<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 8-K/A
CURRENT REPORT
(Amendment No. 2)
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): JULY 31, 1997
---------------------------------------------
TRANSCRYPT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-21681 47-0801192
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification Number)
4800 NW FIRST STREET, LINCOLN, NEBRASKA 68521
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (402) 474-4800
<PAGE> 2
Item 2. Acquisition or Disposition of Assets.
On July 31, 1997, Transcrypt International, Inc. ("Transcrypt" or the
"Company") consummated the acquisition (the "Acquisition") of all of the
outstanding shares of capital stock and certain indebtedness of E.F. Johnson
Company, a Minnesota corporation ("EF Johnson"). The Company entered into and
consummated the following definitive agreements as of July 31, 1997: (i) a Stock
Purchase Agreement by and among EFJ Partners, EF Johnson, William Weksel and the
Company (the "Common Stock Purchase Agreement"); (ii) a Preferred Stock Purchase
Agreement between NorAm Energy Corp. ("NorAm") and the Company (the "Preferred
Stock Purchase Agreement"); (iii) a Series B Preferred Stock and Warrant
Purchase Agreement between Securicor Radiocoms Limited ("Securicor") and the
Company (the "Series B Preferred Stock Purchase Agreement"); and (iv) a
Registration Rights Agreement by and among NorAm, Intek Diversified Corporation
("Intek") (the parent of Securicor) and the Company (the "Registration Rights
Agreement"). The Company had previously announced, on June 12, 1997, a letter of
intent to acquire EF Johnson dated June 6, 1997, as amended on June 11, 1997
(the "Letter of Intent").
Pursuant to the Common Stock Purchase Agreement, the Company acquired
from EFJ Partners all of the outstanding shares of Common Stock, $.01 par value,
of EF Johnson. At the closing, the Company discharged certain indebtedness of EF
Johnson, pursuant to the Common Stock Purchase Agreement, representing total
cash consideration of $436,000. Pursuant to the Preferred Stock Purchase
Agreement, the Company acquired from NorAm all of the outstanding shares of
Preferred Stock, $100 par value, of EF Johnson (together with the right to all
accrued and unpaid dividends thereon) in exchange for 457,856 newly issued
shares of Common Stock, $.01 par value, of the Company issued to NorAm with an
approximate market value of $5.5 million. In addition, NorAm agreed to cancel a
9.79% Senior Subordinated Note due July 31, 1997 of EF Johnson with a principal
amount of $10,000,000, and any accrued and unpaid interest thereon. Pursuant to
the Series B Preferred Stock Purchase Agreement, the Company acquired from
Securicor (i) all of the outstanding shares of Series I Class B Preferred Stock,
$.01 par value, of EF Johnson (together with the right to all accrued and unpaid
dividends thereon) and (ii) a warrant to purchase up to an aggregate of 291,790
shares of Common Stock of EF Johnson for an exercise price equal to the fair
market value of such Common Stock on the date the warrant is exercised, all in
exchange for 374,609 newly issued shares of Common Stock of the Company issued
to Intek with an approximate market value of $4.5 million. In addition, pursuant
to the Letter of Intent, the Company had previously delivered letters of credit
in the aggregate amount of $2,000,000 to support a surety bond issued by one
of EF Johnson's bonding companies and to provide additional collateral under
certain indebtedness of EF Johnson.
The shares of Common Stock of the Company issued to NorAm and Intek
were exempt from registration under the Securities Act of 1933 in reliance upon
Section 4(2) of such Act as transactions by an issuer not involving any public
offering. Pursuant to the Registration Rights Agreement, the Company granted
certain piggyback and demand registration rights to NorAm and Intek with respect
to the aggregate 832,465 shares of Common Stock issued to such entities in
connection with the Acquisition (the "New Shares"). Under the piggyback
registration rights provisions, if the Company proposes to register any of its
securities under the Securities Act of 1933 (except for a registration on Forms
S-4 or S-8 or involving an issuance related to an exchange offer or offering
solely to existing
1
<PAGE> 3
stockholders or employees of the Company), either for its own account or the
account of other securityholders, the holders of the New Shares will be entitled
to notice of such proposed 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. Such piggyback
registration rights are effective immediately as to 416,232 of the New Shares
and are effective as to the remaining 416,233 of the New Shares beginning 180
days after the date of effectiveness of the Registration Rights Agreement, or
January 27, 1998. In addition, the holders of at least 66 2/3% of the New Shares
will be entitled to one demand registration by the Company beginning 180 days
after the date of effectiveness of the Registration Rights Agreement, subject
to, among other things, the right of the Company, under certain conditions, to
defer such registration. The holders of the New Shares have also agreed not to
dispose of any of the New Shares for a period of 180 days after the date of
effectiveness of the Registration Rights Agreement, except pursuant to a sale in
connection with the aforementioned registration rights.
The cash consideration used by the Company in the Acquisition was
obtained from the proceeds of the Company's initial public offering in January
1997. Other than as described above, at the time of the Acquisition there were
no material relationships between any of the stockholders of EF Johnson and the
Company, any of the Company's affiliates, any director or officer of the Company
or any associate of any such director or officer. The Acquisition will be
accounted for under the purchase method of accounting.
EF Johnson develops and manufactures wireless communications products
and systems for the land mobile radio market. The Company intends to continue
operating the business of EF Johnson and has announced a restructuring program
for EF Johnson, including a 25% reduction in EF Johnson's workforce, the
phase-out of low margin products and services, the consolidation of EF Johnson's
corporate headquarters with that of the Company, the elimination of duplicative
sales, marketing and personnel expenses with the Company and the implementation
of cash management policies and expense controls consistent with the Company's
standards.
The foregoing descriptions of the terms of Common Stock Purchase
Agreement, Preferred Stock Purchase Agreement, Series B Preferred Stock Purchase
Agreement and Registration Rights Agreement do not purport to be complete
statements of the parties' rights and obligations thereunder, and are qualified
in their entirety by reference to the definitive agreements, copies of which are
attached as exhibits hereto and the contents of which are incorporated herein by
reference. Certain additional matters relating to the proposed transaction are
more fully described in the Company's press releases dated July 31, 1997 and
August 6, 1997, which are attached as exhibits hereto and the contents of which
are also hereby incorporated herein by reference.
Statements made in this report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, and as such, may involve risks and uncertainties. These forward-looking
statements relate to, among other things, forecasts and projections regarding
the anticipated benefits of the restructuring and the future performance of the
Company and its EF Johnson subsidiary,
2
<PAGE> 4
expectations of the business environment in which the Company operates,
perceived opportunities in the market and statements regarding the Company's
mission and vision. The Company's actual results, performance and achievements
may differ materially from the results, performance and achievements expressed
or implied in such forward-looking statements and from historical results. Some
of the risks and uncertainties that might cause such a difference include: the
timing of the full implementation of the Company's restructuring program for EF
Johnson, the effects of the restructuring program on the customers, vendors and
employees of the Company and EF Johnson, business conditions generally, the
state of the overall economy, development of the markets for the Company's
products, including the domestic digital land mobile radio market, availability
of third-party compatible products, other competitive factors, and the risks and
uncertainties discussed in the Company's reports filed with the Securities and
Exchange Commission, including under the caption "Risk Factors" in the Company's
Prospectus dated January 22, 1997 and under the caption "Item 1. Business --
Summary of Business Considerations and Certain Factors that may Affect Future
Results of Operations and/or Stock Price" contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
3
<PAGE> 5
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial statements of business acquired.
Index to Financial Statements
- -----------------------------
Page
----
Report of Independent Accountants...................................... F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995........... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994..................................... F-3
Consolidated Statements of Shareholders' Equity (Deficit) for the
Years Ended December 31, 1996, 1995 and 1994......................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994..................................... F-5
Notes to Consolidated Financial Statements............................. F-6
Condensed Consolidated Balance Sheet as of June 29, 1997 (unaudited)... F-18
Condensed Consolidated Statements of Operations for the Six Months
Ended June 29, 1997 (unaudited)...................................... F-19
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 29, 1997 (unaudited)...................................... F-20
Notes to Condensed Consolidated Financial Statements................... F-21
(b) Pro forma financial information.
Index to Financial Statements
- -----------------------------
Page
----
Pro Forma Condensed Combined Balance Sheet as of June 30, 1997
(unaudited).......................................................... F-22
Pro Forma Condensed Combined Income Statement for the Six Months
ended June 30, 1997 (unaudited)...................................... F-24
Pro Forma Condensed Combined Income Statement for the Year
ended December 31, 1996 (unaudited).................................. F-25
Notes to Pro Forma Condensed Combined Financial Statements............. F-26
(c) Exhibits.
2.1* Stock Purchase Agreement, dated as of July 31, 1997,
by and among EFJ Partners, E.F. Johnson Company,
William Weksel and the Company.
2.2* Preferred Stock Purchase Agreement, dated as of July
31, 1997, between NorAm Energy Corp. and the Company.
2.3* Series B Preferred Stock and Warrant Purchase
Agreement, dated as of July 31, 1997, between
Securicor Radiocoms Limited and the Company.
4.1* Registration Rights Agreement, dated as of July 31,
1997, by and among NorAm Energy Corp., Intek
Diversified Corporation and the Company.
23.1 Consent of Price Waterhouse LLP.
99.1* Press Release issued on July 31, 1997 by the Company.
99.2* Press Release issued on August 6, 1997 by the
Company.
* Filed as an exhibit to the Registrant's Current Report on Form 8-K (File No.
0-21681) filed with the Commission on August 14, 1997 and incorporated herein
by this reference.
4
<PAGE> 6
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this Amendment No. 2 to this report
to be signed on its behalf by the undersigned thereunto duly authorized.
TRANSCRYPT INTERNATIONAL, INC.
Date: September 23, 1997 By: /s/ JOHN T. CONNOR
-----------------------------------
John T. Connor
Chairman of the Board of Directors
5
<PAGE> 7
REPORT OF INDEPENDENT ACCOUNTANTS
May 2, 1997
To the Board of Directors
and Shareholders of
E.F. Johnson Company
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of E.F. Johnson Company and its subsidiaries at
December 31, 1996 and 1995 and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 1 to the financial statements, the Company is in default under
several debt arrangements, has suffered recurring losses from operations
and has a capital deficiency. These factors raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Price Waterhouse LLP
Minneapolis, Minnesota
F-1
<PAGE> 8
E.F. JOHNSON COMPANY
CONSOLIDATED BALANCE SHEET
(Thousands of dollars)
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash $ 176 $ 86
Trade accounts receivable, net of allowance for doubtful accounts
of $1,320 and $2,699, respectively 9,468 13,929
Receivable from sale of assets 799 14,159
Receivables from related parties 463 286
Inventories 13,240 17,996
Prepaid expenses and other current assets 2,106 1,498
--------- ---------
Total current assets 26,252 47,954
Property, plant and equipment, net 7,040 10,095
Intangible assets, net 6,170 12,877
Receivables from related parties 1,624 1,748
Other assets 1,666 1,184
--------- ---------
Total assets $ 42,752 $ 73,858
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 11,623 $ 2,902
Debt in default subject to acceleration 13,864
Accounts payable 10,551 9,096
Technology and license purchase payables 3,604 1,408
Advance billings 3,586 2,888
Accrued compensation and benefits 2,642 2,344
Other accrued expenses 4,391 3,593
--------- ---------
Total current liabilities 50,261 22,231
--------- ---------
Long-term liabilities:
Long-term debt 1,802 32,681
Payable to related parties 2,767 1,693
Technology and license purchase payables 3,205
Other 490 142
--------- ---------
Total long-term liabilities 5,059 37,721
--------- ---------
Total liabilities 55,320 59,952
--------- ---------
Commitments and contingencies
Redeemable Series A preferred stock, $100 par value, 80,000 shares
authorized, issued and outstanding, at liquidation value 10,880 10,240
Redeemable Series I Class B preferred stock, $.01 par value,
2,000,000 shares authorized, 925,850 Series I shares, issued and
outstanding, at liquidation value 11,118 10,480
Shareholders' equity (deficit):
Common stock, $.01 par value, 10,000,000 shares authorized,
3,800,000 shares issued and outstanding 38 38
Additional paid-in capital 828 828
Retained deficit (35,432) (7,680)
--------- ---------
Total shareholders' equity (deficit) (34,566) (6,814)
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 42,752 $ 73,858
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements
F-2
<PAGE> 9
E.F. JOHNSON COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $ 78,966 $ 88,932 $ 99,240
Cost of sales 50,623 60,630 60,349
--------- --------- ---------
Gross profit 28,343 28,302 38,891
--------- --------- ---------
Operating expenses:
Selling, general and administrative 29,201 32,107 28,284
Research and development 8,401 8,118 7,534
Nonrecurring items (see note 14) 13,521 (7,479) 890
--------- --------- ---------
Total operating expenses 51,123 32,746 36,708
Loss from operations (22,780) (4,444) 2,183
--------- --------- ---------
Other income (expense):
Interest expense (3,924) (4,505) (3,075)
Interest income 230 400 407
--------- --------- ---------
Total other income (expense) (3,694) (4,105) (2,668)
--------- --------- ---------
Net loss before income tax (26,474) (8,549) (485)
Income tax benefit 578
--------- --------- ---------
Net (loss) income $ (26,474) $ (8,549) $ 93
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE> 10
E.F. JOHNSON COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Thousands of dollars)
<TABLE>
<CAPTION>
Redeemable Preferred Stock Shareholders' Equity (Deficit)
------------------------------------- --------------------------------------------------
Series A Series I Class B Common Stock Additional Retained
----------------- ---------------- ------------------ Paid-In Earnings
Shares Stock Shares Stock Shares Amount Capital (Deficit) Total
------ ----- ------ ----- --------- ------ ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 80,000 $ 8,960 3,800,000 $ 38 $ 1,069 $ 2,536 $ 3,643
Accrued preferred stock dividends 640 (640) (640)
Net income 93 93
-------- --------- --------- --------- ----------- ------- --------- --------- ---------
Balance at December 31, 1994 80,000 9,600 3,800,000 38 1,069 1,989 3,096
Series I Class B issuance 925,850 $ 10,000
Preferred stock issuance costs (241) (241)
Accrued preferred stock dividends 640 480 (1,120) (1,120)
Net loss (8,549) (8,549)
-------- --------- --------- --------- ----------- ------- --------- --------- ---------
Balance at December 31, 1995 80,000 10,240 925,850 10,480 3,800,000 38 828 (7,680) (6,814)
Accrued preferred stock dividends 640 638 (1,278) (1,278)
Net loss (26,474) (26,474)
-------- --------- --------- --------- ----------- ------- --------- --------- ---------
Balance at December 31, 1996 80,000 $ 10,880 925,850 $ 11,118 3,800,000 $ 38 $ 828 $ (35,432) $ (34,566)
======== ========= ========= ========= =========== ======= ========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE> 11
E.F. JOHNSON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (26,474) $ (8,549) $ 93
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 5,819 6,539 4,647
Loss from write down of long-term assets 6,000
Provision for losses on accounts receivable 466 2,734 59
Gain on sale of Components Division (8,343)
Loss on sale of property 40 51 39
Changes in components of working capital, net of
effect of sale of
Division:
Receivables 3,994 3,456 (5,546)
Inventories 4,757 (1,639) (4,307)
Prepaid expenses and other current assets (610) (662) (50)
Accounts payable 1,455 1,982 4,765
Advance billings 698 2,888
Accrued liabilities 1,098 (1,286) (855)
--------- --------- ---------
Net cash used by operating activities (2,757) (2,829) (1,155)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (1,480) (3,557) (3,430)
Proceeds from sale of property 43 136 86
Receipt of proceeds from sale of assets 14,659
Purchase of intangible assets (1,669) (4,007) (986)
Change in other assets (1,781) 39 620
--------- --------- ---------
Net cash provided (used) by investing activities 9,772 (7,389) (3,710)
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in debt (7,947) 6,972 4,706
Proceeds from issuance of preferred stock, net 1,913
Change in amount to/from related parties 1,022 1,342 153
--------- --------- ---------
Net cash (used) provided by financing activities (6,925) 10,227 4,859
--------- --------- ---------
Increase (decrease) in cash during the year 90 9 (6)
Cash - beginning of year 86 77 83
--------- --------- ---------
Cash - end of year $ 176 $ 86 $ 77
========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 3,472 $ 4,253 $ 3,045
Income tax refund $ (509) $ (336) $ (124)
Supplemental schedule of non-cash activity:
Liabilities incurred in exchange for purchased
technology $ - $ 913 $ 5,922
Preferred stock issued for license and technology
rights $ - $ 4,630 $ -
Preferred stock issued in payment of accounts
payable $ - $ 3,216 $ -
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE> 12
E.F. JOHNSON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
NOTE 1 - DESCRIPTION OF BUSINESS AND ORGANIZATION
Operations
E.F. Johnson Company (the Company) is a leading provider of wireless
communications products and systems to the private two-way land mobile radio
(LMR) industry. The Company designs, develops, manufactures and markets
stationary transmitters/receivers (base stations or repeaters) and mobile and
portable radio transceivers. The Company offers an extensive line of such
products, including "conventional," "trunked" and "networked" systems, which are
used in a broad range of applications by numerous industrial and commercial
organizations, ranging from taxi fleets to large oil and gas refineries, and
state and local government agencies, including public safety departments such as
police departments.
Ability to Continue as a Going Concern
The Company is presently in default under several debt agreements and will be
required to restructure these obligations and possibly seek additional
financing. In addition, the Company has experienced recurring losses and as of
December 31, 1996 has a retained deficit of $35,432 and a working capital
deficit of $24,009. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
assets or liabilities that might result if the Company is unable to continue as
a going concern.
Management is currently pursuing additional equity and attempting to restructure
existing debt agreements. However, there is no assurance that these efforts will
be successful.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated balance sheet includes the accounts of the Company and its
wholly owned subsidiaries E.F. Johnson International, Inc. and E.F. Johnson
Communications, Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
F-6
<PAGE> 13
Revenue Recognition
Sales are recorded as products are shipped and services are rendered with the
exception of system sales which are generally recognized based upon performance
criteria and customer acceptance. For system sales with extended delivery dates,
sales and cost of sales are recognized under the percentage-of-completion method
as costs are incurred. Profits expected to be realized on contracts are based on
the Company's estimates of total sales value and costs at completion. These
estimates are reviewed and revised periodically throughout the lives of the
contracts, and adjustments to profits resulting from such revisions are recorded
in the accounting period in which the revisions are made.
Inventories
Inventories are stated at the lower of cost or market, cost being determined by
the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives which range from three to fifteen years.
Retirement Benefits
The Company has a defined contribution qualified retirement savings and
profit-sharing plan which covers all of its employees. The Company's
profit-sharing contributions are discretionary. No profit-sharing contributions
were authorized in 1996, 1995 and 1994. The Company's contributions to the
retirement savings plan are based on specified levels of employee contributions
subject to certain overall salary limitations. Company contributions were
approximately $253, $298 and $271 for the years ended December 31, 1996, 1995
and 1994, respectively.
The Company does not currently provide postretirement healthcare benefits.
NOTE 3 - INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Raw materials and purchased components $ 5,365 $ 6,118
Work-in-process 1,974 2,792
Finished goods 5,901 9,086
--------- ---------
$ 13,240 $ 17,996
========= =========
</TABLE>
F-7
<PAGE> 14
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Land $ 34 $ 34
Buildings and improvements 3,238 3,099
Machinery and equipment 19,166 18,382
--------- ---------
22,438 21,515
Less: Accumulated depreciation (15,398) (11,420)
--------- ---------
$ 7,040 $ 10,095
========= =========
</TABLE>
At December 31, 1996 and 1995, property, plant and equipment includes $1.1
million (net of depreciation of $883) and $1.3 million (net of deprecation of
$792), respectively, of buildings and improvements under a capital lease.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Technology $ 5,100 $ 9,900
Licenses 663 2,756
Loan origination fees 1,765 1,765
Software 2,523 1,731
--------- ---------
10,051 16,152
Less: Accumulated amortization (3,881) (3,275)
--------- ---------
$ 6,170 $ 12,877
========= =========
</TABLE>
Amortization of intangibles is provided on a straight line basis over estimated
useful lives ranging from three to ten years. The Company assesses potential
impairment of its intangible assets based on anticipated undiscounted cash flows
from operations. During 1996 the Company wrote-off $5,858 of intangibles
primarily related to discontinued product lines and a reassessment of the value
of certain technology purchased in prior years.
F-8
<PAGE> 15
NOTE 6 - BILLINGS ON UNCOMPLETED CONTRACTS IN EXCESS OF INCURRED COSTS
Amounts included in the financial statements which relate to billings on
uncompleted contracts in excess of incurred costs are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Costs incurred on uncompleted contracts $ 16,867 $ 1,472
Profits on uncompleted contracts 9,596 645
--------- ---------
26,463 2,117
Less: Progress payments (29,886) (5,005)
--------- ---------
$ (3,423) $ (2,888)
========= =========
Included in the balance sheet:
Recoverable costs and accrued profits not yet billed $ 163
Advanced billings (3,586) $ (2,888)
--------- ---------
$ (3,423) $ (2,888)
========= =========
</TABLE>
Recoverable costs and accrued profits include direct costs of manufacturing,
installation, project management, engineering, and allocable manufacturing
overhead costs.
NOTE 7 - DEBT
Debt consists of:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Revolving credit line, maximum borrowings determined
periodically against contractual percentages of accounts
receivable and inventory. $ 11,331 $ 16,743
Bank term loan, secured by machinery and equipment. 3,933 6,650
Senior subordinated note due July 31, 1997, interest payable
semi-annually on January 31 and July 31, interest at 9.79%
per annum. 10,000 10,000
Subordinated debentures, due in quarterly installments
beginning January 1, 1994 through October 31, 1996,
interest rate of 20.51%. 64
</TABLE>
F-9
<PAGE> 16
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Capital lease obligation, due in monthly principal and
interest installments of $42 through July 1996, thereafter,
increasing to $52 through July 31, 2002, with payments
first applied to interest, effective interest rate of 22.1%
per annum, secured by land and building. $ 1,996 $ 2,092
Other capital lease obligation. 29 34
--------- ---------
27,289 35,583
Less: Current portion based on scheduled repayments (11,623) (2,902)
Debt in default subject to acceleration (13,864) -
--------- ---------
Long-term debt $ 1,802 $ 32,681
========= =========
</TABLE>
On March 3, 1995, the Company refinanced its existing revolving credit line and
term loan arrangements with the same financial institution (Senior Creditor).
The amended Financing Agreements (Agreements) increased the Company's maximum
credit facility from $20,000 to $35,000 and provide for borrowings at 1.75% over
the bank's prime rate. The Agreements include a fee of 2% on the unused portion
of $30,000 of the facility. The term loan requires scheduled monthly principal
payments of $117 through February 1998 and a final payment of $2,306 due on
March 3, 1998. The balance outstanding under the revolver is due on March 3,
1998.
The revolving credit line, bank term loan and capital lease agreements include
certain covenants and restrictions including minimum net worth and working
capital requirements. The Company is also prohibited from paying dividends under
its credit facility, except that the holders of Preferred Stock are entitled to
receive cumulative cash dividends if and when declared by the Board of Directors
of the Company. The Company was not in compliance with these covenants for the
year ended December 31, 1996. According to the terms of the Agreements, the
creditor has the right to make all the outstanding amounts under the Agreements
due and payable, the right to appropriate, set off and apply to the payment of
outstanding amounts all collateral under the Agreements. As of May 2, 1997
creditor had not made the outstanding amounts under the Agreements due and
payable.
In addition, the Company failed to make its semi-annual interest payments of
$490 due July 31, 1996 and January 31, 1997 with the holder of the $10,000
Senior subordinated note (the Note). On April 15, 1997, the creditor gave the
Company and the Senior Creditor notice under the default terms of the Note
agreement and has accelerated all outstanding principal of the Note. The
creditor can take action, including the initiation of legal proceedings, to
collect outstanding amounts 159 days after it has given notice to the Senior
Creditor.
The Company has failed to make scheduled payments under the terms of some of its
Technology agreements. The total amounts due under these agreements are included
in Technology and license purchase payable on the Company's balance sheet.
F-10
<PAGE> 17
Scheduled maturities of debt (without regard to possible acceleration of
payments due to covenant defaults) at December 31, 1996, are approximately as
follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ ------
<S> <C>
1997 $ 11,623
1998 14,125
1999 319
2000 393
2001 490
Thereafter 339
---------
$ 27,289
=========
</TABLE>
NOTE 8 - LEASE OBLIGATIONS
The Company leases certain buildings and improvements under an arrangement which
is accounted for as a capital lease. The lease requires monthly installments
ranging from $33 to $52, including an effective average annual interest rate of
22.1% through July 31, 2002. The Company also leases various equipment,
automobiles and buildings under operating leases. Rent expense for the years
ended December 31, 1996, 1995 and 1994 was $1,354, $1,109 and $876,
respectively. Future minimum rental payments under noncancelable lease
agreements are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Capital Operating
------------------------ ------- ---------
<S> <C> <C>
1997 $ 644 $ 655
1998 635 394
1999 628 288
2000 625 220
2001 625 236
Thereafter 364 11
--------- ---------
Total minimum lease payments 3,521 $ 1,804
=========
Less: Amount representing interest (1,496)
---------
Present value of future minimum long-term capital
lease payments (see Note 7) $ 2,025
=========
</TABLE>
F-11
<PAGE> 18
NOTE 9 - REDEEMABLE PREFERRED STOCK
Series A
The terms of the preferred stock provide that, subject to certain limitations,
the holders of the shares may exchange any or all of such shares for senior
subordinated notes of the Company upon the occurrence of certain events. The
notes, if issued, would mature on the fifth anniversary of the date of issuance
and otherwise have the same terms as the Company's Senior Subordinated Notes.
Notes issued in exchange for shares would be stated at a principal amount equal
to the liquidation value of the shares exchanged.
Dividends on the preferred stock accrue cumulatively on a daily basis at a rate
of 8% per annum. To the extent the dividends are not paid, unpaid dividends are
added to the liquidation value of any shares which is equal to the sum of one
hundred dollars per share, plus any accrued but unpaid dividends. The preferred
shares are carried on the consolidated balance sheet at liquidation value,
including accumulated dividends.
All or any portion of the outstanding shares of Preferred Stock may be redeemed
at the Company's option, at any time, for a redemption price of $100 per share
plus accrued and unpaid dividends. In addition, up to 30,000 outstanding shares
of Preferred Stock may be redeemed at the Company's option for a redemption
price of $50 per share plus accrued and unpaid dividends, at any time after the
Company has satisfied certain specified conditions. As of December 31, 1996, the
Preferred Stock is valued at its $100 per share redemption value because not all
conditions have been satisfied. If the conditions for redemption of shares at
$50 per share were fulfilled, the recorded amount of preferred stock would be
reduced by $1.5 million with a corresponding increase to additional paid-in
capital.
Series I Class B
In March 1995, the Company issued 925,850 shares of Series I Class B Preferred
Stock, $.01 par value per share at $10.80 per share. Simultaneous with this
issuance, the Company purchased from the preferred shareholder technology and
license rights for $4,630, settled an outstanding accounts payable balance of
$3,216 due the preferred shareholder and received cash proceeds of $2,154. The
Company incurred $241 of stock issuance costs in conjunction with this
transaction.
The terms of the Series I Class B preferred stock allow the holders of the
shares to exchange any or all such shares for common stock of the Company at a
conversion rate of one to one. Dividends accrue cumulatively on a daily basis at
the rate of 6% per annum. To the extent dividends are not paid, unpaid dividends
are added to the liquidation value of any shares which are equal to the sum of
the issuance price plus any accrued but unpaid dividends. Through December 31,
1996, no dividends have been declared or paid. The preferred shares are carried
on the consolidated balance sheet at liquidation value, including accumulated
dividends.
All or any portion of the outstanding shares of the Series I Class B preferred
stock may be redeemed at the Company's option, at any time, for a redemption
price equal to the then current liquidation value. The Company must redeem the
stock upon the earlier occurrence of March 14, 2005, the closing of an
underwritten public offering of the Company's common stock or the sale or
transfer of more than fifty percent of the Company's common stock.
F-12
<PAGE> 19
NOTE 10 - SHAREHOLDERS' EQUITY
Stock Options
The 1993 Incentive Stock Option Plan (the Plan) provides for the issuance to
employees of up to 200,000 shares of the Company's common stock at exercise
prices determined by the Option Committee. The Plan provides for the issuance of
both incentive stock options and non-qualified options. Options issued under the
Plan generally vest in equal installments over a five year period and expire ten
years from the date of grant. A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Incentive Option Price Average
Stock Range Per Exercise
Options Share Price
------- ----- -----
<S> <C> <C> <C>
Outstanding at December 31, 1993 182,518 $1.00 - $9.00 $ 2.33
Granted - - -
Canceled (39,943) 1.00 - 9.00 7.01
---------
Outstanding at December 31, 1994 142,575 1.00 - 2.00 1.02
Granted 98,870 3.85 - 7.71 5.51
Canceled (68,430) 1.00 - 7.71 1.42
---------
Outstanding at December 31, 1995 173,015 1.00 - 7.71 3.43
Granted 135,310 3.85 3.85
Canceled (120,790) 1.00 - 7.71 4.04
---------
Outstanding at December 31, 1996 187,535 $1.00 - $7.71 $ 3.34
=========
Exercisable at December 31, 1996 46,316 $1.00 - $7.71 $ 2.65
=========
</TABLE>
As permitted by Financial Accounting Standards (FAS) No. 123, "Accounting for
Stock-Based Compensation," the Company applies Accounting Principles Board (APB)
Opinion No. 25 and related interpretations in accounting for its stock option
plans and, accordingly, does not recognize compensation expense related thereto.
If the Company had elected to recognize compensation expense based on the fair
value of the options granted at grant date as prescribed by FAS No. 123, net
loss would not have been materially impacted.
Warrants
On July 31, 1992, the Company issued to the holder of the senior zero-coupon
note a warrant to purchase a total of 670,700 shares of the Company's common
stock at $.075 per share. The warrant expires on July 31, 1997. The number and
kind of securities purchasable upon the exercise of the warrant and the warrant
purchase price are subject to adjustments upon the occurrence of certain events,
including stock dividends, stock splits or combinations, reclassifications and
mergers. The warrant was valued at fair market value at the date of issuance
which resulted in a debt discount and a contribution to capital of $107.
F-13
<PAGE> 20
On March 14, 1995, the Company issued the holder of the Series I Class B
preferred stock a warrant to purchase up to 291,790 shares of the Company's
common stock. The exercise price is the fair market value of the Company's
common stock on the date the warrant is exercised. The warrant expires on the
earlier of March 14, 2005, the redemption of the Series I Class B preferred
stock or the date of an initial public offering of the Company's stock.
NOTE 11 - INCOME TAXES
The Company provides income taxes using the liability method under Financial
Accounting Standard No. 109, "Accounting for Income Taxes."
At December 31, 1996, the Company had approximately $231 of available general
business credit carryforwards, $18 of minimum tax credit carryforward, $8.9
million of tax benefit from federal net operating loss carryforwards, and tax
effected benefit of net temporary differences of $5 million available to offset
taxable income in the future. A valuation allowance has been established for the
entire net tax benefit of approximately $14 million as realization is not
assured.
The future tax benefits related to tax credit carryforwards expire in 1997. The
amount of these tax credit carryforwards are subject to final verification
related to the tax status of the predecessor. The net operating loss
carryforward begins to expire in 2009.
In fiscal 1994, the Company incurred a loss before taxes for financial reporting
and tax return purposes. For tax return purposes, the loss was carried back to
recover income taxes paid in prior years. A tax benefit of $578 has been
recognized in the 1994 statement of operations to the extent of this recovery of
taxes paid in prior years.
NOTE 12 - RELATED PARTY TRANSACTIONS
Management Agreement
The Company has a management agreement with a company controlled by significant
shareholders. The agreement automatically renews on December 31 for consecutive
one year terms unless either party gives thirty days notice. The management
agreement provides for a fee of $60 per month for the period November 1, 1993 to
June 30, 1994, $70 per month through June 1996 and $100 per month thereafter.
Shareholder Transactions
The Company incurred fees payable to significant shareholders for their
execution of noncompete agreements related to the sale of the Components
Division, personally guaranteeing performance bonds and personally guaranteeing
over advances on the Company's line of credit. These fees totaled $1,074 and
$1,693 during 1996 and 1995, respectively, and are included within amounts
payable to related parties on the balance sheet. In 1996, approximately $1
million of these fees related to performance guarantees and were included in
nonrecurring costs in the statement of operations.
F-14
<PAGE> 21
In October 1993, the Company loaned an aggregate of $1.5 million to two of its
shareholders. The notes bear interest at 2.5% over prime and are secured by the
shareholders' respective interest in Viking Partners, the sole shareholder of
Viking Mobile Communications, Inc. (VMC) (see below). The principal on each of
the notes is due November 1, 1998 and is included within amounts receivable from
related parties on the balance sheet. Interest income for 1996, 1995 and 1994
was $70, $172 and $148, respectively.
Viking Mobile Communications
In June 1993, the Company entered into a lease arrangement with VMC, a
corporation controlled by significant shareholders of the Company. Under the
rental agreement, the Company has agreed to lease sites to VMC which are
appropriate for the installation of two-way land mobile radio communication
systems for 800 MHz SMR service and to install and service such systems. Systems
leased to VMC under this agreement qualify as sales-type leases. Sales during
the year ended December 31, 1994 approximated $49.
No new leases were entered into during 1996 and 1995. As of December 31, 1996,
the lease receivable of $175 is recorded as a net receivable from related party
in the Company's balance sheet and is due with interest over the period through
1999.
The balance due as of December 31, 1996 includes $106 of payments in arrears.
Scheduled payments in 1997 have not been made. A shareholder of the Company has
guaranteed VMC's remaining obligations under the agreement.
The Company agreed to accept the return of certain previously leased equipment
from VMC during 1996. The returns resulted in losses to the Company of $76 and
$264 recorded in 1996 and 1995, respectively.
Automated Dispatch Solutions (formerly RadioSoft, Inc.)
In March 1995, the Company entered into an agreement with Automated Dispatch
Solutions, a corporation controlled by significant shareholders of the Company.
Under the terms of the agreement, Automated Dispatch Solutions provides the
Company with sales leads and purchases product from the Company. Automated
Dispatch Solutions purchased $96 and $106, respectively, of product from the
Company during 1996 and 1995, respectively. The Company paid Automated Dispatch
Solutions $150 in sales lead fees during 1995. The Company had a receivable of
$57, from Automated Dispatch Solutions at December 31, 1995.
Viking Dispatch Services, Inc.
In June 1995, the Company entered into an agreement with Viking Dispatch
Services, Inc. (VDS), a corporation controlled by significant shareholders of
the Company. Under terms of this agreement, the Company will reimburse VDS up to
$200 for attorneys' fees and regulatory expenses and VDS will purchase a minimum
of $2 million of equipment from the Company by June 1997.
During 1995 the Company reimbursed VDS $72 in legal and regulatory expenses. No
equipment has been purchased by VDS from the Company through December 31, 1996.
F-15
<PAGE> 22
Securicor
During the year ended December 31, 1995, purchases from Securicor, a preferred
shareholder (see Note 9), were $1,418. During the year ended December 31, 1995,
the Company recorded sales of $2,379, to Securicor. During the year ended
December 31, 1994, the Company had $2,493 of purchases from Securicor.
NOTE 13 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment. Foreign sales were as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
South America $ 6,715 $ 13,425 $ 6,143
Central America and Caribbean 2,018 6,089 5,527
Far East 9,990 5,670 8,548
Middle East 242 707 1,211
Europe 175 394 451
Other 3,289 2,983 680
--------- --------- ---------
$ 22,429 $ 29,268 $ 22,560
========= ========= =========
</TABLE>
NOTE 14 - NONRECURRING ITEMS
The Company incurred the following nonrecurring items during the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Gain on sale of Component Division $ 8,343
Write down of assets $ (11,618)
Employee severance costs (375) (762)
Costs related to initial public offering not consummated $ (630)
Costs incurred to acquire minority shares (298)
Costs incurred in debt refinancing not consummated (105)
Gain from refund of real estate taxes paid in prior years 203
Other nonrecurring costs (1,528) (102) (60)
--------- --------- ---------
Total nonrecurring (expense) income $ (13,521) $ 7,479 $ (890)
========= ========= =========
</TABLE>
Effective December 29, 1995, the Company sold the net assets of its Components
Division for proceeds of $15,159 and recorded a gain on the sale of $8,343.
Total revenues and divisional contribution before allocation of corporate costs,
interest expense and income taxes from the Division were approximately $15.5
million and $4.2 million, respectively, during 1995 and $13.8 million and $3.6
million, respectively, during 1994. Write down of assets primarily related to
discontinued product lines and reassessment of the value of certain technology
purchased in prior years and includes $5,858 of intangible assets, $4,771 of
inventory, and $989 of fixed assets and other.
F-16
<PAGE> 23
NOTE 15 - SUBSEQUENT EVENT
Effective January 15, 1997 the Company sold the net assets of its Data Telemetry
Division for net proceeds of $3,841 and recorded a gain on the sale of $2,154.
Additionally, advance payments of $2,168 were received for products and services
to be provided. The sale and advance payment proceeds were used to repay $5,785
of borrowings under the revolving credit line and $100 of principal on the bank
term loan. Total revenues and divisional contribution before allocation of
corporate costs, interest expense and income taxes from this Division were
approximately $8.7 million and $1.5 million, respectively, during 1996.
F-17
<PAGE> 24
E.F. JOHNSON COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited and in thousands of dollars, except share data)
<TABLE>
<CAPTION>
June 29, 1997
-------------
<S> <C>
ASSETS
------
Current Assets:
Cash $ 76
Trade accounts receivable, net 8,060
Inventories 11,173
Prepaid expenses and other current assets 2,330
---------
Total current assets 21,639
Property, plant and equipment, net 6,233
Intangible assets, net 5,618
Other assets 2,243
---------
Total assets $ 35,733
=========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 24,152
Accounts payable 10,061
Technology and license purchase payables 3,552
Other accrued expenses 9,870
---------
Total current liabilities 47,635
---------
Long-term liabilities:
Long-term debt 1,708
Payable to related parties 4,078
Other 1,062
---------
Total long-term liabilities 6,848
---------
Total liabilities 54,483
---------
Commitments and contingencies
Redeemable Series A preferred stock, $100 par value, 80,000 shares
authorized, issued and outstanding, at liquidation value 11,200
Redeemable Series I Class B preferred stock, $.01 par value,
2,000,000 shares authorized, 925,850 Series I shares, issued and
outstanding, at liquidation value 11,452
Shareholders' equity (deficit):
Common stock, $.01 par value, 10,000,000 shares authorized,
3,800,000 shares issued and outstanding 38
Additional paid-in capital 828
Retained deficit (42,268)
---------
Total shareholders' equity (deficit) (41,402)
---------
Total liabilities and shareholders' equity (deficit) $ 35,733
=========
</TABLE>
See accompanying notes to the condensed consolidated financial statements
F-18
<PAGE> 25
E.F. JOHNSON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands of dollars)
<TABLE>
<CAPTION>
Six months ended
--------------------------------------
June 29, 1997 June 29, 1996
------------- -------------
<S> <C> <C>
Net sales $ 28,223 $ 43,166
Cost of sales 18,157 26,717
-------- ---------
Gross profit 10,066 16,449
Operating expenses:
Selling, general and administrative 11,695 14,816
Research and development 2,938 3,888
Nonrecurring items (666) --
--------- ---------
Total operating expenses 13,967 18,704
Loss from operations (3,901) (2,255)
Other income (expense):
Interest, net (2,282) (1,736)
---------- ----------
Net loss $ (6,183) $(3,991)
========== ==========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
F-19
<PAGE> 26
E.F. JOHNSON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands of dollars)
<TABLE>
<CAPTION>
Six months ended
-----------------------------------
June 29, 1997 June 29, 1996
------------- ------------
<S> <C> <C>
Net cash used by operating activities $ (4,928) $ (8,242)
--------- ----------
Cash flows from investing activities:
Capital expenditures (961) (758)
Proceeds from sale of property 3 14
Receipt of proceeds from sale of assets 4,112 13,159
Purchase of intangible assets (52) (118)
Change in other assets 1,273 (415)
--------- ----------
Net cash provided by investing activities 4,375 11,882
--------- ----------
Cash flows from financing activities:
Net increase (decrease) in debt 453 (3,614)
========= =========
Net cash (used) provided by financing
activities 453 (3,614)
========= =========
Increase (decrease) in cash during the year (100) 26
Cash - beginning of year 176 86
--------- ---------
Cash - end of year $ 76 $ 112
========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
F-20
<PAGE> 27
E.F. JOHNSON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except share amounts)
NOTE 1 - GENERAL
The condensed consolidated financial statements of E.F. Johnson Company (the
Company) as of June 29, 1997 and for the six months then ended are unaudited and
reflect all normal and recurring accruals and adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim periods. The results
of operations and cash flows for the six months ended June 29, 1997 are not
necessarily indicative of the results for the entire fiscal year ending December
31, 1997.
NOTE 2 - INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
June, 29 1997
-------------
<S> <C>
Raw materials and purchased components $ 5,120
Work-in-process 1,001
Finished goods 5,052
--------
$ 11,173
========
</TABLE>
NOTE 3 - DEBT
The Company has a revolving credit line and term loan with a maximum credit
facility of $35,000. Maximum borrowings under the revolving credit line are
determined periodically against contractual percentages of accounts receivable
and inventory. The term loan is secured by machinery and equipment. As of June
29, 1997, the Company had $10,755 and $3,133 outstanding on the revolving credit
line and term loan respectively. At June 29, 1997, the Company had a $10,000
Senior subordinated note due July 31, 1997 and a capital lease secured by land
and buildings with a principal balance of $1,900 outstanding.
NOTE 4 - SUBSEQUENT EVENT
On July 31, 1997, Transcrypt International, Inc. (Transcrypt) consummated the
acquisition of all of the outstanding shares of capital stock and certain
indebtedness of the Company. In exchange, one shareholder of the Company
received $436 in cash and the two remaining shareholders received 832,465 shares
of Transcrypt common stock, with an approximate market value of $10 million. The
transaction extinguishes the Company's existing senior subordinated debt and
related accrued interest resulting in a gain on extinguishment of debt of $11.4
million. In addition, receivables and payables with affiliated companies were
extinguished, resulting in a gain on extinguishment of debt of $2.4 million.
Transcrypt designs and manufactures specialized scrambling and encryption
devices which prevent the unauthorized interception of sensitive voice and data
communications for both analog and digital transmissions.
F-21
<PAGE> 28
TRANSCRYPT INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Combined Balance Sheet as of
June 30, 1997 and unaudited Pro Forma Condensed Combined Income Statements for
the six months ended June 30, 1997 and for the year ended December 31, 1996
illustrate the effect of the acquisition of E. F. Johnson Company (the
"Acquisition") as if the Acquisition had occurred on June 30, 1997 for the Pro
Forma Condensed Combined Balance Sheet and as of January 1, 1996 for the Pro
Forma Condensed Combined Income Statements, after giving effect to the
merger-related adjustments described in the respective accompanying notes. The
acquisition will be accounted for under the purchase method of accounting. Under
this method of accounting, the purchase price will be allocated to the assets
acquired and liabilities assumed based on their estimated fair values at the
closing.
These Pro Forma Condensed Combined Financial Statements should be read
in conjunction with the historical financial statements of Transcrypt
International, Inc. ("Transcrypt") and E. F. Johnson Company ("EFJ") which are
incorporated by reference herein or set forth elsewhere herein.
The Pro Forma Condensed Combined Financial Statements are presented for
comparative purposes only and are not intended to be indicative of actual
results had the transactions occurred as of the dates indicated above nor do
they purport to indicate results which may be attained in the future. The Pro
Forma Condensed Combined Financial Statements reflect the best estimate of the
allocation of the purchase price as of the date of this filing. Due to operating
losses incurred by EFJ between the "as of" date of the pro forma financial
statements and the transaction date, the ultimate value of goodwill is expected
to increase substantially. It is Transcrypt's intention, subsequent to the
Acquisition, to more fully evaluate the acquired assets and, as a result, the
allocation of the acquisition costs among the tangible and intangible assets
acquired may change. As a result of the foregoing, the final Pro Forma Combined
amounts will differ from those set forth in the Pro Forma Condensed Combined
Financial Statements.
F-22
<PAGE> 29
TRANSCRYPT INTERNATIONAL, INC. PRO FORMA CONDENSED
COMBINED BALANCE SHEET (1) (Unaudited)
As of June 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Transcrypt/
EF Johnson
Transcrypt EF Johnson Pro Forma Pro Forma
Historical(2) Historical(2) Adjustments Combined
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $12,699 $ 76 $ (436)(5) $12,339
Accounts receivable, net 7,923 8,060 (461)(3) 15,522
Inventory 2,718 11,173 13,891
Other current assets 498 2,330 (723)(7) 2,105
------------- ------------- ----------- -----------
TOTAL CURRENT ASSETS 23,838 21,639 (1,620) 43,857
PROPERTY, PLANT & EQUIPMENT, NET 6,222 6,233 12,455
OTHER ASSETS:
Intangible assets, net 0 5,618 (837)(4) 4,781
Goodwill 0 0 3,010 (4) 3,010
Deferred tax asset 1,713 0 9,863 (10) 11,576
Other assets 78 2,243 (1,624)(7) 697
------------- ------------- ----------- -----------
TOTAL OTHER ASSETS 1,791 7,861 10,412 20,064
------------- ------------- ----------- -----------
$31,851 $35,733 $ 8,792 $76,376
------------- ------------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 159 $24,152 $(10,000)(12) $14,311
Accounts payable 1,193 10,061 (677)(7) 10,966
(461)(3)
850 (6)
Technology and license purchase payable 0 3,552 3,552
4,045 (8)
Other current liabilities 1,208 9,870 (1,387)(12) 13,736
------------- ------------- ----------- -----------
TOTAL CURRENT LIABILITIES 2,560 47,635 (7,630) 42,565
LONG-TERM DEBT AND LEASE OBLIGATIONS 2,850 1,708 4,558
OTHER LIABILITIES:
Other liabilities 0 1,062 1,062
Payable to related parties 0 4,078 (4,078)(7) 0
------------- ------------- ----------- -----------
TOTAL OTHER LIABILITIES 0 5,140 (4,078) 1,062
SHAREHOLDERS' EQUITY:
Series A preferred stock 0 11,200 (11,200)(11) 0
Class B preferred stock 0 11,452 (11,452)(11) 0
Common stock 93 38 8 (11) 101
(38)(13)
Paid in capital 27,368 828 9,992 (11) 37,360
12,652 (11)
(13,480)(13)
Retained earnings (1,020) (42,268) (8,250)(9) (9,270)
9,863 (10)
2,408 (7)
11,387 (12)
18,610 (13)
------------- ------------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 26,441 (41,402) 43,152 28,191
------------- ------------- ----------- -----------
$31,851 $35,733 $ 8,792 $76,376
------------- ------------- ----------- -----------
</TABLE>
See accompanying notes to the Pro Forma Condensed Combined Balance Sheet.
F-23
<PAGE> 30
TRANSCRYPT INTERNATIONAL, INC. PRO FORMA CONDENSED
COMBINED INCOME STATEMENT(1) (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Transcrypt/
EF Johnson
Transcrypt EF Johnson Pro Forma Pro Forma
Historical(2) Historical(2) Adjustments Combined
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues $10,278 $28,223 $ (537)(14) $37,964
Cost of sales 3,865 18,157 (537)(14) 21,485
------- ------- --------- -------
Gross profit 6,413 10,066 0 16,479
Operating expenses:
Research and development 1,316 2,938 4,254
Selling, general and administrative 3,003 11,695 (732)(16) 13,966
Nonrecurring items 0 (666) 0 (666)
Goodwill amortization 0 0 200 (17) 200
------- ------- --------- -------
Total operating expenses 4,319 13,967 (532) 17,754
------- ------- --------- -------
Income (loss) from operations 2,094 (3,901) 532 (1,275)
Other income (expense):
Interest, net 236 (2,282) 489 (15) (1,557)
------- ------- --------- -------
Income (loss) before tax 2,330 (6,183) 1,021 (2,832)
Provision (benefit) for income taxes 672 0 (1,635)(18) (963)
------- ------- --------- -------
Net income (loss) $ 1,658 $(6,183) $2,656 $(1,869)
======= ======= ========= =======
Number of common and common equivalent
shares issued and outstanding 9,596 832 (19) 10,428
Income (loss) per share $ 0.17 ($0.18)
------- -------
</TABLE>
See accompanying notes to the Pro Forma Condensed Combined Income Statement.
F-24
<PAGE> 31
TRANSCRYPT INTERNATIONAL, INC. PRO FORMA CONDENSED
COMBINED INCOME STATEMENT (1) (Unaudited)
For the Year Ended December 31, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
Transcrypt/
EF Johnson
Transcrypt EF Johnson Pro Forma Pro Forma
Historical(2) Historical(2) Adjustments Combined
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $13,776 $78,966 ($554)(14) $92,188
Cost of sales 4,865 50,623 (554)(14) 54,934
------- -------- ------ --------
Gross profit 8,911 28,343 0 37,254
Operating expenses:
Research and development 2,234 8,401 10,635
Selling, general and administrative 3,516 29,201 (1,277)(16) 31,440
Special compensation expense 5,568 0 5,568
Nonrecurring items 0 13,521 13,521
Goodwill and other amortization 1,001 0 400(17) 1,401
------- -------- ------ --------
Total operating expenses 12,319 51,123 (877) 62,565
------- -------- ------ --------
Loss from operations (3,408) (22,780) 877 (25,311)
Other income (expense):
Interest, net (131) (3,694) 997(15) (2,828)
------- -------- ------ --------
Loss before tax (3,539) (26,474) 1,874 (28,139)
Provision (benefit) for income taxes (1,528) 0 (8,039)(18) (9,567)
------- -------- ------ --------
Net loss ($2,011) ($26,474) $9,913 ($18,572)
------- -------- ------ --------
Number of common and common equivalent
shares issued and outstanding 6,969 832(19) 7,801
Loss per share ($0.29) ($2.38)
------- --------
</TABLE>
See accompanying notes to the Pro Forma Condensed Combined Income Statement.
F-25
<PAGE> 32
NOTES TO TRANSCRYPT INTERNATIONAL, INC. PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
1. The pro forma financial data do not give effect to any potential cost
savings and synergies that could result from the Acquisition. The pro forma
Condensed Combined Balance Sheet reflects the write-off of intangible assets
consisting of in-process research and development ("R&D") projects of $8.3
million related to the Acquisition, the gain of $11.4 million from the
forgiveness of debt, the gain of $2.4 million from the forgiveness of net
payables due to the former common shareholders and the recording of net deferred
tax assets of $9.9 million. The effect of these transactions have not been
reflected in the accompanying Pro Forma Condensed Combined Income Statements as
they are of a non-recurring nature. The pro forma data are not necessarily
indicative of the operating results or financial position that would have
occurred had the Acquisition been consummated at the dates indicated, nor
necessarily indicative of future operating results or financial position.
2. These columns represent historical results of operations and financial
position. The six month period for E.F. Johnson is as of and ended June 29,
1997.
Condensed Combined Balance Sheet As of June 30, 1997:
3. To eliminate receivables and payables attributable to the intercompany
transactions between Transcrypt and EFJ.
4. This adjustment reflects the excess of cost over net tangible assets
acquired. For purposes of allocating the acquisition costs among the various
assets acquired, Transcrypt has tentatively considered the carrying value of
substantially all of the acquired assets to approximate their fair value, with
the excess of such acquisition costs being attributed to in-process R&D
(research and development projects in-process) and goodwill. The following is a
summary of the adjustment to goodwill and other intangibles:
Purchased R&D in-process $8,250,000
Write-off of purchased R&D in-process $(8,250,000)
Goodwill $3,010,000
Goodwill is being amortized over a 15 year life.
The determination of the purchase price is as follows:
Issuance of common shares of Transcrypt $10,000,000
Cash 436,000
Net assets acquired (7,426,000)
-----------
Goodwill $ 3,010,000
Operating losses of approximately $2.9 million due primarily to working capital
constraints incurred by EFJ from the date of the pro forma financial statements
until the acquisition date of July 31, 1997 will increase the ultimate amount of
goodwill recorded by approximately $6.0 million. Net assets acquired are after
fair value adjustments of $0.8 million.
5. To record the use of cash to purchase the EFJ common stock outstanding for
$436,000.
6. Reflects liabilities incurred for transaction costs, such as investment
advisory, legal and accounting fees, related to the Acquisition.
7. To eliminate the receivable and payable attributable to transactions
between EFJ and the former common shareholders of EFJ, which are forgiven as
part of the Acquisition, resulting in a gain on extinguishment of debt of
$2.4 million.
F-26
<PAGE> 33
8. To record a reserve for costs related to plans Transcrypt has formulated
for the restructuring of EFJ's operations subsequent to the Acquisition,
including severance and relocation costs.
9. Write-off of intangible assets consisting of in-process R&D projects of
$8.3 million. (See Note 1.)
10. To record net deferred tax assets of EFJ that are deemed more likely than
not to be realized.
11. Represents the issuance of 832,465 shares of Transcrypt Common Stock,
valued at $10 million as of the Acquisition Date to purchase the EFJ preferred
stock outstanding with a carrying value of $22.7 million.
12. To record forgiveness of $10 million of subordinated debt and related
accrued interest payable of $1.4 million in accordance with the Acquisition
Agreement.
13. To eliminate the equity of EFJ.
Condensed Combined Income Statement for the Six Months Ended June 30, 1997
and for the Year Ended December 31, 1996:
14. To eliminate the revenues and corresponding costs attributable to the
intercompany transactions between Transcrypt and EF Johnson.
15. To eliminate the interest expense attributable to the senior subordinated
debt forgiven in accordance with the Acquisition Agreement.
16. To eliminate the management fees and expenses incurred by EFJ to its common
shareholders.
17. To record amortization for the effect of the goodwill acquired in the
Acquisition based upon the expected goodwill of approximately $6.0 million.
(see Note 4).
18. To record the tax effect of the pro forma consolidated entity at the
marginal tax rate of 34%.
19. Pro forma per share data are based on the number of Transcrypt common and
common equivalent shares that would have been outstanding had the Acquisition
occurred on the earliest date presented.
F-27
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-30673) of our report dated May 2, 1997 on
the consolidated financial statements of E.F. Johnson Company appearing in
Amendment No. 2 of the Current Report on Form 8-K of Transcrypt International,
Inc.
/s/ PRICE WATERHOUSE LLP
- ------------------------
Price Waterhouse LLP
Minneapolis, Minnesota
September 23, 1997
