<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1998.
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ______________
COMMISSION FILE NUMBER: 0-21681
TRANSCRYPT INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 47-0801192
(State or other jurisdiction (I.R.S. Employee
of incorporation or organization) Identification No.)
4800 NW 1ST STREET
LINCOLN, NEBRASKA 68521
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 474-4800
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates, based
upon the closing sale price of the Common Stock on February 28, 1997, as
reported on the Nasdaq National Market System, was approximately $35,879,735.
Shares of Common Stock held by each officer, director and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. Such determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 28, 1997, 9,283,078 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
================================================================================
<PAGE> 2
ANNUAL REPORT ON FORM 10-K/A CROSS-REFERENCE INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART II
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. 2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 4
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. 11
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS
ON FORM 8-K. 12
</TABLE>
<PAGE> 3
PART II
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data of the Company is
qualified by reference to, and should be read in conjunction with, the
Consolidated Financial Statements and Notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
herein. The Consolidated Statement of Operations data for the years ended
December 31, 1996, 1995 and 1994 and the Consolidated Balance Sheet data as of
December 31, 1996 and 1995 are derived from, and are qualified by reference to,
the Consolidated Financial Statements of the Company included elsewhere in this
Form 10-K/A. The Consolidated Statement of Operations data for the years ended
December 31, 1993 and 1992 and the Consolidated Balance Sheet data as of
December 31, 1994, 1993 and 1992 are derived from financial statements not
included herein.
The Company restated its previously released results for the three
months and year ended December 31, 1997, the Company's financial statements as
of and for the year ended December 31, 1996 and the financial statements as of
and for each of the quarterly periods ended March 31, June 30, September 30, and
December 31 during 1997 and 1996. See Note 16 of the Notes to Consolidated
Financial Statements included elsewhere in this Form 10-K/A and Notes 2 and 21
of Notes to Consolidated Financial Statements contained in the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission (the "SEC")
on July 15, 1998. The restatements for the year ended December 31, 1996 relate
primarily to: (i) revenue recognition for certain sales for which collection was
determined to not be reasonably assured or was contingent on a future event,
(ii) revenue recognition for certain sales where a formal written agreement was
not received, and (iii) revenue recognized on sales of certain products which
were subsequently returned to the Company.
2
<PAGE> 4
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (RESTATED)
<S> <C> <C> <C> <C> <C>
Revenues $ 10,619 $ 8,128 $ 9,155 $ 6,900 $ 4,974
Cost of sales 4,274 2,983 2,901 1,616 1,236
-------- -------- -------- -------- --------
Gross profit 6,345 5,145 6,254 5,284 3,738
-------- -------- -------- -------- --------
Operating costs and expenses:
Research and development 2,234 1,953 1,180 1,138 963
Sales and marketing 2,187 2,109 1,590 982 656
General and administrative(1) 2,529 2,284 2,166 2,243 2,572
Special compensation expense(2) 5,568 -- -- -- --
-------- -------- -------- -------- --------
Total operating costs and expenses 12,518 6,346 4,936 4,363 4,191
-------- -------- -------- -------- --------
Income (loss) from operations (6,173) (1,201) 1,318 921 (453)
Interest expense, net 131 137 111 133 143
Benefit for income taxes(3) (2,186) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ (4,118) $ (1,338) $ 1,207 $ 788 $ (596)
======== ======== ======== ======== ========
Income (loss) before income taxes $ (6,304) $ (1,338)
Pro forma benefit for income taxes(3) (2,190) (496)
-------- --------
Pro forma net loss $ (4,114) $ (842)
======== ========
Pro forma net loss per share - Basic and Diluted(4) $ (0.61) $ (0.12)
======== ========
Weighted average common shares - Basic and Diluted(4) 6,783 6,783
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA: (RESTATED)
<S> <C> <C> <C> <C> <C>
Working capital $ 1,844 $ 1,684 $ 3,353 $ 1,726 $ 436
Total assets 11,938 7,523 9,627 7,908 7,741
Long-term debt and capitalized lease
obligations, net of current portion 2,632 1,847 2,164 2,035 2,552
Stockholders' equity 4,966 3,907 5,945 4,599 3,821
</TABLE>
(1) Includes the amortization of intangible assets related to the
acquisition of the Company's business in December 1991.
(2) Represents a non-recurring, non-cash compensation expense of $5.4
million resulting from the vesting in September 1996 of 716,916 stock
options for 10 executive officers and employees of the Company at a
weighted average exercise price of $1.81 per share, and the accrual of
a special compensation expense of $210,000 in September 1996, which is
payable to the Company's Chief Executive Officer.
(3) Prior to June 30, 1996, the Company operated as a partnership. The pro
forma provision for income taxes reflects the provision for income taxes
as if the Company had been taxed as a Subchapter "C" corporation under
the Internal Revenue Code.
3
<PAGE> 5
(4) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used to
compute pro forma net loss per share - basic and diluted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Discussions of certain matters contained in this Annual Report on Form
10-K/A may constitute forward-looking statements under Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements may involve risks and uncertainties.
These forward-looking statements relate to, among other things, expectations of
the business environment in which the Company operates, projections of future
performance, both in domestic and international markets, perceived opportunities
in the market, and statements regarding the Company's mission and vision. The
Company's actual results, performance and achievements may differ materially
from the results, performance and achievements expressed or implied in such
forward-looking statements and from historical results. Among the factors that
could cause such a difference include the following: business conditions
generally, the state of the overall economy, development of the markets for the
Company's products, including the domestic digital land mobile radio market,
availability of third-party compatible products, other competitive factors, and
the risk and uncertainties discussed in the Company's reports filed with the
SEC, including under the caption "ITEM 1. BUSINESS - Summary of Business
Considerations and Certain Factors That May Affect Future Results of Operations
and/or Stock Price" contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
The following discussion is intended to provide a better understanding
of the significant changes in trends relating to the Company's financial
condition and results of operations. Management's Discussion and Analysis should
be read in conjunction with the accompanying Consolidated Financial Statements
of the Company and related notes.
OVERVIEW
The Company commenced operations in 1978 to manufacture and distribute
embedded voice privacy and specialized signaling add-on devices for LMR users.
In December 1991, an investor group led by John T. Connor, the Company's current
Chairman and interim Chief Executive Officer, acquired substantially all of the
assets of the Company and certain intellectual property rights held by the
Company's founders, creating intangible assets of approximately $5.5 million,
which the Company amortized on a straight-line basis over a 60-month period
ending November 30, 1996. Following the acquisition, management took steps to
diversify the Company's product lines and further exploit the Company's core
competencies in information security technologies.
In late 1993, the Company began marketing system-wide security upgrades
to large users of wireless communications, particularly foreign public safety
and government users. Primarily as a result of such sales to these foreign
customers, revenues in 1994 and 1995 generally increased while gross margins
were reduced by the lower unit prices associated with these larger orders. The
Company's gross margins were also negatively impacted during this period by a
worldwide shortage of surface-mount microprocessors of the type used in the
Company's add-on scrambling modules, which increased the Company's component
costs. In mid-1994, the Company began purchasing components from a large
electronics component distributor, which contributed to a gradual improvement in
the Company's access to such components and reduced component costs.
In order to take advantage of the growing demand for digital
communications, in 1993 the Company started to invest in digital product and
technology research and development. In September 1994, the Company began
developing an APCO 25 compliant hand-held digital LMR. In connection with the
development of this new product, the Company hired additional technical
personnel to focus on basic digital research and product development. In order
to help finance these additional research and development expenditures, in
September 1994, the Company raised $1.0 million through the sale of additional
equity to its existing equity holders. As a result of these development efforts,
the Company introduced a digital landline telephone encryptor in October 1995
and an APCO 25 compliant digital hand-held radio in August 1996, and as of March
5, 1997, planned to introduce additional digital products.
4
<PAGE> 6
In 1995, the Company's growth was interrupted when the Company
experienced a reduction in annual revenues and profitability before amortization
of intangible assets. The Company believes that these results were primarily
attributable to a management conflict over the future direction and control of
the Company, which led to a management restructuring commencing in the second
quarter of 1995 that resulted in the departure of five executive officers. The
Company believes that these factors diverted management attention from
day-to-day operations, which negatively impacted operating results, particularly
in the first half of 1995. In addition, the Company incurred direct expenditures
in 1995 of approximately $305,000 in severance payments and recruiting and
relocation costs for new executives in connection with the restructuring.
The Company has benefited and continues to benefit from state tax
credits arising from a 1993 agreement with the State of Nebraska, which results
in annual state income tax credits through 1999. In addition, the Company
utilizes its foreign sales corporation subsidiary located in Guam to exempt from
income taxation a portion of the Company's foreign sales income. See " --
Results of Operations -- Provision for Income Taxes."
----------
RESULTS OF OPERATIONS
The following table sets forth certain Consolidated Statement of
Operations information as a percentage of revenues during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----- ---- ----
(RESTATED)
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of sales 40.2% 36.7% 31.7%
----- ----- -----
Gross profit 59.8% 63.3% 68.3%
----- ----- -----
Operating expenses:
Research and development 21.0% 24.0% 12.9%
Sales and marketing 20.6% 26.0% 17.4%
General and administrative 23.8% 28.1% 23.6%
Special compensation expense 52.4% 0.0% 0.0%
----- ----- -----
Total operating expenses 117.9% 78.1% 53.9%
----- ----- -----
Income (loss) from operations (58.1)% (14.8)% 14.4%
Interest expense, net (1.2)% 1.7% 1.2%
Benefit for income taxes (20.6)% 0.0% 0.0%
----- ----- -----
Net income (loss) (38.8)% (16.5)% 13.2%
===== ===== =====
Loss before pro forma income taxes (59.4)% (16.5)%
Pro forma benefit for income taxes (20.6)% (6.1)%
----- -----
Pro forma net loss (38.8)% (10.4)%
===== =====
</TABLE>
Revenues
Revenues are recognized when product is shipped, less an estimate for an
allowance for returns, if applicable, if collection is reasonably assured. For
shipments where collection is not reasonably assured, the Company recognizes
revenue as cash is received. If collection is contingent on a future event, such
as a reseller of product selling the product to the end user, the Company
recognizes revenue when the contingency lapses, generally upon cash collection.
Revenues increased to $10.6 million in 1996 from $8.1 million in 1995.
This increase was attributable primarily to revenues in 1996 associated with
several large new sales contracts, including the commencement of shipments of
socket scramblers to Motorola. The Company also began shipment of its first
stand-alone radio and cellular products in September 1996, which contributed to
the increase in 1996 revenue. In addition, revenues for 1995 were negatively
5
<PAGE> 7
impacted due to management conflicts over the future direction and control of
the Company, which led to a management restructuring commencing in the second
quarter of 1995 and resulted in the departure of five senior executive officers.
Revenues declined to $8.1 million in 1995 from $9.2 million in 1994, due
primarily to lower sales volumes in the first half of 1995, which management
believes resulted primarily from the internal management conflicts discussed
above.
International sales as a percentage of revenues were 53.9%, 71.4% and
57.3% in 1996, 1995 and 1994, respectively. The Company believes that the
proportion of international sales in 1995 was unusually high, reflecting large
sales to Egypt and Turkey and lower domestic sales. As of March 5, 1997, the
Company anticipated that international sales would continue to represent a
significant portion of revenues in the future, although domestic sales might
increase as a percentage of revenues in the future due to an increased marketing
emphasis on domestic sales, including scrambler sales to Motorola, and the
introduction and expanded marketing domestically of the Company's current and
proposed digital radio products in 1997.
Gross Profit
Cost of sales includes materials, labor, depreciation and overhead costs
associated with the production of the Company's products, as well as shipping,
royalty and warranty product costs. Gross profit increased to $6.3 million in
1996 from $5.1 million in 1995. Gross margin decreased to 59.8% in 1996 from
63.3% in 1995. The Company began shipment of its first stand-alone products in
September 1996, which generally have lower gross margins than add-on products.
Future gross margins are likely to vary based predominantly upon the mix of
products comprising revenues for that period.
Gross profit was $5.1 million in 1995 and $6.3 million in 1994. Gross
margin declined to 63.3% in 1995 from 68.3% in 1994, due primarily to lower
sales volumes during the first six months of 1995 without a comparable decline
in fixed overhead costs.
Research and Development
Research and development expenses consist primarily of the costs
associated with research and development personnel, materials and the
depreciation of research and development equipment and facilities. The Company
expenses all research and development costs as they are incurred. Research and
development expenses increased to $2.2 million in 1996 from $2.0 million in
1995. This increase was due primarily to expenses related to the continued
development of the Company's APCO 25 digital LMRs and the related development of
internal manufacturing capabilities for certain radio components. Research and
development expenses as a percentage of revenues decreased to 21.0% in 1996 from
24.0% in 1995, due to greater revenues in 1996. Research and development
expenses as a percentage of revenues were 12.9% in 1994. As of March 5, 1997,
the Company anticipated that it would continue to devote increased resources to
research and development during 1997 compared to 1996.
Research and development expenses increased to $2.0 million in 1995 from
$1.2 million in 1994. This dollar increase was due primarily to the commencement
of development of the Company's APCO 25 compliant digital LMRs, which began in
September 1994, and the expanded development of telephone security product
lines.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and related
costs of sales personnel, including sales commissions and travel expenses, and
costs of advertising, public relations, seminars and trade show participation.
Sales and marketing expenses increased slightly to $2.2 million in 1996 from
$2.1 million in 1995, although the expense figure for 1995 includes severance
payments and recruiting and relocation costs for new sales executives related to
the Company's management restructuring. Sales and marketing expenses decreased
as a percentage of revenues to 20.6% in 1996 from 26.0% in 1995, due primarily
to the increase in revenues in 1996. As of March 5, 1997, the Company expected
to increase its sales and marketing expenditures during 1997 through the
addition of direct sales and marketing personnel, primarily to support the
introduction of new products, including digital radios.
6
<PAGE> 8
Sales and marketing expenses increased to $2.1 million in 1995 from $1.6
million in 1994. This increase was due primarily to an increase in personnel and
associated expenses relating to the development of international markets and
distribution channels. Sales and marketing expenses as a percentage of revenues
were 26.0% in 1995 and 17.4% in 1994. The percentage increase from 1994 to 1995
was also due in part to the Company's lower revenues in 1995.
General and Administrative
General and administrative expenses consist primarily of salaries and
other expenses associated with the Company's management, accounting, finance and
administrative functions, and amortization of intangible assets. General and
administrative expenses increased to $2.5 million in 1996 from $2.3 million in
1995. This increase was attributable primarily to salaries, recruiting and
relocation expenses associated with hiring several key management employees. As
of March 5, 1997, the Company expected to incur additional increases in general
and administrative expenses in 1997 due to costs associated with maintaining its
status as a publicly-held company and upgrades to the Company's management
information systems. As of March 5, 1997, it was expected that this increase
would be more than offset by the reduction in amortization of intangible assets.
Intangible assets for years prior to 1997 consisted primarily of the costs
associated with the acquisition of Transcrypt's business in December 1991,
including proprietary technology licenses, non-competition agreements and
goodwill. Transcrypt amortized these intangible assets on a straight line basis
over a 60-month period ended November 30, 1996. General and administrative
expenses as a percentage of revenues decreased slightly to 23.8% in 1996 from
28.1% in 1995, due primarily to the increase in revenues in 1996.
General and administrative expenses remained generally constant at $2.3
million in 1995 and $2.2 million in 1994. General and administrative expenses as
a percentage of revenues were 28.1% in 1995 and 23.6% in 1994.
Special Compensation Expense
In September 1996, the Company incurred a non-recurring, non-cash
compensation expense of $5.4 million, resulting from the vesting in September
1996 of 716,916 stock options for 10 executive officers and key employees of the
Company at a weighted average exercise price of $1.81 per share, and a special
compensation expense of $210,000 payable to the Company's Chief Executive
Officer, for services rendered related to the original purchase in 1991.
Interest Expense, Net
Net interest expense consists of interest expense, including amounts
payable on the Company's term loans and bank line of credit, net of interest
income earned on cash and invested funds. Net interest expense was $131,000,
$137,000 and $111,000 in 1996, 1995 and 1994, respectively.
Provision for Income Taxes
Prior to June 1996, the Company was organized as a partnership, and
therefore was not subject to income taxation except to the extent that its
earnings were attributed to its partners. The Company's benefit for income taxes
subsequent to reorganization as a corporation for the six month period ended
December 31, 1996 was $2.2 million, primarily resulting from a deferred tax
benefit of $1.8 million in connection with the stock option related special
compensation expense of $5.4 million.
The Company benefits from state tax credits arising from a 1993
agreement with the State of Nebraska (the "Nebraska Agreement") to create at
least 30 new jobs and invest at least $3.0 million in new equipment prior to
December 31, 1999. This agreement results in annual state income tax credits
through 1999 of ten percent of the purchase price of new equipment and a refund
of Nebraska sales taxes (at a rate of 6.5% at December 31, 1996) paid on
purchases of new equipment during each year and, beginning on January 1, 1996, a
credit of five percent of the annual compensation paid to the new employees
exceeding the base year's aggregate compensation. As of March 5, 1997, the
Company believed that sufficient tax credits will be available through the life
of the Nebraska Agreement to offset the Company's expected Nebraska state income
tax liability during such period. In addition, the Company utilizes its foreign
sales corporation ("FSC") subsidiary located in Guam to exempt from income
taxation a portion of the Company's foreign sales income.
7
<PAGE> 9
Recently Issued Accounting Standards
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation." SFAS No. 123 allows companies to continue the current
method of accounting for stock-based compensation plans under APB Opinion No.25
or adopt the fair value based method contained in SFAS No. 123. The Company has
adopted SFAS No. 123 and has elected to provide disclosure of the relevant
information in the Notes to Consolidated Financial Statements.
Quarterly Results of Operations
The following tables set forth certain unaudited financial information
in dollars and as a percentage of revenues for the eight quarters ended December
31, 1996. In the opinion of the Company's management, this information has been
prepared on the same basis as the Consolidated Financial Statements appearing
elsewhere in this Form 10-K/A and includes all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the unaudited results
set forth herein. The operating results for any quarter are not necessarily
indicative of results for any subsequent period or for the entire fiscal year.
8
<PAGE> 10
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
------------ ------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $1,460 $1,562 $2,336 $2,770
Cost of sales 646 761 859 716
------ ------ ------ ------
Gross profit 814 801 1,477 2,054
------ ------ ------ ------
Operating expenses:
Research and development 397 457 508 591
Sales and marketing 509 411 535 654
General and administrative(1) 558 545 535 646
Special compensation expense(2) -- -- -- --
------ ------ ------ ------
Total operating expenses 1,464 1,413 1,578 1,891
------ ------ ------ ------
Income (loss) from operations (650) (612) (101) 163
Interest expense, net 29 24 42 43
Provision (benefit) for income taxes(3) -- -- -- --
------ ------ ------ ------
Net income (loss) $ (679) $ (636) $ (143) $ 120
====== ====== ====== ======
Income (loss) before pro forma taxes $ (679) $ (636) $ (143) $ 120
Pro forma provision (benefit) for
income taxes (252) (236) (53) 45
------ ------ ------ ------
Pro forma net income (loss) $ (427) $ (400) $ (90) $ 75
====== ====== ====== ======
Pro forma net income (loss) per
share - Basic(4) $(0.06) $(0.06) $(0.01) $ 0.01
====== ====== ====== ======
Shares used to compute net income (loss)
per share - Basic(4) 6,783 6,783 6,783 6,783
===== ===== ===== =====
Pro forma net income (loss) per
share - Diluted(4) $(0.06) $(0.06) $(0.01) $ 0.01
====== ====== ====== ======
Shares used to compute net income (loss)
per share - Diluted(4) 6,783 6,783 6,783 7,312
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
(Restated) (Restated) (Restated) (Restated)
------------ ------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $2,442 $2,577 $ 2,617 $2,983
Cost of sales 880 903 998 1,493
------ ------ ------ ------
Gross profit 1,562 1,674 1,619 1,490
------ ------ ------ ------
Operating expenses:
Research and development 436 649 602 547
Sales and marketing 469 404 681 633
General and administrative(1) 626 615 695 593
Special compensation expense(2) -- -- 5,568 --
------ ------ ------ ------
Total operating expenses 1,531 1,668 7,546 1,773
------ ------ ------ ------
Income (loss) from operations 31 6 (5,927) (283)
Interest expense, net 19 31 29 52
Provision (benefit) for income taxes(3) -- -- (2,051) (135)
------ ------ ------ ------
Net income (loss) $ 12 $ (25) $(3,905) $ (200)
====== ====== ====== ======
Income (loss) before pro forma taxes $ 12 $ (25) $(5,956) $ (335)
Pro forma provision (benefit) for
income taxes 5 (9) (2,051) (135)
------ ------ ------ ------
Pro forma net income (loss) $ 7 $ (16) $(3,905) $ (200)
====== ====== ====== ======
Pro forma net income (loss) per
share - Basic(4) $ -- $ -- $ (0.58) $(0.03)
====== ====== ====== ======
Shares used to compute net income (loss)
per share - Basic(4) 6,783 6,783 6,783 6,783
====== ====== ====== ======
Pro forma net income (loss) per
share - Diluted(4) $ -- $ -- $ (0.58) $(0.03)
====== ====== ====== ======
Shares used to compute net income (loss)
per share - Diluted(4) 7,325 6,783 6,783 6,783
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
------------ ------------ ------------ ------------
As a percentage of revenue
<S> <C> <C> <C> <C>
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 44.3 % 48.7 % 36.8 % 25.9 %
----- ----- ----- -----
Gross profit 55.7 % 51.3 % 63.2 % 74.1 %
----- ----- ----- -----
Operating expenses:
Research and development 27.2 % 29.3 % 21.7 % 21.3 %
Sales and marketing 34.8 % 26.3 % 22.9 % 23.6 %
General and administrative(1) 38.2 % 34.9 % 22.9 % 23.3 %
Special compensation expense(2) 0.0 % 0.0 % 0.0 % 0.0 %
----- ----- ----- -----
Total operating expenses 100.2 % 90.5 % 67.5 % 68.2 %
----- ----- ----- -----
Income (loss) from operations (44.5)% (39.2)% (4.3)% 5.9 %
Interest expense, net 2.0 % 1.5 % 1.8 % 1.6 %
Provision (benefit) for income taxes(3) 0.0 % 0.0 % 0.0 % 0.0 %
----- ----- ----- -----
Net income (loss) (46.5)% (40.7)% (6.1)% 4.3 %
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
(Restated) (Restated) (Restated) (Restated)
------------ ------------ ------------ ------------
As a percentage of revenue
<S> <C> <C> <C> <C>
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 36.0 % 35.0 % 38.1 % 50.1 %
----- ----- ----- -----
Gross profit 64.0 % 65.0 % 61.9 % 49.9 %
----- ----- ----- -----
Operating expenses:
Research and development 17.9 % 25.1 % 23.0 % 18.3 %
Sales and marketing 19.2 % 15.7 % 26.0 % 21.2 %
General and administrative(1) 25.6 % 23.9 % 26.5 % 19.8 %
Special compensation expense(2) 0.0 % 0.0 % 212.8 % 0.0 %
----- ----- ----- -----
Total operating expenses 62.7 % 64.7 % 288.3 % 59.4 %
----- ----- ----- -----
Income (loss) from operations 1.3 % 0.2 % (226.5)% (9.5)%
Interest expense, net (0.8)% (1.2)% (1.1)% (1.7)%
Provision (benefit) for income taxes(3) 0.0 % 0.0 % (78.4)% (4.5)%
----- ----- ----- -----
Net income (loss) (0.5)% (1.0)% (149.2)% (6.7)%
===== ===== ===== =====
</TABLE>
- ----------
(1) Includes the amortization of intangible assets related to
the acquisition of the Company's business in December 1991.
(2) Represents a non-recurring, non-cash compensation expense of
$5.4 million resulting from the vesting in September 1996 of 716,916
stock options for 10 executive officers and employees of the Company at
a weighted average exercise price of $1.81 per shares, and the accrual
of a special compensation expense of $210,000 in September 1996, which
is payable to the Company's Chief Executive Officer.
(3) Prior to June 30, 1996, the Company operated as a
partnership. The pro forma provision for income taxes reflects the
provision for income taxes as if the Company had been taxed as a
Subchapter "C" corporation under the Internal Revenue Code.
(4) See Note 1 of Notes to Consolidated Financial Statements for
an explanation of the method used to determine the number of shares used
to compute pro forma net income (loss) per share.
9
<PAGE> 11
The Company historically has experienced, and in the future expects to
continue to experience, substantial variability in its revenues and
profitability from quarter to quarter. The level of revenues in a particular
quarter varies primarily based upon the timing of customer purchase orders, due
principally to the seasonal nature of governmental budgeting processes and the
needs of competing budgetary concerns of the Company's customers during the
year. Other factors which affect the level of revenues in a particular quarter
include the timing of the introduction of new products, general economic
conditions, and the timing and mix of product sales and specific economic
conditions in the information security and wireless communications industries.
The Company believes that its quarterly results are likely to vary for the
foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 1996, the Company had financed its operations and
met its capital requirements primarily through cash flow generated from
operations, short-term borrowings, long-term debt and an additional capital
investment from its investors. The Company's operating activities generated cash
of $921,000, $55,000 and $2.9 million in 1996, 1995 and 1994, respectively. Cash
provided by operating activities in 1996 consisted primarily of a net loss plus
depreciation and amortization and the special compensation expense and an
increase in accounts payable and accrued expenses along with a decrease in
accounts receivable, offset in part by an increase in inventory and deferred tax
assets. Cash provided by operating activities in 1995 consisted primarily of a
net loss plus depreciation and amortization and an increase in accrued expenses,
offset in part by an increase in accounts receivable and a decrease in accounts
payable. Cash provided by operating activities in 1994 consisted primarily of
net income plus depreciation and amortization and a decrease in accrued
expenses, offset in part by increases in accounts receivable, inventory and
prepaid and other assets.
The deferred tax assets totaling $2.2 million (which resulted primarily
from the stock option related special compensation expense of $5.4 million
incurred in September 1996) were 18.5% and 44.5% of total assets and
stockholders' equity, respectively, at December 31, 1996. Management believes
that it is more likely than not that future taxable income will be sufficient to
fully utilize all deferred tax assets recorded.
Cash used for investing activities, attributable primarily to capital
expenditures, totaled $3.0 million, $1.3 million and $1.7 million in 1996, 1995
and 1994, respectively. Capital expenditures consisted primarily of computer and
networking equipment, office furniture and manufacturing equipment and, in 1996
and 1994, expenses related to the construction of the Company's Lincoln
facility. In August 1996, the Company began construction of a 21,000 square foot
expansion of its existing Lincoln facility at an estimated final cost of $1.0
million, primarily to accommodate additional manufacturing capacity, which
expansion was completed in the first quarter of 1997. As of December 31, 1996,
the Company had no material firm commitments for capital expenditures, except a
commitment to purchase approximately $400,000 of office furniture and equipment
related primarily to the new premises, and as of March 5, 1997, the Company
expected to purchase additional computer equipment and replace its current
management information system in 1997.
Financing activities, attributable primarily to cash provided by
borrowings on term loans and operating lines of credit and cash used for
partnership distributions, totaled $1.8 million cash provided, $564,000 cash
used and $744,000 cash provided in 1996, 1995 and 1994, respectively. Financing
activities consisted primarily of borrowings under and payments on an industrial
development revenue bond issue (the "IDR") arranged through the Nebraska
Investment Finance Authority, two term notes, an installment note secured by
equipment and a bank line of credit. Additionally, in September 1994, the
Company received an additional $1.0 million equity investment from existing
investors to help the Company finance the development of its APCO 25 digital
radio project.
The IDR bore interest at a fixed rate of 6.25%, was non-amortizing and
matured in January 2004. At December 31, 1996, the outstanding principal amount
under the IDR was $850,000. Both of the term notes bore interest at the bank's
regional money market rate plus 0.5% and are secured by substantially all of the
Company's assets. At December 31, 1996, the outstanding principal amounts under
the two term notes were $251,000 and $376,000, respectively. The installment
note was secured specifically by equipment and bore interest at the bank's
national prime rate plus 0.5%. At December 31, 1996, the outstanding principal
amount under the installment note was $359,000. The bank line of credit provided
for working capital and capital advances not to exceed $4.0 million, with
specific advances calculated based upon a percentage of eligible inventories,
accounts receivable and fixed assets. Interest was payable monthly on the bank
line at the bank's money market rate and the bank line of credit was
collateralized by substantially all of the Company's
10
<PAGE> 12
assets. At December 31, 1996, the outstanding principal amount under the bank
line of credit was $1.8 million. On January 25, 1997, the Company paid off all
of the outstanding balances on the two term notes, the installment note and the
bank line of credit with proceeds from the Company's initial public offering.
In November 1996, the Company obtained a $1.0 million construction loan
to fund the expansion of its existing Lincoln facility. Interest on the loan was
payable monthly at the bank's national money market rate plus 0.5% (8.75% at
December 31, 1996), with the principal balance maturing in August 1997. At
December 31, 1996 and February 28, 1997, the principal balance outstanding on
the construction loan was $585,000 and $892,000, respectively.
Prior to June 1996, the Company was organized as a partnership and, as
such, made distributions to its partners of $181,000, $700,000 and $861,000 in
the six months ended June 30, 1996 and in 1995 and 1994, respectively, primarily
to cover its partners' attributed tax liabilities. As of March 5, 1997, the
Company intended to retain earnings, if any, to support its growth strategy and
did not anticipate paying cash dividends in the foreseeable future.
As of March 5, 1997, the Company believed that cash generated from
operations and the net proceeds of $17.7 million from the sale of Common Stock
in the Company's initial public offering completed in January 1997, together
with the Company's cash, cash equivalents and lines of credit, would be
sufficient to meet its anticipated cash needs for working capital, capital
expenditures and business expansion plans at least through 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See "Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K" for the Company's Consolidated Financial Statements and related notes
and financial schedules included at page 12 of this Annual Report on Form
10-K/A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for under this item has been reported by the
Company in its (i) Current Report on Form 8-K filed with the SEC on May 4, 1998,
(ii) Current Report on Form 8-K filed with the SEC on May 12, 1998 and (iii)
Amendment No. 1 to Current Report on Form 8-K filed with the SEC on May 20,
1998.
11
<PAGE> 13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are included in this report at the page numbers
indicated.
<TABLE>
<CAPTION>
1. FINANCIAL STATEMENTS Page No.
--------
<S> <C>
Independent Auditors' Report* F-1
Consolidated Balance Sheets as of F-2
December 31, 1996 and 1995
Consolidated Statements of Operations for the F-3
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity F-4
for the Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years ended F-5
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements F-6 to F-20
</TABLE>
*The Report of KPMG Peat Marwick LLP on the Company's financial
statements as of and for the years ended December 31, 1996 and 1995 is
included in this Form 10-K/A. However, the Report of Coopers & Lybrand
L.L.P. ("Coopers"), the Company's former accountant, relating to the
year ended December 31, 1994 is unavailable to be included in this
filing, although Coopers has not withdrawn such Report. THEREFORE, THE
FINANCIAL STATEMENTS INCLUDED IN THIS FORM 10-K/A FOR THE YEAR ENDED
DECEMBER 31, 1994 SHALL BE DEEMED TO BE UNAUDITED.
<TABLE>
<CAPTION>
<S> <C>
2. FINANCIAL STATEMENT SCHEDULES:
Independent Auditors' Report S-1
Schedule III - Valuation and Qualifying Accounts and Reserves S-2
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable or
is shown in the financial statements or notes thereto.
3. EXHIBITS:
</TABLE>
12
<PAGE> 14
(i) Executive Compensation Plans and Arrangements:
The following is a summary of the Company's executive
compensation plans and arrangements which are required to be filed as exhibits
to this Report on Form 10-K/A:
1. Employment Agreement between the Company and John T. Connor dated as of
September 10, 1996 (incorporated herein by reference to Exhibit 10.1 to the
Company's Form S-1 Registration No. 333-14351 declared effective on January 22,
1997).
2. Employment Agreement between the Company and Jeffery L. Fuller dated as
of July 18, 1996 (incorporated herein by reference to Exhibit 10.2 to the
Company's Form S-1 Registration No. 333-14351 declared effective on January 22,
1997).
3 Form of Employment Agreement between the Company and C. Eric Baumann,
Michael P. Wallace and Joel K. Young (incorporated herein by reference to
Exhibit 10.3 to the Company's Form S-1 Registration No. 333-14351 declared
effective on January 22, 1997).
4. Form of 1996 Stock Incentive Plan, together with forms of stock option
agreements (incorporated herein by reference to Exhibit 10.4 to the Company's
Form S-1 Registration No. 333-14351 declared effective on January 22, 1997).
5. Form of Indemnification Agreement between the Company and each executive
officer and director of the Company (incorporated herein by reference to Exhibit
10.5 to the Company's S-1 Registration No. 333-14351 declared effective on
January 22, 1997.
(ii) Exhibit Index:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Second Amended and Restated Certificate of Incorporation of the
Company filed on September 30, 1996 with the Secretary of State
of the State of Delaware (incorporated herein by reference to
Exhibit 3.1 to the Company's Form S-1 Registration No. 333-14351
declared effective on January 22, 1997 (hereinafter "1997
Registration Statement")).
3.2 Amended and Restated Bylaws of the Company (incorporated herein
by reference to Exhibit 3.2 to 1997 Registration Statement).
3.3 Certificate of Merger of Transcrypt International, Ltd., a
Nebraska limited partnership, with and into the Company, filed on
June 28, 1996 with the Secretary of State of the State of
Delaware (incorporated herein by reference to Exhibit 3.3 to 1997
Registration Statement).
3.4 Certificate of Merger of Transcrypt International, Inc., a
Nebraska corporation, with and into the Company, filed on
September 30, 1996 with the Secretary of State of the State of
Delaware (incorporated herein by reference to Exhibit 3.4 to 1997
Registration Statement).
4.1 Specimen Certificate for Common Stock (incorporated herein by
reference to Exhibit 4.1 to 1997 Registration Statement).
10.1 Employment Agreement between the Company and John T. Connor dated
as of September 10, 1996 (incorporated herein by reference to
Exhibit 10.1 to 1997 Registration Statement).
10.2 Employment Agreement between the Company and Jeffery L. Fuller
dated as of July 18, 1996 (incorporated herein by reference to
Exhibit 10.2 to 1997 Registration Statement).
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.3 Form of Employment Agreement between the Company and C. Eric
Baumann, Michael P. Wallace and Joel K. Young (incorporated
herein by reference to Exhibit 10.3 to 1997 Registration
Statement).
10.4 Form of 1996 Stock Incentive Plan, together with forms of stock
option agreements (incorporated herein by reference to Exhibit
10.4 to 1997 Registration Statement).
10.5 Form of Indemnification Agreement between the Company and each
executive officer and director of the Company (incorporated
herein by reference to Exhibit 10.5 to 1997 Registration
Statement).
10.6 License Agreement for APCO Project 25 Compliant Product between
Motorola, Inc. and the Company dated as of August 2, 1994
(incorporated herein by reference to exhibit 10.6 to 1997
Registration Statement).
10.7* Amendment, dated as of June 28, 1996, to License Agreement for
APCO Project 25 Compliant Product between Motorola, Inc. and the
Company dated as of August 2, 1994 (incorporated herein by
reference to Exhibit 10.7 to 1997 Registration Statement).
10.8 OEM Agreement between Motorola, Inc. and the Company dated as of
August 2, 1994 (incorporated herein by reference to Exhibit 10.8
to 1997 Registration Statement).
10.9* Amendment, dated as of July 15, 1996, to OEM Agreement between
Motorola, Inc. and the Company dated as of August 2, 1994
(incorporated herein by reference to Exhibit 10.9 to 1997
Registration Statement).
10.10* Private Label/Supplier Agreement for Analog Scrambling Modules
between Motorola, Inc. and the Company dated as of August 8, 1995
(incorporated herein by reference to Exhibit 10.10 to
1997 Registration Statement).
10.11* Motorola Cellular Subscriber Products Sales Agreement, dated as
of June 13, 1996, by and between Motorola, Inc. and the Company
(incorporated herein by reference to Exhibit 10.11 to 1997
Registration Statement).
10.12 License Agreement for APCO Fed Project 25 Algorithm between
Digital Voice Systems, Inc. and the Company, dated as of August
14, 1995 (incorporated herein by reference to Exhibit 10.12 to
1997 Registration Statement).
10.13 Consigned Inventory Agreement between Arrow/Schweber Electronics
Group and the Company, dated as of June 22, 1994 (incorporated
herein by reference to Exhibit 10.13 to 1997 Registration
Statement).
10.14 Nebraska Investment Finance Authority $850,000 Industrial Revenue
Bond (Transcrypt International, Ltd. Project), Series 1994, dated
as of January 15, 1994, and Note (incorporated herein by
reference to Exhibit 10.14 to 1997 Registration Statement).
10.15 Trust Indenture, dated as of January 15, 1994, for $850,000
Industrial Revenue Bond (Transcrypt International, Ltd. Project),
Series 1994, between Nebraska Investment Finance Authority as
Issuer and Norwest Bank Nebraska, N.A. as Trustee (incorporated
herein by reference to Exhibit 10.15 to 1997 Registration
Statement).
10.16 Loan Agreement, dated as of January 15, 1994, for $850,000
Industrial Revenue Bond (Transcrypt International, Ltd. Project),
Series 1994, between Nebraska Investment Finance Authority as
Issuer and the Company (incorporated herein by reference to
Exhibit 10.16 to 1997 Registration Statement).
10.17 Amended and Restated Loan Agreement, dated as of May 18, 1994, by
and between Norwest Bank Nebraska, N.A., and the Company
(incorporated herein by reference to Exhibit 10.17 to 1997
Registration Statement).
10.18 First Amendment, dated as of June 1, 1995, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company (incorporated herein
by reference to Exhibit 10.18 to 1997 Registration Statement).
10.19 Second Amendment, dated as of April 10, 1996, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company (incorporated herein
by reference to Exhibit 10.19 to 1997 Registration Statement).
10.20 Promissory Note, dated as of May 11, 1995, between West Gate Bank
and the Company (incorporated herein by reference to Exhibit
10.20 to 1997 Registration Statement).
10.21 RESERVED.
10.22 RESERVED.
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.23 RESERVED.
10.24 Form of Adoption Agreement for Nonstandardized 401(k) Profit
Sharing Plan (incorporated herein by reference to Exhibit 10.24
to 1997 Registration Statement).
10.25 Defined Contribution Master Plan and Trust Agreement of Norwest
Bank Nebraska, N.A., Master Plan Sponsor (incorporated herein by
reference to Exhibit 10.25 to 1997 Registration Statement).
10.26 Third Amendment, dated as of October 22, 1996, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company, together with
Modification of Note (incorporated herein by reference to Exhibit
10.26 to 1997 Registration Statement).
10.27 Fourth Amendment, dated as of November 19, 1996, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company, together with
Commercial Installment Note, dated November 19, 1996
(incorporated herein by reference to Exhibit 10.27 to 1997
Registration Statement).
10.28+ Construction Loan, dated November 15, 1996, by and between
Norwest Bank Nebraska, N.A., and the Company, together with
related documents.
10.29+ Commercial Installment Note, dated January 9, 1997, related to
Amended and Restated Loan Agreement, dated as of May 18, 1994, by
and between Norwest Bank Nebraska, N.A., and the Company.
10.30+ Commercial Installment Note secured by equipment, dated December
23, 1996, by and between Norwest Bank Nebraska, N.A., and the
Company, together with Security Agreement.
11.1 Statement re: Computation of Per Share Earnings.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
</TABLE>
* Confidential treatment has been granted as to a portion of this exhibit.
+ Incorporated herein by reference to the Company's 1996 Annual Report on
Form 10-K filed with the SEC on March 5, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of
1996.
(c) Exhibits Required by Item 601 of Regulation S-K
See Item 14(a)(3) above.
(d) Additional Financial Statements.
See page S-2 to the Annual Report on Form 10-K/A for Schedule III
- Valuation and Qualifying Accounts and Reserves.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
July, 1998.
TRANSCRYPT INTERNATIONAL, INC.
(Registrant)
By /s/ John T. Connor
-------------------------------
John T. Connor
Chairman of the Board and
interim Chief Executive Officer
(Principal Executive Officer)
By /s/ Craig J. Huffaker
-------------------------------
Craig J. Huffaker
Chief Financial Officer
(Principal Financial and Accounting
Officer)
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Transcrypt International, Inc.:
We have audited the accompanying consolidated balance sheets of Transcrypt
International, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Transcrypt International, Inc. and Subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
As discussed in Note 16, the accompanying consolidated financial statements as
of December 31, 1996 and for the year then ended have been restated.
/s/ KPMG PEAT MARWICK LLP
Omaha, Nebraska
June 26, 1998
F-1
<PAGE> 19
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 and 1995
(in thousands, except share and per share data)
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ 292
Accounts receivable, net of allowance for doubtful accounts of $430
and $182 in 1996 and 1995, respectively 1,256 1,923
Receivable - employees and affiliate 29 58
Inventory 2,853 1,120
Income taxes recoverable 213 --
Prepaid expenses 60 60
Deferred tax assets 1,773 --
------------ ------------
Total current assets 6,184 3,453
Property, plant and equipment, at cost, net of accumulated depreciation 4,325 3,067
Deferred tax assets 439 --
Intangible assets, net of accumulated amortization 422 1,003
Deferred initial public offering costs 568 --
------------ ------------
$ 11,938 $ 7,523
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 386 $ --
Revolving line of credit 1,022 --
Current portion of long-term debt 596 428
Obligations under noncompete agreements -- 340
Accounts payable 1,174 177
Accrued expenses 946 767
Deferred revenue 216 57
------------ ------------
Total current liabilities 4,340 1,769
Long-term debt, net of current portion 1,840 1,847
Revolving line of credit 792 --
------------ ------------
6,972 3,616
------------ ------------
Commitments and contingencies
Stockholders' equity:
Partners' capital -- 3,907
Preferred stock, ($.01 par value; 3,000,000 shares authorized; none issued) -- --
Common stock ($.01 par value; 19,400,000 voting shares authorized,
6,565,536 issued and outstanding; 600,000 nonvoting shares authorized,
217,542 issued and outstanding) 68 --
Additional paid-in capital 9,003 --
Accumulated deficit (4,105) --
------------ ------------
4,966 3,907
------------ ------------
$ 11,938 $ 7,523
============ ============
</TABLE>
See accompanying notes to of the consolidated financial statements.
F-2
<PAGE> 20
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1996, 1995 and 1994
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 10,619 $ 8,128 $ 9,155
Cost of sales 4,274 2,983 2,901
----------- ----------- -----------
Gross profit 6,345 5,145 6,254
----------- ----------- -----------
Operating costs and expenses:
Research and development 2,234 1,953 1,180
Sales and marketing 2,187 2,109 1,590
General and administrative 2,529 2,284 2,166
Special compensation expense 5,568 -- --
----------- ----------- -----------
Total operating costs and expenses 12,518 6,346 4,936
----------- ----------- -----------
Income (loss) from operations (6,173) (1,201) 1,318
Interest income 31 53 34
Interest expense (162) (190) (145)
----------- ----------- -----------
Income (loss) before income taxes (6,304) (1,338) 1,207
Benefit for income taxes (2,186) -- --
----------- ----------- -----------
Net income (loss) $ (4,118) $ (1,338) $ 1,207
=========== =========== ===========
Pro forma information:
Loss before income taxes $ (6,304) $ (1,338)
Pro forma benefit for income taxes (2,190) (496)
=========== ===========
Pro forma net loss $ (4,114) $ (842)
=========== ===========
Pro forma net loss per share - Basic and Diluted $ (0.61) $ (0.12)
=========== ===========
Weighted average common shares outstanding
- Basic and Diluted 6,783,078 6,783,078
=========== ===========
</TABLE>
See accompanying notes to of the consolidated financial statements.
F-3
<PAGE> 21
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
(in thousands, except share and unit data)
<TABLE>
<CAPTION>
Common Stock
----------------------------- Additional
Par Paid-in
Units Shares Value Capital
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 4,975,434 -- $ -- $ --
Additional investment 200,000 -- -- --
Distributions -- -- -- --
Net income -- -- -- --
--------- --------- ---------- ----------
Balance, December 31, 1994 5,175,434 -- -- --
Distributions -- -- -- --
Net loss -- -- -- --
--------- --------- ---------- ----------
Balance, December 31, 1995 5,175,434 -- -- --
Distributions -- -- -- --
Net loss -- -- -- --
Issuance of stock in exchange for
units of the Predecessor (5,175,434) 5,175,434 52 3,661
Additional shares issued in
1.3106311 -for-1 stock split effected
in the form of a stock dividend -- 1,607,644 16 (16)
Special compensation - options
issued -- -- -- 5,358
--------- --------- ---------- ----------
Balance, December 31, 1996 -- 6,783,078 $ 68 $ 9,003
========= ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated Partners'
Deficit Capital Total
---------- ---------- ----------
<S> <C> <C> <C>
Balance, December 31, 1993 $ -- $ 4,599 $ 4,599
Additional investment -- 1,000 1,000
Distributions -- (861) (861)
Net income -- 1,207 1,207
---------- ---------- ----------
Balance, December 31, 1994 -- 5,945 5,945
Distributions -- (700) (700)
Net loss -- (1,338) (1,338)
---------- ---------- ----------
Balance, December 31, 1995 -- 3,907 3,907
Distributions -- (181) (181)
Net loss (4,105) (13) (4,118)
Issuance of stock in exchange for
units of the Predecessor -- (3,713) --
Additional shares issued in
1.3106311 -for-1 stock split effected
in the form of a stock dividend -- -- --
Special compensation - options
issued -- -- 5,358
---------- ---------- ----------
Balance, December 31, 1996 $ (4,105) $ -- $ 4,966
========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE> 22
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(4,118) $(1,338) $ 1,207
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Special compensation expense 5,358 -- --
Depreciation and amortization 1,580 1,625 1,443
Loss (gain) on sale of fixed assets 6 (2) 43
Provisions for warranty and inventory reserves 114 102 176
Provision for bad debts 82 94 139
Deferred tax benefit (2,207) -- --
Changes in:
Accounts receivable 696 (673) (63)
Inventory (1,733) 83 (175)
Prepaid expenses and other assets -- 113 (80)
Accounts payable 997 (117) 11
Income taxes payable (213) -- --
Accrued expenses 359 264 195
Deferred revenue -- (96) (35)
------- ------- -------
Total adjustments 5,039 1,393 1,652
------- ------- -------
Net cash provided by operating activities 921 55 2,859
------- ------- -------
Cash flows from investing activities:
Issue notes receivable -- (12) (2)
Payments received on note receivable -- 10 5
Proceeds from sale of fixed assets 31 37 591
Purchase of fixed assets (2,119) (1,029) (1,992)
Increase in patents and trademarks (581) (1) (3)
Payments under noncompete agreement (340) (340) (340)
------- ------- -------
Net cash used in investing activities (3,009) (1,335) (1,741)
------- ------- -------
Cash flows from financing activities:
Borrowings on revolving lines of credit, net 1,022 -- --
Borrowings on term loan 1,377 1,016 2,363
Payments on term loan (408) (867) (1,744)
Principal payments on capitalized leases (16) (13) (14)
Proceeds from issuance of partnership interests -- -- 1,000
Partnership distributions paid (181) (700) (861)
Bank overdraft 386 -- --
Deferred initial public offering costs (384) -- --
------- ------- -------
Net cash provided by (used in) financing activities 1,796 (564) 744
------- ------- -------
Net increase (decrease) in cash and cash equivalents (292) (1,844) 1,862
Cash and cash equivalents, beginning of period 292 2,136 274
------- ------- -------
Cash and cash equivalents, end of period $ -- $ 292 $ 2,136
======= ======= =======
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized $ 163 $ 190 $ 137
Income taxes paid $ 294 $ -- $ --
Supplemental disclosure of noncash investing activities:
Additions to fixed assets included in accounts payable $ 174
Additions to deferred initial public offering costs included
in accounts payable and accrued liabilities $ 184
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE> 23
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed
in the preparation of these consolidated financial statements. Certain prior
period amounts have been reclassified to conform to the current period
presentation.
Organization
Transcrypt International, Ltd. (the "Predecessor") was a limited
partnership formed in 1991 composed of the general partner, Transcrypt
International, Inc. (a Nebraska corporation) and various limited partners. One
percent of the profits or losses was allocated to the general partner and the
remaining 99% was allocated to the limited partners based on their respective
units of partnership interest.
Effective June 30, 1996, the assets and liabilities of the partnership
were merged tax-free into a Delaware corporation, Transcrypt International, Inc.
(the "Company"). Each respective partnership unit was converted pro rata into
common shares of the Company.
The Company is engaged in the design, manufacture and marketing of
information security products for the land mobile radio and cellular telephone
markets. The Company markets its products to customers worldwide.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in the consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities less than 90 days as cash equivalents. The Company places its
temporary cash investments with high credit qualified financial institutions.
Such investments are carried at cost, which approximates fair value.
Inventory
Inventory is recorded at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. The Company's policy
is to capitalize expenditures for major improvements and to charge to operating
expenses the cost of maintenance and repairs. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets as follows:
land improvements - 15 years; buildings and improvements - 15 to 30 years;
equipment and furniture and fixtures - 3 to 7 years. The cost and related
accumulated depreciation of assets retired or otherwise disposed of are
eliminated from the respective accounts at the time of disposition. Any
resulting gain or loss is included in current operating results. For the years
ended December 31, 1996, 1995 and 1994, $7, $0 and $29 of interest expense was
capitalized, respectively.
F-6
<PAGE> 24
TRANSCRIPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
Intangible Assets
Intangibles are carried at cost less applicable amortization. Provision
for amortization of intangible assets is based upon the estimated useful lives
of the related assets and is computed using the straight-line method. All
intangible assets are being amortized over five years. Management reviews
intangible assets whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable.
Income Taxes
The Predecessor as a partnership was not subject to Federal or state
income taxes. Any tax liabilities arising from the Predecessor's operations were
the direct responsibility of the individual partners.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The pro forma provision for income taxes reflects the provision for
income taxes as if the Company had been taxed as a C Corporation under the
Internal Revenue Code for all years presented. The actual provision for income
taxes for 1996 included in the consolidated statements of operations is
reflective only of the results of operations for the period that the Company was
a C Corporation, July 1, 1996 through December 31, 1996.
Revenue Recognition
Revenues are recognized when product is shipped, less an estimate for an
allowance for returns, if applicable, if collection is reasonably assured. For
shipments where collection is not reasonably assured, the Company recognizes
revenue as cash is received. If collection is contingent on a future event, such
as a reseller of product selling the product to the end user, the Company
recognized revenue when the contingency lapses, generally upon cash collection.
Costs associated with the installation and servicing of equipment are
charged to expense as incurred and allowances are provided for returns. The
Company defers income for prepayments of significant initial engineering costs,
which are components of the selling price of certain products sold. Also
included in deferred revenue are prepayments from foreign customers for which
goods cannot be shipped until certain export regulations are met.
F-7
<PAGE> 25
TRANSCRIPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
Export Sales
A significant portion of the Company's sales are made to customers
outside of the United States. Export sales are recorded and settled in U.S.
dollars. Total export sales by geographic area were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Europe $1,960 $2,464 $2,580
Middle East 1,525 2,276 1,692
Latin America 2.235 1,060 978
------ ------ ------
$5,720 $5,800 $5,250
====== ====== ======
</TABLE>
Warranty Costs
The Company provides for warranty costs based on estimated future
expenditures that will be incurred under product guarantees and warranties
presently in force.
Pro Forma Net Loss Per Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (FAS 128). FAS 128 requires a basic calculation of
earnings per share (EPS), based upon the weighted average number of common
shares outstanding during the period. FAS 128 also requires a diluted EPS
calculation that reflects the potential dilution from common stock equivalents
such as stock options. All current and prior years' EPS calculations included
herein have been restated under the provisions of FAS 128. As the years ended
December 31, 1996 and 1995 have net losses, the impact of outstanding stock
options on weighted average common shares is anti-dilutive.
Pro forma net loss per share for 1996 and 1995 is computed on the basis
of the weighted average number of partnership interest units outstanding during
the year converted into common shares on a one-to-one ratio, and adjusted for
the stock split discussed below.
Stock Split
On September 30, 1996, the Board of Directors and the shareholders
approved an increase in the Company's authorized common shares from 10 million
to 20 million shares. On November 18, 1996, the Company declared a 1.310631
- -for-1 stock split in the form of a stock dividend. All shares and per share
information has been restated to reflect the split.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect carrying amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of financial statement
dates, as well as the reported revenues and expenses for the years then ended.
Actual results may differ from management's estimates.
F-8
<PAGE> 26
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
2. INVENTORY:
The following is a summary of inventory at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Raw materials and supplies $1,373 $ 880
Work in process 715 101
Finished goods 765 139
------ ------
$2,853 $1,120
====== ======
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Land $ 150 $ 150
Building 1,302 1,302
Equipment 3,380 2,326
Leased equipment 74 74
Automobiles -- 65
Furniture and fixtures 397 371
Construction in progress 797 --
------ ------
6,100 4,288
Less accumulated depreciation and amortization 1,775 1,221
------ ------
$4,325 $3,067
====== ======
</TABLE>
4. INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Proprietary technology $3,756 $3,356
Noncompete agreements 1,700 1,700
Goodwill 290 290
Organization costs 117 117
Patents and trademarks 43 6
------ ------
5,906 5,469
Less accumulated amortization 5,484 4,466
------ ------
$ 422 $1,003
====== ======
</TABLE>
5. REVOLVING LINES OF CREDIT:
The Company has a working capital revolving line of credit not to exceed $2,000
calculated using a specified borrowing base of eligible inventories and accounts
receivable. In addition, the Company has a
F-9
<PAGE> 27
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
second revolving capital line of credit not to exceed $1,000, calculated using a
specified borrowing base of certain eligible fixed assets. Interest for both
lines of credit is payable monthly at a regional bank's national money market
rate. The working capital line is collateralized by substantially all the
Company's assets and the capital line is collateralized by certain fixed assets.
At December 31, 1996, the Company had $1,022 outstanding on the working capital
line of credit and $792 on the capital line of credit. The capital line of
credit is due January 2002. In January 1997, the Company increased the working
capital revolving line of credit not to exceed $3,000.
Average borrowings under the Company's lines of credit and the weighted
average interest rate during 1996 were $256 and 8.27%.
As described in Note 15, the revolving lines of credit were repaid using
a portion of the net proceeds from the initial public offering.
6. LONG-TERM DEBT:
Long-term debt at December 31, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Term note payable to bank due in monthly installments of $18 including interest
at 7.75% beginning in March 1993 until March 1996 when it can be adjusted to a
specified rate of a regional bank (8.75% at December 31, 1996). Principal is
due in full in February 1998. The note is collateralized by
essentially all the assets of the Company in addition to the
personal guarantees of certain stockholders $ 251 $ 438
Term note payable to bank due in monthly installments of $14 including interest
at 8% beginning June 1994 until May 1996, when it can be adjusted to a
specified rate of a regional bank (8.75% at December 31, 1996). Principal is
due in full in May 1999. The note is collateralized by essentially all the
assets of the Company in addition to personal guarantees of certain
stockholders 376 508
Installment note for equipment purchase payable to bank due in monthly
installments of $10 including daily-adjusted interest at a specified rate
above the prime rate (8.25% at December 31, 1996). The note is collateralized
by specific equipment and inventory. The note is guaranteed by a stockholder 359 449
Industrial development revenue bonds payable to bank with quarterly interest
only payments beginning April 15, 1994 at 6.25% with principal due on January
15, 2004. This note is collateralized by a deed of trust 850 850
Construction note payable to bank, due in August 1997, including
interest at 8.75% 585 -
Other capital lease obligations 15 -
------ ------
2,436 2,245
</TABLE>
F-10
<PAGE> 28
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
<TABLE>
<S> <C> <C>
Less current portion 596 428
------ ------
$1,840 $1,847
====== ======
</TABLE>
The agreements of the term notes payable and the revolving bank notes
payable discussed in Note 5 require, among other things, that the Company
maintain certain levels of working capital, net worth and debt-to-equity ratios
and limit capital expenditures, investments, other indebtedness, distributions,
mergers and acquisitions.
The construction note payable has been classified as long-term as the
Company has received a letter of intent to refinance the note through issuance
of industrial development revenue bonds upon completion of the construction
project on terms similar to the existing industrial development revenue bonds
payable.
As described in Note 15, the term and installment notes payable were
retired using a portion of the net proceeds from the initial public offering.
7. OBLIGATIONS UNDER NON-COMPETE AGREEMENTS:
In connection with the purchase of the net assets of Transcrypt
International, Incorporated in 1991, the Company entered into non-compete
agreements with the former owners which called for the Company to pay a total of
$1,700 in consideration for the former owners' agreement not to compete for a
period of five years. The remaining payments of $340 were paid in 1996.
8. INCOME TAXES:
The components of the benefit for income taxes for the period ending
December 31, 1996 are as follows:
<TABLE>
<S> <C>
Current $ 21
Deferred (2,207)
-------
$(2,186)
=======
</TABLE>
The entire provision is comprised of federal taxes, as no state taxes
are expected to be paid as a result of various state incentive tax credits for
which the Company has qualified.
The Company's tax provision effective tax rate on pretax loss differs
from U.S. federal statutory tax rate as follows:
<TABLE>
<S> <C> <C>
U.S. federal tax at statutory tax rate $(2,143) (34.0)%
Income taxable directly to partners of the Predecessor 4 --
Benefit of foreign sales corporation (53) (0.7)
Other 6 --
------- ----
$(2,186) (34.7)%
======= =====
</TABLE>
F-11
<PAGE> 29
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
Temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities that give rise to deferred income taxes
at December 31, 1996 relate to the following:
<TABLE>
<S> <C>
Deferred tax assets:
Special compensation expense $1,882
Allowance for bad debts 58
Net operating loss carryforwards 376
Difference between tax and book liability accruals 55
------
2,311
Deferred tax liabilities:
Difference between tax and book depreciation 99
------
Net deferred asset $2,212
======
</TABLE>
Management believes it is more likely than not that future taxable
income will be sufficient to fully utilize all deferred tax assets recorded.
9. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Payroll, bonuses and employee benefits $329 $211
Warranty reserve 73 65
Commissions 101 265
Special compensation expense 210 --
Other expenses 233 226
---- ----
$946 $767
==== ====
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
The Company has been named as a defendant in several class action
lawsuits that were filed subsequent to the Company's announcement on March 27,
1998 that the filing of its Annual Report on Form 10-K for year ended December
31, 1997 would be delayed and that adjustments would be made to the Company's
previously announced financial results. Between March 31, 1998 and May 27, 1998,
twelve purported class action lawsuits were filed against the Company in the
United States District Court for the District of Nebraska and one complaint was
filed in the District Court of Scotts Bluff County, Nebraska. Certain of the
complaints also name one or more officers of the Company as additional
defendants. The longest class period alleged in any of the class complaints is
the period from January 22, 1997 through April 24, 1998.
The complaints generally allege claims under Sections 10 and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and
relate primarily to allegations of false and misleading financial statements and
representations and material omissions by the Company. The Nebraska action
alleges violations of Nebraska securities laws. The complaints seek unspecified
compensatory damages, punitive damages, attorneys' fees and costs. The
plaintiffs in the Federal actions have stipulated to the consolidation of the
Federal actions and the appointment of a lead plaintiff(s). The Company is not
required to answer or otherwise respond to the federal complaints until after
the lead plaintiff(s) files a consolidated complaint.
F-12
<PAGE> 30
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
The Company may in the future be the subject of additional lawsuits or
claims in connection with the events or facts surrounding its restatement of
previously announced financial results. The Company is unable to predict when or
whether such additional lawsuits or claims may be initiated or the likelihood of
the outcome or range or amount of potential liability that may arise therefrom.
Although the complaints described above do not allege the amount of
damages and other relief that the plaintiffs are seeking, the Company believes
the amount of damages ultimately sought by the plaintiffs will be significant.
In light of the Company's restatement of financial information contained in its
various registration statements and prospectuses, the Company believes that
there may be an unfavorable outcome for at least some of the claims asserted in
the lawsuits or which may be asserted in the future against the Company. The
Company believes that the stockholder class actions are more likely to settle
than proceed to trial, judgment and appeal. Given the circumstances of these
cases, the terms of a settlement would be structured in a manner to avoid
causing the Company to seek protection under the federal bankruptcy
reorganization laws. In any circumstances where the Company could not structure
a settlement of all claims within its financial resources, it would vigorously
defend any attempt to establish the amount of liability or to require payment
beyond its resources. Many factors will ultimately affect and determine the
results of the litigation however, and the Company can provide no assurances
that the outcome will not have a significant adverse effect on the Company's
business, financial condition, results of operations and cash flows.
In April 1998, the Securities and Exchange Commission ("SEC") issued a
formal order of investigation to determine whether violations of certain aspects
of the Federal securities laws had occurred in connection with the Company. At
the present time, the Company is unable to predict whether the SEC is likely to
initiate proceedings against the Company or its affiliated parties relating to
these events.
During 1997, on the basis of product orders placed with the Company by
federal personnel within the Maryland Procurement Office ("MPO"), which acts as
the purchasing arm for various federal agencies in the Washington D.C. area, the
Company shipped approximately $2.2 million worth of encrypted radio equipment
and related items to MPO. MPO has taken the position that the person placing the
orders on behalf of MPO was not authorized to do so, and therefore, has refused
payment. In March 1998, the Company filed a certified contract claim for
payment. Alternatively, the Company has requested ratification, by which MPO
would treat the procurement as an authorized commitment. To date, MPO has
rejected ratification. The contract claim is pending, and the Company is unable
to predict whether the likelihood of a favorable final outcome is probable or
remote.
The Company is involved in certain other legal proceedings incidental to
the normal conduct of its business. The Company does not believe that any
liabilities relating to such other legal proceedings are likely to be,
individually or in the aggregate, material to the Company's business, financial
condition, results of operations or cash flows.
The Company agreed to pay fees totaling $350 to its chairman and chief
executive officer for initiating the purchase of the net assets of Transcrypt
International, Incorporated in 1991. Payment was contingent upon the original
limited partners receiving capital distributions equal to their original capital
contributions or upon the approval of the Board of Directors of the Company for
the sale of equity interests in the Company to the public. Payments of $70 were
made as of December 31, 1995 and an additional payment of $70 was approved and
paid during February 1996. These payments were accounted for as a bonus and the
officer waived his rights to receive fees to the extent of such payments. The
Board of Directors approved the payment of the remaining $210 fees on September
30, 1996. These remaining fees are included in special compensation expense in
the consolidated statements of operations. The $210 was paid in February 1997.
F-13
<PAGE> 31
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
In the normal course of its business activities, the Company is required
under a contract with various governmental authorities to provide letters of
credit and bonds that may be drawn upon if the Company fails to perform under
its contracts. The letters of credit, which expire on various dates in 1998,
have a total undrawn balance of $2.1 million, and bonds which expire on various
dates through 1999, totaling $22.4 million at December 31, 1997.
As a result of the acquisition of E.F. Johnson Company ("EFJ"), the
Company has an agreement with a vendor to purchase certain annual dollar volume
of products. See Note 15, "Subsequent Events." In the event the Company fails to
purchase the minimum volume, it must pay a penalty equal to 35% of the
shortfall. In 1997, the Company paid $396 as a result of this take or pay
contract. Future minimum purchase quantities are as follows: 1998 - $2,500; 1999
- - $2,500; 2000 - $391. The Company does not anticipate meeting its future
minimum purchase commitments. This shortfall was anticipated and accrued as a
liability in the allocation of the purchase price for EFJ.
The Company is in the process of converting its manufacturing and
financial information system to that currently being utilized by its acquired
subsidiary, EFJ. Once converted, the Company will then upgrade to a newer
version of the same information system or will purchase a separate information
system that will be Year 2000 compliant. The conversion to a Year 2000 compliant
system is anticipated to be completed by mid-year 1999 with the cost estimated
to be from $750 to $1,500. These expenditures were planned and budgeted for in
an effort to upgrade the quality of the Company's manufacturing and financial
information system and not as a direct remediation of any Year 2000 issue,
although that will be a valuable by-product of the upgrade. There are other
computerized systems involved in manufacturing and engineering systems. A
preliminary assessment has been made as to what effect, if any, the Year 2000
issue will have on these systems and whether or not there will be a material
effect on future financial results. As of December 31, 1997, no conclusions have
been drawn. Furthermore, the Company has not yet initiated formal communications
with all of its significant suppliers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issue.
The Company has entered into contracts for the completion of a new
addition to its Lincoln, Nebraska headquarters facility. Total dollar amount of
the contracts is approximately $2,250 with the total project cost estimated at
approximately $3,000.
11. OPTION PLANS:
In January 1992, the Board of Directors approved a 1992 Partnership
Interest Option Plan, which provided for the granting of up to 1,297,525 units
of non-qualified interest options to certain officers and key employees. Under
the Plan, the exercise price for the options was the fair market value at the
date of grant as determined by the Board of Directors. The term of each option
granted will in no event exceed 10 years from the date of grant. Effective June
30, 1996, the unit options were converted to stock options on a one to one
ratio. No options were exercisable under the Plan provisions until the Board of
Directors approved granting of all reserved options and full vesting of the
716,916 stock options on September 30, 1996. The vesting resulted in a special
compensation charge of $5,358 in the quarter ended September 30, 1996.
Effective as of September 6, 1996, the Company established the 1996
Stock Incentive Plan (the "Plan"). Any employee, including any director of the
Company, and any nonemployee director or independent contractor of the Company
is eligible to be considered for the issuance of shares of common stock, $0.01
par value per share, of the Company or of any other class of security or right
of the Company which is convertible into common stock. The aggregate number of
shares issued under the Plan shall not exceed 1,200,000. The aforementioned
716,916 options have been issued under the Plan, all of which
F-14
<PAGE> 32
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
are vested and compensation recognized. The Plan provides that unless otherwise
provided by the Plan committee any stock option granted shall have an exercise
price not less than 100% of the market value of a share of common stock on the
date the option is granted and that the term of such option shall be ten years
from date of grant. In January 1997, the Company granted stock options for an
additional 325,000 shares, with an exercise price equal to the price per share
in the initial public offering.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1996
consistent with the provisions of SFAS No. 123, the Company's pro forma net loss
and pro forma loss per share would not have been different than the reported
amounts as fair value of the options was not determinable prior to September 30,
1996 when the Board of Directors approved full vesting of the outstanding
options.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for options vested in 1996:
<TABLE>
<S> <C>
Expected option life 10 years
Expected annual volatility N/A
Risk-free interest rate 6.50%
Dividend yield 0%
</TABLE>
The status of stock options under the Plan are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Price Per Options
Shares Share Exercisable
--------- ---------- -----------
<S> <C> <C> <C>
Balance at December 31, 1993 1,039,330 $0.76 --
Granted 117,958 3.05
Exercised --
Forfeited (16,383) 3.05
--------- -----
Balance at December 31, 1994 1,140,905 0.96 --
Granted 137,617 3.05
Exercised -- -- --
Forfeited (813,903) 1.22
--------- ----- -------
Balance at December 31, 1995 464,619 1.13 --
Granted 252,297 3.05
Exercised --
Forfeited --
--------- ----- -------
Balance at December 31, 1996 716,916 $1.81 716,916
========= ===== =======
</TABLE>
F-15
<PAGE> 33
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable Average
December 31, Contractual Exercise at December Exercise
Exercise Price 1996 Life Price 31, 1996 Price
-------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.76 389,258 5.1 years $ 0.76 389,258 $ 0.76
$ 3.05 327,658 8.6 years 3.05 327,658 3.05
- --------------- -------------- ----------- ----------- ----------- -----------
$ 0.76 to $3.05 716,916 6.7 years $ 1.81 716,916 $ 1.81
=============== ============== =========== =========== =========== ===========
</TABLE>
12. BENEFIT PLANS:
The Company has a profit sharing plan, which covers substantially all
employees. Contribution levels are determined by the Board of Directors
annually. Profit sharing expense approximated $60, $27 and $45 for the years
ended December 31, 1996, 1995 and 1994, respectively.
The Company also has a 401 (k) plan, which covers substantially all
employees. Participants may contribute up to 10% of their annual compensation
and the Company makes matching contributions of 25% of the amount contributed by
participants. Contributions may not exceed the maximum allowable by law. Company
contributions approximated $16, $13 and $11 for the years ended December 31,
1996, 1995 and 1994, respectively.
13. CONCENTRATIONS:
Sales to major customers were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Individual customers
representing 10% or
more of consolidated
sales in each year:
Customer A -- -- $2,044
Customer B -- $ 849 --
Customer C $2,180 -- --
</TABLE>
In addition, a substantial portion of the Company's revenue is from
customers in the governmental sector, both domestic and foreign. The Company's
policy does not require significant collateral or other security to support such
receivables, however, export sales are generally shipped against prepayments or
backed by irrevocable letters of credit confirmed by U.S. banks.
In addition to being a major customer, Motorola is also a key
manufacturer of electronic components used by the Company. Purchases by the
Company from Motorola totaled approximately $1,878 and $726 in 1996 and 1995,
respectively.
F-16
<PAGE> 34
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents, accounts receivable,
receivable-employees and affiliates, income taxes recoverable, prepaid expenses,
bank overdraft, obligation under noncompete agreements, accounts payable,
accrued expenses approximate fair value because of the short maturity of these
instruments. The carrying amount of long-term debt and the revolving line of
credit approximate fair value as calculated by discounting the future cash flows
of each instrument at rates currently offered to the Company for similar debt
instruments of comparable maturities by the Company's bankers.
15. SUBSEQUENT EVENTS:
On January 22, 1997, the Company completed an initial public offering of
2,900,000 shares of common stock at a price of $8.00 per share. Of the 2,900,000
shares offered, 2,500,000 shares were sold by the Company and 400,000 were sold
by certain of the Company's stockholders. The Company's net proceeds from the
offering, after underwriting commissions and expenses, were approximately
$17,710.
A portion of the Company's net proceeds from the offering was used to
retire the term and installment notes payable and the revolving lines of credit.
The remaining net proceeds were used for general working capital purposes and to
support the Company's growth and business strategy.
On July 31, 1997, the Company completed the acquisition of EFJ in
exchange for cash consideration of $436 and issuance of 832,465 shares of the
Company's common stock, with an approximate market value of $10,000. Transaction
costs and restructuring costs for changes to EFJ's operations were expected to
approximate $5,000.
EFJ develops and manufactures wireless communications products and
systems primarily for the land mobile radio market.
On October 20, 1997, the Company completed a secondary offering of
5,175,000 shares of common stock at a price of $21.00 per share. Of the
5,175,000 shares offered 2,684,481 shares were sold by the Company and 2,490,519
were sold by certain of the Company's stockholders. The Company's net proceeds
from the offering, after underwriting commissions and expenses, were
approximately $52,939.
A portion of the Company's net proceeds from the offering was used to
retire revolving line of credit. The remaining net proceeds are being used for
working capital, to purchase EFJ's Waseca, Minnesota manufacturing facility in
January 1998, facilities improvements, potential acquisitions, and general
corporate purposes.
On March 27, 1998, the Company issued a press release announcing that it
would not file its 1997 Annual Report on Form10-K with the SEC on March 31, 1998
because the audit of its 1997 financial statements was not yet completed. The
Company also announced that (i) certain accounting principles relating primarily
to revenue recognition were not yet resolved by the Company's independent
accountants, (ii) the accountants and Company management were undertaking a
review of the Company's accounting policies and (iii) adjustments would be made
to the Company's previously announced financial results.
On April 13, 1998, the Company announced that it would not file its 1997
Form 10-K on or before the extension date of April 15, 1998 due to ongoing work
being performed by the Company and its independent accountants. The Company also
announced that the Audit Committee of the Board of Directors had retained
independent counsel to conduct an investigation.
F-17
<PAGE> 35
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
In April 1998, the SEC issued a formal order of investigation to
determine whether violations of certain aspects of the Federal securities laws
had occurred in connection with the Company.
On April 24, 1998, Coopers & Lybrand, L.L.P. resigned as the Company's
independent accountants. In conjunction with its resignation, Coopers & Lybrand
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 were withdrawn as of the date of their
resignation.
On April 27, 1998, the Nasdaq National Market ("Nasdaq") effected a
temporary qualification trading halt in the Company's common stock. On May 11,
1998, the common stock was delisted from the Nasdaq National Market. The Company
has appealed the Nasdaq delisting.
On May 6, 1998, the Company announced that it had engaged KPMG Peat
Marwick LLP as its independent auditors for the fiscal years ended December 31,
1997, 1996 and 1995.
On May 18, 1998, the Company disclosed in a filing with the SEC that its
Quarterly Report on Form 10-Q for the Quarter Ended March 31, 1998 will not be
filed within the period prescribed for such report.
Effective May 31, 1998, Jeffery L. Fuller resigned as President, Chief
Executive Officer ("CEO") and Director of the Company. On June 8, 1998, the
Company announced that the Board of Directors had appointed a committee to
identify a CEO of the Company and that John T. Connor, who serves as Chairman of
the Board, had been appointed as interim CEO. Mr. Connor accepted such
appointment until the earlier of September 8, 1998 or the hiring of a permanent
CEO. Mr. Connor has indicated that if a permanent CEO is not hired by such date,
he will discuss with the Board of Directors the possibility of staying on for a
longer time.
On July 8, 1998, the Company's primary bank lender, U.S. Bank National
Association, agreed to waive the Company's violations of its bank credit
facility arising out of the Company's failure to timely provide financial
statements, meet certain financial covenants and provide monthly borrowing base
certificates to U.S. Bank. U.S. Bank also agreed to amend the credit facility by
reducing the Company's required tangible net worth amount to $55 million from
$70 million.
The Company has been named as a defendant in several class action
lawsuits that were filed subsequent to the Company's announcement on March 27,
1998 that the filing of its Annual Report on Form 10-K for year ended December
31, 1997 would be delayed and that adjustments would be made to the Company's
previously announced financial results. Between March 31, 1998 and May 27, 1998,
twelve purported class action lawsuits were filed against the Company in the
United States District Court for the District of Nebraska, and one complaint was
filed in the District Court of Scotts Bluff County, Nebraska.
Certain of the complaints also name one or more officers of the Company
as additional defendants. The longest class period alleged in any of the class
complaints is the period from January 22, 1997 through April 24, 1998.
The complaints generally allege claims under Sections 10 and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and
relate primarily to allegations of false and misleading financial statements and
representations and material omissions by the Company. The Nebraska action
alleges violations of Nebraska securities laws. The complaints seek unspecified
compensatory damages, punitive damages, attorneys' fees and costs. The
plaintiffs in the Federal actions have stipulated to the consolidation of the
Federal actions and the appointment of a lead plaintiff(s).
F-18
<PAGE> 36
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
16. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to the filing of the Company's 1996 Annual Report on Form
10-K with the SEC, the Company determined it was necessary to restate its
previously filed results for the year ended December 31, 1996.
The restatements relate primarily to: (i) revenue recognition for
certain sales for which collection was determined to not be reasonably assured
or was contingent on a future event; (ii) revenue recognition for certain sales
where a formal written agreement was not received; and (iii) revenue recognized
on sales of certain products which were subsequently returned to the Company. As
a result, the financial statements of the Company have been restated from
amounts previously reported.
The summary of the significant changes as of and for the year ended
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
As of December 31, 1996
-------------------------------
As Previously As Restated
Reported
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net $ 4,216 $ 1,256
Receivables - other 11 29
Inventory 2,261 2,853
Income taxes recoverable -- 213
Prepaid expenses and other current assets 60 60
Deferred tax assets 196 1,773
------------ ------------
Total current assets 6,744 6,184
------------ ------------
Property, plant and equipment, net 4,908 4,325
Deferred tax assets 1,723 439
Intangible assets, net 38 422
Deferred public offering costs 568 568
------------ ------------
$ 13,981 $ 11,938
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 386 $ 386
Revolving line of credit and bank notes payable 1,022 1,022
Current portion of long-term debt 596 596
Accounts payable 1,174 1,174
Income taxes payable 152 --
Accrued expenses 946 946
Deferred revenue -- 216
------------ ------------
Total current liabilities 4,276 4,340
------------ ------------
Long-term debt, net of current portion 1,840 1,840
Revolving line of credit 792 792
------------ ------------
6,908 6,972
------------ ------------
Stockholders' equity:
Common stock 68 68
Additional paid-in capital 9,683 9,003
Retained deficit (2,678) (4,105)
------------ ------------
7,073 4,966
------------ ------------
$ 13,981 $ 11,938
============ ============
</TABLE>
F-19
<PAGE> 37
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
December 31, 1996
-----------------------------------
As Previously
Reported As Restated
------------- -------------
<S> <C> <C>
Revenues $ 13,775 $ 10,619
Cost of sales 4,864 4,274
------------- -------------
Gross profit 8,911 6,345
------------- -------------
Operating expenses:
Research and development 2,234 2,234
Sales and marketing 2,103 2,187
General and administrative 2,414 2,529
Special compensation expense 5,568 5,568
------------- -------------
Total operating expenses 12,319 12,518
------------- -------------
Loss from operations (3,408) (6,173)
Interest income 30 31
Interest expense (162) (162)
------------- -------------
Loss before income taxes (3,540) (6,304)
Benefit for income taxes (1,529) (2,186)
------------- -------------
Net loss $ (2,011) $ (4,118)
============= =============
Pro forma information:
Loss before income taxes $ (3,540) $ (6,304)
Pro forma benefit for income taxes (1,393) (2,190)
------------- -------------
Pro forma net loss $ (2,147) $ (4,114)
============= =============
Pro forma net loss per share - Basic and Diluted $ (0.31) $ (0.61)
============= =============
Weighted average common shares - Basic and Diluted 6,968,712 6,783,078
============= =============
</TABLE>
F-20
<PAGE> 38
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Transcrypt International, Inc.:
The audits referred to in our report dated June 26, 1998, included the related
financial statement schedule as of December 31, 1996, and for each of the years
in the two-year period ended December 31, 1996, included in Form 10-K/A. The
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based on our audits. In our opinion, such financial statement schedule when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ KMPG PEAT MARWICK LLP
Omaha, Nebraska
June 26, 1998
S-1
<PAGE> 39
SCHEDULE III - - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance at
beginning expenses to other Deductions end
of period (Provisions) accounts (Writeoffs) of period
--------- ----------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Bad Debts for the:
Year Ended December 31, 1994 68,973 139,059 -- 20,018 188,014
Year Ended December 31, 1995 188,014 94,285 -- 100,640 181,659
Year Ended December 31, 1996 181,659 288,596 -- 40,004 430,251
Inventory Obsolescence Reserve for the:
Year Ended December 31, 1994 6,966 168,309 -- 141,713 33,562
Year Ended December 31, 1995 33,562 61,496 -- 13,016 82,041
Year Ended December 31, 1996 82,041 129,650 -- 170,842 40,849
</TABLE>
S-2
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Second Amended and Restated Certificate of Incorporation of the
Company filed on September 30, 1996 with the Secretary of State
of the State of Delaware (incorporated herein by reference to
Exhibit 3.1 to the Company's Form S-1 Registration No. 333-14351
declared effective on January 22, 1997 (hereinafter "1997
Registration Statement")).
3.2 Amended and Restated Bylaws of the Company (incorporated herein
by reference to Exhibit 3.2 to 1997 Registration Statement).
3.3 Certificate of Merger of Transcrypt International, Ltd., a
Nebraska limited partnership, with and into the Company, filed on
June 28, 1996 with the Secretary of State of the State of
Delaware (incorporated herein by reference to Exhibit 3.3 to 1997
Registration Statement).
3.4 Certificate of Merger of Transcrypt International, Inc., a
Nebraska corporation, with and into the Company, filed on
September 30, 1996 with the Secretary of State of the State of
Delaware (incorporated herein by reference to Exhibit 3.4 to 1997
Registration Statement).
4.1 Specimen Certificate for Common Stock (incorporated herein by
reference to Exhibit 4.1 to 1997 Registration Statement).
10.1 Employment Agreement between the Company and John T. Connor dated
as of September 10, 1996 (incorporated herein by reference to
Exhibit 10.1 to 1997 Registration Statement).
10.2 Employment Agreement between the Company and Jeffery L. Fuller
dated as of July 18, 1996 (incorporated herein by reference to
Exhibit 10.2 to 1997 Registration Statement).
10.3 Form of Employment Agreement between the Company and C. Eric
Baumann, Michael P. Wallace and Joel K. Young (incorporated
herein by reference to Exhibit 10.3 to 1997 Registration
Statement).
10.4 Form of 1996 Stock Incentive Plan, together with forms of stock
option agreements (incorporated herein by reference to Exhibit
10.4 to 1997 Registration Statement).
10.5 Form of Indemnification Agreement between the Company and each
executive officer and director of the Company (incorporated
herein by reference to Exhibit 10.5 to 1997 Registration
Statement).
10.6 License Agreement for APCO Project 25 Compliant Product between
Motorola, Inc. and the Company dated as of August 2, 1994
(incorporated herein by reference to exhibit 10.6 to 1997
Registration Statement).
10.7* Amendment, dated as of June 28, 1996, to License Agreement for
APCO Project 25 Compliant Product between Motorola, Inc. and the
Company dated as of August 2, 1994 (incorporated herein by
reference to Exhibit 10.7 to 1997 Registration Statement).
10.8 OEM Agreement between Motorola, Inc. and the Company dated as of
August 2, 1994 (incorporated herein by reference to Exhibit 10.8
to 1997 Registration Statement).
10.9* Amendment, dated as of July 15, 1996, to OEM Agreement between
Motorola, Inc. and the Company dated as of August 2, 1994
(incorporated herein by reference to Exhibit 10.9 to 1997
Registration Statement).
10.10* Private Label/Supplier Agreement for Analog Scrambling Modules
between Motorola, Inc. and the Company dated as of August 8, 1995
(incorporated herein by reference to Exhibit 10.10 to
1997Registration Statement).
10.11* Motorola Cellular Subscriber Products Sales Agreement, dated as
of June 13, 1996, by and between Motorola, Inc. and the Company
(incorporated herein by reference to Exhibit 10.11 to 1997
Registration Statement).
10.12 License Agreement for APCO Fed Project 25 Algorithm between
Digital Voice Systems, Inc. and the Company, dated as of August
14, 1995 (incorporated herein by reference to Exhibit 10.12 to
1997 Registration Statement).
10.13 Consigned Inventory Agreement between Arrow/Schweber Electronics
Group and the Company, dated as of June 22, 1994 (incorporated
herein by reference to Exhibit 10.13 to 1997 Registration
Statement).
10.14 Nebraska Investment Finance Authority $850,000 Industrial Revenue
Bond (Transcrypt International, Ltd. Project), Series 1994, dated
as of January 15, 1994, and Note (incorporated herein by
reference to Exhibit 10.14 to 1997 Registration Statement).
10.15 Trust Indenture, dated as of January 15, 1994, for $850,000
Industrial Revenue Bond (Transcrypt
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
International, Ltd. Project), Series 1994, between Nebraska
Investment Finance Authority as Issuer and Norwest Bank
Nebraska, N.A. as Trustee (incorporated herein by reference to
Exhibit 10.15 to 1997 Registration Statement).
10.16 Loan Agreement, dated as of January 15, 1994, for $850,000
Industrial Revenue Bond (Transcrypt International, Ltd. Project),
Series 1994, between Nebraska Investment Finance Authority as
Issuer and the Company (incorporated herein by reference to
Exhibit 10.16 to 1997 Registration Statement).
10.17 Amended and Restated Loan Agreement, dated as of May 18, 1994, by
and between Norwest Bank Nebraska, N.A., and the Company
(incorporated herein by reference to Exhibit 10.17 to 1997
Registration Statement).
10.18 First Amendment, dated as of June 1, 1995, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company (incorporated herein
by reference to Exhibit 10.18 to 1997 Registration Statement).
10.19 Second Amendment, dated as of April 10, 1996, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company (incorporated herein
by reference to Exhibit 10.19 to 1997 Registration Statement).
10.20 Promissory Note, dated as of May 11, 1995, between West Gate Bank
and the Company (incorporated herein by reference to Exhibit
10.20 to 1997 Registration Statement).
10.21 RESERVED.
10.22 RESERVED.
10.23 RESERVED.
10.24 Form of Adoption Agreement for Nonstandardized 401(k) Profit
Sharing Plan (incorporated herein by reference to Exhibit 10.24
to 1997 Registration Statement).
10.25 Defined Contribution Master Plan and Trust Agreement of Norwest
Bank Nebraska, N.A., Master Plan Sponsor (incorporated herein by
reference to Exhibit 10.25 to 1997 Registration
Statement).
10.26 Third Amendment, dated as of October 22, 1996, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company, together with
Modification of Note (incorporated herein by reference to Exhibit
10.26 to 1997 Registration Statement).
10.27 Fourth Amendment, dated as of November 19, 1996, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company, together with
Commercial Installment Note, dated November 19, 1996
(incorporated herein by reference to Exhibit 10.27 to 1997
Registration Statement).
10.28+ Construction Loan, dated November 15, 1996, by and between
Norwest Bank Nebraska, N.A., and the Company, together with
related documents.
10.29+ Commercial Installment Note, dated January 9, 1997, related to
Amended and Restated Loan Agreement, dated as of May 18, 1994, by
and between Norwest Bank Nebraska, N.A., and the Company.
10.30+ Commercial Installment Note secured by equipment, dated December
23, 1996, by and between Norwest Bank Nebraska, N.A., and the
Company, together with Security Agreement.
11.1 Statement re: Computation of Per Share Earnings.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
</TABLE>
* Confidential treatment has been granted as to a portion of this exhibit.
+ Incorporated herein by reference to the Company's 1996 Annual Report on
Form 10-K filed with the SEC on March 5, 1997.
<PAGE> 1
EXHIBIT 11
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF PRO FORMA NET LOSS PER SHARE
(As Restated, See Note 2)
Year Ended December 31,
------------------------------
1996 1995
----------- -----------
Pro Forma Net Loss (In thousands) $ (4,114) $ (8,677)
PRO FORMA NET LOSS PER SHARE-BASIC
Shares used in this computation:
Weighted average common shares-Basic 6,783,078 6,783,078
========== ==========
Pro forma net loss per share-Basic $ (0.61) $ (0.12)
========== ==========
PRO FORMA NET LOSS PER SHARE-DILUTED
Shares used in this computation:
Weighted average common shares-Basic 6,783,078 6,783,078
Dilutive effect of shares under employee
stock plans* -- --
---------- ----------
Weighted average common shares-Diluted 6,783,078 6,783,078
========== ==========
Pro forma net loss per share-Diluted $ (0.61) $ (0.12)
========== ==========
* Common stock equivalents were not included as their effect would be
anti-dilutive.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Transcrypt International, Inc.
We consent to incorporation by reference in the registration statement (No.
333-30673) on Form S-8 of Transcrypt International, Inc. (the "Company") of our
report dated June 26, 1998, relating to the consolidated balance sheets of the
Company and its subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of operations, changes in stockholder's equity and cash
flows for the years then ended, which report appears in the Annual Report on
Form 10-K/A of the Company dated July 28, 1998.
/s/ KPMG Peat Marwick LLP
Omaha, Nebraska
July 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TRANSCRYPT INT'L INC.'S CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED
BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,715
<ALLOWANCES> 430
<INVENTORY> 2,853
<CURRENT-ASSETS> 6,184
<PP&E> 6,100
<DEPRECIATION> 1,775
<TOTAL-ASSETS> 11,938
<CURRENT-LIABILITIES> 4,340
<BONDS> 1,840
0
0
<COMMON> 68
<OTHER-SE> 4,898
<TOTAL-LIABILITY-AND-EQUITY> 11,938
<SALES> 10,619
<TOTAL-REVENUES> 10,619
<CGS> 4,274
<TOTAL-COSTS> 4,274
<OTHER-EXPENSES> 12,518<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> (6,304)
<INCOME-TAX> (2,186)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,118)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
<FN>
<F1>ITEM INCLUDES ONE TIME CHARGE FOR SPECIAL COMPENSATION EXPENSE OF $5.6 MILLION.
</FN>
</TABLE>
