<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
TRANSCRYPT INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------------------
<PAGE> 2
TRANSCRYPT INTERNATIONAL, INC.
------------------------
NOTICE OF 1998
ANNUAL MEETING OF STOCKHOLDERS
AND
PROXY STATEMENT
------------------------
<TABLE>
<C> <S>
DATE: Tuesday, October 27, 1998
TIME: 10:00 a.m.
PLACE: Cornhusker Hotel
333 South 13th Street
Lincoln, Nebraska 68508
</TABLE>
<PAGE> 3
TRANSCRYPT LOGO
September 18, 1998
Dear Stockholder:
It is my pleasure to invite you to Transcrypt International, Inc.'s 1998
Annual Meeting of Stockholders.
We will hold the meeting on Tuesday, October 27, 1998, at 10:00 a.m. at the
Cornhusker Hotel, 333 South 13th Street in Lincoln, Nebraska. In addition to the
formal items of business, we will review 1997, give an update of Transcrypt,
answer your questions and discuss Transcrypt's future prospects.
This booklet includes the Notice of Annual Meeting and the Proxy Statement.
The Proxy Statement describes the business that we will conduct at the meeting
and provides information about Transcrypt.
Your vote is important. Whether you plan to attend the meeting or not,
please complete, date, sign and return the enclosed proxy card promptly. If you
received more than one proxy card because you own shares registered in different
names or at different addresses, please be sure to separately complete and
return each proxy card. If you attend the meeting and prefer to vote in person,
you may do so.
Please indicate on the proxy card whether or not you expect to attend the
meeting so that we can provide adequate seating.
We look forward to seeing you at the meeting.
Sincerely,
/s/ John T. Connor
John T. Connor
Chairman of the Board
<PAGE> 4
TRANSCRYPT INTERNATIONAL, INC.
------------------------
NOTICE OF 1998
ANNUAL MEETING OF STOCKHOLDERS
------------------------
<TABLE>
<C> <S>
Date: Tuesday, October 27, 1998
Time: 10:00 a.m.
Place: Cornhusker Hotel
333 South 13th Street
Lincoln, Nebraska 68508
</TABLE>
Dear Stockholders:
At our Annual Meeting, we will ask you to:
- Elect two directors to each serve for a term of three years;
- Approve an amendment to our 1996 Stock Incentive Plan and the amended
Plan;
- Ratify the selection of KPMG Peat Marwick LLP as independent public
accountants for 1998; and
- Transact any other business that may properly be presented at the Annual
Meeting.
Our Bylaws provide for the nomination of directors at the Meeting in the
following manner:
"Section 7. Stockholder Proposals and Nominations of Directors. Nominations
for election to the Board of Directors of the Corporation at a meeting of the
stockholders may be made by the Board of Directors, or on behalf of the Board of
Directors by a Nominating Committee appointed by the Board of Directors, or by
any stockholder of the Corporation entitled to vote for the election of
directors at such meeting. Any nominations, other than those made by or on
behalf of the Board of Directors, and any proposal by any stockholder to
transact any corporate business.... shall be made by notice in writing and
mailed by certified mail to the Secretary of the Corporation and.... received no
later than 35 days prior to the date of the annual meeting; provided, however,
that if less than 35 days' notice of a meeting of stockholders is given to the
stockholders, such notice of proposed business or nomination by such stockholder
shall have been made or delivered to the Secretary of the Corporation not later
than the close of business on the seventh day following the day on which the
notice of a meeting was mailed. A notice of nominations by stockholders shall
set forth as to each proposed nominee who is not an incumbent director (i) the
name, age, business address and, if known, residence address of each nominee
proposed in such notice, (ii) the principal occupation or employment of each
such nominee, (iii) the number of shares of stock of the Corporation which are
beneficially owned by each such nominee and the nominating stockholder and (iv)
any other information concerning the nominee that must be disclosed regarding
nominees in proxy solicitations pursuant to Section 14(a) of the Securities
Exchange Act of 1934, as amended, and the rules under such section."
If you were a stockholder of record at the close of business on September
3, 1998, you may vote at the Annual Meeting.
By order of the Board of Directors,
/s/ R. Andrew Massey
R. Andrew Massey
Corporate Secretary
September 18, 1998
Lincoln, Nebraska
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING............. 1
Why Did You Send Me This Proxy Statement?................. 1
Who Is Entitled to Vote?.................................. 1
What Constitutes a Quorum?................................ 1
How Many Votes Do I Have?................................. 1
How Do I Vote By Proxy?................................... 1
May I Change My Vote After I Return My Proxy?............. 2
How Do I Vote in Person?.................................. 2
What Vote Is Required to Approve Each Proposal?........... 2
Proposal 1: Elect Two Directors........................ 2
Proposal 2: Approve Amendment to 1996 Stock Incentive
Plan and the amended Plan.................. 2
Proposal 3: Ratify Selection of Independent Public
Accountants................................ 2
The Effect of Broker Non-Votes......................... 2
What Are the Costs of Soliciting these Proxies?........... 2
How Do I Obtain an Annual Report on Form 10-K?............ 3
INFORMATION ABOUT TRANSCRYPT COMMON STOCK OWNERSHIP......... 3
Which Stockholders Own at Least 5% of Transcrypt?......... 3
How Much Stock is Owned by Directors and Executive
Officers?.............................................. 4
Compensation Committee Interlocks and Insider
Participation.......................................... 5
Did Directors, Executive Officers and Greater-Than-10%
Stockholders Comply With Section 16(a) Beneficial
Ownership Reporting in 1997?........................... 5
INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS.......... 5
The Board of Directors.................................... 5
The Committees of the Board............................... 5
Directors................................................. 6
How Do We Compensate Directors?........................... 7
Certain Relationships and Related Transactions............ 8
Executive Officers........................................ 8
How We Compensate Executive Officers...................... 10
Summary Compensation Table............................. 10
Option Grants in Last Fiscal Year...................... 11
Fiscal Year-End Option Value Table..................... 11
Employment Agreements..................................... 12
Compensation Committee Report On Executive Compensation..... 13
The Report................................................ 13
Performance Graph........................................... 15
Discussion of Proposals Recommended by the Board............ 15
Proposal 1: Elect Two Directors........................... 15
Proposal 2: Approve Amendment to 1996 Stock Incentive Plan
and the amended Plan.......................... 16
Description of 1996 Stock Incentive Plan............... 17
Federal Income Tax Consequences........................ 21
Proposal 3: Ratify Selection of Independent Public
Accountants for 1998.......................... 23
Information About Stockholder Proposals..................... 24
Appendix A
Transcrypt International, Inc. 1996 Stock Incentive Plan,
as amended............................................. A-1
Appendix B
Transcrypt International, Inc. Current Report on Form 8-K
filed with the SEC on May 4, 1998...................... B-1
Appendix C
Transcrypt International, Inc. Current Report on Form
8-K/A filed with the SEC on May 20, 1998............... C-1
</TABLE>
i
<PAGE> 6
PROXY STATEMENT FOR TRANSCRYPT INTERNATIONAL, INC.
1998 ANNUAL MEETING OF STOCKHOLDERS
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
WHY DID YOU SEND ME THIS PROXY STATEMENT?
We sent you this Proxy Statement and the enclosed proxy card because our
Board of Directors is soliciting your proxy to vote at the 1998 Annual Meeting
of Stockholders. This Proxy Statement summarizes the information you need to
know to cast an informed vote at the Annual Meeting. However, you do not need to
attend the Annual Meeting to vote your shares. Instead, you may simply complete,
date, sign and return the enclosed proxy card.
WHO IS ENTITLED TO VOTE?
We will begin sending this Proxy Statement, the attached Notice of Annual
Meeting and the enclosed proxy card on or about September 18, 1998 to all
stockholders entitled to vote. At the close of business on September 3, 1998,
there were 12,946,624 shares of Transcrypt common stock outstanding, of which
12,729,082 were entitled to vote. Transcrypt common stock is our only class of
voting stock. We are also sending along with this Proxy Statement, the
Transcrypt 1997 Annual Report, which includes our financial statements.
WHAT CONSTITUTES A QUORUM?
The holders of a majority of the issued and outstanding shares of
Transcrypt common stock entitled to vote at the meeting must be present, in
person or by proxy, in order to constitute a quorum. We can only conduct the
business of the meeting if a quorum has been established. We will include
proxies marked as abstentions and broker non-votes in determining the number of
shares present at the meeting.
HOW MANY VOTES DO I HAVE?
Each share of Transcrypt common stock that you own entitles you to one
vote. The proxy card indicates the number of shares of Transcrypt common stock
that you own.
HOW DO I VOTE BY PROXY?
Whether you plan to attend the Annual Meeting or not, we urge you to
complete, date and sign the enclosed proxy card and to return it promptly in the
postage-prepaid envelope provided. Returning the proxy card will not affect your
right to attend the Annual Meeting and vote.
If you properly fill in your proxy card and send it to us in time to vote,
your "proxy" (one of the individuals named on your proxy card) will vote your
shares as you have directed. If you sign the proxy card but do not make specific
choices, your proxy will vote your shares as recommended by the Board of
Directors as follows:
- "FOR" the election of the two nominees for director (see pages 15 - 16),
- "FOR" the approval of the amendment to the 1996 Stock Incentive Plan and
the amended Plan (see pages 16 - 22), and
- "FOR" the ratification of the selection of KPMG Peat Marwick LLP as
independent public accountants for 1998 (see page 23).
If any other matter is presented, your proxy will vote in accordance with
the recommendation of the Board of Directors or, if no recommendation is given,
in their own discretion. At the time this Proxy Statement went to press, we knew
of no matters which needed to be acted on at the Annual Meeting, other than
those discussed in this Proxy Statement.
1
<PAGE> 7
MAY I CHANGE MY VOTE AFTER I RETURN MY PROXY?
Yes. If you give a proxy, you may change your vote at any time before it is
exercised. You may change your vote in any one of three ways:
- You may send Transcrypt's Secretary another proxy with a later date.
- You may notify Transcrypt's Secretary in writing before the Annual
Meeting that you have revoked your proxy.
- You may attend the Annual Meeting and vote in person.
HOW DO I VOTE IN PERSON?
If you plan to attend the Annual Meeting and vote in person, we will give
you a ballot form when you arrive.
WHAT VOTE IS REQUIRED TO APPROVE EACH PROPOSAL?
PROPOSAL 1:
Elect Two Directors The two nominees for director who receive the
most votes will be elected.
PROPOSAL 2:
Approve Amendment to 1996
Stock
Incentive Plan and the amended
Plan
The affirmative vote of a majority of shares of
common stock present in person or represented
by proxy at the Annual Meeting and entitled to
vote on this proposal is required to approve
the amendment to the Plan and the amended Plan.
So, if you "ABSTAIN" from voting, it has the
same effect as if you voted "against" this
proposal.
PROPOSAL 3:
Ratify Selection of
Independent Public
Accountants
The affirmative vote of a majority of shares of
common stock present in person or represented
by proxy at the Annual Meeting is required to
ratify the selection of independent public
accountants. So, if you "ABSTAIN" from voting,
it has the same effect as if you voted
"against" this proposal.
THE EFFECT OF BROKER NON-VOTES If your broker holds your shares in its name,
the broker will be entitled to vote your shares
on Proposals 1 and 3 even if it does not
receive instructions from you. Your broker is
not entitled to vote on Proposal 2 unless it
receives instructions from you. If your broker
does not vote your shares on Proposal 2, such
"broker non-votes" would reduce the number of
affirmative votes that are necessary to approve
Proposal 2.
WHAT ARE THE COSTS OF SOLICITING THESE PROXIES?
We will pay all the costs of soliciting these proxies. In addition to
mailing proxy soliciting material, our directors, officers and employees also
may solicit proxies in person, by telephone or by other electronic means of
communications for which they will receive no compensation. We will ask banks,
brokers and other institutions, nominees and fiduciaries to forward the proxy
material to their principals and to obtain authority to execute proxies. We will
then reimburse them for their expenses. In addition, we have engaged Corporate
Investor Communications, Inc. to assist in the distribution and solicitation of
proxies, for which we have agreed to pay a fee of $4,500 plus reasonable
out-of-pocket expenses incurred.
2
<PAGE> 8
HOW DO I OBTAIN AN ANNUAL REPORT ON FORM 10-K?
IF YOU WOULD LIKE A COPY OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1997, THAT WE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC"), WE WILL SEND YOU ONE WITHOUT CHARGE. PLEASE WRITE TO:
TRANSCRYPT INTERNATIONAL, INC.
4800 NW FIRST STREET
LINCOLN, NEBRASKA 68521
ATTENTION: INVESTOR RELATIONS
INFORMATION ABOUT TRANSCRYPT COMMON STOCK OWNERSHIP
WHICH STOCKHOLDERS OWN AT LEAST 5% OF TRANSCRYPT?
The following table shows, as of September 3, 1998, all persons we know to
be "beneficial owners" of more than five percent of Transcrypt's common stock.
The information about the University of Nebraska Foundation below is based on a
Schedule 13G report filed with the SEC on March 9, 1998. If you wish, you may
obtain this report from the SEC.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENT OF CLASS(2)
------------------------------------ --------------------- -------------------
<S> <C> <C>
John T. Connor(3)....................................... 1,501,528 11.3%
4800 NW First Street
Lincoln, Nebraska 68521
Janice K. Connor(4)..................................... 1,207,271 9.3
4800 NW First Street
Lincoln, Nebraska 68521
University of Nebraska Foundation....................... 661,622 5.1
1111 Lincoln Mall, Suite 200
Lincoln, Nebraska 68508
</TABLE>
- ---------------
(1) "Beneficial ownership" is a technical term broadly defined by the SEC to
mean more than ownership in the usual sense. So, for example, you
"beneficially" own Transcrypt common stock not only if you hold it directly,
but also if you directly or indirectly (through a relationship, a position
as a director or trustee, or a contract or understanding), have or share the
power to vote the stock, to invest it, to sell it or you currently have the
right to acquire it or the right to acquire it within 60 days of September
3, 1998.
(2) Shares of Transcrypt common stock issuable upon exercise of stock options
currently exercisable, or exercisable within 60 days of September 3, 1998,
are considered outstanding for purposes of computing the percentage of the
person or entity holding those options but are not considered outstanding
for computing the percentage of any other person or entity. We consider the
217,542 shares of our non-voting common stock held by First Commerce
Bancshares, Inc. outstanding for computing the percentage each person or
entity owns.
(3) Includes 294,257 shares which are issuable upon the exercise of stock
options that are exercisable within 60 days of September 3, 1998. Of the
1,501,528 shares, Mr. Connor shares voting and investment power of 1,207,271
shares with his wife, Janice K. Connor. Mr. Connor disclaims beneficial
ownership of 490,258 shares held by Mrs. Connor and 97,980 shares held by or
in trust for other members of the Connor family.
(4) Mrs. Connor shares voting and investment power of these shares with her
husband, John T. Connor. Mrs. Connor disclaims beneficial ownership of
619,033 shares by Mr. Connor and 97,980 shares held by or in trust for other
members of the Connor family.
3
<PAGE> 9
HOW MUCH STOCK IS OWNED BY DIRECTORS AND EXECUTIVE OFFICERS?
The following table shows, as of September 3, 1998, the Transcrypt common
stock beneficially owned by our directors and the two individuals who served as
our Chief Executive Officer ("CEO") during 1997 and the other individuals who
were serving as our executive officers at the end of 1997 and who received
salary and bonus at a rate in excess of $100,000 during 1997 (such executive
officers, collectively, the "Named Executive Officers"), and those shares of
common stock owned by all executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENT OF CLASS(2)
------------------------ --------------------- -------------------
<S> <C> <C>
John T. Connor(3)......................................... 1,501,528 11.3%
Jeffery L. Fuller(4)...................................... 158,829 1.2
C. Eric Baumann(4)........................................ 31,766 *
Michael P. Wallace(4)..................................... 31,766 *
Joel K. Young(4).......................................... 31,766 *
Thomas E. Henning(5)...................................... 8,000 *
Thomas R. Thomsen(6)...................................... 7,553 *
Winston J. Wade(4)(7)..................................... 6,553 *
Frederick G. Hamer(4)..................................... 5,000 *
Thomas C. Smith(8)........................................ 2,800 *
Terry L. Fairfield(4)(9).................................. 1,000 *
Thomas R. Larsen(4)....................................... 1,000 *
All executive officers and directors as a group (16
persons)................................................ 1,787,561 13.2
</TABLE>
- ---------------
* Less than 1%
(1) See footnote 1 in the table included above at page 3 under "Which
Stockholders Own at Least 5% of Transcrypt?"
(2) Shares of Transcrypt common stock issuable upon exercise of stock options
currently exercisable, or exercisable within 60 days of September 3, 1998,
are considered outstanding for computing the percentage of the person
holding those options but are not considered outstanding for computing the
percentage of any other person. We consider the 217,542 shares of our
non-voting common stock held by First Commerce Bancshares, Inc. outstanding
for computing the percentage each person owns. 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 each beneficially owns.
(3) Includes 294,257 shares which are issuable upon the exercise of stock
options that are exercisable within 60 days of September 3, 1998. Of the
1,501,528 shares, Mr. Connor shares voting and investment power of 1,207,271
shares with his wife, Janice K. Connor. Mr. Connor disclaims beneficial
ownership of 490,258 shares held by Mrs. Connor and 97,980 shares held by or
in trust for other members of the Connor family.
(4) Consists solely of shares issuable upon the exercise of stock options that
are currently exercisable or exercisable within 60 days of September 3,
1998.
(5) Includes 1,000 shares issuable upon the exercise of stock options that are
exercisable within 60 days of September 3, 1998. Does not include shares
held by The Security Mutual Life Insurance Company, of which Mr. Henning
serves as President, CEO and director.
4
<PAGE> 10
(6) Includes 6,553 shares issuable upon the exercise of stock options that are
exercisable within 60 days of September 3, 1998.
(7) Does not include shares held by the University of Nebraska Foundation, of
which Mr. Wade serves as director.
(8) Includes 1,000 shares issuable upon the exercise of stock options that are
exercisable within 60 days of September 3, 1998.
(9) Does not include shares held by the University of Nebraska Foundation, of
which Mr. Fairfield serves as President and CEO.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our Compensation Committee is or has been an officer
or employee of Transcrypt.
DID DIRECTORS, EXECUTIVE OFFICERS AND GREATER-THAN-10% STOCKHOLDERS COMPLY WITH
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING IN 1997?
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires our directors, executive officers, and greater-than-10%
stockholders to file reports with the SEC reflecting changes in their beneficial
ownership of Transcrypt common stock and to provide us with copies of the
reports. Based on our review of these reports and certifications furnished by
each of the reporting persons, except for Frederick G. Hamer and Glenn P.
Oorlog, each of whom filed one late report involving their initial statement of
beneficial ownership of Transcrypt common stock on Form 3, and Thomas E. Henning
and Thomas C. Smith, each of whom filed one late report involving the purchase
of common stock on Form 4, we believe that all of these reporting persons
complied with their filing requirements for 1997.
INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS
THE BOARD OF DIRECTORS
The Board of Directors oversees our business and affairs and monitors the
performance of management. In accordance with corporate governance principles,
the Board does not involve itself in day-to-day operations. The directors keep
themselves informed through, among other things, discussions with the Chairman,
other key executives and our principal external advisers (legal counsel, outside
auditors, investment bankers and other consultants), reading reports and other
materials that we send them and participating in Board and committee meetings.
The Board met 13 times during fiscal 1997. With the exception of Mr. Wade,
who missed six out of 13 Board meetings and four out of seven Compensation
Committee meetings, each incumbent director attended at least 75% of the total
number of Board and committee meetings, of which he was a member, held in fiscal
1997.
THE COMMITTEES OF THE BOARD
The Board has an Audit Committee, a Compensation Committee, and a
Nominating Committee.
THE AUDIT COMMITTEE The Audit Committee oversees actions taken by
our independent public accountants and reviews
our internal accounting controls. Messrs.
Henning, Larsen and Smith currently serve as
members of the Audit Committee. The Audit
Committee met two times during 1997.
5
<PAGE> 11
THE COMPENSATION COMMITTEE The Compensation Committee is responsible for
determining our compensation policies and
administering our compensation plans and 1996
Stock Incentive Plan. The Compensation
Committee also reviews the compensation levels
of our employees and makes recommendations to
the Board regarding changes in compensation.
The Compensation Committee's Report on
Executive Compensation for 1997 is printed
below at pages 13 - 14. Messrs. Fairfield,
Thomson and Wade currently serve as members of
the Compensation Committee. The Compensation
Committee met seven times during 1997.
THE NOMINATING COMMITTEE The Nominating Committee recommends candidates
for election to our Board of Directors. Messrs.
Fairfield, Connor and Thomson currently serve
as members of the Nominating Committee. The
Nominating Committee met two times during 1997.
DIRECTORS
The following are the biographies of our current directors, except for
Class II Directors, Thomas R. Thomsen and Thomas C. Smith, whose biographies are
included below at page 16 under "Proposal 1: Elect Two Directors."
Class I Directors. The following are our current Class I directors. Each
Class I director was elected at Transcrypt's 1997 annual meeting of stockholders
for terms expiring in 2000:
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
------------ --------------------------------------------
<S> <C>
Thomas R. Larsen (54)..................... Mr. Larsen has served as a director of Transcrypt since
October 1995. 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.
Winston J. Wade (59)...................... Mr. Wade has served as a director of Transcrypt since
July 1996. Since December 1996, he has served as Chief
Executive Officer and Chief Operating Officer of
Binariang-Malaysia, a joint venture of U.S. West
International. From February to December 1996, he served
as managing director of BPL U.S. West Cellular in India.
From 1963 to 1996, he held various positions with
Northwestern Bell, AT&T and U.S. West Communications.
Mr. Wade also serves as a director of the University of
Nebraska Foundation, Ameritas Variable life Insurance
Company and Binariang-Malaysia.
</TABLE>
6
<PAGE> 12
Class III Directors. The following are our current Class III directors.
Each Class III director was elected at Transcrypt's 1996 annual meeting of
stockholders for terms expiring in 1999:
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
------------ --------------------------------------------
<S> <C>
John T. Connor (54)....................... Mr. Connor has served as Transcrypt's Chairman of the
Board of Directors since its inception in December 1991
through the present. He served as the Chief Executive
Officer from December 1991 through July 1997 and was
reappointed interim Chief Executive Officer in June
1998. 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.
Terry L. Fairfield (49)................... Mr. Fairfield has served as a director of Transcrypt
since December 1991. Since 1987, he has served as
President and Chief Executive Officer of the University
of Nebraska Foundation, a nonprofit corporation. Mr.
Fairfield also serves as a director of Aliant
Communications Inc., a Nasdaq listed, telecommunications
company.
Thomas E. Henning (45).................... Mr. Henning was appointed to serve the remaining term as
director for Harold S. Myers, a former director of
Transcrypt who passed away in December 1996. Mr. Henning
previously served as director of Transcrypt from
February 1993 through July 1996. Mr. Henning has, since
February 1995, served as President, Chief Executive
Officer and director of The Security Mutual Life
Insurance Company, a life insurance, annuity and pension
products company, and also serves as a director of
National Bank of Commerce, a subsidiary of First
Commerce Bancshares, Inc., a publicly held,
exchange-listed bank holding company. From March 1990 to
February 1995, Mr. Henning served as President and Chief
Operating Officer of The Security Mutual Life Insurance
Company.
</TABLE>
HOW DO WE COMPENSATE DIRECTORS?
Meeting Fees. In 1997, we paid our non-employee directors a fee of:
- $1,000 for attendance at each Board meeting; and
- $400 for attendance at each committee meeting.
The annual maximum fee per director was $5,000 plus expenses per year.
In January 1998, the Compensation Committee set the fees for directors of
the Board at $1,000 for each Board meeting attended; $500 for each telephonic
Board meeting; and $500 for each committee meeting. In addition, the annual
maximum cap on fees paid to directors was eliminated. In addition, our directors
are eligible to participate in the 1996 Stock Incentive Plan.
Expenses and Benefits. We reimburse all directors for out-of-pocket and
travel expenses incurred in attending Board meetings.
7
<PAGE> 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1991, we entered into an agreement with Connor Enterprises for
investment banking services. During fiscal 1997, we paid Connor Enterprises
$210,000 earned in 1996 for the services performed in 1991. Mr. Connor is the
President of Connor Enterprises.
EXECUTIVE OFFICERS
The following are the biographies of our current executive officers, except
for Mr. Connor, our interim CEO, whose biography is included above under
"Directors."
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
------------ --------------------------------------------
<S> <C>
Frederick G. Hamer (55)................... Mr. Hamer joined Transcrypt from E.F. Johnson as Vice
President of International Sales in July 1997 and
currently serves as Vice President of Sales. From
October 1992 through June 1995, he served as Vice
President, International for E.F. Johnson. Mr. Hamer
served as Vice President, Sales and Distribution for
E.F. Johnson from March 1983 through October 1992 and
June 1995 to January 1996. From January 1997 to July
1997, Mr. Hamer served as Vice President, Sales and
Marketing for E.F. Johnson. In addition, Mr. Hamer was
Vice President of Sales and Marketing for Dispatch
Industries, Inc. from January 1996 through December
1997.
Craig J. Huffaker (53).................... Mr. Huffaker, a certified public accountant, joined
Transcrypt as Senior Vice President and Chief Financial
Officer in January 1998. From July 1996 to January 1998,
he served as Vice President and Chief Financial Officer
of Tie Communications, Inc., and from August 1994 to
April 1996, served as Senior Vice President and Chief
Financial Officer of TSW International, Inc. Mr.
Huffaker served as Senior Vice President and Chief
Financial Officer of Applied Immune Sciences, Inc. from
November 1991 to August 1994.
Christopher S. Litras (45)................ Mr. Litras joined Transcrypt as Vice President of Human
Resources in June of 1998. From 1993 to 1998, he served
as Vice President of Human Resources at the
Manfield/Dover Operations and Director of Human
Resources and Information Systems at Eastern Stainless
Corporation for ARMCO, Inc. Prior to joining ARMCO,
Inc., he worked for USX Corporation where he held
multiple positions in Human Resources and Operations
from 1975 to 1988.
R. Andrew Massey (29)..................... Mr. Massey, an attorney, joined Transcrypt in December
1997 and has served as Corporate Secretary since June
1998. From November 1995 to July 1997, he served as a
legal assistant to the Nebraska Public Service
Commission.
</TABLE>
8
<PAGE> 14
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
------------ --------------------------------------------
<S> <C>
Edgar L. Osborn (45)...................... Mr. Osborn joined Transcrypt as Senior Vice President of
Marketing and Chief Operating Officer in March of 1998,
and in June 1998, he was appointed acting President of
Transcrypt. Mr. Osborn served as Director of Marketing
and Sales and later as Vice President of Westinghouse
Industry Products International Company, Inc. for
Westinghouse Electric Corporation from 1995 to March
1998. From 1992 to 1995, he held numerous positions with
Harris Corporation, a manufacturer and developer of
wireless communications. From 1990 to 1992, he served as
Market Manager for Ericsson General Electric.
Michael P. Wallace (37)................... Mr. Wallace joined Transcrypt as Vice President of
Operations in February 1994. From December 1989 to
February 1994, he served as the Electric Card Assembly
and Test Engineering Manager of Scientific Atlanta Inc.,
a manufacturer and distributor of broadband
communications products.
Joel K. Young (33)........................ Mr. Young joined Transcrypt as Vice President of
Engineering in February 1996 and was appointed Vice
President of Marketing and Engineering in June 1997.
From 1986 to January 1996, he held numerous positions
with AT&T, the former AT&T Bell Laboratories and
telecommunications research companies, 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.
</TABLE>
9
<PAGE> 15
HOW WE COMPENSATE EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table shows the compensation paid during the last three
fiscal years to the Named Executive Officers. No other executive officer
received salary and bonus in excess of $100,000 during 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- ------------ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS # COMPENSATION(1)
- --------------------------- ---- -------- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
John T. Connor(2).......... 1997 $196,539 $ 40,000 $ -- -- $ 6,864
Chairman of the 1996 172,885 50,000 210,000(3) -- 8,716
Board and interim CEO 1995 169,808 86,830 -- -- 4,760
Jeffery L. Fuller(2)....... 1997 $182,308 $ 53,000 $ -- 125,000 $ 9,006
Former President, CEO, 1996 156,923 35,000 -- -- 1,440
Chief Operating Officer 1995 66,346(4) 14,840 -- 163,829 25,066
and Director
C. Eric Baumann(5)......... 1997 $109,438 $ 2,000 $ 75,813(7) 20,000 $ 3,000
Former Vice President of 1996 103,000 2,000 58,254(7) 32,766 14,705
Sales and Distribution 1995 15,054(6) 3,168 154(7) -- --
Joel K. Young.............. 1997 $107,885 $ 14,573 $ -- 20,000 $ 3,000
Vice President 1996 88,461(8) 2,000 -- 32,766 36,852
of Engineering 1995 N/A
Michael P. Wallace......... 1997 $107,403 $ 23,375 $ -- 20,000 $13,623
Vice President of 1996 N/A
Operations 1995 N/A
Frederick G. Hamer......... 1997 $ 62,000(9) $113,742 $ -- 20,000 $ 6,793
Vice President of 1966 N/A
Sales 1995 N/A
</TABLE>
- ---------------
(1) Represents contributions to Transcrypt's 401(k) Profit Sharing & Savings
Plan, moving allowances and personal use of Transcrypt-owned automobiles.
(2) Mr. Connor served as CEO through July 1997 and Mr. Fuller served as
President and Chief Operating Officer through July 1997. In July 1997, Mr.
Fuller became CEO of Transcrypt and served as President and CEO through May
31, 1998. Effective May 31, 1998, Mr. Fuller resigned from all positions
with Transcrypt. In June 1998, Mr. Connor was appointed interim CEO of
Transcrypt.
(3) Represents remaining amount due to Mr. Connor for deferred fees payable
under his employment contract.
(4) Represents salary at the rate of $150,000 per year beginning in July 1995.
(5) Mr. Baumann resigned from all positions with Transcrypt effective May 31,
1998.
(6) Represents salary at the rate of $103,000 per year beginning in November
1995.
(7) Represents sales commissions Mr. Baumann earned.
(8) Represents salary at the rate of $100,000 per year beginning in February
1996.
(9) Represents salary at the rate of $100,000 per year beginning in August 1997.
10
<PAGE> 16
The following table sets forth information concerning stock options granted
to the Named Executive Officers during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(2)
OPTIONS EMPLOYEES EXERCISE EXPIRATION ----------------------
NAME GRANTED(1) IN 1997 PRICE DATE 5% 10%
---- ---------- ------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
John T. Connor....... N/A N/A N/A N/A N/A N/A
Jeffery L. Fuller.... 125,000(3) 27.2%(3) $ 8.00 9/30/99(3) $ 20,500(3) $ 42,000(3)
C. Eric Baumann...... 20,000(3) 4.4(3) 8.00 3/31/99(3) 3,280(3) 6,720(3)
Frederick G. Hamer... 25,000 5.4 11.375 7/31/07 78,842 453,221
Michael P. Wallace... 20,000 4.4 8.00 1/22/07 100,623 254,999
Joel K. Young........ 20,000 4.4 8.00 1/22/07 100,623 254,999
</TABLE>
- ---------------
(1) Options vest 20% per year, at the end of each year, for five years
commencing on the date of grant. Options were granted pursuant to the terms
of the 1996 Stock Incentive Plan.
(2) The amounts shown are hypothetical gains based on the indicated assumed
rates of appreciation of Transcrypt common stock, compounded annually from
the date of grant to the expiration date and assuming that the closing price
was the market value of the common stock on the date of grant. The actual
value (if any) that an executive officer receives from a stock option will
depend upon the amount by which the market price of Transcrypt's common
stock exceeds the exercise price of the option on the date of exercise. We
cannot assure that the common stock will appreciate at any particular rate
or at all in future years.
(3) In connection with a Severance Agreement and Mutual Release entered into
between Transcrypt and each of Messrs. Fuller and Baumann, only that portion
of the options vested as of May 31, 1998 (which was 25,000 shares for Mr.
Fuller and 4,000 shares for Mr. Baumann) remain outstanding. Such options
expire on September 30, 1999 for Mr. Fuller and March 31, 1999 for Mr.
Baumann. The potential realizable value at assumed annual rates of stock
appreciation for option terms for Messrs. Fuller and Baumann is based upon
25,000 and 4,000 shares, respectively. See "Employment Agreements" below at
page 12.
The following table sets forth the number and value of stock options held
by the Named Executive Officers at December 31, 1997.
FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR-END AT YEAR-END(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John T. Connor............. 95,000 $1,747,050 294,257 -- $7,096,008 $ --
Jeffery L. Fuller(2)....... 30,000 538,500 133,829 125,000 2,917,788 2,109,375
C. Eric Baumann(2)......... 5,000 89,750 27,766 20,000 600,929 337,500
Frederick G. Hamer......... -- -- -- 25,000 -- 337,500
Michael P. Wallace......... 5,000 89,750 27,766 20,000 605,993 337,500
Joel K. Young.............. 5,000 89,750 27,766 20,000 605,993 337,500
</TABLE>
- ---------------
(1) Solely for purposes of this table, the fair market value per share of
Transcrypt common stock is assumed to be $24.875, the closing price of the
common stock on the Nasdaq National Market on December 31,
11
<PAGE> 17
1997. The common stock currently trades on the OTC Bulletin Board. The last
sale price of the common stock on September 8, 1998, as reported on the OTC
Bulletin Board, was $3 3/8.
(2) The number of options held by Messrs. Fuller and Baumann were adjusted
subsequent to year-end pursuant to a Severance Agreement and Mutual Release
entered into between Transcrypt and each of Messrs. Fuller and Baumann. See
"Employment Agreements" below.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with John T. Connor, our Chairman
and interim CEO, for a term beginning on July 23, 1997 and ending December 31,
1999. The agreement sets forth a base salary of $200,000 per year and provides
for a quarterly bonus of (i) 20% of his salary if Transcrypt meets or exceeds
quarterly sales goals and (ii) 20% of his salary if Transcrypt meets or exceeds
quarterly profit goals, which goals are based upon Board-approved plans. The
agreement provides for certain benefits to Mr. Connor, including paid vacations,
pension benefits, qualified profit-sharing plans, employee group insurance and
disability insurance. The agreement includes a Noncompete Agreement, which is
effective during the term of the agreement. On January 29, 1997, the Board of
Directors and Mr. Connor eliminated Mr. Connor's quarterly bonus provisions
based on Transcrypt sales and profitability goals effective August 1, 1997.
We entered into an employment agreement with Jeffery L. Fuller, our former
President and CEO, for a term beginning July 31, 1997 and ending on December 31,
1999. Mr. Fuller's employment was terminated effective May 31, 1998, pursuant to
a Severance Agreement and Mutual Release dated June 2, 1998, described further
below. The employment agreement set forth a base salary of $200,000 per year and
provided for an annual bonus in an amount to be determined by the Board of
Directors, provided Transcrypt met or exceeded certain performance objectives
provided to the Board of Directors. Mr. Fuller was entitled, at a minimum, to
receive a bonus of 20% of his quarterly salary if Transcrypt met or exceeded its
quarterly sales goals and 20% of his quarterly salary if Transcrypt met or
exceeded its quarterly profit goals. The agreement also provided 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, effective during the term of the
agreement. On January 29, 1998, the Board of Directors increased Mr. Fuller's
base annual salary to $235,000 effective January 1, 1998.
On July 29, 1997, we entered into an employment agreement with Frederick G.
Hamer, Vice President of Sales. Mr. Hamer's employment provided for a base
salary of $150,000 and commission payments based on sales if Transcrypt achieved
its quarterly plans. Under the agreement, Mr. Hamer received a one-time payment
of $100,000 because he was employed with Transcrypt on July 31, 1998. The
agreement also provided for certain benefits, including paid vacations, pension
benefits, qualified profit-sharing plans, employee group insurance and
disability insurance. This agreement expired on July 31, 1998 and Mr. Hamer
continues to be employed on an at-will basis as Vice President of Sales. Mr.
Hamer has entered into a Noncompete Agreement effective during the term of the
employment agreement and for two years thereafter.
On September 30, 1996, we entered into employment agreements with Michael
P. Wallace and Joel K. Young, each of whom is a Transcrypt Vice President, and
C. Eric Baumann, who was a Transcrypt Vice President until his resignation
effective May 31, 1998. 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
according 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.
In connection with their resignation from Transcrypt, Messrs. Baumann and
Fuller each entered into a Severance Agreement and Mutual Release with
Transcrypt effective May 31, 1998. The agreements provide compensation to Mr.
Fuller of approximately $333,785 and to Mr. Baumann of $158,756, less applicable
payroll taxes, for all unpaid monetary compensation for the period of June 1,
1998 through September 30,
12
<PAGE> 18
1999 and June 1, 1998 through March 31, 1999, respectively. Messrs. Fuller and
Baumann will also receive the same medical, dental, disability and life
insurance benefits which each has received from Transcrypt in the past until the
earlier to occur of September 30, 1999 for Mr. Fuller and March 31, 1999 for Mr.
Baumann or each individual's procurement of employment elsewhere. The severance
agreements set forth that no additional shares of Transcrypt common stock held
by Messrs. Fuller and Baumann pursuant to stock options shall vest or become
vested after May 31, 1998. Any vested stock options held by Messrs. Fuller and
Baumann which are not exercised on or before September 30, 1999 or March 31,
1999, respectively, shall expire. The agreements also provide that the
Indemnification Agreements previously entered into between each of Messrs.
Fuller and Baumann and Transcrypt shall remain in full force and effect, subject
to certain modifications. The agreements also include provisions concerning (i)
non-competition and non-solicitation for the period ending September 30, 1999
for Mr. Fuller and March 31, 1999 for Mr. Baumann, (ii) unauthorized disclosure
of certain trade secrets or confidential information, and (iii) mutual releases
of certain claims.
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The following Compensation Committee Report on Executive Compensation shall
not be deemed to be "soliciting material" or to be "filed" with the SEC or
subject to Regulations 14A or 14C or to the liabilities of Section 18 of the
Exchange Act and shall not be deemed incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Exchange Act,
notwithstanding any general incorporation by reference of this Proxy Statement
into any other document.
THE REPORT
The Compensation Committee of the Board of Directors (the "Committee") is
composed of three directors who are not also Transcrypt employees. The Committee
establishes Transcrypt's overall compensation and employee benefits and the
specific compensation of our executive officers. It is the Committee's goal to
implement executive officer compensation programs that further our business
objectives and that attract, retain and motivate the best qualified executive
officers.
We adopt and administer our executive compensation policies and specific
executive compensation programs in accordance with the principal goal of
maximizing return on stockholders' equity. The Committee believes that we can
best achieve our performance goal, and the long-term interests of our
stockholders generally by attracting and retaining management of high quality,
and that such management will require commensurate compensation. The Committee
believes that our executive officer compensation policies are consistent with
this policy.
Certain of our executive officers, including our current interim Chief
Executive Officer, John T. Connor, have written, employment agreements with us
(see "Employment Agreements" on page 12 above). The Committee determines the
levels of compensation granted in such employment agreements, and the levels of
compensation granted to other executive officers from time to time based on
factors that the Committee considers appropriate. As indicated below, our
overall financial performance is a key factor the Committee considers in setting
compensation levels for executive officers.
The Committee determines annual compensation levels for executive officers,
including the Chief Executive Officer, and compensation levels which may be
implemented from time to time in written employment agreements with executive
officers based primarily on its review and analysis of the following factors:
(i) the responsibilities of the position, (ii) the performance of the individual
and his or her general experience and qualifications, (iii) our overall
financial performance (including return on equity, levels of general and
administrative expense and budget variances) for the previous year and the
contributions to such performance measures by the individual or his or her
department, (iv) the officer's total compensation during the previous year, (v)
compensation levels that comparable companies in similar industries
(telecommunications and information security) pay, (vi) the officer's length of
service with us, and (vii) the officer's effectiveness in dealing with external
and internal audiences. In addition, the Committee receives the recommendations
of the Chief Executive Officer with respect to the compensation of other
executive officers,
13
<PAGE> 19
which the Committee reviews in light of the above factors. The Committee
believes, based on a review of relevant compensation surveys, that the base
compensation of the executive officers is competitive with companies of similar
size and with comparable operating results in similar industries.
In addition to the above criteria applicable to executive officers
generally, the compensation of our two Chief Executive Officers for 1997 was
also based on each individual's progress in satisfying certain additional
criteria. These criteria include progress in completing our secondary public
offering, results in meeting our strategic business plan, achievement of budget
and performance objectives that we established and leadership abilities
(including developing an effective senior management team). Since Mr. Connor,
our interim Chief Executive Officer, is employed pursuant to a contract, these
criteria will be used in awarding him bonuses in 1998 while his base salary will
have been fixed by his contract.
While the Committee establishes salary and bonus levels based on the
above-described criteria, the Committee also believes that encouraging equity
ownership by executive officers further aligns the interests of the officers
with the performance objectives of our stockholders and enhances our ability to
attract and retain highly qualified personnel on a basis competitive with
industry practices. We granted stock options pursuant to the 1996 Stock
Incentive Plan to help achieve this objective, and to provide additional
compensation to the officers to the extent that the price of the common stock
increases over fair market value on the date of grant. The Committee currently
structures awards granted under the 1996 Stock Incentive Plan to qualify as
"performance-based compensation" under Section 162(m) of the Internal Revenue
Code of 1986, as amended. Section 162(m) allows us to preserve our right to take
a tax deduction for compensation attributable to these awards if certain
requirements, which include the achievement of certain performance goals, are
met. We have granted stock options to each of the Named Executive Officers and
to 24 other of our officers or key employees. Through the 1996 Stock Incentive
Plan, there will be an additional direct relationship between our performance
and benefits to executive officer Plan participants.
The principles that guided the Committee in determining our other executive
officers' compensation during the 1997 fiscal year also included the motivation
of employees to attain the highest level of performance and the ability to
attract, and retain qualified employees. With the acquisition of E.F. Johnson
Company, the Committee made it a priority to retain essential personnel of E.F.
Johnson management through executive compensation. In addition, the Committee
evaluated individual performance involving our initial and secondary public
offering, and granted bonuses to individuals who performed at a level that
significantly exceeded expectations.
Another component of compensation for our executive officers is our Sales
Compensation Plan. This plan optimizes both individual and team sales
performance by providing a stimulus to exceed monthly individual quotas with a
vested focus on monthly total Team Transcrypt sales. The Sales Compensation Plan
is designed for certain members of our Domestic, Radio or International Sales
Teams. Individual quotes are assigned and tracked both monthly and cumulatively,
with an understanding that the quotes should reflect market-buying cycles.
Members of the Compensation Committee of the Board of Directors:
Terry L. Fairfield, Chairman
Thomas R. Thomsen
Winston J. Wade
Dated: August 26, 1998
14
<PAGE> 20
PERFORMANCE GRAPH
The graph below compares the eleven-month total return to stockholders
(stock price appreciation plus reinvested dividends) for Transcrypt common stock
with the comparable return of two indexes: the Nasdaq Stock Market and the
Nasdaq Electronic Components Index. Points on the graph represent the
performance on January 31, 1997 and December 31, 1997. We have used an
eleven-month graph since we went public, and began trading as a company, on
January 22, 1997.
COMPARISON OF ELEVEN-MONTH TOTAL RETURN TO STOCKHOLDER
AMONG TRANSCRYPT, NASDAQ STOCK MARKET
AND NASDAQ ELECTRONIC COMPONENTS INDEX
TRANSCRYPT, NASDAQ STOCK MARKET AND NASDAQ ELECTRONIC COMPONENTS STOCKS
<TABLE>
<CAPTION>
TRANSCRYPT NASDAQ
INTERNATIONAL, NASDAQ STOCK ELECTRONIC
INC. MARKET (U.S.) COMPONENTS
<S> <C> <C> <C>
1/31/97 100 100 100
12/31/97 311 115 88
</TABLE>
DISCUSSION OF PROPOSALS RECOMMENDED BY THE BOARD
PROPOSAL 1: ELECT TWO DIRECTORS
The Board has nominated two directors for election at the Annual Meeting.
Each nominee is currently serving as one of our Class II directors. Each Class
II director's term expires in 1998. If you re-elect them, they will hold office
until the annual meeting in 2001 or until their successors have been elected or
until they resign. The Board is presently seeking additional qualified directors
with business experience that would prove an asset to the Board.
We know of no reason why any nominee may be unable to serve as a director.
If any nominee is unable to serve, your proxy may vote for another nominee
proposed by the Board, or the Board may reduce the number of directors to be
elected. If any director resigns, dies or is otherwise unable to serve out his
term, or the Board
15
<PAGE> 21
increases the number of directors, the Board may fill the vacancy until the next
annual meeting at which the Class that the director has been appointed to will
be elected.
NOMINEES
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
------------ --------------------------------------------
<S> <C>
Thomas R. Thomsen (63)............... Mr. Thomsen has served as a director of Transcrypt 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, AT&T Credit
Corp. and Oliveti Inc. Mr. Thomsen also serves as a director
of the University of Nebraska Technology Park.
Thomas C. Smith (53)................. Mr. Smith has served as a director of Transcrypt since
October 1995. 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 also the President of Smith Hayes Financial
Services Corporation. He is a director of the Nebraska
Research and Development Authority and First Mid-America
Finance Corporation. Mr. Smith is also a director of Smith
Hayes Trust, Inc., a mutual fund management company.
</TABLE>
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION OF THE TWO NOMINEES
FOR DIRECTOR.
PROPOSAL 2: APPROVE AMENDMENT TO 1996 STOCK INCENTIVE PLAN AND THE AMENDED PLAN
We are seeking your approval of an amendment to Transcrypt's 1996 Stock
Incentive Plan and the amended Plan. The 1996 Stock Incentive Plan was approved
by the Board of Directors and by our stockholders in September 1996. The Board
adopted an amendment to increase the number of shares of common stock reserved
for issuance under the 1996 Stock Incentive Plan on August 27, 1998, subject to
your approval at the Annual Meeting.
We propose to amend the 1996 Stock Incentive Plan to increase the number of
shares of common stock reserved for issuance under the 1996 Stock Incentive Plan
by 800,000, from 1,200,000 to 2,000,000. As of September 3, 1998, of the
1,200,000 shares reserved for issuance under the 1996 Stock Incentive Plan, only
157,867 are available for future grant. We believe that in order to attract,
retain and motivate officers, employees and non-employee directors, the number
of shares available for issuance under the 1996 Stock Incentive Plan must be
increased. In particular, we are currently conducting a search for a permanent
chief executive officer. Additional shares may be needed in the 1996 Stock
Incentive Plan in order to structure a compensation package that would attract a
qualified person that we might identify to accept the position. However, it may
be possible under certain circumstances to structure an acceptable compensation
package without the availability of additional shares under the 1996 Stock
Incentive Plan. We do not expect to make any additional awards under the 1996
Stock Incentive Plan to Mr. Connor, our Chairman of the Board and interim Chief
Executive Officer.
While we recognize the possible dilutive effect on the stockholders, we
believe, on balance, the incentive that is provided by the opportunity to
participate in the growth and earnings of Transcrypt through the
16
<PAGE> 22
granting of awards to acquire Transcrypt common stock is important to our
success and, accordingly, will benefit Transcrypt and its stockholders. We
believe it is in the best interests of our stockholders to approve this
amendment to the 1996 Stock Incentive Plan and the amended Plan. If the proposal
is not approved by the stockholders, the 1996 Stock Incentive Plan will continue
with only 1,200,000 shares of common stock reserved for issuance thereunder.
We have provided below the proposed amendment which replaces Section 4(a)
of the 1996 Stock Incentive Plan. In addition, we have summarized below certain
key provisions of the 1996 Stock Incentive Plan and have also included, for your
review, the full text of the amended 1996 Stock Incentive Plan as Appendix A. If
you approve this proposal, the additional awards available under the 1996 Stock
Incentive Plan will be subject to the same terms and provisions that are
currently in the 1996 Stock Incentive Plan. Amended Section 4(a) provides as
follows:
- "Subject to adjustment as provided in Section 7 hereof, at any time, the
aggregate number of Shares issued and issuable pursuant to all Awards
(including all Incentive Stock Options) granted under the Plan shall not
exceed 2,000,000."
DESCRIPTION OF 1996 STOCK INCENTIVE PLAN
PURPOSES AND ELIGIBILITY The purpose of the 1996 Stock Incentive Plan
(the "Plan") is to retain and motivate our
employees, non-employee directors and
independent contractors by providing them with
or increasing their ownership interests in
Transcrypt. The Plan authorizes the issuance of
awards to certain of our employees,
non-employee directors and independent
contractors.
SHARES AVAILABLE
-- OVERALL LIMIT Subject to certain adjustment provisions, a
total of 1,200,000 shares of common stock are
currently authorized for issuance under the
Plan. If this proposal is approved, the number
of shares of common stock reserved for issuance
will be increased to 2,000,000. This maximum
number does not include the number of shares
subject to the unexercised portion of any stock
option that expires or is terminated. We may
reissue expired or terminated shares under new
options. As of September 3, 1998, a total of
157,867 shares remain available for future
awards under the Plan. The Compensation
Committee (the "Committee") will adjust the
number of shares available for issuance under
the Plan if there are changes in our
outstanding common stock because of a
reorganization, merger, consolidation,
recapitalization, stock split, sale of
substantially all of our property and assets,
or a similar transaction is effected.
SPECIAL LIMITS
-- INDIVIDUAL EMPLOYEE LIMIT
ON SHARES In addition to the overall share limit, one
special limit applies: in order to qualify as
"performance-based compensation" as defined
under Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"), the
maximum number of shares that can be granted to
any one eligible person during any calendar
year is 400,000.
ADMINISTRATION Subject to the provisions of the Plan, the
Committee will administer the Plan, determine
persons eligible to participate in the Plan,
select participants from among eligible
employees, interpret and construe the Plan,
adopt, amend and rescind rules and regulations
relating to administration, and determine the
form, terms and conditions of awards.
17
<PAGE> 23
AWARDS
-- GENERALLY To date, we have only made awards of stock
options under the Plan. The Plan, however,
authorizes the following awards based upon our
common stock: 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. Awards
made under the plan are not restricted to any
specified form or structure.
The Committee will determine vesting,
exercisability and other restrictions that
apply to an award. Vesting generally means the
date the individual has the right to the award
or can exercise the stock option or stock
appreciation right.
No awards may be made under the Plan after
December 31, 2006. However, shares may be
issued after December 31, 2006 if they are
issued under awards made prior to that date. No
shares will be issued under the Plan after
December 31, 2016.
-- STOCK OPTIONS AND STOCK
APPRECIATION RIGHTS Stock options may be either nonqualified or
incentive stock options (within the meaning of
Section 422 of the Code).
The Committee will issue stock options and
stock appreciation rights at an exercise price
no less than the fair market value of our
common stock on the date of grant.
The exercise price of a stock option or stock
appreciation right may be paid, in whole or in
part, by any one or more of the following
means: the delivery of cash; the delivery of
other property the Committee considers
acceptable; the delivery of previously owned
shares of our capital stock (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
participant or of a third party, the terms and
conditions of which the Committee shall
determine. The Committee will fix the term of a
stock option or stock appreciation right upon
grant. However, under the Plan, the term may be
no longer than ten years unless the Committee
provides otherwise.
-- PERFORMANCE-BASED
AWARDS Performance-based awards are awards granted
under the Plan (i.e., stock options, stock
appreciation rights and stock awards) that the
Committee intends to qualify as
"performance-based compensation" under Section
162(m) of the Code. The purpose is to preserve
our right to take a tax deduction in full for
the compensation attributable to such awards.
Section 162(m) of the Code limits corporate
deductions for compensation to executives to
$1,000,000 per year in certain circumstances.
Compensation in the category of "performance-
based compensation" (as specifically defined)
is not subject to this deduction limitation.
Currently, the Plan is not subject to these
potential deduction limitation rules, but the
Plan will become subject to these rules in the
future.
18
<PAGE> 24
The Treasury Regulations promulgated under Code
Section 162(m) contain a special set of rules
for public corporations that adopted
compensation plans and agreements prior to
their initial public offering. In the case of a
corporation that was not a publicly held
corporation and then becomes a publicly held
corporation, the deduction limit of Code
Section 162(m) does not apply to any
remuneration paid pursuant to a compensation
plan or agreement that existed during that
period in which the corporation was not
publicly held. However, in the case of such a
corporation that becomes publicly held in
connection with an initial public offering,
this relief from the rules of Code Section
162(m) applies only to the extent that the
prospectus accompanying the initial public
offering disclosed information concerning those
plans and agreements that satisfied all
applicable securities laws then in effect. We
believe that the Plan qualifies for this
transition rule.
The relief from Code Section 162(m) expires at
the end of a "reliance period." The "reliance
period" expires at the earliest of (a) the
expiration of the plan or agreement; (b) the
"material modification" of the plan or
agreement (as specially defined); (c) the
issuance of all employer stock and other
compensation that has been allocated under the
plan; or (d) the first meeting of shareholders
at which directors are to be elected that
occurs after the close of the third calendar
year following the calendar year in which the
initial public offering occurs. Accordingly,
the Plan inevitably will become subject to Code
Section 162(m) because the "reliance period"
inevitably will expire under one of the
foregoing standards.
A favorable special rule applies to certain
forms of compensation. The exemption from
application of the rules of Code Section 162(m)
applies to any compensation received pursuant
to the exercise of a stock option or stock
appreciation right, or the substantial vesting
of restricted property, granted under a plan or
agreement that qualifies for the transition
rule if the grant occurs on or before the
earliest of the events terminating the
"reliance period" as described above. To date,
we have issued solely options under the Plan,
and we believe that the "reliance period" for
the Plan has not yet terminated.
When the "reliance period" for the Plan
terminates, awards under the Plan must qualify
as "performance-based compensation" in order to
be excluded from the computation of the
$1,000,000 annual deduction limit. For the
award to so qualify:
- at the time of grant the Committee must be
comprised solely of two or more "outside
directors" (as such term is used in Code
Section 162(m) and the regulations
thereunder)
- with respect to either the granting or
vesting of an award (other than a
nonqualified stock option or a stock
appreciation right which are granted with an
exercise price at or above the fair market
value of our common stock on the date of
grant), such award must be subject to the
achievement of a performance goal
19
<PAGE> 25
or goals based on one or more of the
performance measures including, among other
things:
- net sales
- pretax income before allocation of
corporate overhead and bonus
- earnings per share
- net income
- division, group or corporate financial
goals
- return on stockholders' equity, and
- return on assets
- the Committee must establish in writing
objective performance goals applicable to a
given performance period and the individual
employees or class of employees to which
such performance goals apply no later than
90 days after the commencement of such
performance period (but in no event after
25 percent of such performance period has
elapsed)
- the performance goals must satisfy certain
stockholder approval requirements
- no compensation attributable to a
performance-based award can be paid to or
otherwise received by a participant until
the Committee certifies in writing that the
performance goals (and any other material
terms) applicable to such period have been
satisfied
- after the establishment of a performance
goal, the Committee cannot revise such
performance goal or increase the amount of
compensation payable under the award upon
the attainment of such performance goal
In the case of stock options and stock
appreciation rights granted under the Plan, the
grant or award will be made by the Committee;
the Plan states that the maximum number of
shares with respect to which stock options or
stock appreciation rights may be granted during
any calendar year to any one person shall not
exceed 400,000; and, under the terms of the
stock option or stock appreciation right, the
amount of compensation the person could receive
is based solely on an increase in value of
Transcrypt stock after the date of the grant or
award. We believe that these features satisfy
the requirement in the Treasury Regulations
promulgated under Code Section 162(m) that such
grants or awards are based on a preestablished
performance goal. The formula used to calculate
the amount of compensation to be paid to the
holder of such a stock option or stock
appreciation right if the above-described
performance goal is attained is the difference
between the exercise price (i.e., the fair
market value of a share of Transcrypt stock on
the date of grant or award) and the current
value of such share on the exercise date, times
the number of shares subject to the grant or
award (subject to the maximum of 2,000,000
shares provided for in the amended Plan). The
20
<PAGE> 26
maximum amount of compensation that could be
attributable to stock options or stock
appreciation rights may be calculated under
this formula by using assumptions as to future
prices for Transcrypt shares.
-- TERMINATION OF EMPLOYMENT If an employee ceases to be employed by us for
any reason other than death or disability, or a
non-employee director ceases to be a
non-employee director with us, an option shall
not become exercisable to an extent greater
than it could have been exercised on the date
the employee's employment by us, or the non-
employee director's incumbency, as the case may
be, ceased.
-- TERMINATION OF PLAN The Board may suspend or terminate the Plan at
any time with or without prior notice, but such
termination cannot reduce the amount of any
outstanding award or change the terms and
conditions of such award without the
participant's consent.
-- AMENDMENT OF PLAN The Board may amend the Plan at any time with
or without prior notice, but such amendment
cannot reduce the amount of any outstanding
award or change the terms and conditions of
such award without the participant's consent.
For grants or awards other than stock options or stock appreciation rights,
it is not possible to determine the benefits or amounts that any participant
will receive for the current year or any year in the future because (a) the
Committee determines performance goals at the beginning of the performance
period, and (b) the amount, if any, payable will depend upon the extent to which
the executive satisfies such performance goals. If the Committee determines to
issue awards under the Plan (other than stock options or stock appreciation
rights), the Committee will establish the appropriate performance goals for such
awards and seek appropriate stockholder approval for such awards in accordance
with any applicable requirements in the Treasury Regulations promulgated under
Code Section 162(m).
The table on page 11 sets forth the number of options our most highly
compensated officers have received under the Plan. Collectively, all current
executive officers have been granted 623,066 options at an average exercise
price of $4.49. Our non-employee directors have received the following number of
options at the average exercise price of $13.65:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
-----------------
<S> <C>
Terry L. Fairfield.................................. 10,000
Thomas E. Henning................................... 10,000
Thomas R. Larsen.................................... 10,000
Thomas C. Smith..................................... 10,000
Thomas R. Thomsen................................... 16,553
Winston J. Wade..................................... 16,553
</TABLE>
Collectively, all our current employees who are not executive officers, as
a group have received 105,366 options under the Plan at an average exercise
price of $10.70.
FEDERAL INCOME TAX CONSEQUENCES
It is not practicable at this time to attempt to describe the federal
income tax consequences for all the types of grants and awards potentially
issuable under the Plan. The Plan is very flexible in permitting utilization of
a wide variety of compensation techniques. The federal income tax consequences
to participants and to Transcrypt will vary depending upon the type of award. To
date, the Committee has granted solely options under the Plan. Accordingly, the
following description (which is subject to the previous discussion of Code
Section 162(m)) concerns solely federal income tax consequences applicable to
options.
21
<PAGE> 27
The federal income tax consequences of issuing and exercising stock options
under the Plan may be summarized as follows:
NONQUALIFIED STOCK OPTIONS The grant of a nonqualified stock option has no
immediate federal income tax effect: the
optionee will not recognize taxable income and
Transcrypt will not receive a tax deduction at
such time.
When the optionee exercises the option, the
optionee will recognize ordinary income in an
amount equal to the excess of the fair market
value of the common stock on the date of
exercise over the exercise price. In the case
of employees, Transcrypt is required to
withhold tax on the amount of income
recognized. Transcrypt will receive a tax
deduction equal to the amount of income
recognized. The timing of such deduction is
based upon the timing of the optionee's income
inclusion.
When the optionee sells common stock obtained
from exercising a nonqualified stock option,
any gain or loss will be taxed as a capital
gain or loss (long-term or short-term,
depending on how long the shares have been
held). Certain additional rules apply if the
exercise price for an option is paid in shares
previously owned by the optionee.
INCENTIVE STOCK OPTIONS Only employees may receive incentive stock
options. When an employee is granted an
incentive stock option, or when the employee
exercises the option, the employee will
generally not recognize taxable income (but may
incur the alternative minimum tax upon exercise
of the option) and Transcrypt will not receive
a tax deduction.
If the employee holds the shares of common
stock for at least two years from the date of
grant, and one year from the date of exercise,
then any gain or loss will be treated as
long-term capital gain or loss. If, however,
the shares are sold or exchanged during this
period, the disposition will be deemed to be a
"disqualifying disposition." The optionee would
have taxable ordinary income at the time of the
disposition equal to the lesser of the
difference between the exercise price and the
fair market value of the shares determined as
of the date of exercise of the option or as of
the date of the disqualifying disposition. Any
additional gain on the disposition would be
capital gain.
Under current law, the maximum federal income
tax rate for capital gains on assets held for
more than one year (but not for more than 18
months) is 28%, whereas the maximum federal
income tax rate for capital gains on assets
held for more than 18 months is 20%.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE AMENDMENT TO 1996
STOCK INCENTIVE PLAN AND THE AMENDED PLAN.
22
<PAGE> 28
PROPOSAL 3: RATIFY SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS FOR 1998
We are asking you to ratify the Board's selection of KPMG Peat Marwick LLP,
certified public accountants, ("KPMG") as independent public accountants for
1998.
On May 5, 1998, we retained KPMG as our principal accountants, replacing
Coopers & Lybrand L.L.P. ("Coopers") which, on April 24, 1998, resigned as our
principal accountants. In conjunction with its resignation, Coopers advised us
that their reports with respect to our consolidated financial statements, as of
and for the years ended December 31, 1995 and 1996, should no longer be relied
upon and were withdrawn. Neither our Board of Directors nor Audit Committee
recommended the decision to change accountants. KPMG was retained to audit our
financial statements for the fiscal years ended December 31, 1997 and 1998, and
to reaudit our financial statements for the fiscal years ended December 31, 1995
and 1996. Our Board of Directors and Audit Committee unanimously recommended and
approved the engagement of KPMG.
None of Coopers' reports on our consolidated financial statements as of and
for the years ended December 31, 1995 and 1996 contained any adverse opinion or
a disclaimer of opinion, nor was qualified or modified as to uncertainty, audit
scope, or accounting principle.
During March and April 1998, we had a number of disagreements with Coopers
and reportable events that were reportable under Item 304(a)(1)(iv) and Item
304(a)(1)(v) of Regulation S-K promulgated by the SEC. These disagreements and
reportable events are described in our Current Report on Form 8-K filed with the
SEC on May 4, 1998 (the "Initial 8-K"). The full text of the Initial 8-K, other
than the exhibit, is attached hereto as Appendix B. We have modified the text as
originally set forth in the Initial 8-K to add a number before each paragraph.
On May 18, 1998, we received the response of Coopers to the Initial 8-K. The May
18, 1998 response of Coopers was included as Exhibit 16 to our Current Report on
Form 8-K/A (Amendment No. 1) filed with the SEC on May 20, 1998 ("Amendment to
the Initial 8-K"). A copy of the Amendment to the Initial 8-K is attached hereto
as Appendix C, except that the Initial 8-K which was attached to Coopers'
response is not included because it is set forth in full in Appendix B to the
Proxy Statement. We have authorized Coopers to respond fully to any inquiries by
KPMG.
Prior to engaging KPMG as our principal accountants, we retained KPMG to
perform a review under SAS No. 50 of the accounting principles applied by us to
certain transactions that were the subject of a disagreement with Coopers. KPMG
completed its preliminary review on April 28, 1998 and presented its preliminary
conclusions orally to our Audit Committee on such date, which conclusions
generally concurred with the views previously expressed by Coopers.
During our two most recent fiscal years ended December 31, 1997 and during
the interim period subsequent thereto until its consultations with KPMG
described above, we had not consulted with KPMG with respect to the application
of accounting principles to any specified transactions or the specific type of
audit opinion that might be rendered on our financial statements, and no written
report or oral advice was given to us other than a general discussion of
proposed services and anticipated fees, nor did we consult with KPMG during such
period with respect to the subject of any disagreement under Item 304(a)(1)(iv)
or reportable event under Item 304(a)(1)(v) of Regulation S-K.
A representative of KPMG Peat Marwick LLP will attend the Annual Meeting
and be able to make a statement and to answer your questions.
We are submitting this proposal to you because the Board believes that such
action follows sound corporate practice. If you do not ratify the selection of
independent public accountants, the Board will consider it a direction to
consider selecting other public accountants. However, even if you ratify the
selection, the Board may still appoint new independent public accountants at any
time during the year if it believes that such a change would be in the best
interests of Transcrypt and our stockholders.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" RATIFICATION OF THE SELECTION OF
KPMG PEAT MARWICK LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR 1998.
23
<PAGE> 29
INFORMATION ABOUT STOCKHOLDER PROPOSALS
If you wish to submit proposals to be included in our 1999 proxy statement,
we must receive them, in a form which complies with the applicable securities
laws, on or before May 21, 1999. In addition, in the event a stockholder
proposal is not submitted to us prior to August 4, 1999, the proxy to be
solicited by the Board of Directors for the 1999 Annual Meeting will confer
authority on the holders of the proxy to vote the shares in accordance with
their best judgment and discretion if the proposal is presented at the 1999
Annual Meeting without any discussion of the proposal in the proxy statement for
such meeting. At this time, we anticipate that the 1999 Annual Meeting may be
held sometime in May 1999. The rules and regulations promulgated by the SEC
provide that if the date of our 1999 Annual Meeting is advanced or delayed more
than 30 days from the date of this year's meeting, stockholder proposals
intended to be included in the proxy materials for the 1999 Annual Meeting must
be received by us a reasonable time before we begin to print and mail our proxy
materials for the 1999 Annual Meeting. Accordingly, in the event our 1999 Annual
Meeting is held in May, the May 21, 1999 and August 4, 1999 deadlines set forth
above will no longer be applicable. When we determine the date of the 1999
Annual Meeting and if such date is advanced or delayed more than 30 days from
the date of this year's Meeting, we will inform you of such change by including
a notice, under Item 5, in our earliest possible Quarterly Report on Form 10-Q.
Please address your proposals to: Transcrypt International, Inc., 4800 NW First
Street, Lincoln, Nebraska 68521, Attention: Corporate Secretary.
By order of the Board of Directors,
/s/ R. Andrew Massey
R. Andrew Massey
Corporate Secretary
September 18, 1998
24
<PAGE> 30
APPENDIX A
TRANSCRYPT INTERNATIONAL, INC.
1996 STOCK INCENTIVE PLAN, AS AMENDED
SECTION 1. PURPOSE OF PLAN
The purpose of this 1996 Stock Incentive Plan ("Plan") of Transcrypt
International, Inc., a Delaware corporation (the "Company"), is to enable the
Company to attract, retain and motivate its employees, non-employee directors
and independent contractors by providing for or increasing the proprietary
interests of such employees, non-employee directors and independent contractors
in the Company.
SECTION 2. PERSONS ELIGIBLE UNDER PLAN
Any person, including any director of the Company, who is an employee of
the Company or any of its subsidiaries (an "Employee"), and any non-employee
director (a "Non-Employee Director") or independent contractor of the Company
(an "Independent Contractor," or, together with the Employees and the Non-
Employee Directors, the "Eligible Persons") shall be eligible to be considered
for the grant of Awards (as hereinafter defined) hereunder.
SECTION 3. AWARDS
(a) The Committee (as hereinafter defined), on behalf of the Company, is
authorized under this Plan to enter into any type of arrangement with an
Eligible Person that is not inconsistent with the provisions of this Plan and
that, by its terms, involves or might involve the issuance of (i) shares of
Common Stock, $.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 Shares or with a value derived from the
value of the Shares, 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. The entering into of any such arrangement
is referred to herein as the "grant" of an "Award."
(b) Awards 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 an Award may consist of one such
security or benefit, or two or more of them in tandem or in the alternative. The
terms upon which an Award is granted shall be evidenced by a written agreement
executed by the Company and the Eligible Person to whom such Award is granted.
(c) Subject to paragraph (d)(ii) below, Awards may be issued, and Shares
may be issued pursuant to an Award, for any lawful consideration as determined
by the Committee, including, without limitation, services rendered by the
Eligible Person.
(d) Subject to the provisions of this Plan, the Committee, in its sole and
absolute discretion, shall determine all of the terms and conditions of each
Award granted under this Plan, which terms and conditions may include, among
other things:
(i) provisions permitting the Committee to allow or require the
recipient of such Award, including any Eligible Person who is a director or
officer of the Company, or permitting any such recipient the right, to pay
the purchase price of the Shares or other property issuable pursuant to
such Award, or such
A-1
<PAGE> 31
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:
(A) the delivery of cash;
(B) the delivery of other property deemed acceptable by the
Committee;
(C) the delivery of previously owned shares of capital stock of the
Company (including "pyramiding") or other property;
(D) a reduction in the amount of Shares or other property otherwise
issuable pursuant to such Award; or
(E) 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;
(ii) provisions specifying the exercise or settlement price for any
option, stock appreciation right or similar Award, or specifying the method
by which such price is determined, provided that the exercise or settlement
price of any option, stock appreciation right or similar Award shall be not
less than the fair market value of a Share on the date such Award is
granted;
(iii) provisions relating to the exercisability and/or vesting of
Awards, lapse and non-lapse restrictions upon the Shares obtained or
obtainable under Awards or under the Plan and the termination, expiration
and/or forfeiture of Awards;
(iv) provisions conditioning or accelerating the grant of an Award or
the receipt of benefits pursuant to such Award, either automatically or in
the discretion of the Committee, upon the occurrence of specified events,
including, without limitation, the achievement of performance goals, the
exercise or settlement of a previous Award, the satisfaction of an event or
condition within the control of the recipient of the Award or within the
control of others, a change of control of the Company, an acquisition of a
specified percentage of the voting power of the Company, the dissolution or
liquidation of the Company, a sale of substantially all of the property and
assets of the Company or an event of the type described in Section 7
hereof; and/or
(v) provisions required in order for such Award to qualify as an
incentive stock option ("Incentive Stock Option") under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
(e) Unless otherwise provided by the Committee in the written agreement
evidencing an Award, the terms of any stock option or stock appreciation right
granted under the Plan shall provide:
(i) that the term of such option or stock appreciation right shall be
ten years from the date of grant;
(ii) 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 or stock
appreciation right 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;
(iii) that the option or stock appreciation right 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;
and
(iv) that the amount of compensation the optionee or holder of the
stock appreciation right could receive under the option or stock
appreciation right is based solely on an increase in value of the Shares
after the date of grant or award.
A-2
<PAGE> 32
SECTION 4. STOCK SUBJECT TO PLAN
(a) Subject to adjustment as provided in Section 7 hereof, at any time, the
aggregate number of Shares issued and issuable pursuant to all Awards (including
all Incentive Stock Options) granted under this Plan shall not exceed 2,000,000.
(b) The aggregate number of Shares subject to Awards granted during any
calendar year to any one Eligible Person (including the number of shares
involved in Awards having a value derived from the value of Shares) shall not
exceed 400,000. Such aggregate number of shares shall be subject to adjustment
under Section 7 only to the extent that such will not affect the status of any
Award intended to qualify as "performance based compensation" under Section
162(m) of the Code.
(c) Subject to adjustment as provided in Section 7 hereof, the aggregate
number of Shares issued and issuable pursuant to all Incentive Stock Options
granted under this Plan shall not exceed 1,200,000; provided, however, that such
aggregate number of shares shall be subject to adjustment under Section 7 only
to the extent that such adjustment will not affect the status of any Incentive
Stock Option under Section 422 of the Code. Such maximum number does not include
the number of Shares subject to the unexercised portion of any Incentive Stock
Option granted under this Plan that expires or is terminated.
(d) The aggregate number of Shares issued under this Plan at any time shall
equal only the number of shares actually issued upon exercise or settlement of
an Award and shall not include Shares, or rights with respect to shares, that
have been canceled or returned to the Company upon forfeiture of an Award or in
payment or satisfaction of the purchase price, exercise price or tax withholding
obligation of an Award.
SECTION 5. NATURE AND DURATION OF PLAN
(a) This Plan is intended to constitute an unfunded arrangement for a
select group of management or other key employees.
(b) No Awards shall be made under this Plan after December 31, 2006.
Although Shares may be issued after December 31, 2006 pursuant to Awards made
prior to such date, no Shares shall be issued under this Plan after December 31,
2016.
SECTION 6. ADMINISTRATION OF PLAN
(a) This Plan shall be administered by one or more committees of the Board
(any such committee, the "Committee"). If no persons are designated by the Board
to serve on the Committee, the Plan shall be administered by the Board and all
references herein to the Committee shall refer to the Board. The Board shall
have the discretion to appoint, add, remove or replace members of the Committee,
and shall have the sole authority to fill vacancies on the committee. Unless
otherwise provided by the Board: (i) with respect to any Award for which such is
necessary and desired for such Award to be exempted by Rule 16b-3 of the
Exchange Act, the Committee shall consist of 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 Award 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
Award, 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
Awards under the Plan).
(b) Subject to the provisions of this Plan, the Committee shall be
authorized and empowered to do all things necessary or desirable in connection
with the administration of this Plan with respect to the Awards over which such
Committee has authority, including, without limitation, the following:
(i) adopt, amend and rescind rules and regulations relating to this
Plan;
(ii) determine which persons are Eligible Persons and to which of such
Eligible Persons, if any, and when Awards shall be granted hereunder;
A-3
<PAGE> 33
(iii) grant Awards to Eligible Persons and determine the terms and
conditions thereof, including the number of Shares subject thereto and the
circumstances under which Awards become exercisable or vested or are
forfeited or expire, which terms may but need not be conditioned upon the
passage of time, continued employment, the satisfaction of performance
criteria, the occurrence of certain events (including events which the
Board or the Committee determine constitute a change of control), or other
factors;
(iv) at any time cancel an Award with the consent of the holder and
grant a new Award to such holder in lieu thereof, which new Award may be
for a greater or lesser number of Shares and may have a higher or lower
exercise or settlement price;
(v) determine whether, and the extent to which adjustments are
required pursuant to Section 7 hereof; and
(vi) interpret and construe this Plan, any rules and regulations under
the Plan and the terms and conditions of any Award granted hereunder.
All decisions, determinations, and interpretations of the Committee shall be
final and conclusive upon any Eligible Person to whom an Award has been granted
and to any other person holding an Award.
(c) The Committee may, in the terms of an Award or otherwise, temporarily
suspend the issuance of Shares under an Award if the Committee determines that
securities law considerations so warrant.
(d) The Committee from time to time may permit a recipient holding any
stock option granted by the Company to surrender for cancellation any
unexercised portion of such option and receive in exchange an option or other
Award for such number of Shares as may be designated by the Committee. The
Committee may, with the consent of the person entitled to exercise any
outstanding option, amend such option, including reducing the exercise price of
any option and/or extending the term thereof.
SECTION 7. ADJUSTMENTS
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.
SECTION 8. AMENDMENT AND TERMINATION OF PLAN
The Board may amend or terminate this 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.
A-4
<PAGE> 34
SECTION 9. EFFECTIVE DATE OF PLAN
This Plan shall be effective as of the date upon which it was approved by
the Board, subject however to approval of the plan by the affirmative votes of
the holders of a majority of the securities of the Company present, or
represented, and entitled to vote at a meeting duly held in accordance with the
laws of the State of Delaware.
SECTION 10. COMPLIANCE WITH OTHER LAWS AND REGULATIONS
The Plan, the grant and exercise of Awards thereunder, and the obligation
of the Company to sell and deliver shares under such Awards, shall be subject to
all applicable federal and state laws, rules and regulations and to such
approvals by any governmental or regulatory agency as may be required. The
Company shall not be required to issue or deliver any certificates for shares of
Common Stock prior to the completion of any registration or qualification of
such shares under any federal or state law or issuance of any ruling or
regulation of any government body which the Company shall, in its sole
discretion, determine to be necessary or advisable. Any adjustments provided for
in Section 7 shall be subject to any shareholder action required by Delaware
corporate law.
SECTION 11. NO RIGHT TO COMPANY EMPLOYMENT
Nothing in this Plan or as a result of any Award granted pursuant to this
Plan shall confer on any individual any right to continue in the employ of the
Company or interfere in any way with the right of the Company to terminate an
individual's employment at any time. The agreement evidencing an Award may
contain such provisions as the Committee may approve with reference to the
effect of approved leaves of absence.
SECTION 12. LIABILITY OF COMPANY
The Company and any affiliate which is in existence or hereafter comes into
existence shall not be liable to an Eligible Person or other persons as to:
(a) The Non-Issuance of Shares. The non-issuance or sale of shares as
to which the Company has been unable to obtain from any regulatory body
having jurisdiction the authority deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any shares hereunder; and
(b) Tax Consequences. Any tax consequence expected, but not realized,
by any Eligible Person or other person due to the issuance, exercise,
settlement, cancellation or other transaction involving any Award granted
hereunder.
SECTION 13. GOVERNING LAW
This Plan and any Awards and agreements hereunder shall be interpreted and
construed in accordance with the laws of the State of Delaware and applicable
federal law.
A-5
<PAGE> 35
APPENDIX B
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
------------------------
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 24, 1998
------------------------
TRANSCRYPT INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 0-21681 47-0801192
(STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NUMBER)
</TABLE>
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> 36
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
1. (i) On April 24, 1998, Coopers & Lybrand L.L.P. ("Coopers") resigned as the
principal accountants of Transcrypt International, Inc. (the "Company"). On
April 27, 1998, the Company issued a news release disclosing this information,
among other things. The full text of that news release is filed herewith as
Exhibit 99.1 and is incorporated by reference herein.
2. In conjunction with its resignation, Coopers advised the Company that their
reports with respect to the consolidated financial statements of the Company and
its subsidiaries, as of and for the years ended December 31, 1995 and 1996,
should no longer be relied upon and are withdrawn. As of the date of this
Report, the Company is in the process of retaining a new independent accountant.
3. (ii) None of Coopers' reports on the financial statements of the Company and
its subsidiaries as of and for the years ended December 31, 1995 and 1996
contained any adverse opinion or a disclaimer of opinion, nor was qualified or
modified as to uncertainty, audit scope, or accounting principle. An audit
report on the financial statements of the Company and its subsidiaries as of and
for the year ended December 31, 1997 has not yet been issued.
4. (iii) Neither the Company's Board of Directors nor its Audit Committee
recommended the decision to change accountants.
5. (iv) Prior to its resignation on April 24, 1998, Coopers had been the
independent public accountant of the Company since 1992, and representatives of
Coopers have worked closely with the Company's management in connection with the
Company's financial statements. Coopers performed timely interim reviews of the
Company's quarterly financial statements since the Company's initial public
offering and reviewed significant year-end and quarter-end sales. Coopers also
worked with management in establishing appropriate accounting policies,
procedures and controls, including specific revenue recognition policies.
6. During the Company's two most recent fiscal years and subsequent interim
period through mid- to late-March 1998, the Company received no indication from
Coopers regarding a disagreement on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Coopers, would have caused
Coopers to make reference to the subject matter of the disagreement in
connection with any of its reports, nor did the Company receive any indication
from Coopers regarding any other reportable event under Rule 304. Coopers
consented to the inclusion of its audit reports in connection with the Company's
two public offerings completed on January 22, 1997 and October 15, 1997, and
provided "comfort letters" in connection with such offerings. On February 6,
1998, the Company released its financial results for 1997 via a public press
release. The audit partner of Coopers read and took no exception to such press
release prior to its issuance.
7. During late February and March 1998, Coopers informed the Company that
Coopers had received several anonymous letters and one anonymous telephone call
which, among other things, questioned the accounting practices of the Company
relating primarily to certain sales transactions and alleged wrongdoing in
connection therewith. Beginning shortly after the receipt of the first letter,
meetings were held involving management of the Company, members of the Company's
Audit Committee and the Coopers audit partner. At an Audit Committee meeting
held on March 4, 1998 attended by the Coopers audit partner, Coopers indicated
that the Company's reserve for receivables was adequate based on information
currently available to it, and that the sales transactions referred to in the
first anonymous letter had been recorded consistent with the Company's revenue
recognition procedures, as previously approved by Coopers. On March 5, 1998, the
Company issued a press release referring to the first anonymous letter and
stating that the Company continued to stand by its previously issued financial
statements and publicly announced financial results, but was continuing to
investigate these matters. The audit partner of Coopers read and took no
exception to such press release prior to its issuance.
8. In mid-March 1998, the Company learned that the National Office of Coopers
had become involved in the review of issues raised in the anonymous letters.
During the week of March 23, 1998, a representative of the National Office held
several meetings with Company management and one meeting with members of the
Company's Audit Committee. The Company also was advised that the National Office
representative began to
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<PAGE> 37
review Coopers' workpapers. On March 26, 1998, in a meeting attended by the
Coopers audit partner and National Office representative, members of the Audit
Committee and certain members of management, the Company was advised orally that
Coopers was still in the process of reviewing and examining the workpapers
relating to the 1997 audit and that adjustments would be required to previously
announced financial results for 1997, although Coopers stated that it was not
yet in a position to quantify such adjustments. On March 27, 1998, the Company
issued a press release indicating that its 1997 Annual Report on Form 10-K would
be delayed and that adjustments would be made to the Company's previously
announced results.
9. In a number of subsequent meetings held in late March and in April 1998
between Coopers and Audit Committee members and Coopers and management of the
Company, Coopers described adjustments that it was considering recommending
regarding the Company's 1997 financial statements and that such adjustments
might impact the Company's 1996 fiscal year. During this time, the Company
provided additional documentation and information to Coopers regarding the
transactions at issue.
10. During its meetings with Coopers, representatives of the Company questioned
Coopers regarding the basis and support for its proposed adjustments under
generally accepted accounting principles ("GAAP") and discussed with Coopers the
Company's reliance on Coopers' prior review of certain of these transactions and
audits. On April 3, 1998, the Board of Directors of the Company met and, due to
its belief that Coopers had a potential conflict of interest in reviewing its
prior work, authorized the Audit Committee to retain another major independent
accounting firm to review, under SAS No. 50, the accounting principles applied
to the transactions in question and report whether the accounting principles
applied were in accordance with GAAP. Such independent accountant was retained
by the Company. In addition, the Audit Committee retained independent counsel to
conduct an investigation and advise the Audit Committee in connection with
certain matters, concurring with Coopers' advice that it must do so.
11. On the afternoon of April 23, Company management spoke with representatives
of the other major accounting firm to discuss their SAS No. 50 review. On the
morning of April 24, 1998, special counsel for the Audit Committee contacted
Coopers' outside counsel telephonically and informed such counsel that the
Company would agree to Coopers' proposed accounting treatment of the
transactions in question, and requested that Coopers proceed with completion of
the audit. Promptly thereafter, Coopers' outside counsel called back the special
counsel to the Audit Committee and informed such special counsel that Coopers
would be contacting the Audit Committee, and further that the members of the
special counsel's law firm would not be permitted to review Coopers' workpapers
that day as previously agreed. Shortly thereafter, representatives of Coopers
held a conference call with the Audit Committee Chairman and notified the
Chairman that Coopers was resigning, effective immediately, as the Company's
independent accountant, and that Coopers was withdrawing its audit reports
relating to the Company's 1995 and 1996 financial statements.
12. Set forth below is a description of the disagreements between Coopers and
the Company reportable under Rule 304(a)(1)(iv). These items were discussed
between Coopers and members of the Audit Committee at various times in late
March or in April 1998. The Company has authorized Coopers to respond fully to
inquiries of the successor accountant (when retained), including inquiries
concerning these matters.
1. E.F. JOHNSON COMPANY
13. (a) Revenue Recognition for Systems Contracts. E.F. Johnson Company ("EFJ")
is the Company's wholly-owned, consolidated subsidiary acquired on July 31,
1997. Certain contract revenues totaling approximately $2,626,000 were recorded
by EFJ during the fourth quarter of 1997. EFJ had historically recognized
revenues on system contracts using the "percentage of completion" method,
applying the ratio of costs incurred to date to the total cost of the system. In
late March 1998, Coopers informed the Company that costs of purchased materials,
even though incurred, should not be included in the percentage of completion
calculation until installation and integration of such materials into the system
has at least begun. The Company intends to make this change, which will result
in a substantial downward adjustment in the Company's 1997 annual and fourth
quarter consolidated operating results.
14. (b) Revenue Recognition for License of Technology. Revenue from a license
of technology by EFJ totaling $300,000 was recorded in the fourth quarter of
1997 based upon the electronic delivery to the
B-2
<PAGE> 38
customer in that quarter of certain technical know-how and documentation.
Coopers' current position is that, since the customer had a cancellation right
and the payment terms extend beyond one year, revenue should be recognized on an
installment basis. The Company notes that although the purchase agreement
initially contained a cancellation right, it was amended to eliminate such right
prior to issuance of the Company's 1997 financial results. Nevertheless, the
Company will recognize revenue on these sales as payments are received. This
change will result in a downward adjustment in the Company's 1997 annual and
fourth quarter consolidated operating results.
15. (c) Opening Balance Sheet of EFJ. EFJ's finished goods and work in process
inventory at July 31, 1997 totaled approximately $3 million. In connection with
its acquisition of EFJ, the Company did not believe that it was appropriate to
adjust such inventories to allocate a portion of the purchase price for
potential manufacturing profit on these inventories. Coopers reviewed the
allocation of purchase cost of EFJ at the time of the acquisition and provided
substantial assistance to the Company in preparing the opening balance sheet of
EFJ. On March 31, 1998, Coopers informed the Company that inventories should
have been adjusted for the manufacturing profit included in inventory at the
acquisition date. The Company intends retroactively to reduce goodwill and
increase inventories of EFJ by the amount of the manufacturing profit included
in inventory at the date of acquisition, effective July 31, 1997. No final
determination has been made at this time regarding the amounts of the
adjustments. The Company believes that these changes may impact the annual and
third and fourth quarter consolidated operating results for 1997.
16. A second issue is whether the opening balance sheet should have been
adjusted to reduce a $500,000 bad debt reserve that was established by EFJ with
respect to a receivable from a specific customer. The Company ultimately
collected the receivable after the customer received third party financing of
$30 million in the first quarter of 1998, and the Company left the $500,000
reserve on the books. In connection with Coopers' audit for 1997, Coopers
informed the Company that the Company could not make any adjustments
retroactively to the EFJ opening balance sheet. Coopers' current position is
that this recovery should have been reflected retroactively by reducing the
goodwill recorded in the purchase allocation and eliminating the reserve that
had been established. This change could impact the annual and the third and
fourth quarter consolidated operating results for 1997. The Company is currently
evaluating these issues, including whether Coopers' current position is
consistent with SFAS No. 38, as interpreted in Staff Accounting Bulletin No. 92.
2. TRANSCRYPT INTERNATIONAL, INC.
17. (a) Revenue Recognition on Certain Government Agency Sales. The Company
recorded revenues on a number of "quick ship" sales involving national security
to a federal government agency based on the shipment of products. This quick
ship process began in mid-1996 and initially involved the receipt by the Company
from the customer of oral orders that included a federal purchase request
number. Later, in the second quarter of 1997, at the recommendation of Coopers,
this process was modified to include the receipt of a "pro forma invoice" order
signed by the customer reflecting all of the material terms and conditions of
the sale. The customer, in the usual course of business, would subsequently
reduce the transaction to a formal written agreement. Coopers has now advised
the Company that such revenues should not have been recorded until a formal
written agreement was received, on the grounds that the federal government's
commitment may not have been perfected until that time. The Company intends to
adjust its historical financial statements to delay recognition of the full
amount of these revenues until the period that a formal written agreement was
received, and intends to follow this procedure in the future. This change will
impact the timing of revenue recognition in the Company's 1997 consolidated
operating results and may impact the 1996 consolidated operating results.
18. In addition, the Company also recorded, during the second and third
quarters of 1997, revenues totaling approximately $2.2 million on sales for
which the Company has not received formal written agreements from the federal
government agency customer. On March 25, 1998, the customer advised the Company
in writing that the person with whom the Company had been dealing in the past in
these transactions did not have the authority to bind the government. The
customer also advised the Company that it would not ratify these transactions
pursuant to the Company's ratification request dated March 11, 1998. On March
25, 1998, the Company filed a certified claim to recover the amounts due on
these sales. Coopers' position is that in light of
B-3
<PAGE> 39
these facts, these revenues must be reversed in their entirety. The Company
intends to eliminate these revenues from its consolidated 1997 operating results
and will only recognize these revenues if this claim is favorably resolved.
19. (b) Revenue Recognition on Sales to Certain International Dealers and
Distributors. In mid-March 1998, Coopers reevaluated a number of sales by the
Company to certain international dealers and distributors during 1997. Coopers
indicated that some of the dealers and distributors appeared to lack a
commitment and ability to pay for the products, and therefore the sales should
not have been recorded on the accrual basis. This disagreement relates to the
Company's program to offer financing for the purchase of the Company's products
by certain international dealers and distributors to further develop the
Company's distribution channels. At the time of each of these sales, the Company
received a written purchase order from the customer, and the Company believed
that each of these customers had the ability to pay for the products. The
Company currently believes that potential eliminations and adjustments to the
timing of revenues involve sales totaling an estimated $2.0 million in 1997. The
Company is continuing to review this issue, including the magnitude and timing
of any adjustments in 1997, whether any additional 1997 sales would be involved
and whether any adjustments may be required to 1996 consolidated operating
results.
20. (c) Other Revenue Recognition Issue. The Company believes that Coopers
first raised this issue as a disagreement subsequent to its resignation on April
24, 1998. According to Coopers, the Company recorded revenues based upon
shipments to certain customers who had an explicit right to exchange the product
for other products. Coopers' position is that revenues on these sales should not
have been recorded until a final sale was consummated. Coopers has indicated
that adjustments will impact the annual and quarterly consolidated operating
results for 1997, but does not know whether 1996 and 1995 will be affected. The
Company is currently evaluating this issue.
21. (v) Set forth below is a description of the events reportable under Rule
304(a)(1)(v). The Company, and with respect to certain matters, the special
counsel to the Audit Committee, are currently evaluating these issues:
22. (A) Internal Controls: Coopers has informed the Company that it believes
that the Company's internal controls over the proper recording of revenue
transactions were deficient.
23. (B) Reliance on management representations/association with financial
statements prepared by management: Coopers has informed the Company's Audit
Committee in meetings in late March and in April 1998 that it believes that it
was possible that illegal acts may have been committed by Company personnel,
including management. In this regard, Coopers recommended that the Audit
Committee retain independent counsel to conduct a special investigation into
possible illegal acts. The Audit Committee retained independent counsel for such
purpose and such counsel's investigation is continuing. Coopers informed the
Audit Committee that under these circumstances, it could no longer rely on
representations made by Company management.
24. (C) Notification of need to expand audit scope and identification of
matters that may result in changes to financial statements of 1997 or prior
years: Coopers informed the Company's Audit Committee, in conjunction with its
resignation on April 24, 1998, that it would have needed to significantly expand
its audit scope to examine all revenue transactions recorded in 1995, 1996 and
1997 and all credit memos issued in those periods and subsequently.
25. Coopers has also identified the following issues which it believes may
result in significant changes to financial statements of one or more years and
quarters, which Coopers believes were unresolved as the result of its
resignation prior to completion of the expanded audit scope:
26. 1. Issues regarding the purchase accounting for the 1997 acquisition of
EFJ, including reserves established as of the acquisition date for
restructuring, doubtful accounts and contracts in process, proper valuation of
purchased in-process research and development and whether a valuation allowance
is required for deferred tax assets.
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<PAGE> 40
27. 2. Issues regarding the appropriateness of recording revenues in 1996
and 1997 for transactions where goods may have been shipped to public
warehouses, family members, employees and to the Company itself.
28. 3. Issues regarding the verification of the physical existence and the
valuation of inventory at customer locations, where there was substantial
uncertainty regarding the customer's commitment and ability to pay for the
products, and at other locations such as public warehouses, and inventory
returned to the Company after year-end where such inventory was not accepted or
was exchanged by the customer.
29. 4. Issues regarding the appropriateness of recording revenues in 1996
and 1997 for sales of newly developed products for which engineering development
may not have been complete.
30. 5. Issues regarding reserving for sales returns and allowances.
31. 6. Issues regarding the possible need for a valuation allowance with
respect to the Company's consolidated deferred tax asset balance.
32. (D) Matter that may require a change to 1996 financial statements: Coopers
informed the Audit Committee, in conjunction with its resignation on April 24,
1998, of the need to make an adjustment to the 1996 financial statements for the
following item, but due to Coopers' resignation such adjustment has not yet been
made:
33. The Company recorded $240,000 of revenues for engineering services upon
invoicing in November 1996; a contract was received dated December 31, 1996.
These services may not have been completed until 1997. Coopers' position is that
revenues should not be recorded until the related services have been provided.
This change could negatively impact the Company's 1996 annual and fourth quarter
consolidated operating results and positively impact 1997 annual and quarterly
consolidated operating results.
34. The Company has requested from Coopers a letter addressed to the Commission
stating whether it agrees with all of the above statements (as in response to
Rule 304(a)). A copy of this letter will be filed as an exhibit to an amended
Report on Form 8-K promptly upon the Company's receipt of same.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements.
None required.
(b) Pro Forma Financial Information.
None required.
(c) Exhibits.
The following are furnished as exhibits to this report:
99.1 News Release issued on April 27, 1998 by the Registrant.
B-5
<PAGE> 41
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
TRANSCRYPT INTERNATIONAL, INC.
Date: May 4, 1998 By: /s/ JEFFERY L. FULLER
------------------------------------
Jeffery L. Fuller
Chief Executive Officer
(Principal executive officer and
duly authorized signatory)
B-6
<PAGE> 42
APPENDIX C
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
CURRENT REPORT
------------------------
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 24, 1998
------------------------
TRANSCRYPT INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 0-21681 47-0801192
(STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NUMBER)
</TABLE>
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> 43
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On May 18, 1998, Transcrypt International, Inc. (the "Company") received
the response of its former auditors, Coopers & Lybrand L.L.P. ("Coopers"), to
the Company's Current Report on Form 8-K filed with the Commission on May 4,
1998, which Form 8-K announced that Coopers had resigned as the Company's
independent public accountant and had withdrawn its opinion on the Company's
1995 and 1996 financial statements, among other things. The March 18, 1998
response of Coopers, annexed hereto as Exhibit 16, is incorporated in its
entirety by reference in response to this Item 4. The position of the Company on
disputed issues is set forth in its May 4, 1998 Form 8-K filing, which is
incorporated herein by this reference. The Company does not agree with Coopers'
characterization of certain events in its response or the implications of
Coopers' statements.
C-1
<PAGE> 44
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements.
None required.
(b) Pro Forma Financial Information.
None required.
(c) Exhibits.
The following are furnished as exhibits to this report:
16 Letter from Coopers & Lybrand L.L.P. to the Commission dated May 18,
1998.
C-2
<PAGE> 45
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
TRANSCRYPT INTERNATIONAL, INC.
Date: May 20, 1998 By: /s/ JEFFERY L. FULLER
------------------------------------
Jeffery L. Fuller
Chief Executive Officer
(Principal executive officer and
duly authorized signatory)
C-3
<PAGE> 46
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
16 Letter from Coopers & Lybrand L.L.P. to the Commission dated
May 18, 1998.
</TABLE>
C-4
<PAGE> 47
EXHIBIT 16
[LETTERHEAD OF COOPERS & LYBRAND, L.L.P., OMAHA, NEBRASKA OFFICE]
May 18, 1998
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
Ladies and Gentlemen:
We have read the statements made by Transcrypt International, Inc. (the
"Registrant") in its Form 8-K report that we understand the Registrant filed
with the Commission pursuant to Item 4 of Form 8-K on May 4, 1998 (copy
attached). We disagree with many of the Registrant's statements in its Form 8-K,
as we set forth below. Some of the reasons why we disagree with the Registrant's
statements are also set forth below. For ease in referring to specific portions
of the Form 8-K, we have numbered each of the Registrant's paragraphs as shown
in the attached copy of the Form 8-K and refer to the Registrant's statements by
those paragraph numbers.
1. In its fifth paragraph, the Registrant states that Coopers & Lybrand
L.L.P. ("C&L") worked with the Registrant's management in establishing
appropriate accounting policies, procedures and controls, including specific
revenue recognition policies. We do not agree with this statement. While C&L
commented on certain internal control matters over the years, C&L did not work
with the Registrant's management to establish accounting policies and procedures
for the Registrant, including the Registrant's revenue recognition policies. In
its fifth paragraph, the Registrant also indicates that C&L performed timely
interim reviews of the Registrant's quarterly financial statements since the
Registrant's initial public offering and reviewed significant year-end and
quarter-end sales. We would respond that, in accordance with AICPA standards, an
accountant's "review" of quarterly financial statements is substantially less in
scope than an audit, and such a review does not necessarily involve the
examination of documentary evidence related to any "reviewed" transaction.
Furthermore, with respect to the Registrant's year-end sales, the only year-end
since the Registrant's initial public offering was December 31, 1997. C&L
resigned prior to completing its audit procedures for the Registrant's year
ending December 31, 1997, and therefore the Registrant was not entitled to take
comfort that any transactions had been audited even though C&L was in the
process of performing certain audit procedures. Moreover, the Registrant was
aware that C&L, while conducting its audit procedures for year-end 1997, had
uncovered numerous issues with respect to improperly recorded transactions.
Further discussion of these points is set forth below.
2. In its sixth paragraph, the Registrant states that until mid-to-late
March 1998 it had received no indication from C&L of "disagreements" or other
"reportable events" under Rule 304 (actually, Item 304 of SEC Regulation S-K).
We do not agree with this statement, nor do we agree with the implications of
the Registrant's further statement in this paragraph that the C&L audit partner
had read the Registrant's February 6, 1998 press release announcing the
Registrant's financial results for 1997 and took no exception to it prior to
issuance. Starting on December 31, 1997, when C&L identified and reported to the
Registrant's management the percentage-of-completion issue at the Registrant's
E.F. Johnson subsidiary, and on a continuing basis thereafter, C&L raised
numerous questions to the Registrant's management relating to the Registrant's
revenue recognition and other issues as C&L identified them during the course of
its audit, which was never completed, of the Registrant's financial results for
1997. Moreover, the Registrant's management was aware at the time it issued its
February 6, 1998 press release that none of these issues had been resolved to
C&L's satisfaction. Prior to February 6, the C&L audit partner had discussed
with the Registrant's senior management the fact that there were numerous open
issues and incomplete audit procedures remaining in the audit. Indeed, on the
morning of February 6 before the press release was issued, the C&L audit partner
specifically discussed with the Registrant's senior management one of the
principal open issues. Further, the Registrant's management also was aware at
that time of its delays in completing its closing process and that it had not
provided C&L with sufficient time to complete critical audit procedures before
the Registrant issued
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its February 6 press release. For example, the Registrant had not provided its
1997 consolidating schedules to C&L until late in the evening of February 5,
1998. The Registrant issued its press release at approximately 10:00 a.m. on
February 6. C&L also at no time provided any assurance to the Registrant that
C&L had audited the financial results for 1997 that the Registrant announced in
its February 6 press release. Further, despite C&L's numerous requests to the
Registrant from January 1998 on for additional documentation and information to
help C&L resolve the many accounting issues and questions it had identified with
respect to the Registrant's 1997 financial results, the Registrant's management
failed to provide C&L with any additional documentation or information until
after late February 1998, when C&L received the first anonymous letter alleging
wrongful revenue recognition by the Registrant. After late February 1998,
management was still very slow in providing C&L with the documentation and
information C&L had requested to complete its audit. Even after the anonymous
letters began to arrive in late February 1998, the Registrant's management --
expressing incredulity that anyone would question its accounting
practices -- focused on finding out who had sent the anonymous letters, rather
than on the more important question, with which C&L was concerned, of whether
the allegations in the letters had any factual basis. In fact, as C&L
discovered, virtually all of the allegations in the anonymous letters proved to
be accurate. As C&L's attempts to audit the Registrant continued, management's
misdirected focus became increasingly apparent. Over time, the numerous
questions and possible accounting misstatements by the Registrant that C&L had
earlier identified and reported to management eventually reached the level of
"disagreements" and other "reportable events" as C&L discussed with the
Registrant's management and ultimately with the Audit Committee.
3. In its seventh paragraph, the Registrant states that at a March 4, 1998
meeting with the Registrant's Audit Committee the C&L audit partner indicated
that the Registrant's reserve for receivables was adequate based on the
information that C&L had available at the time and that the sales referred to in
the first anonymous letter had been recorded consistent with the Registrant's
revenue recognition procedures, as previously approved by C&L. We disagree with
this statement. Concerning the Registrant's reserves for receivables, C&L had
specifically expressed concern during the March 4, 1998 meeting with the
Registrant's Audit Committee regarding the adequacy of the Registrant's reserves
for receivables because of unanswered confirmations and lack of subsequent cash
collections. In addition, while it was the Registrant's position at the March 4
meeting that the Registrant's underestimate of its reserves for receivables at
Transcrypt was offset by an overestimate of reserves at the E.F. Johnson
subsidiary the Registrant had acquired during 1997, C&L subsequently learned of
erroneous accounting for an E.F. Johnson receivable collected after the
acquisition, which resulted in the Registrant's overall understatement of
reserves (which is discussed in the formal "disagreement" disclosed in the
Registrant's sixteenth paragraph). In addition, at the time of the March 4 Audit
Committee meeting, the sales referenced in the first anonymous letter (which
sales also are the subject of the formal "disagreement" that the Registrant
disclosed in its eighteenth paragraph) continued to be an open item in C&L's
audit for which C&L had not received information that it had previously
requested, i.e., a written contract or confirmation from the government. C&L had
previously told the Registrant's management on several occasions that there had
to be some resolution of this issue before the Registrant's Form 10-K could be
filed. The Registrant's management knew this issue had not been resolved by
March 4, 1998, and C&L did not in any way advise the Registrant's Audit
Committee on March 4, 1998 that this issue had been resolved, as the Registrant
implies in its seventh paragraph. Our comments below in response to the
Registrant's seventeenth and eighteenth paragraphs deal further with these
sales. Our comments above in response to the Registrant's fifth paragraph also
apply here in response to the implication of Registrant's seventh paragraph that
C&L had approved revenue recognition procedures of the Registrant. In its
seventh paragraph, the Registrant additionally states that before it had issued
its March 5, 1998 press release saying that it continued to stand by its
previously issued financial statements and its previously announced financial
results, the C&L audit partner had read this press release and took no exception
to it. We disagree with the implications of this statement. While the C&L audit
partner knew the Registrant's position on March 5 was that the Registrant was
continuing to stand by its 1997 financial results that the Registrant had
announced on February 6, 1998, the C&L audit partner had never approved or
audited those financial results, as the Registrant's management was well aware.
In fact, at the time of the March 5 press release, the Registrant's management
was well aware that no resolution had been reached of the numerous accounting
issues and questions that C&L had raised to management.
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4. In its eighth paragraph, the Registrant discusses that in mid-March 1998
it learned that the National Office of C&L had become involved in the review of
issues raised in the anonymous letters. We disagree with the implications of
this paragraph that C&L's National Office became involved solely to review the
issues raised by the anonymous letters. C&L's local office had specifically
requested the assistance of C&L's National Office after C&L had received the
anonymous letters. C&L's local office had requested the assistance of C&L's
National Office not only on the issues raised by the anonymous letters, but also
on the many other broader issues relating to the Registrant's accounting. This
broader scope included the many still open and unresolved issues that C&L had
previously identified to the Registrant's management. To provide this broad
assistance, it was necessary for the C&L National Office partner to review the
working papers that C&L's local office had prepared to date. In further response
to the Registrant's eighth paragraph, we would also point out that, during the
referenced meetings with the Registrant's management and with the Audit
Committee the week of March 23, 1998, the local C&L audit partner always
attended these meetings along with the representative of C&L's National Office.
5. In its ninth paragraph, the Registrant states that during late March and
in April 1998 it provided additional documentation and information to us
regarding the transactions at issue. We disagree with any implication in this
statement that during this time period the Registrant had provided C&L with all
of the documentation and information that C&L had requested. Starting in January
1998 and continuing until April 24, 1998, when C&L resigned, there were at all
times outstanding documentation and information requests that C&L had made to
the Registrant that the Registrant had failed to satisfy. During the week of the
March 27, 1998 press release described in the Registrant's eighth paragraph, the
Registrant's management had engaged another accounting firm, TenEyck Associates,
Inc. ("TenEyck"), to review certain accounting issues that C&L had raised to
date for which the Registrant's management disagreed with C&L. Only after
consulting with TenEyck (and after receiving the March 25, 1998 letter from the
government customer referenced in the Registrant's eighteenth paragraph) did the
Registrant's management finally appear to acknowledge that it would have to
record adjustments to its previously announced financial results. Moreover, in
many cases the additional documentation and information the Registrant provided
C&L during this time period in response to C&L's requests only led C&L to make
additional requests for more documentation and information from the Registrant
because of the incomplete and questionable explanations that the Registrant
provided to C&L.
6. In its tenth paragraph, the Registrant states that on April 3, 1998, its
Board of Directors authorized the Audit Committee to engage another major
accounting firm to conduct a review, under SAS No. 50, of the accounting
principles C&L had proposed for the transactions in question because the Board
believed that C&L had a potential conflict of interest in reviewing its prior
work. We disagree with certain aspects of this statement and the implications of
the statement. The Registrant did not engage the other major accounting firm,
which was KPMG Peat Marwick ("KPMG"), to review C&L's prior work; rather, KPMG
was engaged to review C&L's accounting conclusions with which C&L understood the
Registrant's management disagreed. Further, we disagree with the Registrant's
statement that C&L had any potential conflict of interest in reviewing its prior
work. Since C&L's 1997 audit of the Registrant was in progress and had not been
completed, it was necessary and appropriate under normal audit procedures for
C&L to review its prior work to date, in conjunction with its continuing
examination of the Registrant's financial records, particularly in light of the
new information of which C&L had become aware as a result of its ongoing
inquiries and the anonymous letters. Moreover, until the Registrant had so
stated in its May 4, 1998 Form 8-K, neither the Board, the Audit Committee nor
KPMG had ever advised C&L of any belief that C&L had a conflict of interest in
reviewing its prior work to date in order to try to complete its audit. We would
also note that KPMG was the second accounting firm the Registrant had engaged in
a period of a few weeks to try to obtain an accounting opinion different from
what C&L had advised. It is C&L's understanding that both of the other
accounting firms that the Registrant consulted with during this
period -- TenEyck and KPMG -- agreed with C&L's opinions on the accounting
principles at issue. In its tenth paragraph, the Registrant further states that
the Audit Committee retained independent counsel to conduct an investigation and
advise the Audit Committee in connection with certain matters, concurring with
C&L's advice that it must do so. We believe this statement by the Registrant
requires further elaboration to be fully accurate. On April 2, 1998, the day
preceding the April 3 Board meeting that the Registrant also discusses in this
paragraph, the C&L audit
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partner and two C&L National Office partners held a meeting with the
Registrant's Audit Committee (which is made up of three outside Directors of the
Registrant). C&L had initiated this meeting with the Audit Committee and had
specifically requested that the Audit Committee not permit the Registrant's
management and counsel to attend the meeting. C&L advised the Audit Committee at
this private April 2 meeting that C&L had identified possible fraud by the
Registrant, and that the fraud possibly had been committed by, or at the
direction of, the Registrant's most senior management. C&L explained to the
Audit Committee during the meeting details of the primary circumstances and
events that had led C&L to reach this conclusion of possible fraud, including
the fact, among others, that in late March 1998 C&L's investigations had led it
to a non-anonymous and apparently credible source who expressly told C&L that
the Registrant's management had intentionally manipulated sales revenues. During
the April 2 meeting, C&L told the Audit Committee that, because of the
possibility of fraud and illegal acts, (1) in C&L's opinion, the Audit Committee
should retain special counsel who was independent of the Registrant and its
management to conduct an investigation to determine whether fraud or other
illegal acts in fact had occurred; and (2) if the Audit Committee did not do
this, C&L would resign. In response, the Registrant's outside counsel made
repeated attempts to convince C&L and the Audit Committee that the Audit
Committee did not need to retain special counsel. On April 7, 1998, the same
three C&L partners had a telephonic meeting with the Audit Committee in which
C&L repeated its position that, if the Audit Committee did not retain special
counsel to investigate the possible fraud, C&L would resign. With that, the
Audit Committee then retained special counsel.
7. In its eleventh paragraph, the Registrant states that on the morning of
April 24, 1998, the Audit Committee's special counsel telephoned C&L's outside
counsel and informed C&L's outside counsel that "the Company would agree with
Coopers' proposed accounting treatment of the transactions in question" and
requested that C&L proceed with completion of the audit. We disagree with the
quoted portion of this statement. Until late in the day on April 24, 1998, no
one had suggested to C&L or its outside counsel that the Registrant (as opposed
to KPMG) had now decided to agree with C&L's proposed accounting treatment of
the transactions in question that KPMG was reviewing under SAS No. 50. Moreover,
based on what the Registrant itself states in later paragraphs of the Form 8-K,
specifically its fifteenth, sixteenth and nineteenth paragraphs, concerning
reportable "disagreements" with C&L, the Registrant still is continuing to
evaluate whether it agrees with C&L's proposed accounting treatment for some of
the transactions involved in KPMG's review under SAS No. 50. Furthermore, C&L
had made its decision to resign on the evening of the prior day, April 23. Early
the morning of April 24, at approximately 8:30 a.m. (or approximately one hour
before the Audit Committee's special counsel spoke with C&L's outside counsel),
C&L telephoned the Audit Committee Chairman and requested that a conference call
be set up as soon as possible that morning between C&L and the Audit Committee.
C&L's purpose in requesting this conference call was to inform the Audit
Committee of C&L's resignation decision. Because of C&L's resignation decision,
C&L also decided to postpone for the time being the appointment that happened to
be that day for the Audit Committee's special counsel to review the working
papers and to continue its debriefing of C&L's audit partner pursuant to C&L's
volunteered and ongoing efforts to assist the special counsel in the
investigation that C&L had requested into the Registrant's possible fraud.
Notably, due to a number of factors, C&L's decision to resign would not have
been altered even if C&L had been able to learn on the evening of April 23 or
the morning of April 24 that the Registrant now agreed with C&L's proposed
accounting treatment of the transactions in question. C&L had assumed for some
time that the Registrant's management would ultimately face the reality that it
had to agree with C&L's proposed accounting adjustments. C&L had already decided
a month earlier -- during the week of March 23, 1998 -- that, if the
Registrant's management refused to agree to the accounting adjustments C&L
believed were necessary, C&L would take exception to or render an adverse
opinion on the Registrant's financial statements for 1997. Accordingly, the
exercise the Registrant's management was going through to obtain yet a third
opinion on the proper accounting treatment was not important to C&L. C&L knew at
the time of its decision to resign that KPMG appeared to be in agreement with
C&L on the issues involved in the SAS No. 50 review. C&L also had understood for
approximately a month that the other accounting firm the Registrant's management
had engaged, TenEyck, appeared to be in agreement with C&L on the issues. The
factors, among others, that did lead to C&L's decision to resign included the
following: (a) the unresolved issues relating to C&L's concerns about the
integrity of the Registrant's management and possible fraud, which concerns
arose while C&L was attempting to do its audit for year-end 1997; (b) the
repeated attempts
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by the Registrant, Audit Committee and their counsel to pressure C&L to complete
its audit prior to May 7, 1998, when the Registrant had been ordered to appear
at a NASDAQ delisting hearing due to the Registrant's late Form 10-K; (c) the
concerns C&L had that, prior to the Registrant's desired May 7, 1998 audit
deadline, the Audit Committee's special counsel was not likely to have
sufficient time and opportunity to conduct the thorough and comprehensive
investigation that C&L had envisioned when it had requested the Audit Committee
to retain special counsel to investigate the possible fraud and illegal acts,
much less permit C&L sufficient time and opportunity before the May 7, 1998
delisting hearing to review the special counsel's findings and conclusions and
to determine if C&L agreed with them; (d) the numerous examples of the
Registrant's management presenting information to C&L that C&L later learned
constituted distortions of the truth and half-truths, while the Registrant's
management continued to resist making the necessary corrections to the financial
results it had reported for 1997; and (e) the increasingly apparent indications
C&L would need to extend its audit procedures far beyond normal audit
procedures, and also beyond the audit for calendar year 1997 to include calendar
years 1995 and 1996, due to C&L's concerns about the integrity of the
Registrant's management at all levels and possible fraud.
8. In its twelfth paragraph, the Registrant states it is setting forth the
"disagreements" between C&L and the Registrant that are reportable under Rule
304 (actually, Item 304 of SEC Regulation S-K) that C&L and members of the Audit
Committee discussed at various times in late March or in April 1998. We disagree
with any implication of this statement that, as the Registrant claimed in its
sixth paragraph, C&L had not given any indication to the Registrant regarding
any disagreements at an earlier time. We accordingly refer here to our response
above to the Registrant's sixth paragraph.
9. In its thirteenth paragraph, the Registrant discusses the reportable
disagreement it had with C&L concerning application of the
percentage-of-completion accounting method to the systems contracts of the
Registrant's E.J. Johnson subsidiary. We disagree with the implications of the
Registrant's discussion in this paragraph that E.F. Johnson's consistent
practice, prior to its July 31, 1997 acquisition by the Registrant, was to
include major purchased components in the percentage-of-completion calculation
when such components had not yet begun to be installed into the system. This was
not E.F. Johnson's prior practice before its acquisition by the Registrant.
Further, the costs the Registrant had included in its percentage-of-completion
calculation for this contract had not, in C&L's opinion, even been incurred
during 1997. In December 1997, the Registrant had ordered the components at
issue from several vendors, with the request that each vendor issue the
Registrant a "pro forma invoice" by December 31, 1997, in an apparent attempt by
the Registrant to demonstrate that it had incurred the costs in 1997. Each of
these pro forma invoices in fact was dated December 30 or 31, 1997. However, the
components were not delivered to the Registrant by December 31, 1997. In fact,
the components were not even scheduled for delivery until April 1998 at the
earliest. Moreover, C&L believes it unlikely that the vendors had even
manufactured the component parts by December 31, 1997. Even if such components
actually had been manufactured in only two or three weeks during late December,
then C&L believes that they should not be included in a cost-to-cost calculation
of the percentage of completion because they would not be special purpose
component parts. Rather, they would be "off-the-shelf" components that should
not be included in a percentage-of-completion calculation, which is intended to
measure the revenue earned by the Registrant's substantive efforts toward
completion. Further, we also disagree with the Registrant's implication in its
thirteenth paragraph that it was not until late March 1998 that C&L first
informed the Registrant of C&L's position in this regard. To the contrary, C&L
informed the Registrant in early January 1998 and again prior to the February 6,
1998 press release that inclusion of significant uninstalled materials in the
percentage-of-completion calculation for E.F. Johnson's system contracts was not
appropriate.
10. In its fourteenth paragraph, the Registrant discusses the reportable
disagreement it had with C&L concerning revenue the Registrant had recorded in
the fourth quarter of 1997 under a license contract containing a cancellation
right. The Registrant states that C&L's "current" position is that, because the
customer had a cancellation right and the payment terms extend beyond one year,
revenue should be recognized on an installment basis. The Registrant also states
that it amended the contract to eliminate the cancellation right before issuing
its 1997 financial results. We disagree with the implications of these
statements. C&L at no time agreed with the Registrant's position that the
revenue from this license agreement
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could be recorded in 1997 if the contract subsequently was amended to eliminate
the customer's cancellation right. The Registrant had recorded the revenue for
this contract on the last day of the year, December 31, 1997. The terms of the
original contract gave the customer the right until February 15, 1998 to cancel
the contract; the contract additionally set forth a payment schedule over a
three-year period for the customer to pay the Registrant, with the customer's
first payment not due until February 15, 1998, when the cancellation right
expired. The Registrant, in January 1998, in an attempt to have the contract
revenue apply to its 1997 revenues, contacted the customer and, on January 30,
1998 -- only two weeks before the customer's cancellation right was to expire
anyway under the original terms of the contract -- the Registrant and the
customer agreed to amend the contract to delete the customer's cancellation
right. C&L received a copy of the amended contract in mid-March 1998 and
concluded, based on all of these facts, that the Registrant was not entitled to
recognize any revenue from this contract in 1997 and, further, that when the
Registrant could properly recognize revenue from this contract beginning in
1998, it must be recognized on an installment basis.
11. In its sixteenth paragraph, the Registrant discusses the reportable
disagreement it had with C&L of whether the opening balance sheet after the
Registrant's acquisition of E.F. Johnson Company should have been adjusted to
reduce a $500,000 bad debt reserve established by E.F. Johnson and left on the
books, although the receivable was collected in the first quarter of 1998. The
Registrant does not mention that if goodwill and the bad debt reserve of E.F.
Johnson are reduced by $500,000, as C&L believes would be appropriate, it is
C&L's further opinion that the Registrant's consolidated bad debt reserve
potentially could be understated by an amount substantially in excess of
$500,000. Further, C&L disagrees with the Registrant's implication that C&L,
after reaching a final audit opinion on this issue, had later changed its
position. Retroactive adjustments to acquisition date balance sheets are not
ordinarily made as a result of changes in circumstances that occur subsequent to
the acquisition date. Occasionally, as was the case for the Registrant, however,
facts are discovered subsequent to the acquisition that indicate the
circumstances were different on the acquisition date than originally believed.
In the course of C&L's audit for 1997, C&L learned additional information that
indicated the retroactive adjustment in question was necessary as it was not due
to a change of circumstances after the acquisition.
12. In its seventeenth paragraph, the Registrant discusses its reportable
disagreement with C&L concerning recognition of revenue on certain government
agency sales. We disagree with implications of certain aspects of this
paragraph. The Registrant states that the government agency customer at issue,
in the usual course of business, would subsequently reduce the transaction to a
formal written agreement. However, the events described in the Registrant's
eighteenth paragraph demonstrate why the Registrant's assertions that recording
revenue on shipments prior to receipt of a contract is not an appropriate
accounting policy. The Registrant also states that C&L has now advised the
Registrant that these revenues should not have been recorded until a formal
written agreement was received. However, the Registrant fails to point out that
it had never informed C&L until late April 1998 that, in May 1997, the
government agency customer at issue had notified the Registrant by letter that
the agency's contact person with whom the Registrant was dealing was not
authorized to contractually commit the government agency. In late April 1998,
the Registrant received a letter from the government agency that enclosed a copy
of this May 1997 letter. The Registrant's management had informed and assured
C&L on numerous occasions prior to late April 1998 that the Registrant's
recording of revenue on shipments before receipt of a contract was appropriate
for transactions with this government agency due to the unique circumstances
involved, including the agency's need for quick shipments for national security
reasons. Had C&L known about the government's May 1997 letter to the Registrant,
C&L never would have initially accepted management's practice of recording
revenues before receipt of a formal written contract for these transactions.
13. In its eighteenth paragraph, the Registrant discusses its reportable
disagreement with C&L concerning the specific transactions with the government
agency customer referenced in the preceding paragraph. We disagree with certain
aspects of the Registrant's statements in this paragraph and with implications
of the Registrant's statements. The Registrant states that on March 25, 1998
this government agency customer advised the Registrant that the agency's
employee with whom the Registrant had been dealing was not authorized to
contractually bind the government, thereby implying that the Registrant first
learned this on March 25, 1998. However, this is not true. As noted above, the
government agency had sent a
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letter in May 1997 to the Registrant advising that this agency employee was not
authorized to contractually commit the government agency. Further, the
Registrant also had been orally informed of this in a meeting with the
government agency in mid-March 1998. In its eighteenth paragraph, the Registrant
also fails to mention that, when it had recognized the revenue from these
transactions in the second and third quarters of 1997, it had shipped the
products at issue for this government agency to a public warehouse. C&L
subsequently learned in late February 1998 or in March 1998 that these products
remained in the public warehouse and, to the best of C&L's knowledge as of the
date it resigned, continue to remain there. The Registrant further fails to
mention that it had not manufactured many of the products in question, but
rather that another company had supplied a significant majority of the products
and was paid by the Registrant because the other company had refused to ship
products to the government agency without a binding contract.
14. In its nineteenth paragraph, the Registrant refers to its reportable
disagreement with C&L concerning the Registrant's recognition of revenue on
shipments to certain international dealers and distributors. We take issue with
several aspects of this paragraph. The Registrant states that in mid-March 1998
C&L "reevaluated" these sales that the Registrant made during 1997, implying
that C&L had previously audited these sales. As C&L's response above to the
Registrant's fifth paragraph points out, there is a significant difference under
AICPA standards between an accountant's quarterly review procedures and its
audit procedures at year-end. For example, the quarterly reviews would not
ordinarily include examination of the customer credit files. The Registrant does
not mention in this paragraph that it had failed to perform ordinary credit
review procedures prior to its agreement to advance substantial amounts of
credit to these dealers and distributors, as C&L learned in conducting its audit
procedures for year-end 1997. The Registrant also fails to note that C&L's
position, with which the Registrant disagreed, is that certain of these
shipments by the Registrant to public freight forwarders are in substance
consigned inventory, rather than sales, because the shipments are not in any
distribution channel and, in at least one instance, the product was shipped back
to the Registrant after year-end 1997.
15. In its twentieth paragraph, the Registrant discusses its reportable
disagreement with C&L regarding shipments to customers who had the explicit
right to exchange the products shipped for other products. The Registrant states
that it believes C&L did not disclose this issue to the Registrant until after
C&L resigned. We disagree with this statement. In early April 1998, some weeks
before C&L resigned on April 24, 1998, C&L specifically informed the
Registrant's management and its Audit Committee about this issue after C&L had
reviewed one of the Registrant's customer files that disclosed the customer's
express right to exchange the products the Registrant was shipping for other
products. In mid-April 1998, C&L repeated this information to the Audit
Committee's special counsel and an Audit Committee member in conjunction with
C&L's efforts to assist the special counsel's investigation of the possible
fraud.
16. In its twenty-second paragraph, the Registrant discloses the reportable
event that C&L had informed the Registrant that the Registrant's internal
controls for recording of sales revenue were deficient. C&L would add that it
discussed the Registrant's lack of internal controls for revenue recognition
with the Registrant's Audit Committee in March 1998.
17. In its twenty-third paragraph, the Registrant discusses the reportable
event relating to C&L's disclosure to the Audit Committee that C&L had
identified possible fraud and illegal acts at the Registrant, which possibly
involved the Registrant's management. C&L's discussion in more detail of this
issue is set forth above in response to the Registrant's tenth paragraph and
should be referenced. C&L would also clarify in response to the Registrant's
statements in its twenty-third paragraph that, as of April 2, 1998, when C&L
reported the possible fraud and illegal acts to the Audit Committee, C&L also
indicated to the Audit Committee on that date that C&L felt it could no longer
rely on representations of the Registrant's management under the circumstances
existing at that time.
18. In its twenty-fourth paragraph, the Registrant discusses C&L's need to
expand the scope of its audit, which the Registrant states C&L indicated only at
the time of its resignation on April 24, 1998. However, C&L had informed the
Audit Committee at meetings in late March and early April 1998 that C&L's audit
scope would have to be significantly expanded.
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19. In its twenty-fifth paragraph, the Registrant discloses that C&L had
identified issues that may result in significant changes to the Registrant's
financial statements of one or more years and quarters that C&L "believes" were
unresolved as the result of its resignation prior to completion of the expanded
audit scope. However, for clarification, C&L would state that these issues in
fact existed and were unresolved at the time of C&L's resignation.
20. In its twenty-seventh paragraph, the Registrant describes one of the
specific unresolved issues C&L had identified as being issues regarding the
appropriateness of the Registrant's recording of revenues in 1996 and 1997 for
transactions where the Registrant "may" have shipped goods to itself, to public
warehouses, to family members and to employees. However, at the time of its
resignation, C&L did not believe it was merely "possible" that in 1997 the
Registrant had made shipments to itself, to public warehouses and to employees'
family members. C&L learned when conducting its audit procedures for 1997 that
the Registrant in fact had made some shipments of this nature during 1997. C&L
had not resolved at the time of its resignation whether the Registrant had
improperly recorded revenues in 1997 for such transactions.
21. In its twenty-ninth paragraph, the Registrant describes one of the
specific unresolved issues C&L had identified as being issues regarding the
appropriateness of recording revenues in 1996 and 1997 for sales of newly
developed products for which engineering development may not have been complete.
C&L would more fully describe these issues as regarding the appropriateness of
the Registrant's recording of revenues in 1996 and 1997 for sales of newly
developed products for which, given the large volume of defects found and
merchandise returned by customers, engineering development may not have been
complete at the time the Registrant began marketing the products.
22. In its thirtieth paragraph, the Registrant describes one of the
specific unresolved issues C&L had identified as being issues regarding
reserving for sales returns and allowances. C&L would more fully describe these
issues as regarding the adequacy of the Registrant's reserves for inventory
returns and allowances given the large volume of merchandise returned by
customers due to product defects and other return arrangements.
23. In its thirty-first paragraph, the Registrant describes one of the
specific unresolved issues C&L had identified as being issues regarding the
possible need for a valuation allowance with respect to the Registrant's
consolidated deferred tax asset balance. C&L would more fully describe these
issues as regarding the possible need for a valuation allowance with respect to
the Registrant's consolidated deferred tax asset balance given the history of
losses experienced both by Transcrypt and by E.F. Johnson.
24. The Registrant's thirty-third paragraph discusses a reportable event
regarding reversal of $240,000 for engineering services revenue that the
Registrant recorded in November 1996 under a contract dated December 31, 1996.
These services were for the same government agency discussed in the Registrant's
eighteenth paragraph. In the Registrant's thirty-second paragraph, the
Registrant states that C&L had disclosed the need to make this adjustment in
conjunction with C&L's resignation on April 24, 1998. However, the Registrant
does not note that, at C&L's request, the Registrant had provided C&L in late
March 1998 with a list of all revenues the Registrant had recorded for this
government agency in 1996. This list reflected the November 1996 billing and the
December 31, 1996 contract date, but the list did not indicate when the
Registrant had provided the services in question to the government agency. Only
on April 22, 1998, after C&L had repeatedly requested the Registrant to supply
this information, did the Registrant finally provide C&L with the information
that allowed C&L to determine that the Registrant had performed all or most of
the services in 1997. Further, the Registrant states in this thirty-third
paragraph that these services "may not" have been completed until 1997. We
disagree with this statement. As noted, all or most of these services were
performed in 1997. Finally, the Registrant states in this paragraph that this
accounting change "could" negatively impact the Registrant's 1996 annual and
fourth quarter consolidated operating results. However, it is C&L's position
that this change is required and that it will negatively impact 1996 results.
Very truly yours,
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
C-12
<PAGE> 55
PROXY TRANSCRYPT INTERNATIONAL, INC.
PROXY SOLICITED BY BOARD OF DIRECTORS
John T. Connor and Terry L. Fairfield, and each of them, with full power of
substitution, are hereby appointed proxy to vote all the stock of Transcrypt
International, Inc. which the undersigned is entitled to vote at the Annual
Meeting of Stockholders on October 27, 1998, and at any adjournments thereof, to
be held at the Cornhusker Hotel located at 333 South 13th Street, Lincoln,
Nebraska 68508.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION OF DIRECTORS,
"FOR" THE APPROVAL OF AMENDMENT TO THE 1996 STOCK INCENTIVE PLAN AND THE AMENDED
PLAN AND "FOR" THE RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS.
PROPOSAL ONE. ELECTION OF DIRECTORS
<TABLE>
<S> <C>
[ ] FOR all Nominees listed below (except as indicated to [ ] WITHHOLD AUTHORITY to vote for all Nominees
the contrary below) listed below
</TABLE>
Thomas R. Thomsen and Thomas C. Smith
INSTRUCTION: To withhold authority to vote for any individual Nominee, write
that Nominee's name in the space provided below.
- --------------------------------------------------------------------------------
PROPOSAL TWO. APPROVAL OF AMENDMENT TO THE 1996 STOCK INCENTIVE PLAN AND THE
AMENDED PLAN
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL THREE. RATIFICATION OF APPOINTMENT OF KPMG PEAT MARWICK LLP AS
INDEPENDENT PUBLIC ACCOUNTANTS FOR FISCAL 1998
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment thereof,
including procedural and other matters relating to the conduct of the meeting.
<PAGE> 56
THIS PROXY WILL BE VOTED AS DIRECTED. UNLESS OTHERWISE DIRECTED, THIS PROXY WILL
BE VOTED FOR THE ELECTION OF THE TWO DIRECTOR NOMINEES, FOR APPROVAL OF
AMENDMENT TO THE 1996 STOCK INCENTIVE PLAN AND THE AMENDED PLAN AND FOR
RATIFICATION OF THE APPOINTMENT OF KPMG PEAT MARWICK LLP.
Please sign exactly as
name appears hereon.
--------------------------
--------------------------
Dated: ___________ , 1998
When shares are held by
joint tenants, both should
sign. When signing as
attorney, as executor,
administrator, trustee or
guardian, please indicate
as such. If a corporation,
please sign in full
corporate name by an
authorized officer. If a
partnership, please sign
in partnership name by
authorized person.
I (WE) DO [ ] DO NOT [ ] EXPECT TO ATTEND
THE MEETING.
PLEASE DATE, SIGN AND RETURN THIS CARD IN THE ENCLOSED ENVELOPE.
