chairman and Chief Executive Officer
June 25, 1996
Wayne Leland VIA FEDERAL EXPRESS
Motorola, Inc.
1301 E. Algonquin Road
Schaumburg, IL 60196-1078
RE: LICENSE AGREEMENT BETWEEN MOTOROLA, INC. ("MOTOROLA") AND E.F.
JOHNSON COMPANY ("EFJ") DATED OCTOBER 14, 1994, AS AMENDED JULY 27,
1995 AND SEPTEMBER 27, 1995 (COLLECTIVELY, THE "LICENSE AGREEMENT")
Dear Wayne:
As you know, Section 5.2 of the License Agreement requires EFJ to pay
Motorola $5,000,000 (the "Section 5.2 Payment"). Under the License Agreement,
EFJ will have paid Motorola a total of $1,720,000 towards the Section 5.2
Payment as of August 1, 1996. As a result of negotiations over the last several
weeks, EFJ and Motorola have agreed that Section 5.2 of the License Agreement is
amended to require EFJ's payment of the remaining $3,280,000, due on August 31,
1996, without any interest, service or late payment charges, according to the
following revised schedule:
1. $1,800,000 payable in twelve monthly payments of $150,000 due on the
first day of each month commencing September 1, 1996 and continuing on
each consecutive month thereafter to and including August 1, 1997;
2. One final payment of $1,480,000 due on August 31, 1997; and
3. If EFJ completely refinances its current debt and equity structure at
any time prior to August 31, 1997, the unpaid balance of the Section
5.2 Payment as of such refinancing shall be immediately payable.
Except as amended herein, the License Agreement shall remain in full force
and effect.
<PAGE> 45
Wayne Leland
Page 2
June 25, 1996
Please acknowledge Motorola's acceptance and agreement to this amendment
to the License Agreement by signing both originals of this amendment below.
After signing, please return one of the originals to me for our files.
E.F. Johnson Company
By: [SIG]
----------------------------------------------
Title: President and CEO
AGREED TO AND ACCEPTED:
MOTOROLA, INC.
By: [SIG]
------------------------------------------
Title: Vice President and General Manager
<PAGE> 1
EXHIBIT 10.36
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "Agreement") is made and entered into this
15th day of January 1997, by and between E.F. Johnson Company, a Minnesota
corporation ("Licensor"), and Johnson Data Telemetry Corporation, a Delaware
corporation ("Licensee").
RECITALS
WHEREAS, pursuant to that certain Agreement for Purchase and Sale of
the Data Telemetry Division of E.F. Johnson Company (the "Purchase Agreement")
dated as of January 15, 1997 between Licensor and Licensee, Licensor has sold
and transferred to Licensee certain assets utilized by Licensor to operate its
data telemetry products business, all as more specifically set forth in such
agreement; and
WHEREAS, Licensee desires to obtain the right to use a certain name and
mark owned by Licensor in connection with Licensee's acquired business and its
sale of certain data telemetry products and Licensor desires to grant Licensee
such a right, all upon the terms and subject to the conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties agree as follows:
1. - Grant of Rights
1.1 Licensor hereby grants to Licensee a royalty-free exclusive right
to use JOHNSON DATA TELEMETRY (the "Mark") anywhere in the world as a trade
name, trademark, or service mark "in connection with Licensee's manufacturing,
promotion, distribution and sale of the products specifically listed on Schedule
1.1 attached hereto, and any other conventional, nontrunked data telemetry
products having commercially similar applications or intended uses as such
listed products (the "Licensed Products"), subject to the terms and conditions
set forth herein. Licensee shall not make, or authorize to be made, any use,
direct or indirect, of the Mark on any other products or services of any
description whatsoever, or in any manner not expressly authorized hereunder.
1.2 For a period of one year from and after the date hereof, Licensee
shall have the right, in connection with its products catalogs, corporate
stationary, promotional literature and advertising of the Licensed Products, to
use the phrase "formerly associated with E.F. Johnson Company."
1.3 Nothing in this Agreement shall bar Licensor from use of the
trademark JOHNSON alone or in combination with words other than "data telemetry"
in any order as all
<PAGE> 2
or part of a mark, or from the sublicense of such right to third parties. Except
as provided in the Non-competition Agreement or the Preferred Vendor and
Cooperation Agreement (each as referred to in Section 6.03 of the Purchase
Agreement), Licensor shall not use the trademark JOHNSON in connection with the
manufacturing, promotion, distribution and sale of the Licensed Products for the
term of the Non-competition Agreement.
1.4 For a period of one year from and after the date hereof, Licensee
shall have the right to use all of Licensor's stocks of packaging, stationary,
catalogs and promotional literature existing as of the date hereof in connection
with the Licensed Products. For all such stocks not exhausted by Licensee or for
such stocks in which the references to the Mark and/or the Licensed Products is
incidental, Licensor retains the right to deplete all inventory of such stocks
in the ordinary course.
2. - Effective Date and Duration
2.1 This Agreement shall become effective on the date hereof (the
"Effective Date"), and shall continue for a 10 year term (the "Initial Term"),
unless sooner terminated in accordance with its provisions. This agreement shall
automatically renew for additional 10 year terms (each a "Renewal Term"),
unless Licensee delivers written notice to the contrary no later than one year
prior to the expiration of the Initial Term or any Renewal Term
2.2 This Agreement may not be licensed or assigned, in whole or in
part, without the written permission of Licensor, such permission not to be
unreasonably withheld; provided, however, that Licensee may assign its rights
under this Agreement in connection with the sale of all, or substantially all of
its assets if (a) Licensee receives the prior written permission of Licensor,
such permission not to be unreasonably withheld, and (b) such assignee assumes
all of Licensee's obligations under this Agreement.
3. - Quality Control
3.1 In connection with the use of the Mark, Licensee agrees that its
standards for all Licensed Products or promotion or advertising thereof bearing
the Mark shall be reasonably consistent with the quality standards of Licensed
Products sold by Licensor prior to the date hereof and all Licensed Products
shall comply in all material respects with all applicable laws and regulations
pertaining to such products in connection with which the Mark is used. All
marketing and promotion of the Licensed Products shall be done in a professional
manner in keeping with the reasonable standards of Licensor.
3.2 Licensee agrees that the Mark has an established prestige and
goodwill and is well recognized by the trade and public worldwide, and is of
great importance and value to Licensor. Licensee agrees that its use of the Mark
shall be in a commercially acceptable and responsible manner.
2
<PAGE> 3
3.3 In furtherance of the purpose and intent expressed in
paragraphs 3.1 and 3.2 above, Licensee shall submit to Licensor or its
authorized representative at its request, from time to time, but at least once
per calendar year, a reasonable number of representative samples of all Licensed
Products which Licensee offers for sale under the Mark. If Licensor disapproves
of any sample (such disapproval to be reasonable in light of standards set forth
in Paragraphs 3.1 and 3.2 above), Licensor shall notify Licensee in writing
within thirty (30) days of Licensor's receipt of such sample, specifying in
reasonable detail the basis for such disapproval. If Licensor does not approve
or disapprove of the Licensed Products within such 30 day period, such Licensed
Products shall be deemed to be approved. If any sample is so disapproved by
Licensor, Licensee shall upon the reasonable request of Licensor, cease public
distribution of all Licensed Products of comparable quality to the disapproved
sample within 120 days following receipt of such notice. Thereafter, Licensee
shall not manufacture or release replacement Licensed Products for public
distribution until Licensor's approval has been obtained, which approval shall
not be unreasonably withheld or delayed.
4. - Disputes
4.1 Licensor and Licensee agree that in the event of any dispute of any
kind, nature or description between the parties hereto, arising out of this
Agreement or its interpretation, including, without limitation, disputes
relating to the quality of the Licensed Products, the parties shall first
attempt in good faith to resolve such dispute by negotiations between senior
executives of each party with authority to settle the dispute. In the event of
the failure of the parties to resolve such dispute within 30 days after the
dispute arises, the dispute shall be submitted to the American Arbitration
Association in accordance with its commercial arbitration rules, to be heard
before three arbitrators (the "Arbitrators"). The award of the Arbitrators shall
be final and binding and judgment may be entered thereon in any court of
competent jurisdiction. In addition to the foregoing, both parties shall be free
to seek injunctive relief under this License Agreement from the federal and
state courts located in Minneapolis, Minnesota and both parties agree to submit,
and hereby submit, to the jurisdiction of such courts for such purpose.
4.2 Notwithstanding paragraph 4.1 above, Licensee agrees that
Licensor's rights and interests in and to the Mark are special and unique and
that any material violation hereof by Licensee, would not be adequately
compensated by money damages, and Licensee hereby grants Licensor the night to
specifically enforce ("including injunctive relief where appropriate) the terms
of this Agreement after the cure period provided by Paragraph 4.1.
5. - Property of Licensor
5.1 Licensee recognizes the value of the goodwill associated with the
Mark and the identification of the Licensed Products therewith. Licensee
acknowledges that the Mark and all rights therein and goodwill pertaining
thereto belong exclusively to Licensor.
3
<PAGE> 4
5.2 To the extent any rights in and to the Mark are deemed to accrue to
Licensee, Licensee hereby assigns to Licensor any and all such rights, at such
time as they may be deemed to accrue, including the related goodwill.
5.3 Upon expiration or termination of this Agreement for any reason,
Licensee will be deemed automatically to have assigned, transferred, and
conveyed to Licensor any and all tradename, trademark or service mark rights
related to the Mark including copyrights and all equities, goodwill and any
other right title and interest thereto which may have vested in Licensee.
Licensee hereby agrees to execute and cooperate with Licensor in connection with
the execution of any documents required by Licensor to accomplish or confirm the
foregoing.
5.4 Licensor represents and warrants to Licensee that (i) it has all
corporate right, power and authority to execute this Agreement and grant to
Licensee the rights granted hereunder, (ii) it knows of no adverse claim to the
right to use the Mark, and (iii) it has not granted to any other party any
rights which conflict with the rights granted to Licensee hereunder.
6. - Tradename Protection
6.1 Licensee shall assist Licensor at Licensor's expense, to the extent
reasonably necessary or requested by Licensor, in protecting any of Licensor's
rights in and to the Mark. Licensor, if it so desires in its own discretion, may
prosecute any claims or suits to protect the Mark in Licensor's own name or in
the name of Licensee, or join Licensee as a party thereto at Licensor's expense.
If Licensor elects, in its sole discretion, not to prosecute any such claims or
suits, Licensee shall have the right to prosecute such claims or suits to
protect the Mark, at the sole expense of Licensee, in the name of Licensee or in
the name of Licensor.
6.2 Licensee shall promptly notify Licensor in writing of any uses that
have come to Licensee's attention which may constitute infringement or imitation
by others of the Mark on any product or services.
6.3 Licensee will not, during the term of this Agreement or any time
thereafter, challenge Licensor's title or rights in and to the Mark.
6.4 Licensee agrees to comply, at its own expense, with all laws,
ordinances, rules, regulations, and other requirements of all governmental units
having jurisdiction pertaining to the Licensee's use of the Mark and this
Agreement, and proof of such compliance will be given by Licensee to Licensor
from time to time, at Licensor's request.
4
<PAGE> 5
7. - Termination for Insolvency or Bankruptcy of Licensee
7.1 If Licensee files a petition in bankruptcy, or by an equivalent
proceeding is adjudicated a bankrupt, or a petition in bankruptcy is filed
against Licensee, and such petition or proceeding is not dismissed or withdrawn
within 30 days from the date of filing, or if Licensee becomes insolvent or
makes an assignment for the benefit of creditors or any arrangement pursuant to
any bankrupt law; or if Licensee discontinues its business or if a receiver is
appointed for Licensee and such receiver is not discharged within 30 days from
the date of appointment, this Agreement shall automatically terminate without
any notice whatsoever being necessary, to the full extent allowed by applicable
law. In the event this Agreement is terminated pursuant to this paragraph 7.1,
Licensee, its receivers, representatives, trustees, agents, administrators,
successors and/or assigns, shall have no right to use the Mark covered by this
Agreement except with the prior written consent of Licensor.
7.2 The non-assumption of this Agreement by a trustee presiding over a
bankruptcy proceeding pursuant to any bankruptcy law where the Licensee is named
as a debtor, shall operate to automatically terminate this Agreement, without
any notice whatsoever being necessary, effective as of the date of the
commencement of the bankruptcy proceedings.
8. - Termination for Breach
8.1 If Licensee shall breach any of its obligations under this
Agreement, Licensor shall have the right to terminate this Agreement by giving
Licensee written notice of such breach and intent to terminate this Agreement.
Unless Licensee cures such breach within 30 days after written notice of breach
and termination from Licensor, this Agreement shall automatically terminate on
the 30th day after such notice. Termination of this Agreement shall be without
prejudice to any rights or remedies which Licensor may otherwise have against
Licensee.
9. - Consequences of Expiration or Termination of This Agreement
9.1 Upon and after the expiration or termination of this Agreement for
whatever reason, all rights granted to Licensee hereunder shall cease
immediately, provided, however, Licensee shall have the right to use the Mark in
connection with the liquidation of Licensed Products then held by Licensee, such
right to extend for a period of 90 days following termination of this Agreement.
9.2 From and after the expiration or termination of this Agreement,
Licensee shall not make any reference in its advertising or its business
materials indicating that it was formerly licensed by Licensor.
5
<PAGE> 6
9.3 Except as set forth Section 9. 1, upon and after the expiration or
termination of this Agreement, Licensee will refrain from any further use of the
Mark, and Licensee shall not make use of anything which is a simulation of, or
deceptively similar to, the Mark.
10. - Miscellaneous
10.1 Notices. Any notice or other communication under this Agreement
shall be in writing and shall be considered given when delivered personally or
sent by facsimile (receipt confirmed), one day after delivery by a reputable
overnight courier, or four days after being mailed by registered mail, return
receipt requested, to the parties at the addresses set forth below (or at such
other address as a parry may specify by notice to the other):
If to Licensee, to it at:
c/o Dataradio, Inc.
5500 Royalmount Avenue, Suite 200
Mount Royal, Quebec, Canada H4P1H7
Fax: (514) 737-7883
Attention: R.T. Rouleau, President
If to Licensor, to it at:
438 Gateway Boulevard
Burnsville, Minnesota 55337
Fax: (612) 882-5817
Attention: President
10.2 Governing Law. This Agreement shall be governed by the law of the
State of Minnesota as to all matters, including but not limited to, matters of
validity, construction, effect and performance, except that no doctrine of
choice of law shall be used to apply any law other than that of the State of
Minnesota.
10.3 Miscellaneous. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement may be
executed by telecopy with the same legal effect as if executed in person. The
section headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
This Agreement embodies the entire agreement and understanding of the parties
hereto in respect of the subject matter contained herein and may not be modified
orally, but only by a writing signed by both parties hereto. There are no
6
<PAGE> 7
restrictions, promises, representations, warranties, covenants or undertakings,
other than those expressly set forth herein. This Agreement supersedes all prior
agreements and understandings (whether oral or written) between the parties with
respect to such subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
E.F. JOHNSON COMPANY JOHNSON DATA TELEMETRY CORPORATION
By: [SIG] By: [SIG]
----------------------------- -------------------------------
Its: Its:
---------------------------- ------------------------------
7
<PAGE> 8
EF JOHNSON SCHEDULE 1.1
TELEMETRY
PRODUCT LIST 1/14/97 11:45
<TABLE>
<CAPTION>
ITEM DESCRIPTION
---- -----------
<S> <C>
090 -0004 - 839 3490 932 RX/945 TX XCVR
090 -0004 - 840 3490 945RX/932 TX XCRV
090 -0004 - 841 3420 401 REC/501 TX
090 -0004 - 859 R S 232 MODEM W/RTS DELAY
090 -0004 - 946 3420 501REC/401 TX
574 -3001 - 016 FOAM PAD .312 THICK
574 -3001 - 017 FOAM PAD .5 X .5 X .75 CL
250 -3201 - 001 800 MHZ BI-DIRECTIONAL AMPLIFIER
023 -3225 - 001 LOCKHEED ENCLOSURE KIT
001 -3240 - 001 MANUAL 3240 TELEMETRY UNIVERSAL LOADER BD
023 -3240 - 001 LOADER KIT W/DIAGNOSTICS 3412,3422,3492
023 -3240 - 002 FACTORY INSTALLED LOADER KIT
023 -3240 - 332 AUTO UNIVERSAL LOADER BOARD TOP
023 -3250 - 008 3250 REMOTE EXPANSION KIT
250 -3250 - 100 3250 HOST
250 -3250 - 101 3250 HOST/3480 SPREAD SPECTRUM
250 -3250 - 200 3250 REMOTE
250 -3250 - 201 3250 REMOTE/3480 SPREAD SPECTRUM
250 -3275 - 001 2/4 WIRE MODEM INTRF
023 -3276 - 001 FACTORY INSTALL 3276 MODEM KIT/3412, 3422
023 -3276 - 002 FACTORY INSTALLED 3276 MODEM KIT/3474
023 -3276 - 005 SETUP/DIAGNOSTIC SFTW FOR 3276 MODEM
023 -3276 - 006 MODEM PROGRAMMING/POWER CABLE
023 -3276 - 007 ACESS INTERCONNECT/POWER CABLE
001 -3281 - 002 SER MANUAL RS-232 MODEM
023 -3281 - 001 RS232 MODEM FACTORY INSTALLED
250 -3281 - 001 RS232 MODEM **
250 -3281 - 010 RS232 MODEM BOARD**
250 -3281 - 100 SLOW UN-KEY MODEM**
250 -3281 - 101 SLOW UN-KEY MODEM**
001 -3290 - 001 SERV.MAN R/B 001-3290-002
001 -3290 - 002 SERVICE MANUAL TELEMETRY
023 -3290 - 010 4800 BAUD MODEM/CASE FACTORY INSTALLED
250 -3290 - 001 4800 BAUD MODEM/CASE **
250 -3290 - 010 4800 BAUD MODEM BOARD **
250 -3292 - 001 MOBILE RADIO MODEM TS 2000
001 -3295 - 001 SERV MAN R/B 001-3295-002
001 -3295 - 002 SERV MANUAL 9600 BAUD MODEM
023 -3295 - 100 9600 BAUD MOD INTF 3410,20,90 FCTY INSTLD
250 -3295 - 100 9600 MODEM INTF 3410,20,90 ACCESSORY
001 -3296 - 001 9600 BAUD TELEMETRY MODEM SERVICE MANUAL
023 -3296 - 001 3296 MODEM KIT 3412,3422
023 -3296 - 002 3296 MODEM KIT 3474
001 -3400 - 001 SERV MAN SOC INTFC MOD
009 -3400 - 002 TELEMETRY APPLICATION NOTE
250 -3400 - 100 SOC INTERFACE ONLY**
250 -3400 - 101 SOC INTERFACE WITH REG**
250 -3400 - 102 SOC INTFC W/MODEM**
250 -3400 - 103 SOC INTFC W/REG & MODEM**
250 -3400 - 104 SOC INTFC W/PWR COND**
</TABLE>
Page 1
<PAGE> 9
EF JOHNSON
TELEMETRY
PRODUCT LIST 1/14/97 11:45
<TABLE>
<CAPTION>
ITEM DESCRIPTION
---- -----------
<S> <C>
250 - 3400 - 105 SOC INTFC W/PCOND &MOD**
001 - 3410 - 007 DL 3410 UHF SRC MANUAL
004 - 3410 - 150 3400 SERIES 2/4 W INTRFC
023 - 3410 - 005 FCTRY/NARROW BAND KIT
023 - 3410 - 094 4 CONN RBN CABLE 18 IN
023 - 3410 - 097 BNC MALE/FEM PNL MT 18"
023 - 3410 - 098 SMA MALE/BNC FEM BLKHD
023 - 3410 - 100 SMA MALE/BNC TE COAX
023 - 3410 - 101 SIMPLEX RBN INTRC 9 IN
023 - 3410 - 102 15 IN RP ACC AMOCAM CBL
023 - 3410 - 103 SMA MALE/UHF FEM COAX
023 - 3410 - 104 3-CONN SOCKET IFC CAB
023 - 3410 - 105 RBN INTERCONNECT
023 - 3410 - 106 DUPLEX INTERCONNECT 18 IN
023 - 3410 - 107 SIMPLEX INTERCONNECT 18"
023 - 3410 - 108 9 IN AMOCAM RIBBON CABLE
023 - 3410 - 109 DISCRT 10P XCVR 1 CONN
023 - 3410 - 111 INTERCONNECT CABLE 5.7"
023 - 3410 - 113 2 IN M-M 25 COND DB-25
023 - 3410 - 117 SMA MALE/BNC MALE 9 IN
023 - 3410 - 118 SMA FEM TO BNC MALE 18 IN
023 - 3410 - 119 SMA MALE/BNC MALE 12 IN
023 - 3410 - 122 SMA/UHF PNL MT CA
023 - 3410 - 125 DISCRT 10P XCVR 2 CONN
023 - 3410 - 126 DISCRT 10P XCVR 3 CONN
023 - 3410 - 127 DISCRT 10P XCRV 4 CONN
023 - 3410 - 128 N BLKHD RT ANG JCM CON
023 - 3410 - 132 SMA TO PL259 MALE
023 - 3410 - 134 SIMPLES RBN INTRFC 3 IN
023 - 3410 - 141 SMA MALE RA TO UHF MALE
023 - 3410 - 155 2/4 WIRE MODEM INTFC-FACTORY INSTALLED
023 - 3410 - 171 FACTORY INSTAL PWR SET KIT
023 - 3410 - 200 FCTRY INSTL TOT KIT
242 - 3410 - 001 UHF DATA LINK T/R 450-470 MHZ
242 - 3410 - 002 450-470 MHZ TX MODULE
242 - 3410 - 003 450-470 MHZ RX MODULE
242 - 3410 - 007 UHF DATALINK T/R DUPLX
242 - 3410 - 009 UHF DATALINK XCVR SP
242 - 3410 - 010 XCVR SP A 500
242 - 3410 - 011 UHF DATA LINK T/R SPL
242 - 3410 - 012 TRANSMIT BOARD ASSM
242 - 3410 - 013 RECEIVER BOARD ASSM
242 - 3410 - 016 RX MODULE SP TCD
242 - 3410 - 017 DATALINK XCVR450-470MO
242 - 3410 - 018 CONTINUOUS DUTY PAGING TRANS 450-470 MHZ
242 - 3410 - 019 CONTINUOUS DUTY TRANS 450-470 MHZ
242 - 3410 - 022 440-480MHZ TX BD MO
242 - 3410 - 023 440-480 RX BD MO
242 - 3410 - 082 440-480 MHZ 35 WATT RFPA
242 - 3410 - 085 403-440 MHZ 35 WATT RFPA
</TABLE>
Page 2
<PAGE> 10
EF JOHNSON
TELEMETRY
PRODUCT LIST 1/14/97 11:45
ITEM DESCRIPTION
242 - 3410 - 088 482-512 MHZ 35 WATT RFPA
242 - 3410 - 112 450-470 TX INCASE W/O TCXO
242 - 3410 - 113 450-470 RX INCASE W/O XTAL
242 - 3410 - 401 403-430MHZ XCVR
242 - 3410 - 402 403-430MHZ TX IN CASE
242 - 3410 - 403 403-430 RX IN CASE
242 - 3410 - 407 403-430MHZ DUPLEX XCVR
242 - 3410 - 408 403-430MHZ DUPLEX W/MO
242 - 3410 - 409 403-430 XCVR SP A 1000
242 - 3410 - 410 403-430 XCVR SP A 500
242 - 3410 - 411 403-430MHZ XCVR SP A
242 - 3410 - 412 403-430 TX INCASE W/O TCXO
242 - 3410 - 413 403-430 RX INCASE W/O XTAL
242 - 3410 - 417 DATALINK DCVR403-430MO
242 - 3410 - 418 CONTINUOUS DUTY PAGING TRANS 403-430
242 - 3410 - 419 CONTINUOUS DUTY TRANS 403-430
242 - 3410 - 422 400-440 MHZ TX BD MO
242 - 3410 - 423 400-440 RX BD MO
242 - 3410 - 501 UHF T/R 480-512
242 - 3410 - 502 480-512 MHZ TX MODULE
242 - 3410 - 503 480-512 MHZ RX MODULE
242 - 3410 - 507 UHF T/R DUPLX 480-512
242 - 3410 - 509 UHF XCVR SP 480-512
242 - 3410 - 510 480-512MHZ XCUPSPA500
242 - 3410 - 511 480-512MHZ SP
242 - 3410 - 512 480-512 TX INCASE W/O TCXO
242 - 3410 - 513 480-512 RX INCASE W/O XTAL
242 - 3410 - 517 DATALINK XCVR480-512MO
242 - 3410 - 518 CONTINUOUS DUTY PAGING TRANS 480-512 MHZ
242 - 3410 - 519 CONTINUOUS DUTY TRANS 480-512 MHZ
242 - 3410 - 520 RX W/2/4 WIRE INTFC 480-512
242 - 3410 - 522 480-520MHZ TX BD MO
242 - 3410 - 523 480-520 RX BD MO
250 - 3410 - 150 2/4 WIRE MODEM INTFC **
001 - 3412 - 001 UHF SYNTHESIZED TELM UNIT
242 - 3412 - 130 380-403 XCVR 25 KHZ
242 - 3412 - 210 403-419 XCVR 12.5 KHZ
242 - 3412 - 216 403-419 TX ONLY
242 - 3412 - 218 403-419 RX ONLY 12.5 KHZ
242 - 3412 - 230 403-419 XCVR 25 KHZ
242 - 3412 - 238 403-419 RX ONLY 25KHZ
242 - 3412 - 310 419-435 XCVR 12.5 KHZ
242 - 3412 - 316 419-435 TX ONLY
242 - 3412 - 318 419-435 RX ONLY 12.5 KHZ
242 - 3412 - 330 419-435 XCVR 25 KHZ
242 - 3412 - 338 419-435 RTX ONLY 25KHZ
242 - 3412 - 410 435-451 XCVR 12.5 KHZ
242 - 3412 - 416 435-451 TX ONLY
242 - 3412 - 418 435-451 RX ONLY 12.5 KHZ
242 - 3412 - 430 435-451 XCVR 25 KHZ
Page 3
<PAGE> 11
EF JOHNSON
TELEMETRY
PRODUCT LIST 1/14/97 11:45
- -------------------------------------------------------------------------------
ITEM DESCRIPTION
- -------------------------------------------------------------------------------
242 - 3412 - 438 435-451 RX ONLY 25KHZ
242 - 3412 - 510 450-470 XCVR 12.5KHZ
242 - 3412 - 516 450-470 TX ONLY
242 - 3412 - 518 450-470 RX ONLY 12.5 KHZ
242 - 3412 - 530 450-470 XCVR 25KHZ
242 - 3412 - 538 450-470 RX ONLY 25KHZ
242 - 3412 - 610 464-480 XCVR 12.5 KHZ
242 - 3412 - 616 464-480 TX ONLY
242 - 3412 - 618 464-480 RX ONLY 12.5 KHZ
242 - 3412 - 630 464-480 XCVR 25 KHZ
242 - 3412 - 638 464-480 RX ONLY 25KHZ
242 - 3412 - 710 480-496 XCVR 12.5 KHZ
242 - 3412 - 716 480-496 TX ONLY
242 - 3412 - 718 480-496 RX ONLY 12.5 KHZ
242 - 3412 - 730 480-496 XCVR 25 KHZ
242 - 3412 - 738 480-496 RX ONLY 25 KHZ
242 - 3412 - 810 496-512 XCVR 12.5 KHZ
242 - 3412 - 816 496-512 TX ONLY
242 - 3412 - 818 496-512 RX ONLY 12.5 KHZ
242 - 3412 - 830 496-512 XCVR 25 KHZ
242 - 3412 - 838 496-512 RX ONLY 25KHZ
001 - 3420 - 004 DL 3420 VHF SVCMAN
023 - 3420 - 200 FCTRY INSTL TOT KIT
242 - 3420 - 101 VHF XCVR 132-142 MHZ
242 - 3420 - 107 VHF 132-142 DUPLEX
242 - 3420 - 109 VHF SP A-1000 132-142
242 - 3420 - 110 VHF SP A-500 132-142
242 - 3420 - 111 XCVR SPL A 132-142MHZ
242 - 3420 - 116 VHF CONTINUOUS DUTY TX 132-142 MHZ
242 - 3420 - 117 DATALINK XCVR 132-142MO
242 - 3420 - 118 132-142 XCVR W/4800MOD
242 - 3420 - 120 VHF CONTINUOUS DUTY PAGING TX 132-142 MHZ
242 - 3420 - 201 VHF XCVR 142-150 MHZ
242 - 3420 - 207 VHF 142-150 DUPLEX
242 - 3420 - 209 VHF SP A-1000 142-150
242 - 3420 - 210 VHF SP A-500 142-150
242 - 3420 - 211 XCVR SPL A 142-150MHZ
242 - 3420 - 216 VHF CONTINUOUS DUTY TX 142-150 MHZ
242 - 3420 - 217 DATALINK XCVR 142-150MO
242 - 3420 - 220 VHF CONTINUOUS DUTY PAGING TX 142-150 MHZ
242 - 3420 - 300 VHF RX IN CASE 132-142
242 - 3420 - 301 132-142 RX INCASE W/O XTAL
242 - 3420 - 310 VHF RX IN CASE 142-150
242 - 3420 - 311 142-150 RX INCASE W/O XTAL
242 - 3420 - 320 VHF TX 132-142 MHZ
242 - 3420 - 321 132-142 TX INCASE W/O XTAL
242 - 3420 - 330 VHF TX 142-150 MHZ
242 - 3420 - 331 142-150 TX INCASE W/O XTAL
242 - 3420 - 338 132-142 RX BD MO
242 - 3420 - 339 132-142 TX BD MO
Page 4
<PAGE> 12
EF JOHNSON
TELEMETRY
PRODUCT LIST 1/14/97 11:45
- --------------------------------------------------------------------------------
ITEM DESCRIPTION
- --------------------------------------------------------------------------------
242 - 3420 - 348 142-150 MHZ RX BD MO
242 - 3420 - 349 142-150 MHZ TX BD MO
242 - 3420 - 401 VHF XCVR 150-162 MHZ
242 - 3420 - 407 VHF 150-162 DUPLEX
242 - 3420 - 409 VHF SP A-1000 150-162
242 - 3420 - 410 VHF SP A500 150-162
242 - 3420 - 411 VHF SP A 5XX 150-162
242 - 3420 - 416 VHF CONTINUOUS DUTY TX 150-162 MHZ
242 - 3420 - 417 DATALINK XCVR150-162MO
242 - 3420 - 420 VHF CONTINUOUS DUTY PAGING TX 150-162 MHZ
242 - 3420 - 501 VHF XCVR 162-174 MHZ
242 - 3420 - 507 VHF 162-172 DUPLEX
242 - 3420 - 509 VHF SP A-1000 162-174
242 - 3420 - 510 VHF SP A-5XX 162-174
242 - 3420 - 511 VHF SP A-5XX 162-174
242 - 3420 - 516 VHF CONTINUOUS DUTY TX 162-174 MHZ
242 - 3420 - 517 DATALINK XCVR162-174MO
242 - 3420 - 520 VHF CONTINUOUS DUTY PAGING TX 162-174 MHZ
242 - 3420 - 600 VHF RX 150-162 MHZ
242 - 3420 - 601 150-162 RX INCASE W/O XTAL
242 - 3420 - 610 VHF RX 162-174 MHZ
242 - 3420 - 611 160-172 RX INCASE W/O XTAL
242 - 3420 - 620 VHF TX 150-162 MHZ
242 - 3420 - 621 150-162 TX INCASE W/O XTAL
242 - 3420 - 630 VHF TX 162-174 MHZ
242 - 3420 - 631 162-174 TX INCASE W/O XTAL
242 - 3420 - 638 150-162 MHZ RX BD MO
242 - 3420 - 639 150-162 MHZ TX BD MO
242 - 3420 - 648 162-174 MHZ RX BD MO
242 - 3420 - 649 162-174 MHZ TX BD MO
242 - 3422 - 410 132-150 MHZ VHF XCVR 15 KHZ
242 - 3422 - 416 132-150 MHZ VHF TXO
242 - 3422 - 418 132-150 MHZ VHF RXO 15 KHZ
242 - 3422 - 430 132-150 MHZ VHF XCVR 30 KHZ
242 - 3422 - 438 132-150 MHZ VHF RXO 30 KHZ
242 - 3422 - 510 150-174 MHZ VHF XCVR 15 KHZ
242 - 3422 - 516 150-174 MHZ VHF TXO 30/15 KHZ
242 - 3422 - 518 150-174 MHZ VHF RXO 15 KHZ
242 - 3422 - 530 150-174 MHZ VHF XCVR 30 KHZ
242 - 3422 - 538 150-174 MHZ VHF RXO 30 KHZ
242 - 3450 - 005 LPI RPTR RACK 440-482
242 - 3450 - 006 LPI RPTR RACK 403-440
242 - 3450 - 007 LPI RPTR RACK 482-512
242 - 3450 - 030 RPTR W/PA RACK 440-482
242 - 3450 - 031 RPTR W/PA RACK 403-440
242 - 3450 - 032 RPTR W/PA PACK 482-512
242 - 3450 - 105 LPI RPTR WALL 440-482
242 - 3450 - 106 LPI RPTR WALL 403-440
242 - 3450 - 107 LPI RPTR WALL 482-512
242 - 3450 - 130 RPTR W/PA WALL 440-482
Page 5
<PAGE> 13
EF JOHNSON
TELEMETRY
PRODUCT LIST
<TABLE>
<CAPTION>
ITEM DESCRIPTION
---- -----------
<S> <C>
242-3450-131 RPTR W/PA WALL 403-440
242-3450-132 RPTR W/PA WALL 482-512
023-3470-018 FACTORY INSTALL NB 3470 FILTER KIT
023-3470-020 FACTORY INSTALL CVNTL 3470 FILTER KIT
023-3470-240 CARRIER DETECT MODULE
242-3470-110 UHF XCVR ND-450 100MW
242-2470-111 UHF XCVR NDX-450 100MW
242-3470-210 UHF XCVR ND-450
242-3470-211 UHF XCVR NDX-450
242-3470-212 UHF XCVR ND-450 W/O CD
242-3470-213 UHF XCVR NDX-450 W/O CD
242-3470-217 450-480 UHF XCVR D0 W/XTAL
242-3470-220 UHF XCVR LE-450
242-3470-221 UHF XCVR LEX-450
242-3470-222 UHF XCVR 450-480 SPC SS
242-3470-223 3470 DF SPECIAL
242-3470-411 UHF XCVR NDX-403
242-3470-417 403-430 UHF XCVR DO-W/XTAL
242-3470-420 UHF XCVR LE-403
242-3470-421 UHF XCVR LEX-403
242-3470-422 UHF XCVR 403-430SPC SS
242-3470-510 UHF XCVR ND-480
242-3470-511 UHF XCVR NDX-480
242-3470-512 UHF XCVR ND-480 W/O CD
242-3470-517 480-512 UHF XCVR DO W/XTAL
242-3470-522 UHF XCVR 480-512SPC SS
242-3470-526 XCVR LNX-450 1W
001-3472-214 MAN SYN UHF DATA XCVR
023-3472-007 RADIO MODEM/LOADER TEST CABLE
023-3472-014 FACTORY INSTALL 3472 12.5 KHZ FILTER KIT
023-3472-330 LOADER BD LEADED COMP
242-3472-210 450-470 XCVR 5.0 PPM
242-3472-212 450-470 5.0 PPM W/MODEM
242-3472-220 450-470 2.5 PPM XCVR
242-3472-222 450-470 2.5 PPM W/MODEM
242-3472-230 450-470 5.0 PPM W/LOADER
242-3472-240 450-470 2.5 PPM W/LOADER
242-3472-310 403-416 UHF DATAXCVR 5.0 PPM
242-3472-312 403-416 3472 5.0 PPM W/MODEM
242-3472-320 403-416 UHF DATAXCVR 2.5 PPM
242-3472-322 403-416 3472 2.5 PPM W/MODEM
242-3472-330 403-416 3472 5.0 PPM W/LOADER
242-3472-340 403-416 3472 2.5 PPM W/LOADER
242-3472-410 416-430 UHF DATAXCVR 5.0 PPM
242-3472-412 416-430 3472 5.0 PPM W/MODEM
242-3472-420 416-430 UHF DATAXCVR 2.5 PPM
242-3472-422 416-430 3472 2.5 PPM W/MODEM
242-3472-430 416-430 3472 5.0 PPM W/LOADER
242-3472-440 416-430 3472 2.5 PPM W/LOADER
242-3472-510 470-480 MHZ DATAXCVR 5.0 PPM
</TABLE>
Page 6
<PAGE> 14
EF JOHNSON
TELEMETRY
PRODUCT LIST 1/14/97 11:45
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
ITEM DESCRIPTION
- ------------------------------------------------------------------------------
<S> <C>
242-3472-512 3472 470-480 MHZ 5.0 PPM W/MODEM
242-3472-520 470-480 MHZ DATAXCVR 2.5 PPM
242-3472-522 3472 470-480 MHZ 2.5 PPM W/MODEM
242-3472-530 3472 470-480 MHZ 5.0 PPM W/LOADER
242-3472-540 3472 470-480 MHZ 2.5 PPM W/LOADER
242-3472-610 480-496 DATAXCVR 5.0 PPM
242-3472-612 3472 480-496 5.0 PPM W/MODEM
242-3472-620 480-496 DATXCVR 2.5 PPM
242-3472-622 3472 480-496 2.5 PPM W/MODEM
242-3472-630 3472 480-496 5.0 PPM W/LOADER
242-3472-640 3472 480-496 2.5 PPM W/LOADER
242-3472-710 496-512 DATAXCVR 5.0 PPM
242-3472-712 3472 496-512 5.0 PPM W/MODEM
242-3472-720 496-512 DATAXCVR 2.5 PPM
242-3472-722 3472 496-512 2.5 PPM W/MODEM
242-3472-730 3472 496-512 5.0 PPM W/LOADER
242-3472-740 3472 496-512 2.5 PPM W/LOADER
242-3472-810 430-450 DATAXCVR 5.0 PPM
242-3472-812 430-450 3472 TELEM XCVR W/MODEM
242-3472-820 430-450 DATAXCVR 2.5 PPM
242-3472-822 430-450 3472 TELEM XCVR W/MODEM
242-3472-830 430-450 3472 5.0 PPM W/LOADER
242-3472-840 430-450 3472 2.5 PPM W/LOADER
250-3472-001 3472 LOADER/CASE**
250-3472-014 12.5KHZ FILTER INST. KIT
242-3474-110 380-403 HI-SPEC DATA XCVR 12.5K (M9
242-3474-112 380-403 PORTABLE DATA XCVR 12.5K (M9
242-3474-130 380-403 HI SPEC DATA XCVR 25KHZ(M9
242-3474-132 380-403 PORTABLE DATA XCVR 25KHZ(M9
242-3474-210 403-419 HI-SPEC DATA XCVR 12.5K
242-3474-220 403-419 HI-SPEC DATA XCVR 20.0KHz
242-3474-230 403-419 HI-SPEC DATA XCVR 25.0KHz
242-3474-310 419-435 HI-SPEC DATA XCVR 12.5K
242-3474-320 419-435 HI-SPEC DATA XCVR 20.0KHz
242-3474-330 419-435 HI-SPEC DATA XCVR 25.0KHz
242-3474-410 435-451 HI-SPEC DATA XCVR 12.5K
242-3474-420 435-451 HI-SPEC DATA XCVR 20.0KHz
242-3474-430 435-451 HI-SPEC DATA XCVR 25.0KHz
242-3474-510 450-466 HI-SPEC DATA XCVR 12.5K
242-3474-520 450-466 HI-SPEC DATA XCVR 20.0KHz
242-3474-530 450-466 HI-SPEC DATA XCVR 25.0KHz
242-3474-560 450-470 DATA XCVR 12.5KHZ
242-3474-570 450-470 DATA XCVR 25.0KHZ
242-3474-582 450-470 PORTABLE DATA XCVR 12.5KHZ
242-3474-592 450-470 PORTABLE DATA XCVR 25.0KHZ
242-3474-610 464-480 HI-SPEC DATA XCVR 12.5K
242-3474-620 464-480 HI-SPEC DATA XCVR 20.0KHz
242-3474-630 464-480 HI-SPEC DATA XCVR 25.0KHz
242-3474-710 480-496 HI-SPEC DATA XCVR 12.5K M9
242-3474-720 480-496 HI-SPEC DATA XCVR 20.0KHz
</TABLE>
Page 7
<PAGE> 15
EF JOHNSON
TELEMETRY
PRODUCT LIST 1/14/97 11:45
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ITEM DESCRIPTION
- -------------------------------------------------------------------------------
<S> <C>
242-3474-730 480-496 HI-SPEC DATA XCVR 25.0KHz (M9
242-3474-810 496-512 HI-SPEC DATA XCVR 12.5K
242-3474-820 496-512 HI-SPEC DATA XCVR 20.0KHz
242-3474-830 496-512 HI-SPEC DATA XCVR 25.0KHz
001-3478-001 SVC MAN 3478 RIB 001-3478-002
001-3478-002 SVC MAN 3478 TELEMETRY
242-3478-220 800MHZ TELEMETRY
242-3478-221 800MHZ TELEM W/HUMISEA
242-3478-250 TX/RX W/LOADER L.B.
242-3478-260 TELEMETRY RCVR 851-869
242-3478-820 800MHZ TELEMETRY BASE
242-3478-821 800MHZ TELM BASE HUMIS
242-3478-850 TX/RX W/LOADER H.B.
001-3480-001 SERVICE MANUAL 3480 TELEMETRY
002-3480-001 3480 SPREAD SPECTRUM OP-MANUAL
023-3480-002 DL3480 MOUNTING BRACKET
242-3480-100 900 SPD SPECT W/O VOICE
242-3480-101 900 SPD SPECT W/VOICE
242-3480-110 900 SPD SPECT W/O VOICE LESS HDSET
242-3480-200 2.4 SPD SPECT W/O VOICE
242-3480-201 2.4 SPD SPECT W/VOICE
001-3490-002 3490 TELMTRY SVC MANUAL
023-3490-003 NB FLTR RCTRY INST KIT
023-3490-100 SMA TO N-FEMALE
023-3490-101 SMA TO N-MALE
023-3490-102 SMA TO BNC MALE 9 IN
023-3490-103 SMA TO BNC MALE 18 IN
023-3490-105 SMA/BNC BULKHD RG400
023-3490-200 FCTRY INSTL TOT KIT
242-3490-001 928RX 956TX XCVR
242-3490-004 928R 956T W/4800 MODEM
242-3490-005 928R 956T DUPL 4800MOD
242-3490-006 928 RX 956 TX XCVR
242-3490-007 928RX 956TX DUPLEXXCVR
242-3490-008 928RX 956TX DUP W/MODE
242-3490-009 928RX956TX XCVR A-1000
242-3490-011 928RX956TX DUPXCVR DO SP
242-3490-101 956RX 928TX XCVR
242-3490-104 956R 928T W/4800 MODEM
242-3490-105 956R 928T DUPL 4800MOD
242-3490-106 956 RX 928 TX XCVR
242-3490-107 956RX928TX DUPLEX XCVR
242-3490-108 956RX928TX DUP W/MODEM
242-3490-109 956RX928TX XCVR A-1000
242-3490-118 CONTINUOUS DUTY PAGING 928 TX
242-3490-151 956RX/928TX 200MW D.R
242-3490-201 945RX 928TX XCVR
242-3490-300 928RX IN CASE
242-3490-303 928 RX BD MO
242-3490-305 928 RX INCASE W/O TCXO
</TABLE>
Page 8
<PAGE> 16
EF JOHNSON
TELEMETRY
PRODUCT LIST 1/14/97 11:45
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ITEM
- -------------------------------------------------------------------------------
<S> <C>
242-3490-310 956RX IN CASE
242-3490-313 956 RX BD MO
242-3490-315 956 RX INCASE W/O TCXO
242-3490-320 928TX IN CASE
242-3490-321 928 TX BOARD ONLY
242-3490-323 928 TX BD MO
242-3490-324 CONTINUOUS DUTY 928 TX
242-3490-325 928 TX INCASE W/O TCXO
242-3490-330 956TX IN CASE
242-3490-333 956 TX BD MO
242-3490-334 CONTINUOUS DUTY 956 TX
242-3490-335 956 TX INCASE W/O TCXO
242-3490-340 939-950 MHZ RX IN CASE
242-3490-344 CONTINUOUS DUTY 945 TX
242-3490-350 928-939 MHZ RX IN CASE
242-3490-354 CONT DUTY TX 928-939 MHZ
242-3490-401 928 RX 928 TX XCVR
242-3490-407 928RX 928TX FULL DLPX
242-3490-409 928RX 928TX XCVR SPA
242-3490-501 956 RX 956 TX XCVR 1/2 DUPLEX
242-3490-507 956RX 956TX FULL DUPLEX XCVR
242-3490-509 956RX 956TX XCVR SPA
242-3490-601 928RX 945TX XCVR
023-9998-389 3420 LOADER PROGRAMMING SOFTWARE ASSM
023-9998-264 3.5 INCH DISC LOADER 3472/3474
023-9998-359 3.5 IN DISC WIRELESS SENSOR
023-9998-389 3240 LOADER PROGRAMMING SOFTWARE ASSM.
023-9998-263 5.25 INCIA DISC 3472 PROGRAMMING SOFTWARE
</TABLE>
Page 9
<PAGE> 1
EXHIBIT 10.37
ACCOUNTS FINANCING AGREEMENT
[SECURITY AGREEMENT]
BETWEEN
CONGRESS FINANCIAL CORPORATION
1133 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
AND
E.F. JOHNSON COMPANY
(NAME OF CLIENT)
11095 VIKING DRIVE
(STREET ADDRESS)
MINNEAPOLIS, MINNESOTA 55344
(CITY) (STATE)
[LOGO] A CORESTATES COMPANY
<PAGE> 2
July 31, 1992
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
The Agreement states the terms and conditions upon which, effective as
of the date of acceptance by you, we may obtain loans and other financial
accommodations from you for our general corporate and business purposes upon
the security referred to herein. We shall be, if two or more in number, jointly
and severally bound hereunder.
Section 1. DEFINITIONS.
1.1 All terms used herein which are defined in Article 1 or Article 9
of the Uniform Commercial Code ("UCC") shall have the meanings given therein,
unless otherwise defined in this Agreement and all references to the plural
herein shall also mean the singular.
1.2 "ACCOUNTS" shall mean all of our present and future accounts,
contract rights, general intangibles, chattel paper, documents and instruments,
as such terms are defined in the UCC, including, without limitation, all
obligations for the payment of money arising out of our sale, lease or other
disposition of goods or other property or rendition of services.
1.3 "ACCOUNT DEBTOR" shall mean each debtor or obligor in any way
obligated on or in connection with any Account.
1.4 "COLLATERAL" shall have the meaning set forth in Section 4.1
hereof.
1.5 "ELIGIBLE ACCOUNTS" shall have the meaning set forth in the
Covenant Supplement hereto.
1.6 "EVENTS OF DEFAULT" shall have the meaning set forth in Section
8.1 hereof.
1.7 "MAXIMUM CREDIT" shall mean the amount of $20,000,000 minus any
payments of principal received and applied to the Term Loan (as defined in the
Covenant Supplement hereto).
1.8 "NET AMOUNT OF ELIGIBLE ACCOUNTS" shall mean the gross amount of
Eligible Accounts less sales, excise or similar taxes, and less returns,
discounts, claims, credits and allowances of any nature at any time issued,
owing, granted, outstanding, available or claimed.
1.9 "OBLIGATIONS" shall mean any and all loans, indebtedness,
liabilities and obligations of any kind owing by us to you, however evidenced,
whether as principal, guarantor or otherwise, whether arising under this
Agreement, any supplement hereto, or otherwise, whether now existing or
hereafter arising, whether director or indirect, absolute or contingent, joint
or several, due or not due, primary or secondary, liquidated or unliquidated,
secured or unsecured, original, renewed or extended, and whether arising
directly or acquired from others (including, without limitation, your
participations or interests in our obligations to others) and including,
without limitation, your charges, commissions, interest, expenses, costs and
attorneys' fees chargeable to us in connection with all of the foregoing.
1.10 "RECORDS" shall have the meaning set forth in Section 4.1(f)
hereof.
1.11 "RENEWAL DATE" shall have the meaning set forth in Section 9.1
hereof.
Section 2. LOANS.
2.1 You shall, in your discretion, make loans to us from time to time,
at our request, of up to the following percentages of the Net Amount of
Eligible Accounts (or such greater or lesser percentage as you shall in your
sole discretion determine from time to time): (a) eighty (80%) percent of the
Net Amount of Eligible Accounts arising from sales other than system or network
sales and (b) sixty-five (65%) percent of the Net Amount of Eligible Accounts
arising from system or network sales.
2.2 All loans shall be charged to a loan account in our name on your
books. You shall render to us each month a statement of our loan account which
shall be considered correct and deemed accepted by, and conclusively binding
upon, us as an account stated, except to the extent that you receive a written
notice of any specific exceptions by us thereto within thirty (30) days after
the date of such statement, absent manifest error.
2.3 Except in your sole discretion, the outstanding aggregate
principal amount of all loans by you to us hereunder, under any supplement
hereto or evidenced by any promissory note, shall not exceed the Maximum Credit
at any time. Without limiting your right to demand payment of the Obligations,
or any portion thereof, in accordance with any other terms of this Agreement,
or any supplement hereto, in the event that the outstanding aggregate principal
amount of loans by you to us exceeds the Maximum Credit or the formula set
forth in Section 2.1 hereof, we shall remain liable therefor and the entire
amount of such excess(es) shall, at your option, become immediately due and
payable, upon your demand.
2.4 At your option, all principal, interest, fees, commissions, costs,
expenses or other charges with respect to this Agreement or any supplement
hereto (all of which shall be cumulative and not exclusive) and any and all
loans and advances by you to us may be charged directly to our account
maintained by you.
2.5 All loans shall be payable at your office specified above or at
such other place as you may hereafter designate from time to time and, at your
option and upon your request, we shall execute and deliver to you one or more
promissory notes in form and substance satisfactory to you to further evidence
such loans.
Section 3. INTEREST AND FEES.
3.1 Interest shall be payable by us to you on the first day of each
month upon the closing daily balances in our loan account for each day during
the immediately preceding month, at a rate equal to two and one-half percent
(2 1/2%) per annum in excess of the prime commercial interest rate (presently
6% per annum) from time to time publicly announced by Philadelphia National
Bank, incorporated as CoreStates Bank, N.A., Philadelphia, Pennsylvania,
whether or not such announced rate is the best rate available at such bank. The
interest rate charged hereunder shall increase or decrease by an amount equal
to each increase or decrease, respectively, in said prime loan rate, effective
on the first day of the month after any change in said prime loan rate based on
the prime loan rate in effect on the last day of the month in which any such
change occurs. The rate of interest in effect hereunder on the date hereof,
expressed in terms of simple interest, is eight and one-half percent (8 1/2%)
per annum. In the event that the outstanding aggregate principal amount of
loans by you to us exceeds the Maximum Credit or the formula set forth in
Section 2.1 hereof or any other formula or sublimit set forth in any supplement
hereto, interest on the entire amount of such excess(es) shall be payable at
the rate set forth in Section 3.2 hereof (whether or not such excess(es) arise
or are made with or without your knowledge or consent).
-1-
<PAGE> 3
3.2 On and after the date of any event of default or termination or
non-renewal hereof, interest on all outstanding unpaid Obligations shall accrue
at a rate equal to two percent (2%) per annum in excess of the pre-default rate
set forth above from the date of such Event of Default or termination or
non-renewal, and all interest accruing hereunder shall thereafter be payable on
demand.
3.3 Interest shall be calculated on the basis of a 360-day year and shall
be included in each monthly statement of our loan account. You shall have the
right, at your option, to charge all interest to our loan account on the first
day of each month, and such interest shall be deemed to be paid by the first
amounts subsequently credited thereto.
3.4 In no event shall charges constituting interest, payable by us under
this Agreement, exceed the rate permitted under any applicable law or
regulation, and if any part or provision of this Agreement is in contravention
of any such law or regulation, such part or provision shall be deemed amended
to conform thereto.
3.5 If the average outstanding daily principal balance of all loans by
you to us under this Agreement or any supplement hereto in any calendar month
shall be less than the Maximum Credit, we shall pay to you on or before the
tenth (10th) day of the next succeeding calendar month an unused line fee equal
to one-half of one percent (1/2%) per annum upon the amount by which the
Maximum Credit exceeds the average outstanding daily principal balance of all
such loans in respect of such month.
3.6 We shall pay to you a facility fee in an amount equal to $300,000,
less any amounts previously paid by us to you as a commitment to provide this
credit facility, payable simultaneously with the execution hereof, which fee is
fully earned as of the date hereof.
Section 4. SECURITY INTEREST.
4.1 As security for the prompt performance, observance and payment in full
of all Obligations, we hereby grant as collateral to you a continuing security
interest in, a lien upon and a right of setoff against, and we hereby assign,
transfer, pledge and set over to you the following (which together with any of
our other personal property in which you may at any time have a security
interest or lien, whether pursuant to this Agreement or any supplement hereto,
or otherwise, are herein collectively referred to as the "Collateral"): All
present and future (a) Accounts; (b) moneys, securities and other property and
the proceeds thereof, now or hereafter held or received by, or in transit to,
you from or for us, whether for safekeeping, pledge, custody, transmission,
collection or otherwise, and all of our deposits (general or special), balances,
sums and credits with you at any time existing; (c) all of our right, title and
interest, and all of our rights, remedies, security and liens, in, to and in
respect of the Accounts and other Collateral, including, without limitation,
rights of stoppage in transit, replevin, repossession and reclamation and other
rights and remedies of an unpaid vendor, lienor or secured party, guaranties or
other contracts of suretyship with respect to the Accounts, deposits or other
security for the obligation of any Account Debtor, and credit and other
insurance; (d) all of our right, title and interest in, to and in respect of all
goods and relating to, or which by sale have resulted in, Accounts including,
without limitation, all goods described in invoices, documents, contracts or
instruments with respect to, or otherwise representing or evidencing, any
Accounts or other collateral, including without limitation, all returned,
reclaimed or repossessed goods; (e) all deposit accounts; (f) all books,
records, ledger cards, computer programs, and other property and general
intangibles evidencing or relating to the Accounts and any other Collateral or
any Account Debtor, together with the file cabinets or containers in which the
foregoing are stored ("Records"); (g) all other general intangibles of every
kind and description, including without limitation, trade names and trademarks,
and the goodwill of the business symbolized thereby, patents, copyrights,
licenses and Federal, State and local tax refund claims of all kinds and (h) all
proceeds of the foregoing in any form, including, without limitation, any claims
against third parties for loss or damage to or destruction of any or all of the
foregoing.
4.2 We shall keep and maintain, at our cost and expense, satisfactory and
complete books and records of all Accounts, all payments received or credits
granted thereof, and all other dealings therewith. At such times as you may
request, we shall deliver to you all original documents evidencing the sale and
delivery of goods or the performance of services which created any Accounts,
including but not limited to all original contracts, orders, invoices, bills of
lading, warehouse receipts, delivery tickets and shipping receipts, together
with schedules describing the Accounts and/or written confirmatory assignments
to you of each Account, in form and substance satisfactory to you and duly
executed by us, together with such other information as you may request. In no
event shall the making or the failure to make or the content of any schedule or
assignment or our failure to comply with the provisions hereof be deemed or
construed as a waiver, limitation or modification of your security interest in,
lien upon and assignment of the Collateral or our representations, warranties
or covenants under this Agreement or any supplement hereto.
Section 5. COLLECTION AND ADMINISTRATION.
5.1 Until our authority to do so is curtailed or terminated at any time
by you, we shall, at our expense and on your behalf, collect, as your property
and in trust for you, all remittances and all amounts unpaid on Accounts, and
we shall not commingle such collections with our own funds. We shall on the
day received remit all such collections to you in the form received duly
endorsed by us for deposit with you, unless you shall direct us otherwise. All
amounts collected on Accounts when received by you shall be credited to our
loan account, after adding five (5) business days for collection, clearance and
transfer of remittances, except for federal funds, as to which two (2) business
days shall be added, conditional upon final payment to you.
5.2 You or your representatives shall, during normal business hours and
after reasonable notice prior to the occurrence of an Event of Default and at
any time and from time to time after the occurrence of an Event of Default,
have free access to and right of inspection of the Collateral and have full
access to and the right to examine and make copies of our Records, to confirm
and verify all Accounts, to perform general audits and to do whatever else you
deem necessary to protect your interests. You may at any time remove from
our premises or require us or any accountants and auditors employed by us to
deliver any Records and you may, without cost or expense to you, use such of
our personnel, supplies, computer equipment and space at our places of business
as may be reasonably necessary for the handling of collections.
5.3 We shall immediately upon obtaining knowledge thereof report to you
all reclaimed, repossessed or returned goods, Account Debtor claims and any
other matter affecting the value, enforceability or collectibility of
Accounts. At your request, any goods reclaimed or repossessed by or returned
to us will be set aside, marked with your name and held by us for your account
and subject to your security interest. All claims and disputes relating to
Accounts are to be promptly adjusted within a reasonable time, at our own cost
and expense. You may, at your option, settle, adjust or compromise claims and
disputes relating to Accounts which are not adjusted by us within a reasonable
time.
5.4 We shall, in the manner requested by you from time to time, direct
that all proceeds of Accounts, letters of credit, bankers' acceptances and other
proceeds of Collateral shall be payable to a lock box or post office box
designated by you and under your control and/or deposited into a blocked
account under your control and/or deposited into an account maintained in your
name and under your control and in connection therewith shall execute such lock
box, blocked account or other agreement as you in your sole discretion shall
specify.
Section 6. REPRESENTATIONS, WARRANTIES AND COVENANTS.
We hereby represent, warrant and covenant to you the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which, or compliance with, being a continuing condition of the
making of loans hereunder by you or under any supplement hereto:
-2-
<PAGE> 4
6.1 We are and shall be, with respect to all Collateral and all our
inventory now existing or hereafter acquired, the owner of such Collateral and
inventory free from any lien, security interest, claim or encumbrance of any
kind, except in your favor and as otherwise consented to in writing by you, and
we shall defend the same against the claims of all persons.
6.2 We will not directly or indirectly sell, lease, transfer,
abandon or otherwise dispose of all or substantially all of our property or
assets or consolidate or merge with or into any other entity or permit any
other entity to consolidate or merge with or into us. We will at all times
preserve, renew and keep in full force and effect our existence as a
corporation and the rights and franchises with respect thereto and continue to
engage in business of the same type as we are engaged as of the date hereof. We
shall give you thirty (30) days prior written notice of any proposed change in
our corporate name which notice shall set forth the new name.
6.3 Our Records and chief executive office are maintained at the
address referred to below. We shall not change such location without your prior
written consent and prior to making any such changes, we agree to execute any
additional financing statements or other documents or notices which you may
require, which consent shall not be unreasonably withheld.
6.4 We shall maintain our shipping forms, invoices and other
related documents in a form satisfactory to you and shall maintain our books,
records and accounts in accordance with generally accepted accounting
principles consistently applied. We agree to furnish you monthly with accounts
receivable agings, inventory reports (if requested by you), and interim
financial statements (including balance sheet, statement of income and surplus
account, and cash flow statements), and to furnish you, at any time or from
time to time with such other information regarding our business affairs and
financial condition as you may reasonably request, including, without
limitation, balance sheets, statements of profit and loss, financial
statements, cash flow and other projections, earnings forecasts, schedules,
agings and reports. We hereby irrevocably authorize and direct all accountants
or auditors to deliver to you, at our expense, copies of our financial
statements, paper related thereto, and other accounting records of any nature
in their possession and to disclose to you any information they may have
regarding our business affairs and financial conditions. We shall furnish you
with audited financial statements on an annual basis certified by independent
public accountants selected by us and acceptable to you. All such statements
and information shall fairly present our financial condition as of the dates
and the results of our operations for the periods, for which the same are
furnished. Any document, schedules, invoices or other papers delivered to you
may be destroyed or otherwise disposed of by you one (1) year after the date
the same are delivered to you, unless we make written request therefor and pay
all expenses attendant to their return, in which event you shall return same
when your actual or anticipated need therefor has ceased.
6.5 Each Eligible Account represents a valid and legally
enforceable indebtedness based upon an actual and bona fide sale and delivery
of goods or rendition of services in the ordinary course of our business which
we have no reason to believe has not been finally accepted by the Account
Debtor and for which the Account Debtor is unconditionally liable to make
payment of the amount stated in such invoice, document or instrument evidencing
the Eligible Account is in accordance with the terms thereof, without offset,
defense or counterclaim and which we have no reason to believe will not be paid
in full at maturity.
6.6 All statements made and all unpaid balances appearing in the
invoices, documents and instruments evidencing each Eligible Account are true
and correct and are in all respects what they purport to be to the best of our
knowledge and all signatures and endorsements that appear thereon are genuine
and to the best of our knowledge all signatories and endorsers have full
capacity to contract and to the best of our knowledge each Account Debtor is
solvent and financially able to pay in full the Eligible Account when it
matures. None of the transactions underlying or giving rise to any account shall
violate any state or federal laws or regulations, and all documents relating to
the Accounts shall be legally sufficient under such laws or regulations and
shall be legally enforceable in accordance with their terms and all recording,
filing and other requirements of giving public notice under any applicable law
have been duly complied with to the best of our knowledge.
6.7 We shall be liable for any tax or penalty imposed upon any
transaction under this Agreement or any supplement hereto or giving rise to
the Accounts or any other Collateral or which you may be required to withhold
or pay for any reason and we agree to indemnify and hold you harmless with
respect thereto, and to repay to you on demand the amount thereof, and until
paid by us such amount shall be added to and deemed part of your loans to us.
6.8 Except as otherwise disclosed to you in writing, there is no
present investigation by any governmental agency pending, to our knowledge, or
threatened against us and there is no action, suit, proceeding or claim pending
or threatened against us or our assets or goodwill, or affecting any
transactions contemplated by this Agreement, or any supplement hereto, or any
agreements, instruments or documents delivered in connection herewith or
therewith before any court, arbitrator, or governmental or administrative body
or agency which if adversely determined with respect to us would result in any
material adverse change in our business, properties, assets, goodwill or
condition, financial or otherwise.
6.9 The execution, delivery and performance of this Agreement, any
supplement hereto, or any agreements, instruments and documents executed and
delivered in connection herewith, are within our corporate powers, have been
duly authorized, are not in contravention of law or the terms of our Charter,
By-Laws or other incorporation papers, or of any indenture, agreement or
undertaking to which we are a party or by which we are bound.
6.10 We shall, at our expense, duly execute and deliver, or shall
cause to be duly executed and delivered, such further agreements, instruments
and documents, including, without limitation, additional security agreements,
mortgages, deeds of trust, deeds to secure debt, collateral assignments, Uniform
Commercial Code financing statements or amendments or continuations thereof,
landlord's or mortgagee's waivers of liens and consents to the exercise by you
of all your rights and remedies hereunder, under any supplement hereto or
applicable law with respect to the Collateral, and do or cause to be done such
further acts as may be necessary or proper in your opinion to evidence,
perfect, maintain and enforce your security interest and the priority thereof
in the Collateral and to otherwise effectuate the provisions of this Agreement
or any supplement hereto. Where permitted by law, we hereby authorize you to
execute and file one or more Uniform Commercial Code financing statements
signed only by you; provided, that, you agree to send us copies of any such
Uniform Commercial Code financing statements executed and filed by you pursuant
to this Section 6.10.
Section 7. SPECIFIC POWERS
7.1 We hereby constitute you and your agent and any designee, as our
attorney-in-fact, at our own cost and expense, to exercise at any time all or
any of the following powers which, being coupled with an interest, shall be
irrevocable until all Obligations have been paid in full: (a) to receive, take,
endorse, assign, deliver, accept and deposit, in your or our name, any and all
checks, notes, drafts, remittances and other instruments and documents relating
to the Collateral; (b) on or after the occurrence of an Event of Default, to
receive, open and dispose of all mail addressed to us and to notify postal
authorities to change the address for delivery thereof to such address as you
may designate; (c) on or after the occurrence of an Event of Default, to
transmit to Account Debtors notice of your interest in the Accounts; (d) to
request from such Account Debtors at any time, in our name or that of your
designee, information concerning the Accounts and the amounts owing thereon; (e)
on or after the occurrence of an Event of Default, to notify Account Debtors to
make payment directly to you; (f) on or after the occurrence of an Event of
Default, to take or bring, in your or our name, all steps, actions, suits or
proceedings deemed by you necessary or desirable to effect collection of the
Collateral; and (g) to execute in our name and on our behalf any UCC financing
statements or amendments thereto; provided, that, you agree to send us copies of
any such UCC financing statements executed and filed by you pursuant to this
Section 7.1(g). We hereby release you and your officers, employees and
designees, from any liability arising from any act or acts under this Agreement
or in furtherance thereof, whether of omission or commission, and whether based
upon any error of judgment or mistake of law or fact, except for your gross
negligence or wilful misconduct as determined pursuant to a final nonappealable
order of a court of competent jurisdiction.
Section 8. EVENTS OF DEFAULT AND REMEDIES.
8.1 All Obligations shall be, at your option, immediately due and
payable without notice or demand (notwithstanding any deferred or installment
payments allowed, if any, by any instrument evidencing or relating to the
Obligations) and any provision of this Agreement or any
<PAGE> 5
supplement hereto, as to future loans and advances by you shall, at your
option, terminate forthwith, upon the termination or non-renewal of this
Agreement or upon the occurrence of any Event of Default as defined in the
Covenant Supplement hereto.
8.2 Upon the occurrence of any Event of Default and at any time
thereafter, you shall have the right (in addition to any other rights you may
have under this Agreement, any supplement hereto or otherwise) without further
notice to us, to appropriate set off and apply to the payment of any or all of
the Obligations, any or all Collateral, in such manner as you shall in your
sole discretion determine, to enforce payment of any Collateral, to settle,
compromise or release in whole or in part, any amounts owing on the Collateral,
to prosecute any action, suit or proceeding with respect to the Collateral, to
extend the time of payment of any and all Collateral, to make allowances and
adjustments with respect thereto, to issue credits in your or our name, to
sell, assign and deliver the Collateral (or any part thereof), at public or
private sale, at broker's board, for cash, upon credit or otherwise, at your
sole option and discretion, and you may bid or become purchaser at any such
sale, if public, free from any right of redemption which is hereby expressly
waived.
8.3 In the event you seek to take possession of all or any portion of
the Collateral by judicial process, we irrevocably waive: (a) the posting of
any bond, surety or security with respect thereto which might otherwise be
required, (b) any demand for possession prior to the commencement of any suit
or action to recover the Collateral, and (c) any requirement that you retain
possession and not dispose of any Collateral until after trial or final
judgment.
8.4 We agree that the giving of five (5) business days notice by you,
sent by ordinary mail, postage prepaid, to our address set forth below,
designating the place and time of any public sale or of the time after which
any private sale or other intended disposition of the Collateral is to be made,
shall be deemed to be reasonable notice thereof and we waive any other notice
with respect thereto.
8.5 The net cash proceeds resulting from the exercise of any of the
foregoing rights or remedies shall be applied by you to the payment of the
Obligations in such order as you may elect, and we shall remain liable to you
for any deficiency. Without limiting the generality of the foregoing, if you
enter into any credit transaction, directly or indirectly, in connection with
the disposition of any Collateral, you shall have the option, at any time, in
your sole discretion, to reduce the Obligations by the principal amount of such
credit transaction or to defer the reduction thereof until actual receipt by
you of cash or other immediately available funds in connection therewith.
8.6 The enumeration of the foregoing rights and remedies is not
intended to be exclusive, and such rights and remedies are in addition to and
not by way of limitation of any other rights or remedies you may have under the
UCC or other applicable law. You shall have the right, in your sole discretion,
to determine which rights and remedies, and in which order any of the same, are
to be exercised, and to determine which Collateral is to be proceeded against
and in which order, and the exercise of any right or remedy shall not preclude
the exercise of any others, all of which shall be cumulative.
8.7 No act, failure or delay by you shall constitute a waiver of any of
your rights and remedies. No single or partial waiver by you of any provision
of this Agreement or any supplement hereto, or breach or default thereunder, or
of any right or remedy which you may have shall operate as a waiver of any
other provision, breach, default, right or remedy or of the same provision,
breach, default, right or remedy on a future occasion.
8.8 We waive presentment, notice of dishonor, protest and notice of
protest of all instruments included in or evidencing any of the Obligations or
the Collateral and any and all notices or demands whatsoever (except as
expressly provided herein). You may, at all times, proceed directly against us
to enforce payment of the Obligations and shall not be required to take any
action of any kind to preserve, collect or protect your or our rights in the
Collateral.
Section 9. EFFECTIVE DATE; TERMINATION; COSTS.
9.1 This Agreement shall become effective upon acceptance by you and
shall continue in full force and effect for a term ending three (3) years from
the date hereof (the "Renewal Date") and from year to year thereafter, unless
sooner terminated pursuant to the terms hereof. Either party may terminate this
Agreement on the Renewal Date or on the anniversary of the Renewal Date in any
year by giving the other party at least sixty (60) days prior written notice by
registered or certified mail, return receipt requested, and, in addition, you
shall have the right to terminate this Agreement immediately at any time upon
the occurrence of an Event of Default. No termination of this Agreement,
however, shall relieve or discharge us of our duties, obligations and covenants
hereunder until all Obligations have been paid in full, and your continuing
security interest in the Collateral shall remain in effect until such
Obligations have been fully discharged.
9.2 If you terminate this Agreement upon the occurrence of an Event of
Default or at our request, in view of the impracticability and extreme
difficulty of ascertaining actual damages and by mutual agreement of the
parties as to a reasonable calculation of your lost profits as a result
thereof, we hereby agree that we shall pay to you, upon the effective date of
such termination, an early termination fee in an amount equal to (a) three (3%)
percent of the Maximum Credit if such termination occurs on or prior to the
first anniversary of this Agreement; (b) two (2%) percent of the Maximum Credit
if such termination occurs after the first anniversary of this Agreement but on
or prior to the second anniversary of this Agreement; or (c) one (1%) percent
of the Maximum Credit if you have exercised your option as provided in
paragraph 9.1 above and such termination occurs after the second anniversary of
this Agreement but prior to the third anniversary of this Agreement. Such
termination fee shall be presumed to be the amount of damages sustained by said
early termination and we agree that it is reasonable under the circumstances
currently existing. The early termination fee provided for in this paragraph
9.2 shall be deemed included in the Obligations.
9.3 This Agreement, any supplement hereto, and any agreements,
instruments or documents delivered or to be delivered in connection herewith
represent our entire agreement and understanding concerning the subject matter
hereof and thereof, and supersede all other prior and contemporaneous
agreements, understandings, negotiations and discussions, representations,
warranties, commitments, offers, contracts, whether oral or written.
9.4 No provision hereof shall be modified or amended orally or by
course of conduct but only by a written instrument expressly referring hereto
signed by both parties.
9.5 Upon your request we shall pay to you, or reimburse you for, all
out of pocket sums, costs and expenses which you may pay or incur in connection
with or related to the negotiation, preparation, consummation, administration
and enforcement of this Agreement, any supplement hereto, and
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<PAGE> 6
all other agreements, instruments and documents in connection herewith and
therewith, and the transactions contemplated hereunder and thereunder, together
with any amendments, supplements, consent or modifications which may be
hereafter made or entered into in respect hereof or thereof, and all efforts
made to defend, protect or enforce the security interest granted herein or
therein or in enforcing payment of the Obligations, including without
limitation, appraisal fees, filing fees and taxes, title insurance premiums,
recording taxes, expenses for searches, expenses heretofore incurred by you and
from time to time hereafter during the course of periodic field examinations of
the collateral and our operations, wire transfer fees, check dishonor fees, the
reasonable fees and disbursements of counsel to you, all fees and expenses for
the service and filing of papers, premiums on bonds and undertakings, fees of
marshals, sheriffs, custodians, auctioneers and others, travel expenses and all
court costs and collection charges, all of which shall be part of the
Obligations and shall accrue interest after demand thereof at a rate equal to
the highest rate then payable on any of the Obligations.
Section 10. NOTICES.
10.1 All notices, requests and demands to or upon the respective
parties hereto shall be deemed to have been duly given or made: if by hand,
telex, telegram or facsimile, immediately upon receipt (if received during
normal business hours), if by Federal Express, Express Mail or any other
overnight delivery service, one (1) business day after dispatch; and if mailed
by certified mail, return receipt requested, five (5) business days after
mailing. All notices, requests and demands are to be given or made to the
respective parties at the address (or to such other addresses as either party
may designate by notice in accordance with the provisions of this paragraph)
set forth herein.
Section 11. WAIVER OF JURY TRIAL; JURISDICTION; CHOICE OF LAW.
11.1 We and you each hereby waive all rights to a trial by jury in any
action or proceeding of any kind arising out of or relating to this Agreement,
any supplement hereto, the Obligations, the Collateral or any such other
transaction. We hereby waive rights of setoff and rights to interpose
counterclaims (except compulsory counterclaims) in the event of any litigation
with respect to any matter connected with this Agreement, any supplement
hereto, the Obligations, the Collateral or any other transaction between the
parties and we hereby irrevocably consent and submit tot the non-exclusive
jurisdiction of the Supreme Court of the State of New York and the United
States District Court for the Southern District of New York in connection with
any action or proceeding of any kind arising out of or relating to this
Agreement, any supplement hereto, the Obligations, the Collateral or any such
other transaction.
11.2 In any such litigation we waive personal service of any summons,
complaint or other process and agree that service thereof may be made by
certified or registered mail directed to us at our address set forth below.
Within thirty (30) days after such mailing, we shall appear in answer to such
summons, complaint or other process, failing which we shall be deemed in
default and judgment may be entered by you against us for the amount of the
claim and other relief requested therein.
11.3 This Agreement and all transactions thereunder shall be deemed to
be consummated in the State of New York and shall be governed by and
interpreted in accordance with the laws of that State. If any part or provision
of this Agreement is invalid or in contravention of any applicable law or
regulation, such part or provision shall be severable without affecting the
validity of any other part or provision of this Agreement.
Very truly yours,
E.F. JOHNSON COMPANY
By: /s/ WILLIAM WEKSEL
--------------------------------
Title: CHAIRMAN
Address:
11095 VIKING STREET
MINNEAPOLIS, MINNESOTA 55344
Accepted at New York, New York
on July 31, 1992
CONGRESS FINANCIAL CORPORATION
By: /s/ STEVEN STONE
---------------------------
Title: VP
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<PAGE> 7
[A CoreStates Company LOGO]
TRADE FINANCING AGREEMENT
SUPPLEMENT TO ACCOUNTS FINANCING AGREEMENT
[SECURITY AGREEMENT]
Congress Financial Corporation ( )
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
This Trade Financing Agreement ("Supplement") is a supplement to the
Accounts Financing Agreement [Security Agreement] between us dated July 31, 1992
(the "Agreement"). This Supplement is (a) hereby incorporated into the
Agreement, (b) made a part thereof and (c) subject to the other terms,
conditions, covenants and warranties thereof. All terms, including capitalized
terms, used herein shall have the meanings ascribed to them respectively in the
Agreement, unless otherwise defined in this Supplement.
This Supplement will confirm the terms and conditions upon which you
may, from time to time in your sole discretion, assist us in establishing or
opening foreign or domestic letters of credit and extend other financial
accommodations for our account. Accordingly, each of us hereby agrees as
follows:
SECTION 1. CREDIT ACCOMMODATIONS
1.1. You may, in your sole discretion, from time to time, for our
account, at our request, provide one or more of the following financial
accommodations to us or our designee(s): (a) issue, open, or cause the issuance
or opening of letters of credit or purchase or other guaranties for the purchase
of goods and services in the ordinary course of our or any such designee's
business or for any other purpose approved by you ("Import Credits"), (b) assist
us in establishing or opening letters of credit for such purposes by
indemnifying the issuer thereof or guaranteeing our payment or performance to
such issuer in connection therewith, (c) make payments for our or such
designee's account in connection with such purchases. All such letters of credit
or purchase or other guaranties and other financial accommodations are referred
to herein individually as a "Credit" and collectively as "Credits".
1.2. The opening or issuance of any Credit shall at all times and in
all respects be in your sole discretion. The amount and extent of any Credit
and the terms, conditions and provisions thereof shall in all respects be
determined solely by you and shall be subject to change, modification and
revision by you, in your sole discretion, at any time and from time to time.
The maturity of each Credit shall not exceed one hundred and eighty (180)
days after opening or issuance, except in your sole discretion.
1.3. Our loan availability under the Agreement and any other
Supplements thereto shall be reduced (i) in the case of Import Credits, 50% of
the amount of all of such outstanding import credits, or (ii) in the case of
all other credits, 100% of the amount of all outstanding credits, or (iii) such
lesser amounts as you may elect in your ? [**]
1.4. All outstanding Credits shall be secured by all collateral in
which you are now or hereafter granted a security interest by us or any
guarantor of our Obligations. All outstanding Credits shall be deemed loans for
purposes of determining whether the Maximum Credit has been exceeded.
1.5. Except in your sole discretion, the amount of all Credits and
all other commitments and obligations made or incurred by you for our account in
connection therewith shall not exceed $4,000,000 in the aggregate at any time
outstanding.
1.6. All indebtedness, liabilities, expenses and obligations of any
kind paid, arising or incurred by you in connection with this Supplement, any
Credit or any documents, drafts and acceptances thereunder, whether present or
future, whether arising or incurred before or after termination or nonrenewal
of this Agreement shall be incurred solely as an accommodation to us and for
our account and constitute part of the Obligations, including without
limitation: (a) all amounts due or which may become due under any Credit or any
drafts or acceptances thereunder; (b) all amounts charged or chargeable to you
or us by any bank or other issuer of any Credit or any correspondent which
opens, issues or is otherwise involved with any Credit, including without
limitation, all fees, expenses and commissions; (c) your fees, expenses and
commissions; (d) duties, freight, taxes, costs, insurance and all such other
charges and expenses which may pertain directly or indirectly to any
Obligations or to the Credits or goods or documents relating thereto; and
(e) all other indebtedness and obligations owed by us to you pursuant to, in
connection with or arising from this Supplement, the Credits or any drafts or
acceptances relating thereto.
1.7. All such Obligations shall accrue interest at the rate provided
for in the Agreement, commencing on the date any payment is made, or
non-contingent obligation incurred, by you and all such Obligations shall,
together with interest thereon and other sums owed by us to you hereunder, be
payable and evidenced as provided in the Agreement.
1.8. In addition to all other fees, charges and expenses payable
under the Agreement, this Supplement, and to any bank or other issuer or
correspondent in connection with any Credit, we agree to pay to you the
following commissions for your services hereunder, which shall be due and
payable on the opening or issuance of each Credit or, if the original term is
extended, on the extension thereof; a charge of 50/100 of one percent (50%) of
the face amount of any Credit (other than drafts or acceptances) for up to the
initial sixty (60) days of the term thereof and an additional charge of 25/100
of one percent (25%) of such face amount for each additional thirty (30) days,
or any portion thereof, of the original term or any extension thereof ? . We
also agree to pay to you, your and any bank's, other issuer's or correspondent's
customary charges for amendments, extensions and administration relating to any
Credit, which charges shall be due and payable on the first day of the month
following the date of incurrence and, at your option may be charged to any of
our account(s) maintained by you.
1.9. Nothing contained herein shall be deemed or construed to grant
us any right, power or authority to pledge your credit in any manner. You shall
have no liability of any kind with respect to any Credit opened or issued by a
bank or other issuer or any draft or acceptance with respect thereto unless and
until you shall have first duly executed and delivered your guarantee or
indemnification in writing with respect thereto, as provided herein.
SECTION 2. ADDITIONAL SECURITY INTEREST
2.1. As additional security for the prompt performance, observance
and payment in full of all Obligations, we hereby grant to you a continuing
security interest in, a lien upon, and a right to set off against, and we hereby
assign, transfer, pledge and set over to you all of the following property
acquired by us in connection with any Credit or otherwise owned, by us, whether
now owned or hereafter acquired (which, is and shall be deemed a part of the
Collateral as defined and used in the Agreement): (a) all raw materials,
work-in-process, finished goods and all other inventory and goods of whatsoever
kind or nature, wherever located, including inventory or goods in transit
("Inventory"), including without limitation, all wrapping, packaging,
advertising and shipping materials, and all other goods consumed in our
business, all labels and other devices, names or marks affixed or to be affixed
thereto for purposes of selling or of identifying the same or the seller or
manufacturer thereof and all of our right, title and interest therein and
thereto; (b) documents of payment, transport and title or the equivalent
thereof, including with-
<PAGE> 8
out limitation, original contracts, orders, invoices, checks, drafts, notes,
letters of credit, documents, warehouse receipts, bills of lading, shipping
receipts, dock receipts, delivery tickets and documents made available to us
for the purpose of ultimate sale or exchange of Inventory or for the purpose of
loading, unloading, storing, shipping, transhipping, manufacturing, processing
or otherwise dealing with Inventory in a manner preliminary to their sale or
exchange; (c) all books, records, other property and general intangibles
relating to the foregoing; and (d) all products and proceeds of the foregoing
in any form, including without limitation, insurance proceeds and any claims
against third parties for loss or damage to or destruction of any or all of the
foregoing.
2.2. We hereby recognize and admit that until all of the Obligations
have been fully and indefeasibly paid and discharged, you may be deemed to have
absolute ownership in and unqualified right to the possession and disposal of
the following: (a) all property shipped under or pursuant to or in connection
with any Credit or in any way related thereto and, including, but not limited
to, the documents, drafts or acceptances drawn thereunder, whether or not
released to us, (b) in and to all shipping documents, warehouse receipts,
policies, or certificates of insurance and other documents accompanying or
relative to documents, drafts or acceptances drawn under or relating to any
Credit, and (c) all proceeds of each of the foregoing.
2.3. You may, on or after occurrence of any Event of Default, exercise
any or all of your rights of ownership, including the rights of possession and
sale or other disposition, with or without notice to us, without liability to
you and entirely at our expense and without relieving us from any Obligations.
SECTION 3. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS.
We hereby represent, warrant and covenant to you the following (which
shall survive the execution and delivery of this Supplement), the truth and
accuracy of which, or compliance with, being a continuing condition of the
making of loans by you under the Agreement or any supplement thereto and the
extension by you of each Credit and other financial accommodations pursuant
hereto:
3.1. All sales of any Inventory shall be made by us only in the
ordinary course of business and the Accounts arising from such sales and
proceeds thereof shall be and are hereby transferred and assigned to you and we
confirm that your lien and security interest extends and attaches to those
Accounts and proceeds.
3.2. Except as you may otherwise specifically consent in writing prior
to the opening or issuance of any Credit, all Credits shall be opened or issued
to cover the actual purchase and delivery of Inventory solely for our account.
3.3. All shipments made under any Credit are in accordance with the
governmental laws and regulations of the countries in which the shipments
originate and terminate, and are not prohibited by any such laws and
regulations.
3.4. We assume all risk, liability and responsibility for, and agree
to pay and discharge, all present and future local, state, federal or foreign
taxes, duties, or levies. Any embargo, restriction, laws, customs or
regulations of any country, state, city, or other political subdivision, where
the Collateral is or may be located, or wherein payments are to be made, or
wherein drafts may be drawn, negotiated, accepted, or paid, shall be solely our
risk, liability and responsibility.
3.5. All documents, instruments, notices and statements relating to
any Credit and/or the Collateral, if any, shall at your request, be promptly
delivered to you.
3.6. We shall procure promptly, or cause to be procured, any necessary
licenses for the shipping of goods and comply or cause any drawer under, or
beneficiary of, any Credit (or any transferee or assignee thereof), to comply
with all foreign and domestic governmental laws and regulations in regard to
the shipping of the Inventory, the financing thereof or payment therefor,
including governmental laws and regulations pertaining to transactions
involving designated foreign countries or their nationals and to furnish such
certificates in that respect as you or any bank or other issuer or
correspondent may at any time require.
3.7. The only locations of any Collateral are those addresses listed
on Schedule A annexed hereto and made a part hereof. Schedule A sets forth the
owner and/or operator of the premises at such addresses, for all locations
which we do not own and operate and all mortgages, if any, with respect to the
premises. We shall not remove any Collateral from such locations, without your
prior written consent, except for sales of Inventory in the ordinary course of
our business.
3.8. We shall at all times maintain, with financially sound and
reputable insurers, casualty and hazard insurance with respect to the
Collateral for not less than its full market value and against all risks to
which it may be exposed. All such insurance policies shall be in such form,
substance, amounts and coverage as may be satisfactory to you and shall provide
for ten (10) days' minimum prior cancellation notice in writing to you. You may
act as attorney for us in obtaining, adjusting, settling, amending and
cancelling such insurance. We shall promptly (a) obtain endorsements to all
existing and future insurance policies with respect to the Collateral
specifying that the proceeds of such insurance shall be payable to you as your
interests may appear and further specifying that you shall be paid regardless
of any act, omission or breach of warranty by us, (b) deliver to you an
original executed copy of, or executed certificate of the insurance carrier with
respect to, such endorsement and, at your request, the original or a certified
duplicate copy of the underlying insurance policy and (c) deliver to you such
other evidence which is satisfactory to you of compliance with the provisions
hereof.
3.9. We shall promptly notify you in writing of the details of any
loss, damage, investigation, action, suit, proceeding or claim relating to the
Collateral or which would result in any material adverse change in our
business, assets, goodwill or condition, financial or otherwise.
3.10. At your option, you may apply any insurance monies received at
any time to the cost of repairs to or replacement for the Inventory and/or to
payment of any of the Obligations, whether or not due, in any order and in such
manner as you, in your sole discretion, may determine.
3.11. Upon your request, at any time and from time to time, we shall,
at our sole cost and expense, execute and deliver to you written reports or
appraisals as to the Inventory listing all locations, items and categories
thereof, describing the condition of same and setting forth the lower of cost
or fair market value thereof, in such form as is satisfactory to you.
3.12. We shall (a) use, store and maintain the Inventory with all
reasonable care and caution and (b) use the Inventory for lawful purposes only
and in conformity with applicable laws, ordinances, regulations and insurance
policies.
3.13. We assume all responsibility and liability arising from or
relating to the use, sale or other disposition of the Inventory and other
Collateral.
SECTION 4. INDEMNIFICATION AND RELEASE.
4.1. We shall and do hereby indemnify you and hold you harmless from
and against, and agree to pay you on demand the amount of, any and all losses,
costs, claims, demands, causes of action, liabilities or expenses (collectively,
"Liabilities") which you may suffer or incur arising from or in connection with
any transactions or occurrences relating to any Credit, the Collateral and any
documents, drafts or acceptances thereunder or relating thereto, including, but
not limited to, Liabilities due to any action taken by any bank or other issuer
or correspondent with respect to any Credit. We further agree to and do hereby
release and hold you harmless for any acts, waivers, errors, delays or
omissions, whether caused by you, by any bank or other issuer or correspondent
or otherwise with respect to or relating to any Credit. Our unconditional
obligation to you hereunder shall not be modified or diminished for any reason
or in any manner whatsoever. Any fees, commissions or other charges made to you
with respect to any Credit or other Obligations by any bank or other issuer or
correspondent thereof shall be conclusive and may be charged by you to any of
our account(s) maintained by you.
4.2. The drawer under or beneficiary of any Credit (or any assignee or
transferee thereof) shall be deemed our agent and we assume all risk, loss,
liabilities, charges and expenses with respect to their acts or omissions.
<PAGE> 9
4.3. If any Credit provides that payment is to be made by any bank,
other issuer or correspondent, you shall not be responsible for the failure of
any of the documents specified in any Credit to come into your possession or for
any delay in connection therewith, and our obligation to make reimbursement
shall not be affected by such failure or delay in the receipt by you of any such
documents.
4.4. We agree that any action taken by you, or any action taken by
any bank or other issuer or correspondent under or in connection with any
Credit, the Collateral and any documents, drafts, or acceptances thereunder,
shall, notwithstanding any judgment or instructions we may or may not express to
the contrary or inconsistent therewith, be conclusive and binding on us and
shall not create any resulting liability to you, except for your own willful
misconduct or gross negligence. In furtherance thereof, you shall have the full
and sole right and authority to: (a) clear and resolve any questions of
non-compliance of documents; (b) give any instructions as to acceptance or
rejection of any documents or goods; (c) execute any and all applications for
steamship or airway guaranties, indemnities or delivery orders; (d) grant any
extensions of the maturity modifications, changes or cancellations of any of the
terms or conditions of any of the applications, Credits, or documents, drafts or
acceptances thereunder or any letters of credit included in the Collateral; all
in your sole name, and any bank or other issuer or correspondent shall be
entitled to comply with and honor any and all such documents or instruments
executed by or received solely from you, all without any notice to or any
consent from us.
4.5. Without your express consent and endorsement in writing, we
agree not to: (a) approve or resolve any questions of non-compliance of
documents; (b) give any instructions as to acceptance or rejection of any
documents or goods; (c) execute any and all applications for steamship or airway
guaranties, indemnities or delivery orders; (d) grant any extensions of the
maturity of, time of payment for, or time of presentation of, any drafts,
acceptances or documents; or (e) agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of any
of the applications, Credits, or documents, drafts or acceptances thereunder.
4.6. Any rights, remedies, duties or obligations granted or
undertaken by us to any bank or other issuer or correspondent in any application
for any Credit, or any outstanding agreement relating to the opening or issuance
of any Credit or acceptances or otherwise, shall be deemed to have been granted
to you and apply in all respects to you and shall be in addition to any rights,
remedies, duties or obligations contained herein.
4.7. Any duties or obligations undertaken by you to any bank or other
issuer or correspondent in any application for or in connection with any Credit,
including any outstanding agreement relating to the opening or issuance of any
Credit or otherwise, shall be deemed to have been undertaken by us and apply in
all respects to us and shall be in addition to the duties or obligations
contained herein.
SECTION 5. ADDITIONAL REMEDIES.
Upon the occurrence of any Event of Default and at any time thereafter,
you shall have the right (in addition to any other rights you may have under the
Agreement, this Supplement or otherwise), without notice to us, at any time and
from time to time, in your discretion, with or without judicial process or the
aid or assistance of others and without cost to you:
5.1. To enter upon any premises on or in which any of the Inventory
may be located and, without resistance or interference by us, take possession
of the Inventory;
5.2. To complete processing, manufacturing, repair and shipment to
customers of all or any portion of the Inventory;
5.3. To sell, foreclose or otherwise dispose of any part or all of
the Inventory on or in any of our premises or premises of any other party;
5.4. To require us, at our expense, to assemble and make available
to you any part or all of the Inventory at any place and time designated by you;
5.5. To remove any or all of the Inventory from any premises on or
in which the same may be located, for the purpose of effecting the sale,
foreclosure or other disposition thereof or for any other purpose (and if any
of the Inventory consists of motor vehicles, you may use our registrations and
license plates).
IN WITNESS WHEREOF, we have caused these presents to be duly executed
this 18th day of March, 1993.
E.F. Johnson
By: /s/ SCOTT R. BOCKLUND
--------------------------------
Title: VICE PRESIDENT, FINANCE
SCHEDULE A
LOCATIONS OF COLLATERAL
<PAGE> 10
COVENANT SUPPLEMENT TO
ACCOUNTS FINANCING AGREEMENT
[SECURITY AGREEMENT]
July 31, 1992
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
This Covenant Supplement ("Supplement") is a supplement to the Accounts
Financing Agreement (Security Agreement] between E.F. Johnson Company, a
Minnesota corporation (as survivor by merger with EFJ Acquisition Corp., a
Delaware Corporation, together with its successors and assigns, "Borrower") and
Congress Financial Corporation, a California corporation (together with its
successors and assigns, "Congress"), dated of even date herewith (the "Accounts
Agreement", and together with this Supplement, any and all other supplements
thereto, and all other agreements, documents and instruments now or at any time
hereafter executed and/or delivered in connection therewith or related thereto,
as the same now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced, individually and collectively, the
"Financing Agreements"). This Supplement is (a) hereby incorporated into the
Accounts Agreement, (b) made a part thereof and (c) subject to the terms,
conditions, covenants and warranties thereof. All terms (including capitalized
terms) used herein shall have the meanings ascribed to them respectively in the
Accounts Agreement, unless otherwise defined in this Supplement.
Section 1. ADDITIONAL DEFINITIONS
As used herein:
1.1 "Affiliate" shall mean, with respect to a specified Person, any
other Person which directly or indirectly, through one or more intermediaries,
controls or is controlled by or is under common control with such Person, and
without limiting the generality of the foregoing, includes (a) any Person which
beneficially owns or holds five (5%) percent or more of any class of voting
securities of such Person or other equity interests in such Person or (b) any
Person of which such Person beneficially owns or holds five (5%) percent or more
of any class of voting securities or in which such Person beneficially owns or
holds five (5%) percent or more of the equity interest. For the purposes of this
definition, the term "control" (including with correlative meanings, the terms
"controlled by" and "under common control with"), as used with respect to any
Person, means the
<PAGE> 11
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or by contract or otherwise. In no event shall
the term "Affiliate" as used herein include Buhl.
1.2 "AmeriCom" shall mean AmeriCom Corporation, a Georgia corporation
and its successors and assigns.
1.3 "Arkla" shall mean Arkla, Inc., a Delaware corporation and its
successors and assigns.
1.4 "Arkla Blockage Event" shall mean either: (a) the maturity of the
Indebtedness of Borrower to Congress by lapse of time, acceleration or
otherwise, or (b) the default by Borrower in the payment of the Indebtedness of
Borrower to Congress when due or (c) the occurrence of an Event of Default
(other than a default by Borrower in the payment of any Indebtedness of Borrower
to Congress when due).
1.5 "Arkla Subordination Agreement" shall mean the Subordination
Agreement, dated of even date herewith, by and among Arkla, Congress and
Borrower, as the same now exists or may 'hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.6 "Arkla Subordinated Notes" shall mean, individually and
collectively, the $10,000,000 Note, the $800,000 Note, the $500,000 Note and the
Exchange Notes.
1.7 "Buhl" shall mean C. Henry Buhl, III and his successors, assigns,
heirs, executors and administrators.
1.8 "Buhl Agreements" shall mean, individually and collectively, the
following (as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced): (a) the Note Purchase
Agreement, dated of even date herewith, between Borrower and Buhl, (b) the
ZeroCoupon Note, (c) the Limited Guaranty and Pledge Agreement, dated of even
date herewith, between EJF Holding and Buhl and (d) all related agreements,
documents and instruments executed by EFJ Holding, Borrower and/or Buhl or any
Affiliate or Subsidiary of any of them.
1.9 "Buhl Intercreditor Agreement" shall mean the Intercreditor
Agreement, dated of even date herewith, by and between Buhl and Congress, as
acknowledged and agreed to by Borrower, as the same now exists or may hereafter
be amended, modified, supplemented, extended, renewed, restated or replaced.
1.10 "Capital Expenditures" shall mean all expenditures for, or
contracts for expenditures for, any fixed assets or improvements, or for
replacements, substitutions or additions thereto,
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<PAGE> 12
which have a useful life of more than one (1) year, including, but not limited
to, the direct or indirect acquisition of such assets by way of increased
product service charges, offset items or otherwise, and shall include
capitalized lease payments.
1.11 "Consolidated Net Worth" shall mean, as to any Person, at any time,
in accordance with GAAP, on a consolidated basis for such Person and its
Subsidiaries, the amount equal to the difference between: (a) the aggregate net
book value of all assets of such Person and its Subsidiaries, calculating the
book value of inventory for this purpose on a first-in-first-out basis, after
deducting from such book values all appropriate reserves (including all reserves
for doubtful receivables, obsolescence, depreciation and amortization) and (b)
the aggregate Indebtedness of such Person and its Subsidiaries (including tax
and other proper accruals); provided, that for purposes of this definition,
Indebtedness shall not include Indebtedness permitted under Section 4.6(e)
hereof.
1.12 "Consolidated Working Capital" shall mean, as to any Person, at any
time, on a consolidated basis for such Person and its Subsidiaries, the amount
equal to the difference between: (a) the aggregate net book value of all assets
of such Person and its Subsidiaries, on a consolidated basis, calculating the
book value of inventory for this purpose on a first-in-first-out basis, which
would, in accordance with GAAP, be classified as current assets and (b) all
Indebtedness of such Person and its Subsidiaries, on a consolidated basis, which
would in accordance with GAAP, be classified as current liabilities.
1.13 "EFJ Acquisition" shall mean EFJ Acquisition Corp., a Delaware
corporation and its successors and assigns.
1.14 "EFJ Holding" shall mean EFJ Holding Corp., a Delaware corporation
and its successors and assigns.
1.15 "Eligible Accounts" shall mean Accounts created by Borrower in the
ordinary course of its business arising out of the sale of goods or rendition of
services, which are and at all times shall continue to be acceptable to Congress
in all respects. Standards of eligibility may be fixed and revised from time to
time solely by Congress in its exclusive judgment. In determining eligibility,
Congress may, but need not, rely on agings, reports and schedules of Accounts
furnished to Congress by Borrower, but reliance by Congress thereon from time to
time shall not be deemed to limit Congress' right to revise standards of
eligibility at any time as to both present and future Accounts. In general, an
Account shall not be deemed eligible unless: (a) the Account Debtor on such
Account is at all times and continues to be acceptable to Congress, (b) such
Account complies in all respects with the representations, covenants and
warranties set forth herein and in the other Financing Agreements, (c) no more
than ninety (90) days have elapsed since
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<PAGE> 13
the invoice date of such Account, (d) if it is a Foreign Account, such Foreign
Account is secured or payable by a letter of credit or acceptance issued by a
bank and on terms acceptable to Congress (the original of which has been
delivered to Congress and the issuer of which has been notified of the
assignment thereof to Congress) or the Foreign Account is subject to credit
insurance payable to Congress issued by an insurer and on terms and in an amount
acceptable to Congress, (e) if it is a Government Account, Borrower shall have
complied in all respects with the Federal Assignment of Claims Act of 1940, as
amended, and any state or local equivalent in a manner satisfactory to Congress
with respect to such Account and (f) the Account is not owed by an Account
Debtor who has or whose Affiliates have more than fifty (50%) percent of its and
their Accounts outstanding and unpaid more than ninety (90) days past the
invoice date thereof. Any accounts which Congress determines to be ineligible or
unacceptable for availability purposes at any time shall nevertheless be and
remain at all times part of the Collateral.
1.16 "Excess Availability" shall mean the amount, as determined by
Congress, calculated at any time, equal to:
(a) the amount of the loans which Congress would at such time make
available to Borrower based on the lending formulas and subject to
the sublimits and reserves from time to time established by Congress
hereunder and subject to the Maximum Credit,
minus
(b) the sum of: (i) the amount of all then outstanding and unpaid
Obligations, including the initial loans under the Accounts
Agreement made by Congress to Borrower as of the date hereof, plus
(ii) the aggregate amount of all trade payables past due as of such
time.
1.17 "Financing Agreements" shall have the meaning set forth in the first
paragraph hereof.
1.18 "Foreign Account" shall mean an Account arising out of the sale of
goods to an Account Debtor which: (a) does not maintain its chief executive
office in the United States, Puerto Rico or the U.S. Virgin Islands, (b) is not
organized under the laws of the United States or any state thereof or Puerto
Rico or the U.S. Virgin Islands, or (c) is the government of any foreign country
or sovereign state, or of any state, province, municipality or other political
subdivision thereof, or of any
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<PAGE> 14
department, agency, public corporation or other instrumentality thereof.
1.19"GAAP" shall mean generally accepted accounting principles as in
effect on the date hereof consistently applied.
1.20 "Government Account" shall mean any Account at any time owing by an
Account Debtor which is: (a) the United States, (b) any State of the United
States or a local municipality or other political subdivision thereof or (c) any
body, department, authority, agency, public corporation or instrumentality of
any of the foregoing.
1.21 "Greene Street" shall mean Greene Street Capital Corporation, a
Delaware corporation and its successors and assigns.
1.22 "Greene Street Sale/Leaseback Agreements" shall mean, individually
and collectively, the following (as the same new exist or may hereafter be
amended, modified, supplemented, extended, renewed or replaced): (a) the
Purchase and Sale Agreement For Improved Real Property, dated of even date
herewith, by and between Borrower and Greene Street with respect to the Waseca
Premises, (b) the Agreement of Lease, dated of even date herewith, by and
between Greene Street, as landlord, and Borrower, as tenant, with respect to the
Waseca Premises and (c) all related agreements, documents and instruments
executed by Greene Street and/or Borrower (as in effect on the date hereof).
1.23 "Indebtedness" shall mean, as to any Person, all items which, in
accordance with GAAP, would be included in determining total liabilities shown
on the liability side of its balance sheet as at the date such Indebtedness is
to be calculated and, in any event, shall include any liabilities secured by any
mortgage, pledge, lien or security interest existing on such person's owned or
acquired property.
1.24 "Merger" shall mean the merger of EFJ Acquisition with and into
Borrower with Borrower as the surviving corporation pursuant to the terms of the
Merger Agreements.
1.25 "Merger Agreements" shall mean, collectively, the Agreement of
Merger, dated of even herewith, by and between EFJ Acquisition and Borrower, the
Plan of Merger, dated of even date herewith, by and between EFJ Acquisition and
Borrower, the Articles of Merger of EFJ Acquisition and Borrower, the
Certificate of Merger of EFJ Acquisition and Borrower and all related
agreements, documents and instruments.
1.26 "Person" or "person" shall mean any individual, sole proprietorship,
partnership, corporation (including a business trust), unincorporated
association, joint stock corporation,
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<PAGE> 15
trust, joint venture or other entity or government or any agency or
instrumentality or political subdivision thereof.
1.27 "Preferred Stock" shall mean the eighty thousand (80,000) shares of
preferred stock of Borrower, having a par value per share of $100, directly and
beneficially owned and held by Arkla on the date hereof and received by Arkla as
part of the consideration for the purchase by EFJ Acquisition of the Purchased
Stock in accordance with the Purchase-Agreements (as in effect on the date
hereof).
1.28 "Purchase Agreements" shall mean, individually and collectively, the
following (as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced): (a) the Stock Purchase
Agreement and all other agreements of transfer as are referred to therein and
all side letters with respect thereto, (b) the Arkla Subordinated Notes and (c)
all other related agreements, documents and instruments executed by EFJ
Acquisition, Borrower and/or Arkla and any Affiliate or Subsidiary of each of
the foregoing.
1.29 "Purchased Stock" shall mean all of the issued and outstanding shares
of common stock of Borrower.
1.30 "Stock Purchase Agreement" shall mean the Stock Purchase Agreement,
dated as of March 20, 1992, between Arkla and EFJ Acquisition, as the same now
exists or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.
1.31 "Subsidiary" or "subsidiary" shall mean any corporation, association
or organization, active or inactive, as to which more than fifty (50%) percent
of the outstanding voting stock or shares or interests shall now or hereafter be
owned or controlled, directly or indirectly by any Person, any Subsidiary of
such Person, or any Subsidiary of such Subsidiary.
1.32 "Term Loan" shall mean the outstanding Obligations owed to Congress
by Borrower consisting of the secured term loan made by Congress to Borrower as
provided for in Section 3.2 hereof and evidenced by the Term Note.
1.33 "Term Note" shall mean the Term Promissory Note, dated of even date
herewith, made by Borrower payable to Congress in the original principal amount
of $4,500,000, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.34 "Tradestyle" shall have the meaning set forth in Section 4.2 hereof.
1.35 "Waseca premises" shall mean the real property located at 299 Johnson
Avenue, Waseca, Minnesota and 206 Second
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<PAGE> 16
Avenue S.W., Waseca, Minnesota conveyed by Borrower to Greene Street on the date
hereof and immediately thereafter leased back by Borrower from Greene Street.
1.36 "Weksel" shall mean William Weksel and his successors, assigns,
heirs, executors and administrators.
1.37 "Zero Coupon Note" shall mean the Zero Coupon Note due July 31, 1997
in the face amount of up to $5,000,000 issued by Borrower payable to Buhl, as
the same now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
1.38 "$10,000,000 Note" shall mean the 9.79% Senior Subordinated Note, due
July 31, 1997, dated of even date herewith, issued by Borrower payable to the
order of Arkla in the original principal amount of $10,000,000, as the same now
exists or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.
1.39 "$800,000 Note" shall mean the Promissory Note, dated of even date
herewith, issued by Borrower payable to the order of Arkla in the original
principal amount of $800,000, as the same now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced.
1.40 "$500,000 Note" shall mean the Promissory Note, dated of even date
herewith, issued by Borrower payable to the order of Arkla in the original
principal amount of $500,000, as the same now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced.
Section 2. ADDITIONAL CONDITIONS PRECEDENT
Each of the following is an additional condition precedent to Congress
making any loans to Borrower pursuant to the Accounts Agreement, this Agreement
and any other supplement thereto and the other Financing Agreements, including
the making of the initial and any other and future loans (including the Term
Loan), advances and other financial accommodations contemplated hereunder and
thereunder:
2.1 Congress shall have received, in form and substance satisfactory to
Congress and its counsel, evidence that the Purchase Agreements have been duly
executed and delivered by and to the appropriate parties therein and the
transactions contemplated under the terms of the Purchase Agreements have been
consummated prior to or contemporaneously with the execution of this Agreement;
2.2 Congress shall have received, in form and substance satisfactory to
Congress and its counsel, evidence that the
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<PAGE> 17
certificates of Merger with respect to the Merger have been filed with the
Secretary of State of the State of Minnesota and the Secretary of State of State
of Delaware and the Merger is valid and effective in accordance with the terms
and provisions of the Merger Agreements and the General Corporation Law of the
State of Delaware and the Business Corporation Act of the State of Minnesota;
2.3 Congress shall have received, in form-and substance satisfactory to
Congress and its counsel: (a) evidence that Borrower has received cash from EFJ
Holding or EFJ Acquisition as a cash equity contribution to Borrower of not less
than $1,000,000, (b) evidence that Borrower has received cash from Greene Street
in the aggregate amount of not less than $2,000,000 pursuant to the Greene
Street Sale/Leaseback Agreements and (c) evidence that Borrower has received
cash from Buhl in the aggregate amount of not less than $1,000,000 pursuant to
the Buhl Agreements;
2.4 Congress shall have received, in form and substance satisfactory to
Congress and its counsel, evidence that the $4,000,000 consisting of (a)
$1,000,000 cash received by Borrower from EFJ Holding or EFJ Acquisition
(immediately prior to the Merger) as an equity contribution, (b) $2,000,000 cash
received by Borrower from Greene Street pursuant to the Greene Street
Sale/Leaseback Agreements and (c) $1,000,000 cash received by Borrower from Buhl
pursuant to the Buhl Agreements has been applied as partial payment of the cash
portion of the purchase price for the Purchased Stock;
2.5 Congress shall have received, the duly authorized and executed
Acknowledgment and Consent to the Assignment of Indemnification Rights and
Remedies by Arkla, in form and substance satisfactory to Congress, consenting to
the collateral assignment by Borrower to Congress of all of the rights and
remedies and claims for damages or other relief under the Purchase Agreements of
Borrower (as successor pursuant to the Merger) and granting Congress such other
rights as Congress may require;
2.6 Congress shall have received, in form and substance satisfactory to
Congress and its counsel, a limited guarantee of payment of the Obligations duly
executed and delivered by Weksel;
2.7 Congress shall have received, in form and substance satisfactory to
Congress and its counsel, an absolute and unconditional guarantee of payment of
the Obligations, a general security agreement with respect to all of its assets
and related UCC financing statements, each duly authorized, executed and
delivered by AmeriCom;
2.8 Congress shall have received, (a) in form and substance satisfactory
to Congress and its counsel, a junior participation
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<PAGE> 18
agreement between Congress and Weksel, duly executed and delivered by Weksel and
(b) not less than $500,000 in cash from Weksel representing the purchase price
paid for the junior participation purchased by Weksel pursuant to such junior
participation agreement;
2.9 Congress shall have received, in form and substance satisfactory to
Congress and its counsel, the Buhl Intercreditor Agreement and the Arkla
Subordination Agreement--each in favor of Congress, duly authorized, executed
and delivered by Buhl and Arkla, respectively;
2.10 Congress shall have received, in form and substance satisfactory to
Congress and its counsel, a consolidated pro-forma balance sheet of Borrower
reflecting the initial transactions contemplated hereunder, including, but not
limited to, the transactions contemplated by the Purchase Agreements, the Merger
Agreements, the Greene Street Sale/Leaseback Agreements and the Buhl Agreements,
the loans, advances and other accommodations provided by Congress to Borrower on
the date hereof (including, but not limited to, the Term Loan) and the use of
the proceeds of the initial loans and advances and other accommodations as
provided herein accompanied by a certificate, dated of even date herewith, of
the vice chairman of the board of directors of Borrower, acceptable to Congress
stating that such pro-forma balance sheet represents the reasonable, good faith
opinion of such officer as to the subject matter thereof as of the date of such
certificate;
2.11 Borrower shall have Excess Availability, as determined by Congress as
of the date hereof, in an amount not less than $2,000,000;
2.12 Congress shall have received, in form and substance satisfactory to
Congress, all consents, waivers, acknowledgements and other agreements from
third persons which Congress may deem necessary or desirable in order to permit,
protect and perfect its security interests in and liens upon the Collateral or
to effectuate the provisions or purposes of this Agreement and the other
Financing Agreements, including, without limitation, (a) waivers by lessors,
owners and/or mortgagees of any security interests, liens or other claims by
such persons in and to the Collateral, and agreements by such persons permitting
Congress access to the premises to exercise its rights and remedies and
otherwise deal with the Collateral and (b) acknowledgements by processors,
consignees and warehousemen at any time in possession of any of the Collateral
of the security interests and liens of Congress, waivers by such persons of any
security interests, liens or other claims by such persons in and to the
Collateral, and agreements by such persons to follow the directions of Congress
with respect to the release and delivery of any Collateral at any time in their
possession;
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<PAGE> 19
2.13 Congress shall have received evidence of insurance and loss payee
endorsements required hereunder and under the other Financing Agreements, in
form and substance satisfactory to Congress, and certificates of insurance
policies and/or endorsements naming Congress as loss payee, all at Borrower's
cost and expense;
2.14 Congress shall have received, in form and substance satisfactory to
Congress and its counsel, such opinion letters of counsel to Borrower and each
guarantor with respect to the Financing Agreements, including, but not limited
to, the legality, validity, binding effect and enforceability of the guarantees
to be executed and delivered by AmeriCom in favor of Congress with respect to
the Obligations, the transactions contemplated by the Purchase Agreements and
the Merger Agreements and such other matters as Congress may request;
2.15 the other Financing Agreements and all instruments and documents
hereunder and thereunder shall have been duly executed and delivered to
Congress, in form and substance satisfactory to Congress;
2.16 all representations and warranties contained herein and in the other
Financing Agreements shall be true and correct in all material respects; and
2.17 no Event of Default shall have occurred and no event shall have
occurred or condition be existing which, with notice or passage of time or both,
would constitute an Event of Default.
Section 3. ADDITIONAL LOAN PROVISIONS
3.1 Termination. Notwithstanding anything to the contrary contained in
Section 9 of the Accounts Agreement, the Accounts Agreement may not be
terminated by Borrower pursuant to Section 9.1 or at Borrower's request pursuant
to Section 9.2 thereof unless each of the other Financing Agreements is
terminated simultaneously therewith in accordance with their terms. No
termination of the Financing Agreements shall relieve or discharge Borrower of
its duties, obligations and covenants until all Obligations have been
indefeasibly paid in full and Congress' continuing security interests shall
remain in effect until such Obligations have been so discharged.
3.2 Term Loan. Subject to, and upon the terms and conditions contained
herein, Congress shall make the Term Loan to Borrower in the original principal
amount of Four Million Five Hundred Thousand ($4,500,000) Dollars. The Term Loan
shall be (a) evidenced by the Term Note, (b) repaid, together with interest and
other amounts due thereunder, in accordance with the terms and provisions of the
Term Note, this Agreement and the
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<PAGE> 20
other Financing Agreements and (c) secured by all of the collateral.
3.3 Reserves. Without limiting any other rights or remedies of Congress
under this Agreement or any of the other Financing Agreements, all loans,
advances and other financial accommodations otherwise available to Borrower
pursuant to the lending formulas, the lending statements and the Maximum Credit
shall be subject to Congress' continuing right, in its discretion, to establish
a reserve reducing the amount of the loan otherwise available to Borrower
pursuant to the lending formulas, lending statements and Maximum Credit, and to
increase and decrease such reserve from time to time, if and to the extent that,
in Congress' discretion, Congress believes such reserve is necessary to protect
Congress against possible non-payment for any reason by any Account Debtor,
possible non-payment of any Indebtedness owed by Borrower to third parties, or
in respect of any state of facts which does or would, with the passage of time
or notice or both, constitute an Event of Default under any of the Financing
Agreements or for any other reason.
3.4 Use of Proceeds. A portion of the initial proceeds of the loans and
advances made by Congress to or for the account of Borrower on the date hereof
shall be used to pay the remaining cash balance owed to Arkla pursuant to the
Purchase Agreements after the application to such purchase price of the proceeds
of the $4,000,000 cash received by Borrower from (a) the equity capital
contribution in the amount of $1,000,000, (b) the sale of certain real property
to Greene Street in the amount of $2,000,000 and (c) the issuance of the Zero
Coupon Note in the amount of $1,000,000. All other loans, advances, and other
financial accommodations provided by Congress to or for the account of Borrower
pursuant to the Accounts Agreements, this Agreement and any other supplement
thereto and the other Financing Agreements shall be used by Borrower for general
operating and working capital purposes of Borrower and such other lawful and
proper corporate purposes not otherwise prohibited by the terms hereof.
Section 4. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS
In addition to the representations, warranties and covenants contained in
the Accounts Agreement and the other Financing Agreements, Borrower hereby
represents, warrants and covenants to Congress the following, the truth and
accuracy of which are, and compliance with being, a continuing condition of the
making of loans to Borrower by Congress under the Accounts Agreement or under
any supplement thereto:
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4.1 Subsidiaries.
(a) Borrower does not have any Subsidiaries as of the date hereof
except as set forth on Exhibit A hereto.
(b) Borrower shall not form or acquire any Subsidiaries without the
prior written consent of Congress, which consent shall not be unreasonably
withheld. In the event Congress so consents, promptly upon such formation or
acquisition, Borrower will execute and deliver, or will cause any such
Subsidiary to execute and deliver, to Congress, in form and substance
satisfactory to Congress and its counsel: (i) an absolute and unconditional
guarantee of payment of any and all present and future Obligations of Borrower
to Congress, (ii) a general security agreement granting to Congress a first and
only lien (except as otherwise consented to by Congress in writing) upon all of
such Subsidiary's assets, (iii) related Uniform Commercial Code Financing
Statements, and (iv) such other agreements, documents and instruments as
Congress may require, including, but not limited to, supplements and amendments
hereto and other loan agreements or instruments evidencing the obligations and
Indebtedness of such new Subsidiary to Congress.
4.2 Acquisition of Purchased Stock.
(a) The Purchase Agreements and the transactions contemplated
thereunder have been duly executed, delivered and performed in accordance with
their terms for the respective parties thereto in all respects, including the
fulfillment (not merely the waiver) of all conditions precedent set forth
therein and giving effect to the terms of the Purchase Agreements and the
assignments to be executed and delivered by Arkla (or any of its affiliates or
subsidiaries) thereunder, EFJ Acquisition acquired and as a result of the Merger
EFJ Holding now has good and marketable title to the Purchased Stock.
(b) All actions and proceedings required by the Purchase Agreements,
applicable law or regulation (including, but not limited to, compliance with the
Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended) have been
taken and the transactions required thereunder have been duly and validly taken
and consummated.
(c) No court of competent jurisdiction has issued any injunction,
restraining order or other order which prohibits consummation of the
transactions described in the Purchase Agreements and no governmental or other
action or proceeding has been threatened or commenced, seeking any injunction,
restraining order or other order which seeks to void or otherwise modify the
transactions described in the Purchase Agreements.
(d) Borrower has delivered, or caused to be delivered, to Congress,
true, correct and complete copies of the Purchase
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Agreements. Set forth in Exhibit B hereto is a correct and complete list of the
Purchase Agreements and all other agreements, documents and instruments existing
as of the date hereof between Borrower, any of its Affiliates, Arkla and any of
Arkla's affiliates.
4.3 Merger.
(a) The Merger is valid and effective in accordance with the terms
of the Merger Agreements, and the General Corporation Law of the State of
Delaware and the Business Corporation Act of the State of Minnesota and Borrower
is the surviving corporation pursuant to the Merger.
(b) All actions and proceedings required by the Merger Agreements'
applicable law and regulation have been taken and the transactions required
thereunder had been duly and validly taken and consummated.
(c) No court of competent jurisdiction has issued any injunction,
restraining order or other order which prohibits consummation of the
transactions described in the Merger Agreements and no governmental action or
proceeding has been threatened or commenced seeking any injunction, restraining
order or other order which seeks to void or otherwise modify the transactions
described in the Merger Agreements.
(d) Borrower has delivered, or caused to be delivered, to Congress,
true, correct and complete copies of the Merger Agreements.
4.4 Capitalization.
(a) All of the issued and outstanding shares of capital stock of
Borrower are directly and beneficially owned and held by EFJ Acquisition
immediately prior to the Merger and by EFJ Holding immediately upon the
effectiveness of the Merger (except for the Preferred Stock issued to Arkla
pursuant to the Purchase Agreements) and all of such shares have been duly
authorized and are fully paid and non-accessible, free and clear of all claims,
liens, pledges and encumbrances of any kind, except for the pledge by EFJ
Holding of certain shares of the common stock to Buhl as collateral security for
the guaranty by EFJ Holding of all of the Indebtedness of Borrower to Buhl.
(b) EFJ Acquisition or EFJ Holding has, on or before the date
hereof, made a cash equity contribution to Borrower in the amount of $1,000,000
as consideration for shares of capital stock of Borrower consisting of common
stock, and such amounts have been applied, contemporaneously herewith, to a
portion of the purchase price for the Purchased Stock.
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(c) Borrower has sufficient capital to carry on all businesses and
transactions in which it now engages or proposes to engage in, is solvent and
will continue to be solvent after the creation of the Obligations and the
security interests in favor of Congress and is able to pay its debts as they
mature.
4.5 Trade Names. Some of Borrower's invoices may from time to time be
rendered to customers under the trade names or tradestyles listed on Exhibit C
hereto (which, together with any new trade names or tradestyles used after the
date hereof are referred to collectively as the "Tradestyles" and individually,
as a "Tradestyle"). As to the Tradestyles used by it, and the related Accounts,
Borrower hereby agrees that:
(a) Each Tradestyle is a trade name and style (and not an
independent corporation or other legal entity) by which Borrower may identify
and sell or lease certain of its goods or services and conduct a portion of its
business.
(b) All Accounts and proceeds thereof (including any returned
merchandise) which arise from the sale or lease of goods or rendition of
services invoiced under the Tradestyle shall be owned solely by Borrower and
shall be subject to the security interests of Congress and other terms of the
Accounts Agreement and the other Financing Agreements.
(c) All assignments or confirmatory schedules of Accounts delivered
to Congress by Borrower or Borrower's Eligible Subsidiary, whether in the name
of any of the Tradestyles or Borrower, shall be executed by Borrower or
Borrower's Eligible Subsidiary, as the case may be, as owner of such assigned
Accounts.
(d) New Tradestyles may be used by Borrower, but only if (i)
Congress is given at least thirty (30) days prior written notice of the intended
use of any new Tradestyle, which notice shall set forth the proposed new
Tradestyle and (ii) such supplemental financing statements as Congress shall
request shall be executed and delivered by Borrower for filing by Congress prior
to the use of such new Tradestyle.
4.6 Indebtedness. Borrower will not, and will not permit any Subsidiary
to, create, incur, assume or permit to exist, contingently or otherwise, any
Indebtedness, except:
(a) Indebtedness to Congress;
(b) Indebtedness consisting of unsecured current liabilities
incurred in the ordinary course of its business which are not more than ninety
(90) days past due;
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(c) Indebtedness incurred in the ordinary course of its business
secured only by liens permitted under Sections 4.7(b) and 4.7(c);
(d) Indebtedness of Borrower to Arkla pursuant to the Arkla
Subordinated Notes as in effect as of the date hereof in the aggregate principal
amount of $11,300,000 which Indebtedness is unsecured and subject to and
subordinate in right of payment to the right of Congress to receive the prior
indefeasible payment in full of all of the Obligations pursuant to the terms of
the Arkla Subordination Agreement; provided, that: (i) Borrower shall not,
directly or indirectly, make any payments in respect of such Indebtedness,
including, but not limited to, any prepayments or other non-mandatory payments
or any payments pursuant to the purported acceleration thereof, except that
unless and until the occurrence of an Arkla Blockage Event, Borrower may make
regularly scheduled payments of principal and interest in respect of such
Indebtedness to the extent permitted in the Arkla Subordination Agreement; (ii)
Borrower shall not, directly or indirectly, (A) amend, modify, alter or change
the terms of the Purchase Agreements or (B) redeem, retire, decease, purchase or
otherwise acquire such Indebtedness, or set aside or otherwise deposit or invest
any sums for such purpose; and (iii) Borrower shall furnish to Congress all
notices, demands or other materials concerning such Indebtedness either received
by Borrower from Arkla, any of its Affiliates, or on its or their behalf,
promptly after receipt thereof, or sent by Borrower, any of its Affiliates or on
its or their behalf, to Arkla or any of its Affiliates, concurrently with the
sending thereof, as the case may be;
(e) contingent Indebtedness of Borrower to Arkla pursuant to the
rights of Arkla under the terms of the Preferred Stock (as in effect on the date
hereof) to exchange any shares of the Preferred Stock on the last day of any
June or December for senior subordinated notes of Borrower maturing on the fifth
(5th) anniversary of the date of issuance of such notes and otherwise having the
same terms as the $10,000,000 Note, which Indebtedness shall be unsecured and
subject to and subordinate in right of payment to the right of Congress to
receive the prior indefeasible payment in full of all of the Obligations
pursuant to the terms of the Arkla Subordination Agreement; provided, that: (i)
the maximum amount of any such notes issued by Borrower in any fiscal quarter
may not exceeded the amount by which the Consolidated Net Worth of Borrower
exceeds $10,000,000 as of the end of the immediately preceding fiscal quarter;
(ii) Borrower shall not directly or indirectly, make any payments in respect of
such Indebtedness, including, but not limited to, any prepayments or other
non-mandatory payments or any payments pursuant to the purported acceleration
thereof, except that unless and until the occurrence of an Arkla Blockage Event,
Borrower may make regularly scheduled payments of principal and interest in
respect of such Indebtedness to the extent permitted
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under the Arkla Subordination Agreement; (iii) Borrower shall not, directly or
indirectly, (A) amend, modify, alter or change the terms of the Preferred Stock
with respect to the issuance of such notes or once issued, the terms of any of
such notes or (B) redeem, retire, defease, purchase or otherwise acquire such
Indebtedness, or set aside or otherwise deposit or invest any sums for such
purpose; and (iii) Borrower shall furnish to Congress all notices, demands or
other materials concerning such Indebtedness either received by Borrower from
Arkla, any of its Affiliates, or on its or their behalf, promptly after receipt
thereof, or sent by Borrower, any of its Affiliates on or its or their behalf,
to Arkla or any of its Affiliates, concurrently with the sending thereof, as the
case may be;
(f) Indebtedness of Borrower to Buhl pursuant to the Zero Coupon
Note as in effect as of the date hereof in the principal amount of up to
$5,000,000 which is secured only by the capital stock of Borrower owned by EFJ
Holding and subject to certain restrictions on the enforcement of Buhl's rights
and remedies under the Buhl Agreements pursuant to the terms of the Buhl
Intercreditor Agreement; provided, that: (i) Borrower shall not, directly or
indirectly, (A) amend, modify, alter or change the terms of the Buhl Agreements
or (B) redeem, retire, defease, purchase or otherwise acquire such Indebtedness,
or set aside or otherwise deposit or invest any sums for such purpose; and (ii)
Borrower shall furnish to Congress all notices, demands or other materials
concerning such Indebtedness either received by Borrower from Buhl, any of its
Affiliates, or on its or their behalf, promptly after receipt thereof, or sent
by Borrower, any of its Affiliates or on its or their behalf, to Buhl or any of
its Affiliates, concurrently with the sending thereof, as the case may be;
(g) Indebtedness of AmeriCom to Borrower arising pursuant to the
loans by Borrower to AmeriCom permitted under Section 4.8(b) below;
(h) Indebtedness existing on the date hereof which is described on
Exhibit E hereto, provided, that: (i) Borrower and its Subsidiaries may only
make regularly scheduled payments of principal and interest in respective of
such Indebtedness as set forth on Exhibit E, (ii) Borrower will not, directly or
indirectly, (A) make any pre-payments or other non-mandatory payments in respect
of any such Indebtedness or (B) redeem, retire, decease, purchase or otherwise
acquire such Indebtedness, or set aside or otherwise deposit or invest any sums
for such purpose or (C) amend, modify, alter or change the terms of the
arrangements relating thereto or any agreement or instrument evidencing such
Indebtedness, and (iii) Borrower and its Subsidiaries will furnish to Congress
all notices, demands or other materials concerning such Indebtedness, promptly
after receipt thereof or concurrently with the sending thereof, as the case may
be.
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4.7 Limitation on Liens. Borrower will not, and will not permit any
Subsidiary to, create or suffer to exist any mortgage, pledge, security
interest, lien, encumbrance, defect in title or restriction upon the use of
their real or personal properties, whether now owned or hereafter acquired,
except:
(a) the liens or security interests in favor of Congress;
(b) tax, mechanics and other like statutory liens arising in the
ordinary course of Borrower's or its Subsidiary's respective businesses to the
extent (i) such liens secure Indebtedness which is not overdue or (ii) until
foreclosure or similar proceedings shall have been commenced, such liens secure
Indebtedness relating to claims or liabilities which are being contested in good
faith by appropriate proceedings available to Borrower or its Subsidiaries prior
to the commencement of foreclosure or other similar proceedings and are
adequately escrowed for or reserved against in Congress' judgment;
(c) purchase money mortgages or other purchase money liens or
security interests upon any specific fixed assets hereafter acquired, or
mortgages, liens or security interests existing on any such future fixed assets
at the time of acquisition thereof (including, without limitation, capitalized
or finance leases), provided, that, (i) no such purchase money or other
mortgage, lien or security interest (or capitalized or finance lease, as the
case may be) with respect to specific future fixed assets shall extend to or
cover any other property, other than the specific fixed assets so acquired, or
acquired subject to such mortgage, lien or security interest (or lease) and the
proceeds thereof, (ii) such mortgage, lien or security interest only secures the
obligation to pay the purchase price of such specific fixed assets only (or the
obligations under the capitalized or finance lease), and (iii) the principal
amount secured thereby shall not exceed one hundred (100%) percent of the cost
of the fixed assets so acquired;
(d) the existing liens, encumbrances or security interests described
on Exhibit F hereto.
4.8 Loans, Investments, Guaranties, Etc. Borrower will not, and will not
permit any Subsidiary to, directly or indirectly, make any loans or advance
money or property to any Person, or invest in (by capital contribution or
otherwise) or purchase or repurchase the stock or Indebtedness or all or
substantially all of the assets or property of any Person, or guarantee, assume,
endorse, or otherwise be or become responsible for (directly or indirectly) the
Indebtedness, performance, obligations or dividends of any Person or agree to do
any of the foregoing, except:
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(a) the endorsement of instruments for collection or deposit in the
ordinary course of business;
(b) intercompany loans by Borrower to AmeriCom; provided, that, (i)
no Event of Default exists or has occurred, (ii) the Indebtedness of AmeriCom to
Borrower arising pursuant to such intercompany loans shall be evidenced by, and
repaid in accordance with, the Revolving Note, dated May 30, 1990, issued by
AmeriCom payable to Borrower, which note has-been pledged, endorsed and
delivered to Congress as part of the Collateral, and (iii) the total aggregate
principal amount of such loans shall not exceed $7,000,000 at any time
outstanding;
(c) after written notice thereof to Congress, investments in the
following instruments, which shall be pledged and delivered to Congress upon
Congress' request, (i) marketable obligations issued or guaranteed by the United
States of America or an instrumentality or agency thereof, maturing not more
than one (1) year after the date of acquisition thereof, (ii) certificates of
deposit or other obligations maturing not more than one (1) year after the date
of acquisition thereof issued by any bank or trust company organized under the
laws of and located in the United States of America or any State thereof and
having capital, surplus and undivided profits of at least $100,000,000, and
(iii) open market commercial paper with a maturity not in excess of two hundred
seventy (270) days from the date of acquisition thereof which have the highest
credit rating by either Standard & Poor's Corporation or Moody's Investors
Service, Inc.
4.9 Transactions with Affiliates. Borrower will not, and will not permit
any Subsidiary to, directly or indirectly:
(a) purchase, acquire or lease any property or receive any services
from, or sell, transfer or lease any property or services to, any Affiliate of
Borrower, except for such transactions on prices and terms no less favorable
than would have been obtained in an arm's length transaction with a
non-affiliated Person; except, as to the administrative services provided by
Borrower to AmeriCom pursuant to the Services Agreement, dated July 1, 1992,
between Borrower and AmeriCom in accordance with the terms thereof; or
(b) make any payment of management or other fees or of the principal
amount of or interest on any Indebtedness owing to any shareholder, officer,
director or Affiliate of Borrower; except: (i) AmeriCom may make payments to
Borrower in respect of the Indebtedness of AmeriCom to Borrower described in
Section 4.6(g) hereof and (ii) Borrower may make payments to Weksel, Davies &
Co., Inc. for fees for executive management and financial consulting services
rendered by Weksel, Davies & Co., Inc. to Borrower in accordance with the
Executive Management Services Agreement, dated of even date herewith, between
Borrower
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and Weksel, Davies & Co., Inc. (as in effect on the date hereof); provided,
that, (A) in no event shall the amount of such fees paid by Borrower to Weksel,
Davies & Co., Inc. exceed $250,000 per annum, payable in twelve (12) equal
monthly installments and (B) no Event of Default or act, condition or event
which with notice or passage of time or both would constitute an Event of
Default shall exist or have occurred and (iii) Borrower may reimburse Weksel,
Davies & Co., Inc. for all reasonable out-of-pocket expenses incurred in
connection with the services provided by Weksel, Davies & Job., Inc. as
described in Section 4.9(b)(ii) above based on statements furnished by Weksel,
Davies & Co., Inc. to Borrower.
4.10 Dividends, Etc. Borrower shall not, and shall not permit any
Subsidiary to, directly or indirectly, during any fiscal year, commencing with
the current fiscal year, declare or pay any dividends on account of any shares
of any class of capital stock of Borrower or its Subsidiaries now or hereafter
outstanding, or set aside or otherwise deposit or invest any sums for such
purpose, or redeem, retire, decease, purchase or otherwise acquire any shares of
any class of capital stock (or set aside or otherwise deposit or invest any sums
for such purpose) for any consideration other than stock or apply or set apart
any sums, or make any other distribution (by reduction of capital or otherwise)
in respect of any such shares or agree to do any of the foregoing, except:
(a) dividends may be declared and paid to Borrower and other
distributions may be made to Borrower by its Subsidiaries on any class of
capital stock or any other interest in, or measured by its profit, owned by
Borrower or any Subsidiary of Borrower, in each case out of legally available
funds therefor and otherwise in accordance with applicable law; and
(b) dividends may be declared and paid by Borrower to Arkla in
respect of the Preferred Stock to the extent permitted under the Arkla
Subordination Agreement, in each case out of legally available funds therefor
and otherwise in accordance with applicable law.
4.11 Environmental Compliance.
(a) Except as set forth on Exhibit G, Borrower and its Subsidiaries
have not generated, used, stored, treated, transported, manufactured, handled,
produced or disposed of any hazardous substances on or off its premises (whether
or not owned by it) in any manner which violates any applicable statute, rule or
regulation relating to environmental pollution and employee health and safety,
or any license, permit, certificate, approval or similar authorization
thereunder and the operations of Borrower and its Affiliates comply in all
material respects with all such statutes, rules and regulations and all
licenses,
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permits, certificates, approvals and similar authorizations thereunder.
(b) Except as set forth on Exhibit G, there is no outstanding
investigation, proceeding, complaint, order, directive, claim, citation or
notice by any governmental authority or any other person nor is any pending or
threatened, with respect to any non-compliance with or violation of the
requirements of any statute, rule or regulation-relating to environmental
pollution and employee health and safety, by Borrower or any of its Subsidiaries
or the release, spill or discharge, threatened or actual, of any hazardous
substance or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any substances materials or any
other environmental, health or safety matter, which affects Borrower or its
Subsidiaries or their businesses, operations or assets or any properties at
which Borrower or its Subsidiaries transported, stored or disposed of any
substances.
(c) Except as set forth on Exhibit G, Borrower and its Subsidiaries
have no material liability (contingent or otherwise) in connection with
hazardous substances or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any hazardous substances.
(d) Except as set forth on Exhibit G, Borrower and its Subsidiaries
have all licenses, permits, certificates, approvals or similar authorizations
required to be obtained or filed in connection with the operations of Borrower
and its Affiliates under any statute, rule or regulation relating to
environmental pollution and employee health and safety, and all of such
licenses, permits, certificates, approvals or similar authorizations are valid
and in full force and effect.
4.12 Compliance with Laws, Regulations, Etc. Borrower shall, and shall
cause each Subsidiary to, at all times comply in all material respects with all
applicable provisions of laws, rules, regulations, licenses, permits, approvals
and orders and duly observe all requirements, of any foreign, federal, state or
local governmental authority, including, without limitation, the Employee
Retirement Income Security Act of 1974, as amended, the Internal Revenue Code of
1986, as amended, the occupational Safety and Health Act of 1970, as amended,
the Fair Labor Standards Act of 1938, as amended and the rules and regulations
thereunder and all other statutes, rules, regulations, orders, permits and
stipulations relating to environmental pollution and employee health and safety,
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended and the Resource Conservation
and Recovery Act of 1976 and any similar state or local statutes with respect
thereto.
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4.13 Payment of Taxes. Borrower shall, and shall cause each Subsidiary and
each member of any consolidated group with Borrower for purposes of filing any
tax returns to, duly pay and discharge all taxes, assessments, contributions and
governmental charges upon or against them or their properties or assets, except
for taxes which are being contested in good faith and with all due diligence by
appropriate proceedings and which are adequately reserved against in the
reasonable opinion of Lender, prior to the date on which penalties attach
thereto.
4.14 Net Worth. Borrower shall, at all times, maintain a Consolidated Net
Worth of not less than the greater of: (a) $5,000,000 or (b) the amount equal
to: (i) the Consolidated Net Worth as set forth in the opening balance sheet of
Borrower minus (ii) $2,000,000.
4.15 Working Capital. Borrower shall, at all times, maintain a
Consolidated Working Capital of not less than the greater of: (a) $8,000,000 or
(b) the amount equal to: (i) the Consolidated Working Capital as set forth in
the consolidated opening balance sheet of Borrower minus (ii) $2,000,000.
4.16 Capital Expenditures. Borrower and its subsidiaries, shall not,
directly or indirectly, make or commit to make, whether through purchase,
capital leases or otherwise, Capital Expenditures on a non-cumulative basis
(such that expenditures not made or committed to be made in any one fiscal year
may not be made or committed to be made in any following fiscal year), in excess
of $2,500,000 in any fiscal year of Borrower.
4.17 Opening Balance Sheet. Borrower shall deliver, or cause to be
delivered, within ninety (90) days hereof opening balance sheets prepared by
independent certified public accountants which accountants shall be a nationally
recognized independent certified public accounting firm selected by Borrower and
reasonably acceptable to Congress, and certified by such accountants to the
effect that such opening balance sheets have been prepared in accordance with
GAAP and present fairly the financial condition of Borrower and its Subsidiaries
as of such date.
Section 5. EVENTS OF DEFAULT AND REMEDIES
5.1 The occurrence of any one or more of the following (each an "Event of
Default") shall constitute an Event of Default hereunder,
(a) Borrower shall be in default in the payment of any of the
Obligations when due, which default shall continue for three (3) business days;
(b) Borrower shall fail to observe or perform any covenant or
agreement contained in Sections 6.4 and 6.7 of the
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Accounts Agreements, Sections 2.8, 2.9 and 2.11 of the Inventory and Equipment
Security Agreement Supplement to the Accounts Agreement, or Sections 4.6 (but
only to the extent of Indebtedness other than for borrowed money), 4.7 (but only
to the extent of nonconsensual security interests, liens, claims or
encumbrances), 4.12, 4.13, 4.14 and 4.15 hereof and such default shall continue
uncured for a period of thirty (30) days; provided, that, such thirty (30) day
cure period shall not apply in the case of:
(i) intentional breach on the part of management of Borrower
of any of such covenants or agreements; or
(ii) failure to observe or perform any such covenants or
agreements, other than an intentional breach, which is not capable of being
cured at all or within such thirty (30) day cure period, or which has been the
subject of a prior failure within a six (6) month period;
Provided, further, that the foregoing cure periods shall neither (A) impair
Congress' exercise during such cure periods of any rights contained herein or in
the other Financing Agreements, other than any rights which it has only upon or
after the occurrence of an Event of Default, nor (B) impair Congress' exercise
of any default remedies immediately if, at the commencement of or at any time
during such cure period there exists or occurs any Event of Default not subject
to the foregoing cure period, whether based on the same or other circumstances
or events; or
(c) Borrower shall fail to observe or perform any covenants or
agreements contained in this Agreement, the other Financing Agreements or in any
other document or instrument referred to herein or therein, other than as
described in Section 5.1(a) and Section 5.1(b) above;
(d) any guarantor, endorser or other person liable on the
Obligations shall terminate or breach any of the terms, covenants, conditions or
provisions of any guarantee, endorsement or other agreement of such person with,
or in favor of, Congress; or
(e) any representation, warranty or statement of fact when made to
Congress at any time by or on behalf of Borrower is false or misleading in any
material respect; or
(f) Borrower or any guarantor, endorser or other person liable on
the Obligations shall become insolvent, generally unable to pay its debts as
they mature, call a meeting of creditors or have a creditors' committee
appointed, make a general assignment for the benefit of creditors, suspend or
discontinue doing business for any reason, or shall commence any action or
proceeding for the appointment of any trustee,
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receiver, custodian or liquidator of it or all or any part of its properties or
assets; or
(g) a judgment is rendered against Borrower or any guarantor,
endorser, or other person liable on the obligations in excess of $100,000 in any
one case or in excess of $250,000 in the aggregate and the same shall remain
undischarged for a period in excess of thirty (30) days or execution shall at
any time not be effectively stayed; or
(h) Borrower or any guarantor, endorser or other person liable on
the obligations shall commence any action or proceeding for relief under the
Bankruptcy Code or any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under the Bankruptcy Code or any
other present or future statute, law or regulation or shall take any corporate
action to authorize any of such actions or proceedings; or
(i) Borrower or any guarantor, endorser or other person liable on
the Obligations shall have commenced against it any action or proceeding for
relief under the Bankruptcy Code or any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under the
Bankruptcy Code or any other present or future statute, law or regulation or for
the appointment of any trustee, receiver, custodian or liquidator of it or all
or any part of its properties or assets, which action or proceeding is not
dismissed within thirty (30) days of its commencement, or Borrower, any
guarantor, endorser or such other person shall file any answer admitting or not
contesting the allegations of a petition filed against it in any such action or
proceeding or by any act or omission indicates its consent to, acquiescence in
or approval of, any such action or proceeding or if the relief requested is
granted sooner; or
(j) there shall be a material adverse change in the business, assets
or condition (financial or otherwise) of Borrower from the date hereof; or
(k) there is any change in the majority control or ownership of
Borrower;
(l) at any time, Congress shall, in its discretion, consider the
Obligations insecure or all or any part of the Collateral unsafe, insecure or
insufficient and Borrower shall not on Congress' demand furnish other Collateral
or make payment on account, reasonably satisfactory to Congress; or
(m) Borrower or any guarantor, endorser or other person liable on
the Obligations shall default in the payment of any amounts at any time due on
any Indebtedness owed by it or in the performance of any of the other terms or
covenants of any evidence of such Indebtedness or of any material mortgage,
- 23 -
<PAGE> 33
security agreement, indenture, pledge or other agreement relating thereto or
securing such Indebtedness or with respect to any material contract, lease,
license or other agreement with any person other than Congress, including,
without limitation, the Purchase Agreements, the Greene Street Sale/Leaseback
Agreements, and the Buhl Agreements, which default continues for more than the
applicable cure period, if any, with respect thereto; or
(n) the occurrence of an event of default under any other
agreement, document or instrument at any time executed and/or delivered to, with
or in favor of Congress or any of its Affiliates by Borrower, any of its
Subsidiaries or Affiliates or any other person liable on the Obligations,
including, but not limited to, the other Financing Agreements.
5.2 Without limiting any rights or remedies of Congress at any time on or
after an Event of Default pursuant to this Supplement or the other Financing
Agreements or applicable law, Congress may, at its option, cure any default by
Borrower or any of its Affiliates under any agreement, law, regulation, permit,
license or approval with, or issued or promulgated by, any Person, which
constitutes, or with notice or passage or both would constitute an Event of
Default hereunder or under any of the other Financing Agreements, or pay or bond
on appeal any judgment, order, directive, claim or citation entered or made
against Borrower (irrespective of the amount of said judgment or the time
elapsed since entry thereof) and charge Borrower's account therefor, such
amounts to be repayable by Borrower to Congress on demand, together with
interest thereon at the rate of interest then payable by Borrower under the
Accounts Agreement; provided, however, Congress shall be under no obligation to
effect such cure, payment or bonding and shall not, by making any payment for
Borrower's account, be deemed to have assumed any obligation or liability of
Borrower or any such Affiliate.
6. Miscellaneous
6.1 Fees
(a) Notwithstanding anything to the contrary contained in Section
3.2 or Section 9.2 of the Accounts Agreement, if Congress shall declare an Event
of Default based on Section 5.1(1) hereof and no other Event of Default exists
or has occurred, (i) Borrower shall not be required to pay interest at the rate
provided in Section 3.2 of the Accounts Agreement so long as the Event of
Default under Section 5.1(1) is the only Event of Default which exists or has
occurred and is continuing and (ii) in the event the Accounts Agreement and the
other Financing Agreements are terminated, after the date of the notice from
Congress to Borrower of an Event of Default under Section 5.1(1) hereof (which
notice is not rescinded by Congress), Borrower shall have no liability for the
early termination fee
- 24 -
<PAGE> 34
provided for in Section 9.2 of the Accounts Agreement so long as the Event of
Default under Section 5.1(1) is the only Event of Default which exists or has
occurred and continuing.
(b) Borrower shall pay to Congress all of its customary charges and
fees in connection with (i) any payment, claim or refund relating to the
dishonor of any checks or other items of Borrower or Account Debtors, and (ii)
wire transfers to Borrower.
(c) Borrower shall pay to Congress a charge of $500 per person per
day for Congress' field examiners, in addition to the reimbursement of their
out-of-pocket expenses in connection with the periodic field examinations of the
Collateral and the operations of Borrower by Congress. The foregoing shall not
be construed to limit any other provisions of the Financing Agreements regarding
costs and expenses to be paid by Borrower.
6.2 Confidentiality. Congress agrees to use reasonable efforts in
accordance with its customary business practices to keep confidential the
Information (hereinafter defined) and all copies thereof, extracts therefrom and
analyses or other materials based thereon, except that Congress shall be
permitted to disclose Information (a) to such of its respective officers,
directors, employees, agents and representatives who, in accordance with
Congress' usual business practices, customarily have access to such information,
(b) to the participants with Congress in the financing arrangements with
Borrower and such of their respective officers, directors, employees, agents and
representatives who, in accordance with the participant's usual practices
customarily have access to such information, (c) to the extent required by
applicable laws and regulations or by any subpoena or similar legal process, or
(d) to the extent such Information (i) becomes publicly available other than as
a result of a breach of this Section 6.2 by Congress, or (ii) becomes available
to Congress on a non-confidential basis from a source other than Borrower or any
Affiliate of Borrower. For the purposes of this Section 6.2, "Information" shall
mean all financial statements and other financial information, which are
received from the Borrower or any of its Affiliates which relate to the
Borrower.
6.3 Successors. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Congress, Borrower and their respective
successors and assigns, except that Borrower may not assign its rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written consent of Congress. Congress may
assign its rights and delegate its obligations under this Agreement and the
other Financing Agreements and further may assign, or sell participations in,
all or any part of the loans or any other interest herein to another
- 25 -
<PAGE> 35
bank or other person, in which event, the assignee or participant shall have, to
the extent of such assignment or participation, the same rights and benefits as
it would have if it were the lender hereunder, except as otherwise provided by
the terms of such assignment or participation. Congress may furnish any
information concerning Borrower in the possession of Congress from time to time
to assignees and participants or prospective assignees and participants. If a
participant shall at any time participate with Congress in the financing
arrangements provided by Congress to Borrower, Borrower hereby grants to such
participant and such participant shall have and is hereby given, a continuing
lien on and security interest in any money, securities and other property of
Borrower in the custody or possession of the participant, including the right of
setoff, to the extent of the participant's participation in the Obligations, and
such Participant shall be deemed to have the same right of setoff to the extent
of its participation in the Obligations, as it would have if it were a direct
lender.
Very truly yours,
E.F. JOHNSON COMPANY
By: [SIG]
---------------------------------
Title: VICE CHAIRMAN
---------------------------------
ACCEPTED:
CONGRESS FINANCIAL CORPORATION
By: [SIG]
--------------------------------
Title: VP
--------------------------------
- 26 -
<PAGE> 36
EXHIBIT A
to
COVENANT SUPPLEMENT
List of Subsidiaries
AmeriCom Corporation
(see annexed chart of capital structure).
<PAGE> 37
Attachment
to
Exhibit A
AMERICOM CAPITAL STRUCTURE SCHEDULE
<TABLE>
<CAPTION>
AUTHORIZED MINORITY TOTAL
SECURITY SHARES SHAREHOLDERS THE COMPANY OUTSTANDING
- --------------------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
COMMON SHARES 50,000,000 282,592 7,595,060 7,877,652
(par value $.01)
PREFERRED A SHARES 5,000 0 5,000 5,000
(par value $100.00)
PREFERRED B SHARES 2,550 315 1,786 2,101
(Par value $100.00)
PREFERRED C SHARES 14,600 567 13,214 13,781
(Par value $100.00)
PREFERRED D SHARES 40,000 4,426 27,101 31,527
(Par value $100.00)
WARRANTS 26,356 190,454 216,810
DEBENTURES* $169,400 $0 $169,400
INCENTIVE STOCK
OPTIONS ** 18,400 18,400
</TABLE>
- ----------
* At face amount; does not include accrued interest.
** Estimated based on employee information as of June 19, 1992.
<PAGE> 38
EXHIBIT B
to
COVENANT SUPPLEMENT
Agreements between Borrower or its
Affiliates and Arkla or its Affiliates
1. Stock Purchase Agreement ("Agreement") dated as of March 20, 1992 between
Arkla and EFJ, as modified by that certain Letter Agreement dated June 11,
1992 between Arkla and EFJ.
2. 9.79% Senior Subordinated Note of even date herewith by Borrower to Arkla.
3. Subordination Agreement dated of even date herewith among Arkla, Congress
and Borrower.
4. Executive Management Services Agreement of even date herewith between
Borrower and Weksel, Davies & Co., Inc.
5. Services Agreement dated July 1, 1992 between AmeriCom and Borrower.
6. Agreement dated July 31, 1992 between Minnegesco, a Division of Arkla, and
Borrower.
7. Statement of Working Capital dated July 31, 1992.
8. Officer's Certificate of even date herewith by Arkla attesting that the
Statement of Working Capital is true and accurate.
9. Officer's Certificate of even date herewith, by Arkla, attesting that the
representations and warranties contained in the Agreement are true and
correct.
10. Officer's Certificate of even date herewith, by Borrower, attesting that
the representations and warranties contained in the Agreement are true and
correct.
<PAGE> 39
EXHIBIT C
to
COVENANT SUPPLEMENT
Trade Names and Tradestyles Used on Invoices
1. E.F. Johnson Company
2. E.F. Johnson
3. E.F. Johnson Co.
4. Johnson
5. EFJ
<PAGE> 40
EXHIBIT D
to
COVENANT SUPPLEMENT
Intentionally Omitted
<PAGE> 41
EXHIBIT E
to
COVENANT SUPPLEMENT
Existing Debt
1. Promissory Note dated December 12, 1985, made by AmeriCom in favor of Gary
A. Hampton in the principal amount of $20,000.
2. AmeriCom Subordinated Convertible Debenture dated December 31, 1988,
issued to J&R Capital Company in the principal amount of $57,750.
3. AmeriCom Subordinated Convertible Debenture dated December 31, 1988,
issued to W&J Capital Company in the principal amount of $57,750.
4. AmeriCom Subordinated Convertible Debenture dated December 31, 1988,
issued to Wadleigh C. Winship in the principal amount of $53,900.
5. Contingent Indebtedness of Borrower to the General Insurance Company of
America pursuant to the General Agreement of Indemnity dated February 21,
1991 relating to bid bond for Borrower.
6. The obligations to pay rent or other amounts under the Agreement of Lease,
dated July 31, 1992, between Borrower, as lessee and Greene Street Capital
Corporation, as lessor.
<PAGE> 42
EXHIBIT F
to
COVENANT SUPPLEMENT
Existing Liens
1. Lien set forth in lease, dated 5/3/90 between E.F. Johnson and Tishman
Speyer Miami Airport Limited Partnership upon all property of tenant now
or subsequently located on premises located at Suite No. G2, 7253
Corporate Center Drive, Miami, Florida 33126.
2. Lien set forth in lease, dated 2/10/86 between E.F. Johnson and Travelers
Insurance Company upon all property now or subsequently on the premises
located at 11095 Viking Drive, Eden Prairie, Minnesota 55344.
<TABLE>
<CAPTION>
Filed With/ Filing Property
Secured Party Date Filed Number Description
------------- ---------- ------ -----------
<S> <C> <C> <C> <C>
3. AB Financial FL, SOS 89-0000283771 Specific equipment;
Resources, Inc. 10/26/89 Assignment filed on
8/27/90 assigning secure
interest to Datronic
Equipment Fund XVII, L.P.
4. Xerox Corporation MN, SOS 119202 Specific equipment
11/9/88
5. Polychrome MN, SOS 1341332 Specific equipment
Corporation 7/2/90
6. Hewlett Packard MN, SOS 1348325 Specific equipment
Company 8/2/90
7. Hewlett Packard MN, SOS 1378610 Specific equipment
Company 12/14/90
8. Hewlett Packard MN, SOS 1503399 Specific equipment
Company 5/20/92
9. Equitable Life MN, SOS 751269 Specific equipment;
Leasing Corporation 6/4/84 UCC-3 continuation filed
("Equitable") on 5/10/89
10. Equitable MN, SOS 754875 Specific equipment; UCC-
6/22/84 continuation filed on
5/10/89
</TABLE>
<PAGE> 43
<TABLE>
<S> <C> <C> <C> <C>
11. Equitable MN, SOS 756505 Specific equipment; UCC
7/2/84 Amendment filed on
7/16/84 adding serial
numbers to collateral descriptions;
UCC-3 continuation
filed on 5/18/89
12. Equitable MN, SOS 780880 Specific equipment; UCC-
11/15/84 continuation filed on
5/18/89
13. NorWest Financial MN, SOS 988052400 Specific equipment; UCC-
Leasing, Inc. 9/11/87 continuation filed on
6/8/92
14. Haringer, Inc. MN, SOS 1270132 Specific equipment
9/14/89
15. Hewlett Packard MN, SOS 1287446 Specific equipment
Company 11/27/89
16. Hewlett Packard MN, SOS 1290599 Specific equipment
Company 12/8/89
17. Mid-Continental MN, SOS 1337971 Specific equipment
Leasing 6/18/90
Assignment to:
First Bank
Southeast, N.A.
</TABLE>
<PAGE> 44
EXHIBIT G
to
COVENANT SUPPLEMENT
Environmental Compliance
1. All items disclosed in the following reports: (a) ENSR Phase I Due
Diligence Investigations at E.F. Johnson Company Properties, 299 Johnson
Avenue, Waseca, Minnesota, dated June 1992; (b) ENSR Phase I Due Diligence
Investigations at Two E.F. Johnson Company Properties, Second Avenue
Southwest, Waseca, Minnesota, dated June 1992; and (c) Final Phase II Due
Diligence Investigations at E.F. Johnson Company Properties, 299 Johnson
Avenue, Waseca Minnesota.
2. The Waseca Site contains five underground storage tanks, all of which were
used to store petroleum products, one of which is still used for that
purpose. Four of the underground storage tanks were emptied of petroleum,
cleaned and filled with water but were not removed from the ground.
3. Prior to EFJ Acquisition Corp.'s ("EFJ") acquisition, Borrower submitted
periodic reports on its effluent discharges at the Property in compliance
with its NPDES permit. The reports were prepared by Borrower's laboratory
which had not been certified by the MDOH. Borrower advised EFJ it did not
believe such certification was required, but that it was aware that
representatives of the MDOH have stated their general belief that
laboratories preparing such reports must be certified. Neither the MDOH
nor any other governmental agency nor any other person had claimed that
Borrower or EFJ has failed to comply with its NPDES permit or the statutes
or regulations governing it.
4. There is encapsulated friable asbestos located around certain pipes and
steam lines at the Operations Center at the 299 Johnson Avenue facility.
5. There are two drums containing contaminated soils which were excavated
from certain areas located in the vicinity of the east wall of the
Operations Center at the 299 Johnson Avenue facility. These drums are
currently stored at the Operations Center until disposal.
6. There are four areas of contaminated soil at the Waseca Site in the
vicinity of the east wall of the 299 Johnson Avenue facility described
more fully in the reports identified in paragraph 1 of this Exhibit G.
<PAGE> 45
7. The 299 10th Avenue S.W. facility was listed in the Comprehensive
Environmental Response Compensation and Liability Information System but
has been noted as requiring No Further Remedial Action. See appendix G to
ENSR Phase I Due Diligence Investigations at 299 Johnson Avenue dated June
1992.
<PAGE> 46
AMENDMENT NO. 1 TO FINANCING AGREEMENTS
January 26, 1993
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation, a California corporation (together with
its successors and assigns, "Congress") and E.F. Johnson Company, a Minnesota
corporation (as survivor by merger with EFJ Acquisition Corp., a Delaware
corporation together with its successors and assigns, "Borrower") have entered
into certain financing arrangements pursuant to the Accounts Financing Agreement
[Security Agreement], dated as of July 31, 1992, between Congress and Borrower
(together with the various supplements thereto, the "Accounts Agreement") and
other agreements, documents and instruments at any time executed and/or
delivered in connection therewith or related thereto (together with the Accounts
Agreement, as the same are amended hereby and may hereafter be further amended,
modified, supplemented, extended, renewed, restated or replaced, collectively,
the "Financing Agreements").
Borrower has requested that Congress agree to certain amendments to the
Financing Agreements and Congress is willing to agree to such amendments,
subject to the terms and conditions contained herein. Borrower and Congress
desire and intend to evidence such amendments by this letter agreement.
In consideration of the foregoing, the parties hereto agree as follows:
1. All capitalized terms used in this Amendment, unless otherwise defined
herein shall have the respective meanings assigned thereto in the Financing
Agreements.
2. Section 4.6 of the Covenant Supplement to the Accounts Agreement is
hereby amended to add a now subsection 4.6(i) as follows:
"(i) contingent Indebtedness of Borrower to National American
Insurance Company, the Security Insurance Co. of Hartford or Connecticut
Indemnity Company (collectively, the "Sureties", and individually a
"Surety") pursuant to certain agreements of Indemnity between Borrower and
such parties, true, correct and complete copies of which have been
delivered by Borrower to Congress, to reimburse and indemnify the
Sureties for amounts paid by any of them under bonds or other obligations
of suretyship which they have issued for the benefit of Borrower to
Account Debtors; provided, that:
<PAGE> 47
(i) Congress shall receive not less than two (2) business days prior
written notice of the issuance of any such bonds or other obligations of
suretyship by any of the Sureties identifying the contract of Borrower to
which such bond or other obligation relates, the total amount payable to
Borrower under the contract, the amount of the bond, the liability of
Borrower to the Surety in connection therewith, together with such other
information with respect thereto as Congress may at any time and from time
to time require;
(ii) no Event of Default, or act, Condition or event which with
notice or passage of time both would constitute an Event of Default shall
exist or have occurred;
(iii) the aggregate amount of such contingent Indebtedness
outstanding at any one time shall not exceed $5,000,000;
(iv) Borrower shall furnish to Congress all notices, demands or
other materials concerning such Indebtedness either received by Borrower
or on its behalf, promptly after receipt thereof, or sent by Borrower, or
on its behalf, concurrently with the sending thereof, as the case any be."
3. Section 4.7 of the Covenant Supplement to the Accounts Agreement is
hereby amended to add a new subsection 4.7(e) as follows:
"(e) the liens, security interests or other claims in favor of a
Surety on (1) Accounts arising from services rendered by Borrower to an
Account Debtor pursuant to the contract for which such Surety has issued a
bond or other obligation of suretyship in favor of such Account Debtor as
permitted under Section 4.6(i) hereof and (ii) the Inventory and Equipment
identifiable to the contract for which such Surety has issued a bond or
other obligation of suretyship in favor of such Account Debtor as
permitted under Section 4.6(i) hereof; provided, that, (A) the liens,
security interests or other claim of any of the Sureties in any of such
Inventory or Equipment shall be junior and subordinate in all respects to
the security interests and liens of Congress therein and (ii) Borrower
shall not, at any time, permit to be recorded any financing statement
under the UCC or other evidence or notice of the liens, security interests
or claims of any of the Sureties in any governmental office or public
records
-2-
<PAGE> 48
or agree to do any of the foregoing."
4. Without limiting the right of Congress to determine eligibility with
respect to any Accounts or Inventory as provided in the Accounts Agreement,
Borrower hereby acknowledges that: (a) any Accounts arising from the sale of
goods or rendition of services by Borrower pursuant to a contract for which a
Surety has issued a bond or other obligation of suretyship shall not be
considered an "Eligible Account" for purposes of determining the availability
of any loans to Borrower under the terms of the Financing Agreements to the
extent of the liabilities of Borrower to such Surety, whether pursuant to the
bond or other obligation of suretyship relating to such contract or otherwise
and (b) any Inventory identifiable to a contract for which a Surety has issued a
bond or other obligation of suretyship (as determined by Congress) shall not be
considered "Eligible Inventory" for purposes of determining the availability of
any loans to Borrower under the terms of the Financing Agreements.
5. Except as modified pursuant hereto, the Financing Agreements are hereby
specifically ratified, restated and confirmed by all parties hereto as of the
date hereof. To the extent of a conflict between the terms of this Amendment and
the other Financing Agreements, the terms of this Amendment shall control.
6. Borrower shall execute and deliver such additional documents and take
such additional actions as may be necessary or desirable, as determined by
Congress, to effectuate the provisions and purposes of this Amendment.
Very truly yours,
E.F. JOHNSON COMPANY
By: /s/ SCOTT R. BOCKLUND
----------------------------------
Title: Vice President, Finance
--------------------------------
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
BY: [SIG]
------------------------------
Title: VP
----------------------------
-3-
<PAGE> 49
AMENDMENT NO. 2 TO FINANCING AGREEMENTS
As of October 4, 1993
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation, a California corporation (together with
its successors and assigns, "Congress") and E.F. Johnson Company, a Minnesota
corporation (as survivor by merger with EFJ Acquisition Corp., a Delaware
corporation together with its successors and assigns, "Borrower") have entered
into certain financing arrangements as set forth in the Accounts Financing
Agreement (Security Agreement], dated as of July 31, 1992, between Congress and
Borrower (together with the various supplements thereto, the "Accounts
Agreement"), and various other agreements, documents and instruments executed
and/or delivered in connection therewith or related thereto, as amended pursuant
to Amendment No. 1 to Financing Agreements, dated January 26, 1993 (together
with the Accounts Agreement, as the same are amended hereby and may hereafter be
further amended, modified, supplemented, extended, renewed, restated or
replaced, collectively, the "Financing Agreements").
Borrower has requested that Congress agree to certain amendments to the
Financing Agreements and Congress is willing to agree to such amendments,
subject to the terms and conditions contained herein. Borrower and Congress
desire and intend to evidence such amendments by this letter agreement.
In consideration of the foregoing, the parties hereto agree as follows:
1. Definitions.
(a) All references to the term "Term Note" in the Financing
Agreements shall be deemed and each such reference is hereby amended to mean the
Amended and Restated Term Promissory Note, dated of even date herewith, made by
Borrower, payable to Congress, in the original principal amount of $5,300,000,
as the same now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
<PAGE> 50
(b) All capitalized terms used herein shall have the meanings
assigned thereto in the other Financing Agreements, unless otherwise defined
herein.
2. Term Loan. As of the close of business on October 1, 1993, the
outstanding principal amount of the Term Loan was $2,447,842.50. Subject to the
terms and conditions contained herein, upon the effective date hereof, Congress
shall make a loan to Borrower in the amount of $2,852,157.50, so that the
outstanding principal amount of the Term Loan pursuant to Section 3.2 of the
Covenant Supplement to the Accounts Agreement as of the date hereof shall be
$5,300,000. Such Term Loan shall be (a) evidenced by the Amended and Restated
Term Promissory Note executed and delivered by Borrower to Congress concurrently
herewith, (b) repaid, together with interest and other amounts due thereunder,
in accordance with the terms and provisions of such note, the Accounts Agreement
and the other Financing Agreements and (c) secured by all of the Collateral.
3. Inventory Loans. Section 2 and 3 of the letter agreement with respect
to inventory loans, dated as of July 31, 1992, between Congress and Borrower
(the "Inventory Loan Letter") is hereby deleted in its entirety and the
following substituted therefor:
"2. In addition to loans which may be made by you to us, pursuant
to Section 2 of the Accounts Agreement, you shall, in your discretion,
make loans to us from time to time, at our request, of up to the following
percentages of Value of the following categories of Eligible Inventory (or
such greater or lesser percentages thereof as you shall, in your sole
discretion, determine from time to time):
(a) fifty (50%) percent of the Value of Eligible Inventory
consisting of finished goods; plus
(b) twenty (20%) percent of the Value of Eligible Inventory
consisting of raw materials and purchased parts; plus
(c) thirty-five (35%) percent of the Value of Eligible Inventory
consisting of accessories; plus
(d) fifty (50%) percent of the Value of Eligible Inventory
consisting of component products for original equipment
manufacturers (OEM); plus
(e) ten (10%) percent of the Value of Eligible Inventory
consisting of service parts.
-2-
<PAGE> 51
3. Except in your sole discretion, the outstanding aggregate
principal amount of loans by you to us hereunder shall not exceed, at any
time, the lower of (a) the aggregate amount of the above percentages of
Value of Eligible Inventory or (b) the amount equal to twenty (20%)
percent of the aggregate amount of the Value of all categories of Eligible
Inventory."
4. Indebtedness. Section 4.6(f) of the Covenant Supplement to the Accounts
Agreement is hereby deleted in its entirety and the following substituted
therefor: "intentionally omitted;"
5. Loans, Investments, Guaranties, etc. Section 4.8 of the Covenant
Supplement to the Accounts Agreement is hereby amended by adding new subsection
4.8(d) as follows:
"(d) the loans by Borrower to Weksel and Robert H. Davies in the
original aggregate principal amount of $1,500,000; provided, that, (i) the
original of any promissory note or other instrument evidencing the
Indebtedness arising pursuant to such loan or loans shall be delivered, or
caused to be delivered, to Congress, duly endorsed and assigned as
collateral to Congress and with full recourse to Borrower, (ii) Congress
shall have received true, correct and complete copies of all other
agreements, documents and instruments relating thereto, (iii) Borrower
shall not amend, modify, alter or change the terms of the arrangements
relating thereto or any agreement or instrument evidencing such
Indebtedness so as to make the terms thereof less favorable to Borrower in
any respect, as determined by Congress, without the prior written consent
of Congress, provided, that, Borrower shall furnish copies of any
amendments to Congress whether or not the consent of Congress is required
upon the execution of any such amendments, and (iv) Borrower shall furnish
to Congress all notices, demands or other materials concerning such
Indebtedness, promptly after receipt thereof or concurrently with the
sending thereof, as the case may be."
6. Net Worth. Section 4.14 of the Covenant Supplement to the Accounts
Agreement is hereby deleted in its entirety and the following substituted
therefor:
"4.14 Net Worth. Borrower shall, at all times, maintain a
Consolidated Net Worth of not less than $5,000,000; provided, that, in the
event of any sale or issuance of capital stock by Borrower or its
shareholders, on and after the effective date of such
-3-
<PAGE> 52
sale or issuance, Borrower shall, at all times, maintain a Consolidated
Net Worth of not less than the amount equal to sum of: (a) $5,000,000 plus
(b) fifty (50%) percent of the net cash proceeds (after deducting
underwriting commissions and discounts, if any, and all other expenses
related directly to such sale or issuance) received by Borrower pursuant
to the sale or issuance of such capital stock.:
7. Working Capital. Section 4.15 of the Covenant Supplement to the
Accounts Agreement is hereby deleted in its entirety and the following
substituted therefor:
"4.15 Working Capital. Borrower shall at all times maintain a
Consolidated Working Capital of not less than $3,000,000".
8. Capital Expenditures. Section 4.16 of the Covenant Supplement is hereby
amended by deleting the reference to the figure "$2,500,000" contained therein
and substituting the following therefor: "$5,000,000".
9. Additional Representations and Warranties. In addition to the
continuing representations and warranties heretofore or hereafter made by
Borrower to Congress pursuant to the Financing Agreements, Borrower hereby
represents and warrants to Congress as follows (which representations,
warranties and covenants are continuing and shall survive the execution and
delivery hereof and shall be incorporated into and made a part of the Financing
Agreements):
(a) No Event of Default exists on the date of this Amendment
(after giving effect to the amendments to the Financing Agreements made by this
Amendment).
(b) This Amendment has been duly executed and delivered by
Borrower and is in full force and effect as of the date hereof, and the
agreements and obligations of Borrower contained herein constitute legal, valid
and binding obligations of Borrower enforceable against Borrower in accordance
with their respective terms.
10. Conditions Precedent. The effectiveness of the amendments contained
herein shall be subject to the receipt by Congress of each of the following, in
form and substance satisfactory to Congress and its counsel:
(a) evidence that (i) Borrower has paid $2,500,000 to Buhl in
payment in full of all Indebtedness of Borrower to Buhl evidenced by or arising
under the Zero Coupon Note and the Buhl Agreements, and (ii) except for
obligations under the Warrant Purchase Agreement, dated as of July 31, 1992, by
and among
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<PAGE> 53
Borrower, EFJ Holding, Weksel, Davies & Co., Inc. and Buhl, Borrower and EFJ
Holding have no further obligations or liabilities to Buhl (and including any
successors or assigns) pursuant to the Buhl Agreements or otherwise, including,
but not limited to, a copy of the Zero Coupon Note marked "paid";
(b) the originals of any promissory notes or other instruments
made or issued by Weksel and Robert H. Davies payable to Borrower to evidence
their Indebtedness to Borrower, duly endorsed by Borrower as payable to the
order of Congress;
(c) the consent of any participants in the financing arrangements
of Congress with Borrower to the amendments provided for herein;
(d) an original of the Amended and Restated Term Promissory Note,
dated of even date herewith, made by Borrower payable to Congress in the
original principal amount of $5,300,000, duly authorized, executed and delivered
by Borrower;
(e) evidence that Borrower has obtained all required consents or
approvals of any persons other than Congress to the loans from Borrower to
Weksel and Robert H. Davies in the amount of $1,500,000 as contemplated under
Section 5 above and the amendments contained herein;
(f) no Event of Default shall have occurred and be continuing and
no event shall have occurred or condition be existing and continuing which, with
notice or passage of time or both, would constitute an Event of Default; and
(g) an original of this Amendment, duly authorized, executed and
delivered by Borrower.
11. Effect of this Agreement. Except as modified pursuant hereto, no
other changes or modifications to the Financing Agreement are intended or
implied, and in all other respects the Financing Agreements are hereby
specifically ratified, restated and confirmed by the parties hereto as of the
date hereof. To the extent of a conflict between the terms of this Amendment and
the other Financing Agreements, the terms of this Amendment shall control.
12. Further Assurances. Borrower shall execute and deliver such
additional documents and take such additional actions as may be necessary or
desirable, as determined by Congress, to effectuate the provisions and purposes
of this Amendment.
13. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the laws of the State of New York.
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<PAGE> 54
14. Binding Effect. This Amendment shall be binding upon and inure to the
benefit of each of the parties hereto and their respective successors and
assigns.
15. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
Please sign the enclosed copy of this Amendment in the space provided
below, whereupon this Amendment, as so accepted by Congress, shall become a
binding agreement between Borrower and Congress.
Very truly yours,
E.F. JOHNSON COMPANY
By:
------------------------------------
Title:
---------------------------------
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
By: [SIG]
----------------------------------
Title: Asst. V.P.
-------------------------------
AMERICOM CORPORATION
By:
----------------------------------
Title:
-------------------------------
EFJ HOLDING CORP.
By:
----------------------------------
Title:
-------------------------------
- -------------------------------------
WILLIAM WEKSEL, individually
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<PAGE> 55
14. Binding Effect. This Amendment shall be binding upon and inure to the
benefit of each of the parties hereto and their respective successors and
assigns.
15. Counterparts. This Amendment may be executed in any number
of counterparts, but all of such counterparts shall together constitute but one
and the same agreement. In making proof of this Amendment, it shall not be
necessary to produce or account for more than one counterpart thereof signed by
each of the parties hereto.
Please sign the enclosed copy of this Amendment in the space provided
below, whereupon this Amendment, as so accepted by Congress, shall become a
binding agreement between Borrower and Congress.
Very truly yours,
E.F. JOHNSON COMPANY
By: /s/ WILLIAM WEKSEL
------------------------------------
Title:
---------------------------------
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
By:
----------------------------------
Title:
-------------------------------
AMERICOM CORPORATION
By: /s/ WILLIAM WEKSEL
----------------------------------
Title:
-------------------------------
EFJ HOLDING CORP.
By: /s/ WILLIAM WEKSEL
----------------------------------
Title:
-------------------------------
/s/ WILLIAM WEKSEL
- -------------------------------------
WILLIAM WEKSEL, individually
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<PAGE> 56
AMENDMENT NO. 3 TO FINANCING AGREEMENTS
August 4, 1994
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation, a California corporation (together with
its successors and assigns, "Congress") and E.F. Johnson Company, a Minnesota
corporation (as survivor by merger with EFJ Acquisition Corp., a Delaware
corporation, together with its successors and assigns, "Borrower") have entered
into certain financing arrangements as set forth in the Accounts Financing
Agreement [Security Agreement], dated as of July 31, 1992, between Congress and
Borrower (together with the various supplements thereto, the "Accounts
Agreement"), and various other agreements, documents and instruments executed
and/or delivered in connection therewith or related thereto, as amended pursuant
to Amendment No. 1 to Financing Agreements, dated January 26, 1993 and Amendment
No. 2 to Financing Agreements, dated as of October 4, 1993 (together with the
Accounts Agreement, as the same are amended hereby and may hereafter be further
amended, modified, supplemented, extended, renewed, restated or replaced,
collectively, the "Financing Agreements").
Borrower has requested that Congress agree to certain amendments to the
Financing Agreements and Congress is willing to agree to such amendments,
subject to the terms and conditions contained herein. Borrower and Congress
desire and intend to evidence such amendments by this letter agreement.
In consideration of the foregoing, the parties hereto agree as follows:
1. Definitions. All capitalized terms used herein shall have the meanings
assigned thereto in the other Financing Agreements, unless otherwise defined
herein.
2. Inventory Loans. Section 3 of the letter agreement with respect to
inventory loans, dated as of July 31, 1992, between Congress and Borrower (the
"Inventory Loan Letter") is hereby deleted in its entirety and the following
substituted therefor:
<PAGE> 57
"3. Except in your sole discretion, the outstanding aggregate
principal amount of loans by you to us hereunder shall not exceed, at
any time, the lower of (a) the aggregate amount of the above percentages
of Value of Eligible Inventory or (b) $4,000,000."
3. Limit on Advances on Certain Foreign Accounts. The reference to the
figure "$1,000,000" contained in the second paragraph of the letter agreement
with respect to the limit on advances on certain foreign accounts, dated as of
July 31, 1992, between Congress and Borrower (the "Foreign Accounts Letter") is
hereby deleted and the following figure substitute therefor: "$2,500,000".
4. Indebtedness. Section 4.6(i) of the Covenant Supplement to the
Accounts Agreement is hereby deleted in its entirety and the following
substituted therefor:
"(i) contingent Indebtedness of Borrower to National American
Insurance Company, the Security Insurance Co. of Hartford, Connecticut
Indemnity Company, Boston Old Colony Insurance Company, Commercial
Insurance Company of Newark, New Jersey, Fireman's Insurance Company of
Newark, New Jersey, First Insurance Company of Hawaii, Ltd., Glens Falls
Insurance Company, Kansas City Fire and Marine Insurance Company,
National-Ben Franklin Insurance Company of Illinois, National-Ben
Franklin Insurance Company of Michigan, Niagara Fire Insurance Company,
The Buckeye Union Insurance Company, The Continental Insurance Company,
The Continental Insurance Company of Canada or The Fidelity and Casualty
Company of New York (collectively, the "Sureties", and individually, a
"Surety") pursuant to certain agreements of indemnity between Borrower
and such parties, true, correct and complete copies of which have been
delivered by Borrower to Congress, to reimburse and indemnify the
Sureties for amounts paid by any of them under bonds or other
obligations of suretyship which they have issued for the benefit of
Borrower to Account Debtors; provided, that:
(i) Congress shall receive not less than two (2) business days
prior written notice of the issuance of any such bonds or other
obligations of suretyship by any of the Sureties identifying the
contract of Borrower to which such bond or other obligation relates, the
total amount payable to Borrower under the contract, the amount of the
bond, the liability of Borrower to the Surety in connection therewith,
together with such other information with respect thereto as Congress
may at any time and from time to time require;
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<PAGE> 58
(ii) no Event of Default, or act, condition or event which with
notice or passage of time both would constitute an Event of Default
shall exist or have occurred;
(iii) the aggregate amount of such contingent Indebtedness
outstanding at any one time shall not exceed $5,000,000; and
(iv) Borrower shall furnish to Congress all notices, demands or
other materials concerning such Indebtedness either received by Borrower
or on its behalf, promptly after receipt thereof, or sent by Borrower,
or on its behalf, concurrently with the sending thereof, as the case may
be."
5. Transactions with Affiliates. Section 4.9(b)(ii) of the Covenant
Supplement to the Accounts Agreement is hereby deleted in its entirety and the
following substituted therefor:
"(ii) Borrower may make payments to Weksel, Davies & Co., Inc.
for fees for executive management and financial consulting services
rendered by Weksel, Davies & Co., Inc. to Borrower in accordance with
the Executive Management Services Agreement, dated of even date
herewith, between Borrower and Weksel, Davies & Co., Inc.; provided,
that, (A) in no event shall the amount of such fees paid by Borrower to
Weksel, Davies & Co., Inc. exceed (I) $250,000 per annum, payable in
twelve (12) equal monthly installments, for the period from the date
hereof to October 31, 1993, (II) $720,000 per annum, payable in twelve
(12) equal monthly installments, for the period from November 1, 1993 to
June 30, 1994, and (III) $840,000 per annum, commencing July 1, 1994,
payable in twelve (12) equal monthly installments and (B) no Event of
Default or act, condition or event which with notice or passage of time
or both would constitute an Event of Default shall exist or have
occurred and"
6. Additional Representations and Warranties. In addition to the
continuing representations and warranties heretofore or hereafter made by
Borrower to Congress pursuant to the Financing Agreements, Borrower hereby
represents and warrants to Congress as follows (which representations,
warranties and covenants are continuing and shall survive the execution and
delivery hereof and shall be incorporated into and made a part of the Financing
Agreements):
(a) No Event of Default exists on the date of this Amendment
(after giving effect to the amendments to the Financing Agreements made by this
Amendment).
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<PAGE> 59
(b) This Amendment has been duly executed and delivered by
Borrower and is in full force and effect as of the date hereof, and the
agreements and obligations of Borrower contained herein constitute legal, valid
and binding obligations of Borrower enforceable against Borrower in accordance
with their respective terms.
7. Conditions Precedent. The effectiveness of the amendments contained
herein shall be subject to the receipt by congress of each of the following, in
form and substance satisfactory to Congress and its counsel:
(a) the consent of any participants in the financing arrangements
of Congress with Borrower to the amendments provided for herein;
(b) no Event of Default shall have occurred and be continuing and
no event shall have occurred or condition be existing and continuing which, with
notice or passage of time or both, would constitute an Event of Default; and
(c) an original of this Amendment, duly authorized, executed and
delivered by Borrower.
8. Effect of this Agreement. Except as modified pursuant hereto, no
other changes or modifications to the Financing Agreement are intended or
implied, and in all other respects the Financing Agreements are hereby
specifically ratified, restated and confirmed by the parties hereto as of the
date hereof. To the extent of a conflict between the terms of this Amendment and
the other Financing Agreements, the terms of this Amendment shall control.
9. Further Assurances. Borrower shall execute and deliver such
additional documents and take such additional actions as may be necessary or
desirable, as determined by Congress, to effectuate the provisions and purposes
of this Amendment.
10. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the laws of the State of New York.
11. Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
12. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or
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<PAGE> 60
account for more than one counterpart thereof signed by each of the parties
hereto.
Please sign the enclosed copy of this Amendment in the space provided
below, whereupon this Amendment, as so accepted by Congress, shall become a
binding agreement between Borrower and Congress.
Very truly yours,
E.F. Johnson Company
By: [SIG]
------------------------------------
Title: Vice President, Finance
---------------------------------
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
By: [SIG]
----------------------------------
Title: Asst. V.P.
-------------------------------
AMERICOM CORPORATION
By: [SIG]
----------------------------------
Title:
-------------------------------
EFJ PARTNERS, a general
partnership
By: [SIG]
----------------------------------
Title: General Partner
[SIG]
- -------------------------------------
WILLIAM WEKSEL, individually
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<PAGE> 61
AMENDMENT NO. 4 TO FINANCING AGREEMENTS
March 3, 1995
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation, a California corporation (together with
its successors and assigns, "Congress") and E.F. Johnson Company, a Minnesota
corporation (as survivor by merger with EFJ Acquisition Corp., a Delaware
corporation, together with its successors and assigns,, "Borrower") have entered
into certain financing arrangements as set forth in the Accounts Financing
Agreement [Security Agreement], dated July 31, 1992, between Congress and
Borrower (the "Accounts Agreement"), the Covenant Supplement to Accounts
Financing Agreement [Security Agreement], dated July 31, 1992, between Congress
and Borrower (the "Covenant Supplement"), and various other agreements,
documents and instruments executed and/or delivered in connection therewith or
related thereto, as amended pursuant to Amendment No. 1 to Financing Agreements,
dated January 26, 1993, Amendment No. 2 to Financing Agreements, dated as of
October 4,1993 and Amendment No. 3 to Financing Agreements dated August 4, 1994
(together with the Accounts Agreement, as the same are amended hereby and may
hereafter be further amended, modified, supplemented, extended, renewed,
restated or replaced, collectively, the "Financing Agreements").
Borrower has requested that Congress agree to certain amendments to the
Financing Agreements and Congress is willing to agree to such amendments,
subject to the terms and conditions contained herein. Borrower and Congress
desire and intend to evidence such amendments by this Amendment.
In consideration of the foregoing, the parties hereto agree as follows:
1. Definitions.
(a) Additional Definitions. As used herein, the following terms
shall have the respective meanings given to them below and the Financing
Agreements are hereby amended to include, in addition and not in limitation,
each of the following:
<PAGE> 62
(i) "Amendment No. 4" shall mean the Amendment No. 4 to
Financing Agreements, dated as of even date hereof, between Congress, Borrower,
EFJ Partners and Weksel, as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
(ii) "Bonded Contracts" shall mean agreements by Borrower for
the purchase of goods or rendition of services in the ordinary course of
business, for which a Surety has any liability for any payments or performance
by Borrower owing to an Account Debtor pursuant to a bond, indemnity, guarantee,
contract of suretyship, other instrument or otherwise.
(b) Amendments to Definitions.
(i) All references to the term "Maximum Credit" in the
Financing Agreements shall be deemed and each such reference is hereby amended
to mean $35,000,000.
(ii) All references to the term "Term Note" in the Financing
Agreements shall be deemed and each such reference is hereby amended to mean the
Second Amended and Restated Term Promissory Note, dated of even date herewith,
made by Borrower, payable to Congress, in the original principal amount of
$8,400,000, as the same now exists or may hereinafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
(iii) All references to the term "Renewal Date" in the
Financing Agreements shall be deemed and each such reference is hereby amended
to mean "March 3, 1998".
(iv) All references to the term "Surety" shall be deemed and
each such reference is hereby amended to mean any person who at any time becomes
liable for any payments or performance by Borrower owing to an Account Debtor
pursuant to a bond, indemnity, guarantee, contract of suretyship, or other
instrument or otherwise, including, but not limited to, Hartford Fire Insurance
Company or any of its insurance company affiliates (whether pursuant to the
arrangements of Borrower in connection with the General Indemnity Agreement,
dated December 24, 1994, by Borrower in favor of them or otherwise).
(v) All references to the term "Consolidated Working Capital"
shall be deemed and each such reference is hereby amended to mean, as to any
Person, at any time, on a consolidated basis for such Person and its
Subsidiaries, the amount equal to the difference between: (a) the aggregate net
book value of all assets of such Person and its Subsidiaries, on a consolidated
basis, calculating the book value of inventory for this purpose on a
first-in-first-out basis, which would, in accordance with GAAP, be classified as
current assets and (b) all Indebtedness of such Person and its Subsidiaries, on
a consolidated basis, which would in accordance with GAAP, be
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<PAGE> 63
classified as current liabilities; provided that, for purposes of this
definition, current liabilities (A) shall include Indebtedness of Borrower to
Congress arising pursuant to the revolving-loans by Congress to Borrower under
the Accounts Agreement and the other Financing Agreements and (B) shall not
include amounts due from Borrower to Motorola pursuant to the existing license
agreement between Borrower and Motorola (as in effect on the date hereof).
(c) Interpretation. All capitalized terms used herein shall have
the meanings assigned thereto in the other Financing Agreements, unless
otherwise defined herein.
2. Eligible Accounts. Section 1.15 of the Covenant Supplement is hereby
deleted in its entirety and the following substituted therefor:
"1.15 "Eligible Accounts" shall mean Accounts created by Borrower in
the ordinary course of its business arising out of the sale of goods
or rendition of services, which are and at all times shall continue
to be acceptable to Congress in all respects. Standards of
eligibility may be fixed and revised from time to time solely by
Congress in its exclusive judgment. In determining eligibility,
Congress may, but need not, rely on agings, reports and schedules of
Accounts furnished to Congress by Borrower, but reliance by Congress
thereon from time to time shall not be deemed to limit Congress'
right to revise standards of eligibility at any time as to both
present and future Accounts. In general, an Account shall not be
deemed eligible unless: (a) the Account Debtor on such Account is at
all times and continues to be acceptable to Congress, (b) such
Account complies in all respects with the representations, covenants
and warranties set forth herein and in the other Financing
Agreements, (c) more than sixty (60) days have elapsed since the
original due date of such Account, but in any event no more than one
hundred eighty (180) days have elapsed since the original invoice
date of such Account, (d) if it is a Foreign Account, such Foreign
Account is secured or payable by a letter of credit or acceptance
issued by a bank and on terms acceptable to Congress (the original
of which has been delivered to Congress and the issuer of which has
been notified of the assignment thereof to Congress) or the Foreign
Account is subject
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<PAGE> 64
to credit insurance payable to Congress issued by an insurer and on
terms and in an amount acceptable to Congress, (e) if it is a
Government Account, Borrower shall have complied in all respects
with the Federal Assignment of Claims Act of 1940, as amended, and
any state or local equivalent in a manner satisfactory to Congress
with respect to such Account, (f) the Account is not owed by an
Account Debtor who has or whose Affiliates have more than fifty
(50%) percent of its and their Accounts outstanding and unpaid more
than sixty (60) days past the original due date of the invoice of
such Account, but in any event, no more than one hundred (180) days
have elapsed since the original invoice date of such Account, and
(g) as to the Accounts arising from the sale of goods or rendition
of services by Borrower pursuant to a Bonded Contract, no more than
$5,000,000 of such Accounts which otherwise constitute Eligible
Accounts shall be deemed Eligible Accounts. Any accounts which
Congress determines to be ineligible or unacceptable for
availability purposes at any time shall nevertheless be and remain
at all times part of the Collateral."
3. Loans on Accounts. Section 2.1 of the Accounts Agreement is hereby
deleted in its entirety and the following substituted therefor:
"2.1 You shall, in your discretion, make loans to us from time to
time, at our request, of up to the following percentages of the Net
Amount of Eligible Accounts (or such greater or lesser percentage as
you shall in your sole discretion determine from time to time): (a)
eighty-five (85%) percent of the Net Amount of Eligible Accounts
(other than Accounts arising from the sale or installation of radio
systems or networks) and (b) seventy (70%) percent of the Net Amount
of Eligible Accounts arising from the sale or installation of radio
systems or networks; provided that, in the event that the
Consolidated Net Worth of Borrower does not, at any time, equal or
exceed the sum of the amounts set forth on Exhibit A to Amendment
No. 4 for the applicable period set forth therein, plus ninety (90%)
percent of the net cash proceeds received by Borrower pursuant to
the sale or issuance of capital
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<PAGE> 65
stock (after deducting underwriting commissions and discounts, if
any, and all other expenses related directly to such sale or
issuance), you may, at your option, either reduce such percentage
with respect to the Net Amount of Eligible Accounts arising from the
sale or installation of radio systems or networks or no longer
consider such Accounts as Eligible Accounts."
4. Interest. The first three sentences of Section 3.1 of the Accounts
Agreement are hereby deleted in their entirety and the following substituted
therefor:
"3.1 Interest shall be payable by us to you on the first day of
each month upon the closing daily balances in our loan account
for each day during the immediately preceding month, at a rate
equal to one and three-quarters of one percent (1-3/4%) per annum
in excess of the prime commercial interest rate from time to time
publicly announced by CoreStates Bank, N.A., Philadelphia,
Pennsylvania, whether or not such announced rate is the best rate
available at such bank. The interest rate charged hereunder shall
increase or decrease, respectively, in said prime loan rate,
effective on the first day of the month after any change in said
prime loan rate based on the prime loan rate in effect on the
last day of the month in which any such change occurs."
5. Term Loan. As of the close of business on March 1, 1995, the
outstanding principal amount of the Term Loan was $2,797,222.26. Subject to the
terms and conditions contained herein, upon the effective date hereof, Congress
shall make an additional advance to Borrower in the amount of $5,602,777.74, so
that the outstanding principal amount of the Term Loan pursuant to Section 3.2
of the Covenant Supplement as of the date hereof shall be $8,400,000. Such Term
Loan shall be (a) evidenced by the Second Amended and Restated Term Promissory
Note executed and delivered by Borrower to Congress concurrently herewith, (b)
repaid, together with interest and other amounts due thereunder, in accordance
with the terms and provisions of such Note, the Accounts Agreement and the other
Financing Agreements and (c) secured by all of the Collateral.
6. inventory Loans. Sections 2 and 3 of the letter agreement with
respect to inventory loans, dated as of July 31, 1992, between Congress and
Borrower (the "Inventory Loan Letter") are hereby deleted in its entirety and
the following substituted therefor:
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<PAGE> 66
"2. In addition to loans which may be made by you to us, pursuant
to Section 2 of the Accounts Agreement, you shall, in your
discretion, make loans to us from time to time, at our request,
of up to the following percentages of Value of the following
categories of Eligible Inventory (or such greater or less
percentages thereof as you shall, in your sole discretion,
determine from time to time):
(a) sixty (60%) percent of the Value of Eligible Inventory
consisting of radio finished goods; plus
(b) forty (40%) percent of the Value of Eligible Inventory
consisting of raw materials and purchased parts; plus
(c) thirty-five (35%) percent of the Value of Eligible
Inventory consisting of accessories; plus
(d) fifty (50%) percent of the Value of Eligible Inventory
consisting of component products; plus
(e) ten (10%) percent of the Value of Eligible Inventory
consisting of service parts.
3. Except in your sole discretion, the outstanding aggregate
principal amount of loans by you to us hereunder shall not
exceed, at any time, the lower of (a) the aggregate amount of the
above percentages of Value of Eligible Inventory or (b)
$8,000,000."
7. Line Increase Fee. Borrower shall pay to Congress a line increase
fee in the amount of $150,000, which amount shall be payable simultaneously with
the execution hereof and shall be deemed fully earned as of the date hereof.
Such line increase fee, may, at Congress' option be charged directly to any
account of Borrower maintained with Congress.
8. Unused Line Fee. Section 3.5 of the Accounts Agreement is hereby
deleted in its entirety and the following substituted therefor:
"3. If the average outstanding daily principal balance of all
loans by you to us under this Agreement or any Supplement hereto
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<PAGE> 67
in any calendar month shall be less than $30,000,000, we shall pay
to you on or before the tenth (10th) day of the next succeeding
calendar month an unused line fee equal to one-half of one percent
(1/2%) per annum upon the amount by which $30,000,000 exceeds the
average outstanding daily principal balance of all such loans in
respect of such month."
9. Letters of Credit.
(a) The reference to $4,000,000 in Section 1.5 of the Trade
Financing Agreement Supplement to Accounts Financing Agreement [Security
Agreement], dated March 18, 1993, between Congress and Borrower (the "Trade
Financing Agreement") is hereby deleted and the following substituted therefor:
"$5,000,000".
(b) Section 1.3 of the Trade Financing Agreement is hereby
deleted in its entirety and the following substituted therefor:
"1.3 No Credits shall be available unless on the date of the
proposed issuance of any Credit, the revolving loans available to
Borrower under the Agreement (subject to the Maximum Credit) are
equal to or greater than: (i) if the proposed Credit is for the
purpose of purchasing Eligible Inventory, the sum of (A) the
applicable percentage with respect to the type of Eligible Inventory
being purchased as set forth in Section 2 of the letter agreement
with respect to the inventory loans between you and us of the cost
of such Eligible Inventory, plus (B) freight, taxes, duty and other
amounts which you estimate must be paid in connection with such
Inventory upon arrival and for delivery to one of our locations for
Eligible Inventory within the United States of America and (ii) if
the proposed Credit is for any other purpose, an amount equal to one
hundred (100%) percent of the face amount thereof and all other
commitments and obligations made or incurred by you with respect
thereto."
(c) Section 1.8 of the Trade Financing Agreement is hereby deleted in
its entirety and the following substituted therefor:
"1.8. In addition to all other fees, charges and expenses payable
under the Agreement, this Supplement, and to any bank or other
issuer or correspondent in connection with
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<PAGE> 68
any Credit, we agree to pay you a letter of credit fee at a rate
equal to two and one-half (2 1/2%) percent per annum on the daily
outstanding balance of all outstanding Credits for the immediately
preceding month (or part thereof), payable in arrears as of the
first day of each succeeding month. Such letter of credit fee shall
be calculated on the basis of a three hundred sixty (360) day year
and actual days elapsed and the obligation of Borrower to pay such
fee shall survive the termination or non-renewal of the Agreement.
We also agree to pay you, your and any bank's, other issuer's or
correspondent's customary charges for amendments, extensions and
administration relating to any Credit, which charges shall be due
and payable on the first day of the month following the date of
incurrence and, at your option may be changed to any of our
account(s) maintained by you."
10. Indebtedness.
Section 4.6(i) of the Covenant Supplement is hereby deleted in
its entirety and the following substituted therefor:
"(i) contingent Indebtedness of Borrower to Sureties pursuant to
certain agreements of indemnity between Borrower and such parties,
true, correct and complete copies of which have been delivered by
Borrower to Congress, to reimburse and indemnify the Sureties for
amounts paid by any of them under any bond, indemnity, guarantee,
contract of suretyship or other instrument which any Surety has
issued for the benefit of Borrower to an Account Debtor; provided,
that:
(i) Congress shall receive not less than two (2) business days
prior written notice of the issuance of any such bond, indemnity,
guarantee, contract of suretyship, other instrument or other
obligation by any of the Sureties, which notice shall identify the
contract of Borrower to which such bond, indemnity, guarantee,
contract of suretyship, other instrument or other obligation
relates, the total amount payable to Borrower under the contract,
the amount of the bond, indemnity, guarantee, contract of
suretyship, other instrument or other obligation, the liability of
Borrower to the Surety in
-8-
<PAGE> 69
connection therewith, a copy of the contract of Borrower to which
such bond or other obligation relates, together with such other
information with respect thereto as Congress may at any time and
from time to time require;
(ii) at the time of and after incurring such indebtedness, no
Event of Default, or act, condition or event which with notice or
passage of time both would constitute an Event of Default shall
exist or have occurred;
(iii) the aggregate amount of such contingent Indebtedness
outstanding at any one time shall not exceed $20,000,000;
(iv) all Inventory identifiable to a Bonded Contract shall be
segregated from the other Inventory of Borrower and shall not be
considered Eligible Inventory;
(v) on a monthly basis or more frequently as Congress may
request, Congress shall receive a report of all of the outstanding
contingent Indebtedness of Borrower to any Surety, including the
amount of the outstanding Accounts arising under Bonded Contracts,
the amount of the bonds, indemnity, guarantee, contract of
suretyship or other instrument or the obligations then outstanding,
the scope and nature of such bonds or the obligation, and such other
information with respect thereto as Congress may request;
(vi) Borrower shall furnish to Congress all notices, demands or
other materials concerning such Indebtedness either received by
Borrower or on its behalf, promptly after receipt thereof, or sent
by Borrower, or on its behalf, concurrently with the sending
thereof, as the case may be."
11. Net Worth. Section 4.14 of the Covenant Supplement is hereby
deleted in its entirety and the following substituted therefor:
"4.14 Net Worth. Borrower shall, at the end of each fiscal
quarter, have a Consolidated Net Worth of not less than $11,000,000;
provided, that, in the event of any sale or
-9-
<PAGE> 70
issuance of capital stock by Borrower or its shareholders, on and
after the effective date of such sale or issuance, Borrower shall,
at the end of each fiscal quarter, have a Consolidated Net Worth of
not less than the amount equal to the sum of: (a) $11,000,000 plus
(b) seventy-five (75%) percent of the net cash proceeds (after
deducting underwriting commissions and discounts, if any, and all
other expenses related directly to such sale or issuance) received
by Borrower pursuant to the sale or issuance of such capital stock."
12. Working Capital. Section 4.15 of the Covenant Supplement is hereby
deleted in its entirety and the following substituted therefor:
"4.15 Working Capital. Borrower shall, at the end of each fiscal
quarter, have Consolidated Working Capital of not less than
$2,000,000."
13. Termination.
(a) Section 9.1 of the Accounts Agreement is hereby deleted in
its entirety and the following substituted therefor:
"9.1 This Agreement shall become effective upon acceptance by
you and shall continue in full force and effect for a term ending
March 3, 1998 (the "Renewal Date") and from year to year thereafter,
unless sooner terminated pursuant to the terms hereof. Either party
may terminate this Agreement on the Renewal Date or on the
anniversary of the Renewal Date in any year by giving the other
party at least sixty (60) days prior written notice by registered or
certified mail, return receipt requested, and, in addition, you
shall have the right to terminate this Agreement immediately at any
time upon the occurrence and continuation of an Event of Default. No
termination of this Agreement, however, shall relieve or discharge
us of our duties, obligations and covenants hereunder until all
Obligations have been paid in full, and your continuing security
interest in the Collateral shall remain in effect until such
Obligations have been fully discharged."
(b) Section 9.2 of the Accounts Agreement is hereby deleted in
its entirety and the following substituted therefor:
-10-
<PAGE> 71
"9.2 If you terminate this Agreement upon the occurrence of an Event
of Default or at our request, in view of the impracticability and
extreme difficulty of ascertaining actual damages and by mutual
agreement of the parties as to a reasonable calculation of your lost
profits as a result thereof, we hereby agree that we shall pay to
you, upon the effective date of such termination, an early
termination fee in an amount equal to: (a) two percent (2%) of the
Maximum Credit if such termination occurs on or prior to March 3,
1996; (b) one percent (1%) of the Maximum Credit if such termination
occurs after March 3, 1996 but on or prior to March 3, 1997; or (c)
one percent (1%) of the Maximum Credit if such termination occurs
after March 3, 1997 but prior to the Renewal Date. Such termination
fee shall be presumed to be the amount of damages sustained by said
early termination and we agree that it is reasonable under the
circumstances currently existing. The early termination fee provided
for in this paragraph 9.2 shall be deemed included in the
Obligations."
14. Capital Expenditures. Section 4.16 of the Covenant Supplement is
hereby deleted in its entirety and the following substituted therefor:
"Intentionally omitted."
15. Additional Representations and Warranties. In addition to the
continuing representations and warranties heretofore or hereafter made by
Borrower to Congress pursuant to the Financing Agreements, Borrower hereby
represents and warrants to Congress as follows (which representations,
warranties and covenants are continuing and shall survive the execution and
delivery hereof and shall be incorporated into and made a part of the Financing
Agreements):
(a) No Event of Default exists on the date of this Amendment
(after giving effect to the amendments to the Financing Agreements made by this
Amendment).
(b) Borrower has obtained or received all required consents and
approvals of any persons other than Congress in connection with the amendments
contemplated by the Amendment, except for any consent or approval if the failure
to obtain or receive the same will not have a material adverse effect on the
business of Borrower.
(c) No material adverse change in the business, operations,
profits or prospects of Borrower or in the condition
-11-
<PAGE> 72
of the assets of Borrower shall have occurred since the date of the last field
examination by Congress of Borrower.
(d) This Amendment has been duly executed and delivered by
Borrower and is in full force and effect as of the date hereof, and the
agreements and obligations of Borrower contained herein constitute legal, valid
and binding obligations of Borrower enforceable against Borrower in accordance
with their respective terms.
16. Conditions Precedent. The effectiveness of the amendments contained
herein shall be subject to the satisfaction of the following conditions
precedent in a manner satisfactory to Congress and its counsel:
(a) Borrower shall have received the consent of any participants
in the financing arrangements of Congress with Borrower to the amendments
provided for herein;
(b) no Event of Default shall have occurred and be continuing and
no event shall have occurred or condition be existing and continuing which, with
notice or passage of time or both, would constitute an Event of Default;
(c) Congress shall have received evidence, in form and substance
satisfactory to Congress, that Borrower has obtained all required consents and
approvals of any persons other than Congress in connection with the amendments
contemplated by this Amendment, except for any consent or approval if the
failure to obtain or receive the same will not have a material adverse effect on
the business of Borrower;
(d) Congress shall have received, in form and substance
satisfactory to Congress, an original of the Second Amended and Restated Term
Promissory Note, dated of even date herewith, made by Borrower payable to
Congress in the original principal amount of $8,400,000, duly authorized,
executed and delivered by Borrower; and
(e) Congress shall have received, in form and substance
satisfactory to Congress, an original of this Amendment, duly authorized,
executed and delivered by Borrower, EFJ Partners, William Weksel and Robert H.
Davies.
17. Effect of this Agreement. Except as modified pursuant hereto, no
other changes or modifications to the Financing Agreement are intended or
implied, and in all other respects the Financing Agreements are hereby
specifically ratified, restated and confirmed by the parties hereto as of the
date hereof. To the extent of a conflict between the terms of this Amendment and
the other Financing Agreements, the terms of this Amendment shall control.
-12-
<PAGE> 73
18. Further Assurances. Borrower shall execute and deliver such
additional documents and take such additional actions as may be necessary or
desirable, as determined by Congress, to effectuate the provisions and purposes
of this Amendment.
19. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the laws of the State of New York.
20. Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
21. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
Please sign the enclosed copy of this Amendment in the space provided
below, whereupon this Amendment, as so accepted by Congress, shall become a
binding agreement between Borrower and Congress.
Very truly yours,
E.F. JOHNSON COMPANY
By: [SIG]
----------------------------------
Title:
-------------------------------
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
By: [SIG]
----------------------------------
Title:
-------------------------------
EFJ PARTNERS, a general
partnership
By: [SIG]
----------------------------------
Title: General Partner
[SIG]
- -------------------------------------
WILLIAM WEKSEL, individually
-13-
<PAGE> 74
EXHIBIT A
to
AMENDMENT NO. 4 TO FINANCING AGREEMENTS
<TABLE>
<CAPTION>
Time Period Consolidated Net Worth*
----------- ----------------------
<S> <C>
12/31/94 - 3/30/95 11,946,000
3/31/95 - 6/29/95 11,971,000
6/30/95 - 9/29/95 12,757,000
9/30/95 - 12/30/95 14,309,000
12/31/95 - 3/30/96 16,794,000
3/31/96 - 6/29/96 17,294,000
6/30/96 - 9/29/96 17,794,000
9/30/96 - 12/30/96 18,294,000
12/31/96 - 3/30/97 18,794,000
3/31/97 - 6/29/97 19,294,000
6/30/97 - 9/29/97 19,794,000
9/30/97 - 12/30/97 20,294,000
12/31/97 and at all 20,794,000
times thereafter
</TABLE>
* For purposes of this Exhibit A, Consolidated Net Worth does not include
any net cash proceeds received by Borrower pursuant to the sale or issuance of
capital stock.
<PAGE> 75
AMENDMENT No. 5 TO FINANCING AGREEMENTS
March 14, 1995
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation, a California corporation (together with
its successors and assigns, "Congress") and E.F. Johnson Company, a Minnesota
corporation (as survivor by merger with EFJ Acquisition Corp., a Delaware
corporation, together with its successors and assigns, "Borrower") have entered
into certain financing arrangements as set forth in the Accounts Financing
Agreement [Security Agreement], dated July 31, 1992, between Congress and
Borrower (the "Accounts Agreement"), the Covenant Supplement to Accounts
Financing Agreement [Security Agreement], dated July 31, 1992, between Congress
and Borrower (the "Covenant Supplement"), and various other agreements,
documents and instruments executed and/or delivered in connection therewith or
related thereto, as amended pursuant to Amendment No. 1 to Financing Agreements,
dated January 26, 1993, Amendment No. 2 to Financing Agreements, dated as of
October 4, 1993, Amendment No. 3 to Financing Agreements, dated August 4, 1994,
Amendment No. 4 to Financing Agreements, dated March 3, 1995 (together with the
Accounts Agreement, as the same are amended hereby and may hereafter be further
amended, modified, supplemented, extended, renewed, restated or replaced,
collectively, the "Financing Agreements").
On November 29, 1994, Borrower formed a wholly-owned subsidiary known as
EFJ Communications Inc., a Minnesota corporation ("EFJ Communications").
Borrower has made arrangements with the United States Federal Communications
Commission ("FCC") to transfer to EFJ Communications the licenses issued by the
FCC to Borrower listed on Exhibit A hereto (collectively, the "FCC Licenses").
Borrower plans to issue and sell 925,850 shares of its Series I Class B
Preferred Shares ("Series I Preferred Stock") and a warrant to purchase up to
291,790 shares of the common stock of Borrower, to Securicor Communications
Inc., a Delaware corporation ("Securicor"), pursuant to the Stock Purchase
Agreement dated March 14, 1995 between Borrower and Securicor (the "Stock
Purchase Agreement"). In addition, Securicor may make unsecured subordinated
loans to Borrower. The Indebtedness of Borrower to Securicor arising pursuant to
such loans will be evidenced by 11% Junior Subordinated Notes in the form
included
<PAGE> 76
as an exhibit to the Stock Purchase Agreement (the "Junior Subordinated Notes").
Borrower has requested that Congress consent to the foregoing and agree
to certain amendments to the Financing Agreements and Congress is willing to
consent to the foregoing and agree to such amendments, subject to the terms and
conditions contained herein. Borrower and Congress desire and intend to evidence
such amendments by this Amendment.
In consideration of the foregoing, the parties hereto agree as follows:
1. Definitions.
(a) Additional Definitions. As used herein, the following terms
shall have the respective meanings given to them below and the Financing
Agreements are hereby amended to include, in addition and not in limitation,
each of the following:
(i) "Amendment No. 5" shall mean the Amendment No. 5 to
Financing Agreements, dated as of even date hereof, between Congress, Borrower,
EFJ Partners, Weksel and EFJ Communications, as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
(ii)"EFJ Communications" shall mean EFJ Communications Inc., a
Minnesota Corporation, and its successors and assigns.
(iii) "EFJ Communications Assets" shall mean the assets of
Borrower transferred to EFJ Communications, including, but not limited to, the
FCC licenses set forth on Exhibit A to Amendment No. 5.
(iv)"Junior Subordinated Notes" shall mean, collectively, the
11% Junior Subordinated Notes to be issued by Borrower payable to the order of
Securicor, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
(v) "Securicor" shall mean Securicor Communications Inc., a
Delaware corporation, and its successors and assigns.
(b) Interpretation. All capitalized terms used herein shall have the
meanings assigned thereto in the other Financing Agreements, unless otherwise
defined herein.
2. Consent to Transfer of Assets, Sale of Stock and to Securicor Loans.
Subject to the terms and conditions contained
- 2 -
<PAGE> 77
herein, Congress hereby consents to: (a) the formation by Borrower of EFJ
Communications, (b) the capital contribution by Borrower to EFJ Communications
as of the date hereof, (c) the transfer by Borrower to EFJ Communications of the
EFJ Communications Assets, (d) the issuance and sale of the Series I Preferred
Stock to Securicor pursuant to the Stock Purchase Agreement and (e) the loans by
Securicor to Borrower evidenced by the Junior Subordinated Notes.
3. Investments. Section 4.8 of the Covenant Supplement is hereby amended
by adding a new Section 4.8(e) thereto as follows:
"(e) the capital contribution by Borrower to EFJ Communications of the
EFJ Communications Assets."
4. Indebtedness. Section 4.6(j) of the Covenant Supplement is hereby
amended by adding a new Section 4.6(j) thereto as follows:
"(j) the unsecured Indebtedness of Borrower to Securicor arising after
the date hereof evidenced by the Junior Subordinated Notes as in effect
on the dates of the execution thereof, which Indebtedness is subject and
subordinate in right of payment to the right of Congress to receive the
prior full and final payment of all of the Obligations; provided, that:
(i) the total principal amount of such Indebtedness thereunder shall not
exceed $5,000,000, less all repayments of principal in respect thereof,
plus interest thereon at the rate set forth in the Junior Subordinated
Notes as in effect on the dates of the execution thereof, (ii) Congress
shall have received not less than five (5) business days prior written
notice of the intention to incur such Indebtedness, which notice shall
set forth in reasonable detail satisfactory to Congress, the amount of
such Indebtedness, the person or persons to whom such Indebtedness will
be owed, the interest rate, the schedule of repayments and maturity date
with respect thereto and such other information as Congress may
reasonably request with respect thereto, (iii) Congress shall have
received true, correct and complete copies of all agreements, documents
and instruments evidencing or otherwise related to such Indebtedness,
(iv) on and before the date of incurring such Indebtedness and after
giving effect thereto, no Event of Default, or event which with the
passage of time or both would constitute an Event of Default, shall
exist or have occurred and be continuing, (v) Congress shall have
received, in form and substance satisfactory to Congress, a
subordination agreement between Congress and Securicor, providing for
the terms of the subordination in right of payment of the Indebtedness
of Borrower to Securicor to the payment of the
- 3 -
<PAGE> 78
Obligations and related matters, duly authorized, executed and delivered
by each of Securicor and Borrower, (vi) the terms and conditions of such
Indebtedness shall, in all respects, be reasonably satisfactory to
Congress, (vii) Borrower shall not, directly or indirectly, make any
payments in respect of such Indebtedness, including, but not limited to,
any prepayments or other nonmandatory payments, except that until an
Event of Default, or event which with notice or passage of time or both
would constitute an Event of Default, shall exist or have occurred and
be continuing, Borrower may make regularly scheduled payments of
interest in accordance with the terms of the Junior Subordinated Notes
as in effect on the date of the execution thereof, (viii) Borrower shall
not, directly or indirectly, (A) amend, modify, alter or change the
terms of such Indebtedness or any agreement, document or instrument
related thereto, or (B) redeem, retire, defease, purchase or otherwise
acquire such Indebtedness, or set aside or otherwise deposit or invest
any sums for such purpose, and (ix) Borrower shall furnish to Congress
all notices, demands or other materials in connection with such
Indebtedness either received by Borrower or on its behalf, promptly
after the receipt thereof, or sent by Borrower or on its behalf,
concurrently with the sending thereof, as the case may be.
5. Additional Representations and Warranties. In addition to the
continuing representations and warranties heretofore or hereafter made by
Borrower to Congress pursuant to the Financing Agreements, Borrower hereby
represents and warrants to Congress as follows (which representations,
warranties and covenants are continuing and shall survive the execution and
delivery hereof and shall be incorporated into and made a part of the Financing
Agreements):
(a) No Event of Default exists on the date of this Amendment (after
giving effect to the amendments to the Financing Agreements made by this
Amendment).
(b) Borrower has obtained or received all required consents and
approvals of any persons other than Congress in connection with (i) the transfer
of the EFJ Communications Assets to EFJ Communications, (ii) the issuance and
sale of the Series I Preferred Stock to Securicor pursuant to the Stock Purchase
Agreement, (iii) the loans by Securicor to Borrower evidenced by the Junior
Subordinated Notes and (iv) the amendments contemplated by this Amendment.
(c) As of the date hereof, Borrower is the direct and beneficial
owner and holder of one hundred (100%) percent of all of the issued and
outstanding shares of common stock of EFJ
- 4 -
<PAGE> 79
Communications, free and clear of all claims and encumbrances, other than the
liens of Congress and restrictions under any agreements among the stockholders
of EFJ Communications. All such shares are fully paid and non-assessable.
(d) No court of competent jurisdictions has issued any injunction,
restraining order or other order which prohibits consummation of the
transactions consented to by Congress herein and no governmental or other action
or proceeding has been threatened or commenced, seeking any injunction,
restraining order or other order which seeks to void or otherwise modify the
transactions consented to by Congress herein.
(e) This Amendment has been duly executed and delivered by Borrower
and is in full force and effect as of the date hereof, and the agreements and
obligations of Borrower contained herein constitute legal, valid and binding
obligations of Borrower enforceable against Borrower in accordance with their
respective terms.
6. Conditions Precedent. The effectiveness of the amendments contained
herein shall be subject to the satisfaction of the following conditions
precedent in a manner satisfactory to Congress and its counsel:
(a) Borrower shall have received the consent of any participants in
the financing arrangements of Congress with Borrower to the amendments provided
for herein;
(b) no Event of Default shall have occurred and be continuing and no
event shall have occurred or condition be existing and continuing which, with
notice or passage of time or both, would constitute an Event of Default;
(c) Congress shall have received evidence, in form and substance
satisfactory to Congress, that Borrower has obtained all required consents and
approvals of any persons other than Congress in connection with (i) the transfer
of the EFJ Communications Assets to EFJ Communications, (ii) the issuance and
sale of the Series I Preferred Stock to Securicor pursuant to the Stock Purchase
Agreement, (iii) the loans by Securicor to Borrower evidenced by the Junior
Subordinated Notes and (iv) the amendments contemplated by this Amendment.
(d) Congress shall have received the originals of the stock
certificates representing all of the issued and outstanding shares of capital
stock of EFJ Communications owned by Borrower, together with stock powers duly
executed in blank by Borrower with respect thereto;
(e) all requisite corporate action and proceedings in connection
with this Amendment shall be in form and substance satisfactory to Congress, and
Congress shall have received all
- 5 -
<PAGE> 80
information and copies of all documents, including, without limitation, records
of requisite corporate action and proceedings which Congress may have reasonably
requested in connection therewith, such documents when requested by Congress or
its counsel to be certified by appropriate corporate officers or governmental
authorities;
(f) Congress shall have received, in form and substance satisfactory
to Congress, (i) a Pledge and Security Agreement by Borrower in favor of
Congress with respect to all of the outstanding shares of capital stock of EFJ
Communications owned by Borrower, (ii) a Guarantee and Waiver, by EFJ
Communications in favor of Congress of the obligations of Borrower to Congress,
(iii) a General Security Agreement by EFJ Communications in favor of Congress;
(iv) UCC-1 financing statements between EFJ Communications, as debtor, and
Congress, as secured party, duly authorized, executed and delivered by Borrower
and EFJ Communications;
(g) Borrower shall have received not less than $9,999,900 in cash or
other immediately available funds constituting proceeds from the issuance and
sale of the Series I Preferred Stock to Securicor;
(h) Congress shall have received, in cash or other immediately
available funds for application to the Obligations in such order and manner as
Congress shall determine, the amount of $2,154,352.08 representing a portion of
the proceeds payable to Borrower from the issuance and sale of the Series I
Preferred Stock to Securicor pursuant to the Stock Purchase Agreement (as in
effect on the date hereof), the balance of which has been paid by Borrower to
Linear Modulation Technology, Limited for the purchase of technology in
accordance with the terms of the Stock Purchase Agreement (as in effect on the
date hereof) and to Securicor in settlement of certain of the existing
indebtedness of Borrower owing to Securicor; and
(i) Congress shall have received, in form and substance satisfactory
to Congress, an original of this Amendment, duly authorized, executed and
delivered by Borrower, EFJ Partners, William Weksel and EFJ Communications.
7. Effect of this Agreement. Except as modified pursuant hereto, no other
changes or modifications to the Financing Agreement are intended or implied, and
in all other respects the Financing Agreements are hereby specifically ratified,
restated and confirmed by the parties hereto as of the date hereof. To the
extent of a conflict between the terms of this Amendment and the other Financing
Agreements, the terms of this Amendment shall control.
8. Further Assurances. Borrower shall execute and deliver such additional
documents and take such additional actions as may
- 6 -
<PAGE> 81
be necessary or desirable, as determined by Congress, to effectuate the
provisions and purposes of this Amendment.
9. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the laws of the State of New York.
10. Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
11. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
Please sign the enclosed copy of this Amendment in the space provided
below, whereupon this Amendment, as so accepted by Congress, shall become a
binding agreement between Borrower and Congress.
Very truly yours,
E.F. JOHNSON COMPANY
By: [SIG]
------------------------------------
Title: Vice Chairman
---------------------------------
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
By: [SIG]
---------------------------------
Title: Asst VP
------------------------------
EFJ PARTNERS, a general partnership
By: [SIG]
---------------------------------
Title: General Partner
EFJ COMMUNICATIONS, INC.
By: [SIG]
---------------------------------
Title: Vice Chairman
------------------------------
- -------------------------------------
WILLIAM WEKSEL, individually
- 7 -
<PAGE> 82
be necessary or desirable, as determined by Congress, to effectuate the
provisions and purposes of this Amendment.
9. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the laws of the State of New York.
10. Binding Effect. This Amendment shall be binding upon and inure to the
benefit of each of the parties hereto and their respective successors and
assigns.
11. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
Please sign the enclosed copy of this Amendment in the space provided
below, whereupon this Amendment, as so accepted by Congress, shall become a
binding agreement between Borrower and Congress.
Very truly yours,
E.F. JOHNSON COMPANY
By:
------------------------------------
Title:
---------------------------------
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
By:
---------------------------------
Title:
------------------------------
EFJ PARTNERS, a general partnership
By:
---------------------------------
Title: General Partner
EFJ COMMUNICATIONS, INC.
By:
---------------------------------
Title:
------------------------------
/s/ WILLIAM WEKSEL
- -------------------------------------
WILLIAM WEKSEL, individually
- 7 -
<PAGE> 83
EXHIBIT A
to
AMENDMENT NO. 5 TO FINANCING AGREEMENTS
List of licenses in the name of EFJ Communications Inc.
<TABLE>
<CAPTION>
Call Transmitter Location/ Type of
Sign Site Coordinates Service
---- ---------------- -------
<S> <C> <C>
KLJ860 Us Nationwide IB
(used for equipment demonstrations)
WNHA456 Acree, GA YX
31 32 57 N 084 00 19 W
(license held for Rodd Electronics)
WNHX915 Ashville, NC YX
35 36 04 N 082 39 06 W
(license held for Whitley Communication
Service)
WNIC919 Biloxi, MS YX*
30 25 55 N 088 57 23 W
(license held for Gulf States Systems)
WNGV226 Borger, TX YX
35 38 27 N 101 29 55 W
(license held for Pittencrieff Communications)
WNZX470 Burley, ID YX*
42 19 36 N 113 39 20 W
(license held for Radio Service Company)
WNXH854 Burnsville, MN YX
44 44 42 N 093 16 36 W
(license for Jeffrey Fuller and staff)
WNJI714 Columbia, SC YX
34 08 23 N 081 03 22 W
(license held for South Carolina Comms. Ltd.)
WNAU560 Copeland, KS YX*
37 30 10 N 100 54 22 W
(license held for Meade TV & Two Way)
WPBD582 Dakota, MN (WNXH854) YB
70 MIRA 44 44 42 N 093 16 36 W (SMR end
(license applied for to load SMR system for user)
dealer)
WNQU982 Dixon, IL YX*/**
41 53 52 N 089 36 20 W
(pursuant to Business Marketing Agreement with
Radio Ranch, Inc.)
</TABLE>
<PAGE> 84
<TABLE>
<S> <C> <C>
WNRY874 Durham, NC (WNBW509) YB
40 MIRA 36 03 40 N 078 57 16 W (SMR end
(license applied for to load SMR system) user)
WNWN359 Eufaula, AL YX*
31 54 30 N 085 09 51 W
(license held for Palmer Communications)
WNNG700 Fond Du Lac, WI YX
43 47 57 N 088 22 25 W
(pursuant to Business Marketing Agreement with
Communications Electronics)
WNHS600 Fort Wayne, IN YX*
41 06 25 N 085 11 46 W
(pursuant to Business Marketing Agreement with
Parkerson Electronics)
WNGC334 Garner, IA YX
43 06 08 N 093 35 51 W
(license held for Electronic Specialties)
WNXS394 Gilmore City, IA YX
42 43 45 N 094 26 33 W
(license held for Electronic Specialties)
WNFW626 Glendi, VA YX**
38 26 45 N 077 31 49 W
(license held for Mid Atlantic Communications)
Pending Gretna, FL YX
30 33 24 N 084 36 05 W
(license applied for CHQ/Liberty Bell)
WNHA514 Hanover Township, PA YX
41 10 58 N 075 52 26 W
(license held for Industrial Electronics)
WNSQ809 Hennepin, MN (KNAP937) YB
25 MIRA 44 58 32 N 093 16 18 W (SMR end
(license held for the Company's employees) user)
WZV242 Houston, TX GX
29 44 13 N 095 27 39 W
(purchased by Nextel)
WXV926 Houston, TX GX
29 44 13 N 095 27 39 W
(purchased by Nextel)
WZC830 Houston, TX GX
29 44 13 N 095 27 39 W
(purchased by Nextel)
</TABLE>
2
<PAGE> 85
<TABLE>
<S> <C> <C>
WYH435 Houston, TX GX
29 44 13 N 095 27 39 W
(purchased by Nextel)
WXE787 Houston, TX GX
29 44 13 N 093 27 39 W
(purchased by Nextel)
WNRE815 Jackson, MS YX***
32 16 25 N 090 11 53 W
(license held for Gulf States Systems)
WNRI505 Jefferson City, MO YX
38 33 15 N 092 12 00 W
(pursuant to Business Marketing Agreement with
Central Mobile Phone)
WNZX471 Jerome, ID YX*
42 43 42 N 114 24 43 W
(license held for Radio Service Company)
WNGC376 Kelso, WA YX
46 09 51 N 122 51 31 13 W
(license held for Questar)
KNIY865 Lakeside, MT YX*
48 00 40 N 114 21 48 W
(license held for Grice Communications;
Mobilephone operating the system)
WNPE218 Lanai, HI YX*
20 50 00 N 156 48 50 W
(license held for Harmer Radio & Electronics)
KNJH433 Little Rock, AR YX
34 47 31 N 092 28 38 W
(license held for Central Arkansas Radio
Systems)
WNDX296 Manitou, CO YX
38 44 38 N 104 51 39 W
(license held for Questar)
WNIT711 Martinsville, VA YX*
36 42 16 N 079 50 06 W
(license held for Professional Communications)
Pending Milford, IA YX
43 19 32 N 095 08 45 W
(license applied for Electronic Specialties due
to 40 mile conflict)
WPEM265 Mount Holly Springs, PA GX
40 05 34 N 077 12 59 W
(license held for Industrial Electronics)
</TABLE>
3
<PAGE> 86
<TABLE>
<S> <C> <C>
WNSK781 New Hampton, IA YX
43 02 46 N 092 18 09 W
(license held for Circle K Communications)
WNKE856 New Castle, OK YX*
35 12 07 N 097 35 18 W
(license held for Leon's Radio)
WNGC380 Olympia, WA YX
46 58 23 N 123 08 41 W
(license held for Questar)
WPFF224 Port Royal, PA YX
40 28 43 N 077 23 05 W
(license held for Centre Communications)
WNYQ871 St. Tammany, LA (WNHJ738) YB
45 MIRA 30 23 07 N 089 55 20 W (SMR end
(license held for Two Way Communications) user)
KNJH484 Sandia Crest, NM YX****
35 13 00 N 106 27 07 W
(license held for Pittencrieff Communications)
WNFW757 Searcy, AR YX
35 12 41 N 091 48 26 W
(purpose of license unknown)
WNGW915 Shelby, TN (KNHH640) YB
30 MIRA 35 09 17 N 089 49 20 W (SMR end
(license applied for to load SMR system for user)
dealer)
KNIY901 Sioux City, IA YX
42 29 39 N 096 24 54 W
(license held for Tri State Communications)
WNXW290 Sky Valley, CA YX
33 51 57 N 116 25 56 W
(license held for Applied Technology)
KNJH505 Spokane, WA YX*
47 34 14 N 117 04 56 W
(pursuant to Business Marketing Agreement with
Industrial Communications)
WNRB672 Springdale, AR YX*
36 11 18 N 094 05 27 W
(pursuant to Business Marketing Agreement with
Smith Two Way)
WNQS449 Summit, MS YX*
31 16 40 N 090 26 56 W
(license held for A & H Communications)
</TABLE>
4
<PAGE> 87
<TABLE>
<S> <C> <C>
Pending Swea City, IA YX
43 23 10 N 094 18 40 W
(license applied for Electronic Specialties due
to 40 mile conflict)
WPED591 Tonawanda, NY YX
42 59 23 N 078 51 15 W
(license held for FM Communications)
WNGC439 Tucson, AZ XY
32 26 00 N 110 46 51 W
(J-Net contract with Master Communications)
WNIT716 Vienna, WV YX
39 20 38 N 081 29 48 W
(license hold for Miller Communications)
WNAY686 Waco, TX YX
31 33 03 N 097 08 57 W
(license held for Pittencrieff Communications)
WNPP594 Wanchese, NC YX*
35 50 44 N 075 38 50 W
(pursuant to Business Marketing Agreement with
Mid Atlantic Communications)
KYH850 Waseca, MN IX
44 04 07 N 093 30 37 W
(license held for the Company's manufacturing)
KAD4226 Waseca, MN ZA
44 04 07 N 093 30 37 W
(license held for the Company's employees)
WNSV860 Waseca, MN IB
75 MIRA 44 04 07 N 093 30 37 W
(license held for the Company's manufacturing)
KAB1055 Waseca, MN ZA
44 04 47 N 093 30 37 W
(license held for the Company's employees)
WPEF462 Waterloo, IA YX
42 25 16 N 092 19 00 W
(license held for Circle K Communications)
WNGQ408 Pierce, Olympia, Issaquah, Quilcence, Mount YB
Vernon, WA (KNJA564, KNGR395, KNEM363, KNGR386) (SMR end
70 MIRA user)
(license applied for to load SMR system for dealer)
WIK669 Williamstown, NJ IB
39 40 57 N 075 01 43 W
(license held for Atlantic Coast Communications)
</TABLE>
5
<PAGE> 88
<TABLE>
<S> <C> <C>
WNAJ774 Wisconsin Rapids, WI YX
44 22 28 N 089 43 09 2 W
(license held for Air Communications of Central WI)
</TABLE>
* These licenses are in the process of being assigned as shown:
WNIC919 - Gulf States Systems (filed 7/13/94)
WNQU982 - Radio Ranch, Inc. (filed 10/25/94)
WNWN359 - Garbo Dispatch Communications (filed 12/9/94)
WNHS600 - Communications Alert (filed 11/4/94)
WNFW626 - Mid Atlantic Communications
WNPE218 - Harmer Radio & Electronics (filed 8/30/94)
WNIT711 - Professional Communications Inc.
KNJH505 - Industrial Communnications, Inc. (filed 10/25/94)
WNRB672 - Smith Two Way (filed 11/9/93)
WNQS449 - A & H Communications
WNPP594 - Mid Atlantic Communications
WNZX471 - Radio Service Company
WNZX470 - Radio Service Company (filed 1/17/95)
WNAU560 - SWK Leasing filed 2/7/95)
KNIY865 - Richon, Inc.
** Finder's Preference pending against this license by Laura Lee Fairbanks.
Filed on 6/30/94.
*** Finder's Preference pending against this license by DKM, Incorporated.
Filed on 7/15/94
**** The Finder's Preference pending against this license was withdrawn on
January 13, 1995. The FCC has not corrected its list to reflect such
action.
6
<PAGE> 89
AMENDMENT NO. 6 TO FINANCING AGREEMENTS
July 29, 1996
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation, a California corporation (together with
its successors and assigns, "Congress") and E.F. Johnson Company, a Minnesota
corporation (as survivor by merger with EFJ Acquisition Corp., a Delaware
corporation, together with its successors and assigns, "Borrower") have entered
into certain financing arrangements as set forth in the Accounts Financing
Agreement [Security Agreement], dated July 31, 1992, between Congress and
Borrower (the "Accounts Agreement"), the Covenant Supplement to Accounts
Financing Agreement [Security Agreement], dated July 31, 1992, between Congress
and Borrower (the "Covenant Supplement"), and various other agreements,
documents and instruments executed and/or delivered in connection therewith or
related thereto, as amended pursuant to Amendment No. 1 to Financing Agreements,
dated January 26, 1993, Amendment No. 2 to Financing Agreements, dated as of
October 4, 1993, Amendment No. 3 to Financing Agreements dated August 4, 1994,
Amendment No. 4 to Financing Agreements, dated March 3, 1995 and Amendment No. 5
to Financing Agreements, dated March 14, 1995 (together with the Accounts
Agreement, as the same are amended hereby and may hereafter be further amended,
modified, supplemented, extended, renewed, restated or replaced, collectively,
the "Financing Agreements").
Borrower has requested that Congress agree to certain amendments to the
Financing Agreements and Congress is willing to agree to such amendments,
subject to the terms and conditions contained herein. Borrower and Congress
desire and intend to evidence such amendments by this Amendment.
In consideration of the foregoing, the parties hereto agree as follows:
1. Definitions.
(a) Additional Definitions. As used herein, the term "Amendment No. 6"
shall mean the Amendment No. 6 to Financing Agreements, dated as of even date
hereof, by and among Congress, Borrower, EFJ Partners, EFJ Communications Inc.,
Weksel and Robert H. Davies, as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or
<PAGE> 90
replaced and the Financing Agreements are hereby amended to include, in addition
and not in limitation, such definition.
(b) Interpretation. All capitalized terms used herein shall have the
meanings assigned thereto in the other Financing Agreements, unless otherwise
defined herein.
2. Loans on Accounts. Section 2.1 of the Accounts Agreement is hereby
deleted in its entirety and the following substituted therefor:
"2.1 You shall, in your discretion, make loans to us from time
to time, at our request, of up to the following percentages of
the Net Amount of Eligible Accounts (or such greater or lesser
percentage as you shall in your sole discretion determine from
time to time): (a) eighty-five (85%) percent of the Net Amount
of Eligible Accounts (other than Accounts arising from the sale
or installation of radio systems or networks) and (b) seventy
(70%) percent of the Net Amount of Eligible Accounts arising
from the sale or installation of radio systems or networks;
provided that, in the event that the Consolidated Net Worth of
Borrower does not, at any time, equal or exceed the sum of the
amounts set forth on Exhibit A to Amendment No. 6 for the
applicable period set forth therein, plus ninety (90%) percent
of the net cash proceeds received by Borrower pursuant to the
sale or issuance of capital stock (after deducting underwriting
commissions and discounts, if any, and all other expenses
related directly to such sale or issuance), you may, at your
option, either reduce such percentage with respect to the Net
Amount of Eligible Accounts arising from the sale or
installation of radio systems or networks or no longer consider
such Accounts as Eligible Accounts."
3. Net Worth. Section 4.14 of the Covenant Supplement is hereby deleted
in its entirety and the following substituted therefor:
"4.14 Net Worth. Borrower shall, at the end of each fiscal
quarter, have a Consolidated Net Worth of not less than the
amount set forth on Exhibit A to Amendment No. 6 for the
applicable period set forth therein; provided, that, in the
event of any sale or issuance of capital stock by Borrower or
its
-2-
<PAGE> 91
shareholders, on and after the effective date of such sale or
issuance, Borrower shall, at the end of each fiscal quarter,
have a Consolidated Net Worth of not less than the amount equal
to the sum of: (a) the amount set forth on Exhibit A to
Amendment No. 6 for the applicable period set forth therein plus
(b) seventy-five (75%) percent of the net cash proceeds (after
deducting underwriting commissions and discounts, if any, and
all other expenses related directly to such sale or issuance)
received by Borrower pursuant to the sale or issuance of such
capital stock."
4. Amendment Fee. Borrower shall pay to Congress a fee in the amount of
$35,000, which amount shall be payable simultaneously with the execution hereof
and shall be deemed fully earned as of the date hereof. Such fee, may, at
Congress' option be charged directly to any account of Borrower maintained with
Congress.
5. Additional Representations and Warranties. In addition to the
continuing representations and warranties heretofore or hereafter made by
Borrower to Congress pursuant to the Financing Agreements, Borrower hereby
represents and warrants to Congress as follows (which representations,
warranties and covenants are continuing and shall survive the execution and
delivery hereof and shall be incorporated into and made a part of the Financing
Agreements):
(a) No Event of Default exists on the date of this Amendment
(after giving effect to the amendments to the Financing Agreements made by this
Amendment).
(b) Borrower has obtained or received all required consents and
approvals of any persons other than Congress in connection with the amendments
contemplated by the Amendment, except for any consent or approval if the failure
to obtain or receive the same will not have a material adverse effect on the
business of Borrower.
(c) No material adverse change in the business, operations,
profits or prospects of Borrower or in the condition of the assets of Borrower
shall have occurred since the date of the last field examination by Congress of
Borrower.
(d) This Amendment has been duly executed and delivered by
Borrower and is in full force and effect as of the date hereof, and the
agreements and obligations of Borrower contained herein constitute legal, valid
and binding obligations of Borrower enforceable against Borrower in accordance
with their respective terms.
-3-
<PAGE> 92
6. Conditions Precedent. The effectiveness of the amendments contained
herein shall be subject to the satisfaction of the following conditions
precedent in a manner satisfactory to Congress and its counsel:
(a) Borrower shall have received the consent of any participants
in the financing arrangements of Congress with Borrower to the amendments
provided for herein;
(b) no Event of Default shall have occurred and be continuing and
no event shall have occurred or condition be existing and continuing which, with
notice or passage of time or both, would constitute an Event of Default;
(c) Congress shall have received evidence, in form and substance
satisfactory to Congress, that Borrower has obtained all required consents and
approvals of any persons other than Congress in connection with the amendments
contemplated by this Amendment, except for any consent or approval if the
failure to obtain or receive the same will not have a material adverse effect on
the business of Borrower; and
(d) Congress shall have received, in form and substance
satisfactory to Congress, an original of this Amendment, duly authorized,
executed and delivered by Borrower, EFJ Partners, EFJ Communications Inc.,
Weksel and Robert H. Davies.
7. Effect of this Agreement. Except as modified pursuant hereto, no
other changes or modifications to the Financing Agreement are intended or
implied, and in all other respects the Financing Agreements are hereby
specifically ratified, restated and confirmed by the parties hereto as of the
date hereof. To the extent of a conflict between the terms of this Amendment and
the other Financing Agreements, the terms of this Amendment shall control.
8. Further Assurances. Borrower shall execute and deliver such
additional documents and take such additional actions as may be necessary or
desirable, as determined by Congress, to effectuate the provisions and purposes
of this Amendment.
9. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the laws of the State of New York.
10. Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
11. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall
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<PAGE> 93
together constitute but one and the same agreement. In making proof of this
Amendment, it shall not be necessary to produce or account for more than one
counterpart thereof signed by each of the parties hereto.
Please sign the enclosed copy of this Amendment in the space provided
below, whereupon this Amendment, as so accepted by Congress, shall become a
binding agreement between Borrower and Congress.
Very truly yours,
E.F. JOHNSON COMPANY
By: /s/ WILLIAM WEKSEL
-----------------------------------------
Title: President
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
By: /s/ [sig] ???????????
----------------------------------
Title: Vice President
EFJ PARTNERS, a general partnership
By: /s/ WILLIAM WEKSEL
----------------------------------
Title: General Partner
EFJ COMMUNICATIONS, INC.
By: /s/ WILLIAM WEKSEL
----------------------------------
Title: President
WILLIAM WEKSEL
- -------------------------------------
WILLIAM WEKSEL, individually
ROBERT H. DAVIES
- -------------------------------------
ROBERT H. DAVIES, individually
-5-
<PAGE> 94
EXHIBIT A
to
AMENDMENT NO. 6 TO FINANCING AGREEMENTS
<TABLE>
<CAPTION>
Time Period Consolidated Net Worth
----------- ----------------------
<S> <C>
10/1/95 - 12/31/95 12,906,000
1/1/96 - 6/30/96 7,515,000
7/1/96 - 9/30/96 7,656,000
10/1/96 - 12/31/96 7,727,000
1/1/97 - 3/31/97 9,168,000
4/l/97 - 6/30/97 10,968,000
7/l/97 - 9/30/97 12,768,000
10/1/97 - 12/31/97 14,928,000
1/l/98 - 3/31/98 17,547,000
and at all times thereafter
</TABLE>
- ----------
* For purposes of this Exhibit A, Consolidated Net Worth does not
include any net cash proceeds received by Borrower pursuant to the sale or
issuance of capital stock.
-6-
<PAGE> 95
[6/9/97]
AMENDMENT NO. 7 TO FINANCING AGREEMENTS
June ___, 1997
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation, a California corporation (together with
its successors and assigns, "Congress") and E.F. Johnson Company, a Minnesota
corporation (as survivor by merger with EFJ Acquisition Corp., a Delaware
corporation, together with its successors and assigns, "Borrower") have entered
into certain financing arrangements as set forth in the Accounts Financing
Agreement [Security Agreement], dated July 31, 1992, between Congress and
Borrower (the "Accounts Agreement"), the Covenant Supplement to Accounts
Financing Agreement [Security Agreement], dated July 31, 1992, between
Congress and Borrower (the "Covenant Supplement"), and various other agreements,
documents and instruments executed and/or delivered in connection therewith or
related thereto, as amended pursuant to Amendment No. 1 to Financing Agreements,
dated January 26, 1993, Amendment No. 2 to Financing Agreements, dated as of
October 4, 1993, Amendment No. 3 to Financing Agreements dated August 4, 1994,
Amendment No. 4 to Financing Agreements, dated March 3, 1995, Amendment No. 5 to
Financing Agreements, dated March 14, 1995 and Amendment No. 6 to Financing
Agreements, dated July 29, 1996 (together with the Accounts Agreement, as the
same are amended hereby and may hereafter be further amended, modified,
supplemented, extended, renewed, restated or replaced, collectively, the
"Financing Agreements").
Borrower has requested that Lender (a) consent to the contingent
indebtedness of Borrower to Transcrypt International, Inc. ("Transcrypt") with
respect to letter or letters of credit to be issued for the account of
Transcrypt payable to Acstar Insurance Company ("Acstar") or another surety in
respect of bid and performance bonds issued or to be issued by Acstar or such
other surety for the benefit of Borrower, (b) consent to the license by Borrower
to Transcrypt of certain intellectual property pursuant to the Transcrypt
License Agreement (as hereinafter defined), (c) consent to the subordinate
security interests and liens of Transcrypt in the assets of Borrower and (d)
agree to certain amendments to the Financing Agreements in connection therewith.
Congress is willing to consent to such indebtedness, license and liens
and agree to such amendments, subject to the terms and sale conditions contained
herein. By this Amendment, Congress and Borrower desire and intend to evidence
such consents and amendments.
<PAGE> 96
In consideration of the foregoing, the parties hereto agree as follows:
1. Definitions.
(a) Additional Definitions. As used herein, the following terms
shall have the meanings given to them below and the Accounts Agreement and the
other Financing Agreements are hereby amended to include, in addition and not in
limitation, the following definitions:
(i) "Acstar" shall mean Acstar Insurance Company, an
Illinois corporation, and its successors and assigns.
(ii) "Surety Letters of Credit" shall mean, individually
and collectively, letters of credit from time to time issued by Norwest Bank
Minnesota, National Association for the account of Transcrypt payable to any
bonding company (including Acstar) as beneficiary to induce such bonding company
to issue or continue to issue bid or performance bonds to customers of Borrower
in connection with goods sold and services rendered by Borrower to such
customers in the ordinary course of the business of Borrower.
(iii) "Transcrypt" shall mean Transcrypt International,
Inc., a Delaware corporation, and its successors and assigns.
(iv) "Transcrypt License Agreement" shall mean the License
Agreement, dated June ___, 1997, by and among Transcrypt, Borrower, E.F. Johnson
Communications, Inc. and E.F. Johnson International, Inc., as the same now
exists or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.
(b) Interpretation. All capitalized terms used herein shall have
the meanings assigned thereto in the other Financing Agreements, unless
otherwise defined herein.
2. Consent. Subject to the terms and conditions contained herein,
Congress hereby confirms that it has no objection to (a) the contingent
reimbursement obligations of Borrower to Transcrypt with respect to the Surety
Letters of Credit, (b) the license by Borrower of certain intellectual property
to Transcrypt pursuant to the Transcrypt License Agreement (as in effect on the
date hereof) and (c) the security interests and liens of Transcrypt in the
assets of Borrower which secure the contingent reimbursement obligations of
Borrower to Transcrypt arising pursuant to the issuance of the Surety Letters of
Credit as set forth in the letter of intent, dated June 6, 1997, between
Borrower and Transcrypt, and which are junior in priority to the
-2-
<PAGE> 97
security interests and liens of Congress in the assets of Borrower.
3. Indebtedness. Section 4.6 of the Covenant Supplement is hereby
amended by adding a new Section 4.6(k) thereto as follows:
"(k) contingent Indebtedness of Borrower to Transcrypt with
respect to the Surety Letters of Credit as set forth in the
[letter of intent, dated June 6, 1997, between Borrower and
Transcrypt], a true, correct and complete copy of which has been
delivered to Congress; provided, that, (i) Congress shall
receive not less than ten (10) business days prior written
notice of the issuance of any Surety Letter of Credit; (ii) upon
the issuance of any Surety Letter of Credit, no Event of
Default, or act, condition or event which with notice or passage
of time both would constitute an Event of Default shall exist or
have occurred; (iii) the aggregate amount of such contingent
Indebtedness outstanding at any one time shall not exceed
$2,000,000; and (iv) Borrower shall furnish to Congress all
notices, demands or other materials concerning such Indebtedness
either received by Borrower or on its behalf, promptly after
receipt thereof, or sent by Borrower, or on its behalf,
concurrently with the sending thereof, as the case may be."
4. Limitation on Liens. Section 4.7 of the Covenant Supplement is hereby
amended by adding a new Section 4.7(f) thereto as follows:
"(f) the license by Borrower of certain intellectual property to
Transcrypt pursuant to the Transcrypt License Agreement and the
liens and security interests of Transcrypt on the assets of
Borrower to secure the Indebtedness of Borrower to Transcrypt
permitted under Section 4.6(k) hereof, which liens and security
interests are, in all respects, subject and subordinate in
priority to the liens and security interests of Congress
pursuant to the Intercreditor Agreement between Congress and
Transcrypt."
5. Additional Representations and Warranties. In addition to the
continuing representations and warranties heretofore or hereafter made by
Borrower to Congress pursuant to the Financing Agreements, Borrower hereby
represents and warrants to Congress as follows (which representations,
warranties and covenants are continuing and shall survive the execution and
delivery hereof
-3-
<PAGE> 98
and shall be incorporated into and made a part of the Financing Agreements):
(a) Transcrypt shall deliver to Acstar on the date hereof Surety
Letters of Credit with a face amount of $_________ . Immediately upon the
receipt by Acstar of such Surety Letters of Credit from Transcrypt, Borrower
shall cause Acstar to remit directly to Congress in immediately available funds
the amount of $_________ , currently held by Acstar as cash collateral for the
obligations of Borrower to Acstar in respect of bid and performance bonds issued
by Acstar for the benefit of Borrower.
(b) Borrower has delivered, or caused to be delivered, true,
correct and complete copies of the Transcrypt License Agreement and all other
agreements by Borrower with, to or in favor of Transcrypt (including the letter
of intent).
(c) No Event of Default exists on the date of this Amendment
(after giving effect to the amendments to the Financing Agreements made by this
Amendment).
(d) Borrower has obtained or received all required consents and
approvals of any persons other than Congress in connection with the amendments
contemplated by the Amendment, except for any consent or approval if the failure
to obtain or receive the same will not have a material adverse effect on the
business of Borrower.
(e) No material adverse change in the business, operations
profits or prospects of Borrower or in the condition of the assets of Borrower
shall have occurred since the date of the list field examination by Congress of
Borrower.
(f) This Amendment has been duly executed and delivered by
Borrower and is in full force and effect as of the date hereof, and the
agreements and obligations of Borrower contained herein constitute legal, valid
and binding obligations of Borrower enforceable against Borrower in accordance
with their respective terms.
6. Conditions Precedent. The effectiveness of the amendments contained
herein shall be subject to the satisfaction of the following conditions
precedent in a manner satisfactory to Congress and its counsel:
(a) Congress shall have received the consent of any participants
in the financing arrangements of Congress with Borrower to the amendments
provided for herein;
(b) no Event of Default shall have occurred and be continuing and
no event shall have occurred or condition be
-4-
<PAGE> 99
existing and continuing which, with notice or passage of time or both, would
constitute an Event of Default;
(c) Congress shall have received true, correct and complete
copies of the Transcrypt License Agreement and all other agreements by Borrower
with, to or in favor of Transcrypt (including the letter of intent);
(d) Congress shall have received, in form and substance
satisfactory to Congress, an Intercreditor Agreement between Congress and
Transcrypt and acknowledged by Borrower, EFJ Partners, EFJ Communications,
Weksel and Robert H. Davies, duly authorized, executed and delivered by the
parties thereto;
(e) Congress shall have received evidence, in form and substance
satisfactory to Congress, that Borrower has obtained all required consents and
approvals of any persons other than Congress in connection with the amendments
contemplated by this Amendment, except for any consent or approval if the
failure to obtain or receive the same will not have a material adverse effect on
the business of Borrower; and
(f) Congress shall have received, in form and substance
satisfactory to Congress, an original of this Amendment, duly authorized,
executed and delivered by Borrower, EFJ Partners, EFJ Communications Inc.,
Weksel and Robert H. Davies.
7. Effect of this Agreement, Except as modified pursuant hereto, no
other changes or modifications to the Financing Agreement are intended or
implied, and in all other respects the Financing Agreements are hereby
specifically ratified, restated and confirmed by the parties hereto as of the
date hereof. To the extent of a conflict between the terms of this Amendment and
the other Financing Agreements, the terms of this Amendment shall control.
Nothing contained herein shall be deemed to constitute the consent of Congress
to any sale or other disposition of the assets of Borrower to Transcrypt or
otherwise.
8. Further Assurances. Borrower shall execute and deliver such
additional documents and take such additional actions as may be necessary or
desirable, as determined by Congress, to effectuate the provisions and purposes
of this Amendment.
9. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the laws of the State of New York.
10. Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
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<PAGE> 100
11. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
Please sign the enclosed copy of this Amendment in the space provided
below, whereupon this Amendment, as so accepted by Congress, shall become a
binding agreement between Borrower and Congress.
Very truly yours,
E.F. JOHNSON COMPANY
By:
-----------------------------------------
Title:
--------------------------------------
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
By:
----------------------------------
Title:
-------------------------------
EFJ PARTNERS, a general partnership
By:
----------------------------------
Title: General Partner
EFJ COMMUNICATIONS, INC.
By:
----------------------------------
Title:
-------------------------------
- -------------------------------------
WILLIAM WEKSEL, individually
- -------------------------------------
ROBERT H. DAVIES, individually
<PAGE> 101
11. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
Please sign the enclosed copy of this Amendment in the space provided
below, whereupon this Amendment, as so accepted by Congress, shall become a
binding agreement between Borrower and Congress.
Very truly yours,
E.F. JOHNSON COMPANY
By:
-----------------------------------------
Title:
--------------------------------------
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
By: /s/ [SIG]
----------------------------------
Title: Senior Vice President
-------------------------------
EFJ PARTNERS, a general partnership
By:
----------------------------------
Title: General Partner
EFJ COMMUNICATIONS, INC.
By:
----------------------------------
Title:
-------------------------------
- -------------------------------------
WILLIAM WEKSEL, individually
- -------------------------------------
ROBERT H. DAVIES, individually
<PAGE> 102
11. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
Please sign the enclosed copy of this Amendment in the space provided
below, whereupon this Amendment, as so accepted by Congress, shall become a
binding agreement between Borrower and Congress.
Very truly yours,
E.F. JOHNSON COMPANY
By: /s/ WILLIAM WEKSEL
-----------------------------------------
Title: CEO
--------------------------------------
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
By:
----------------------------------
Title:
-------------------------------
EFJ PARTNERS, a general partnership
By: /s/ WILLIAM WEKSEL
----------------------------------
Title: General Partner
-------------------------------
EFJ COMMUNICATIONS, INC.
By: /s/ WILLIAM WEKSEL
----------------------------------
Title: ?????????????
-------------------------------
/s/ WILLIAM WEKSEL
- -------------------------------------
WILLIAM WEKSEL, individually
/s/ ROBERT H. DAVIES
- -------------------------------------
ROBERT H. DAVIES, individually
[AMENDMENT NO. 8 TO FINANCING AGREEMENTS WILL BE FILED BY AMENDMENT]
<PAGE> 103
AMENDMENT NO. 9 TO FINANCING AGREEMENTS
July 31, 1997
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation, a California corporation (together with
its successors and assigns, "Congress") and E.F. Johnson Company, a Minnesota
corporation (as survivor by merger with EFJ Acquisition Corp., a Delaware
corporation, together with its successors and assigns, "Borrower") have entered
into certain financing arrangements as set forth in the Accounts Financing
Agreement [Security Agreement], dated July 31, 1992, between Congress and
Borrower (the "Accounts Agreement"), the Covenant Supplement to Accounts
Financing Agreement [Security Agreement], dated July 31, 1992, between Congress
and Borrower (the "Covenant Supplement"), and various other agreements,
documents and instruments executed and/or delivered in connection therewith or
related thereto, as amended pursuant to Amendment No. 1 to Financing Agreements,
dated January 26, 1993, Amendment No. 2 to Financing Agreements, dated as of
October 4, 1993, Amendment No. 3 to Financing Agreements dated August 4, 1994,
Amendment No. 4 to Financing Agreements, dated March 3, 1995, Amendment No. 5 to
Financing Agreements, dated March 14, 1995, Amendment No. 6 to Financing
Agreements, dated July 29, 1996, Amended No. 7 to Financing Agreements, dated
June 11, 1997 and Amendment No. 8 to Financing Agreements, dated July 22, 1997
(together with the Accounts Agreement, as the same are amended hereby and may
hereafter be further amended, modified, supplemented, extended, renewed,
restated or replaced, collectively, the "Financing Agreements").
Borrower has requested that Lender (a) consent to the sale of all of the
issued and outstanding shares of common stock of Borrower by EFJ Partners to
Transcrypt International, Inc. ("Transcrypt"), (b) consent to the purchase by
Transcrypt of all of the securities of Borrower held by Securicor Radiocoms
Limited and NorAm Energy Corp. and the cancellation of the indebtedness of
Borrower to NorAm Energy Corp., (c) agree to terminate any and
all guarantees of Borrower's obligations to Congress given by William Weksel,
Deanna Weksel and Robert H. Davies, including the Limited Guarantee and Waiver,
dated July 31, 1992, by William Weksel in favor of Congress, the Limited
Guarantee and Waiver, dated June 5, 1995, by Robert H. Davies in favor of
Congress and
<PAGE> 104
the Limited Guarantee and Waiver, dated November 15, 1996, by Deanna G. Weksel
in favor of Congress, (d) agree to terminate the junior Participation Agreement
between William Weksel and Congress and (e) agree to certain amendments to the
Financing Agreements in connection therewith.
Congress is willing to consent to such sale, purchases of securities,
cancellation of indebtedness, termination of guarantees and participation
agreement and agree to such amendments, subject to the terms and conditions
contained herein. By this Amendment, Congress and Borrower desire and intend to
evidence such consents and amendments.
In consideration of the foregoing, the parties hereto agree as follows:
1. Definitions.
(a) Additional Definitions. As used herein, the following terms
shall have the meanings given to them below and the Accounts Agreement and the
other Financing Agreements are hereby amended to include, in addition and not in
limitation, the following definitions:
(i) "Capital Stock" shall mean, with respect to any
person, any and all shares, interests, participation or other equivalents
(however designated) of such person's capital stock at any time outstanding, and
any and all rights, warrants or options exchangeable for or convertible into
such capital stock (but excluding any debt security that is exchangeable for or
convertible into such capital stock).
(ii) "NorAm Purchase Agreements" shall mean, individually
and collectively, the Preferred Stock Purchase Agreement, dated July 31, 1997,
between NorAm and Transcrypt and all related agreements, documents and
instruments by Borrower, Transcrypt and/or any of their Affiliates, as the same
now exist or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced.
(iii) "Purchase Agreements" shall mean, collectively, the
Transcrypt Purchase Agreements, the NorAm Purchase Agreements and the Securicor
Purchase Agreements.
(iv) "Securicor Purchase Agreements" shall mean,
individually and collectively, the Series B Preferred Stock Purchase Agreement,
dated July 31, 1997, between Securicor and Transcrypt and all related
agreements, documents and instruments
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<PAGE> 105
executed by Transcrypt, Borrower and/or any of their Affiliates, as the same now
exist or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.
(v) "Transcrypt" shall mean Transcrypt International,
Inc., a Delaware corporation, and its successors and assigns.
(vi) "Transcrypt Purchase Agreements" shall mean,
individually and collectively, the Transcrypt Stock Purchase Agreement and all
related agreements, documents and instruments executed by EFJ Partners, Borrower
and/or any of their Affiliates, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced.
(vii) "Transcrypt Stock Purchase Agreement" shall mean the
Stock Purchase Agreement, dated July 31, 1997, between Transcrypt and EFJ
Partners, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
(b) Amendments to Definitions.
(i) All references to the term "Maximum Credit" herein and
in the Accounts Agreement and the other Financing Agreements shall be deemed and
each such reference is hereby amended to mean $18,000,000.
(ii) All references to the term "NorAm" herein and in the
Accounts Agreement and in the other Financing Agreements shall be deemed to
mean, and each such reference shall mean, NorAm Energy Corp., a Delaware
corporation formerly known as Arkla, Inc., and its successors and assigns.
(iii) All references to the term "Renewal Date"
herein and in the Accounts Agreement and the other Financing Agreements shall be
deemed and each such reference is hereby amended to mean October 31, 1997.
(iv) The definition of "Consolidated Working Capital" in
Section 1.12 of the Covenant Supplement is hereby amended by adding the
following to the end thereof: "provided, that, for purposes of this definition,
current liabilities shall not included Indebtedness permitted under Section
4.6(e) hereof."
(c) Interpretation. All capitalized terms used herein shall have
the meanings assigned thereto in the other Financing Agreements, unless
otherwise defined herein.
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<PAGE> 106
2. Change of Control. Subject to the terms and conditions contained
herein, Congress hereby consents to the sale by EFJ Partners to Transcrypt of
all of the issued and outstanding shares of Capital Stock of Borrower on or
about the date hereof pursuant to the Transcrypt Stock Purchase Agreement as in
effect on the date hereof (provided, that, the foregoing shall not be construed
as a consent to or waiver of any Event of Default as a result of any other or
subsequent change of majority control or ownership of Borrower).
3. Cancellation of Indebtedness to NorAm and Securicor. Notwithstanding
anything to the contrary contained in Sections 4.6(d) or 4.6(e) of the Covenant
Supplement as to Indebtedness of Borrower to NorAm or Section 4.6(j) of the
Covenant Supplement as to Indebtedness of Borrower to Securicor, but subject to
the terms and conditions contained herein, (a) as of the date hereof, Transcrypt
shall purchase all of the Capital Stock of Borrower owned by NorAm, including,
without limitation, all contingent Indebtedness of Borrower to NorAm under the
terms of the Preferred Stock; (b) as of the date hereof Transcrypt shall
purchase the Series I Preferred Stock and any warrants at any time issued by
Borrower to Securicor or otherwise arising under or in connection with the Stock
Purchase Agreement, dated March 14, 1995, between Borrower and Securicor; (c)
the total amount paid by Transcrypt to NorAm and Securicor in respect of all
such shares of Capital Stock shall not exceed the aggregate amount of
$10,000,000, which amount shall be paid only in the form of common stock of
Transcrypt, (d) as of the date hereof, all of the outstanding Indebtedness of
Borrower to NorAm and Securicor shall be cancelled so that Borrower shall have
no further obligation or liability to NorAm or Securicor and (e) Congress shall
have received such agreements, documents and instruments by NorAm and Securicor
releasing Borrower and its Affiliates as Congress may reasonably require.
4. Indebtedness.
(a) Sections 4.6(d), 4.6(f) and 4.6(j) of the Covenant Supplement
are each hereby deleted in their entirety and the following substituted
therefor: "intentionally omitted".
(b) Section 4.6(e) of the Covenant Supplement is hereby deleted
in its entirety and the following substituted therefor:
"(e) unsecured Indebtedness of Borrower arising after the date
hereof pursuant to loans in cash or other immediately available
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<PAGE> 107
funds by Transcrypt to Borrower, provided, that, (i) such
Indebtedness is subject and subordinate in right of payment to
the right of Congress to receive the prior indefeasible payment
and satisfaction in full of all of the Obligations, on
substantially the terms set forth on Exhibit A to Amendment No. 9
hereto; (ii) the terms of such Indebtedness shall not require any
payments in respect of the principal thereof or interest thereon
at any time prior to the end of the then current term of this
Agreement, and (iii) Borrower shall not, directly or indirectly,
make any payments in respect of such Indebtedness, including, but
not limited to, any prepayment or other non-mandatory payments."
5. Transactions with Affiliates. Sections 4.9(b)(ii) and 4.9(b)(iii) of
the Covenant Supplement are each hereby deleted in their entirety and the
following substituted therefor: "intentionally omitted".
6. Dividends. Section 4.10(b) of the Covenant Supplement is hereby
deleted in its entirety and the following substituted therefor: "intentionally
omitted".
7. Net Worth. Effective on and after the date that Congress receives the
financial statements referred to in Section 11 below, Section 4.14 of the
Covenant Supplement shall be deleted in its entirety and the following
substituted therefor:
"4.14 Net Worth. Borrower shall, at all times maintain a
Consolidated Net Worth of not less than the amount equal to: (a)
the Consolidated Net Worth as set forth in the balance sheet of
Borrower received by Congress pursuant to Section 11 of
Amendment No. 9 hereto minus (b) $1,500,000."
8. Working Capital. Effective on and after the date Congress receives
the financial statements referred to in Section 11 below, Section 4.15 of the
Covenant Supplement shall be deleted in its entirety and the following
substituted therefor:
"4.15 Working Capital. Borrower shall, at all times, maintain a
Consolidated Working
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<PAGE> 108
Capital of not less than the amount equal to: (a) the
Consolidated Working Capital as set forth in the balance sheet
of Borrower received by Congress pursuant to Section 11 of
Amendment No. 9 hereto minus (b) $1,500,000."
9. Unused Line Fee. Section 3.5 of the Accounts Agreement is hereby
deleted in its entirety and the following substituted therefor:
"3.5 If the average outstanding daily principal balance of all
loans by you to us under this Agreement or any Supplement hereto
in any calendar month shall be less than $18,000,000, we shall
pay to you on or before the tenth (10th) day of the next
succeeding calendar month an unused line fee equal to one-half
of one percent (1/2%) per annum upon the amount by which
$18,000,000 exceeds the average outstanding daily principal
balance of all such loans in respect of such month."
10. Term. Section 9.1 of the Accounts Agreement is hereby deleted in its
entirety and the following substituted therefor:
"9.1 This Agreement shall become effective upon acceptance by
you and shall continue in full force and effect for a term
ending October 31, 1997 (the "Renewal Date"), unless sooner
terminated pursuant to the terms hereof. This Agreement shall
terminate on the Renewal Date, unless otherwise agreed by you
and us in writing, and, in addition, you shall have the right to
terminate this Agreement immediately at any time upon the
occurrence and continuation of an Event of Default. No
termination of this Agreement, however, shall relieve or
discharge us of our duties, obligations and covenants hereunder
until all obligations have been paid in full, and your
continuing security interest in the Collateral shall remain in
effect until such obligations have been fully discharged. All
Obligations shall be absolutely and unconditionally due and
payable in full in cash or other immediately available funds
(including such cash collateral as we may
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<PAGE> 109
require for contingent Obligations with respect to letters of
credit or checks which have not been collected or otherwise) on
the Renewal Date, unless otherwise-agreed by you and us in
writing."
11. Delivery of Financial Statements. Borrower shall furnish to Congress
within thirty (30) days after the date hereof financial statements in form and
substance satisfactory to Congress reflecting the transactions contemplated by
this Amendment, including, without limitation, the purchases of Capital Stock of
Borrower by Transcrypt and the cancellation of Indebtedness of Borrower owing to
NorAm.
12. Termination of Weksel and Davies Guarantees and Junior
Participation. Upon the satisfaction of the conditions to the effectiveness of
this Amendment:
(a) any and all guarantees of Borrower's obligations to Congress
given by William Weksel, Deanna Weksel and Robert H. Davies, including the
Limited Guarantee and Waiver, dated July 31, 1992, by Weksel in favor of
Congress with respect to the Obligations, the Limited Guarantee and Waiver,
dated June 5, 1995, by Robert H. Davies in favor of Congress with respect to the
obligations, and the Limited Guarantee and Waiver, dated November 15, 1996, by
Deanna G. Weksel in favor of Congress with respect to the Obligations, shall
terminate; and
(b) the Junior Participation Agreement, dated July 31, 1992,
between Weksel and Congress shall terminate (and Weksel hereby irrevocably
authorizes and directs Congress to remit all amounts payable by Congress to
Weksel pursuant to such termination to the bank account set forth on Exhibit B
hereto); and
(c) Congress shall execute and deliver to any of William Weksel,
Deanna Weksel and Robert H. Davies, at the cost and expense of Borrower, such
instruments and documents, including without limitation, a Release of Mortgage
and Security Agreement, in each case in such form and substance as is reasonably
acceptable to Congress, as any such individual shall reasonably request in
writing for the purpose of giving effect to the termination of guarantees
provided for in this Section 12.
13. Additional Representations and Warranties. In addition to the
continuing representations and warranties heretofore or hereafter made by
Borrower to Congress pursuant to the Financing Agreements, Borrower hereby
represents and warrants and covenants
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<PAGE> 110
to Congress as follows (which representations, warranties and covenants are
continuing and shall survive the execution and delivery hereof and shall be
incorporated into and made a part of the Financing Agreements):
(a) The Purchase Agreements and the transactions contemplated
thereunder have been duly executed, delivered and performed in accordance with
their terms by the respective parties thereto in all respects, including the
fulfillment (not merely the waiver) of all conditions precedent set forth
therein. After giving effect to the terms of the Purchase Agreements, Transcrypt
has good title to all of the issued and outstanding shares of the Capital Stock
of Borrower. All of the Indebtedness of Borrower to NorAm and Securicor has been
cancelled and Borrower has no other or further obligations or liabilities to
NorAm or Securicor.
(b) All actions and proceedings required by the Purchase
Agreements, applicable law or regulation (including, but not limited to,
compliance with the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as
amended) have been taken and the transactions required thereunder have been duly
and validly taken and consummated.
(c) No court of competent jurisdiction has issued any injunction,
restraining order or other order which prohibits consummation of the
transactions described in the Purchase Agreements and no governmental or other
action or proceeding has been threatened or commenced, seeking any injunction,
restraining order or other order which seeks to void or otherwise modify the
transactions described in the Purchase Agreements.
(d) Borrower has delivered, or caused to be delivered, to
Congress, true, correct and complete copies of the Purchase Agreements. Set
forth in Exhibit C hereto is a correct and complete list of the Purchase
Agreements and all other agreements, documents and instruments existing as of
the date hereto between Borrower, any of its Affiliates, Transcrypt and any of
its Affiliates or NorAm or Securicor.
(e) All of the issued and outstanding shares of Capital Stock of
Borrower are directly and beneficially owned and held by Transcrypt and all of
such shares have been duly authorized and are fully paid and non-assessable,
free and clear of all claims, liens, pledges and encumbrances of any kind.
(f) Transcrypt has, on or before the date hereof, made a cash
equity contribution to Borrower in the amount of
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<PAGE> 111
$2,000,000 as consideration for shares of Capital Stock of Borrower, the
proceeds of which have been delivered to Congress for application to the
obligations in such order and manner as Congress shall determine.
(g) Neither the execution and delivery of the Purchase
Agreements, nor the consummation of the transactions contemplated by the
Purchase Agreements, nor compliance with the provisions thereof, shall result in
the creation nor imposition of any lien, charge or encumbrance upon any of the
Collateral.
(h) Neither the execution and delivery of the Purchase Agreements
nor the consummation of the transactions therein contemplated, nor compliance
with the provisions thereof, has violated or shall violate any law or regulation
or any order or decree of any court or governmental instrumentality in any
respect or does or shall conflict with or result in the breach of, or constitute
a default in any respect under, any indenture, mortgage, deed of trust, security
agreement, agreement or instrument to which Borrower is a party or may be bound,
or violate any provision of the Certificate of Incorporation or By-Laws of
Borrower.
(i) Borrower and EFJ Partners have obtained or received all
required consents and approvals of any persons other than Congress in connection
with the transfer of the shares of Capital Stock of Borrower by EFJ Partners to
Transcrypt pursuant to the Transcrypt Purchase Agreements, the purchase and
cancellation of the Indebtedness of Borrower to NorAm and Securicor and the
other transactions contemplated by the Amendment.
(j) The failure of Borrower to comply with the covenants,
conditions and agreements contained herein or in any other agreement, document
or instrument at any time executed and/or delivered by Borrower with, to or in
favor of Congress shall constitute an Event of Default under the Financing
Agreements.
(k) This Amendment has been duly executed and delivered by
Borrower and is in full force and effect as of the date hereof, and the
agreements and obligations of Borrower contained herein constitute legal, valid
and binding obligations of Borrower enforceable against Borrower in accordance
with their respective terms.
14. Conditions Precedent. The effectiveness of the amendments contained
herein shall be subject to the satisfaction
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<PAGE> 112
of the following conditions precedent in a manner satisfactory to Congress and
its counsel:
(a) Congress shall have received the consent of any participants
in the financing arrangements of Congress with Borrower to the amendments
provided for herein;
(b) Congress shall have received true, correct and complete
copies of the Transcrypt Purchase Agreements and all other agreements by
Borrower with, to or in favor of Transcrypt (including the letter of intent);
(c) Congress shall have received, in form and sub stance
satisfactory to Congress, an unconditional general release of Congress, its
officers, directors, employees, agents and other Affiliates by EFJ Partners,
Weksel and Robert H. Davies, duly authorized, executed and delivered by such
persons;
(d) Congress shall have received evidence, in form and substance
satisfactory to Congress, that Borrower has obtained all required consents and
approvals of any persons other than Congress in connection with the sale of all
of the Capital Stock of Borrower by EFJ Partners to Transcrypt pursuant to the
Transcrypt Stock Purchase Agreements and the other transactions contemplated by
this Amendment;
(e) the sale of all of the Capital Stock of Borrower by EFJ
Partners to Transcrypt pursuant to the Stock Purchase Agreement shall have
occurred by no later than July 31, 1997;
(f) Congress shall have received evidence, in form and substance,
satisfactory to Congress that (i) all Indebtedness of Borrower to NorAm and
Securicor (and to Transcrypt as the purchaser of such Indebtedness) has been
duly and validly can celled in accordance with the terms of the agreements,
documents or instruments evidencing such Indebtedness, and (ii) NorAm and
Securicor have released Borrower from all obligations, liabili ties and other
Indebtedness owing to them;
(g) Congress shall have received in cash or other immediately
available funds not less than $2,000,000 with the proceeds of a cash equity
capital contribution by Transcrypt to Borrower on or before the date hereof, for
application to the Obligations in such order and manner as Congress may
determine;
(h) all requisite corporate action and proceedings in connection
with this Amendment shall be in form and substance satisfactory to Congress, and
Congress shall have received all
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<PAGE> 113
information and copies of all documents, including, without limitations, records
of requisite corporate action and proceed ings which Congress may have
reasonably requested in connection therewith, such documents where requested by
Congress or its counsel to be certified by appropriate corporate officers or
work governmental authorities;
(i) all representations and warranties contained herein shall be
true and correct;
(j) Congress shall have received, in form and sub stance
satisfactory to Congress, an original of this Amendment, duly authorized,
executed and delivered by Borrower, EFJ Partners, EFJ Communications Inc.,
Weksel and Robert H. Davies.
15. Fee. In addition to all other fees, charges, interest and expenses
payable by Borrower to Congress under the other Financing Agreements, Borrower
hereby agrees to pay to Congress a consent and extension fee in an amount equal
to $25,000, which amount shall be payable on the date hereof, and which amount
is fully earned as of such date, and may be charged directly to Borrower's loan
account maintained by Congress.
16. Effect of this Agreement. Except as modified pursuant hereto, no
other changes or modifications to the Financing Agreement are intended or
implied, and in all other respects the Financing Agreements are hereby
specifically ratified, restated and confirmed by the parties hereto as of the
date hereof. To the extent of a conflict between the terms of this Amendment and
the other Financing Agreements, the terms of this Amendment shall control.
17. Further Assurances. Borrower shall execute and deliver such
additional documents and take such additional actions as may be necessary or
desirable, as determined by Congress, to effec tuate the provisions and purposes
of this Amendment.
18. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the laws of the State of New York.
19. Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
20. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall
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<PAGE> 114
together constitute but one and the same agreement. In making proof of this
Amendment, it shall not be necessary to produce or account for more than one
counterpart thereof signed by each of the parties hereto.
Please sign the enclosed copy of this Amendment in the space provided
below, whereupon this Amendment, as so accepted by Congress, shall become a
binding agreement between Borrower and Congress.
Very truly yours,
E.F. JOHNSON
By: /s/
-------------------------------------
Title: Chairman and CEO
-------------------------------------
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
By: /s/
-----------------------------------
Title: Senior Vice President
EFJ PARTNERS, a general partnership/
By: /s/
-----------------------------------
Title: General Partner
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<PAGE> 115
[SIGNATURES CONTINUED ON THE PREVIOUS PAGE]
/s/ William Weksel
- ------------------------------------------
WILLIAM WEKSEL, individually
/s/ Robert H. Davies
- ------------------------------------------
ROBERT H. DAVIES, individually
TRANSCRIPT INTERNATIONAL, INC.
By: /s/
-----------------------------------
Title: Chairman
-----------------------------------
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<PAGE> 116
EXHIBIT A TO AMENDMENT NO. 9
1. DEFINITIONS
As used above and in this Subordination Agreement, the following terms
shall have the meanings ascribed to them below:
1.1 "Agreements" shall mean, collectively, the Senior Creditor
Agreements and the Junior Creditor Agreements.
1.2 "Creditors" shall mean, collectively, Senior Creditor and
Junior Creditor and their respective successors and assigns.
1.3 "Debtor" shall mean E.F. Johnson Company, a Minnesota
corporation and its successors and assigns, including, without limitation, a
receiver, trustee or debtor-in-possession on behalf of such person or on behalf
of any such successor or assign.
1.4 "Junior Creditor" shall mean Transcrypt International, Inc.
a Delaware corporation, and its successors and assigns.
1.5 "Junior Creditor Agreements" shall mean, collectively,
_______________ and all agreements, documents and instruments at any time
executed and/or delivered by Debtor or any other person to, with or in favor of
Junior Creditor in connection therewith or related thereto, as all of the
foregoing now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
1.6 "Junior Debt" shall mean all obligations, liabilities and
indebtedness of every kind, nature and description owing by Debtor to Junior
Creditor arising after the date hereof other than in connection with the
Transcrypt Stock Purchase Agreement (as defined in the Senior Creditor
Agreements) or the contingent indebtedness of Debtor to reimburse Junior
Creditor in the event of a draw under the Congress Letter of Credit or the
Acestar Letter of Credit (as each such term is defined in the Senior Creditor
Agreements), including principal, interest, charges, fees, premiums, indemnities
and expenses, however evidenced, whether as principal, surety, endorser,
guarantor or otherwise, whether arising under or evidenced by the Junior
Creditor Agreements or otherwise, whether now existing or hereafter arising,
whether arising before, during or after the initial or any renewal term of the
Junior Creditor Agreements or after the commencement of any case with respect to
Debtor under
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the U.S. Bankruptcy Code or any similar statute (and including, without
limitation, any principal, interest, fees, costs, expenses and other amounts,
whether or not such amounts are allowable in whole or in part, in any such case
or similar proceeding), whether direct or indirect, absolute or contingent,
joint or several, due or not due, primary or secondary, liquidated or
unliquidated, secured or unsecured, and whether arising directly or howsoever
acquired by Junior Creditor.
1.7 "Person" or "person" shall mean any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code of
1986, as amended), business trust, unincorporated association, joint stock
company, trust, joint venture, or other entity or any government or any agency
or instrumentality or political subdivision thereof.
1.8 "Senior Creditor" shall mean Congress Financial Corporation,
a California corporation, and its successors and assigns.
1.9 "Senior Creditor Agreements" shall mean, collectively, the
Accounts Financing Agreement [Security Agreement], dated of July 31, 1992,
between Senior Creditor and Debtor and all agreements, documents and instruments
at any time executed and/or delivered by Debtor or any other person to, with or
in favor of Senior Creditor in connection therewith or related thereto, as all
of the foregoing now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
1.10 "Senior Debt" shall mean all obligations, liabilities and
indebtedness of every kind, nature and description owing by Debtor to Senior
Creditor and/or its affiliates, or participants, including principal, interest,
charges, fees, premiums, indemnities and expenses, however evidenced, whether as
principal, surety, endorser, guarantor or otherwise, whether arising under the
Senior Creditor Agreements or otherwise, whether now existing or hereafter
arising, whether arising before, during or after the initial or any renewal term
of the Senior Creditor Agreements or after the commencement of any case with
respect to Debtor under the U.S. Bankruptcy Code or any similar statute (and
including, without limitation, any principal, interest, fees, costs, expenses
and other amounts, whether or not such amounts are allowable either in whole or
in part, in any such case or similar proceeding), whether direct or indirect,
absolute or contingent, joint or several, due or not due, primary or secondary,
liquidated or unliquidated, secured or
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unsecured, and whether arising directly or howsoever acquired by Senior
Creditor.
1.11 All terms used herein which are defined in the Uniform
Commercial Code as in effect in the State of _________, unless otherwise defined
herein shall have the meanings set forth therein. All references to any term in
the plural shall include the singular and all references to any term in the
singular shall include the plural.
2. SUBORDINATION OF JUNIOR DEBT
2.1 Subordination. Junior Creditor hereby subordinates its right
to payment and satisfaction of the Junior Debt and the payment thereof, directly
or indirectly, by any means whatsoever, is deferred, to the indefeasible payment
and satisfaction in full of all Senior Debt.
2.2 Distributions.
(a) In the event of any distribution, division, or
application, partial or complete, voluntary or involuntary, by operation of law
or otherwise, of all or any part of the assets of Debtor or the proceeds thereof
to the creditors of Debtor or readjustment of the obligations and indebtedness
of Debtor, whether by reason of liquidation, bankruptcy, arrangement,
receivership, assignment for the benefit of creditors, marshalling of assets of
Debtor or any other action or proceeding involving the readjustment of all or
any part of indebtedness of Debtor or the application of the assets of Debtor to
the payment or liquidation thereof, or upon the dissolution or other winding up
of Debtor's business, or upon the sale of all or substantially all of Debtor's
assets, then, and in any such event, (i) Senior Creditor shall first receive
indefeasible payment in full in cash of all of the Senior Debt prior to the
payment of all or any part of the Junior Debt, and (ii) Senior Creditor shall be
entitled to receive any payment or distribution of any kind or character,
whether in cash, securities or other property, which be payable or deliverable
in respect of any or all of the Junior Debt.
(b) In order to enable Senior Creditor to enforce
its rights under Section 2.3(a) above, Senior Creditor is hereby irrevocably
authorized and empowered (in its own name or in the name of Junior Creditor or
otherwise), but shall have no obligation, to enforce claims comprising any of
the Junior Debt by proof of debt, proof of claim, suit or otherwise and take
generally any action which Junior Creditor might otherwise be entitled to take,
as Senior Creditor may deem necessary or
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advisable for the enforcement of its rights or interests hereunder.
(c) To the extent necessary for Senior Creditor to realize
the benefits of the subordination of the Junior Debt provided for herein
(including the right to receive any and all payments and distributions which
might otherwise be payable or deliverable with respect to the Junior Debt in any
proceeding described in Section 2.3(a) or otherwise), Junior Creditor shall
execute and deliver to Senior Creditor such instruments or documents (together
with such assignments or endorsements as Senior Creditor shall deem necessary),
as may be requested by Senior Creditor.
2.3 Payments Received by Junior Creditor. Should any payment or
distribution or security or instrument or proceeds thereof be received by the
Junior Creditor in respect of the Junior Debt, Junior Creditor shall receive and
hold the same in trust, as trustee, for the benefit of Senior Creditor,
segregated from other funds and property of Junior Creditor and shall forthwith
deliver the same to Senior Creditor (together with any endorsement or assignment
of Junior Creditor where necessary), for application to any of the Senior Debt.
In the event of the failure of Junior Creditor to make any such endorsement or
assignment to Senior Creditor, Senior Creditor, or any of its officers or
employees, are hereby irrevocably authorized on behalf of Junior Creditor to
make the same.
2.4 Instrument Legend and Notation. Any instrument at any time
evidencing the Junior Debt, or any portion thereof, shall be permanently marked
on its face with a legend conspicuously indicating that payment thereof is
subordinate in right of payment to the Senior Debt and subject to the terms and
conditions of this Subordination Agreement, and (a) after being so marked
certified copies thereof shall be delivered to Senior Creditor and (b) the
original of any such instrument shall be immediately delivered to Senior
Creditor upon Senior Creditor's request, at any time on or after the occurrence
of an event of default under the Senior Creditor Agreements. In the event any
legend or endorsement is omitted, Senior Creditor, or any of its officers or
employees, are hereby irrevocably authorized on behalf of Junior Creditor to
make the same. No specific legend, further assignment or endorsement or delivery
of notes, guarantees or instruments shall be necessary to subject any Junior
Debt to the subordination thereof contained in this Agreement.
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3. COVENANTS
3.1 Additional Covenants. Junior Creditor and Debtor agree in
favor of Senior Creditor that:
(a) Debtor shall not, directly or indirectly, make and
Junior Creditor shall not, directly or indirectly, accept or receive any payment
of principal or interest or any prepayment or non-mandatory payment or any
payment pursuant to acceleration or claims of breach or any payment to acquire
Junior Debt or otherwise in respect of any Junior Debt;
(b) Debtor shall not grant to Junior Creditor and Junior
Creditor shall not acquire any security interest, lien, claim or encumbrance on
any assets or properties of Debtor or any [additional] guarantees for any of the
Junior Debt;
(c) Junior Creditor shall not sell, assign, pledge,
encumber or otherwise dispose of any of the Junior Debt and guarantees, if any,
or subordinate any of the Junior Debt to any indebtedness of Debtor other than
the Senior Debt, [except, that, Junior Creditor may assign, pledge or encumber
the Junior Debt so long as Senior Creditor shall have received from any
assignee, pledgee or other person acquiring any interest in the Junior Debt a
written acknowledgment of receipt of a copy of this Agreement together with the
written agreement of such person to be bound by the terms and conditions of this
Subordination Agreement];
(d) Junior Creditor and Debtor shall, at any time or times
upon the request of Senior Creditor, promptly furnish to Senior Creditor a true,
correct and complete statement of the outstanding Junior Debt; and
(e) Junior Creditor and Debtor shall execute and deliver
to Senior Creditor such additional agreements, documents and instruments and
take such further actions as may be necessary or desirable in the opinion of
Senior Creditor to effectuate the provisions and purposes of this Subordination
Agreement.
3.2 Waivers. Notice of acceptance hereof, the making of loans,
advances and extensions of credit or other financial accommodations to, and the
incurring of any expenses by or in respect of, Debtor by Senior Creditor, and
presentment, demand, protest, notice of protest, notice of nonpayment or default
and all other notices to which Junior Creditor and Debtor are or may be entitled
are hereby waived (except as expressly provided for herein or as to Debtor, in
the Senior Creditor Agreements).
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Junior Creditor also waives notice of, and hereby consents to, (a) any
amendment, modification, supplement, renewal, restatement or extensions of time
of payment of or increase or decrease in the amount of any of the Senior Debt or
to the Senior Creditor Agreements or any collateral at any time granted to or
held by Senior Creditor, (b) the taking, exchange, surrender and releasing of
collateral at any time granted to or held by Senior Creditor or guarantees now
or at any time held by or available to Senior Creditor for the Senior Debt or
any other person at any time liable for or in respect of the Senior Debt, (c)
the exercise of, or refraining from the exercise of any rights against Debtor or
any other obligor or any collateral at any time granted to or held by Senior
Creditor, (d) the settlement, compromise or release of, or the waiver of any
default with respect to, any of the Senior Debt, and/or (e) Senior Creditor's
election, in any proceeding instituted under the U.S. Bankruptcy Code of the
application of Section 1111(b)(2) of the U.S. Bankruptcy Code. Any of the
foregoing shall not, in any manner, affect the terms hereof or impair the
obligations of Junior Creditor hereunder.
3.3 Subrogation; Marshalling. Junior Creditor shall not be
subrogated to, or be entitled to any assignment of any Senior Debt or Junior
Debt or of any collateral for or guarantees or evidence of any thereof until all
of the Senior Debt is indefeasibly paid and satisfied in full. Junior Creditor
hereby waives any and all rights to have any collateral or any part thereof
granted to or held by Senior Creditor marshalled upon any foreclosure or other
disposition of such collateral by Senior Creditor or Debtor with the consent of
Senior Creditor.
3.4 No Offset. In the event Junior Creditor at any time incurs
any obligation to pay money to Debtor, Junior Creditor hereby irrevocably agrees
that it shall pay such obligation in cash or cash equivalents in accordance with
the terms of the contract governing such obligation and shall not deduct from or
setoff against any amounts owed by the Junior Creditor to Debtor in connection
with any such transaction any amounts the Junior Creditor claims are due to it
with respect to the Junior Debt.
4. MISCELLANEOUS
4.1 Amendments. Any waiver, permit, consent or approval by either
Creditor of or under any provision, condition or covenant to this Subordination
Agreement must be in writing and shall be effective only to the extent it is set
forth in writing and as to the specific facts or circumstances covered
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<PAGE> 122
thereby. Any amendment of this Subordination Agreement must be in writing and
signed by each of the parties to be bound thereby.
4.2 Successors and Assigns.
(a) This Subordination Agreement shall be binding upon the
parties hereto and their respective successors and assigns and shall inure to
the benefit of each of Creditors and its respective successors, participants and
assigns.
(b) Senior Creditor reserves the right to grant
participations in, or otherwise sell, assign, transfer or negotiate all or any
part of, or any interest in, the Senior Debt and the collateral securing same;
provided, that, Junior Creditor shall not be obligated to give any notices to or
otherwise in any manner deal directly with any participant in the Senior Debt
and no participant shall be entitled to any rights or benefits under this
Subordination Agreement except through Senior Creditor. In connection with any
participation or other transfer or assignment, Senior Creditor (i) may disclose
to such assignee, participant or other transferee or assignee all documents and
information which Senior Creditor now or hereafter may have relating to the
Senior Debt or any collateral and (ii) shall disclose to such participant or
other transferee or assignee the existence and terms and conditions of this
Subordination Agreement.
(c) In connection with any assignment or transfer of any
or all of the Senior Debt, or any or all rights of Senior Creditor in the
property of Debtor (other than pursuant to a participation), Junior Creditor
agrees to execute and deliver an agreement containing terms substantially
identical to those contained herein in favor of any such assignee or transferee
and, in addition, will execute and deliver an agreement containing terms
substantially identical to those contained herein in favor of any third person
who succeeds to or replaces any or all of Senior Creditor's financing of Debtor,
whether such successor financing or replacement occurs by transfer, assignment,
"takeout" or any other means.
4.3 Insolvency. This Subordination Agreement shall be applicable
both before and after the filing of any petition by or against Debtor under the
U.S. Bankruptcy Code and all converted or succeeding cases in respect thereof,
and all references herein to Debtor shall be deemed to apply to a trustee for
Debtor and Debtor as debtor-in-possession. The relative rights of Senior
Creditor and, Junior Creditor to repayment of the Senior Debt and the Junior
Debt, respectively, and in or to any distributions
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<PAGE> 123
from or in respect of Debtor or any proceeds of Debtor's property and assets,
shall continue after the filing thereof on the same basis as prior to the date
of the petition, subject to any court order approving the financing of, or use
of cash collateral by, Debtor as debtor-in-possession.
4.4 Bankruptcy Financing. If Debtor shall become subject to a
proceeding under the U.S. Bankruptcy Code and if Senior Creditor desires to
permit the use of cash collateral or to provide financing to Debtor under either
Section 363 or Section 364 of the U.S. Bankruptcy Code, Junior Creditor agrees
as follows: (a) adequate notice to Junior Creditor shall have been provided for
such financing or use of cash collateral if Junior Creditor receives notice two
(2) business days prior to the entry of the order approving such financing or
use of cash collateral and (b) no objection will be raised by Junior Creditor to
any such use of cash collateral or financing. For purposes of this Section,
notice of a proposed financing or use of cash collateral shall be deemed given
when given in the manner prescribed by Section 4.5 hereof to Junior Creditor.
4.5 Notices. All notices, requests and demands to or upon the
respective parties hereto shall be in writing and shall be deemed to have been
duly given or made: if delivered in person, immediately upon delivery; if by
telex, telegram or facsimile transmission, immediately upon sending and upon
confirmation of receipt; if by nationally recognized overnight courier service
with instructions to deliver the next business day, one (1) business day after
sending; and if mailed by certified mail, return receipt requested, five (5)
days after mailing. All notices, requests and demands are to be given or made to
the respective parties at their addresses set forth below (or to such other
addresses as either party may designate by notice in accordance with the
provisions of this Section:
To Senior Creditor: Congress Financial Corporation
(____________)
------------------------------
------------------------------
Attention:
-------------------
To Junior Creditor:
------------------------------
------------------------------
Attention:
-------------------
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<PAGE> 124
Either Creditor may change the addresses) to which all notices, requests and
other communications are to be sent by giving written notice of such address
change to the other Creditor in conformity with this Section 4.5, but such
change shall not be effective until notice of such change has been received by
the other Creditor.
4.6 Counterparts. This Subordination Agreement may be executed in
any number of counterparts, each of which shall be an original with the same
force and effect as if the signatures thereto and hereto were upon the same
instrument.
4.7 Governing Law. The validity, construction and effect of this
Subordination Agreement shall be governed by the laws of the State of New York
(without giving effect to principles of conflicts of law).
4.8 Consent to Jurisdiction; Waiver of Jury Trial. Each of the
parties hereto hereby irrevocably consents to the non-exclusive jurisdiction of
____________________________ and the United States District Court for the
_____________ District of _____________ and waives trial by jury in any action
or proceeding with respect to this Subordination Agreement.
4.9 Complete Agreement. This written Subordination Agreement is
intended by the parties as a final expression of their agreement and is intended
as a complete statement of the terms and conditions of their agreement.
4.10 No Third Parties Benefitted. Except as expressly provided in
Section 4.2, this Subordination Agreement is solely for the benefit of the
Creditors and their respective successors, participants and assigns, and no
other person (including Debtor) shall have any right, benefit, priority or
interest under, or because of the existence of, this Subordination Agreement.
Nothing contained herein shall relieve Debtor of its obligations to Junior
Creditor to make payment in respect of Junior Debt.
4.11 Disclosures, Non-Reliance. Each Creditor has the means to,
and shall in the future remain, fully informed as to the financial condition and
other affairs of Debtor and no Creditor shall have any obligation or duty to
disclose any such information to any other Creditor. Except as expressly set
forth in this Subordination Agreement, the parties hereto have not otherwise
made to each other nor do they hereby make to each other any warranties, express
or implied, nor do they assume any liability to each other with respect to: (a)
the enforceability, validity, value or collectability of any of the Junior Debt
or
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<PAGE> 125
the Senior Debt or any collateral or guarantee which may have been granted to
any of them in connection therewith, (b) Debtor's title to or right to any of
its assets and properties or (c) any other matter except as expressly set forth
in this Subordination Agreement.
4.12 Term. This Subordination Agreement is a continuing agreement
and shall remain in full force and effect until the indefeasible satisfaction in
full of all Senior Debt and the termination of the financing arrangements
between Senior Creditor and Debtor.
IN WITNESS WHEREOF, the parties have caused this Subordination Agreement
to be duly executed as of the day and year first above written.
CONGRESS FINANCIAL CORPORATION
(____________)
By:
--------------------------------
Title:
------------------------------
------------------------------------
By:
--------------------------------
Title:
------------------------------
------------------------------------
By:
--------------------------------
Title:
------------------------------
------------------------------------
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<PAGE> 1
EXHIBIT 10.38
SECOND AMENDED AND RESTATED
TERM PROMISSORY NOTE
$8,400,000.00 New York, New York
March 3, 1995
FOR VALUE RECEIVED, E.F. JOHNSON COMPANY, a Minnesota corporation (the
"Debtor"), hereby unconditionally promises to pay to the order of CONGRESS
FINANCIAL CORPORATION, a California corporation (the "Payee"), at the offices of
Payee at 1133 Avenue of the Americas, New York, Now York 10036, or at such other
place as the Payee or any holder hereof may from time to time designate, the
principal sum of EIGHT MILLION FOUR HUNDRED THOUSAND and 00/100 ($8,400,000.00)
DOLLARS in lawful money of the United States of America and in immediately
available funds, in sixty (60) consecutive monthly installments (or earlier as
hereinafter referred to) on the first day of each month commencing April 1, 1995
of which (i) the first six (6) installments shall each be in the amount of TWO
HUNDRED THIRTY-THREE THOUSAND THIRTY-THREE and 33/100 ($233,333.33) DOLLARS,
(ii) the seventh (7th) through fifty-ninth (59th) installments shall each be in
the amount of ONE HUNDRED SIXTEEN THOUSAND SIX HUNDRED SIXTY-SIX and 00/100
($116,666.66) DOLLARS, and (iii) the last and sixtieth (60th) installment shall
be in the amount of the entire unpaid balance of this Note.
Debtor hereby further unconditionally promises to pay interest to the
order of Payee in like money at said office or place from the date hereof,
commencing April 1, 1995 and on the first day of each month thereafter, on the
unpaid principal balance hereof at a rate prior to an Event of Default (as
hereinafter defined) or termination or non-renewal of the Financing Agreements
(as hereinafter defined), of one and three-quarters (1 3/4%) percent per annum
in excess of the Prime Rate (as hereinafter defined), and at a rate, upon and
after an Event of Default or termination or non-renewal of the Financing
Agreements, of three and three-quarters (3 3/4%) percent per annum in excess of
the Prime Rate. For purposes hereof, "Prime Rate" shall mean the prime
commercial interest rate from time to time publicly announced by CoreStates
Bank, N.A., Philadelphia, Pennsylvania, or its successors or assigns, whether or
not such announced rate is the best rate available at such bank. For purposes
hereof, "Event of Default" shall mean an Event of Default, as such term is
defined in the Accounts Financing Agreement (Security Agreement), dated as of
July 31, 1992, between Debtor and Payee (as the same now exists or may hereafter
be amended, modified, supplemented, extended, renewed, restated or replaced, the
"Accounts Agreement"). Notwithstanding anything to the contrary contained
herein, if Payee shall declare an Event of Default based on Section 5.1(1) of
the Covenant Supplement to
<PAGE> 2
the Accounts Agreement and no other Event of Default exists or has occurred and
is continuing, Debtor shall not be required to pay interest to Payee at the rate
of three and three-quarters (3-3/4%) percent per annum in excess of the Prime
Rate, but shall continue to pay interest to Payee at the rate of one and
three-quarters (1-3/4%) percent per annum in excess of the Prime Rate, so long
as the Event of Default under Section 5.1(l) of the covenant supplement to the
Accounts Agreement is the only Event of Default which exists or has occurred and
is continuing.
The interest rate payable hereunder shall increase or decrease by an
amount equal to each increase or decrease, respectively, in such Prime Rate,
effective on the first day of the month after any change in such Prime Rate,
based on the Prime Rate in affect on the last day of the month in which any such
change occurs. Interest shall be calculated on the basis of a three hundred
sixty (360) day year and actual days elapsed. In no event shall the interest
charged hereunder exceed the maximum permitted under the laws of the State of
New York or other applicable law.
This Note is issued pursuant to the terms and provisions of Amendment
No. 4 to Financing Agreements, dated of even date herewith, between Debtor and
Payee ("Amendment No. 4") to amend and restate, and as so amended and restated
substitute for, the Amended and Restated Term Promissory Note, dated as of
October 4. 1993, in the original principal amount of $5,300,000, made by Debtor
payable to Payee (the "Existing Note") to evidence the "Term Loan" (as defined
in Amendment No. 4) by Payee to Debtor. The indebtedness of Debtor to Payee
evidenced hereby shall be deemed to constitute the unpaid balance of the
indebtedness heretofore evidenced by the Existing Note together with an
additional advance by Payee to Debtor as of the date hereof and shall be
repayable in accordance with the terms hereof. Debtor hereby acknowledges that
Debtor is, as of the date hereof, indebted to Payee, in the principal amount
hereof, together with interest accrued through the date hereof, without offset,
defense or counterclaim of any kind, nature or description whatsoever. The
amendment and restatement contained herein shall not, in any manner, be
construed to constitute payment of, or impair, limit, cancel or extinguish, or
constitute a novation in respect of, the indebtedness and other obligations and
liabilities of Borrower evidenced by or arising under the Existing Note, and the
liens and security interests securing such indebtedness and other obligations
and liabilities, which shall not in any manner be impaired, limited, terminated,
waived or released.
This Note is secured by the "Collateral" described in the Accounts
Agreement and any agreement, document or instrument now or at any time hereafter
executed and/or delivered in connection therewith or related thereto (the
foregoing, as the same now exist or may hereafter be amended, modified,
supplemented,
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<PAGE> 3
renewed, extended, restated or replaced, are hereinafter collectively referred
to as the "Financing Agreements") and is entitled to all of the benefits and
rights thereof and of the Financing Agreements. At the time any payment is due
hereunder, at its option, Payee may charge the amount thereof to any account of
Debtor maintained by Payee.
The indebtedness evidenced by this Note may be prepaid at any time in
whole or in part without premium or penalty and concurrently with the making of
any such prepayment, Debtor shall pay to Payee all accrued interest and other
charges with respect to such prepayment; provided, that, if the indebtedness
evidenced by this Note is prepaid together with all other Obligations, Debtor
shall be required to pay the fee provided for in Section 9.2 of the Accounts
Agreement. Payee may apply any such prepayment to such of the indebtedness
evidenced by this Note in whatever order and manner as Payee, in its discretion,
determines.
If any principal or interest payment is not made when due hereunder (after
any applicable cure periods), or if any other Event of Default shall occur for
any reason, or if the Financing Agreements shall be terminated or not renewed
for any reason whatsoever, then and in any such event, in addition to all rights
and remedies of Payee under the Financing Agreements, applicable law or
otherwise, all such rights and remedies being cumulative, not exclusive and
enforceable alternatively, successively and concurrently, Payee may, at its
option, declare any or all of Debtor's obligations, liabilities and indebtedness
owing to Payee under the Financing Agreements (the "Obligations"), including,
without limitation, all amounts owing under this Note, to be due and payable,
whereupon the then unpaid balance hereof, together with all interest accrued
thereon, shall forthwith become due and payable, together with interest accruing
thereafter at the then applicable rate stated above until the indebtedness
evidenced by this Note is paid in full, plus the costs and expenses of
collection hereof, including, but not limited to, reasonable attorneys' fees and
expenses.
Debtor hereby (i) waives diligence, demand, presentment, protest and
notice of any kind, (ii) agrees that it will not be necessary for any holder
hereof to first institute suit in order to enforce payment of this Note and
(iii) consents to any one or more extensions or postponements of time of
payment, release, surrender or substitution of collateral security, or
forbearance or other indulgence, without notice or consent. The pleading of any
statute of limitations as a defense to any demand against Debtor is expressly
hereby waived. Upon any Event of Default or termination or non-renewal of the
Financing Agreements, Payee shall have the right, but not the obligation to
setoff against this Note all money owed by Payee to Debtor.
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<PAGE> 4
Payee shall not be required to resort to any Collateral for payment, but
may proceed against Debtor and any guarantors or endorsers hereof in such order
and manner as Payee may choose. None of the rights of Payee shall be waived or
diminished by any failure or delay in the exercise thereof.
Debtor hereby waives the right to a trial by jury and all rights of
setoff and rights to interpose counterclaims and cross-claims (other than
compulsory counterclaims), in any litigation or proceeding arising in connection
with this Note, the Accounts Agreement, the other Financing Agreements, the
Obligations or the Collateral. Debtor hereby irrevocably consents to the
non-exclusive jurisdiction of the Supreme Court of the State of New York and the
United States District Court for the Southern District of New York for all
purposes in connection with any action or proceeding arising out of or relating
to this Note, the Accounts Agreement, the other Financing Agreements, the
Obligations or the Collateral and further consents that any process or notice of
motion or other application to said Courts or judge thereof, or any notice in
connection with any proceeding hereunder may be served (i) inside or outside the
State of New York by registered or certified mail, return receipt requested, and
service or notice so served shall be deemed complete five (5) business days
after the same shall have been posted or (ii) in such other manner as may be
permissible under the rules of said Courts.
The execution and delivery of this Note has been authorized by the Board
of Directors and by any necessary vote or consent of the stockholders of Debtor.
This Note, the other Obligations and the Collateral shall be governed by
and construed in accordance with the laws of the State of New York and shall be
binding upon the successors and assigns of Debtor and inure to the benefit of
Payee and its successors, endorsees and assigns. If any term or provision of
this Note shall be held invalid, illegal or unenforceable, the validity of all
other terms and provisions hereof shall in no way be affected thereby.
This Note may not be changed, modified or terminated orally, but only by
an agreement in writing signed by the Payee or the holder hereof.
Whenever used herein, the terms "Debtor" and "Payee" shall be deemed to
include their respective successors and assigns.
E.F. JOHNSON COMPANY
ATTEST:
/s/ [SIG] By: /s/ [SIG]
- ---------------------------------- --------------------------------------
Assistant Corporate Secretary Title: CEO
(Corporate Seal]
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<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
reports dated February 3, 1997, on our audits of the financial statements as of
December 31, 1995 and 1996 and for each of the three years in the period ended
December 31, 1996, and the financial statement schedule of Transcrypt
International, Inc. We also consent to the reference of our Firm under the
caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Lincoln, Nebraska
September 11, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of Transcrypt International, Inc. of our
report dated May 2, 1997 relating to the consolidated financial statements of
E.F. Johnson Company, which appears in such Prospectus. We also consent to the
reference to us under the headings "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Minneapolis, Minnesota
September 11, 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF ZARLEY, MCKEE, THOMTE, VOORHEES & SEASE, P.L.C. PATENT COUNSEL
September 11, 1997
Transcrypt International, Inc.
4800 NW First Street
Lincoln, Nebraska 68521
Dear Sirs:
As patent counsel for Transcrypt International, Inc. (the "Company"),
we have reviewed and approve of the reference to the legal opinion of this firm
appearing under the caption "Business--Intellectual Property" in the
Registration Statement on Form S-1, as amended, and related Prospectus proposed
to be filed shortly by the Company with the Securities and Exchange Commission,
and we hereby consent to the reference to our firm under the caption "Experts"
of such Registration Statement and Prospectus.
/s/ MARK D. HANSING
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ZARLEY, MCKEE, THOMTE, VOORHEES & SEASE, P.L.C.
Des Moines, Iowa
