<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 17, 1997
REGISTRATION NO. 333-14351
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4 TO
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.)
</TABLE>
4800 NW 1ST STREET
LINCOLN, NEBRASKA 68521
(402) 474-4800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN T. CONNOR
CHAIRMAN 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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<S> <C>
WILLIAM T. QUICKSILVER, ESQ. ANDREW L. BLAIR, JR., ESQ.
ALAN E. MORELLI, ESQ. SHERMAN & HOWARD, L.L.C.
ALLEN Z. SUSSMAN, ESQ. 633 17TH STREET, SUITE 3000
MANATT, PHELPS & PHILLIPS, LLP DENVER, COLORADO 80202
11355 WEST OLYMPIC BOULEVARD (303) 297-2900
LOS ANGELES, CALIFORNIA 90064
(310) 312-4000
</TABLE>
------------------------
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. [ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 JANUARY 17, 1997
3,750,000 SHARES
[LOGO]
COMMON STOCK
Of the 3,750,000 shares of Common Stock offered hereby, 2,500,000 are being
sold by Transcrypt International, Inc. and 1,250,000 shares are being sold by
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.
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price for the Common Stock will be between $10.00 and $11.00 per share. See
"Underwriting" for information relating to the method of determining the initial
public offering price. The Company has received approval for quotation of the
Common Stock on the Nasdaq National Market, subject to notice of issuance, under
the symbol "TRII."
------------------------
SEE "RISK FACTORS," BEGINNING ON PAGE 7, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
------------------------
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.
<TABLE>
<CAPTION>
=================================================================================================
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 deducting expenses payable by the Company estimated at $900,000.
(3) The Selling Stockholders have granted the Underwriters a 30-day option to
purchase up to 562,500 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option 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 of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them and subject to the
right of the Underwriters to withdraw, cancel or modify such offer and to reject
orders in whole or in part. It is expected that delivery of shares of the Common
Stock will be made on or about , 1997.
DAIN BOSWORTH FURMAN SELZ
Incorporated
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 3
[INSIDE FRONT COVER]
[TRANSCRYPT LOGO]
Using proprietary technology to bring information security to the expanding
voice and data communications markets.
[These
words Analog Scrambling Digital Encryption
printed
over Core Technologies
blue
arrow Signaling Technology Digital Technology
pointing
right]
[These
words 1978 1995 1997
connected Land Mobile Landline Data
by vertical Radio Telephone Security*
lines to Security Security
arrow]
1991 1996
Cellular Secure
Telephone Digital
Security Radio
* Currently under development
[Entire page is printed against a background image of a circuit board
containing integrated circuits, resistors and other electrical components.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET,
IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 4
[GATEFOLD]
[Transcrypt International logo] Transcrypt's information security products
include voice privacy for the land mobile
radio, cellular telephone and landline
markets and Transcrypt branded secure
cellular telephones and digital radios.
[Picture of [Picture of [Picture of [Picture of [Picture of
Motorola Motorola conventional Transcrypt Transcrypt
LMR and cellular telephone and branded Stealth 25
Transcrypt telephone and Transcrypt cellular Radio]
add-on Transcrypt external telephone]
device] add-on plug-in Digital
device] digital Radio
telephone
encryptor
device]
Land Mobile Transcrypt's
Radio Security Cellular Landline CryptoPhone
Telephone Telephone
Security Security
Providing Information Security Products to the World
[Picture of top of the world]
<PAGE> 5
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 (i) gives effect to a
1.3106311-for-1 stock split in the form of a stock dividend effected in November
1996 and (ii) assumes no exercise of the Underwriters' over-allotment option.
Unless the context otherwise provides, all references to "Transcrypt" or the
"Company" include Transcrypt International, Inc., its consolidated subsidiaries
and its predecessor entities. See "Glossary" for definitions of certain terms
used in this Prospectus.
THE COMPANY
The Company designs and manufactures information security products which
prevent unauthorized interception of sensitive voice and data communications.
The Company focuses on developing and providing information security products
for the land mobile radio ("LMR"), telephony and data security markets. The
Company's products are based on proprietary analog scrambling and digital
encryption technologies. The Company's core technologies offer a number of
significant benefits including high levels of information security and sound
quality, high-speed, real-time data transmission, low power consumption, small
size and cost effective manufacturing. The Company believes its 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. Furthermore, the Company believes its core technological expertise
in analog scrambling and digital encryption enables it to bring new information
security products to market quickly with relatively low development costs.
Land Mobile Radio Products
The Company's principal market for wireless information security products
has historically been the LMR market. Land mobile radios consist of hand-held or
mobile (vehicle mounted) two-way radios commonly used by public safety workers
(e.g., police, fire and medical emergency personnel), businesses (e.g., fleet
operators, taxi dispatch, construction and other commercial users) and a wide
variety of United States and foreign government agencies. According to data
published by Motorola, Inc. ("Motorola"), the worldwide LMR installed base grew
to approximately 45 million units in 1995 from 33 million units in 1992. The
Company believes that demand for information security products in the LMR market
has grown in recent years due, in part, to increased awareness of eavesdropping
by members of the press, commercial competitors and criminals.
The Company's LMR product line has historically consisted of a variety of
add-on information security modules which can be installed in LMR products from
leading manufacturers, including Motorola, Ericsson, Inc. ("Ericsson") and E.F.
Johnson Co. Purchasers of the Company's information security products have
included federal government agencies, such as the Department of Defense, Federal
Bureau of Investigation, National Security Agency and White House Security,
public safety agencies, such as the Los Angeles and New York City Police
Departments, international customers, such as the London Metropolitan Police
Force (New Scotland Yard) and the Russian Ministries of Defense and Internal
Affairs, and a variety of commercial customers, such as Exxon Oil Co., Union
Pacific Railroad and Walt Disney Co.
In 1995, as a result of increasing frequency spectrum capacity constraints,
the Federal Communications Commission ("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, the Association of Public
Safety Communications Officials International, Inc. ("APCO") published an
industry standard for digital land mobile radios, known as "APCO 25," which was
adopted by several major LMR manufacturers, including Motorola, the leading LMR
manufacturer. In addition to meeting FCC requirements, the APCO 25 standard
provides for interoperability among different manufacturers' systems, backward
compatibility with existing analog LMRs and the ability to add advanced
encryption features. The Company believes that demand for APCO 25 compliant
systems will
3
<PAGE> 6
increase as LMR users upgrade or replace their existing systems. The Company
developed and, in September 1996, began shipping in commercial quantities a
Transcrypt-branded, hand-held digital LMR. This new product, known as the
Stealth 25, can operate in both digital and analog modes, is fully compatible
with the APCO 25 standard, contains the Company's information security
technology and includes several additional value-added features, such as remote
disabling if the radio is lost or stolen. Furthermore, Motorola has licensed to
the Company certain technology which enables the Stealth 25 to be backwardly
compatible with the installed base of LMRs that use Motorola's proprietary
Smartnet(TM) trunking technology. The Company intends to introduce additional
products, including a vehicle-mounted LMR, in the first quarter of 1997. The
Company believes the development of the APCO 25 standard and the anticipated
migration from analog to digital technology in the LMR market represents a
significant market opportunity for its new LMR products.
Telephony Products
The Company offers a variety of information security products for cellular
telephone systems, including add-on scrambling modules designed to be installed
into cellular telephones such as Motorola's MicroTAC(TM) and Elite(TM)
telephones. The Company also offers external plug-in scrambling devices for
wireline telephones and scrambling units which can be added to public telephone
switches or private branch exchange ("PBX") units. Additionally, in March 1996
the Company began shipping commercial quantities of a Transcrypt-branded
Motorola MicroTAC(TM) cellular telephone upgraded to include the Company's
advanced add-on scrambling modules. According to International Data Corporation,
the U.S. cellular telephone subscriber base is projected to grow from 40.4
million subscribers in 1996 to 56.9 million subscribers by 2000. The Company
believes that the demand for voice security products is growing with a
heightened public awareness of the unsecure nature of cellular telephone
communications. The Company believes that its expertise in both analog and
digital information security, including the ability to provide "dual mode"
analog and digital security in the same product, will provide a competitive
advantage as cellular telephone users migrate from analog to digital telephones.
Data Security Products
In 1997, the Company plans to develop and introduce data security products
based on its core digital encryption technology. The Company's initial products
are expected to include authentication and encryption/decryption products to
provide secure remote access to computer networks and secure facsimile
transmissions. The Company believes that the shift from mainframe to distributed
computing and the widespread proliferation of local-area networks, servers,
interconnected networks and the Internet, will continue to increase demand for
technologies which solve access and security issues. The Company believes that,
because its proposed data security products will be hardware-based, they will
complement software-based data security solutions and provide an added level of
security. In addition, the Company believes the real-time nature of its digital
encryption/decryption technology, made possible by its high-speed transmission
capabilities, will enable users to achieve secure transmissions without user
delays common in current systems.
The Company's objective is to maintain its position in the market for voice
security products used in LMRs and cellular telephones, while building on its
core technological competencies to enter new markets for secure voice and data
security products. The Company's strategy to accomplish this objective includes
developing new products based on existing core technologies, offering complete
secure products solutions, fostering key strategic relationships, such as the
Company's relationship with Motorola, and exploring strategic acquisitions.
The Company's predecessor was founded in 1978. In December 1991, an
investor group led by John T. Connor, the Company's Chairman and Chief Executive
Officer, acquired the Company's business. The Company's principal offices are
located at 4800 NW 1st Street, Lincoln, Nebraska 68521, and its telephone number
is (402) 474-4800.
4
<PAGE> 7
THE OFFERING
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Common Stock offered:
By the Company.................................. 2,500,000 shares
By the Selling Stockholders..................... 1,250,000 shares
Common Stock to be outstanding after the
offering(1)..................................... 9,283,078 shares
Use of proceeds................................... For repayment of approximately $1.2
million of indebtedness, for working
capital and other general corporate
purposes and to support the Company's
business strategy, including enhancement
of the Company's sales and distribution
capabilities, expansion of manufacturing
facilities and potential acquisitions of,
or investments in, complementary
businesses, products or technologies.
Proposed Nasdaq National Market symbol............ TRII
</TABLE>
- ---------------
(1) Excludes 716,916 shares of Common Stock reserved for issuance upon exercise
of options outstanding as of September 30, 1996 under the Company's stock
option plan at a weighted average exercise price of $1.81 per share and
325,000 shares issuable pursuant to options to be granted upon the
effectiveness of this offering at an exercise price equal to the initial
price to the public. See "Management -- 1996 Stock Incentive Plan."
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- -----------------
1991(1) 1992 1993 1994 1995 1995 1996
------- ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME (LOSS) DATA:
Revenues........................... $ 224 $4,974 $6,900 $9,155 $ 8,128 $ 5,358 $ 9,275
Gross profit....................... 145 3,738 5,284 6,254 5,145 3,091 6,389
Amortization of intangible
assets(2)........................ 89 1,100 1,092 1,092 1,093 829 819
Income (loss) from operations
before special compensation
expense.......................... (88) (453) 921 1,318 (1,201) (1,363) 1,326
Special compensation expense(3).... -- -- -- -- -- -- 5,568
Income (loss) from operations(4)... (88) (453) 921 1,318 (1,201) (1,363) (4,242)
Net income (loss)(4)............... $ (88) $ (596) $ 788 $1,207 $(1,338) $(1,458) $(2,563)
Pro forma provision (benefit) for
income taxes(5).................. (496) (541) (1,623)
Pro forma net loss(4).............. $ (841) $ (917) $(2,698)
Pro forma net loss per
share(4)(6)...................... $ (0.12) $ (0.13) $ (0.38)
Shares used to compute net loss per
share(6)......................... 7,013 7,013 7,013
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
ACTUAL AS ADJUSTED(7)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................... $ 2,139 $ 24,997
Total assets......................................................... 10,891 33,204
Long-term debt and capitalized lease obligations, net of current
portion............................................................ 1,510 855
Stockholders' equity................................................. 6,521 30,034
</TABLE>
5
<PAGE> 8
- ---------------
(1) Reflects operations for the one-month period ended December 31, 1991, which
was the first fiscal period of the Company's operations after acquisition of
the Company's business by current stockholders.
(2) 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 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Amortization of Intangible Assets."
(3) Represents a non-recurring, non-cash compensation expense of $5.4 million
resulting from the vesting in September 1996 of 716,916 stock options for 10
executive officers and key employees of the Company at a weighted average
exercise price of $1.81 per share, and the accrual of a special compensation
expense of $210,000 in September 1996, which is payable to the Company's
Chief Executive Officer. See "Management -- 1996 Stock Incentive Plan" and
"Management -- Employment Agreements."
(4) 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 $1.3 million, $1.2
million, $1.0 million and $0.15, respectively, for the nine-month period
ended September 30, 1996.
(5) 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.
(6) 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.
(7) Adjusted to reflect the sale of the 2,500,000 shares of Common Stock offered
by the Company hereby at an assumed offering price of $10.50 per share (the
midpoint of the estimated range of the initial public offering price), after
deducting underwriting discounts and commissions and estimated offering
expenses, and the receipt and application of the net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
6
<PAGE> 9
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.
RELIANCE ON MOTOROLA
Motorola is the Company's largest customer and a key supplier. During the
nine months ended September 30, 1996, 16.1% (approximately $1.5 million) of the
Company's sales were to Motorola, and the Company purchased an aggregate of $1.0
million in Motorola components during such time for use in its products. The
Company has an agreement with Motorola for the sale of approximately $3.7
million of private-labeled analog socket scramblers through September 1997, of
which $1.5 million had been purchased as of September 30, 1996. In addition, the
Company relies on Motorola to provide MicroTAC(TM) cellular telephones for
resale by the Company as an upgraded, secure cellular telephone. Also, the
Company intends, from time to time, to bid for integrated LMR systems contracts,
which it intends to supply using its hand-held Stealth 25 radio along with
private-labeled base station and repeater equipment purchased from Motorola. The
Company's dependence on Motorola, both as a customer and supplier, is expected
to continue. The Company is also dependent on continuing access to certain
proprietary Motorola intellectual property used in its products. 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, which 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 would have a material
adverse effect on the Company. See "Business -- Motorola Relationship."
TRANSITION FROM ADD-ON TO STAND-ALONE WIRELESS SECURITY PRODUCTS
The Company believes that there has been, and will continue to be,
increasing demand for secure wireless communication devices, particularly in the
LMR and cellular telephone markets, and that in the future these markets will
migrate from analog to digital equipment, due primarily to increased bandwidth
capacity constraints and the perception that digital transmissions are more
secure than analog transmissions. The transition to digital communications could
lead to a decrease in demand for add-on analog security modules, which accounted
for approximately 83% of the Company's revenues in the first nine months of
1996. The Company has historically sold add-on products for use with LMRs and
cellular telephones manufactured by other, larger companies with widely
recognized brand names and established distribution networks. During the third
quarter of 1996, the Company introduced its first two stand-alone
Transcrypt-branded products and intends to develop and place increasing emphasis
on stand-alone products in the future. This represents a fundamental change in
the nature of the Company's products and necessitates the development of new
manufacturing and sales and marketing strategies and capabilities. To some
extent, it also places the Company in competition with larger corporations which
have historically been customers of, and suppliers of components for, the
Company's add-on products. There can be no assurance that the Company will be
successful in making the transition from add-on products to stand-alone products
or that its new position in the market will not cause other companies, with
which it has historically dealt, to discontinue or limit their dealings with the
Company. The inability of the Company to successfully make such transition,
including the failure to meet manufacturing demands or the need for additional
development, testing or refinement following new product introduction, or a
significant decrease in sales of the Company's existing add-on products during
such transition period, would have a material adverse effect on the Company. In
addition,
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<PAGE> 10
although gross profits may increase in the future due to increased sales of the
Company's new stand-alone products, the stand-alone products generally carry
lower gross margins than add-on products. Therefore, 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. See "Business -- The
Company's Strategy."
MANAGEMENT OF GROWTH
The Company has recently expanded and intends to continue to significantly
expand the scope of its operations and the products which it offers. Such
expansion has resulted and will continue to result in an expansion of the
Company's facilities and work force. This growth can be expected to place a
significant strain on the Company's financial, managerial and other resources.
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 the normal course of its business and in connection with its expansion
plans, the Company evaluates potential acquisitions of businesses, products and
technologies that could complement or expand the Company's information security
business. To date, the Company has not completed any acquisitions, although it
may do so in the future. If the Company were to identify an appropriate
acquisition candidate, 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, or that the integration would not cause an
excessive diversion of management time and resources. See "Business -- The
Company's Strategy."
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 is more intense than for add-on and
analog products. Most of the Company's competitors or potential competitors have
significantly greater financial, managerial, technical and marketing resources
than the Company. In particular, Motorola holds a dominant position in the
market for wireless communication products, especially in the LMR and cellular
telephone market segments. Although the Company has no knowledge of any plans or
intentions by A. John Kuijvenhoven, the Company's founder, to compete with the
Company in the future, the non-compete agreement between the Company and Mr.
Kuijvenhoven, entered into at the time of the acquisition of the Company by the
current stockholders, expired in December 1996. 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. See "Business -- Competition"
and "Certain Transactions."
RAPIDLY EVOLVING INDUSTRY
The market for analog and digital information security products is an
emerging market and can be expected to evolve rapidly in the future as a result
of changing technology, industry standards and customer requirements. The
Company's ability to compete effectively in this rapidly evolving industry will
depend upon its ability to anticipate and react to these changes in a timely
manner. 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."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
International sales constituted approximately 57.3%, 71.4%, 57.3% and 39.0%
of the Company's revenues in the nine months ended September 30, 1996 and the
years ended December 31, 1995, 1994 and 1993,
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<PAGE> 11
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. 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. The Company's products are subject
to export controls under U.S. law, which in some cases require the approval of
the National Security Agency and the Department of Commerce. To date, the
Company has been able to secure most required U.S. export licenses. There can be
no assurance, however, 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 could 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 will allow 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. 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. Such 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 would have a material
adverse effect on the Company. See "Business -- Sales, Marketing and
Distribution."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon a number of key
employees, including members of senior management. The loss of the services of
one or more of these key 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 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 technical, managerial and
marketing personnel. Competition for such personnel is intense and there can be
no assurance that the Company will successfully attract, motivate or retain 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 short supply. For
example, in late 1993 and early 1994, there was a shortage of certain Motorola
surface-mount microprocessors, which resulted in a 47% increase in the cost of
these components over a period of approximately seven months. The Company's
inability to obtain key components could result in lost sales, the
9
<PAGE> 12
need to maintain excessive inventory levels and higher component costs, which
could increase the cost of producing the Company's products and result in a
material adverse effect on the Company.
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,
general economic conditions and the timing and mix of product sales. 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. In
addition, the Company's anticipated expansion will result in significant fixed
costs that will be recognized before any related revenues are realized, which
could adversely affect the Company's quarterly operating results. The Company
does not maintain a significant backlog and is dependent upon the receipt of
current customer orders. Any deferral of customer purchasing decisions or delays
in shipments can produce significant variations in the Company's quarterly
results. The impact of such decisions can be especially significant in the case
of government orders, which tend to be quite large. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Quarterly
Results of Operations."
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 would have a material
adverse effect on the Company. 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. 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 one patent and has filed applications for nine
additional patents since 1995. Although the Company assesses the advisability of
patenting any technological development, it has historically relied primarily on
copyright and trade secret law, as well as employee and third party
non-disclosure agreements, to protect its proprietary intellectual property and
rights. The protection afforded by such means is not as complete as patent
protection. In addition, the laws of some countries do not protect trade
secrets. The inability of the Company to preserve 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, Motorola and E.F. Johnson Co.) that it believes that
products complying with the APCO 25 standard will necessarily infringe various
Ericsson patents and that APCO 25 manufacturers must obtain licenses under such
patents. The Company does not believe that the APCO 25 standard or any of the
Company's products infringe the relevant Ericsson patents or any valid
intellectual property right of others. 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, 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."
10
<PAGE> 13
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of this offering, the Company's existing stockholders will
own beneficially, in the aggregate, approximately 59.6% of the Company's
outstanding Common Stock (assuming no exercise of the Underwriters'
over-allotment option). These stockholders will have the ability to control the
outcome of all corporate actions requiring stockholder approval and the election
of the Company's directors. See "Principal and Selling Stockholders."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF SHARE PRICES
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
after this offering or that the market price of the Common Stock will not
decline below the initial public offering price. The initial public offering
price will be determined by negotiations between the Company and the
Underwriters. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.
Market prices for securities of new companies in general, and technology
companies in particular, 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 $7.29 per share, assuming an initial price of $10.50 per share (the
midpoint of the estimated range of the initial public offering price). See
"Dilution."
DIVIDENDS
No dividends have been paid on the Common Stock to date and the Company
does not anticipate paying dividends in the foreseeable future. See "Dividend
Policy."
UNALLOCATED NET PROCEEDS
The Company has not yet identified specific uses for the substantial
majority 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
9,283,078 shares of Common Stock, of which the 2,500,000 shares offered hereby
by the Company and the 1,250,000 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"). The remaining 5,533,078 shares of Common Stock are
"restricted" securities under the Securities Act, which the Company believes
must, under current law, be held until at least June 30, 1998. All of the
Company's existing stockholders have agreed not to sell any Common Stock for a
period of 180 days after this offering without the consent of Dain Bosworth
Incorporated. 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
September 30, 1996, 716,916 shares of Common Stock were issuable upon exercise
of vested stock options granted by the Company prior to the date of this
Prospectus and 325,000 shares will be issuable pursuant to options to be granted
upon the effectiveness of this offering. In addition, the Company intends, as
soon as practicable after the consummation
11
<PAGE> 14
of this offering, to file 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 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."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,500,000 shares of Common Stock offered by the Company in this offering are
estimated to be $23.5 million, based on an assumed offering price of $10.50 per
share (the midpoint of the estimated range of the initial public offering price
in this offering) and after deducting the estimated underwriting discounts and
commissions and offering expenses payable by the Company. 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 $1.2 million of the net proceeds
of this offering to repay the Company's indebtedness on certain term notes with
variable interest rates ranging from 8.25% to 8.75% as of September 30, 1996 and
maturities ranging between 1998 and 2000. The approximately $22.3 million of
remaining net proceeds are expected to be used for working capital and other
general corporate purposes and to support the Company's business strategy,
including enhancement of the Company's sales and distribution capabilities and
capital expenditures to expand the Company's manufacturing facilities. The
Company may also use a portion of the net proceeds to fund 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.
DIVIDEND POLICY
Although the Company's predecessor, a limited partnership, had made
distributions primarily to cover its partners' attributed tax liabilities, the
Company, since its reorganization as a corporation in June 1996, 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.
12
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 and on an as-adjusted basis to reflect the sale of 2,500,000
shares of Common Stock offered by the Company hereby at an assumed offering
price of $10.50 per share (the midpoint of the estimated range of the initial
public offering price in this offering) 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>
SEPTEMBER 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt and capitalized lease obligations, net of current
portion(1)........................................................... $ 1,510 $ 855
Stockholders' equity:
Preferred Stock, $0.01 par value, 3,000,000 shares authorized, none
issued and outstanding(2)......................................... -- --
Common Stock, $0.01 par value, 19,400,000 voting shares authorized,
6,565,536 issued and outstanding, actual; 600,000 non-voting
shares authorized, 217,542 issued and outstanding, actual;
9,065,536 voting shares issued and outstanding, as adjusted;
217,542 non-voting shares issued and outstanding, as
adjusted(2)....................................................... 52 93
Additional paid-in capital(3)........................................ 9,699 33,171
Retained deficit(3).................................................. (3,230) (3,230)
------- -------
Total stockholders' equity................................... 6,521 30,034
------- -------
Total capitalization................................................... $ 8,031 $30,889
======= =======
</TABLE>
- ---------------
(1) See Notes 6 and 7 of Notes to Consolidated Financial Statements.
(2) Shares issued and outstanding excludes 716,916 shares of Common Stock
reserved for issuance upon exercise of options outstanding as of September
30, 1996 under the Company's stock option plan at a weighted average
exercise price of $1.81 per share and 325,000 shares issuable pursuant to
options to be granted upon the effectiveness of this offering at an exercise
price equal to the initial price to the public. See "Management -- 1996
Stock Incentive Plan" and Note 13 of Notes to Consolidated Financial
Statements.
(3) 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, which is payable to the Company's
Chief Executive Officer. See "Management -- 1996 Stock Incentive Plan" and
"Management -- Employment Agreements."
13
<PAGE> 16
DILUTION
The net tangible book value of the Company as of September 30, 1996 was
$6.3 million or approximately $0.93 per share. Net tangible book value per share
is determined by dividing the Company's net tangible book value (total tangible
assets less total liabilities) by the shares of Common Stock outstanding. 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
made hereby and the 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 2,500,000 shares of Common Stock offered hereby at an assumed
offering price of $10.50 per share (the midpoint of the estimated range of the
initial public offering price in this offering) and the application of the
estimated net proceeds therefrom, the pro forma net tangible book value of the
Company as of September 30, 1996 would have been $29.8 million or $3.21 per
share. This represents an immediate increase in net tangible book value of $2.28
per share to existing stockholders and an immediate dilution in net tangible
book value of $7.29 per share to the purchasers of Common Stock in this
offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................. $10.50
Net tangible book value per share as of September 30, 1996........ $0.93
Increase in net tangible book value per share attributable to new
investors...................................................... 2.28
-----
Net tangible book value per share after offering.................... 3.21
------
Dilution per share to new investors................................. $ 7.29
======
</TABLE>
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 September 30,
1996, 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 initial public offering price of
$10.50 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)............... 6,783,078 73.1% $ 7,864,123 23.1% $ 1.16
New investors(1)....................... 2,500,000 26.9 26,250,000 76.9 10.50
--------- ----- ----------- ----- ------
Total........................ 9,283,078 100.0% $34,114,123 100.0% $ 3.67
========= ===== =========== ===== ======
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 5,533,078, or 59.6% (or 53.5% 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
3,750,000, or 40.4% (or 46.5% 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 716,916 shares of Common
Stock issuable upon exercise of outstanding stock options as of September 30,
1996, with a weighted average exercise price of $1.81 per share. See
"Management -- 1996 Stock Incentive Plan" and Note 13 of Notes to Consolidated
Financial Statements.
14
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company is
qualified by reference to and should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
herein. The Consolidated Statements of Income (Loss) data for the years ended
December 31, 1993, 1994 and 1995 and the Consolidated Balance Sheet data as of
December 31, 1994 and 1995 are derived from, and are qualified by reference to,
the audited Consolidated Financial Statements of the Company included elsewhere
in this Prospectus. The Consolidated Statements of Income (Loss) data for the
year ended December 31, 1992 and the Consolidated Balance Sheet data as of
December 31, 1991, 1992 and 1993 are derived from audited financial statements
not included herein. The Consolidated Statements of Income (Loss) data for the
one-month period ended December 31, 1991 (the first fiscal period of the
Company's operations subsequent to the acquisition of the Company's business by
current stockholders) and for the nine-month periods ended September 30, 1995
and 1996, and the Consolidated Balance Sheet data as of September 30, 1996, 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 nine months ended September
30, 1996 is not necessarily indicative of the results for the entire fiscal
year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- ------------------
1991(1) 1992 1993 1994 1995 1995 1996
------- ------ ------ ------ ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME (LOSS) DATA:
Revenues.......................... $ 224 $4,974 $6,900 $9,155 $ 8,128 $ 5,358 $ 9,275
Cost of sales..................... 79 1,236 1,616 2,901 2,983 2,267 2,886
----- ------- ------- ------- ------- ------- --------
Gross profit...................... 145 3,738 5,284 6,254 5,145 3,091 6,389
Operating expenses:
Research and development........ 43 963 1,138 1,180 1,953 1,362 1,686
Sales and marketing............. 52 656 982 1,590 2,109 1,456 1,506
General and administrative...... 49 1,472 1,151 1,074 1,191 807 1,052
Amortization of intangible
assets(2).................... 89 1,100 1,092 1,092 1,093 829 819
Special compensation
expense(3)................... -- -- -- -- -- -- 5,568
----- ------- ------- ------- ------- ------- --------
Total operating expenses..... 233 4,191 4,363 4,936 6,346 4,454 10,631
----- ------- ------- ------- ------- ------- --------
Income (loss) from
operations(4)................... (88) (453) 921 1,318 (1,201) (1,363) (4,242)
Interest expense, net............. -- 143 133 111 137 95 79
Provision (benefit) for income
taxes(5)........................ -- -- -- -- -- -- (1,758)
----- ------- ------- ------- ------- ------- --------
Net income (loss)(4).............. $ (88) $ (596) $ 788 $1,207 $(1,338) $(1,458) $ (2,563)
===== ======= ======= ======= ======= ======= ========
Income (loss) before pro forma
taxes........................... $(1,338) $(1,458) $ (4,321)
Pro forma provision (benefit) for
income taxes(5)................. (497) (541) (1,623)
------- ------- --------
Pro forma net loss(4)............. $ (841) $ (917) $ (2,698)
======= ======= ========
Pro forma net loss per
share(4)(6)..................... $ (0.12) $ (0.13) $ (0.38)
======= ======= ========
Shares used to compute net loss
per share(6).................... 7,013 7,013 7,013
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------ SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................ $ 53 $ 436 $1,726 $3,353 $1,684 $ 2,139
Total assets............................... 8,353 7,741 7,908 9,627 7,523 10,891
Long-term debt and capitalized lease
obligations, net of current portion...... 2,560 2,552 2,035 2,164 1,847 1,510
Stockholders' equity....................... 4,862 3,821 4,599 5,945 3,907 6,521
</TABLE>
- ---------------
(1) Reflects operations for the one-month period ended December 31, 1991, which
was the first fiscal period of the Company's operations after acquisition of
the Company's business by current stockholders.
(2) 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 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Amortization of Intangible Assets."
(3) Represents a non-recurring, non-cash compensation expense of $5.4 million
resulting from the vesting in September 1996 of 716,916 stock options for 10
executive officers and key employees of the Company at a weighted average
exercise price of $1.81 per share, and the accrual of a special compensation
expense of $210,000 in September 1996, which is payable to the Company's
Chief Executive Officer. See "Management -- 1996 Stock Incentive Plan" and
"Management -- Employment Agreements."
(4) 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 $1.3 million, $1.2
million, $1.0 million and $0.15, respectively, for the nine-month period
ended September 30, 1996.
(5) 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.
(6) 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.
16
<PAGE> 19
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 materially from the results discussed in the
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus. 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 and Chief Executive Officer, acquired substantially all of the assets
of the Company and certain intellectual property rights held by the Company's
founders, creating intangible assets of approximately $5.5 million, which the
Company amortized on a straight-line basis over a 60-month period 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 late 1993, the Company began marketing system-wide security upgrades to
large users of wireless communications, particularly foreign public safety and
government users. Primarily as a result of such sales to these foreign
customers, revenues in 1994 and 1995 generally increased while gross margins
were reduced by the lower unit prices associated with these larger orders. The
Company's gross margins were also negatively impacted during this period by a
worldwide shortage of surface-mount microprocessors of the type used in the
Company's add-on scrambling modules, which increased the Company's component
costs. In mid-1994, the Company began purchasing components from a large
electronics component distributor, which contributed to a gradual improvement in
the Company's access to such components and reduced component costs.
In order to take advantage of the growing demand for digital
communications, in 1993 the Company started to invest in digital product and
technology research and development. In September 1994, the Company began
developing an APCO 25 compliant hand-held digital LMR. In connection with the
development of this new product, the Company hired 11 additional technical
personnel to focus on basic digital research and product development. In order
to help finance these additional research and development expenditures, in
September 1994, the Company raised $1.0 million through the sale of additional
equity to its existing equityholders. As a result of these development efforts,
the Company introduced a digital landline telephone encryptor in October 1995
and an APCO 25 compliant digital hand-held radio in August 1996, and plans to
introduce additional digital products in 1997.
In 1995, the Company's growth was interrupted when the Company experienced
a reduction in annual revenues and profitability before amortization of
intangible assets. The Company believes that these results were primarily
attributable to management conflict over the future direction and control of the
Company, which led to a management restructuring commencing in the second
quarter of 1995 that resulted in the departure of five executive officers. The
Company believes that these factors diverted management attention from
day-to-day operations, which negatively impacted operating results, particularly
in the first half of 1995. In addition, the Company incurred direct expenditures
in 1995 of approximately $305,000 in severance payments and recruiting and
relocation costs for new executives in connection with the restructuring.
The Company has benefited and continues to benefit from state tax credits
arising from a 1993 agreement with the State of Nebraska, which results in
annual state income tax credits through 1999. In addition, the Company utilizes
its foreign sales corporation subsidiary located in Guam to exempt from income
taxation a portion of the Company's foreign sales income. See "Provision for
Income Taxes."
17
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth certain Consolidated Statements of Income
(Loss) information as a percentage of revenues during the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ----------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................. 23.4 31.7 36.7 42.3 31.1
----- ----- ----- ----- -----
Gross profit................................... 76.6 68.3 63.3 57.7 68.9
Operating expenses:
Research and development..................... 16.5 12.9 24.0 25.4 18.2
Sales and marketing.......................... 14.2 17.4 26.0 27.2 16.2
General and administrative................... 16.7 11.7 14.7 15.0 11.4
Amortization of intangible assets............ 15.8 11.9 13.4 15.5 8.8
Special compensation expense................. -- -- -- -- 60.0
----- ----- ----- ----- -----
Total operating expenses............. 63.2 53.9 78.1 83.1 114.6
Income (loss) from operations.................. 13.4 14.4 (14.8) (25.4) (45.7)
Interest expense, net.......................... 1.9 1.2 1.7 1.8 0.9
Provision (benefit) for income taxes........... -- -- -- -- (19.0)
----- ----- ----- ----- -----
Net income (loss).............................. 11.5% 13.2% (16.5)% (27.2)% (27.6)%
===== ===== ===== ===== =====
Income (loss) before pro forma income taxes.... (16.5) (27.2) (46.6)
Pro forma provision (benefit) for income
taxes........................................ (6.1) (10.1) (17.5)
----- ----- -----
Pro forma net loss............................. (10.4)% (17.1)% (29.1)%
===== ===== =====
</TABLE>
Revenues
The Company recognizes revenues upon shipment of products to its customers.
Revenues increased to $9.3 million in the nine months ended September 30, 1996
from $5.4 million in the nine months ended September 30, 1995. This increase was
attributable primarily to revenues during the 1996 period associated with
several large new sales contracts, including the commencement of shipments of
socket scramblers to Motorola. In addition, revenues for the nine months ended
September 30, 1995 were negatively impacted due to management conflicts over the
future direction and control of the Company, which led to a management
restructuring commencing in the second quarter of 1995 and resulted in the
departure of five senior executive officers.
Revenues declined to $8.1 million in 1995 from $9.2 million in 1994, due
primarily to lower sales volumes in the first half of 1995, which management
believes resulted primarily from the internal management conflicts discussed
above. Revenues increased to $9.2 million in 1994 from $6.9 million in 1993, due
primarily to several significant international orders in 1994.
International sales as a percentage of revenues were 57.3% and 65.2% during
the nine-month periods ended September 30, 1996 and 1995, respectively, and
71.4%, 57.3% and 39.0% in 1995, 1994 and 1993, respectively. The Company
believes that the proportion of international sales in 1995 was unusually high,
reflecting large sales to Egypt and Turkey and lower domestic sales. The Company
anticipates that international sales will continue to represent a significant
portion of revenues in the future, although domestic sales may increase as a
percentage of revenues in the future due to an increased marketing emphasis on
domestic sales, including scrambler sales to Motorola, and the introduction and
expanded marketing domestically of the Company's current and proposed digital
radio products in 1997.
18
<PAGE> 21
Gross Profit
Cost of sales includes materials, labor, depreciation and overhead costs
associated with the production of the Company's products, as well as shipping,
royalty and warranty product costs. Gross profit increased to $6.4 million in
the nine months ended September 30, 1996 from $3.1 million in the nine months
ended September 30, 1995. In addition, gross margin increased to 68.9% in the
nine months ended September 30, 1996 from 57.7% in the same period in 1995, due
primarily to greater revenues in the nine months ended September 30, 1996
without a comparable increase in fixed overhead costs. In addition, gross
margins were negatively impacted during the 1995 period due to the sale to
international customers of large system-wide security upgrades at reduced unit
prices. The Company began shipment of its first stand-alone products in
September 1996, which generally have lower gross margins than add-on products.
To the extent that sales of stand-alone products increase in the future relative
to add-on product sales, gross margins are likely to decline.
Gross profit was $5.1 million, $6.3 million and $5.3 million in 1995, 1994
and 1993, respectively. Gross margin declined to 63.3% in 1995 from 68.3% in
1994, due primarily to lower sales volumes during the first six months of 1995
without a comparable decline in fixed overhead costs. Gross margin declined to
68.3% in 1994 from 76.6% in 1993, due primarily to increased system-wide sales
to international customers at reduced unit prices and the shortage of
surface-mount microprocessors.
Research and Development
Research and development expenses consist primarily of the costs associated
with research and development personnel, materials and the depreciation of
research and development equipment and facilities. The Company expenses all
research and development costs as they are incurred. Research and development
expenses increased to $1.7 million in the nine months ended September 30, 1996
from $1.4 million in the same period in 1995. This increase was due primarily to
expenses related to the development of the Company's APCO 25 digital LMRs and
the related development of internal manufacturing capabilities for certain radio
components. Research and development expenses as a percentage of revenues
decreased to 18.2% from 25.4% over this period, due to greater revenues in the
nine months ended September 30, 1996. The Company anticipates that it will
continue to devote increased resources to research and development during 1997.
Research and development expenses increased to $2.0 million in 1995 from
$1.2 million in 1994 and $1.1 million in 1993. These increases were due
primarily to the commencement of development of the Company's APCO 25 compliant
digital LMRs, which began in September 1994, and the expanded development of
telephone security product lines. Research and development expenses as a
percentage of revenues were 24.0%, 12.9% and 16.5% in 1995, 1994 and 1993,
respectively.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and related
costs of sales personnel, including sales commissions and travel expenses, and
costs of advertising, public relations, seminars and trade show participation.
Sales and marketing expenses remained constant at $1.5 million in each of the
first nine months of 1996 and 1995. Sales and marketing expenses decreased as a
percentage of revenues to 16.2% during the nine months ended September 30, 1996
from 27.2% in the same period in 1995, due primarily to the increase in revenues
during the 1996 period. The Company expects to increase its sales and marketing
expenditures significantly during 1997 through the addition of direct sales and
marketing personnel, primarily to support the introduction of new products,
including digital radios.
Sales and marketing expenses increased to $2.1 million in 1995 from $1.6
million in 1994 and $982,000 in 1993. These increases were 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%, 17.4% and 14.2% in 1995, 1994 and 1993,
respectively. The percentage increase from 1994 to 1995 was also due in part to
the Company's lower revenues in 1995.
19
<PAGE> 22
General and Administrative
General and administrative expenses consist primarily of salaries and other
expenses associated with the Company's management, accounting, finance and
administrative functions. General and administrative expenses increased to $1.1
million in the nine months ended September 30, 1996 from $807,000 in the same
period in 1995. This increase was attributable primarily to expenses associated
with completing the restructuring of the senior management team begun in 1995,
including recruiting and relocation of several additional senior managers. The
Company expects to incur additional increases in general and administrative
expenses in 1997 due to costs associated with maintaining its status as a
publicly-held company and upgrades to the Company's management information
systems. General and administrative expenses as a percentage of revenues
decreased to 11.4% in the nine months ended September 30, 1996 from 15.0% in the
same period in 1995.
General and administrative expenses remained generally constant at $1.2
million, $1.1 million and $1.2 million in 1995, 1994 and 1993, respectively.
General and administrative expenses as a percentage of revenues were 14.7%,
11.7% and 16.7% in 1995, 1994 and 1993, respectively.
Amortization of Intangible Assets
Intangible assets consist primarily of the costs associated with the
acquisition of the Company's business in December 1991, including proprietary
technology licenses, non-competition agreements and goodwill. The Company
amortized these intangible assets on a straight-line basis over a 60-month
period ending November 30, 1996, which resulted in an amortization expense of
$1.1 million in each of 1995, 1994 and 1993, and approximately $820,000 in each
of the first nine months of 1996 and 1995. These intangible assets were fully
amortized as of November 30, 1996, and thus no such amortization expense will be
incurred subsequent to November 30, 1996.
Special Compensation Expense
In September 1996, the Company incurred a non-recurring, non-cash
compensation expense of $5.4 million, resulting from the vesting in September
1996 of 716,916 stock options for 10 executive officers and key employees of the
Company at a weighted average exercise price of $1.81 per share, and a special
compensation expense of $210,000 payable to the Company's Chief Executive
Officer. 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 $1.3 million, $1.2 million,
$1.0 million and $0.15, respectively, for the nine-month period ended September
30, 1996. See "Management -- 1996 Stock Incentive Plan" and
"Management -- Employment Agreements."
Interest Expense, Net
Net interest expense consists of interest expense, including amounts
payable on the Company's term loans, net of interest income, including interest
earned on cash and investable funds. Net interest expense remained relatively
constant at $80,000 in the nine months ended September 30, 1996, a decrease from
$94,000 in the same period in 1995. Net interest expense was $137,000, $111,000
and $134,000 in 1995, 1994 and 1993, respectively.
Provision for Income Taxes
Prior to June 1996, the Company was organized as a partnership, and
therefore was not subject to income taxation except to the extent that its
earnings were attributed to its partners. The Company's benefit for income taxes
subsequent to reorganization as a corporation for the three-month period ended
September 30, 1996 was $(1.8) million, primarily resulting from a deferred tax
benefit in connection with the stock option related special compensation expense
of $5.4 million.
The Company benefits from state tax credits arising from a 1993 agreement
with the State of Nebraska (the "Nebraska Agreement") to create at least 30 new
jobs and invest at least $3.0 million in new equipment prior to December 31,
1999. This agreement results in annual state income tax credits through 1999 of
ten percent of the purchase price of new equipment and a refund of Nebraska
sales taxes (currently at a rate of 6.5%) paid on purchases of new equipment
during each year and, beginning on January 1, 1996, a credit of five
20
<PAGE> 23
percent of the annual compensation paid to the new employees exceeding the base
year's aggregate compensation. Such credits amounted to $454,000 in the first
six months of 1996, of which $80,000 is currently available to the Company,
while the balance was accrued to the partners of the Company's predecessor
limited partnership. The Company believes that sufficient tax credits will be
available through the life of the Nebraska Agreement to offset the Company's
expected Nebraska state income tax liability during such period. In addition,
the Company utilizes its foreign sales corporation ("FSC") subsidiary located in
Guam to exempt from income taxation a portion of the Company's foreign sales
income.
Recently Issued Accounting Standards
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation." SFAS No. 123 allows companies to continue the current method of
accounting for stock-based compensation plans under APB Opinion No. 25 or adopt
the fair value based method contained in SFAS No. 123. The Company plans to
continue to account for its stock-based compensation under APB Opinion No. 25.
21
<PAGE> 24
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited financial information in
dollars and as a percentage of revenues for the seven quarters ended September
30, 1996. In the opinion of the Company's management, this information has been
prepared on the same basis as the audited Consolidated Financial Statements
appearing elsewhere in this 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, SEPTEMBER 30,
1995 1995 1995 1995 1996 1996 1996
--------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................. $ 1,460 $1,562 $ 2,336 $2,770 $ 2,580 $3,148 $ 3,547
Cost of sales............................. 646 761 859 716 911 939 1,036
------ ------ ------ ------ ------ ------ ------
Gross profit.............................. 814 801 1,477 2,054 1,669 2,209 2,511
Operating expenses:
Research and development................ 397 457 508 591 436 649 601
Sales and marketing..................... 509 411 535 654 431 404 671
General and administrative.............. 285 265 258 383 350 345 357
Amortization of intangible assets(1).... 273 280 277 263 276 270 273
Special compensation expense(2)......... -- -- -- -- -- -- 5,568
------ ------ ------ ------ ------ ------ ------
Total operating expenses.............. 1,464 1,413 1,578 1,891 1,493 1,668 7,470
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations(3).......... (650) (612) (101) 163 176 541 (4,959)
Interest expense, net..................... 29 24 42 43 18 32 29
Provision for income taxes(4)............. -- -- -- -- -- -- (1,758)
------ ------ ------ ------ ------ ------ ------
Net income (loss)(3)...................... $ (679) $ (636) $ (143) $ 120 $ 158 $ 509 $(3,230)
====== ====== ====== ====== ====== ====== ======
Income (loss) before pro forma taxes...... $ (679) $ (636) $ (143) $ 120 $ 158 $ 509 $(4,988)
Pro forma provision (benefit) for income
taxes................................... (252) (236) (53) 45 38 97 (1,758)
------ ------ ------ ------ ------ ------ ------
Pro forma net income (loss)(3)............ $ (427) $ (400) $ (90) $ 75 $ 120 $ 412 $(3,230)
====== ====== ====== ====== ====== ====== ======
Pro forma net income (loss) per
share(3)(5)............................. $ (0.06) $(0.06) $ (0.01) $ 0.01 $ 0.02 $ 0.06 $ (0.46)
====== ====== ====== ====== ====== ====== ======
Shares used to compute net income (loss)
per share(5)............................ 7,013 7,013 7,013 7,013 7,013 7,013 7,013
====== ====== ====== ====== ====== ====== ======
AS A PERCENTAGE OF REVENUES
----------------------------------------------------------------------------------
Revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 44.3 48.7 36.8 25.9 35.3 29.8 29.2
------ ------ ------ ------ ------ ------ ------
Gross margin.............................. 55.7 51.3 63.2 74.1 64.7 70.2 70.8
Operating expenses:
Research and development................ 27.2 29.3 21.7 21.3 16.9 20.6 16.9
Sales and marketing..................... 34.8 26.3 23.0 23.6 16.7 12.8 18.9
General and administrative.............. 19.5 17.0 11.0 13.8 13.6 11.0 10.1
Amortization of intangible assets(1).... 18.7 17.9 11.8 9.5 10.7 8.6 7.7
Special compensation expense(2)......... -- -- -- -- -- -- 157.0
------ ------ ------ ------ ------ ------ ------
Total operating expenses.............. 100.2 90.5 67.5 68.2 57.9 53.0 210.6
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations(3).......... (44.5) (39.2) (4.3) 5.9 6.8 17.2 (139.8)
Interest expense, net..................... 2.0 1.5 1.8 1.6 0.7 1.0 0.8
Provision for income taxes(4)............. -- -- -- -- -- -- (49.6)
------ ------ ------ ------ ------ ------ ------
Net income (loss)(3)...................... (46.5)% (40.7)% (6.1)% 4.3% 6.1% 16.2% (91.0)%
====== ====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Reflects the amortization of intangible assets related to the acquisition of
the Company's business in December 1991. These intangible assets were fully
amortized as of November 30, 1996, and thus no such amortization expense
will be incurred subsequent to November 30, 1996. See "-- Results of
Operations -- Amortization of Intangible Assets."
(2) Represents a non-recurring, non-cash compensation expense of $5.4 million
resulting from the vesting in September 1996 of 716,916 stock options for 10
executive officers and key employees of the Company at a weighted average
exercise price of $1.81 per share, and the accrual of a special compensation
expense of $210,000 in September 1996, which is payable to the Company's
Chief Executive Officer. 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.
22
<PAGE> 25
The Company historically has experienced, and in the future expects to
continue to experience, substantial variability in its revenues and
profitability from quarter to quarter. The level of revenues in a particular
quarter vary primarily based upon the timing of large purchase orders, due
principally to the seasonal nature of governmental budgeting processes and the
needs of competing budgetary concerns of its customers during the year. Other
factors which affect the level of revenues in a particular quarter include the
timing of the introduction of new products, general economic conditions, the
timing and mix of product sales and specific economic conditions in the
information security and wireless communications industries. In addition, due to
the buying patterns of the Company's federal and state agency customers,
revenues for the first quarter of the Company's fiscal year tend to be lower
than revenues for the fourth quarter of the preceding year. The Company believes
that its quarterly results are likely to vary for the foreseeable future. See
"Risk Factors -- Fluctuations in Quarterly Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and met its capital requirements
primarily through cash flow generated from operations, short-term borrowings,
long-term debt and an additional capital investment from its investors. The
Company's operating activities generated cash of $1.4 million, $55,000, $2.9
million and $1.4 million in the nine months ended September 30, 1996 and in
1995, 1994 and 1993, respectively. Cash provided by operating activities in the
nine months ended September 30, 1996 consisted primarily of a net loss plus
depreciation and amortization and the special compensation expense and an
increase in accounts payable, offset in part by an increase in accounts
receivable, inventory and deferred tax assets. Cash provided by operating
activities in 1995 consisted primarily of a net loss plus depreciation and
amortization and an increase in accrued expenses, offset in part by an increase
in accounts receivable and a decrease in accounts payable. Cash provided by
operating activities in 1994 consisted primarily of net income plus depreciation
and amortization and a decrease in accrued expenses, offset in part by increases
in accounts receivable, inventory and prepaid and other assets.
The deferred tax assets totaling $1.9 million (which resulted primarily
from the stock option related special compensation expense of $5.4 million
incurred in September 1996) were 17.9% and 29.9% of total assets and
stockholders' equity, respectively, at September 30, 1996. Based on the current
level of taxable income, management believes that it is more likely than not
that future taxable income will be sufficient to fully utilize all deferred tax
assets recorded.
Cash used for investing activities is attributable primarily to capital
expenditures, which totaled $1.4 million, $1.3 million, $1.7 million and
$591,000 in the nine months ended September 30, 1996 and in 1995, 1994 and 1993,
respectively. Capital expenditures consisted primarily of computer and
networking equipment, office furniture and manufacturing equipment and, in 1994,
expenses related to the construction of the Company's Lincoln facility. In
August 1996, the Company began construction of a 21,000 square foot expansion of
its existing Lincoln facility at an estimated final cost of $1.0 million,
primarily to accommodate additional manufacturing capacity. The expansion is
expected to be completed in the first half of 1997. As of September 30, 1996,
the Company had no additional firm commitments for capital expenditures, but the
Company expects to purchase additional computer equipment and replace its
current management information system in 1997.
Financing activities have consisted primarily of borrowings under and
payments on an industrial development revenue bond issue (the "IDR") arranged
through the Nebraska Investment Finance Authority, two term notes, an
installment note secured by equipment and a bank line of credit. Additionally,
in September 1994, the Company received an additional $1.0 million equity
investment from existing investors to help the Company finance the development
of its APCO 25 digital radio project.
The IDR bears interest at a fixed rate of 6.25%, is non-amortizing and
matures in January 2004. At September 30, 1996, the outstanding principal amount
under the IDR was $850,000. Both of the term notes bear interest at the bank's
regional money market rate plus 0.5% (8.75% at September 30, 1996) and are
secured by substantially all of the Company's assets. One of the term notes had
a principal balance outstanding of $299,305 at September 30, 1996 and matures in
February 1998, while the other term note had a
23
<PAGE> 26
principal balance outstanding of $409,751 at September 30, 1996 and matures in
May 1999. The installment note is secured specifically by equipment and bears
interest at the bank's national prime rate plus 0.5% (8.25% at September 30,
1996). The installment note is payable in monthly installments and matures in
May 2000, and had outstanding $383,373 in principal amount at September 30,
1996. The bank line of credit provides for working capital and capital advances
not to exceed $4.0 million, with specific advances calculated based upon a
percentage of eligible inventories, accounts receivable and fixed assets.
Interest is payable monthly on the bank line at the bank's money market rate
(8.25% at September 30, 1996) and is collateralized by substantially all of the
Company's assets. The Company had $1.8 million of borrowings outstanding on the
bank line of credit at December 31, 1996.
In November 1996, the Company obtained a $1.0 million construction loan to
fund the expansion of its existing Lincoln facility. Interest on the loan is
payable monthly at the bank's national money market rate plus 0.5% (8.75% at
inception), with the principal balance maturing in August 1997.
Prior to June 1996, the Company was organized as a partnership and, as
such, made distributions to its partners of $181,000, $700,000, $861,000 and
$360,000 in the six months ended June 30, 1996 and in 1995, 1994 and 1993,
respectively, primarily to cover its partners' attributed tax liabilities. The
Company currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends in the foreseeable
future.
The Company believes that cash generated from operations and the net
proceeds from the sale of Common Stock 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 at least through 1997.
24
<PAGE> 27
BUSINESS
GENERAL
The Company designs and manufactures information security products which
prevent unauthorized access to sensitive voice and data communications. The
Company focuses on developing and providing information security products for
telecommunications markets, including the land mobile radio, telephony and data
security markets. The Company's products are based on a wide range of
proprietary analog scrambling and digital encryption technologies. The Company's
core technologies offer a number of significant benefits including high levels
of information security and sound quality, high-speed, real-time data
transmission, low power consumption, small size and cost effective
manufacturing. The Company believes its 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. Furthermore,
the Company believes its core technological expertise in analog scrambling and
digital encryption enables it to bring new information security products to
market quickly with relatively low development costs.
INDUSTRY BACKGROUND
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.
Today's information security industry originated from the need to secure
sensitive wireless military communications. By the late 1970s, the availability,
quality and cost of information security devices had improved such that the use
of these devices by non-military governmental users (i.e., law enforcement,
fire, emergency medical and public safety personnel) and large commercial users
became economically and functionally feasible. Although a variety of
manufacturers introduced new products throughout this time period, Motorola
emerged as the leader in wireless voice communications and a developer of
limited analog information security products.
Initially, all electronic communications were transmitted in analog format.
Analog transmissions 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 the supposedly private
cellular telephone conversations of public figures, as well as the widespread
theft of cellular telephone services through telephone "cloning," has
25
<PAGE> 28
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.
Land Mobile Radio Market
One of the earliest applications of information security technology outside
of the military was in protecting LMR voice communications. Land mobile radios
consist of hand-held or mobile (vehicle mounted) two-way radios commonly used by
public safety workers (e.g., police, fire and medical emergency personnel),
businesses (e.g., fleet operators, taxi dispatch, construction and other
commercial users) and a wide variety of United States and foreign government
agencies. A typical LMR system consists of one or more base control stations
networked with each other and with multiple mobile (vehicle-mounted) or
hand-held portable LMRs. According to data published by Motorola, the worldwide
LMR installed base grew to approximately 45 million units in 1995 from 33
million units in 1992.
As with all other major forms of wireless communications devices, LMRs
transmit information in either analog or digital format, although the
substantial majority of LMRs currently in use operate in analog format only. In
1995, as a result of increasing frequency spectrum capacity constraints, the FCC
mandated that all new LMR equipment utilize a more spectrally-efficient,
narrow-band (12.5 kHz) transmission system, which will effectively require all
LMR users to migrate to digital LMR systems. In response to this mandate, an
advisory body of the Association of Public Safety Communications Officials
International, Inc. ("APCO"), including a number of LMR manufacturers,
recommended an industry standard for digital LMR devices which would both meet
the requirements of the FCC mandate and provide solutions for several actual or
potential problems which increasingly troubled public safety LMR users. These
problems included: (i) the lack of interoperability, or the failure of existing
systems to communicate with other systems produced by the same or other
manufacturers; (ii) the lack of backwards compatibility between older analog LMR
systems and the new proposed digital LMR systems; and (iii) the interception of
sensitive public safety communications by third party eavesdroppers. As a
result, the APCO advisory body eventually promulgated an open standard for
digital LMR products, which has come to be known as the "APCO 25 standard."
In order to comply with the APCO 25 standard, a digital LMR system must
utilize a "common air interface" to achieve interoperability with other digital
systems, be compatible with existing analog LMR infrastructure and provide the
user with the ability to use advanced encryption technologies. Motorola, the
largest LMR manufacturer, played a significant role in the formulation of the
APCO 25 standard and has been a major proponent of its adoption by the LMR
public safety market. Certain competitive LMR system standards have been
proposed by other LMR manufacturers, primarily the "EDACS" standard proposed by
Ericsson. Ericsson's EDACS standard is based on time division multiple access
("TDMA") technology, compared with the APCO 25 frequency division multiple
access ("FDMA") 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.
Although public safety agencies are not required by the FCC or the APCO
body to purchase APCO 25 compliant LMR systems, or otherwise adopt the APCO 25
standard, the Company believes, based in part on specifications published or
proposed by certain public safety agencies seeking bids for LMR system
equipment, that APCO 25 compatibility is one of the key purchasing factors for
public safety LMR purchasers and that the demand for APCO 25 compliant LMR
systems will increase as LMR users upgrade their existing systems to comply with
the FCC mandate. On the federal level, in May 1996, the U.S. Air Force proposed
to adopt the APCO 25 standard as the mandatory LMR standard for all future Air
Force LMR requirements and acquisitions. Also, in March 1996, the U.S.
Department of the Interior announced a similar proposal to adopt the APCO 25
standard. Although there can be no assurance that these specific proposals will
be implemented, the Company believes that they reflect developing support for
the APCO 25 standard.
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Telephony 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 40.4 million subscribers in 1996 to 56.9 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.
THE COMPANY'S STRATEGY
The Company believes that its 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
communication products migrate from analog to digital technology. The Company's
objective is to maintain its position in the analog add-on market for wireless
voice security products used in land mobile radios and cellular telephones while
building on its core technological competencies to enter new markets for secure
voice and data security products. 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. The Company is currently developing a product to
provide secure data transmission using the encryption technology developed for
the APCO 25 LMR and the Company's landline encryption device (DME 9600). 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 complete, stand-alone secure communications solutions.
The Company is developing a secure, APCO 25 compliant LMR system based on its
Stealth 25 hand-held LMR and using base stations and repeaters purchased on a
private-labeled basis from Motorola. The Company has also recently begun
providing Transcrypt-branded secure cellular telephones and Voice Privacy
Exchange
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Units to a regional Bell operating company, which offers secure cellular service
in one metropolitan area. The Company believes that providing complete solutions
will allow it to compete for larger sales orders than can be obtained for add-on
products.
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 a minimum of $3.7 million of
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 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 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 be consolidation
among the current competitors. The Company intends to explore opportunities to
acquire businesses and technologies that will complement its products and core
technologies and expand its existing customer base and manufacturing capability.
However, the Company has no present understandings or agreements concerning any
such acquisitions and is not presently negotiating with respect to any such
matter. There is no assurance that the Company will be able to identify an
appropriate acquisition candidate or complete such an acquisition.
CORE TECHNOLOGIES
The Company first entered the information security market in 1978 with
simple, transistor-based add-on scrambling modules for use in analog LMRs
employing basic single-inversion scrambling techniques, which the Company
marketed primarily to public safety agencies and international governments.
Since that time, the Company has further developed and improved upon its core
information security technologies, including its copyrighted Crypto Voice
Plus(@) 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, as
well as in other types of products within the Company's two major product
families, LMR Security and Telephony Security. Such core technologies currently
include the following methods, listed in ascending order of sophistication of
security technique: (i) frequency inversion (inverting or otherwise adjusting
the phase of a signal based on a consistent method); (ii) split-band
transmission (spreading a signal across multiple channels); (iii) rolling code
transmission (incrementally stepping codes); (iv) hopping code transmission
(randomly setting codes based upon an algorithm); (v) frequency hopping
transmission (changing broadcast frequencies multiple times per second based
upon an algorithm); and (vi) digital encryption (encoding a digital bit-stream
based upon a mathematical encryption algorithm).
The Company typically charges higher prices for devices featuring more
advanced levels of security. Therefore, the types of end users at each level of
security tend to vary based upon the importance of the information for which
security is desired. Typical users of the most basic form of scrambler, the
frequency inversion scrambler, include taxi dispatchers, other types of consumer
businesses and football and other sports teams that need to provide real-time
secure communications between players and coaches. Typical users for
medium-level security devices include commercial and industrial users and
international customers for which an export license has not been obtained.
High-level scrambling devices are used primarily by public safety agencies and
federal government personnel.
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PRODUCTS
Current Products
The following tables contain a summary of certain information concerning
the Company's current principal information security products, all of which have
been shipped in commercial quantities, except as otherwise indicated:
LAND MOBILE RADIO SECURITY PRODUCTS
<TABLE>
<CAPTION>
COMMERCIAL LATEST
PRODUCT DESCRIPTION/SECURITY LEVEL LIST PRICE INTRODUCTION UPDATE
- ----------------------------- ------------------------------ ------------ ---------------- ------------
<S> <C> <C> <C> <C>
MODULAR ADD-ON SCRAMBLERS
SC20-400 Scrambler Single inversion scrambler/LOW $124 December 1988 October 1996
SC20-410 Scrambler Rolling code scrambler/MED $249 September 1994 June 1996
SC20-430 Scrambler Hopping code scrambler/MED $399 September 1994 June 1996
SC20-460 Scrambler Hopping code scrambler/HIGH $535-599 April 1989 June 1996
SC20-480 Scrambler Hopping code w/synch/HIGH $599 April 1993 July 1996
SC20-500 Scrambler DSP-based scrambler/VERY HIGH $699 July 1996 August 1996
SOCKET SCRAMBLERS
Plug-in version of
350 OEM Scrambler SC20-460/HIGH $280 April 1996 August 1996
Plug-in version of
316 OEM Scrambler SC20-460/HIGH $200 July 1996* --
Plug-in version of
460 OEM Scrambler SC20-460/HIGH $280 July 1996 --
Plug-in version of
416 OEM Scrambler SC20-460/HIGH $275 August 1996 --
SIGNALING
TR20-200 Series RF signaling modules $59-399 May 1990 June 1996
TR20-800 Series Complex signaling modules $59-399 April 1991 June 1996
APCO 25 DIGITAL RADIO
Hand-held Stealth 25 Radio Digital radio/VERY HIGH $2,250-4,650 September 1996 --
</TABLE>
<TABLE>
<CAPTION>
TELEPHONY SECURITY PRODUCTS
COMMERCIAL LATEST
PRODUCT DESCRIPTION/SECURITY LEVEL LIST PRICE INTRODUCTION UPDATE
- ----------------------------- ------------------------------ ------------ ---------------- ------------
<S> <C> <C> <C> <C>
CELLULAR SCRAMBLERS
Mobile Scrambler-CX Hopping code scrambler/HIGH $250-380 March 1993 June 1996
MicroTAC Scrambler-PX Hopping code scrambler/HIGH $370-500 May 1994 January 1996
Secure Cellular Telephone Hopping code scrambler/HIGH $700-1,500 March 1996 --
DSP Scrambler GSU DSP-based scrambler/VERY HIGH $370-500 September 1996* --
Elite Scrambler DSP-based scrambler/VERY HIGH $800-1,000 October 1996* --
LANDLINE/DESKTOP SCRAMBLERS
Voice Privacy Exchange Unit PBX scrambler/HIGH $7,495 November 1993 June 1996
LX30-33X0 Landline scrambler/HIGH $740-925 December 1993 June 1996
TSU-LX40-33X0 Generic landline/HIGH $895 September 1996* --
DME 9600/9603 Landline encryptor/VERY HIGH $1,495-1,995 October 1995 June 1996
</TABLE>
- ---------------
* This product has been announced but not yet shipped in commercial quantities.
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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.
LMR Security. The Company offers a variety of add-on LMR scrambling
products featuring the Company's different core technologies and varying levels
of security. Add-on scramblers are available in two packages, a modular package
consisting of a circuit board that is designed to be permanently soldered into
existing circuitry, and a socket package designed to be installed in sockets
with standard pin configurations installed by OEM manufacturers. Motorola
currently stocks and sells directly one of the Company's socket modules pursuant
to an August 1995 agreement with the Company. Other products sold by the Company
are compatible with sockets of other OEM manufacturers, including Icom America,
Inc. and Kenwood Radio. The Company also produces modules that add signaling
features to OEM radios, including "man-down" (emergency signal broadcast if
radio position becomes horizontal), "stun-kill" (disables lost or stolen radios
remotely) and "over-the-air reprogramming" (changes encryption and scrambling
codes remotely). Sales of LMR products accounted for approximately 76% and 80%
of total revenues in the nine months ended September 30, 1996 and in 1995,
respectively.
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. The Company
intends to introduce additional secure LMR models, including mobile radios, in
1997. All of the Company's APCO 25 compliant "dual-mode" digital radios are
expected to be compatible and fully interoperable with older analog radio
systems, as well as with Motorola's proprietary analog trunking technology
(Smartnet(TM)) and proprietary digital encryption algorithm. The Company
believes that such backward compatibility will allow early adopters of the APCO
25 standard, such as the federal government and many public safety agencies, 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 a complete, Transcrypt-branded, Motorola
MicroTAC(TM) cellular telephone upgraded to include the Company's advanced
add-on scrambling modules. The Company believes that offering cellular telephone
security through a complete telephone product offers certain advantages to
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 has recently begun providing
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.
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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 1997 additional models of
its hand-held digital LMRs containing different features, as well as a line of
mobile (vehicle mounted) digital LMRs, all of which will comply with the APCO 25
standard. The Company also intends shortly thereafter to introduce hand-held and
mobile radios that transmit in analog format 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 trunking technology
(Smartnet(TM)) and Motorola's digital encryption algorithms. While the Company
is not planning on manufacturing LMR infrastructure, the Company expects that
base stations and repeaters will be available on a private label basis for
resale by the Company as part of an integrated system. The Company is also
developing a modular add-on LMR scrambler for use in OEM equipment that would
utilize the digital encryption algorithms licensed from Motorola. The Company's
analog radios, as well as its Smartnet(TM) compatible radio, are, as of the date
of this Prospectus, in the prototype and testing stage of development. The
remaining LMR security products under development are in the design and
experimentation stage.
Telephony Security. In March 1996, the Company began shipping in commercial
quantities a complete Transcrypt-branded Motorola MicroTAC(TM) cellular
telephone upgraded to include the Company's advanced add-on scrambling modules.
The Company intends to introduce, in 1997, 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 "T1" network
server capable of encryption/decryption for up to 24 simultaneous voice users, a
scrambling module, based on encryption technology, for cellular telephone users
and five new landline security products. Additionally, the Company intends to
introduce, in 1997, a "generic" analog scrambling module incorporating built-in
digital signal processing techniques, which is expected to provide improved
voice quality with less need for customization. Such device would be marketed
primarily to buyers of premium priced cellular telephones, such as Motorola's
new Elite(TM) and StarTAC(TM) telephones. As of the date of this Prospectus, the
Company's "T1" network server and generic analog scrambling module 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
"T1" network server capable of performing high speed, real-time authentication
and encryption/decryption for up to 24 simultaneous computer users, an encrypted
landline modem, an encrypted cellular modem, an encrypted fax/modem PCMCIA card
and a desktop facsimile encryption device. The Company's data security products
are in the initial design and experimentation stage of development. The Company
plans to begin introducing these types of products in 1997.
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CUSTOMERS
The Company's customers use information security products in a variety of
situations involving differing security needs. For example, domestic and
international police forces typically have a medium to high need for security,
while military users which are often faced with hostile and determined threats,
and therefore typically have a high need for security. The following is a
representative list of purchasers, directly or through distributors, of the
Company's add-on information security products since 1991. Other than Motorola,
no customer accounted for more than 10% of aggregate sales during the nine
months ended September 30, 1996.
REPRESENTATIVE PURCHASERS
<TABLE>
<CAPTION>
STATE AND LOCAL PUBLIC SAFETY FEDERAL GOVERNMENT INTERNATIONAL
- -------------------------------------- ---------------------------------- ---------------------------------------
<S> <C> <C>
Arizona Department of Public Safety Air Force Australian Navy
California Department of Justice Army Brazilian Presidential Security
City of Carlsbad (New Mexico) Border Patrol Canadian Border Patrol
City of Seattle Customs Service Columbian Army
Delaware State Patrol Department of Agriculture Egyptian National Police
Livingston County Sheriff Department of Defense German National Police
(Louisiana) Department of Fish and Wildlife Hong Kong Police Force
Hennepin County Sheriff (Minnesota) Department of the Interior London Metropolitan Police Force
Iowa State Highway Patrol Department of the Treasury Polish Border Guard
Los Angeles Police Department Drug Enforcement Agency Polish National Police
Michigan State Police Federal Bureau of Investigation Portuguese National Police
Missouri State Patrol National Forest Service Royal Canadian Mounted Police
Nebraska State Patrol National Security Agency Russian Ministry of Defense
New York City Police Department Navy Russian Ministry of Internal Affairs
Oklahoma State Bureau of Narcotics Secret Service Swedish Customs
Oregon State Patrol White House Security Turkish National Police
Vernal Police Department (Utah) Vietnam Ministry of Interior
<CAPTION>
CELLULAR SERVICE PROVIDERS BUSINESS AND INDUSTRIAL LMR MANUFACTURERS MEDIA/ENTERTAINMENT
- ----------------------------- ------------------------------ -------------------- ---------------------------
<S> <C> <C> <C>
AirTouch B.F. Goodrich, Inc. Allied Signal Corp. ABC News
Communications, Inc. Conoco Inc. E.F. Johnson Co. Charlotte Observer
AT&T Corporation Exxon Oil Co. Ericsson, Inc. Time Warner Inc.
Bell Atlantic/NYNEX Harris Corporation Glenayre Co. Walt Disney Co.
Bell Mobility (Canada) Loral Terracom Icom America, Inc. Warner Bros. Entertainment
GTE MobileNet Service Marathon Oil Co. Kenwood Radio Corp.
GTE/Contel Cellular NEXTEL Corp. Maxon, Inc.
Midland
Furst Group Inc. Pillsbury Co. International
Sprint Corporation Rockwell International, Inc. Motorola, Inc.
Stanilite Pacific
Salomon Brothers Inc Ltd.
Shell Oil Co. SEA Inc.
Union Pacific Railroad Yaesu USA, Inc.
</TABLE>
MOTOROLA RELATIONSHIP
The Company depends to a large extent on a number of significant
relationships with Motorola. Motorola has been one of the Company's largest
customers since 1994, and the Company believes that Motorola is likely to
account for a significant portion of the Company's sales in the near future.
Sales to Motorola totaled $1.5 million in the first nine months of 1996,
$460,000 in 1995 and $2.0 million in 1994. Sales in 1996 consisted primarily of
Motorola-labeled LMR socket scrambling modules available for resale by Motorola
as an accessory to certain of Motorola's portable LMRs sold in North America. In
August 1995, the Company entered into a three-year supply agreement with
Motorola's Radio Products Americas Group to provide socket scrambler modules at
fixed prices in lots of 100 or more. Such agreement provides for minimum
purchases by
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Motorola of $3.7 million of socket scrambler modules during the 18-month period
beginning on April 1, 1996 (of which $1.5 million had been purchased as of
September 30, 1996), after which the agreement terminates in August 1998 or is
otherwise terminable at will by either party upon 60 days' prior notice. By
providing these Motorola-branded socket scramblers to Motorola in volume
pursuant to a fixed-price agreement, the Company believes that it has helped
Motorola to round out its product offerings. The Company is currently seeking to
expand internationally the territories in which socket scrambling modules and
other information security products will be distributed under this type of
agreement.
Motorola is also a key manufacturer of electronic components used by the
Company, including microprocessors used in most of the Company's scramblers,
which are supplied to the Company through an electronics wholesaler. In
addition, Motorola has agreed to sell to the Company, at fixed prices and upon
the Company's request, radio frequency ("RF") platforms for use in various
products. Purchases by the Company of Motorola components totaled approximately
$1.0 million in the first nine months of 1996 and $726,000 in 1995. Furthermore,
pursuant to a product sales agreement executed in June 1996 with Motorola,
Motorola has agreed to sell to the Company, upon the Company's request, original
equipment cellular telephones and related accessories from Motorola's
MicroTAC(TM) line, which the Company intends to resell equipped with the
Company's DSP-based encryption devices and labeled with the Transcrypt logo.
Such agreement specifies fixed prices for purchases of such equipment, and its
original term expires on December 31, 1997, after which it is terminable at will
by either party upon 30 days' prior notice. The Company has, as of September 30,
1996, purchased $46,000 in cellular telephones from Motorola pursuant to such
agreement.
The Company has obtained from Motorola a royalty-bearing, irrevocable,
non-exclusive, worldwide license (the "IPR License") to manufacture products
containing certain proprietary LMR and digital encryption technology 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 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 Company believes that
LMR products containing analog trunking and backward compatibility to analog
devices will be necessary for customers to migrate to digital radios while
avoiding replacing all analog radios simultaneously. In addition, the Company
believes that the incorporation of Motorola's digital encryption algorithms will
be important in marketing its products to federal agencies, many of which use
Motorola equipment.
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. Additionally, the Company is currently negotiating with Motorola to
purchase from Motorola base station, repeater and other LMR infrastructure
components, in order to market such items under the Transcrypt brand name in
fulfilling systems contract requirements.
SALES, MARKETING AND DISTRIBUTION
The Company sells its products domestically through six sales managers.
Add-on products are sold domestically primarily to distributors, OEMs and
self-servicing end users, while complete radio products are sold domestically
primarily to end users. The Company is actively seeking to hire an additional
eight sales persons for radio sales in the United States, and the Company also
intends to market its radio and other complete products to its existing add-on
customer base.
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The Company conducts international sales through four sales managers, each
of whom focuses on specific regions of the world outside of the United States.
The majority of international sales are made by the sales managers in
conjunction with a Company-authorized distributor, which typically provides a
local contact and arranges for technical training in foreign countries.
International sales accounted for 57.3%, 71.4%, 57.3% and 39.0% of the Company's
revenues in the nine months ended September 30, 1996 and in 1995, 1994 and 1993,
respectively. International sales have been, in most cases, denominated in U.S.
dollars, and the Company seeks to reduce the risks of payment in foreign sales
by obtaining advance payment and confirmed, irrevocable letters of credit. See
"Risk Factors -- Risks Associated with International Sales."
The Company distributes its add-on information security products to both
end users in the LMR and telephony markets and to distributors, such as LMR
dealers, that resell the Company's products to end users. In 1995, sales of
information security products to distributors totaled approximately 80% of
aggregate domestic sales and 76% of aggregate international sales. To date, the
Company has sold its self-branded, complete, analog secure cellular telephone
primarily through distributors and cellular service resellers, and the Company
intends in the future to also sell such analog cellular telephone and the
digital version through cellular service providers.
To date, sales to public safety agencies and other governmental entities
have comprised a significant portion of the Company's total sales. Such sales
often involve competitive, open bidding characteristic of public sector
procurement programs. Under the Company's plan to sell stand-alone communication
devices, such as LMR units, to such types of customers, the Company will likely
be required to increase its participation in public bidding and procurement
processes. Among other requirements, suppliers of LMR units in quantity are
often required by public sector end-users issuing requests for bids to supply a
bond from an approved surety company at the time that the bid is submitted and
at the time that the contract is awarded. The availability of such bonds is
limited by a number of factors, including the applicant's financial condition
and operating results, the applicant's record for completing similar systems
contracts in the past and the extent to which the applicant has bonds in place
for other projects.
The Company's basic marketing strategy has been to increase market
awareness of the need for information security products and to convey the
technical capabilities of the Company's products. The Company conducts
promotions through a mix of print advertising, trade shows, direct mail
campaigns, press releases, technical articles, white paper publication, periodic
newsletters, training and presentation material, and distribution of
demonstration and loaner equipment, which are sometimes coordinated with product
launches and trade shows.
The Company provides toll-free telephone access for technical and other
calls, 24-hour voicemail and 24-hour emergency pager contact for customers with
technical or other problems. Product training, which includes classes, seminars
and video programs, is available at both the customer's site and the Company's
Lincoln facility. The Company offers a standard warranty on all products, which
covers parts and labor for a period of one year from purchase, with an extended
warranty service option available at an additional cost.
The Company installs, for a fee, all models of the Company's scrambler
modules into customers' LMRs and telephones. During the first nine months of
1996, the Company performed installations in approximately eight percent of
total units sold. Scrambler modules not installed by the Company are generally
installed by local radio and cellular telephone dealers. The Company documents
installation instructions for its products in OEM devices ("application notes"),
and has developed application notes for more than 2,000 OEM products, including
almost all commercially available two-way radio models sold worldwide.
INTELLECTUAL PROPERTY
The Company presently holds seven registered copyrights, which cover
software containing algorithms for frequency hopping, scrambling and signaling
technologies for LMR and cellular telephony, and one domestic patent, which
covers continuous synchronization methods used in analog scrambling products.
The Company has also applied for nine additional domestic patents relating to
high-end scrambling techniques and methods of integrating after-market devices,
such as the Company's modules, into OEM products. These patent applications were
the result of the Company's expanded intellectual property program, which is
intended to
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<PAGE> 37
enhance the patent protection afforded the Company's new and advanced
intellectual property rights. The Company also holds three registered trademarks
related to the "Transcrypt" name and product names.
In addition to copyright and patent laws, the Company relies on trade
secret law and employee and third-party non-disclosure agreements to protect its
proprietary intellectual property rights. Furthermore, the Company designs its
information security devices to render the underlying software and processes
difficult to reverse engineer, providing an additional level of protection.
The information security and wireless communications industries in which
the Company sells its products are characterized by substantial litigation and
assertions of claims regarding patent and other intellectual property rights. At
various times over the last several years, most recently in December 1996,
Ericsson has notified the APCO 25 Project Steering Committee and certain current
and proposed manufacturers of APCO 25 products (including the Company, Motorola
and E.F. Johnson Co.) that it believes that products complying with the APCO 25
standard will necessarily infringe various Ericsson patents and that APCO 25
manufacturers must obtain licenses under such patents. The Company does not
believe that the APCO 25 standard or any of the Company's products infringe the
relevant Ericsson patents or any valid intellectual property right of others.
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, E.F. Johnson Co., DVSI,
Cycomm Corporation and Glenayre Technologies, among others) are required to make
available to other signatories licenses to intellectual property rights that are
essential to the implementation of the APCO 25 standard on "fair and reasonable
terms." Ericsson has 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
Since December 1991, the Company has invested approximately $7.0 million in
internal research and development related to its proprietary advances in
information security products. Between December 31, 1995 and September 30, 1996,
the Company increased research and development staffing to 31 individuals,
including 24 engineers, from 22 individuals, including 18 engineers. Research
and development personnel have expertise in various fields, including
cryptography, analog hardware, digital hardware, object-oriented software, RF
design and mechanical design. The research and development staff designs and
develops products incorporating digital signal processing, voice coding
(including improved multi-band excitation), encryption, spectral manipulation
and rotation, systems simulation and mixed signal scrambling. In 1995 and 1996,
the Company's research and development efforts increased significantly, as the
Company commenced development of APCO 25 compliant digital LMRs and expanded
development of secure telephony products. As a result, research and development
expenses increased to $2.0 million in 1995 from $1.2 million in 1994, and
management expects that such expenses will be approximately $2.3 million in
1996. In order to facilitate the
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<PAGE> 38
Company's new product line development plans, research and development staffing
has been augmented with additional expertise in the areas of data networking,
communications systems software, RF design, mechanical design, cryptography and
digital signal processing. The Company believes that its research and
development efforts have been, and continue to be, sufficient to support planned
new products lines and enhancements to existing product lines. Based on current
projections, management expects to continue to increase the Company's research
and development staff, primarily in the areas of radio, signal processing and
digital logic development.
MANUFACTURING AND SUPPLIERS
The Company manufactures all of its products at its facility in Lincoln,
Nebraska, mostly from commercially available subassemblies, parts and
components, such as integrated circuits, printed circuit boards, and plastic and
metal parts, manufactured by the Company and by outside suppliers. Certain items
manufactured by suppliers are made to the Company's specific design criteria.
The Company's manufacturing processes utilize principles that conform to ISO
9001 standards, for which the Company received full certification in December
1995. In August 1996, the Company began construction of a 21,000 square foot
expansion to its existing Lincoln, Nebraska facility to house mostly
manufacturing and related functions, which the Company anticipates will be
completed in the first half of 1997. See "-- Properties."
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."
GOVERNMENT REGULATION AND EXPORT CONTROLS
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.
Recently, the Clinton administration and the Congress have reviewed federal
export control policies related to encryption control products. On November 15,
1996, President Clinton issued an Executive Order
36
<PAGE> 39
altering the federal government's policies governing the export of encryption
products, such as those currently offered and proposed to be offered by the
Company. The Executive Order shifts jurisdiction for export controls on, and
licensing of, encryption technology from the Department of State to the
Department of Commerce and removes from the "munitions" list most encryption
products. In addition, the Executive Order establishes a key management control
program, under which a third party would hold "keys" to unlock encrypted
information for legitimate law enforcement and national security needs. As a
result of the Executive Order, certain products featuring digital encryption
technology that had not previously been exportable can now be exported, which
may increase competition for international sales of the Company's analog
scrambling products. Under interim regulations adopted in December 1996 by the
Department of Commerce, during a two-year transition period, non-key recoverable
56-bit digital encryption products may be approved for export if the
manufacturer commits to build and market key recovery products and support key
management infrastructure in the future, and provide to the government interim
reports detailing internal development efforts. During the 104th Congress,
legislation was introduced in the House and Senate to ease export controls on
encryption products, but the Congressional sponsors of the legislation opposed
the key management component of the Administration's plan. Legislation to
address export controls on encryption products is expected to be introduced when
the 105th Congress convenes. Management cannot predict whether such legislation
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.
COMPETITION
The markets for information security and LMR products are highly
competitive. Significant competitive factors in these markets include product
quality and performance, including the effectiveness of security features and
the quality of the resulting voice or data signal, the development of new
products and features, price, name recognition and the quality and experience of
sales, marketing and service personnel. A number of companies currently offer
add-on scramblers for LMRs that compete with the Company's add-on information
security products, including Selectone Corp., Midian Electronics Inc. and MX-COM
Inc. Also, Motorola and Ericsson offer high-end, proprietary digital encryption
for their LMR products. Motorola and Transcrypt are believed to be the only
current suppliers of APCO 25 LMR products as of the date of this Prospectus.
Other anticipated manufacturers of digital LMRs include E.F. Johnson Co., Garmin
Industries, Relm Communications, Midland Systems and Stanilite Pacific Ltd., all
of which have announced intentions to produce hand-held, mobile and/or
infrastructure products meeting the APCO 25 standard. In addition, Ericsson has
actively opposed the APCO 25 standard and has promoted its "EDACS" system as an
alternative standard for the public safety marketplace. Cycomm International
Inc./Privaphone and Motorola offer add-on security products for cellular
telephones. Competitors to the Company's secure landline telephone products
include AT&T Corporation/Datatek, Motorola, Cycomm International Inc. and Cylink
Corporation.
Competition in the data security market is dynamic and growing, as new
companies seek to provide solutions to network and Internet data security. There
are a number of different approaches to data security, including "firewall"
protection, privilege control, data encryption and user identification and
authentication. The Company expects that its planned data security products will
feature mostly data encryption and user authentication features. Competitors in
the data security market include Check Point Software Technologies Ltd., Cylink
Corporation, Secure Computing Corporation, Trusted Information Systems, Inc.,
Raptor Systems, Inc. and Sun Microsystems, Inc., all of which provide firewall
solutions. ActivCard Inc., CryptoCard
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<PAGE> 40
Inc., Digital Pathways, Inc., Security Dynamics Technologies, Inc., Vasco
Corporation and Racal Electronics, Inc. provide remote authentication products.
Many of the Company's competitors have substantially greater financial,
technical, marketing, distribution and other resources, greater name recognition
and longer standing relationships with customers than the Company. Competitors
with greater financial resources are better able to engage in sustained price
reductions in order to gain market share. Any period of sustained price
reductions would have a material adverse effect on the Company's financial
condition and results of operations. There can be no assurance that the Company
will be able to compete successfully in the future or that competitive pressures
will not materially and adversely affect the Company's financial condition and
results of operations.
BACKLOG
The Company presently ships only a small amount of products against
backlog, due to the typically short manufacturing cycle of the Company's
products. As a result, backlog amounts have historically been immaterial to the
Company, and the Company does not believe that backlog figures are necessarily
indicative of actual sales for future periods. However, to the extent that LMR
sales increase as a percentage of the Company's revenues, backlog may increase
due to the generally longer manufacturing cycle time required of its digital LMR
products.
PROPERTIES
The Company conducts its business primarily through a 22,500 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 and, in August 1996, began construction of a 21,000 square foot
expansion to its existing Lincoln facility primarily to house additional
manufacturing and related functions, which the Company anticipates will be
completed in the first half of 1997. 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 September 30, 1996, the Company had 83.5 full-time equivalent employees,
substantially all of whom are employed at the Company's Lincoln, Nebraska
facility. None of the Company's employees are covered by a collective bargaining
agreement. Management believes its employee relations are good.
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<PAGE> 41
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).............. 52 Chairman of the Board and Chief Executive Officer
Jeffery L. Fuller(1)........... 43 President, Chief Operating Officer and Director
C. Eric Baumann................ 31 Vice President of Sales and Distribution
Randal P. Hansen............... 33 Vice President of Finance and Chief Financial Officer
Michael P. Wallace............. 35 Vice President of Operations
Joel K. Young.................. 32 Vice President of Engineering
Terry L. Fairfield(1)(2)....... 47 Director (Vice Chairman of the Board of Directors)
Thomas R. Larsen(3)............ 52 Director
Thomas C. Smith(3)............. 51 Director
Thomas R. Thomsen(2)........... 61 Director
Winston J. Wade(2)............. 57 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
JOHN T. CONNOR led the investor group which purchased the Company from its
founder in 1991. Mr. Connor has served as Chief Executive Officer and Chairman
of the Board of Directors of the Company since December 1991. 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 a 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 has served as a director 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 Co., a
manufacturer and distributor of wireless communication products, serving most
recently as Vice President North American Sales and executive officer in charge
of the North American business unit.
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 Co., a manufacturer and distributor of
wireless communication products, serving most recently as Director North
American Sales and Telemetry.
RANDAL P. HANSEN joined the Company as Vice President of Finance and Chief
Financial Officer in August 1996. From January 1986 to August 1996, he held
numerous positions with KPMG Peat Marwick LLP, an international public
accounting firm, serving most recently as a Senior Audit Manager. Mr. Hansen is
a licensed Certified Public Accountant.
MICHAEL P. WALLACE 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.
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<PAGE> 42
JOEL K. YOUNG joined the Company as Vice President of Engineering in
February 1996. From 1986 to January 1996, he held numerous positions with the
former AT&T Bell Laboratories, a telecommunications research company, and
specialized in signaling, network implementation and voice processing. He served
most recently as District Manager, AT&T Business Communication Services. Mr.
Young has been awarded five patents on various telecommunications systems and
techniques.
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 NMS listed, public
telecommunications 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 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 February 1996, he has served as managing director of BPL U.S. West
Cellular. From November 1990 to February 1996, he held numerous management
positions with U.S. West Communications, serving most recently as Vice President
of Network Operations. Mr. Wade also serves as a director of the University of
Nebraska Foundation.
Beginning on the date following the effectiveness of this offering, the
Board of Directors will be divided into three classes, each of whose members
will serve for a staggered three-year term. The Class I directors, Class II
directors and Class III directors will serve until the annual meeting of the
Company's stockholders to be held in 1997, 1998 and 1999, respectively, and
until their respective successors are duly elected and have qualified or until
their earlier resignation or removal. Upon effectiveness of this offering, the
Board will consist of two Class I directors (Messrs. Larsen and Wade), three
Class II directors (Messrs. Fuller, Thomsen and Smith) and two Class III
directors (Messrs. Connor 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 three committees: an Audit Committee, a
Compensation Committee and an Executive Committee. The Audit Committee,
comprised of Messrs. 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
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<PAGE> 43
employees and makes recommendations to the Board regarding changes in
compensation. The Executive Committee, comprised of Messrs. Connor, Fuller and
Fairfield, 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. After
consummation of this offering, the Company will pay 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. In addition, each director not employed by the
Company will receive an option to purchase up to 5,000 shares of the Common
Stock of the Company upon completion of this offering. Such options will have an
exercise price equal to the initial public offering price in this offering, will
vest in annual installments over a five year period and will have a term of ten
years.
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 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.
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<PAGE> 44
EXECUTIVE COMPENSATION
The following table shows the compensation earned by or paid to, for
services rendered in 1995, the Company's Chief Executive Officer and the only
other executive officer who received cash compensation in excess of $100,000 in
such year (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) SALARY BONUS STOCK OPTIONS COMPENSATION
- --------------------------------------------- -------- ------- ------------- ------------
<S> <C> <C> <C> <C>
John T. Connor............................... $169,808 $86,830(1) -- $ 4,760(2)
Chairman of the Board and
Chief Executive Officer
Jeffery L. Fuller............................ 66,346(3) 14,840 163,829 25,066(4)
President, Chief Operating
Officer and Director
</TABLE>
- ---------------
(1) Consists of $16,830 for services rendered in the 1995 fiscal year and a
$70,000 bonus. See Note 11 of Notes to Consolidated Financial Statements.
(2) Consists of a contribution to the Company's 401(k) Profit Sharing & Savings
Plan by the Company on behalf of Mr. Connor and personal use of a
Company-owned automobile.
(3) Represents salary at the rate of $150,000 per year beginning in July 1995.
(4) Consists of $24,834 in reimbursements for relocation expenses and $232 for
personal use of a Company-owned automobile.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted to
the Named Executive Officers during 1995.
<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 IN 1995 SHARE DATE 5% 10%
- -------------------------------- --------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jeffery L. Fuller............... 163,829(1) 80.64% $ 3.05 06/02/05 $1,339,405 $3,394,316
</TABLE>
- ---------------
(1) The indicated number of options were originally granted by the Company's
predecessor under the terms of the 1992 Partnership Interest Option Plan and
were subsequently converted into options to purchase shares of Common Stock
in the Company under the 1996 Stock Incentive Plan. See "-- 1996 Stock
Incentive Plan."
(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 the assumed initial public offering price per share in this
offering of $10.50. 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.
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-
42
<PAGE> 45
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 nonemployee 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 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
September 30, 1996, there were outstanding options to purchase 716,916 shares of
Common Stock with a weighted average exercise price of $1.81 per share. The
Company intends to grant, prior to the effective date of this offering, stock
options for an additional 325,000 shares, including 5,000 shares to each of the
five Non-Employee Directors, with an exercise price equal to the price per share
in this offering.
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
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<PAGE> 46
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 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 and Chief Executive Officer, for a two-year term beginning
July 18, 1996. The agreement sets forth a base salary of $180,000 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 also provides for special compensation in
the amount of $210,000, to be paid to Mr. Connor at least 15 days prior to the
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<PAGE> 47
projected completion date of this offering. 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 Operating Officer, for a two-year term
beginning July 18, 1996. The agreement sets forth a base salary of $165,000 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 annual salary if the Company meets its
annual sales goals and an additional 20% if the Company meets its annual 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, Company entered into employment agreements with C.
Eric Baumann, Michael P. Wallace and Joel K. Young, each of whom is a Company
Vice President. The agreements set 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 each such
agreement continues for 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.
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 nine months ended September 30, 1996
and paid $40,500 in 1995.
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<PAGE> 48
CERTAIN TRANSACTIONS
In 1991, the Company entered into a number of agreements with A. John and
Yvonne Kuijvenhoven, who are currently principal stockholders of the Company, in
connection with the acquisition of the Company's business and certain
intellectual property held by the Kuijvenhovens. Under a Purchase Agreement
dated December 3, 1991, the Company agreed to pay $340,000 annually, payable in
equal monthly installments, to John Kuijvenhoven in consideration for the
Kuijvenhovens' agreement not to compete against the Company for a period of five
years ending December 31, 1996. The Company paid the last payment due under this
agreement in August 1996, and the Company does not expect the non-compete
agreement to be renewed past December 1996. As security for the non-compete
agreement, the Company entered into a Security and Pledge Agreement dated
December 3, 1991, which was released by the Kuijvenhovens in October 1996,
granting to the Kuijvenhovens a security interest in real property located in
Lancaster, Nebraska owned by the Company. The Company also granted to the
Kuijvenhovens a security interest in its Digital Radio APCO 25 technology,
pursuant to a Security and Pledge Agreement dated August 8, 1994. The Company
believes that it has fully performed its obligations under the Purchase
Agreement and the 1994 Security and Pledge Agreement was released in November
1996.
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 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> 49
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
September 30, 1996 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
OWNED SHARES BENEFICIALLY
PRIOR TO OWNED
OFFERING(1)(2) NUMBER OF AFTER OFFERING(1)(2)(3)
-------------------- SHARES ------------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
- -------------------------------------------- ---------- ------- ---------- -------------- -------
<S> <C> <C> <C> <C> <C>
John T. Connor(4)........................... 1,945,785 27.1% 1,945,785 20.1%
2504 Ridge Road
Lincoln, Nebraska 68512
Janice K. Connor(5)......................... 1,556,528 22.9 1,556,528 16.8
2504 Ridge Road
Lincoln, Nebraska 68512
Farm Bureau Insurance Company............... 1,265,279 18.7 347,222(6) 918,057 9.9
5400 University Avenue
Des Moines, Iowa 50265
University of Nebraska Foundation........... 1,056,622 15.6 1,056,622 11.4
1111 Lincoln Mall, Suite 200
P.O. Box 82555
Lincoln, Nebraska 68501-2555
John Kuijvenhoven and affiliates(7)......... 1,090,704 16.1 902,778(6) 187,926 2.0
P.O. Box 5917
Lincoln, Nebraska 68505
First Commerce Bancshares, Inc.(8).......... 681,692 10.0 681,692 7.3
NBC Center, 3rd Floor
13th & O Streets
Lincoln, Nebraska 68508
Estate of Harold S. Myers(9)................ 791,281 11.7 791,281 8.5
635 South 14th Street, Suite 320
Lincoln, Nebraska 68508
The Security Mutual Life Insurance
Company................................... 340,972 5.0 340,972 3.7
200 Centennial Mall North
Lincoln, Nebraska 68508
Jeffery L. Fuller(10)....................... 163,829 2.4 163,829 1.7
Thomas R. Larsen............................ -- -- -- --
Terry L. Fairfield(11)...................... -- -- -- --
Thomas C. Smith............................. -- -- -- --
Thomas R. Thomsen(10)....................... 6,553 * 6,553 *
Winston J. Wade(10)(12)..................... 6,553 * 6,553 *
All executive officers and directors as a
group (11 persons)........................ 2,221,018 32.7% 2,221,018 23.9%
</TABLE>
- ---------------
* 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.
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<PAGE> 50
(2) Percentage ownership is based on 6,783,078 shares of Common Stock
outstanding prior to this offering and 9,283,078 shares of Common Stock
outstanding after this offering.
(3) Assumes that the Underwriters' over-allotment option is not exercised.
(4) Includes 714,033 shares 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 issuable upon
the exercise of stock options that are exercisable within 60 days of the
date of this Prospectus.
(5) Includes 747,137 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.
(6) Does not include shares which may be sold to cover over-allotments, if any.
The Farm Bureau Insurance Company has granted the Underwriters a 30-day
option to purchase an additional 374,573 shares of Common Stock, and the
Kuijvenhoven group has granted the Underwriters a 30-day option to purchase
its remaining 187,926 shares of Common Stock, in each case solely to cover
the Underwriters' over-allotments, if any.
(7) Beneficial stock ownership amounts prior to the offering include 341,415
shares held by Mr. Kuijvenhoven and 272,676 shares held by Q.E. Dot, Inc.
Mr. Kuijvenhoven is President of Q.E. Dot, Inc., and may be deemed to share
voting and investment powers with respect to this entity but disclaims
beneficial ownership of shares held by Q.E. Dot, Inc., except to the extent
Mr. Kuijvenhoven has a pecuniary interest. Includes 476,613 shares held by
members of the Kuijvenhoven family, for which Mr. Kuijvenhoven disclaims
beneficial ownership.
(8) 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."
(9) Mr. Myers, prior to his death on December 26, 1996, was a director and
principal stockholder of the Company. The amounts indicated include 391,299
shares held by the Estate of Harold S. Myers, 71,949 shares held by the
Harold S. Myers III Trust, for which Mr. Myers served as the Trustee, and
328,033 shares held by or in trust for members of the Myers family.
(10) Consists of shares issuable upon the exercise of stock options that are
exercisable within 60 days of the date of this Prospectus.
(11) Does not include shares held by the University of Nebraska Foundation, of
which Mr. Fairfield serves as President and Chief Executive Officer.
(12) Does not include shares held by the University of Nebraska Foundation, of
which Mr. Wade serves as director.
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 September 30, 1996, there were 6,783,078 shares of Common Stock
outstanding, held of record by 21 stockholders.
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
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<PAGE> 51
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 September 30, 1996. 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 "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, beginning on 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
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<PAGE> 52
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.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of
the Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time. As
described below, no currently outstanding shares of Common Stock or shares
issuable pursuant to stock options issued by the Company, other than the
1,250,000 shares offered hereby by the Selling Stockholders (1,812,500 shares
assuming the Underwriters' over-allotment option is exercised in full), will be
available for sale shortly after this offering because of certain contractual
restrictions on resale and the restrictions of the Securities Act. Sales of
substantial amounts of Common Stock of the Company in the public market could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding
9,283,078 shares of Common Stock, assuming no exercise of options granted under
the Company's 1996 Stock Incentive Plan. Of these shares, the 2,500,000 shares
offered hereby by the Company and the 1,250,000 shares offered hereby by the
Selling Stockholders (1,812,500 shares 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
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<PAGE> 53
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). The
remaining 5,533,078 shares of Common Stock are "restricted" securities under the
Securities Act (the "Restricted Shares"), of which 3,404,437 shares are deemed
to be held by "affiliates" of the Company.
None of the Restricted Shares (currently 5,533,078 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 two years
(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 92,831 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
(currently two years) applicable to 5,464,913 of the Restricted Shares began on
June 30, 1996, while the holding period applicable to the remaining 68,165 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 three
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.
Subject to the contractual "lock-up" agreements discussed below, the
Company intends, after consummation of this offering, to enter into a
Registration Rights Agreement with each holder of Restricted Shares, entitling
each holder to certain rights with respect to the registration of such shares
under the Securities Act. Under such Registration Rights Agreement, if the
Company proposed to register any of its securities under the Securities Act
(except for a registration on Forms S-4 or S-8 or involving an issuance related
to a business combination), either for its own account or the account of other
securityholders, the holders of the Restricted Shares will be entitled to notice
of such registration and will be entitled to include their shares therein;
provided, however, among other conditions, that the underwriters of such
offering will have the right, subject to certain limitations, to limit the
number of such shares included in any such registration.
As of September 30, 1996, 716,916 shares of Common Stock were issuable upon
the exercise of vested stock options under the Company's 1996 Stock Incentive
Plan and 325,000 shares will be issuable pursuant to options to be granted upon
the effectiveness of this offering. 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 intends, as soon as practicable after the
consummation of this offering, to file 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. Such registration
statement will become effective automatically upon filing. 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 existing stockholders and all holders 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 180 days after the effective date of this
offering, without the prior written consent of Dain Bosworth Incorporated. As a
result of these contractual restrictions, shares subject to lock-up agreements
will not be saleable until the agreements expire.
51
<PAGE> 54
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
(the "Underwriting Agreement"), the underwriters named below (the
"Underwriters"), for which Dain Bosworth Incorporated and Furman Selz LLC are
acting as representatives (the "Representatives"), have severally agreed to
purchase from the Company and the Selling Stockholders the shares of Common
Stock offered hereby. Each Underwriter will purchase the number of shares set
forth opposite its name below, and will purchase such shares at the price to
public, less the underwriting discounts and commissions set forth on the cover
page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------ ---------
<S> <C>
Dain Bosworth Incorporated........................................
Furman Selz LLC...................................................
---------
Total................................................... 3,750,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligations are
subject to conditions precedent and that the Underwriters are committed to
purchase all shares of Common Stock offered hereby (other than those covered by
the over-allotment option described below) if the Underwriters purchase any
shares. The Representatives have advised the Company and the Selling
Stockholders that the several Underwriters may offer the shares of Common Stock
directly to the public at the price to public set forth on the cover page of
this Prospectus and to certain dealers at the price to public less a concession
not exceeding $ per share. The Underwriters may allow, and such dealers
may re-allow, a concession not exceeding $ per share to other dealers.
After the shares of Common Stock are released for sale to the public, the
Representatives may change the initial price to public and other selling terms.
The Selling Stockholders have granted to the Underwriters an option,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of 1,250,000 additional shares of the Common Stock at the price to
public, less the underwriting discounts and commissions set forth on the cover
page of this Prospectus. See footnote 6 to the table under "Principal and
Selling Stockholders."
The Underwriting Agreement provides that the Company, the Selling
Stockholders and the Underwriters will indemnify each other against certain
liabilities, including liabilities under the Act, in connection with this
offering.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Company and all of its current stockholders, directors and executive
officers have agreed not to offer, sell, pledge, grant an option to purchase or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the date of this Prospectus (the "Lockup Period") without the prior written
consent of Dain Bosworth Incorporated. This restriction does not prevent the
Company from granting options under the Stock Plans or issuing unregistered
securities in a merger, consolidation, acquisition, joint venture or other
arrangement as long as those securities are not registered under the Securities
Act prior to the end of the 180-day period.
The Representatives have reserved up to 150,000 of the shares of Common
Stock offered hereby for sale to directors and principal stockholders of the
Company (including their affiliated entities) and other persons identified by
the Company who have expressed an interest in purchasing shares of Common Stock.
To the extent shares are purchased by such persons, the number of shares
available for sale to the public will be reduced. Any such purchases will be
made at the initial public offering price to the public and on the same
52
<PAGE> 55
terms and conditions as will be initially offered by the Representatives to
others in this offering. The directors and principal stockholders (including
their affiliated entities) purchasing such shares have agreed not to offer,
sell, pledge, grant an option to purchase or otherwise dispose of any shares of
Common Stock during the 180-day Lockup Period.
Prior to this offering, there has been no public market for the Common
Stock. The price to public will be determined by agreement among the Company,
the Selling Stockholders and the Representatives. In determining the price to
public, the Company, the Selling Stockholders and the Representatives will
consider, among other things, the history of and prospects for the industry in
which the Company operates, past and present operations and earnings of the
Company and the trend of such earnings, the qualifications of the Company's
management, the general condition of the securities markets at the time of this
offering and the market prices for other publicly-traded companies.
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 Sherman & Howard,
L.L.C., Denver, Colorado.
EXPERTS
The financial statements as of December 31, 1994 and 1995 and for each of
the three years in the period ended December 31, 1995 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 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.
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 intends to furnish to its stockholders annual reports
containing consolidated financial statements audited by its independent
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited financial information.
53
<PAGE> 56
GLOSSARY
The following terms appearing in this Prospectus have the meanings
specified below:
Analog transmission. Wireless or wireline communication consisting of a
voice or other non-digital signal transmitted as-is or modulated directly onto a
continuous "carrier" radio wave.
APCO. Association of Public Safety Communications Officials International,
Inc.
APCO 25 Standard. Transmission standard for digital land mobile radio
communications endorsed by APCO and specifying a common air interface. See
"Business -- Industry Background -- Land Mobile Radio Market."
Common air interface. A communications protocol specified in the APCO 25
Standard allowing interoperability among APCO 25 compliant systems from the same
or different manufacturers.
Digital Transmission. Wireless or wireline transmission of discrete
information "bits" in the form of ones and zeroes. An analog signal such as a
voice can be converted to digital format prior to transmission, transmitted
digitally, and reconstituted as an analog signal at the receiving end.
DSP. Digital Signal Processor, an electronic microprocessor that
manipulates and processes digital signals for communications and other purposes.
Encryption. Securing a digital transmission through the use of a
mathematical encoding algorithm which rearranges a digital bit-stream prior to
transmission and a decoding algorithm which reconstitutes the transmitted
digital information to its original form at the receiving end.
FCC. United States Federal Communications Commission.
FDMA. Frequency Division Multiple Access, a method for dividing frequency
spectrum into smaller units to increase capacity.
Frequency hopping. A method of scrambling transmissions which involves
changing transmission frequencies many times per second based upon an algorithm.
Frequency inversion. A method of scrambling transmissions which involves
inverting or otherwise adjusting the phase of a signal based on a consistent
method.
Hopping code. A method of scrambling transmissions which involves changing
transmission codes many times per second based upon an algorithm.
Interoperability. The ability of radio equipment to communicate with other
systems produced by the same or different manufacturers.
LANs. Local Area Computer Networks.
LMR. Land Mobile Radios, which consist of hand-held or mobile (vehicle
mounted) two-way radios commonly used by public safety workers (e.g., police,
fire and medical emergency personnel), businesses (e.g., fleet operators, taxi
dispatch, construction and other commercial users) and a wide variety of United
States and foreign governmental agencies.
OEM. Original equipment manufacturer.
PBX. Private Branch Exchange, a standard telephone switch which connects
telephones located at the customer's premises to the telephone network.
PCMCIA. An industry standard for plug-in cards for use in personal
computers developed by the Personal Computer Memory Card International
Association.
RF. Radio frequency.
Rolling code. A method of scrambling transmissions which involves changing
transmission codes incrementally many times per second.
54
<PAGE> 57
Scrambling. Securing an analog transmission by manipulating the original
signal at the point of transmission and reconstituting the original signal at
the receiving end. Methods of analog scrambling include frequency hopping,
frequency inversion, hopping code, rolling code and split-band.
Split-band. A method of scrambling transmissions which involves spreading
a signal across multiple channels or frequencies.
TDMA. Time Division Multiple Access, a method for allocating usage on a
single channel by interspersing communications of multiple users.
55
<PAGE> 58
TRANSCRYPT INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Income (Loss).............................................. F-4
Consolidated Statements of Stockholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 59
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, Ltd. (the Predecessor) as of December 31, 1994 and 1995, and the
related consolidated statements of income (loss), stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. 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, Ltd. as of December 31, 1994 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
700 Cornhusker Plaza
Lincoln, Nebraska
February 23, 1996
F-2
<PAGE> 60
TRANSCRYPT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................... $2,135,460 $ 291,712 $ --
Accounts receivable, net of allowance for doubtful accounts
of $188,014, $181,659 and $363,169 in 1994, 1995 and 1996
respectively.............................................. 1,251,877 1,923,441 2,833,714
Receivable -- officers, employees and affiliate.............. 53,501 57,791 37,335
Inventory, net............................................... 1,251,996 1,119,763 1,689,175
Prepaid expenses............................................. 177,822 60,323 207,386
Deferred tax assets.......................................... -- -- 232,325
---------- ---------- -----------
Total current assets................................. 4,870,656 3,453,030 4,999,935
Property, plant and equipment, at cost net of accumulated
depreciation................................................. 2,661,702 3,066,740 3,961,057
Deferred tax assets............................................ -- -- 1,715,540
Intangible assets, net of accumulated amortization............. 2,094,636 1,002,860 214,719
---------- ---------- -----------
$9,626,994 $7,522,630 $ 10,891,251
========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................................... $ -- $ -- $ 153,834
Revolving line of credit..................................... -- -- 64,000
Current portion of capitalized lease obligations............. 14,276 15,570 14,103
Current portion of long-term debt............................ 301,377 412,656 437,804
Current portion of obligations under non-compete
agreements................................................ 340,000 340,000 --
Accounts payable............................................. 279,717 176,496 681,334
Income taxes payable......................................... -- -- 154,326
Accrued expenses............................................. 416,002 767,246 1,353,378
Deferred revenue............................................. 153,018 56,814 1,759
Due to related parties....................................... 13,738 489 --
---------- ---------- -----------
Total current liabilities............................ 1,518,128 1,769,271 2,860,538
---------- ---------- -----------
Capitalized lease obligations, net of current portion.......... 30,882 15,099 4,995
Long-term debt, net of current portion......................... 1,793,480 1,831,493 1,504,625
Obligations under non-compete agreements, net of current
portion...................................................... 340,000 -- --
---------- ---------- -----------
2,164,362 1,846,592 1,509,620
---------- ---------- -----------
Commitments and contingencies (Note 11)
Stockholders' equity:
Partners' capital............................................ 5,944,504 3,906,767 --
Common stock ($.01 par value; 19,400,000 voting shares
authorized, 6,565,536 issued and outstanding; 600,000
non-voting shares authorized, 217,542 issued and
outstanding) (Note 17).................................... -- -- 51,754
Additional paid-in capital................................... -- -- 9,699,458
Retained deficit............................................. -- -- (3,230,119)
---------- ---------- -----------
5,944,504 3,906,767 6,521,093
---------- ---------- -----------
$9,626,994 $7,522,630 $ 10,891,251
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 61
TRANSCRYPT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
NINE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996
1993 1994 1995 ------------- -------------
------------ ------------ ------------ (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................... $6,900,000 $9,155,164 $ 8,128,200 $ 5,357,546 $ 9,275,168
Cost of sales.............................. 1,615,563 2,901,577 2,982,942 2,266,492 2,885,788
---------- ---------- ---------- ---------- ----------
Gross profit..................... 5,284,437 6,253,587 5,145,258 3,091,054 6,389,380
Operating costs and expenses:
Research and development................. 1,137,950 1,179,540 1,953,068 1,362,118 1,686,297
Sales and marketing...................... 982,354 1,589,632 2,109,393 1,455,616 1,505,939
General and administrative............... 1,151,099 1,074,408 1,190,751 807,355 1,051,474
Special compensation expense............. -- -- -- -- 5,568,250
Amortization of acquisition related
expense............................... 1,091,761 1,092,426 1,092,680 829,335 819,287
---------- ---------- ---------- ---------- ----------
Total operating costs and
expenses....................... 4,363,164 4,936,006 6,345,892 4,454,424 10,631,247
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. 921,273 1,317,581 (1,200,634) (1,363,370) (4,241,867)
Interest income............................ 6,561 34,147 53,297 42,169 30,279
Interest expense........................... (140,082) (144,940) (190,403) (136,420) (109,874)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... 787,752 1,206,788 (1,337,740) (1,457,621) (4,321,462)
Provision (benefit) for income taxes....... -- -- -- -- (1,758,539)
---------- ---------- ---------- ---------- ----------
Net income (loss)................ $ 787,752 $1,206,788 $ (1,337,740) $ (1,457,621) $ (2,562,923)
========== ========== ========== ========== ==========
Pro forma information:
Income (loss) before income taxes........ $ (1,337,740) $ (1,457,621) $ (4,321,462)
Pro forma provision (benefit) for income
taxes................................. (496,316) (540,793) (1,623,260)
---------- ---------- ----------
Pro forma net loss....................... $ (841,424) $ (916,828) $ (2,698,202)
========== ========== ==========
Pro forma net loss per share............. $ (.12) $ (.13) $ (.38)
========== ========== ==========
Weighted average common and common
equivalent shares outstanding......... 7,012,751 7,012,751 7,012,751
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 62
TRANSCRYPT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED PARTNERS'
UNITS SHARES STOCK CAPITAL DEFICIT CAPITAL TOTAL
----------- ----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992....... 4,727,842 -- $ -- $ -- $ -- $ 3,821,442 $ 3,821,442
Additional investment.......... 247,592 -- -- -- -- 350,000 350,000
Distributions.................. -- -- -- -- -- (360,003) (360,003)
Net income..................... -- -- -- -- -- 787,752 787,752
---------- --------- ------- --------- ---------- ---------- ----------
Balance, December 31, 1993....... 4,975,434 -- -- -- -- 4,599,191 4,599,191
Additional investment.......... 200,000 -- -- -- -- 1,000,007 1,000,007
Distributions.................. -- -- -- -- -- (861,482) (861,482)
Net income..................... -- -- -- -- -- 1,206,788 1,206,788
---------- --------- ------- --------- ---------- ---------- ----------
Balance, December 31, 1994....... 5,175,434 -- -- -- -- 5,944,504 5,944,504
Distributions.................. -- -- -- -- -- (699,997) (699,997)
Net loss....................... -- -- -- -- -- (1,337,740) (1,337,740)
---------- --------- ------- --------- ---------- ---------- ----------
Balance, December 31, 1995....... 5,175,434 -- -- -- -- 3,906,767 3,906,767
Distributions.................. -- -- -- -- -- (181,001) (181,001)
Net income (loss).............. -- -- -- -- (3,230,119) 667,196 (2,562,923)
Issuance of stock in exchange
for units of the
Predecessor.................. (5,175,434) 6,783,078 51,754 4,341,208 -- (4,392,962) --
Special compensation-options
issued....................... -- -- -- 5,358,250 -- -- 5,358,250
---------- --------- ------- --------- ---------- ---------- ----------
Balance, September 30, 1996
(unaudited).................... -- 6,783,078 $ 51,754 $9,699,458 $(3,230,119) $ -- $ 6,521,093
========== ========= ======= ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 63
TRANSCRYPT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
NINE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996
1993 1994 1995 -------------- --------------
------------- ------------- ------------- (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $ 787,752 $ 1,206,788 $(1,337,740) $ (1,457,621) $ (2,562,923)
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Special compensation expense............... -- -- -- -- 5,358,250
Depreciation............................... 275,697 350,188 532,288 349,905 509,086
Amortization............................... 1,091,761 1,092,426 1,092,680 829,335 819,287
Loss (gain) on sale of fixed assets........ 14,894 42,449 (2,446) (1,223) 5,682
Provision for warranties, bad debts and
inventory reserve........................ 422,598 314,589 195,824 115,524 211,869
Deferred tax provision..................... -- -- -- -- (1,947,865)
Changes in:
Accounts receivable...................... (403,078) (63,090) (672,929) 179,619 (1,102,977)
Related party receivables................ (58,164) 44,571 (4,290) (198,336) 19,456
Inventory................................ (897,875) (174,916) 82,850 61,822 (565,225)
Prepaid expenses and other assets........ (14,885) (125,026) 117,499 46,423 (147,063)
Accounts payable......................... 4,213 23,122 (103,221) (137,767) 496,722
Income taxes payable..................... -- -- -- -- 154,326
Accrued expenses......................... 145,622 195,147 264,010 247,169 176,098
Related party payables................... (63,677) (12,328) (13,249) 79,643 (489)
Deferred revenue......................... 116,260 (35,394) (96,204) 205,325 (55,055)
----------- ----------- ----------- ----------- -----------
Total adjustments..................... 633,366 1,651,738 1,392,812 1,777,439 3,932,102
----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities.......................... 1,421,118 2,858,526 55,072 319,818 1,369,179
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Issue notes receivable....................... (25,000) (1,833) (11,846) -- --
Payments received on note receivable......... 5,000 5,000 10,394 -- --
Proceeds from sale of fixed assets........... 3,860 591,084 37,089 19,800 26,725
Purchase of fixed assets..................... (233,561) (1,992,017) (1,029,471) (822,589) (1,039,786)
Increase in patents and trademarks........... (1,625) (2,993) (904) -- (31,371)
Payments under non-compete agreement......... (340,000) (340,000) (340,000) (255,000) (340,000)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities.......................... (591,326) (1,740,759) (1,334,738) (1,057,789) (1,384,432)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on term loan and operating line of
credit..................................... 1,279,580 2,363,000 1,016,000 500,000 64,000
Payments on term loan and operating line of
credit..................................... (1,731,226) (1,743,792) (866,708) (248,384) (301,720)
Principal payments on capitalized leases..... (14,042) (13,648) (13,377) (11,019) (11,572)
Proceeds from issuance of partnership
interests.................................. 350,000 1,000,007 -- -- --
Partnership distributions paid............... (360,003) (861,482) (699,997) (699,997) (181,001)
Bank overdraft............................... (80,493) -- -- -- 153,834
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities................ (556,184) 744,085 (564,082) (459,400) (276,459)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................. 273,608 1,861,852 (1,843,748) (1,197,371) (291,712)
Cash and cash equivalents, beginning of
period....................................... -- 273,608 2,135,460 2,135,460 291,712
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of period....... $ 273,608 $ 2,135,460 $ 291,712 $ 938,089 $ --
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid.............................. $ 140,082 $ 137,481 $ 190,403 $ 136,420 $ 109,874
Income taxes paid.......................... $ -- $ -- $ -- $ -- $ 35,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 64
TRANSCRYPT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed in
the preparation of these financial statements. Certain prior period amounts have
been reclassified to conform to the current period presentation.
(a) Organization:
Transcrypt International, LTD. (the "Predecessor") is 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 is allocated to the general partner and the remaining 99% is
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 world-wide.
(b) Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in the consolidation.
(c) 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.
(d) Inventory:
Inventory is recorded at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
(e) 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 year ended December 31, 1994, $28,776 of interest expense was
capitalized.
(f) 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-7
<PAGE> 65
TRANSCRYPT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(g) Income Taxes:
The partnership as an entity is not subject to Federal or state income
taxes. Any tax liabilities arising from the Predecessor's operations are 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.
(h) 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 period presented.
(i) 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.
(j) 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 and
are generally shipped against prepayments or backed by irrevocable letters of
credit confirmed by U.S. banks. Total export sales by geographic area were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Europe.................................... $ 947,334 $2,580,236 $2,464,164
Middle East............................... 1,740,666 1,691,605 2,275,620
Latin America............................. -- 978,159 1,060,216
---------- ---------- ----------
$2,688,000 $5,250,000 $5,800,000
========== ========== ==========
</TABLE>
(k) 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.
(l) 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 (see Note 17).
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER SEPTEMBER SEPTEMBER
31, 30, 30,
1995 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Common stock............................... 6,783,078 6,783,078 6,783,078
Common stock equivalents -- stock
options.................................. 229,673 229,673 229,673
--------- --------- ---------
7,012,751 7,012,751 7,012,751
========= ========= =========
</TABLE>
F-8
<PAGE> 66
TRANSCRYPT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
(m) 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.
(n) Unaudited Information:
The financial information for the period as of September 30, 1995 and 1996
and the nine months then ended has been prepared by the Company and is
unaudited. In the opinion of management, the accompanying unaudited financial
information contains all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position of
the Company and its Predecessor at September 30, 1996 and the results of their
operations and their cash flows for the nine month period ended September 30,
1995 and 1996. The consolidated statement of loss and consolidated statement of
cash flows for the nine month period ended September 30, 1996 reflects the
combined operating results of the Predecessor for the period January 1, 1996 to
June 30, 1996 and the Company for the period July 1, 1996 to September 30, 1996.
2. INVENTORY:
The following is a summary of inventory at December 31, 1994 and 1995 and
September 30, 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Raw materials and supplies, net of
reserve for obsolescence of $33,562,
$82,041 and $79,057 in 1994, 1995 and
1996, respectively................... $ 657,027 $ 879,587 $1,053,256
Work in process........................ 300,676 101,092 375,633
Finished goods......................... 294,293 139,084 260,286
---------- ---------- ----------
$1,251,996 $1,119,763 $1,689,175
========== ========== ==========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1994 and 1995:
F-9
<PAGE> 67
TRANSCRYPT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Land................................................ $ 150,000 $ 150,000
Building............................................ 1,289,452 1,302,388
Equipment........................................... 1,467,713 2,325,690
Leased equipment.................................... 74,329 74,329
Automobiles......................................... 58,232 64,647
Furniture and fixtures.............................. 345,802 371,160
--------- ---------
3,385,528 4,288,214
Less accumulated depreciation.................. 723,826 1,221,474
--------- ---------
$2,661,702 $3,066,740
========= =========
</TABLE>
4. INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Proprietary technology.............................. $3,355,630 $3,355,630
Non-compete agreements.............................. 1,700,000 1,700,000
Goodwill............................................ 290,516 290,516
Organization costs.................................. 116,910 116,910
Patents and trademarks.............................. 4,618 5,522
--------- ---------
5,467,674 5,468,578
Less accumulated amortization.................. 3,373,038 4,465,718
--------- ---------
$2,094,636 $1,002,860
========= =========
</TABLE>
5. REVOLVING LINE OF CREDIT:
The Company has a revolving line of credit not to exceed $2,000,000
calculated using a specified borrowing base of eligible inventories and accounts
receivable. Interest is payable monthly at a regional bank's national money
market rate. The line is collateralized by substantially all the Company's
assets.
6. CAPITALIZED LEASE OBLIGATIONS:
Future minimum lease payments under capitalized lease obligations at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
1996............................................................... $17,289
1997............................................................... 15,846
-------
Total minimum obligations.......................................... 33,135
Less amount representing interest.................................. 2,466
-------
Present value of net minimum obligations........................... 30,669
Less current portion............................................... 15,570
-------
Long-term portion.................................................. $15,099
=======
</TABLE>
F-10
<PAGE> 68
TRANSCRYPT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT:
Long-term debt at December 31, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <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
from time to time to a specified rate of a regional
bank. 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 shareholders.................. $613,123 $437,358
Term note payable to bank due in monthly installments
of $14,231 including interest at 8% beginning June
1994 until May 1996, when it can be adjusted to
one-percent above a specified rate of a regional
bank from time to time. 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 shareholders......... 631,734 507,653
Installment note for equipment purchase payable to
bank due in monthly installments of $10,506
including daily adjusted interest at a specified
rate above the prime rate (8.5% at December 31,
1995). The note is collateralized by specific
equipment purchased with proceeds as well as
inventory and other equipment. The note is
guaranteed by a shareholder......................... $ -- $ 449,138
Industrial development revenue bonds payable to bank
with quarterly interest only payments beginning
April 15, 1994 at 6.25% with principal due on
January 15, 2004. This note is collateralized by a
deed of trust....................................... 850,000 850,000
----------- -----------
2,094,857 2,244,149
Less current portion.................................. 301,377 412,656
----------- -----------
$1,793,480 $1,831,493
========= =========
</TABLE>
Maturities on long-term debt are summarized as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1996............................................................. $ 412,656
1997............................................................. 447,973
1998............................................................. 303,590
1999............................................................. 182,900
2000............................................................. 47,030
Thereafter....................................................... 850,000
----------
$2,244,149
=========
</TABLE>
The agreements of the term note payable and the bank note 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.
8. 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 call for the Company to pay a
F-11
<PAGE> 69
TRANSCRYPT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
total of $1,700,000 in consideration for the former owners' agreement not to
compete for a period of five years. As of December 31, 1995, the remaining
payments are payable in 1996 and amount to $340,000.
9. DEFERRED INCOME TAXES:
The components of the provision (benefit) for income taxes for the period
ending September 30, 1996 are as follows:
<TABLE>
<S> <C>
Current......................................................... $ 189,326
Deferred........................................................ (1,947,865)
-----------
$(1,758,539)
==========
</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................ $(1,469,297) (34.00)%
Income taxable directly to partners of the
Predecessor......................................... (226,847) (5.25)
Benefit of foreign sales corporation.................. (89,048) (2.06)
Other................................................. 26,653 0.62
----------- ------
$(1,758,539) (40.69)%
========== ======
</TABLE>
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to deferred income taxes at
September 30, 1996 relate to the following:
<TABLE>
<S> <C>
Deferred tax assets:
Special compensation expense................................... $1,821,805
Allowance for bad debts........................................ 65,492
Reserves for warranties and inventory obsolescence............. 41,172
Difference between tax and book liability accruals............. 127,166
----------
2,055,635
----------
Deferred tax liabilities:
Difference between tax and book depreciation................... 106,265
Difference between tax and book liability accruals............. 1,505
----------
107,770
----------
Net deferred asset............................................... $1,947,865
=========
</TABLE>
10. ACCRUED EXPENSES:
Accrued expenses consist of the following:
F-12
<PAGE> 70
TRANSCRYPT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Payroll and bonuses.................. $ 38,930 $151,130 $ 212,900
Accrued licensing costs.............. -- -- 400,000
Warranty reserve..................... 47,221 64,455 73,039
Commissions.......................... 33,513 265,440 132,661
Special compensation expense......... -- -- 210,000
Other expenses....................... 296,338 286,221 324,778
-------- -------- ----------
$416,002 $767,246 $ 1,353,378
======== ======== ==========
</TABLE>
11. 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. Also see Note 17.
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 1996, have a
total undrawn balance of $139,081 at December 31, 1995.
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.
12. RELATED PARTY TRANSACTIONS:
The Company, its partners and other related parties have participated in
various related party transactions. Amounts due to and from related parties are
as set forth in the balance sheet.
The remainder of amounts due to and from related parties primarily
represent amounts due to the general partner and sales commissions (which were
insignificant) due to a wholly-owned subsidiary of the general partner net of
administrative expenses paid on behalf of the subsidiary.
13. OPTION PLAN:
In January 1992, the Board of Directors approved a 1992 Partnership
Interest Option Plan which provides 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 will be the fair market value at the
date of grant as determined by the Board of Directors. Options granted under the
Plan are fully vested and generally become exercisable at the discretion of a
committee designated by the Board to administer the plan, however no options
shall be exercisable until the Board of Directors declare distributions that
will cause the original investors to have received a return of their initial
investment in the Company plus a 20% cumulative annual return on their
investment.
The committee shall also determine the term of each option granted, which
will in no event exceed ten years from the date of grant. Information with
respect to interest options under the above plan is as follows:
F-13
<PAGE> 71
TRANSCRYPT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Units under option, at beginning of year.............. 908,267 961,348
Granted............................................... 53,081 27,523
Exercised............................................. -- --
Canceled or forfeited................................. -- (572,090)
-------- --------
Units under option, at end of year.................... 961,348 416,781
======== ========
Price of options granted.............................. $ 3.05 $ 3.05
Price of options outstanding.......................... $ .76-3.05 $ .76-3.05
</TABLE>
No units were exercisable at December 31, 1995. 880,744 units were
available for future grants under the 1992 agreement. Of the available units,
300,135 have been reserved for issuance contingent upon future employment or
attainment of specified criteria by the grantees.
Effective June 30, 1996, the unit options were converted to stock options
on a one to one ratio. Notwithstanding the restrictions stated above, the issued
options automatically become exercisable and the reserved options become
issuable, fully vested and exercisable if the Company successfully completes an
initial public offering. Also see Note 17.
14. 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 $30,000, $45,000 and $27,500 for
the years ended December 31, 1993, 1994 and 1995, 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 $8,000, $11,000 and $13,000 for the years ended
December 31, 1993, 1994 and 1995, respectively.
15. SALES TO MAJOR CUSTOMERS:
Sales to major customers totaling over $200,000 each were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Percent of total sales.................... 30% 49% 44%
Number of major customers................. 3 6 7
Individual customers representing 10% or
more of consolidated sales in each year:
Motorola -- Poland...................... -- $2,044,350 --
Ministry of Interior -- Egypt........... $1,622,452 -- $849,134
</TABLE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of all financial instruments in the consolidated
balance sheets approximate fair values.
F-14
<PAGE> 72
TRANSCRYPT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. OTHER MATTERS:
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 share and per share information
has been restated to reflect the split.
The Board of Directors approved the payment of the remaining $210,000 fees
for initiating the 1991 purchase of the net assets of Transcrypt International,
Incorporated on September 30, 1996. These fees are included in special
compensation expense in the consolidated statements of operations (see Note 11).
The Board of Directors also approved granting of all reserved options and full
vesting of 716,916 stock options of outstanding stock options on September 30,
1996 (see Note 13). The vesting resulted in a special compensation charge of
$5,358,250 (before related tax benefits of $1,821,805) in the quarter ending
September 30, 1996.
F-15
<PAGE> 73
[Inside Back Cover]
[Picture of Transcrypt Stealth 25 land mobile radio, Motorola cellular
telephone and land mobile radio, Kenwood land mobile radio and hats,
plaques and insignias of various domestic and foreign governmental
agencies that use Transcrypt products, all against the background of a
globe.]
Providing Information Security Worldwide
[Transcrypt International logo]
4800 NW 1st Street * Lincoln, NE 68521
800-894-2615 * 402-474-4800 * Fax 402-474-4858
Transcrypt Sells Stand-alone Products and
Add-on Devices for Use with Equipment
Manufactured by Others
<PAGE> 74
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, COMMON
STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use Of Proceeds....................... 12
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion And Analysis
Of Financial Condition And Results
Of Operations....................... 17
Business.............................. 25
Management............................ 39
Certain Transactions.................. 46
Principal and Selling Stockholders.... 47
Description Of Capital Stock.......... 48
Shares Eligible for Future Sale....... 50
Underwriting.......................... 52
Legal Matters......................... 53
Experts............................... 53
Additional Information................ 53
Glossary.............................. 54
Index To Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS
IN THE COMMON STOCK OFFERED HEREBY, 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
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,750,000 SHARES
LOGO
COMMON STOCK
---------------------
PROSPECTUS
---------------------
DAIN BOSWORTH
Incorporated
FURMAN SELZ
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 75
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 application fees.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 18,296
NASD fee.......................................................... 6,540
Nasdaq National Market application fee............................ 40,700
Blue Sky filing fees and expenses................................. 10,000
Printing and engraving expenses................................... 125,000
Legal fees and expenses........................................... 340,000
Accounting fees and expenses...................................... 75,000
Registrar and transfer agent fees................................. 5,000
Premium for Director and Officer Insurance*....................... 150,000
Miscellaneous..................................................... 129,464
--------
Total........................................................... $900,000
========
</TABLE>
- ---------------
* Portion of director and officer liability insurance attributable to coverage
for liability under the Securities Act of 1933.
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
II-1
<PAGE> 76
advance their expenses incurred as a result of any proceedings against them as
to which they could be indemnified.
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 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 Securities Act of 1933, as amended (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.
(b) 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 Registrant,
filed on September 30, 1996 with the Secretary of State of the State of
Delaware.
3.2* Amended and Restated Bylaws of the Registrant.
3.3* Certificate of Merger of Transcrypt International, Ltd., a Nebraska limited
partnership, with and into the Registrant, filed on June 28, 1996 with the
Secretary of State of the State of Delaware.
3.4* Certificate of Merger of Transcrypt International, Inc., a Nebraska
corporation, with and into the Registrant, filed on September 30, 1996 with
the Secretary of State of the State of Delaware.
4.1* Specimen Certificate for Common Stock.
5.1* Opinion of Manatt, Phelps & Phillips, LLP.
10.1* Employment Agreement between the Registrant and John T. Connor dated as of
September 10, 1996.
10.2* Employment Agreement between the Registrant and Jeffery L. Fuller dated as of
July 18, 1996.
10.3* Form of Employment Agreement between the Registrant and C. Eric Baumann,
Michael P. Wallace and Joel K. Young.
10.4* Form of 1996 Stock Incentive Plan, together with forms of non-qualified stock
option agreements.
</TABLE>
II-2
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------------------------------------------------------------
<S> <C>
10.5* Form of Indemnification Agreement between the Registrant and each executive
officer and director of the Registrant.
10.6* License Agreement for APCO Project 25 Compliant Product between Motorola,
Inc. and the Registrant dated as of August 2, 1994.
10.7** Amendment, dated as of June 28, 1996, to License Agreement for APCO Project
25 Compliant Product between Motorola, Inc. and the Registrant dated as of
August 2, 1994.
10.8* OEM Agreement between Motorola, Inc. and the Registrant dated as of August 2,
1994.
10.9** Amendment, dated as of July 15, 1996, to OEM Agreement between Motorola, Inc.
and the Registrant dated as of August 2, 1994.
10.10** Private Label/Supplier Agreement for Analog Scrambling Modules between
Motorola, Inc. and the Registrant dated as of August 8, 1995.
10.11** Motorola Cellular Subscriber Products Sales Agreement, dated as of June 13,
1996, by and between Motorola, Inc. and the Registrant.
10.12* License Agreement for APCO Fed Project 25 Algorithm between Digital Voice
Systems, Inc. and the Registrant, dated as of August 14, 1995.
10.13* Consigned Inventory Agreement between Arrow/Schweber Electronics Group and
the Registrant, dated as of June 22, 1994.
10.14* Nebraska Investment Finance Authority $850,000 Industrial Revenue Bond
(Transcrypt International, Ltd. Project), Series 1994, dated as of January
15, 1994, and Note.
10.15* Trust Indenture, dated as of January 15, 1994, for $850,000 Industrial
Revenue Bond (Transcrypt International, Ltd. Project), Series 1994, between
Nebraska Investment Finance Authority as Issuer and Norwest Bank Nebraska,
N.A. as Trustee.
10.16* Loan Agreement, dated as of January 15, 1994, for $850,000 Industrial Revenue
Bond (Transcrypt International, Ltd. Project), Series 1994, between Nebraska
Investment Finance Authority as Issuer and the Registrant.
10.17* Amended and Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Registrant.
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 Registrant.
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 Registrant.
10.20* Promissory Note, dated as of May 11, 1995, between West Gate Bank and the
Registrant.
10.21* Noncompete Agreement, dated as of December 3, 1991, between John Kuijvenhoven
and the Registrant.
10.22* Security and Pledge Agreement, dated as of December 3, 1991, by and among
John Kuijvenhoven, Yvonne Kuijvenhoven and the Registrant.
10.23* Security and Pledge Agreement, dated as of August 8, 1994, by and among John
Kuijvenhoven, Yvonne Kuijvenhoven and the Registrant.
10.24* Form of Adoption Agreement for Nonstandardized 401(k) Profit Sharing Plan.
10.25* Defined Contribution Master Plan and Trust Agreement of Norwest Bank
Nebraska, N.A., Master Plan Sponsor.
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 Registrant, together with Modification of Note.
</TABLE>
II-3
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------------------------------------------------------------
<S> <C>
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 Registrant, together with Commercial Installment Note, dated
November 19, 1996.
11.1* Statement re: Computation of Per Share Earnings (see page S-3).
23.1 Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 5.1).
23.3* Consent of International Data Corporation
23.4* Consent of Zarley, McKee, Thomte, Voorhees & Sease, P.L.C.
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
** Previously filed and confidential treatment requested for certain portions.
(b) FINANCIAL STATEMENT SCHEDULES:
Schedule III -- Valuation and Qualifying Accounts and Reserves
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-4
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Lincoln, Nebraska, on this 17th day of January, 1997.
TRANSCRYPT INTERNATIONAL, INC.
By: /s/ JOHN T. CONNOR
------------------------------------
John T. Connor
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* JOHN T. CONNOR Chief Executive Officer and January 17, 1997
- --------------------------------------------- Director (Principal
John T. Connor Executive Officer)
* RANDAL P. HANSEN Vice President of Finance January 17, 1997
- --------------------------------------------- and Chief Financial
Randal P. Hansen Officer (Principal
Financial and Accounting
Officer)
* TERRY L. FAIRFIELD Director January 17, 1997
- ---------------------------------------------
Terry L. Fairfield
* JEFFERY L. FULLER Director January 17, 1997
- ---------------------------------------------
Jeffery L. Fuller
* THOMAS R. LARSEN Director January 17, 1997
- ---------------------------------------------
Thomas R. Larsen
* THOMAS C. SMITH Director January 17, 1997
- ---------------------------------------------
Thomas C. Smith
</TABLE>
II-5
<PAGE> 80
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* THOMAS R. THOMSEN Director January 17, 1997
- ---------------------------------------------
Thomas R. Thomsen
* WINSTON S. WADE Director January 17, 1997
- ---------------------------------------------
Winston S. Wade
*By: /s/ JOHN T. CONNOR
- ---------------------------------------------
John T. Connor
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 81
SCHEDULE III -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
ADDITIONS
----------------------
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, 1993............... $ 20,000 $217,829 $ 0 $168,856 $ 68,973
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
-
------ ------- ------- -------
Inventory Obsolescence Reserves for the:
Year Ended December 31, 1993............... $ 0 $184,769 $ 0 $177,803 $ 6,966
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
-
------ ------- ------- -------
</TABLE>
S-2
<PAGE> 82
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ---------------------------------------------------------------------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement........................................
3.1* Second Amended and Restated Certificate of Incorporation of the
Registrant, filed on September 30, 1996 with the Secretary of State of
the State of Delaware.................................................
3.2* Amended and Restated Bylaws of the Registrant.........................
3.3* Certificate of Merger of Transcrypt International, Ltd., a Nebraska
limited partnership, with and into the Registrant, filed on June 28,
1996 with the Secretary of State of the State of Delaware.............
3.4* Certificate of Merger of Transcrypt International, Inc., a Nebraska
corporation, with and into the Registrant, filed on September 30, 1996
with the Secretary of State of the State of Delaware..................
4.1* Specimen Certificate for Common Stock.................................
5.1* Opinion of Manatt, Phelps & Phillips, LLP.............................
10.1* Employment Agreement between the Registrant and John T. Connor dated
as of September 10, 1996..............................................
10.2* Employment Agreement between the Registrant and Jeffery L. Fuller
dated as of July 18, 1996.............................................
10.3* Form of Employment Agreement between the Registrant and C. Eric
Baumann, Michael P. Wallace and Joel K. Young.........................
10.4* Form of 1996 Stock Incentive Plan, together with forms of
non-qualified stock option agreements.................................
10.5* Form of Indemnification Agreement between the Registrant and each
executive officer and director of the Registrant......................
10.6* License Agreement for APCO Project 25 Compliant Product between
Motorola, Inc. and the Registrant dated as of August 2, 1994..........
10.7** Amendment, dated as of June 28, 1996, to License Agreement for APCO
Project 25 Compliant Product between Motorola, Inc. and the Registrant
dated as of August 2, 1994............................................
10.8* OEM Agreement between Motorola, Inc. and the Registrant dated as of
August 2, 1994........................................................
10.9** Amendment, dated as of July 15, 1996, to OEM Agreement between
Motorola, Inc. and the Registrant dated as of August 2, 1994..........
10.10** Private Label/Supplier Agreement for Analog Scrambling Modules between
Motorola, Inc. and the Registrant dated as of August 8, 1995..........
10.11** Motorola Cellular Subscriber Products Sales Agreement, dated as of
June 13, 1996, by and between Motorola, Inc. and the Registrant.......
10.12* License Agreement for APCO Fed Project 25 Algorithm between Digital
Voice Systems, Inc. and the Registrant, dated as of August 14, 1995...
10.13* Consigned Inventory Agreement between Arrow/Schweber Electronics Group
and the Registrant, dated as of June 22, 1994.........................
10.14* Nebraska Investment Finance Authority $850,000 Industrial Revenue Bond
(Transcrypt International, Ltd. Project), Series 1994, dated as of
January 15, 1994, and Note............................................
</TABLE>
<PAGE> 83
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ---------------------------------------------------------------------- ------------
<C> <S> <C>
10.15* Trust Indenture, dated as of January 15, 1994, for $850,000 Industrial
Revenue Bond (Transcrypt International, Ltd. Project), Series 1994,
between Nebraska Investment Finance Authority as Issuer and Norwest
Bank Nebraska, N.A. as Trustee........................................
10.16* Loan Agreement, dated as of January 15, 1994, for $850,000 Industrial
Revenue Bond (Transcrypt International, Ltd. Project), Series 1994,
between Nebraska Investment Finance Authority as Issuer and the
Registrant............................................................
10.17* Amended and Restated Loan Agreement, dated as of May 18, 1994, by and
between Norwest Bank Nebraska, N.A., and the Registrant...............
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 Registrant....................................
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 Registrant....................................
10.20* Promissory Note, dated as of May 11, 1995, between West Gate Bank and
the Registrant........................................................
10.21* Noncompete Agreement, dated as of December 3, 1991, between John
Kuijvenhoven and the Registrant.......................................
10.22* Security and Pledge Agreement, dated as of December 3, 1991, by and
among John Kuijvenhoven, Yvonne Kuijvenhoven and the Registrant.......
10.23* Security and Pledge Agreement, dated as of August 8, 1994, by and
among John Kuijvenhoven, Yvonne Kuijvenhoven and the Registrant.......
10.24* Form of Adoption Agreement for Nonstandardized 401(k) Profit Sharing
Plan..................................................................
10.25* Defined Contribution Master Plan and Trust Agreement of Norwest Bank
Nebraska, N.A., Master Plan Sponsor...................................
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 Registrant, together with Modification of
Note..................................................................
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 Registrant, together with
Commercial Installment Note, dated November 19, 1996..................
11.1* Statement re: Computation of Per Share Earnings (see page S-3)........
23.1 Consent of Coopers & Lybrand L.L.P....................................
23.2* Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 5.1)...
23.3* Consent of International Data Corporation.............................
23.4* Consent of Zarley, McKee, Thomte, Voorhees & Sease, P.L.C.............
24.1* Power of Attorney. ...................................................
27.1* Financial Data Schedule...............................................
</TABLE>
- ---------------
* Previously filed.
** Previously filed and confidential treatment requested for certain portions.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File No.
333-14351) of our reports dated February 23, 1996, on our audits of the
financial statements as of December 31, 1994 and 1995 and for each of the three
years in the period ended December 31, 1995, and the financial statement
schedule of Transcrypt International, Inc. We also consent to the reference of
our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Lincoln, Nebraska
January 17, 1997
