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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 1999.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 [X] No [ ]
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 voting and non-voting Common Stock held by
non-affiliates of the Registrant, based upon the last sale price of the Common
Stock on March 26, 1999, as reported in the Over the Counter Bulletin Board
market was approximately $26,286,336. Shares of Common Stock held by each
executive officer and director and each person owning more than 5% of the
outstanding Common Stock of the Registrant have been excluded in that such
persons may be deemed to be affiliates of the Registrant. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. Number of shares outstanding of the Registrant's Common Stock, as of
March 26, 1999: 12,946,624.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 1999 Annual
Meeting of Stockholders to be filed within 120 days of the fiscal year ended
December 31, 1998 are incorporated by reference in Items 10, 11, 12 and 13 of
Part III of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
Unless the context otherwise provides, all references in this Annual Report
on Form 10-K to the "Company" includes Transcrypt International, Inc.
("Transcrypt"), its predecessor entities, and its subsidiaries, including E.F.
Johnson Company, on a combined basis, and all references to "E.F. Johnson" refer
to E.F. Johnson Company.
In addition to the historical information contained herein, certain matters
discussed in this Annual Report may constitute forward-looking statements under
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). These statements may involve risks and uncertainties. These
forward-looking statements relate to, among other things, the outcome of pending
class action litigation involving the Company, the outcome of the pending
investigation by the Securities and Exchange Commission (the "SEC"), the effects
of the Company's restatement of its financial statements on the Company's
product development efforts, future sales levels and customer confidence, the
Company's future financial condition, liquidity and business prospects
generally, perceived opportunities in the marketplace for the Company's products
and its products under development, expectations regarding the Company's efforts
to resolve Year 2000 issues and the effects of a failure to resolve such issues
and the Company's other business plans for the future. The actual outcomes of
these matters may differ significantly from the outcomes expressed or implied in
these forward-looking statements. For a discussion of some of the factors that
might cause such a difference, see "-- Summary of Business Considerations and
Certain Factors That May Affect Future Results of Operations and/or Stock Price"
below.
GENERAL
The Company is a manufacturer of information security products and wireless
communications products and systems. The Company designs and manufactures
information security products which prevent unauthorized access to sensitive
voice communications. These products are based on a wide range of analog
scrambling and digital encryption technologies and are sold mainly to the land
mobile radio ("LMR") and telephony security markets. Through its E.F. Johnson
subsidiary, the Company designs, develops, manufactures and markets (1)
stationary LMR transmitters/receivers (base stations or repeaters) and (2)
mobile and portable radios. The Company sells its LMR products and systems
mainly to two broad markets: (1) business and industrial ("B&I") users and (2)
public safety and other governmental users.
In July 1997, the Company expanded its presence in the wireless
communications market by acquiring E.F. Johnson, an established provider of
products and systems for the LMR market. This acquisition was made through the
issuance of shares of Transcrypt common stock ("Common Stock"), the payment of
cash and the assumption of certain indebtedness of E.F. Johnson. The total value
of the cash and shares paid at the time of acquisition was approximately $10.4
million.
In December 1991, the Company acquired the business of its predecessor,
which was founded in 1978. Prior to June 30, 1996, the Company operated as a
partnership. The Company's principal business offices are located at 4800 NW 1st
Street, Lincoln, Nebraska 68521, and its phone number is (402) 474-4800.
RESTATEMENT OF FINANCIAL STATEMENTS AND RELATED EVENTS
In 1998, the Company restated its previously released results for the year
ended December 31, 1997, the Company's financial statements 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. The restatement of the Company's financial statements and other
events relating to the restatement, including the filing of class action
lawsuits against the Company and the initiation of an SEC investigation (See
"Item 3. Legal Proceedings.") which occurred subsequent to March 31, 1998, have
had and continue to have an adverse impact on the Company's business, financial
condition, results of operations, liquidity and cash flows.
RECENT DEVELOPMENTS
On March 1, 1999, the Company hired Michael E. Jalbert as President and
Chief Executive Officer of the Company. On March 25, 1999, Mr. Jalbert became
Chairman of the Board of the Company.
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INFORMATION SECURITY INDUSTRY
OVERVIEW
The electronic information security industry is generally comprised of
products designed to protect the transmission of sensitive voice and data
communications through both wireless and wireline mediums. Without such
protection, many forms of electronic communications, such as LMR and telephone
conversations and remote data communications, are vulnerable to interception and
theft.
The information security industry originated from the need to secure
sensitive wireless military communications. By the late 1970s, the availability,
quality and cost of information security devices had improved so that the use of
these devices became economically and functionally feasible for non-military
governmental users (such as law enforcement, fire, emergency medical and other
public safety personnel) and large commercial users (such as railroads,
construction and oil companies).
Initially, all electronic communications were transmitted in analog format.
Analog transmissions typically consist of a voice or other signal modulated
directly onto a continuous radio "carrier" wave. An analog transmission can be
made secure by (1) "scrambling" or manipulating the original signal at the point
of transmission and (2) reconstituting the original signal at the receiving end.
By the late 1980s, accelerating use of wireless communications devices, such as
LMRs and cellular telephones, resulted in increased demand for limited radio
spectrum. In response to this demand, and enabled by the low-cost availability
of digital signal processors ("DSPs"), electronics manufacturers developed
spectrally efficient (I.E., low-bandwidth) digital communications devices. In
digital communications, an analog signal is "digitized," or converted into a
series of discrete information "bits" in the form of ones and zeroes prior to
transmission. Digital transmissions can be made secure by a process known as
"encryption," which involves (1) the use of a mathematical algorithm to
rearrange the bit-stream prior to transmission and (2) a decoding algorithm to
reconstitute the transmitted information back into its original form at the
receiving end.
Manufacturers of information security products such as the Company typically
charge higher prices for devices featuring more advanced levels of security.
Therefore, the types of end-users at each level of security tend to vary based
upon the importance of the information that the end-user wants to secure.
Typical users of the most basic form of scrambler, the frequency inversion
scrambler, include taxi dispatchers, other types of consumer businesses and
transportation companies. Typical users for medium-level security devices
include B&I users and international customers who do not need an export license.
High-level scrambling and encryption devices are used primarily by public safety
agencies, federal government personnel and international customers who have
obtained the required export license.
LAND MOBILE RADIO SECURITY MARKET
One of the earliest applications of information security technology outside
of the military was in protecting LMR voice communications. LMRs consist of (1)
hand-held or (2) mobile (vehicle mounted) two-way radios. A typical LMR system
consists of one or more base control stations networked with each other and with
hand-held and/or mobile LMRs. As with all other major forms of wireless
communications devices, LMRs transmit information in either analog or digital
format, although there is an increasing migration to the digital format.
TELEPHONY SECURITY MARKET
Since its inception in 1983, cellular telephone service has grown rapidly
and become available to most of the United States population. Cellular telephone
subscribers and revenues have grown rapidly in recent years and are expected to
grow in the future. This increased volume has raised significant new security
and privacy issues and an increased sensitivity to the potential risks involved
in intercepted signals. Unprotected wireless transmissions generally provide
minimal or no security and allow eavesdropping by even casual listeners with
compatible scanners.
In recent years, the cellular industry has been migrating, on an accelerated
basis, away from analog devices towards digital forms of communications, which
are commonly referred to as Personal Communication Services ("PCS"). Similar to
the LMR industry, this migration has occurred principally due to (1) increased
spectrum efficiency, (2) perception of greater voice security and (3) additional
capabilities for advanced features and data communications. PCS technology
typically uses variable rate voice coding, which maximizes the efficiency of
transmissions by only transmitting critical pieces of information and omitting
other information, such as pauses in a conversation. In the area of voice
security, digital telephony is functionally more secure than analog telephony.
While there are some characteristics that make digital transmissions more
difficult to intercept, most digital services do not use any type of active
encryption technology. However, unlike analog scanning technology, digital
scanners are not yet widely available. The
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increased use of digital devices has resulted and will likely continue to result
in reduced demand for add-on voice security devices, such as those produced by
the Company.
WIRELESS PRIVACY ACT OF 1999
On February 25, 1999, House Resolution Bill - H.R.514 passed in the House of
Representatives and is likely to be approved by the Senate and signed by the
President. H.R.514 - Wireless Privacy Act of 1999, amends the Communications Act
of 1934 to prohibit modifying any electronic communication device, equipment, or
system in a manner which causes it to fail to comply with regulations governing
electronic eavesdropping devices. The bill empowers the Federal Communications
Commission ("FCC") to prescribe regulations, and to review and revise them as
necessary in response to changes in technology and behavior, denying equipment
authorization for any scanning receiver capable of (1) receiving transmissions
in frequencies allocated to the domestic cellular or personal communication
service; (2) being readily altered to receive such transmissions; (3) being
equipped with decoders that convert protected specialized mobile radio service
transmissions to analog voice audio, or which convert protected paging service
transmissions to alphanumeric text; or (4) being equipped with devices that
otherwise encode encrypted radio transmissions for purposes of unauthorized
interception.
H.R. 514 directs the FCC, with respect to scanning receivers capable of
receiving transmissions in frequencies used by commercial mobile services and
that are shared by public safety users, to examine methods and prescribe
regulations to enhance the privacy of such frequency users. H.R. 514 also
requires tampering prevention measures and warning labels to be considered by
the FCC in prescribing such regulations.
The Company's encryption devices are designed to provide secure wireless and
wireline communications regardless of the level of restrictions which may be
imposed upon monitoring or scanning equipment providers as outlined in H.R. 514.
It may be possible that the enactment of H.R. 514 could lead some wireless
communication users in the United States to feel that their communications are
more secure, and thus lessen their desire for additional means of providing
secure voice transmissions.
WIRELESS COMMUNICATIONS INDUSTRY
OVERVIEW
The mobile wireless communications industry began in the mid-1930s when
police departments began using LMR systems to enable immediate communication
between headquarters and officers patrolling the community. As (1) other public
safety agencies and commercial enterprises recognized the benefit of immediate
communications with their field personnel, (2) technological advances made LMR
systems more affordable and (3) increasing amounts of spectrum were allocated
for LMR use, LMR dispatch service expanded beyond its traditional police and
fire applications to become an integral communications service for a variety of
government and commercial enterprises. Today, in addition to dispatch-oriented
LMR service, many other forms of mobile wireless communication technologies have
emerged and are continuing to be developed to meet the varied communication
needs of an increasingly mobile society. These include paging, mobile data,
cellular telephone and personal communication services.
BUSINESS AND INDUSTRIAL SYSTEMS MARKET
B&I users include large commercial, industrial and other private
enterprises, such as utility, construction and oil companies, railroads and
universities which require rapid communications among personnel spread out over
relatively large geographic areas. While many B&I LMR users purchase and operate
entire systems for their own use, a large segment of the B&I market consists of
specialized mobile radio ("SMR") operators such as NEXTEL Corp. and Centennial
Communications, and their customers. SMR operators build and lease private LMR
systems on a for-profit basis. They sell airtime to end-users whose mobile
communication needs can be served by renting or purchasing subscriber units as
opposed to purchasing an entire system, or who are unable to obtain a FCC
license to operate their own system. Traditionally, end-users of SMR services
have included taxi fleets and smaller construction and delivery service
companies. Currently, many SMR operators in the larger metropolitan markets,
such as NEXTEL Corp., are also offering more consumer-oriented, cellular-like
SMR services.
There are two general types of LMR systems serving B&I users, (1)
conventional and (2) trunked. Both operate on the specific frequency bands which
the FCC has allocated for such types of systems. Conventional LMR systems use a
single channel to transmit and receive information. All users have unrestricted
access, similar to a "party" telephone line, and the user must monitor the
system and wait until the channel is unoccupied. Trunked systems, including the
Company's logic trunked radio ("LTR-Registered Trademark-") product, combine
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multiple channels so that when a user begins transmitting, an unoccupied channel
is automatically selected. Conventional LMR systems are relatively inefficient
compared to trunked systems.
The development of trunked LMR systems and the allocation of additional
frequency spectrum in the 1970s triggered significant growth in LMR use for B&I
applications. In recent years, technological developments by E.F. Johnson and
others have enabled LMR systems to be "networked," involving multiple "sites"
linked together through a switch to provide extended geographical coverage. In
addition, many trunked subscriber units are capable of functioning as mobile
telephones through interconnections to the public switched telephone network.
The Company has responded to changes in the standard LTR-Registered
Trademark- protocol with the creation of LTR-Net(TM) in 1997, which allows
systems operators to link sites together and provide telephone
interconnection, electronic serial numbers and improved system security in an
advanced B&I focused trunking system.
PUBLIC SAFETY AND OTHER GOVERNMENT USERS MARKET
Public safety and other government users include state and local agencies,
such as law enforcement, fire and emergency medical personnel, and military and
non-military federal governmental agencies. Many of these users operate LMR
equipment which complies with specifications established by the Association of
Public Safety Communications Officials International Inc. ("APCO"), while the
remainder operate mostly conventional and non-APCO trunked LMRs. The most widely
used APCO standard is the "APCO 16" standard established in 1979, which includes
specifications for 800 MHz transmission, analog voice modulation and trunking
functions for using the frequency spectrum. In 1988, E.F. Johnson entered the
market for APCO 16 products with its Multi-Net -Registered Trademark- system.
In 1995, the APCO Advisory Board promulgated a new standard known as APCO
25. Although public safety agencies are not currently required by the FCC or
APCO to purchase APCO 25 compliant LMR systems or otherwise adopt the APCO 25
standard, the Company believes that APCO 25 compatibility will be one of the key
purchasing factors for public safety and other government LMR users.
Furthermore, as LMR users upgrade their existing APCO 16 systems to comply with
FCC-imposed bandwidth limitations, the Company expects that demand for APCO 25
compliant LMR systems will increase, due in part to the fact that APCO 25
systems can potentially be configured for compatibility with older APCO 16
mobile and portable radios, allowing early adopters of the APCO 25 standard to
purchase new equipment without replacing all of their subscriber radios.
Additionally, the Company's APCO 25 radios can be used on existing E.F. Johnson
and most Motorola APCO 16 systems. However, to date the APCO 25 market is
developing slowly which the Company believes is primarily due to the high cost
and limited availability of APCO 25 compliant system infrastructure and radios.
INFORMATION SECURITY PRODUCTS
OVERVIEW
Transcrypt first entered the information security market in 1978 with
simple, transistor-based add-on scrambling modules for use in analog LMRs using
basic single-inversion scrambling techniques. Transcrypt marketed these products
primarily to public safety agencies and international governments. Since that
time, the Company has further developed and improved upon its core information
security technologies, which have at various times been implemented into the
Company's scrambler modules and other products within its major information
security product families, (1) LMR Security and (2) Telephony Security.
The core technologies currently available to the Company for incorporation
in its products include the following methods, which are listed in increasing
order of sophistication of security technique: (1) frequency inversion
(inverting or otherwise adjusting the phase of a signal based on a consistent
method), (2) rolling code transmission (incrementally stepping codes), (3)
frequency hopping transmission (changing broadcast frequencies multiple times
per second based upon an algorithm) and (4) digital encryption (encoding a
digital bit-stream based upon a mathematical encryption algorithm).
As with all of the Company's information security products, the use of
scrambling and encryption equipment is required on both the transmitting and
receiving sides of communications in order to operate in secure mode. For
example, in order to achieve secure LMR communications, it would be necessary
for both the transmitting and receiving equipment, including hand-held, mobile
devices and base stations, to be equipped with one of the Company's modules,
whether as an add-on installation or in the form of one of the Company's
complete LMRs. In the Company's telephony family, a scrambled cellular telephone
may communicate in secure mode only with (1) another of the Company's secure
cellular telephones, (2) a PBX interchange or cellular service provider that has
installed one of the Company's Voice Privacy Exchange Units or (3) a landline
telephone equipped with one of the Company's external desktop
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units. However, all of the Company's products can be used in the clear,
non-scrambled mode with equipment that does not contain a security device.
LAND MOBILE RADIO SECURITY
The Company offers a variety of add-on LMR scrambling products featuring its
core technologies at varying levels of security. Add-on scramblers are available
in two packages, (1) a modular package consisting of a circuit board that is
designed to be permanently soldered into existing circuitry and (2) a socket
package designed for installation in sockets with standard pin configurations
which original equipment manufacturers ("OEM") may install.
Products sold by the Company are compatible with sockets of OEM
manufacturers, including ICOM America, Inc. and Motorola. The Company also
produces modules that add signaling features to radios, including "man-down"
(emergency signal broadcast if radio position becomes horizontal), "stun-kill"
(disables lost or stolen radios remotely) and "over-the-air reprogramming"
(changes encryption and scrambling codes remotely). In December 1997, the
Company introduced an LMR encryption module for use as an add-on or in OEM
equipment that uses the digital encryption standard called "DES." This module
uses the widely recognized DES algorithm for encoding transmissions.
TELEPHONY SECURITY
The Company's add-on scramblers for cellular telephones typically consist of
a modular circuit board designed to be permanently soldered into existing
telephone circuitry. The add-on scrambler product line includes a model designed
specifically for Motorola telephones, which features advanced digital signal
processing technology. With the increased deployment of digital or PCS systems
by cellular service providers, the demand for add-on voice security products for
analog equipment has resulted and will likely continue to result in reduced
demand for add-on voice security devices for analog telephones, such as those
produced by the Company.
The Company offers cellular telephones upgraded to include the Company's
advanced add-on scrambling modules. The Company believes that offering cellular
telephone security through a complete telephone product offers certain
advantages over add-on scrambler sales. These advantages include (1) presenting
the customer with a single vendor, (2) overcoming customer resistance to
surrendering their telephones during installations and (3) allowing the Company
to market cellular security directly to cellular service providers. In the area
of landline telephone voice security, the Company has, since 1995, produced
landline scrambling and encryption devices for installation between the handset
and telephone base, which have been purchased primarily by overseas government
and corporate users. In 1997, the Company introduced a line of complete landline
telephones with built-in voice security capability.
Due to a lack of demand, the Company determined in mid-1998 to discontinue
offering its "Secure Office" product line. This product allowed a company-wide
telephony and data security solution based upon products using real-time
high-speed encryption techniques.
WIRELESS COMMUNICATIONS PRODUCTS
The Company sells its wireless communications products primarily to LMR
dealers, SMR operators, governmental entities and the utility industry.
End-users include B&I concerns and public safety and other government users
desiring point to multi-point communications. Most of these types of products
are sold under the "E.F. Johnson" brand name. To increase its product offering
to its wireless customers, the Company has incorporated its encryption
technology into its wireless communications radio products. The following
discussion summarizes the types of products typically sold to both of these
types of users.
BUSINESS AND INDUSTRIAL USERS
The Company serves the B&I market primarily with its LTR-Registered
Trademark- and analog conventional LMR product lines. The Company's analog
conventional LMR product line is sold into all of the LMR markets which the
Company serves. Management believes that significant niche markets continue
to exist for analog conventional LMR products with value added technology,
such as signaling protocols, security features and scrambling technology.
The LTR-Registered Trademark- product line incorporates the E.F. Johnson
LTR-Registered Trademark- trunking protocols and includes (1) sub-audible
signaling, which automatically selects a clear or unoccupied channel, (2)
open architecture that is compatible with other analog products and (3)
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transmission trunking which provides efficient use of the channels. In December
1997, the Company completed the design of a trunked LMR system known as
"LTR-Net(TM)," which uses its LTR-Registered Trademark- trunking system in a
wide-area configuration, allowing linked communications over a much larger
geographic area than a single trunked system while also providing a much
needed array of user security functions.
The Company's products for the SMR market include mobile radios, portable
radios and repeaters, along with other infrastructure to provide a complete SMR
system. The Company targets smaller regional SMR operators which offer a
combination of dispatch and interconnect services and the traditional local SMR
operators and dealers who serve local businesses primarily with dispatch
service. In serving this market, the Company relies heavily on its network of
dealers, many of whom are authorized by the Company as service centers and
provide installation, maintenance, repair and warranty service. The Company
believes that the end-users of these products value (1) the low cost of point to
multi-point communications, (2) flexibility of networking and (3) support and
responsiveness of the Company and its dealers.
Competition in the domestic business and industrial market has been
increasing. New 800 MHz SMR frequencies are not available and existing channels
are filling up. SMR operator's with licenses for 900 MHz channels have been slow
to develop their build outs. There has been consolidation in both of these SMR
marketplaces. A large number of SMR systems have been converting from analog to
digital, which has resulted in the increasing availability of used analog radios
and repeaters in the marketplace. These factors have contributed to reduced
market demand for new and existing products. Competitors have been reducing
their prices and therefore putting pressure on the Company's prices and margins
in this market.
PUBLIC SAFETY AND OTHER GOVERNMENT USERS
The Company serves public safety and other government users primarily
with its APCO 16 Multi-Net(TM) analog and APCO 25 digital product lines. The
APCO 16 Multi-Net(TM) was built upon the success of the E.F. Johnson
LTR-Registered Trademark- trunking protocol. The Company believes that its
Multi-Net(TM) system, which links together multiple sites for wide-area
coverage using a proprietary architecture, is a high-quality, cost-effective
alternative to comparable APCO 16 systems produced by other manufacturers.
The Company's system offers many features specifically designed for public
safety users, such as (1) emergency queuing, (2) over 8,000 unique
identification codes, (3) automatic subscriber identification, (4) five
levels of priority access, (5) simulcast, and (6) a wide area system
configuration. The Company provides a broad line of Multi-Net(TM) products,
including repeaters, radio network terminals, system management modules,
duplex subscriber units, dispatcher consoles, audio and data link and related
accessories. E.F. Johnson Multi-Net(TM) systems are sold both domestically
and internationally. The Company's APCO 25 compliant analog/digital radios
are compatible and interoperable with older analog radio systems, as well as
with Motorola's proprietary analog APCO 16 trunking technology (SmartNet(TM)
and Smartzone(TM)) and proprietary digital encryption algorithms. In August
1996, the Company introduced a hand held digital LMR complying with the APCO
25 "common air interface" standard and also featuring advanced core
scrambling and digital encryption technologies. All of the Company's APCO 25
radios contain as standard features voice scrambling and/or digital
encryption technology. The Company believes that such backward compatibility
with most Motorola's APCO 16 trunking technology will provide early adopters
of the APCO 25 standard, such as the federal government and many public
safety agencies, with the ability to purchase new equipment without replacing
entire older systems.
PRODUCTS UNDER DEVELOPMENT
Consistent with the Company's development efforts for its existing products,
the Company designs new products around common core scrambling and encryption
technologies using common signal processing platforms and circuitry. Using this
approach, the Company has generally been able to incorporate improvements in
core technologies into its new products more quickly and with relatively lower
development costs compared to developing entire products separately. The
following discussion contains a summary of the Company's principal products
under development. The Company cannot assure that it will be able to
successfully develop any of these products or, if developed, that any such
products will be commercially viable or result in material sales.
LAND MOBILE RADIO SECURITY
The LMR security products under development are new versions of the
Company's SC20-DES module for deployment in different models of radios,
including sockets in certain new model Motorola radios introduced in late 1998.
From time to time, the Company also has under development a number of custom
security modules, including those incorporating custom encryption and scrambling
algorithms.
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TELEPHONY SECURITY
Telephony security products under development include voice security modules
for Nokia and Qualcomm phones.
WIRELESS COMMUNICATIONS
The Company plans to introduce in 1999 additional models of its hand-held
digital LMRs containing different features, as well as a line of mobile digital
LMRs, which are intended to comply with the APCO 25 standard. The Company also
plans to introduce additional mobile radio models that transmit in analog format
(E.G., APCO 16 and conventional LMRs) for the existing analog market, which can
be upgraded to complete APCO 25 functionality. These radios will contain as
optional features voice scrambling and/or digital encryption technology. These
radios will also be compatible and interoperable with older analog LMRs, and
some of the radios will offer compatibility with most of Motorola's proprietary
analog APCO 16 trunking technology (SmartNet(TM)/SmartZone(TM)) and Motorola's
digital encryption algorithms. At this time, the Company has not undertaken the
development of APCO 25 infrastructure equipment, but has entered into an OEM
agreement with a third party vendor for conventional APCO 25 repeater products.
The Company also plans to introduce a new line of cost effective radios
primarily for its LTR-Net(TM) system, but also capable of analog voice
transmissions in LTR-Registered Trademark- and conventional modes of operation.
CUSTOMERS
The Company's customers use information security products in a variety of
situations involving differing security needs. For example, domestic and
international police forces typically have a medium to high need for security,
while military users which are often faced with hostile and determined threats
typically have a very high need for security. Purchasers of the Company's
information security and wireless communications products include public safety
agencies and police forces, federal government agencies, foreign governments,
the military, cellular service providers, LMR manufacturers and business and
corporate users in finance, manufacturing and media/entertainment, among other
industries. No customer accounted for more than 10% of the Company's revenues
during 1998.
SALES AND MARKETING
The following discussion summarizes the Company's current sales and
marketing approaches for its different products:
INFORMATION SECURITY
The Company sells its add-on products domestically primarily to
distributors, OEMs and self-servicing end-users, through sales managers while
complete radio products are sold domestically primarily to end-users.
Furthermore, the Company is continuing to market radio and other complete
products to its existing add-on customer base.
The Company conducts international sales through its sales managers, who
focus on specific regions of the world outside of the United States. The
majority of international sales are made by the sales managers in conjunction
with a Company-authorized distributor, which typically provides a local contact
and arranges for technical training in foreign countries. See "-- Summary of
Business Considerations and Certain Factors That May Affect Future Results of
Operations and/or Stock Price -- Risks Associated with International Sales."
The Company distributes its add-on information security products to both (1)
end-users in the LMR and telephony markets and (2) distributors, such as LMR
dealers, that resell these products to end-users. Currently, the Company sells
self-branded, complete, analog secure cellular telephones primarily through
distributors and cellular service resellers.
The Company's basic marketing strategy has been to increase market awareness
of the need for information security products and to convey the technical
capabilities of its products. The telephony security products marketing staff
conducts promotions through a mix of print advertising, trade shows, direct mail
campaigns, press releases and presentation material, and distribution of
demonstration and loaner equipment, which are sometimes coordinated with product
launches and trade shows.
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WIRELESS COMMUNICATIONS
The Company's sales and marketing functions for LMR systems focus on (1) the
North American market and (2) the international market. For North American
sales, the Company uses a direct sales force of account executives and sales
managers, who sell Company products primarily (1) in the APCO market and (2) to
larger dealers, SMR operators, and telemarketing personnel who sell primarily to
smaller dealers and SMR operators. The Company's international sales are made
through a specialized international direct sales force and by Company authorized
dealer/distributors.
LTR(R) and conventional LMR products are sold in North America primarily to
independently owned and operated dealers, some of which are also SMR operators.
The dealers typically carry other competitive product lines as well. These
products are distributed internationally primarily through dealers and
distributors located in more than 45 countries. Many of the dealers also are
authorized as service centers and provide installation, maintenance, repair and
warranty service. The Company provides comprehensive dealer support, including
cooperative advertising programs, advertising materials, sales and service
training, and technical support.
The majority of system sales of LMR products to both commercial and
governmental purchasers involves soliciting and responding to "requests for
proposals," commonly referred to as "RFPs." The RFP process for system sales has
a relatively long cycle time. The period from proposal requirements to contract
award typically takes at least one year, and depending on the size of the
system, it can take multiple years for complete installation and acceptance of
the project. Public sector end-users issuing RFPs often require suppliers of LMR
systems to supply a bond from an approved surety company at the time that the
bid is submitted and at the time that the contract is awarded.
A number of factors can limit the availability of such bonds, including the
applicant's financial condition and operating results, the applicant's record
for completing similar systems contracts in the past and the extent to which the
applicant has bonds in place for other projects. During 1998, the Company
experienced problems with the completion of systems contracts for certain E.F.
Johnson projects begun prior to the Company's acquisition of E.F. Johnson. The
Company believes that it has corrected most of these systems problems and is
working to correct the remaining problems. If a customer for a systems contract
declares an event of default under the outstanding bond related to the system
contract, the issuer of the Company's bonds could reduce the maximum amount of
bond coverage available to the Company or impose additional restrictions with
respect to the issuance of bonds on behalf of the Company. A reduction in the
amount of bond coverage available to the Company or any restrictions imposed in
connection with the issuance of bonds would adversely affect the Company's
ability to bid on new system contracts in the future.
CUSTOMER SERVICE
For the Transcrypt product line, the Company provides toll-free telephone
access for customers with technical or other problems. The Company will
customize product training for its customers using a classroom approach or
seminars at either or both the customer's site and the Company's Lincoln
facility. The Company offers a standard warranty on all products, which covers
parts and labor for a period of one year from purchase, with an extended
warranty service option available at an additional cost.
The Company installs, for a fee, all models of scrambler modules into
customers' LMRs and telephones. Scrambler modules that the Company does not
install are generally installed by local radio and cellular telephone dealers.
The Company documents installation instructions for its products in OEM devices
and has developed these instructions for more than 2,000 OEM products, including
almost all commercially available two-way radio models sold worldwide.
For the E.F. Johnson product line, the Company's customer service group
provides worldwide after-sales service and support, including technical support
through a toll-free telephone number, on-site technical personnel for repairs
and applications issues, 24-hour turnaround for spare parts and extensive
product training. Product training includes classes and seminars available at
both the customer's site and Waseca manufacturing facility. Such training
provides assistance to the end-user in the use, operation and application of LMR
products and systems, and trains other end-users and dealers to perform network
programming changes and preventive maintenance and repair to products and
systems. LMR products and systems are generally sold with a one year warranty
which covers parts and labor in North America and parts internationally. Broader
warranty and service coverage is provided in certain instances to private
systems customers on a contractual basis, usually for an additional charge.
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MOTOROLA RELATIONSHIP
Motorola is a key manufacturer of electronic components used by the Company.
These components include microprocessors and components used in most of the
Company's scramblers and LMRs, which the Company purchases through an
electronics wholesaler. Furthermore, pursuant to a product sales agreement
executed in June 1996, Motorola sells to the Company, upon the Company's
request, original equipment cellular telephones and related accessories from
Motorola's MicroTAC(TM) line, which the Company resells equipped with its
DSP-based encryption devices and labeled with the Transcrypt logo. This
agreement with Motorola specifies fixed prices for purchases of such equipment,
and provides that after December 31, 1997, either party may terminate the
agreement upon 30 days' prior notice. The Company may also purchase from
Motorola base stations, repeaters and other LMR infrastructure components in
order to fulfill systems contracts requiring compatibility with these devices.
The Company has obtained from Motorola a royalty-bearing, irrevocable,
non-exclusive, worldwide license (the "IPR License") to manufacture products
containing certain proprietary LMR and digital encryption technology. The
Company believes this technology will be important to the success of certain of
its existing and proposed APCO 25 compliant LMR products. The IPR License
includes rights to use Motorola's proprietary analog APCO 16 trunking technology
(SmartNet(TM)), APCO 25 required products and certain Motorola digital
encryption algorithms in LMR products. The digital encryption technology may
also be incorporated into certain other information security products. In
addition, E.F. Johnson, prior to its acquisition by the Company, obtained a
license to certain proprietary technology from Motorola relating to the
development of APCO 25 compliant digital LMRs. This license covered
infrastructure and other APCO 25 technology. Subsequent to the acquisition,
Motorola agreed to expand the coverage of Transcrypt's license to SmartNet(TM)
to cover E.F. Johnson's products.
In addition to the direct benefits of the IPR License to the Company's APCO
25 development efforts, the Company believes that sales of its APCO 25 digital
LMR products have been, and expect that such sales will in the foreseeable
future be, substantially dependent upon Motorola's dominant position as a market
leader in the APCO 25 marketplace. Motorola is the largest manufacturer of APCO
25 compliant LMR products and has been the principal public supporter of the
APCO 25 digital transmission standard for the LMR market. Any reduction in such
support could lead to reduced demand for APCO 25 compliant LMR systems
generally. See "-- Summary of Business Considerations and Certain Factors That
May Affect Future Results of Operations and/or Stock Price -- Reliance on
Motorola."
INTELLECTUAL PROPERTY
Transcrypt presently holds registered copyrights which cover software
containing algorithms for frequency hopping, scrambling and signaling
technologies for LMR and cellular telephony, and one domestic patent, which
covers continuous synchronization methods used in analog scrambling products.
Transcrypt has been granted 8 patents relating to high-end scrambling and
encryption techniques and methods of integrating after-market devices, such as
the Company's modules, into OEM products, and has applied for 28 additional
domestic patents in this area. Transcrypt also holds three registered trademarks
related to the "Transcrypt" name and product names. In addition to the rights
held by Transcrypt, E.F. Johnson currently holds or has been assigned at least
23 U.S. patents, 10 pending applications for U.S. patents, 11 patents in foreign
countries and 8 pending applications for patents in foreign countries. These
patents and applications cover a broad range of technologies, including trunking
protocols and a high-speed data interface for LMR communications. Furthermore,
E.F. Johnson holds numerous registered trademarks related to the "E.F. Johnson"
name and product names. In addition to copyright and patent laws, the Company
relies on trade secret law and employee and third-party non-disclosure
agreements to protect its proprietary intellectual property rights.
RESEARCH AND DEVELOPMENT
As of December 31, 1998, the Company had a research and development staff of
78 individuals, including 75 engineers. The Company organizes research and
development efforts along its two main product lines, (1) information security
and (2) wireless communications products. As part of the integration of E.F.
Johnson's research and development team with Transcrypt's research and
development efforts, the Company has focused significantly on integrating
technologies in order to offer new advanced products by taking advantage of the
competencies of each of the engineering staffs of Transcrypt and E.F. Johnson.
For example, the combined staffs have worked on projects to integrate digital
signal processing technology into the E.F. Johnson radios to make them
interoperable with Multi-Net(TM), SmartNet(TM) and APCO 25.
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INFORMATION SECURITY
The Company's research and development personnel in the information security
area have expertise in various fields, including cryptography, analog hardware,
digital hardware, and object-oriented software. The research and development
staff designs and develops products incorporating digital signal processing,
voice coding (including improved multi-band excitation), encryption, spectral
manipulation and rotation, systems simulation and mixed signal scrambling.
WIRELESS COMMUNICATIONS
The Company's wireless communications research and development organization
have expertise in radio frequency technology, computer architecture, switch
architecture, networking, software and analog and digital hardware designs.
Ongoing engineering efforts are focused on adding additional features to
existing product lines and developing new and innovative platforms.
Cross-disciplinary planning groups involving marketing, manufacturing and
engineering are used for product planning and definition. Present research and
development efforts are involved in upgrading existing product lines, including
the development of next generation repeaters and mobile radios for the Company's
principal product lines. The Company also has a staff of systems applications
design, manufacturing and customer service engineers that focuses on design and
implementation of customized radio systems.
MANUFACTURING
The Company's manufacturing operation generally consists of the procurement
of commercially available (1) subassemblies, (2) parts and (3) components, such
as integrated circuits, printed circuit boards and plastic and metal parts, and
their assembly into finished products. Certain components and subassemblies are
manufactured by vendors to the Company's specific design criteria. The Company
inspects all components and subassemblies for mechanical and electrical
compliance to its specifications in order to ensure high yield and quality.
The Company produces many of its wireless communications products, including
its APCO 25 compliant products, at its Waseca, Minnesota facility. The Company
manufactures all of its information security products at its facility in
Lincoln, Nebraska. The Company is currently evaluating alternative manufacturing
strategies to reduce costs and improve efficiencies.
MATERIALS AND SUPPLIERS
INFORMATION SECURITY
The Company obtains most of its electronic parts and components for
information security and radio products from one principal distributor,
Arrow/Schwebber Electronics Group. The Company believes that concentrating its
purchases through one principal distributor lowers procurement costs and
enhances the ability to control the quality of these components and
subassemblies. The distributor stores several months' supply of basic
components, such as microprocessors, flash, and digital signaling processors,
on-site at the Company's manufacturing location on a consignment basis, which
reduces inventory maintenance costs. Additionally, the Company acquires from
other manufacturers certain high-end subassemblies, such as radio frequency
boards for use in complete LMR units that the Company manufactures. See
"-Summary of Business Considerations and Certain Factors That May Affect Future
Results of Operations and/or Stock Price -- Dependence on Suppliers."
WIRELESS COMMUNICATIONS
Certain components and subassemblies used in the Company's wireless
communications products are presently available only from a single supplier or a
limited group of suppliers. To date, the Company has been able to obtain
adequate supplies of key components and subassemblies in a timely manner from
existing sources. Currently, Motorola is the sole supplier of a majority of the
semiconductors used in certain of the Company's LMR products. Although
historically the Company has not experienced a disruption of Motorola's supply
of this product, disruption or termination of Motorola's supply of this product
would have a material adverse effect on the Company's operations.
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Most of the Company's newer analog LMRs for the B&I market have been
manufactured by Icom Japan ("ICOM") under contract by the Company. Products
produced by ICOM have included hand-held portable radios that operate in both
conventional and trunked mode and more recently, mobile units as well. In
general, the Company and ICOM have jointly developed new products produced by
ICOM for the Company. Although historically the Company has not experienced a
disruption in ICOM's ability to supply these products, disruption or termination
would have a material adverse effect on the Company's ability to supply certain
LMRs to its B&I customers. ICOM requires that the Company supply a letter of
credit before products are shipped to the Company.
With respect to other electronic parts, components and subassemblies, the
Company believes that alternative sources could be obtained to supply these
products, if necessary. Nevertheless, a prolonged inability to obtain certain
components and subassemblies could impair customer relationships and could have
an adverse effect on the Company's operating results. See "-- Summary of
Business Considerations and Certain Factors That May Affect Future Results of
Operations and/or Stock Price -- Dependence on Suppliers."
GOVERNMENT REGULATION AND EXPORT CONTROLS
INFORMATION SECURITY
The Company's information security products have been subject to export
restrictions administered by the Department of State and the Department of
Commerce, which permit the export of encryption products only with the required
level of export license. U.S. export laws also prohibit the export of encryption
products to a number of specified hostile countries. Although to date the
Company has been able to secure most required U.S. export licenses, including
for export to approximately 116 countries since 1978, there can be no assurance
that the Company will continue to be able to secure such licenses in a timely
manner in the future or at all. Based on prior experience in securing export
approvals, the Company believes that it maintains good relations with federal
government agencies with jurisdiction over its products. Additionally, in
certain foreign countries, the Company's distributors are required to secure
licenses or formal permission before encryption products can be imported.
In November 1996, President Clinton issued an Executive Order (the
"Executive Order") altering the federal government's policies governing the
export of encryption products, such as those currently offered and proposed to
be offered by the Company. The Executive Order shifts jurisdiction for export
controls and licensing relating to encryption technology from the Department of
State to the Department of Commerce and removes from the "munitions" list most
encryption products. In addition, the Executive Order establishes a key
management control program, under which a third-party would hold "keys" to
unlock encrypted information for legitimate law enforcement and national
security needs. As a result of the Executive Order, certain products featuring
digital encryption technology that had not previously been exportable can now be
exported. This development may increase competition for international sales of
the Company's analog scrambling products. Under interim regulations adopted in
December 1996 by the Department of Commerce, during a two-year transition
period, non-key recoverable 56-bit digital encryption products may be approved
for export if the manufacturer (1) commits to build and market key recovery
products and support key management infrastructure in the future and (2)
provides to the government interim reports detailing internal development
efforts.
In September 1998, the Clinton Administration announced plans to ease export
restrictions on encryption products for U.S. companies in the finance,
healthcare, insurance and electronic commerce industries. The plan would allow
the export of 56-bit encryption products without requiring provisions for key
recovery, after a one-time review, to interested parties outside of designated
terrorist nations. The new policy would allow export of encryption products of
any strength if key recovery or access to plaintext is provided to a third
party. The Clinton Administration will also support the Federal Bureau of
Investigation's proposal to create a technical support center to aid law
enforcement in staying abreast of new encryption technologies. While industry is
usually supportive of any easing of export restrictions, they argue that 56-bit
encryption has been broken and that stronger encryption is now necessary.
In response to industry opposition to the Clinton Administration's policies,
Members of Congress have taken aggressive steps to further expand exports of
encryption products. In the 106th Congress, Members of the House of
Representatives and Senate have introduced legislation to loosen export
restrictions on export technology. In the House, pro-strong encryption
legislation sponsored by Rep. Bob Goodlatte (R-VA) currently has the backing of
much of the Republican and Democratic leadership, as well as over 300 sponsors.
Rep. Goodlatte's bill H.R. 850, would allow for the export of any mass-market
encryption software or hardware and allow for the export of customized products
equal in strength to what is available in foreign markets. However, the Clinton
Administration opposed similar legislation during the 105th Congress. Also, the
FBI and national security officials continue to argue that lifting current
controls would give criminals and terrorists access to unbreakable encryption
products.
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In the Senate, Senator Conrad Burns has announced plans to introduce
legislation similar to his bill from the 105th Congress, the Promotion of
Commerce On-Line in the Digital Era Act. The bill prohibited mandatory key
recovery and established an Information Security Board as a forum to foster
communication and coordination between industry and government. Additional bills
in both the House and Senate are expected to be introduced.
Management cannot predict whether any legislation easing export controls
will be enacted, what form it will take or how the Executive Order or any such
legislation will impact international sales of the Company's products.
WIRELESS COMMUNICATIONS
The Company's stand alone wireless products are subject to regulation by the
FCC under the Communications Act of 1934, as amended, and the FCC's rules and
policies as well as the regulations of the telecommunications regulatory
authority in each country where the Company sells its products. These
regulations are in the form of general approval to sell products within a given
country for operation in a given frequency band, one-time equipment
certification, and, at times, local approval for installation. In addition, the
construction, operation and acquisition of wireless communications systems, as
well as certain aspects of the performance of mobile communications products,
are regulated by the FCC and foreign regulatory authorities. Many of these
governmental regulations are highly technical and subject to change. The Company
believes that it and its products are in material compliance with all
governmental rules and policies in the jurisdictions where the Company sells its
products.
In the United States, all of Transcrypt's wireless products are subject to
FCC Part 15 rules on unlicensed spread spectrum operation. In those countries
that have accepted certain worldwide standards, such as the FCC rulings or those
from the European Telecommunications Standards Institute, Transcrypt has not
experienced significant regulatory issues in bringing its products to market.
Approval in these markets involves retaining local testing agencies to verify
specific product compliance. However, many developing countries, including
certain markets in Asia, have not fully developed or have no frequency
allocation, equipment certification or telecommunications regulatory standards.
The majority of the systems operated by E.F. Johnson's customers must comply
with the rules and regulations governing what has traditionally been
characterized as "private radio" or private carrier communications systems.
Licenses are issued to use frequencies on either a shared or exclusive basis,
depending upon the frequency band in which the system operates. Some of the
channels designated for exclusive use are employed on a for-profit basis; others
are used to satisfy internal communications requirements. Most SMR systems in
operation today use 800 MHz channels. Within the top 50 metropolitan markets,
900 MHz frequencies licensed for exclusive use systems have been made available
to both SMR and non-SMR licensees. Additional channels designated for exclusive
use were made available in the 220 MHz band for both commercial and
non-commercial systems.
Generally, SMR licenses are issued for five-year terms, initially in blocks
of five channels, and may be renewed upon showing compliance with FCC rules and
may be revoked for cause. Such licenses typically are subject to channel
"loading" or usage requirements, such as loading a minimum of 70 subscriber
units for each channel within the initial five-year term. If an SMR licensee
fails to meet its loading requirements in an area where existing applications
are pending on a wait list, the FCC may cancel the license, in whole or in part,
or deny a request to renew or expand the license. Other than loading
requirements, private systems are subject to similar restrictions. For example,
licenses for private systems are also issued for five-year terms, may be renewed
upon showing compliance with FCC rules and may be revoked for cause.
E.F. Johnson also offers products in bands below 800 MHz where channels are
shared by multiple users in the same geographic area. In this "shared" or
conventional spectrum, there is no requirement for loading the channel to any
particular level in order to retain use of the frequencies. These channels are
generally used by entities satisfying traditional dispatch requirements in,
among others, the transportation and services industries.
The FCC is considering a number of regulatory changes that could affect the
wireless communications industry and the Company's business. Therefore, the
regulatory environment is inherently uncertain and changes in the regulatory
structure and laws and regulations, both in the United States and
internationally, can adversely affect the Company and its customers. Such
changes could make existing or planned products of the Company obsolete or
unsaleable in one or more markets, which could have a material adverse effect on
the Company.
The FCC, through the Public Safety Wireless Advisory Committee, is
considering regulatory measures to facilitate a transition by public safety
agencies to a more competitive, innovative environment so that the agencies may
gain access to higher-quality transmission, emerging technologies, and broader
services, including interoperability. In August 1998, the FCC adopted rules for
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licensing the largest block of spectrum ever allocated at one time for public
safety. The FCC established rules for licensing 24 megahertz in the 700 MHz band
and established a band plan for use of this spectrum. In accordance with this
rule, in January 1999 the FCC established a Public Safety National Coordination
Committee to advise it on issues relating to the use of the 700 MHz public
safety spectrum. The Committee would be responsible for formulating a national
interoperability plan, recommending technical standards to achieve
interoperability spectrum, and providing policy recommendations on an advisory
basis to the regional planning committees in order to facilitate the development
of coordinated plans. The Committee's recommendations could affect products
manufactured by the Company. Management cannot predict the outcome of the FCC
review or any specific changes in the spectrum of FCC policies, or any potential
effect on the Company's sales.
COMPETITION
INFORMATION SECURITY
The markets for information security products are highly competitive.
Significant competitive factors in these markets include product quality and
performance, including (1) the effectiveness of security features, (2) the
quality of the resulting voice or data signal, (3) the development of new
products and features, (4) price, (5) name recognition and (6) the quality and
experience of sales, marketing and service personnel. A number of companies
currently offer add-on scramblers for LMRs that compete with the Company's
add-on information security products, including Selectone Corp., Midian
Electronics Inc., and MX-COM Inc. Also, Motorola and Ericsson offer high-end,
proprietary digital encryption for their LMR products. Cycomm International
Inc./Privaphone and Motorola offer add-on security products for cellular
telephones. Competitors to the Company's secure landline telephone products
include AT&T Corporation/Datatek, Motorola, Cycomm International Inc., Cylink
Corporation and TCC (Technical Communications Corporation).
WIRELESS COMMUNICATIONS
In North America, Motorola, Kenwood and Ericsson are the leading providers
of LMR equipment. The remainder of the LMR market is divided among a large
number of suppliers who focus on particular segments of the market. The Company
believes it is the third largest provider of specialized radio systems in North
America. However, the Company's share of this market is relatively small in
comparison to sales by Motorola and Ericsson.
The Company competes in the wireless communications market on the basis of
price, technology and the flexibility, support and responsiveness provided by
the Company and its dealers. The Company is also experiencing reduced demand for
and downward pricing pressure on its wireless communication analog products sold
to business and industrial users. Management believes that this is due to
several factors. These include the fact that (1) no new 800 MHz SMR frequencies
are being made available and existing channels are filling up; (2) SMR
operator's with licenses for 900 MHz channels have been slow to develop their
build outs; (3) there has been consolidation in both of these SMR marketplaces;
and (4) a large number of SMR systems have been converting from analog to
digital which has resulted in the increasing availability of used analog radios
and repeaters in the marketplace. Most of the Company's competitors in wireless
communications have financial, technical, marketing, sales, manufacturing,
distribution and other resources substantially greater than those of the
Company.
In addition, many of the Company's competitors also possess entrenched
market positions, other intellectual property rights and substantial
technological capabilities. In the North American SMR market, the Company's
competitors include Motorola, Ericsson, Uniden America Corporation ("Uniden"),
Kenwood U.S.A. Corp., ICOM America, Inc., Relm Corporation and Midland
International Corp. The Company believes that cellular telephones and personal
communication services devices provide, to some extent, the same functionality
as SMRs and other LMRs and, as such, may compete with its products. The Company
believes that the international wireless communications market is fragmented,
with Motorola, Kenwood, Nokia, and Ericsson the dominant suppliers. The Company
also competes with Uniden, Hitachi Denshi, Ltd. and Tait in Asia.
As of March 26, 1999, the Company, Motorola, Relm Communications, Racal
Communications and Kenwood are believed to be the current suppliers of APCO 25
LMR products. Companies which have announced or are anticipated to announce the
availability of APCO 25 compliant products or digital LMRs include ADI, AMP,
Midland Systems and Daniels Communications.
Many of the Company's competitors have substantially greater financial,
technical, marketing, distribution and other resources, greater name recognition
and longer-standing relationships with customers than the Company. Competitors
with greater financial resources are better able to engage in sustained price
reductions in order to gain market share. Any period of sustained price
reductions would have a material adverse effect on the Company's financial
condition and results of operations. The Company cannot
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assure that it will be able to compete successfully in the future or that
competitive pressures will not materially and adversely affect its financial
condition and results of operations.
BACKLOG
The Company presently ships a small amount of information security products
against backlog, due to the typically short manufacturing cycle of these
products. Because of generally longer manufacturing cycle times required for the
production of complete wireless communication products, the Company's backlog
for wireless communication products has been larger than for its security
products. The Company does not believe that its backlog figures are indicative
of actual sales of products in future periods.
EMPLOYEES
At December 31, 1998, the Company had 354 full-time equivalent employees,
including 106 at its Lincoln, Nebraska facility, 217 at its Waseca, Minnesota
facility, 8 at its Burnsville, Minnesota sales office and approximately 23 field
sales people, sales managers or staff located in the sales territories in which
they serve. The Company also uses temporary employees, independent contractors
and consultants when necessary to manage fluctuations in demand. None of the
Company's employees are covered by a collective bargaining agreement.
SUMMARY OF BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS AND/OR STOCK PRICE
Certain matters discussed in this Annual Report may constitute
forward-looking statements under Section 27A of the Securities Act and 21E of
the Exchange Act. These forward-looking statements relate to, among other
things, the outcome of pending class action litigation involving the Company,
the outcome of the pending investigation by the SEC, the effects of the
Company's restatement of its financial statements on the Company's product
development efforts, future sales levels and customer confidence, the Company's
future financial condition, liquidity and business prospects generally,
perceived opportunities in the marketplace for the Company's products and its
products under development, expectations regarding the Company's efforts to
resolve Year 2000 issues and the effects of a failure to resolve such issues and
the Company's other business plans for the future. The actual outcomes of these
matters may differ significantly from the outcomes expressed or implied in these
forward-looking statements. The following is a summary of some of the important
factors that could affect the Company's future results of operations and its
stock price, and should be considered carefully.
SECURITIES CLASS ACTION CLAIMS
The Company has been named as a defendant in 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, as
amended, also name one or more current and former officers of the Company and
PriceWaterhouseCoopers, LLP 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.
Although the class action lawsuits 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 material. 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.
On November 4, 1998, Physician's Mutual Insurance Company filed an action in
the District Court of Douglas County, Nebraska against the Company,
PriceWaterhouseCoopers, LLP and two former officers of the Company. The
complaint contains common law causes of action for fraudulent misrepresentation,
fraudulent concealment and negligent misrepresentation against the defendants
arising from the same facts and circumstances underlying the class actions. The
complaint seeks damages in an amount to be proved at trial, but which is
currently alleged to be approximately $850,000.
Many factors will ultimately affect and determine the results of the
litigation. The Company can provide no assurance that the outcomes will not have
a material adverse effect on the Company's business, financial condition,
liquidity, results of operations and cash flows.
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The pending litigation, SEC investigation and any future litigation against
the Company and its officers or directors, regardless of outcome, has resulted,
and will continue to result, in costs and expenses to the Company for legal and
related assistance not covered by insurance. Accordingly, any such pending or
future litigation could have a material adverse effect on the Company,
regardless of the outcome of the litigation. For further information regarding
legal proceedings see "ITEM 3. LEGAL PROCEEDINGS."
SEC INVESTIGATION
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. While it is not possible at this time
to determine whether the SEC is likely to initiate enforcement action against
the Company or the outcome of the SEC's investigation, the SEC has the authority
to impose a variety of sanctions against the Company and Company-affiliated
parties. Such sanctions could include monetary penalties, imposition of a cease
and desist order and issuance of removal and prohibition orders against
Company-affiliated persons, among other things.
EFFECTS OF RESTATEMENT, CLASS ACTION LAWSUITS AND SEC INVESTIGATION ON THE
COMPANY'S BUSINESS
The restatement of the Company's financial statements, class action lawsuits
and the SEC investigation have had an adverse impact on the Company's business,
financial condition, results of operations, liquidity and cash flows. Subsequent
to March 31, 1998, the Company has experienced declining revenues, substantial
operating losses, and substantially reduced liquidity.
Because of the uncertainties resulting from those events, the Company is
also evaluating all of its product lines, and has implemented and is continuing
to look at various initiatives to reduce operating expenses in order to keep
them in line with revenues. Implementation of any plan resulting from these
initiatives may result at some future date in substantial up front cost.
The Company can provide no assurance that the restatement of its financial
statements and the ongoing class action lawsuits and SEC investigation,
regardless of their outcomes, will not continue to have a material adverse
effect on the Company's business, financial condition, results of operations,
liquidity and cash flows. See "ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
COMPETITION
The information security and wireless communications equipment industries,
and the LMR market segment in particular, are highly competitive. Competition in
the sale of stand-alone and digital products is more intense than for add-on and
analog products. In addition, other wireless communication technologies,
including cellular telephone, paging, SMR, satellite communications and PCS
(personal communication services) currently compete and are expected to compete
in the future with certain of the Company's stand-alone products. Furthermore,
other manufacturers have announced or are anticipated to announce the
availability of APCO 25 compliant products or digital LMRs.
In addition, the competition in the domestic B&I market has been increasing
because of reduced demand for radios due to the absence of new 800 MHz SMR
frequencies being made available, the slow build out of 900 MHz channels and the
consolidation in both 800 MHz and 900 MHz SMR marketplaces reducing the number
of potential buyers. There are also a large number of SMR systems converting
from analog to digital which has resulted in the increasing availability of used
analog radios and repeaters in the marketplace.
Many of the Company's competitors or potential competitors have
significantly greater financial, managerial, technical and marketing resources
than the Company. Accordingly, the Company cannot assure that (1) it will be
able to continue to compete effectively in its markets, (2) competition will not
intensify or (3) future competition will not have a material adverse effect on
the Company. In addition, the Company cannot assure that new competitors will
not arise and begin to compete in the markets for the Company's products.
Motorola, Nokia, Kenwood, and Ericsson hold a dominant position in the
market for wireless communication products, especially in the LMR and cellular
telephone market segments. In North America, Motorola, Kenwood and Ericsson are
the leading providers of LMR equipment. While the Company believes that it is
the third-largest supplier in the North American specialized LMR equipment
market, the Company's share of this market is relatively small in comparison to
Motorola and Ericsson. In addition to providing equipment to the industry,
Motorola is one of the largest SMR operators in the United States. Motorola,
Kenwood, and Ericsson have
16
<PAGE>
financial, technical, marketing, sales, manufacturing, distribution and other
resources substantially greater than those of the Company, and have entrenched
market positions in certain segments of the North American LMR market. Certain
of the Company's competitors, including Motorola and Ericsson, have established
trade names, trademarks, patents and other intellectual property rights and
substantial technological capabilities.
The Company believes that the wireless communications equipment industry is
undergoing a period of consolidation which (1) may involve the acquisition or
merger of some of the significant manufacturers of these types of products and
(2) a concentration of market share in a relatively few companies. The Company
cannot assure that consolidations in the industry would not result in the
strengthening of its existing competitors or the creation of new competitors,
some of which may have significantly greater financial, managerial, technical
and marketing resources than the Company. See "-- Competition."
RELIANCE ON MOTOROLA
The Company is dependent on continuing access to certain Motorola products,
electrical components and proprietary intellectual property. Although the
Company believes that its relationship with Motorola is good, the Company cannot
assure that Motorola will continue to supply products, electrical components and
proprietary intellectual property to the Company on the scale or at the price
that it now does. In addition, Motorola may increasingly perceive the Company as
a competitor. This perception could impact Motorola's willingness to do business
with the Company. Although the Company has certain contractual relationships
with Motorola as a customer, most of these agreements are subject to termination
in certain circumstances and expire by their terms within one to ten years. Any
reduction of the Company's contractual relations with Motorola or a decision by
Motorola to reduce or eliminate the provision of products, components and
technology to the Company could have a material adverse effect on the Company.
See "-- Motorola Relationship."
TRANSITION FROM ANALOG TO DIGITAL PRODUCTS
The LMR and cellular telephone markets are migrating from analog to digital
equipment. This migration is primarily due to bandwidth capacity constraints and
the perception that digital transmissions are more secure than analog
transmissions. As a result, the Company is seeking to upgrade many of E.F.
Johnson's LMR products to be compatible with digital LMR communications
standards, including APCO 25. However, the Company cannot assure that it will be
able to effect this transition on a timely basis or that digital products will
compete successfully in the LMR marketplace. The failure of products to compete
successfully in the marketplace would have a material adverse effect on the
Company. In addition, there has been delay in the marketplace acceptance of
digital LMR communications standards. This delay may continue to adversely
affect sales of the Company's APCO 25 products. Furthermore, the transition from
analog to digital communications is resulting in, and in the future is likely to
continue to result in, a decrease in demand for the Company's add-on security
modules, as customers may perceive digital communications to be more secure than
communications using analog devices.
RAPIDLY EVOLVING MARKETS
The information security and wireless communications products markets in
which the Company competes are rapidly evolving and can be expected to further
evolve in the future as a result of changing technology, industry standards and
customer requirements. The Company's ability to compete effectively will depend
upon its ability to anticipate and react to these changes in a timely manner.
The Company may not have, either currently or in the future, adequate capital or
human resources to respond to these changes.
The development of new technologies by existing or future competitors may
place the Company at a competitive disadvantage by rendering some or all of its
existing or new products obsolete. The Company has invested heavily in the
introduction of LMR radios that comply with the APCO 25 standard. Some
manufacturers have adopted and actively support other digital LMR transmission
standards for the public safety marketplace. The widespread acceptance of one or
more other standards in the public safety market would have a material adverse
effect on the Company. See "-- Competition."
A recent technological development in the digital LMR industry has been the
use of digital trunking, digital simulcast and digital voting technologies.
These technologies have led a number of manufacturers to change the
architectures and methodologies used in designing, developing and implementing
large LMR systems. In order for the Company to develop and integrate these new
technologies into its products, the Company would be required to make a
substantial investment of capital and human resources, which resources may not
be available to the Company.
17
<PAGE>
The failure of the Company to incorporate these technologies into its LMR
products could in the future place the Company's LMR products at a competitive
disadvantage to those offered by other manufacturers and possibly make the
Company's hand-held and mobile LMRs incompatible with systems developed by other
manufacturers, which would have a material adverse effect on the Company.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
In 1998 and 1997, international sales constituted approximately 36.6% and
38.1% of revenues, respectively. International sales are subject to a number of
risks not found in domestic sales. These risks include (1) unexpected changes in
regulatory requirements, (2) tariffs and other trade barriers, (3) political and
economic instability in foreign markets, (4) difficulties in establishing
foreign distribution channels, (5) longer payment cycles, (6) uncertainty in the
collection of accounts receivable, (7) increased costs associated with
maintaining international marketing efforts and (8) difficulties in protecting
intellectual property. In particular, the purchase of Company products by
international customers presents increased risks of, among other things, delayed
or reduced collection of revenues. Because most of the Company's sales are
denominated in U.S. dollars, fluctuations in the value of international
currencies relative to the U.S. dollar may also affect the price,
competitiveness and profitability of the Company's products sold in
international markets. Furthermore, the uncertainty of monetary exchange values
has caused, and may in the future cause, some foreign customers to delay new
orders or delay payment for existing orders. Troubled economic conditions, such
as that being currently experienced in Asia and in Latin America, could result
in lower revenues for the Company.
Some of the Company's information security products are subject to export
controls under U.S. law, which in most cases requires the approval of the
Department of Commerce in order to ship internationally. The Company cannot
assure that such approvals will be available to it or its products in the future
in a timely manner or at all or that the federal government will not revise its
export policies or the list of products and countries for which export approval
is required. The Company's inability to obtain required export approvals would
adversely affect the Company's international sales, which would have a material
adverse effect on the Company. In addition, foreign companies not subject to
United States export restrictions may have a competitive advantage in the
international information security market. The Company cannot predict the impact
of these factors on the international market for its products. See "-Government
Regulation and Export Controls."
RELIANCE ON PUBLIC SECTOR MARKETS
Public safety agencies and other governmental entities comprise a
significant portion of the Company's current and anticipated customer base.
Because there is an unknown amount of governmental customers purchase through
dealers for the Company's Information Security segment, the Company cannot
determine the percentage of its products that are ultimately sold to
governmental agencies. However, the Company believes that domestic and
international governments are the end-users of most of its products. As the
transition in the Company's Information Security product line from add-on to
stand-alone products progresses and as competition for such sales intensifies,
the Company expects that it will increasingly be subject to competitive bidding
requirements for sales to governmental customers, which can be expected to
result in lower prices and longer sales cycles with resulting lower margins.
The Company's wireless communication segment public safety sales accounted
for approximately 35% of total sales for the Company in 1998. The Company did
not enter into any major new domestic systems contracts during 1998. The RFP
bidding cycle and contract award stage can take six months to two years before a
contract is awarded and the governmental customers funding process for these
systems can delay the bidding cycle as well.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its future success will depend in part on its
ability to attract, motivate and retain highly skilled engineering, technical,
managerial and marketing personnel. Competition for such personnel is intense
and the Company competes in the market for such personnel against numerous
companies, including larger, more established companies with significantly
greater financial resources than the Company. The Company cannot assure that it
will be successful in attracting, motivating or retaining such personnel.
DEPENDENCE ON SUPPLIERS
Most of the Company's current and proposed products require essential
electronic components supplied by outside vendors. Certain components may be
available from only one supplier and may occasionally be in short supply. For
example, in late 1993 and early 1994, there was a shortage of certain Motorola
surface-mount microprocessors, which resulted in a substantial increase in the
18
<PAGE>
cost of these components. The Company's inability to obtain key components could
result in lost sales, the need to maintain excessive inventory levels and higher
component costs, which could increase the cost of producing the Company's
products and have a material adverse effect on the Company.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced and expects to continue to experience quarterly
variations in its results of operations as a result of many factors. These
factors include the timing of customer orders, the timing of the receipt of cash
payment on sales which are recorded on a cash basis, the timing of the
introduction of new products, the timing and mix of product sales, general
economic conditions and specific economic conditions in the information security
and wireless communications industry. See "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Quarterly Results
of Operations."
REGULATORY ENVIRONMENT
Wireless communications and encryption products are subject to regulation by
United States and foreign laws and international treaties. The regulatory
environment is uncertain and changes in the regulatory structure and laws and
regulations can adversely affect the Company and its customers. Such changes
could make the Company's existing or planned products obsolete or unsaleable in
one or more markets, which could have a material adverse effect on the Company.
See "-- Risks Associated with International Sales" and "-- Government Regulation
and Export Controls."
ENVIRONMENTAL REGULATION
The Company is subject to various federal, state and local environmental
statutes, ordinances and regulations relating to the use, storage, handling and
disposal of certain toxic, volatile or otherwise hazardous substances and wastes
used or generated in the manufacturing and assembly of the Company's products.
Under these laws, the Company may become liable for the costs of removal or
remediation of certain hazardous substances or wastes that have been or are
being released on or in the Company's facilities, or have been or are being
disposed of offsite as wastes. Such laws may impose liability without regard to
whether the Company knew of, or caused, the release of such hazardous substances
or wastes.
The Company cannot assure that any environmental assessments the Company has
undertaken with respect to its facilities have revealed all potential
environmental liabilities, that any prior owner or operator of the Company's
properties did not create any material environmental condition not known to the
Company, or that an environmental condition that could result in penalties,
expenses, or liability to the Company does not otherwise exist in any one or
more of the Company's facilities. In addition, the amount of hazardous
substances or wastes produced or generated by the Company may increase in the
future depending on changes in the Company's operations. Any failure by the
Company to comply with present or future environmental laws could subject it to
the imposition of substantial fines, suspension of production, alteration of
manufacturing processes or cessation of operations, any of which could have a
material adverse effect on the Company. Compliance with such environmental laws
could require the Company to acquire expensive remediation equipment or to incur
substantial expenses. Furthermore, the presence of hazardous substances on a
property or at certain offsite locations could result in the Company incurring
substantial liabilities as a result of a claim by a private third-party for
personal injury or a claim by an adjacent property owner for property damage.
The imposition of any of the foregoing liabilities could materially adversely
affect the Company.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF THIRD-PARTY CLAIMS
OF INFRINGEMENT
The Company currently holds a number of domestic and international patents
and has on file applications for additional patents. Although the Company
assesses the advisability of patenting any technological development, the
Company has historically relied, in the information security area, primarily on
(1) copyright and trade secret law and (2) employee and third-party
non-disclosure agreements to protect its proprietary intellectual property and
rights. The protection afforded by such means may not be as complete as patent
protection. In addition, the laws of some countries do not protect trade
secrets. There are limitations on the availability of patent protection as a
means to protect the Company's products. Even when patent protection can be
obtained, there are often limitations on the enforceability of such patent
rights. The Company's inability to preserve all of its proprietary intellectual
property and rights could have a material adverse effect on the Company. See
"-Intellectual Property."
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<PAGE>
RISKS PRESENTED BY THE YEAR 2000 ISSUE
Many companies face potentially serious problems because many software
applications and operational programs written in the past may not properly
recognize calendar dates beginning in the year 2000. This problem could force
information, manufacturing and engineering systems to fail causing disruption of
operations, including among other things, a temporary failure to process
transactions or engage in similar normal business activities. Accordingly, many
companies, including the Company's customers, potential customers, suppliers,
vendors and strategic partners, may need to upgrade their systems to comply with
applicable year 2000 requirements.
A failure of the Company's internal computerized systems or its
suppliers' systems to correctly recognize dates beyond December 31, 1999 could
materially disrupt the Company's operations, which could materially and
adversely affect the Company's business, results of operations and financial
condition. Additionally, the Company's failure to provide year 2000 compliant
products and services to its clients could result in financial loss,
reputational harm and legal liability. Likewise, the failure of the computer
systems and products of the third parties with which the Company transacts
business to be year 2000 compliant could materially disrupt the Company's
operations, which could materially adversely affect its business, results of
operations and financial condition.
The Company is unable at this time to fully assess the possible impact
on its financial condition, results of operations and cash flows that may result
from any disruptions to its business caused by the year 2000 problems in any
systems controlled by the Company or any third party with whom the Company has a
material relationship. The Company cannot assure that its systems or those of
third parties with whom it interacts will be free of year 2000 problems. See
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Impact of the Year 2000 Issue."
ITEM 2. PROPERTIES
The Company occupies a 76,500 square foot multi-story administrative and
manufacturing facility located at 4800 NW 1st Street, Lincoln, Nebraska, 68521,
which is located in the University of Nebraska Technology Park. The Company owns
this facility and approximately 10 acres of surrounding land. On January 28,
1998, the Company purchased the 250,000 square-foot manufacturing facility
located on a 20-acre site in Waseca, Minnesota. The Company also leases
additional sales and service facilities in Burnsville, Minnesota, Miami,
Florida, and Hong Kong.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in 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, as
amended, also name one or more current and former officers of the Company and
PriceWaterhouseCoopers, LLP 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 federal class actions generally allege claims under Sections 11 and 15
of the Securities Act of 1933 and 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 class action complaints seek unspecified
compensatory damages, attorneys' fees and costs. The federal class actions have
been consolidated and lead plaintiff appointed. The amended federal class action
complaint was filed on March 4, 1999 and the Company is required to answer or
otherwise respond to the complaint by March 27, 1999.
Although the class action complaints 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 material. 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 is attempting to settle the class action lawsuits with a
combination of Company stock and cash up to the limits of its directors' and
officers' liability insurance. In the quarter ended December 31, 1998, the
Company recorded a special provision of
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<PAGE>
$10.0 million relating to the federal and state class action lawsuits. The
Company is in ongoing settlement discussions regarding these lawsuits. While no
settlement agreement has been reached, the $10.0 million special provision is
the Company's best estimate of the amount that would be necessary for the
Company to contribute to settle the class actions. The Company would anticipate
satisfying any settlement by issuing shares of common stock to the class members
rather than using its cash reserves. Despite the taking of the special
provision, the Company can give no assurances whether any settlement can be
reached, what the terms of any settlement would be or whether the Company would
be required to contribute more than $10.0 million. 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 material adverse effect
on the Company's business, financial condition, results of operations and cash
flows.
On November 4, 1998, Physician's Mutual Insurance Company filed an action in
the District Court of Douglas County, Nebraska against the Company,
PriceWaterhouseCoopers, LLP and two former officers of the
Company. The complaint contains common law causes of action for fraudulent
misrepresentation, fraudulent concealment and negligent misrepresentation
against the defendants arising from the same facts and circumstances underlying
the class actions. The complaint seeks damages in an amount to be proved at
trial, but which is currently alleged to be approximately $850,000. The Company
is unable to predict the likelihood of the outcome or range or amount of
potential liability that may arise therefrom.
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.
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. At the present time, the Company is
unable to predict whether the SEC is likely to initiate enforcement action
against the Company or its affiliated parties relating to these events.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on October 27,
1998.
At the Annual Meeting, the Board of Directors' nominees as set forth
in the proxy statement for the Annual Meeting, Thomas E. Thomsen and Thomas C.
Smith, were elected as Class II Directors. The election of Mr. Thomsen was
approved by a vote of 11,882,732 shares in favor and 254,013 shares withheld,
and Mr. Smith was approved by a vote of 11,882,022 shares in favor and 254,723
shares withheld.
The proposal to approve the amendment to the 1996 Stock Incentive Plan to
increase the number shares of common stock reserved for issuance under the Plan
from 1,200,000 to 2,000,000 and the amended Plan was approved by a vote of
6,763,994 shares in favor, 1,277,033 shares against and 89,024 shares abstained.
The proposal to ratify the appointment of KPMG Peat Marwick LLP as the
Company's independent public accountants for 1998 was approved by a vote of
12,021,917 shares in favor, 75,340 shares against and 39,488 shares abstained.
There were 4,056,644 broker non-votes for the approval of the amendment to
the 1996 Stock Incentive Plan and the amended Plan. There were no broker
non-votes for the election of directors or ratification of independent public
accountants at the Annual Meeting.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was quoted on The Nasdaq Stock Market as a
National Market issue under the symbol "TRII" from the completion of the
Company's initial public offering on January 22, 1997 through May 11, 1998. The
Nasdaq Stock Market halted trading in the Company's Common Stock effective April
27, 1998 and delisted the Common Stock on May 11, 1998 based on its review of
events regarding the Company and as a result of the Company's failure to timely
file its periodic reports and audited financial statements for the 1997 fiscal
year. The Common Stock on August 28, 1998 began trading on the Over the Counter
("OTC") Bulletin Board under the symbol "TRII".
The following table sets forth, in the periods indicated, the high and low
sales prices per share of the Common Stock, as reported by all markets for the
periods presented. As of December 31, 1998, the Company had 155 stockholders of
record.
<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
1997
First Quarter ................................ $ 10.06 $ 7.00
Second Quarter ............................... $ 14.75 $ 6.75
Third Quarter ................................ $ 21.75 $ 10.00
Fourth Quarter ............................... $ 26.00 $ 20.12
1998
First Quarter ................................ $ 27.25 $ 8.87
Second Quarter ............................... $ 11.06 $ 3.00
Third Quarter ................................ $ 7.00 $ 1.50
Fourth Quarter ............................... $ 3.69 $ 1.88
</TABLE>
The last sale price of the Common Stock on December 31, 1998, as reported in
the OTC Bulletin Board, was $2.813.
DIVIDENDS
The Company has never paid and has no present intention of paying cash
dividends on its Common Stock. Any determination in the future to pay dividends
will depend on the Company's financial condition, capital requirements, results
of operations, contractual limitations and any other factors deemed relevant by
the Company's Board of Directors.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company is
qualified by reference to, and should be read together with, the Consolidated
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Annual Report on Form 10-K. The Consolidated Statement of Operations data for
the years ended December 31, 1998, 1997 and 1996 and the Consolidated Balance
Sheet data as of December 31, 1998 and 1997 are derived from the Consolidated
Financial Statements of the Company included elsewhere in this Annual Report on
Form 10-K. The Consolidated Statement of Operations data for the years ended
December 31, 1995 and 1994 and the Consolidated Balance Sheet data as of
December 31, 1996, 1995, and 1994 are derived from financial statements not
included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996 1997(8) 1998
---------- ----------- ----------- ----------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues....................................................... $ 9,155 $ 8,128 $ 10,619 $ 40,423 $ 62,041
Cost of sales.................................................. 2,901 2,983 4,274 26,106 44,905
------- ---------- ----------- ----------- ------------
Gross profit................................................... 6,254 5,145 6,345 14,317 17,136
------- ---------- ----------- ----------- ------------
Operating costs and expenses:
Research and development..................................... 1,180 1,953 2,234 4,469 8,812
Sales and marketing.......................................... 1,590 2,109 2,187 7,031 11,476
General and administrative(1)................................ 2,166 2,284 2,529 4,711 12,529
Special compensation expense(2).............................. -- -- 5,568 -- --
In-process research and development costs(3)................. -- -- -- 9,828 --
Restructuring charge (4) .................................... -- -- -- -- 1,230
Provision for litigation settlement (5) ..................... -- -- -- -- 10,000
------- ---------- ----------- ----------- ------------
Total operating costs and expenses................... 4,936 6,346 12,518 26,039 44,047
------- ---------- ----------- ----------- ------------
Income (loss) from operations.................................. 1,318 (1,201) (6,173) (11,722) (26,911)
Interest income (expense), net................................. (111) (137) (131) 231 655
Other income................................................... -- -- -- 18 46
Benefit for income taxes....................................... -- -- (2,186) (524) (3,916)
------- ---------- ----------- ----------- -------------
Net income (loss).............................................. $ 1,207 $ (1,338) $ (4,118) $ (10,949) $ (22,294)
------- ---------- ----------- ----------- ------------
------- ---------- ----------- ----------- ------------
Loss before pro forma taxes.................................... $ (1,338) $ (6,304) $ (11,473) $ (26,210)
Pro forma and provision (benefit) for taxes(6)................. (496) (2,190) (524) (3,916)
---------- ----------- ----------- -------------
Pro forma net loss............................................. $ (842) $ (4,114) $ (10,949) $ (22,294)
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
Pro forma net loss per share(7)-- Basic and Diluted............ $ (0.12)$ (0.61) $ (1.09)$ (1.72)
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
Weighted average common shares-- Basic and Diluted(7).......... 6,783,078 6,783,078 10,056,690 12,946,624
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................................ $ 3,353 $ 1,684 $ 1,844 $ 44,836 $ 17,426
Total assets................................................... $ 9,627 $ 7,523 $ 11,938 $ 106,694 $ 87,212
Long-term debt and capitalized lease obligations, net of current
portion........................................................ $ 2,164 $ 1,847 $ 2,632 $ 2,758 $ 6
Stockholders' equity........................................... $ 5,945 $ 3,907 $ 4,966 $ 75,390 $ 53,096
</TABLE>
- ------------
(1) Includes amortization of intangible assets. For years prior to 1997,
includes the amortization of intangible assets related to the acquisition of
the Company's business in December 1991. Commencing in August 1997,
amortization of intangible assets related to the acquisition of E.F. Johnson
began. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Results of Operations -- General and
Administrative."
(2) Represents a non-recurring, non-cash compensation expense of $5.4 million
resulting from the vesting in September 1996 of 716,916 stock options for 10
executive officers and key employees of the Company at a weighted average
exercise price of $1.81 per share, and the accrual of a special compensation
expense of $210,000 in September 1996.
(3) Represents a non-recurring, non-cash expense of $9.8 million due to the
write-off of purchased in-process research and development costs associated
with the acquisition of E.F. Johnson.
(4) Represents a charge for a 25% reduction in workforce taken in the third
quarter of 1998.
(5) Represents a special provision taken in the fourth quarter of 1998 for
potential class action litigation settlement.
(6) 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.
(7) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute pro
forma and net income (loss) per share.
(8) Statement of Operations Data reflects the operations of E.F. Johnson since
the date of its acquisition on July 31, 1997.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K, including the following Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contains forward-looking statements that may involve risks and uncertainties.
The Company's actual results may differ significantly from those discussed
herein. Factors that might cause such a difference include, but are not limited
to, those discussed under "ITEM 1. BUSINESS -- Summary of Business
Considerations and Certain Factors That May Affect Future Results of Operations
and/or Stock Price." The following discussion should be read together with the
Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Annual Report on Form 10-K.
OVERVIEW
The Company is a manufacturer of information security products and wireless
communications products and systems. The Company designs and manufactures
information security products that prevent unauthorized access to sensitive
voice communications. These products are based on a wide range of analog
scrambling and digital encryption technologies and are sold mainly to the LMR
and telephony security markets. Through the E.F. Johnson subsidiary, the Company
designs, develops, manufactures and markets (1) stationary LMR
transmitters/receivers (base stations or repeaters) and (2) mobile and portable
radios. The Company sells its LMR products and systems mainly to two broad
markets: (1) business and industrial ("B&I") users and (2) public safety and
other governmental users.
On July 31, 1997, the Company acquired the outstanding shares of capital
stock and assumed certain indebtedness of E.F. Johnson. In exchange, the Company
paid cash consideration of $436,000 and issued 832,465 shares of Common Stock.
The acquisition was accounted for under the purchase method of accounting.
In 1998, the Company restated its previously released results for the year
ended December 31, 1997, the Company's financial statements 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. The restatement of the Company's financial statements and other
events relating to the restatement, including the class action lawsuits and the
SEC investigation which occurred subsequent to March 31, 1998, have had an
adverse impact on the Company's business, financial condition, results of
operations, liquidity and cash flows. These events have had, to varying degrees,
an adverse impact on the Company's relationships with its customers and vendors.
Because of these events, the Company is also evaluating all of its product
lines, and has implemented and is continuing to look at various initiatives to
reduce operating expenses in order to keep them in line with revenues. During
the third quarter of 1998, the Company implemented a reduction in workforce.
Implementation of any other plan resulting from these initiatives in the future
may result in substantial up front costs and cash expenditures. The Company can
provide no assurance that the restatement of the financial statements and the
ongoing class action and securities lawsuits and SEC investigation, regardless
of their outcomes, will not continue to have a material adverse effect on the
Company's business, financial condition, results of operations, liquidity and
cash flows.
24
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain Consolidated Statement of Operations
information as a percentage of revenues during the periods indicated. These
results include the results of E.F. Johnson only since July 31, 1997, the date
it was acquired.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
----------- ----------- --------
<S> <C> <C> <C>
Revenues ................................... 100.0% 100.0% 100.0%
Cost of sales .............................. 40.2% 64.6% 72.4%
----- ----- -----
Gross profit ............................... 59.8% 35.4% 27.6%
----- ----- -----
Operating costs and expenses:
Research and development ................. 21.0% 11.1% 14.2%
Sales and marketing ...................... 20.6% 17.4% 18.5%
General and administrative ............... 23.8% 11.7% 20.2%
Special compensation expense ............. 52.4% -- --
In-process research and development costs -- 24.3% --
Restructuring charge ..................... -- -- 2.0%
Provision for litigation settlement ...... -- -- 16.1%
----- ----- -----
Total operating costs and expenses 117.9% 64.4% 71.0%
----- ----- -----
Loss from operations ....................... (58.1)% (29.0)% (43.4)%
Interest income (expense), net ............. (1.2)% 0.6% 1.1%
Other income ............................... -- -- .1%
Benefit for income taxes ................... (20.6)% (1.3)% (6.3)%
----- ----- -----
Net loss ................................... (38.8)% (27.1)% (35.9)%
----- ----- -----
----- ----- -----
Loss before pro forma income taxes ......... (59.4)% (28.4)% (42.2)%
Pro forma benefit for income taxes ......... (20.6)% (1.3)% (6.3)%
----- ----- -----
Pro forma net loss ......................... (38.8)% (27.1)% (35.9)%
----- ----- -----
----- ----- -----
</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.
System sales under long-term contracts are accounted for under the
percentage of completion method. Under this method, revenues are recognized as
work on a contract progresses. The recognized revenue is that percentage of
estimated total revenue that incurred costs to date bear to estimated total
costs to complete the contract. Revisions in cost and profit estimates are made
when conditions requiring such revisions become known. Anticipated losses on
contracts are recognized in operations as soon as such losses are determined to
be probable and reasonably estimable.
Deferred revenue includes unearned warranty fees on extended product
warranty contracts sold to customers. The Company recognizes the fees based on
the expected warranty repairs to be incurred over the life of the contract.
Deferred revenue also includes an advanced payment received for products to be
sold to a former division of EFJ. The advance payment was negotiated as part of
the sale agreement of the division by EFJ. The advanced payment is recognized as
revenue is earned.
Revenues increased 53.5% to $62.0 million in 1998 from $40.4 million in
1997. Of total revenues for 1998, the information security segment comprised
17.6% and the wireless communication segment comprised 82.4%. The increase in
revenue was attributable primarily to revenues derived from the sale of E.F.
Johnson products subsequent to July 31, 1997. As a result of the uncertainty
raised by the restatement which was completed in the third quarter of 1998 and
other related events, sales of products, including LMR systems to governmental
agencies, were adversely impacted during 1998. Revenues declined from $22.0
million in the first quarter of 1998 to $13.9 million in the second quarter,
$14.3 million in the third quarter and $11.9 million in the fourth quarter of
1998. Further, the Company did not enter into any major new domestic systems
contracts during 1998. However, during the first quarter of 1999, the Company
was awarded two contracts in the domestic public safety market.
25
<PAGE>
The Company is also experiencing reduced demand for and downward pricing
pressure on its wireless communication analog products sold to business and
industrial users. Management believes that this is due to several factors. These
include the fact that (1) no new 800 MHz SMR frequencies are being made
available and existing channels are filling up; (2) SMR operator's with licenses
for 900 MHz channels have been slow to develop their build outs; (3) there has
been consolidation in both of these SMR marketplaces; and (4) a large number of
SMR systems have been converting from analog to digital which has resulted in
the increasing availability of used analog radios and repeaters in the
marketplace.
Revenues increased 280.7% to $40.4 million in 1997 from $10.6 million in
1996. Of the total revenues in 1997, the information security segment comprised
26.2% and the wireless communication segment comprised 73.8%. All revenues in
1996 were derived from the information security segment, as the Company did not
have a wireless communication segment until its acquisition E.F. Johnson on July
31, 1997. This increase in 1997 was attributable primarily to revenues derived
from the sale of E.F. Johnson products subsequent to July 31, 1997.
International sales as a percentage of revenues in 1998 were 36.6%, compared
to 38.1% in 1997 and 53.9% in 1996. The decline from 1996 is primarily due to
the inclusion of E.F. Johnson, which makes a larger percentage of its sales to
domestic markets. The Company experienced a 48.4% decline in revenues from the
Middle East and Asian regions during 1998 as compared to 1997 primarily from its
wireless communications segment and as a result of the effect of the troubled
Asian economies. The Company experienced a 143.2% increase in sales to the
Central and Latin America regions from both the information security and
wireless communication segments in 1998 as compared to 1997. The Company does
not expect this significant increase in sales to Latin America to continue
because of the Company's existing market penetration in Central and Latin
America and the current fluctuations in the economies of various countries in
the region.
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 was $17.1 million (27.6% gross
margin) in 1998, compared to $14.3 million (35.4% gross margin) in 1997 and $6.3
million (59.8% gross margin in 1996). Gross margins for the information security
segment were 53.3% in 1998, 44.1% in 1997 and 59.8% in 1996. Gross margins for
the wireless communications segment were 22.1% in 1998 and 32.3% in 1997.
The overall decline in gross margin percentage from 1998 to 1997 was due to
a number of factors. These include (1) the inclusion of E.F. Johnson's revenues
which has historically had lower gross margins than Transcrypt's business for a
full year in 1998 compared to five months in 1997; (2) the decline in sales of
domestic system contracts to the public safety market which provides a higher
margin than the business and industrial portion of E.F. Johnson's wireless
segment; (3) product mix and the level of sales not being sufficient to fully
absorb the Company's manufacturing overhead; (4) a shift in the Company's
information security product segment from primarily add-on products to more
radios and cellular phones incorporating the Company's encryption products,
which tends to have a lower gross margin; and (5) the approximately $1.0 million
in costs to correct systems contract problems in 1998 for certain E.F. Johnson
projects begun prior to the Company's acquisition of E.F. Johnson. Gross margins
are likely to vary in the future based primarily upon the mix of products and
the amount of revenues for that period.
The decrease in gross margin percentage from 1996 to 1997 was primarily due
to the addition of E.F. Johnson revenues in August 1997 and inventory
obsolescence which was charged to cost of goods sold primarily relating to
products returned by a customer which was not sellable to other customers.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of costs associated with
research and development personnel, materials and the depreciation of research
and development equipment and facilities. The Company expenses all research and
development costs as they are incurred. Research and development expenses
increased 97.2% in 1998 to $8.8 million from $4.5 million in 1997. The increase
is attributable to the inclusion of E.F. Johnson for a full year in 1998 as
compared to only five months in 1997. Research and development expenses were
14.2% of sales in 1998 compared to 11.1% in 1997.
The Company expects research and development expenses to decline during
1999, due to a reduction in the overall number of engineers from 87 at June 30,
1998 to 75 at December 31, 1998. The Company has also implemented a new product
development process in 1998, which requires a reduced amount of resources and is
intended to speed up the Company's ability to deliver products to market which
should also aid in reducing research and development expenses. The Company is
focusing on research and development projects in the future that will not
require the staffing levels employed in 1998.
26
<PAGE>
Research and development expenses increased 100.0% to $4.5 million in 1997
from $2.2 million in 1996 due to the addition of E.F. Johnson and an increase in
the members of the engineering staff. However, research and development expenses
as a percentage of sales decreased to 11.1% in 1997, compared to 21.0% in 1996,
due to increased revenues in 1997.
The information security and wireless communications product markets in
which the Company competes are rapidly evolving and can be expected to further
evolve in the future as a result of changing technology, industry standards and
customer requirements. The Company's ability to compete effectively will depend
upon its ability to anticipate and react to these changes in a timely manner.
The Company may not have, either currently or in the future, adequate capital or
human resources to respond to these changes.
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 and trade show participation. Sales and
marketing expenses increased 63.2% to $11.5 million, or 18.5% of sales, in 1998,
compared to $7.0 million, or 17.4% of sales, in 1997. The increase in 1998 was
due primarily to a full year of E.F. Johnson sales and marketing expenses
compared to only five months of E.F. Johnson sales and marketing expenses in
1997. The Company anticipates expenses in the sales and marketing area to
decline as a percentage of revenue going forward as a result of the Company's
effort to bring its operating expenses in line with future revenue expectations.
Sales and marketing expenses increased 221.5% to $7.0 million, or 17.4% of
sales, in 1997, compared to $2.2 million, or 20.6% of sales, in 1996. The
increase in 1997 was due primarily to the acquisition of E.F. Johnson and an
increase in the number of direct sales personnel and associated expenses and
increased participation in advertising and trade shows.
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. In connection
with Transcrypt's purchase of all of the outstanding shares of capital stock of
E.F. Johnson, the Company recorded $18.0 million of goodwill and other
intangibles at the closing of this acquisition. The Company is amortizing this
amount on a straight-line basis over a period of 5 to 15 years. This
amortization began in August 1997.
General and administrative expenses increased 165.9% to $12.5 million from
$4.7 million in 1997. The increase is attributable primarily to the inclusion of
EFJ for a full year in 1998 compared to only five months in 1997, the addition
of several administrative employees, the amortization of goodwill and other
intangibles relating to the E.F. Johnson acquisition for a full year, severance
payments and substantial legal and professional fees incurred in connection with
the restatement of the Company's financial statements and related class action
lawsuits, SEC and Audit Committee investigations. On a percentage of revenue
basis, general and administrative expenses were 20.2% in 1998 compared to 11.7%
in 1997. The Company anticipates a reduction in general and administrative
expenses in 1999.
General and administrative expenses increased 86.3% to $4.7 million in 1997,
compared to $2.5 million in 1996. The increase was attributable primarily to the
addition of E.F. Johnson and several administrative employees and costs
associated with becoming, and maintaining its status as, a publicly held company
in 1997. General and administrative expenses as a percentage of revenues
declined to 11.7% in 1997, compared to 23.8% in 1996, primarily as a result of
the increased revenues during 1997.
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.
IN-PROCESS RESEARCH AND DEVELOPMENT COSTS
The Company incurred a write-off in the third quarter of 1997 totaling
approximately $9.8 million of in-process research and development costs acquired
in the acquisition of E.F. Johnson. This write-off was recognized as the
technological feasibility of such in-process technology had not yet been
established and the technology had no alternative future use.
27
<PAGE>
RESTRUCTURING CHARGE
The Company incurred a restructuring charge in the third quarter of
1998 of approximately $1.2 million in connection with the 25% reduction in its
workforce. The reduction in force utilized a voluntary severance program which,
among other things, provided outplacement services to the employees who chose to
participate in the program.
PROVISION FOR LITIGATION SETTLEMENT
In December 1998, the Company took a special provision of $10.0 million
relating to the federal and state class action lawsuits pending in Nebraska
against the Company and certain of its current and former officers. The Company
is in ongoing settlement discussions regarding these lawsuits. While no
settlement agreement has been reached, the $10.0 million special provision is
the Company's best estimate of the amount that would be necessary for the
Company to contribute to settle the class actions. The Company would anticipate
satisfying any settlement by issuing shares of common stock to the class members
rather than using its cash reserves. Despite the taking of the special
provision, the Company can give no assurances whether any settlement can be
reached, what would be the terms of any settlement or whether the Company would
be required to contribute more than $10.0 million.
NET INTEREST INCOME OR EXPENSE
Net interest income consists of interest income earned on cash and invested
funds, net of interest expense related to amounts payable on its term and
installment loans and bank lines of credit. Net interest income was $655,000 in
1998 compared to $231,000 in 1997. Net interest expense was $131,000 in 1996.
The increase in net interest income in 1998 is due primarily to an increase in
interest income from the investment of the net proceeds from the Company's
initial and secondary public offerings in interest-bearing instruments for the
full year of 1998 and a repayment of certain debt during 1997. The increase in
net interest income in 1997 from 1996 was due primarily to the same reasons as
the increase in 1998. The Company expects net interest income to decline in 1999
when compared to 1998 as the Company's cash, cash equivalents and investments
declined throughout the year of 1998.
PROVISION FOR INCOME TAXES
The Company's benefit for income taxes were $3.9 million in 1998, $524,000
in 1997 and $2.2 million in 1996. The increase in the benefit for income taxes
in 1998 from 1997 is a result of a larger operating loss in 1998 as compared to
1997 and the write-off of in-process research and development costs in 1997 of
$9.8 million not being tax deductible. The Company will not record a benefit for
income taxes going forward until the Company generates net profits sufficient to
utilize the current deferred tax asset.
Prior to June 1996, Transcrypt was organized as a partnership, and therefore
was not subject to income taxation except to the extent that its earnings were
attributed to its partners. Transcrypt converted from a partnership to a "C"
corporation effective June 30, 1996. Pro forma net loss and pro forma net loss
per share calculations reflect a pro forma benefit for income taxes as if the
Company had been taxed as a "C" corporation in the first six months of 1996.
The Company's benefit for income taxes for the year ended December 31, 1996
primarily resulted 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's effective tax benefit rate was 14.9% in 1998 as a result of an
increase in the valuation allowance against tax assets. The Company's effective
tax rate was 33.7% in 1997, excluding the $9.8 million write-off of in-process
research and development costs, which was not a tax-deductible item. The
acquisition of E.F. Johnson resulted in an addition of $5.1 million in deferred
tax assets.
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
(1) ten percent of the purchase price of new equipment, (2) a refund of sales
taxes (currently at a rate of 6.0%) paid on purchases of new equipment during
each year, and (3) 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. The Company believes that sufficient tax credits will be
available through the life of the Nebraska Agreement to offset a substantial
portion of its expected Nebraska state income tax liability during such period.
In addition, the Company utilizes its foreign sales corporation subsidiary
located in Guam to exempt from income taxation a portion of its foreign sales
income.
28
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited financial information in
dollars and as a percentage of revenues for the Company for the eight quarters
ended December 31, 1998. In the opinion of the Company's management, this
information has been prepared on the same basis as the audited Consolidated
Financial Statements appearing elsewhere in this Annual Report on Form 10-K and
includes all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the unaudited results set forth herein. The
operating results for any quarter are not necessarily indicative of results for
any subsequent period or for the entire fiscal year.
<TABLE>
<CAPTION>
QUARTER ENDED
---------- --------- --------- -------- ---------- ---------- ---------- ----------
March 31, June 30, Sept. 30, Dec.31, March 31, June 30, Sept. 30, Dec. 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1997 1997(6) 1997 1998 1998 1998 1998
---------- --------- --------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....................................... $ 3,512 $2,915 $13,428 $20,568 $21,988 $13,877 $14,325 $11,851
Cost of sales.................................. 1,272 2,289 9,561 12,984 12,910 10,853 11,220 9,922
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Gross profit.................................. 2,240 626 3,867 7,584 9,078 3,024 3,105 1,929
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Operating costs and expenses:
Research and development...................... 633 683 1,298 1,855 2,038 2,703 2,174 1,897
Sales and marketing........................... 942 731 2,361 2,997 3,210 3,355 2,626 2,285
General and administrative(1)................. 572 651 1,647 1,841 2,113 4,715 3,030 2,671
In-process research and development
costs(2)........ - - 9,828 - - - - -
Restructuring charge(3).......................
- - - - - - 1,230 -
Provision for litigation
settlement(4)................... - - - - - - - 10,000
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Total operating costs and expenses........... 2,147 2,065 15,134 6,693 7,361 10,773 9,060 16,853
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Income (loss) from operations................. 93 (1,439) (11,267) 891 1,717 (7,749) (5,955) (14,924)
Interest (expense) income and other income,
net........................................... 76 159 (227) 241 311 108 29 253
Net income (loss) before income taxes......... 169 (1,280) (11,494) 1,132 2,028 (7,641) (5,926) (14,671)
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Provision (benefit) for income
taxes(5)................ 27 (490) (468) 407 712 (2,598) (2,030) -
---------- --------- --------- -------- ---------- ---------- ---------- ----------
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Net income (loss)............................. $ 142 $ (790) $ (11,026) $ 725 $ 1,316 $(5,043) $(3,896) $ (14,671)
---------- --------- --------- -------- ---------- ---------- ---------- ----------
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Net income (loss) per share
Basic......................................... $ 0.02 $(0.09) $ (1.12) $ 0.06 $ 0.10 $ (0.39) $ (0.30) $ (1.13)
---------- --------- --------- -------- ---------- ---------- ---------- ----------
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Diluted...................................... $ 0.02 $(0.09) $ (1.12) $ 0.06 $ 0.10 $ (0.39) $ (0.30) $ (1.13)
---------- --------- --------- -------- ---------- ---------- ---------- ----------
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Weighted average common shares
Basic........................................ 8,700 9,283 9,844 12,362 12,947 12,947 12,947 12,947
---------- --------- --------- -------- ---------- ---------- ---------- ----------
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Diluted...................................... 9,282 9,283 9,844 13,103 13,621 12,947 12,947 12,947
---------- --------- --------- -------- ---------- ---------- ---------- ----------
---------- --------- --------- -------- ---------- ---------- ---------- ----------
As a Percentage of Revenues
Revenues..................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 36.2 78.5 71.2 63.1 58.7 78.2 78.3 83.7
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Gross profit................................. 63.8 21.5 28.8 36.9 41.3 21.8 21.7 16.3
Operating costs and expenses:
Research and development..................... 18.0 23.4 9.7 9.0 9.3 19.5 15.2 16.0
Sales and marketing.......................... 26.8 25.1 17.6 14.6 14.6 24.2 18.3 19.3
General and administrative(1)................ 16.3 22.3 12.3 8.9 9.6 34.0 21.2 22.5
In-process research and development 0.0 0.0 73.2 0.0 0.0 0.0 0.0 0.0
costs(2)........
Restructuring charge(3)...................... 0.0 0.0 0.0 0.0 0.0 0.0 8.6 0.0
Provision for litigation
settlement(4)................... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 84.4
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Total operating costs and expenses......... 61.1 70.8 112.7 32.5 33.5 77.6 63.3 142.2
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Income (loss) from operations................ 2.6 (49.4) (83.9) 4.3 7.8 (55.8) (41.6) (125.9)
Interest (expense) income and other income,
net..... 2.2 5.5 (1.7) 1.2 1.4 0.8 0.2 2.1
Provision (benefit) for income
taxes(5)................. 0.8 (16.8) (3.5) 2.0 3.2 (18.7) (14.2) 0.0
---------- --------- --------- -------- ---------- ---------- ---------- ----------
---------- --------- --------- -------- ---------- ---------- ---------- ----------
Net income (loss)............................ 4.0% (27.1)% (82.1)% 3.5% 6.0% (36.3)% (27.2)% (123.8)%
---------- --------- --------- -------- ---------- ---------- ---------- ----------
---------- --------- --------- -------- ---------- ---------- ---------- ----------
</TABLE>
29
<PAGE>
- ---------------
(1) Includes amortization of intangible assets. For years prior to 1997,
reflects the amortization of intangible assets related to the acquisition of the
Company's business in December 1991. Commencing in August 1997, amortization of
intangible assets related to the acquisition of E.F. Johnson began.
(2) Represents a non-recurring, non-cash expense of $9.8 million resulting from
the write-off of in-process research and development costs obtained in the
acquisition of E.F. Johnson.
(3) Represents a charge for a 25% reduction in workforce taken in the third
quarter of 1998.
(4) Represents a special provision taken in the fourth quarter of 1998 for
potential class action litigation settlement.
(5) Prior to June 30, 1996, the Company operated as a partnership. The pro
forma provision for income taxes reflects the provision for income taxes as
if the Company had been taxed as a Subchapter "C" corporation under the
Internal Revenue Code.
(6) The results of E.F. Johnson are included in the results of operations
beginning July 31, 1997.
- ---------------------
The Company historically has experienced, and expects to continue
experiencing, substantial variability in its results of operations 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 results of operations in a particular quarter include the timing of the
introduction of new products, general economic conditions, the timing and mix of
product sales and specific economic conditions in the information security and
wireless communications industries. The Company believes that quarterly results
are likely to vary for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
Since January 1, 1997, the Company has financed its operations and met
its capital requirements primarily through short-term borrowings, long-term debt
and stock offerings completed on January 22, 1997 and October 15, 1997.
The Company's operating activities used cash of $11.0 million in 1998, $18.1
million in 1997, and generated cash of $921,000 in 1996. Cash used in operating
activities in 1998 consisted primarily of a loss from operations and reductions
to accounts payable, accrued expenses and billings in excess of cost on
uncompleted contracts off-set by decreases in accounts receivable, inventory and
an increase in a special provision for litigation settlement. The Company
incurred approximately $3.0 million (net of reimbursement from the Company's
insurance carrier) on legal, audit and severance payments during 1998 related to
the restatement, class action lawsuits, the audit committee investigation and
SEC investigation, which adversely impacted cash flows. Cash flows may continue
to be adversely impacted by the uncertainty of sales volumes.
Cash used in operating activities in 1997 consisted primarily of increases
in accounts receivable and inventory and the reduction of accounts payable.
Approximately $7.2 million of the cash used in the Company's operations was
attributable to the reduction of liabilities incurred due to the E.F. Johnson
acquisition and the buildup of E.F. Johnson's inventory, which E.F. Johnson's
prior management had not maintained at adequate levels due to their cash
position, to meet sales demands. Accounts payable to vendors of E.F. Johnson
amounted to $13.0 million upon the Company's acquisition of E.F. Johnson on July
31, 1997. The Company believes that this level of trade payables was
significantly higher than that historically associated with E.F. Johnson's
business as a result of decisions by E.F. Johnson's prior management to defer
payments to certain vendors. During the first six months of 1998, the Company
paid down the high level of trade payables assumed in the acquisition of E.F.
Johnson.
Cash provided from investing activities were attributable primarily to the
sale of investments in 1998 offset in part by capital expenditures related to
the completion of the Company's Phase III expansion of its corporate
headquarters in Lincoln, Nebraska. The net amount of cash provided from
investing activities in 1998 was $11.1 million.
30
<PAGE>
Cash used for investing activities, attributable primarily to capital
expenditures and purchase of investments in 1997 and capital expenditures and
payments for non-compete agreements in 1996, totaled $20.9 million and $3.0
million, respectively. Capital expenditures consisted primarily of computer and
networking equipment, office furniture and manufacturing equipment for both
years and expenses related to the expansion of the Company's Lincoln facility
during the second quarter of 1997. In May 1997, the Company completed
construction, begun in August 1996, of the 21,000-square-foot expansion of its
existing Lincoln facility, primarily to accommodate additional manufacturing
capacity.
The deferred tax assets totaling $12.4 million and $8.0 million for the
years ended December 31, 1998 and 1997, resulted primarily from the E.F. Johnson
acquisition in 1997, net operating loss carryforwards and stock option related
special compensation expense of $5.4 million incurred in September 1996.
Deferred tax assets were 14.2% and 7.5% of total assets and stockholders' equity
at December 31, 1998. The Company believes that it is more likely than not that
future taxable income will be sufficient to utilize deferred tax assets
recorded, net of existing valuation allowances at December 31, 1998.
Approximately $3.0 million of the deferred tax assets relate to $8.6 million of
federal and state net operating loss carryforwards attributable to its acquired
E.F. Johnson subsidiary. A valuation allowance was established at the time of
the purchase of E.F. Johnson for this amount. Any subsequently recognized tax
benefits relating to this portion of the valuation allowance as of December 31,
1998 will be allocated to goodwill. These net operations loss carryforwards
expire in 2012. Tax regulations limit the amount that may be utilized on an
annual basis to approximately $588,000.
The Company's financing activities have consisted primarily of borrowings
under and payments on an industrial development revenue bond issue ("IDR"), term
and installment notes payable, bank lines of credit and proceeds from an initial
public offering and secondary public offering completed in January 1997 and
October 1997, respectively. Such activities generated $4.9 million in 1998,
$54.3 million in 1997, and $1.8 million and 1996. The amount generated in 1997
was reduced by the liquidation of the revolving credit line and term loans of
$15.7 million assumed in the E.F. Johnson acquisition.
The Company had outstanding on its IDR at December 31, 1998 a principal
amount of $2.7 million due in annual principal payments of $140,000, plus
interest at a variable rate (3.65% at December 31, 1998), until March 1, 2007,
increasing to annual principal payments of $145,000, plus interest at a variable
rate, from March 1, 2008 through March 1, 2016, with the remaining principal and
accrued interest due on March 1, 2017. At December 31, 1998, the remaining net
proceeds of $516,000 were held in escrow for the Company. Subsequent to the year
ended December 31, 1998, the Company has pledged cash collateral of $2.8 million
as additional security on its long-term indebtedness. $2.6 million of long-term
debt was reclassified to a current liability on the Company's balance sheet at
December 31,1998 pending the Company's efforts to refinance the debt.
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 $128,000, and bonds which expire on various
dates through 1999, totaling $24.5 million at December 31, 1998.
The Company has a line of credit with a regional bank. It is a secured line
of credit not to exceed $10.0 million. Interest was 6.18% at December 31, 1998
and is at a variable rate of 1.25% over the interest rate earned on the $10.0
million on certificates of deposits pledged as security on the bank line of
credit. This line of credit, which was originally due on December 31, 1998, was
renewed until August 31, 1999. The working capital line is collateralized by
substantially all the Company's assets including $10.0 million in certificate of
deposits with the bank.
At December 31, 1998, the Company had $7.2 million outstanding on the
revolving line of credit. Average borrowings under the Company's line of credit
and the weighted average interest rate during 1998 were $6.6 million and 6.94%.
The total available credit as of December 31, 1998 was $2,574 under the above
line. The Company also had an additional secured fixed line of credit of 196,000
with the same regional bank. The interest rate was 7.75% at December 31, 1998.
This line of credit and applicable accrued interest was paid off on February 10,
1999.
The Company currently intends to retain earnings, if any, and does not
anticipate paying cash dividends in the foreseeable future.
The Company anticipates expenditures of approximately $550,000 to $750,000
to ensure that its systems are ready for processing information in the Year
2000. The Company anticipates funding year 2000 expenditures from working
capital and operating leases for certain portions of the project.
31
<PAGE>
As of December 31, 1998, the Company had approximately $20.3 million in
cash and cash equivalents, which includes $10.0 million of certificates of
deposit pledged as security on its line of credit. There was approximately
$2.6 million available under its bank line of credit at December 31, 1998.
Subsequent to the year ended December 31, 1998, the Company pledged $2.8
million cash collateral as additional security on its long-term indebtedness.
The Company's bank line of credit expires on August 31, 1999 and the Company
is currently seeking to refinance its bank line of credit and long term
indebtedness with other lenders. However, it has been difficult to refinance
the debt or obtain new lines of credit primarily due to uncertainties
primarily resulting from the pending class action lawsuits and declining
revenues and losses incurred since March 31, 1998. To improve its cash
position, the Company is currently negotiating for the sale and leaseback of
its facilities in Waseca and Lincoln. The Company believes that its cash,
cash equivalents, and lines of credit will be sufficient to meet anticipated
cash needs for working capital and for Year 2000 capital expenditures through
1999. However, if sales do not increase and operating losses do not decline,
or the Company incurs unanticipated substantial costs, the Company may be
required to seek additional financing or funding sources, including possible
sale of securities. No assurance can be given that the Company will be able
to obtain such additional funding or financing, or a renewal of its line of
credit or be able to obtain financing on satisfactory terms. Additionally,
see "Pending Litigation" below for a discussion regarding certain pending
litigation, the resolution of which could materially adversely affect the
Company's liquidity, operating results and financial condition.
PENDING LITIGATION
The Company has been named as a defendant in 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, as
amended, also name one or more current and former officers of the Company and
PriceWaterhouseCoopers, LLP 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 federal class actions generally allege claims under Sections 11 and 15
of the Securities Act of 1933 and 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 class action complaints seek unspecified
compensatory damages, attorneys' fees and costs. The federal class actions have
been consolidated and lead plaintiff appointed. The amended federal class action
complaint was filed on March 4, 1999 and the Company is required to answer or
otherwise respond to the complaint by March 27, 1999.
Although the class action complaints 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 material. 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 is attempting to settle the class action lawsuits with a
combination of Company stock and cash up to the limits of its directors' and
officers' liability insurance. In the quarter ended December 31, 1998, the
Company recorded a special provision of $10.0 million relating to the federal
and state class action lawsuits pending in Nebraska against the Company and
certain of its current and former officers. The Company is in ongoing
settlement discussions regarding these lawsuits. While no settlement
agreement has been reached, the $10.0 million special provision is the
Company's best estimate of the amount that would be necessary for the Company
to contribute to settle the class actions. The Company would anticipate
satisfying any settlement by issuing shares of common stock to the class
members rather than using its cash reserves. Despite the taking of the
special provision, the Company can give no assurances whether any settlement
can be reached, what the terms of any settlement would be or whether the
Company would be required to contribute more than $10.0 million.
On November 4, 1998, Physician's Mutual Insurance Company filed an action in
the District Court of Douglas County, Nebraska against the Company,
PriceWaterhouseCoopers, LLP and two former officers of the Company. The
complaint contains common law causes of action for fraudulent misrepresentation,
fraudulent concealment and negligent misrepresentation against the defendants
arising from the same facts and circumstances underlying the class actions. The
complaint seeks damages in an amount to be proved at trial, but which is
currently alleged to be approximately $850,000. The Company is unable to predict
the likelihood of the outcome or range or amount of potential liability that may
arise therefrom.
Many factors will ultimately affect and determine the results of the
litigation, and the Company can provide no assurances that the outcome will not
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flows.
32
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 requires publicly-held enterprises to report certain information
about their operating segments, to report certain enterprise-wide information
about their products and services, their activities in different geographic
areas, and their reliance on major customers, and to also disclose certain
segment information in their interim financial statements. The basis for
determining an enterprise's operating segments is the manner in which management
operates the business. SFAS 131 is effective for financial statements for
periods beginning after December 31, 1997, however implementation is not
required for interim periods in the first year. The Company has adopted SFAS 131
effective December 31, 1998, and segment reporting can be found in "Notes to
Consolidated Financial Statements, Note 19 " Segment and Related Information".
IMPACT OF THE YEAR 2000 ISSUE
STATE OF READINESS
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
All products currently being shipped by the Company are Year 2000 compliant.
Should a customer use the Company's software with a personal computer that is
not compliant with the year 2000, at that time, the customer may experience
erroneous dates on usage reports, but should not experience any operational
issues. Customers inquiring about previously shipped products are forwarded to
the Year 2000 Compliance Manager in Engineering Product Development. The Year
2000 Compliance Manager researches the customer's product and responds in
writing as to whether the product is compliant. One obsolete software product
has been identified which will incorrectly report the date after December 31,
1999. A solution for this issue has been developed to correct this problem and
has been offered to customers identified as having purchased systems which
include this application software. Written test instructions are also published
for the customer to check their equipment.
In February 1999, Transcrypt completed the first phase of identifying and
thoroughly researching non-compliant hardware and software. In addition, the
Company has completed the process of seeking quotes and delivery estimates for
the equipment and software that must be replaced or upgraded to be Year 2000
compliant.
Transcrypt has identified and prioritized the following non-compliant items:
- The current version of our Enterprise Resource Planning ("ERP")
software is non-compliant. Our ERP system consists of our
manufacturing and accounting software systems. The software
upgrade has been scheduled with the vendor and the contracts are
currently going through final financial and legal review. The
operating system software will be converted as is, with very few
customizations. In addition to vender support, three contractors
have been lined up for the conversion process. The Company is
advised that software upgrade is Year 2000 compliant and is
scheduled for completion in the third quarter 1999.
- Four wide area network file servers, which run our software
applications and interconnects the Company's various locations,
must be replaced with compliant servers. We are in the process of
ordering replacement servers. The servers are to be installed by
the end of June 1999. The remaining servers have already been
upgraded with Year 2000 compliant operating software.
- The payroll system also must be upgraded to be Year 2000
compliant. The contract for this upgrade has been signed with the
vendor, the equipment has been ordered. The upgrade should be
completed by end of May 1999.
- Approximately 98 workstations used by various Company personnel
must be replaced due to compliance issues. The ordering of these
replacements have begun and is scheduled for completion by the end
of August 1999. Additional resources have been hired to assist
with this compliance step.
- The voicemail systems in Waseca and Lincoln are not Year 2000
compliant and must be upgraded. The necessary software has been
ordered to upgrade the Waseca system. The problem with the Lincoln
voicemail system will be corrected with the replacement of the
telephone switch in Lincoln. Both locations installations are to
be completed by end of May 1999.
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<PAGE>
Management believes that all projects relating to Year 2000 compliance will
be completed by the end of the third quarter of 1999. The hardware and software
issues have been researched by Company and vendors. We believe the amount of
changes we must make to be manageable and most contracts are signed and the
installations/conversions are in the process of being scheduled with the
venders. The software we are upgrading is purchased with very few
customizations.
The upgrade to the Company's ERP software discussed above only addresses the
information technology part of the Company's state of readiness with Year 2000
issues. There are other computerized systems involved in manufacturing and
engineering systems of the Company that may contain embedded technology such as
microcontrollers. A preliminary assessment was 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 March 26, 1998, no
definitive 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 issues. The Company intends to perform
steps to obtain reasonable verification and written assurances from these
suppliers as to their Year 2000 readiness by June 30, 1999.
Certifications have been received from the security system, elevators, fire
alarm systems, air conditioning and heating systems at the Lincoln facility. The
same checks are being performed in Waseca, and remote offices.
COSTS TO ADDRESS THE YEAR 2000 ISSUE.
The Company has budgeted expenditures of approximately $550,000 to $750,000
to ensure that its systems are ready for processing information in the Year
2000. The majority of these expenditures relate to the cost of purchasing
hardware and hardware installation. The Company estimates that it has incurred
approximately $50,000 in Year 2000 expenditures through December 31, 1998 with
the balance of the budgeted expenditures to be incurred by the end of 1999. In
addition, the Company has incurred, and will continue to incur, certain costs
relating to the temporary reallocation of its internal resources to address Year
2000 issues. The Company does not separately account for the internal costs
incurred for the Year 2000 issue. The Company anticipates funding year 2000
expenditures from current cash reserves and operating leases for certain
portions of the project.
RISKS PRESENTED BY THE YEAR 2000 ISSUE
If these other internal computerized systems are not found to be Year 2000
compliant and these significant suppliers were to become unable to process
shipments to the Company as a result of Year 2000 issues, it may have a material
adverse effect on the Company's business, results of operations, and financial
condition. There can be no guarantee that the systems of other companies on
which the Company relies upon will be timely converted. The adverse impact may
include the requirement to pay significant overtime to manually process certain
transactions as a result of a systems failure resulting in the inability to
process transactions or engage in normal business activities. At this time, the
Company is unable to predict with any certainty the estimated lost revenue it
may experience as a result of such failure or disruption.
CONTINGENCY PLANS
The Company does not currently have any contingency plans to address the
event of the Company or a major supplier not becoming Year 2000 compliant. The
contingency plan is in the process of being completed as we continue to research
all available information on products and vendors. The project schedules will be
closely monitored and additional resources will be added early in the project.
All systems are to be completed by the end of the third quarter. This allows the
last quarter for final testing and adjustments if necessary. During the last
week of December 1999, all users will be instructed to save critical information
to their hard drives, or to print hard copies of critical data. Hard copy
reports of production schedules, shipments, and forms will be printed in
advance. A team of information systems staff, department representatives, and
contractors will be scheduled for the weekend of January 1, 2000 to monitor the
date change.
34
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does a significant amount of business in foreign countries. The
Company sales in these foreign countries are denominated in United States
dollars. Certain sales in foreign countries may be secured with irrevocable
letters of credit. The Company also carries foreign credit insurance to cover
receivables in a majority of the foreign countries where it does business.
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 Statement, and the notes thereto,
and the financial statement schedules filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for under this item has been previously reported by
the Company in its (1) Current Report on Form 8-K filed with the SEC on May 4,
1998, (2) Current Report on Form 8-K filed with the SEC on May 12, 1998 and (3)
Amendment No. 1 to Current Report on Form 8-K filed with the SEC on May 20,
1998.
PART III
Incorporated by reference in Items 10 to 13 below are certain sections of
the Company's definitive proxy statement, to be filed pursuant to Regulation 14A
with the SEC within 120 days after December 31, 1998.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Incorporated by reference in this Annual Report is the information required
by this Item 10 contained in the sections entitled "Discussion of Proposals
Recommended by the Board -- Proposal 1: Elect Two Directors," "Information About
Directors and Executive Officers" and "Information About Transcrypt Common Stock
Ownership -- Did Directors, Executive Officers and Greater-Than-10% Stockholders
Comply With Section 16(a) Beneficial Ownership Reporting in 1998?" of the
Company's definitive proxy statement, to be filed pursuant to Regulation 14A
with the SEC within 120 days after December 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference in this Annual Report is the information required
by this Item 11 contained in the sections entitled "Information About Directors
and Executive Officers" and "Information About Transcrypt Common Stock Ownership
- -- Compensation Committee Interlocks and Insider Participation" of the Company's
definitive proxy statement, to be filed pursuant to Regulation 14A with the SEC
within 120 days after December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference in this Annual Report is the information required
by this Item 12 contained in the section entitled "Information About Transcrypt
Common Stock Ownership" of the Company's definitive proxy statement, to be filed
pursuant to Regulation 14A with the SEC within 120 days after December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference in this Annual Report is the information required
by this Item 13 contained in the section entitled "Information About Directors
and Executive Officers -- Certain Relationships and Related Transactions" of the
Company's definitive proxy statement, to be filed pursuant to Regulation 14A
with the SEC within 120 days after December 31, 1998.
35
<PAGE>
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>
Page No.
--------
<S> <C>
1. FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report................................................................................. F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997................................................. F-2
Consolidated Statements of Operation for the Years ended December 31, 1998, 1997 and 1996.................... F-3
Consolidated Statements of Changes in Stockholders' Equity for the Years ended December 31, 1998, 1997
and 1996..................................................................................................... F-4
Consolidated Statements of Cash Flows for the Years ended December 31, 1998, 1997 and 1996................... F-5
Notes to Consolidated Financial Statements................................................................... F-6 to F-22
2. FINANCIAL STATEMENT SCHEDULE
Independent Auditors' Report................................................................................. S-1
Schedule II -- Valuation and Qualifying Accounts and Reserves................................................. S-2
</TABLE>
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.
36
<PAGE>
3. EXHIBITS
(1)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 Annual Report on
Form 10-K:
1. Employment Agreement between the Company and John T. Connor dated as of
July 31, 1997 (incorporated herein by reference to Exhibit 10.1.1 to the
Company's Registrant Statement on Form S-1, No. 333-35469, declared
effective on October 15, 1997).
2. Employment Agreement between the Company and Jeffery L. Fuller dated as
of July 31, 1997 (incorporated herein by reference to Exhibit 10.2.1 to
the Company's Registration Statement on Form S-1, No. 333-35469, declared
effective on October 15, 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 Registration Statement on Form S-1, No.
333-14351, declared effective on January 22, 1997).
4. Employment Agreement between the Company and Frederick G. Hamer dated as
of July 29, 1997 (Exhibit 10.3.1 below).
5. Transcrypt International, Inc. 1996 Stock Incentive Plan, as amended
(Exhibit 10.4 below).
6. 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 Registration Statement on Form S-1, No.
333-14351, declared effective January 22, 1997).
7. Severance Agreement and Mutual Release between the Company and Jeffery L.
Fuller dated June 2, 1998 (Exhibit 10.39 below).
8. Severance Agreement and Mutual Release between the Company and Charles
E. Baumann dated June 2, 1998 (Exhibit 10.40 below).
9. Consulting Agreement and Termination of Employment Agreement between
the Company and John T. Connor dated February 23, 1999 (Exhibit 10.41
below).
10. Employment Agreement between the Company and Michael E. Jalbert dated
March 1, 1999 (Exhibit 10.42 below).
11. Employment Agreement between the Company and Michael P. Wallace dated
March 25, 1999 (Exhibit 10.43 below).
37
<PAGE>
12.(2) 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
Registration Statement on Form S-1, No. 333-14351,
declared effective on January 22, 1997 (hereinafter the
"January 1997 Registration Statement")).
3.2 Amended and Restated Bylaws of the Company (incorporated
herein by reference to Exhibit 3.2 to the January 1997
Registration Statement).
4.1 Form of Common Stock certificate (incorporated herein by
reference to Exhibit 4.1 to the January 1997 Registration
Statement).
4.2 Registration Rights Agreement, dated as of July 31, 1997,
by and among NorAm Energy Corp., Intek Diversified
Corporation and the Company (incorporated herein by
reference to Exhibit 4.1 to the Company's Current Report
on Form 8-K, File No. 0-21681, filed with the SEC on
August 14, 1997).
10.1 RESERVED
10.1.1 Employment Agreement between the Company and John T.
Connor dated as of July 31, 1997 (incorporated herein by
reference to Exhibit 10.1.1 to the Company's Registration
Statement on Form S-1, No. 333-35469, declared effective
October 15, 1997 (hereinafter the "October 1997
Registration Statement")).
10.2 RESERVED
10.2.1 Employment Agreement between the Company and Jeffery L.
Fuller dated as of July 31, 1997 (incorporated herein by
reference to Exhibit 10.2.1 to the October 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 the
January 1997 Registration Statement).
10.3.1 Employment Agreement between the Company and Frederick G.
Hamer dated as of July 29, 1997 (incorporated herein by
reference to Exhibit 10.3.1 to the Company's Annual Report
on Form 10-K for the Year Ended December 31, 1997, File
No. 0-21681 (hereinafter "1997 Form 10-K")).
10.4 Transcrypt International, Inc. 1996 Stock Incentive Plan,
as amended.
10.5 Form of Indemnification Agreement between the Company and
each executive officer and director of the Company
(incorporated herein by reference to Exhibit 10.5 to the
January 1997 Registration Statement).
10.6 License Agreement for APCO 25 Compliant Product between
Motorola, Inc. and the Company dated as of August 2, 1994
(incorporated herein by reference to Exhibit 10.6 to the
January 1997 Registration Statement).
10.7* Amendment, dated as of June 28, 1996, to License Agreement
for APCO Project 25 Compliant Product between Motorola,
Inc. and the Company dated as of August 2, 1994
(incorporated herein by reference to Exhibit 10.7 to the
January 1997 Registration Statement).
10.8 OEM Agreement between Motorola, Inc. and the Company
dated as of August 2, 1994 (incorporated herein by
reference to Exhibit 10.8 to the January 1997 Registration
Statement).
10.9* Amendment, dated as of July 15, 1996, to OEM Agreement
between Motorola, Inc. and the Company dated as of August
2, 1994 (incorporated herein by reference to Exhibit 10.9
to the January 1997 Registration Statement).
10.10* Private Label/Supplier Agreement for Analog Scrambling
Modules between Motorola, Inc. and the Company dated as
of August 8, 1995 (incorporated herein by reference to
Exhibit 10.10 to the January 1997 Registration Statement).
10.10.1* Second Amendment, dated March 31, 1997, to Private
Label/Supplier Agreement for Analog Scrambling Modules
between Motorola, Inc. and the Company dated as of August
8, 1995 (incorporated herein by reference to Exhibit
10.10.1 to the Company's Quarterly Report on Form 10-Q for
the Quarter Ended March 31, 1997, File No. 0-21681
(hereinafter "1Q 1997 Form 10-Q")).
10.11* Motorola Cellular Subscriber Products Sales Agreement,
dated as of June 13, 1996, by and between Motorola,
Inc. and the Company (incorporated herein by reference to
Exhibit 10.11 to the January 1997 Registration Statement).
10.12 License Agreement for APCO Fed Project 25 Algorithm
between Digital Voice Systems, Inc. and the Company, dated
as of August 14, 1995 (incorporated herein by reference to
Exhibit 10.12 to the January 1997 Registration Statement).
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.13 Consigned Inventory Agreement between Arrow/Schweber
Electronics Group and the Company, dated as of June 22,
1994 (incorporated herein by reference to Exhibit 10.13 to
the January 1997 Registration Statement).
10.14- RESERVED
10.16
10.17 Amended and Restated Loan Agreement, dated as of May 18,
1994, by and between Norwest Bank Nebraska, N.A., and the
Company (incorporated herein by reference to Exhibit 10.17
to the January 1997 Registration Statement).
10.18 First Amendment, dated as of June 1, 1995, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and
between Norwest Bank Nebraska, N.A., and the Company
(incorporated herein by reference to Exhibit 10.18 to the
January 1997 Registration Statement).
10.19 Second Amendment, dated as of April 10, 1996, to Amended
and Restated Loan Agreement, dated as of May 18, 1994, by
and between Norwest Bank Nebraska, N.A., and the Company
(incorporated herein by reference to Exhibit 10.19 to the
January 1997 Registration Statement).
10.20- RESERVED
10.23
10.24 Form of Adoption Agreement for Nonstandardized 401(k)
Profit Sharing Plan (incorporated herein by reference to
Exhibit 10.24 to the January 1997 Registration Statement).
10.25 Defined Contribution Master Plan and Trust Agreement of
Norwest Bank Nebraska, N.A., Master Plan Sponsor
(incorporated herein by reference to Exhibit 10.25 to the
January 1997 Registration Statement).
10.26 Third Amendment, dated as of October 22, 1996, to Amended
and Restated Loan Agreement, dated as of May 18, 1994, by
and between Norwest Bank Nebraska, N.A., and the Company,
together with Modification of Note (incorporated herein by
reference to Exhibit 10.26 to the January 1997
Registration Statement).
10.27 Fourth Amendment, dated as of November 19, 1996, to
Amended and Restated Loan Agreement, dated as of May 18,
1994, by and between Norwest Bank Nebraska, N.A., and the
Company, together with Commercial Installment Note, dated
November 19, 1996 (incorporated herein by reference to
Exhibit 10.27 to the January 1997 Registration Statement).
10.27.1 Fifth Amendment, dated as of March 1, 1997, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and
between Norwest Bank Nebraska, N.A., and the Company
(incorporated herein by reference to Exhibit 10.27.1 to
the 1Q 1997 Form 10-Q).
10.28 Construction Loan, dated November 15, 1996, by and between
Norwest Bank Nebraska, N.A., and the Company, together
with related documents (incorporated herein by reference
to Exhibit 10.28 to the Company's Annual Report on Form
10-K for the Year Ended December 31, 1996, File No.
0-21681 (hereinafter "1996 Form 10-K")).
10.29 Commercial Installment Note, dated January 9, 1997,
related to Amended and Restated Loan Agreement, dated as
of May 18, 1994, by and between Norwest Bank Nebraska,
N.A., and the Company (incorporated herein by reference to
Exhibit 10.29 to the 1996 Form 10-K).
10.30 Commercial Installment Note secured by equipment, dated
December 23, 1996, by and between Norwest Bank Nebraska,
N.A., and the Company, together with Security Agreement
(incorporated herein by reference to Exhibit 10.30 to the
1996 Form 10-K).
10.31 Nebraska Investment Finance Authority $2,850,000 Variable
Rate Demand Industrial Development Revenue Bond
(Transcrypt International, Inc. Project), Series 1997,
dated as of March 25, 1997 (incorporated herein by
reference to Exhibit 10.31 to the 1Q 1997 Form 10-Q).
10.32 Trust Indenture, dated as of March 1, 1997, for $2,850,000
Variable Rate Demand Industrial Development Revenue Bond
(Transcrypt International, Inc. Project), Series 1997,
between Nebraska Investment Finance Authority as Issuer
and Norwest Bank Nebraska, N.A. as Trustee (incorporated
herein by reference to Exhibit 10.32 to the 1Q 1997 Form
10-Q).
10.33 Loan Agreement, dated as of March 1, 1997, for $2,850,000
Variable Rate Demand Industrial Development Revenue Bond
(Transcrypt International, Inc. Project), Series 1997,
between Nebraska Investment Finance Authority as Issuer
and the Company (incorporated herein by reference to
Exhibit 10.33 to the 1Q 1997 Form 10-Q).
10.34- RESERVED
10.35
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.36 License Agreement, dated as of January 15, 1997, between
E.F. Johnson Company and Johnson Data Telemetry
Corporation (incorporated herein by reference to Exhibit
10.36 to the October 1997 Registration Statement).
10.37 Loan Agreement, dated as of December 31, 1997, by and
between U.S. Bank National Association d/b/a First Bank
N.A., and the Company, together with related documents.
(incorporated herein by reference to Exhibit 10.37 to the
1997 Form 10-K).
10.38 First Amendment to Loan Agreement dated May 21, 1998 by and
between U.S. Bank National Association and the Company,
together with related documents. (incorporated herein by
reference to Exhibit 10.38 to the 1997 Form 10-K).
10.39 Severance Agreement and Mutual Release between the Company
and Jeffery L. Fuller dated June 2, 1998 (incorporated
herein by reference to Exhibit 10.39 to the 1997 Form
10-K).
10.40 Severance Agreement and Mutual Release between the Company
and Charles E. Baumann dated June 2, 1998 (incorporated
herein by reference to Exhibit 10.40 to the 1997 Form
10-K).
10.41 Consulting Agreement and Termination of Employment
Agreement between the Company and John T. Connor dated
February 23, 1999.
10.42 Employment Agreement between the Company and Michael E.
Jalbert dated March 1, 1999.
10.43 Employment Agreement between the Company and Michael P.
Wallace dated March 25, 1999.
11.1 Statement re: Computation of Per Share Earnings.
21 Subsidiaries of the Registrant. (incorporated herein by
reference to Exhibit 21 to the 1997 Form 10-K).
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
</TABLE>
- ------------
* Confidential treatment has previously been granted by the SEC as to a portion
of this exhibit.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
(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 this Annual Report on Form 10-K for Schedule II -- Valuation
and Qualifying Accounts and Reserves.
40
<PAGE>
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.
TRANSCRYPT INTERNATIONAL, INC.
By: /s/ MICHAEL E. JALBERT
--------------------------------------
Michael E. Jalbert
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
Dated: March 25, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ MICHAEL E. JALBERT Chairman of the Board of Directors, President and March 25, 1999
- --------------------------------------------------- Chief Executive Officer
Michael E. Jalbert (Principal Executive Officer)
/S/ CRAIG J. HUFFAKER Senior Vice President of Finance and March 25, 1999
- --------------------------------------------------- Chief Financial Officer
Craig J. Huffaker (Principal Financial and Accounting Officer)
/S/ JOHN T. CONNOR Director March 25, 1999
- ---------------------------------------------------
John T. Connor
/S/ TERRY L. FAIRFIELD Director March 25, 1999
- ---------------------------------------------------
Terry L. Fairfield
/S/ THOMAS E. HENNING Director March 25, 1999
- ---------------------------------------------------
Thomas E. Henning
/S/ THOMAS R. LARSEN Director March 25, 1999
- ---------------------------------------------------
THOMAS R. LARSEN
/S/ THOMAS C. SMITH Director March 25, 1999
- ---------------------------------------------------
Thomas C. Smith
/S/ THOMAS R. THOMSEN Director March 25, 1999
- ---------------------------------------------------
Thomas R. Thomsen
/S/ WINSTON J. WADE Director March 25 , 1999
- ---------------------------------------------------
Winston J. Wade
</TABLE>
41
<PAGE>
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, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ KMPG Peat Marwick LLP
Omaha, Nebraska
February 12, 1999
F-1
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND DATA)
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................ $ 20,262 $ 15,384
Investments .......................................................... -- 15,900
Accounts receivable, net of allowance for returns and doubtful
accounts of $1,997 and $2,417 in 1998 and 1997 respectively .......... 9,287 16,008
Receivables - other .................................................. 605 785
Cost in excess of billings on uncompleted contracts .................. 1,216 942
Inventory ............................................................ 13,907 18,363
Income tax recoverable ............................................... -- 1,065
Prepaid expenses ..................................................... 552 478
Deferred tax assets .................................................. 5,157 3,523
--------- ---------
Total current assets ..................................... 50,986 72,448
Property, plant and equipment, net .......................................... 11,885 11,261
Deferred tax assets ......................................................... 7,219 4,504
Intangible assets, net of accumulated amortization .......................... 16,711 18,029
Other assets ................................................................ 411 452
--------- ---------
$ 87,212 $ 106,694
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit ............................................. $ 7,426 $ --
Current portion of long-term debt .................................... 2,732 2,545
Accounts payable ..................................................... 2,620 9,305
Billings in excess of cost on uncompleted contracts .................. 4,541 6,696
Deferred revenue ..................................................... 1,140 1,743
Accrued expenses ..................................................... 5,101 7,323
Provision for litigation settlement .................................. 10,000 --
--------- ---------
Total current liabilities ................................ 33,560 27,612
Long-term debt, net of current portion ...................................... 6 2,758
Deferred revenue ............................................................ 550 934
--------- ---------
34,116 31,304
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock ($.01 par value; 3,000,000 shares authorized; none
issued) ............................................................. -- --
Common stock ($.01 par value; 19,400,000 voting shares
authorized, 12,729,082 issued and outstanding; 600,000 non-voting
shares authorized, 217,542 issued and outstanding) ................... 129 129
Additional paid-in capital ........................................... 90,315 90,315
Accumulated deficit .................................................. (37,348) (15,054)
--------- ---------
53,096 75,390
--------- ---------
$ 87,212 $ 106,694
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-2
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues ........................................... $ 62,041 $ 40,423 $ 10,619
Cost of sales ...................................... 44,905 26,106 4,274
------------ ------------ ------------
Gross profit ................................. 17,136 14,317 6,345
------------ ------------ ------------
Operating expenses:
Research and development ....................... 8,812 4,469 2,234
Sales and marketing ............................ 11,476 7,031 2,187
General and administrative ..................... 12,529 4,711 2,529
Special compensation expense ................... -- -- 5,568
In-process research and development ............ -- 9,828 --
Restructuring charge ........................... 1,230 -- --
Provision for litigation settlement ............ 10,000 -- --
------------ ------------ ------------
Total operating expenses ..................... 44,047 26,039 12,518
------------ ------------ ------------
Loss from operations ......................... (26,911) (11,722) (6,173)
Other income (expense) ............................. 46 18 --
Interest income .................................... 1,304 874 31
Interest expense ................................... (649) (643) (162)
------------ ------------ ------------
Loss before income taxes ..................... (26,210) (11,473) (6,304)
Income tax benefit ................................. (3,916) (524) (2,186)
------------ ------------ ------------
Net loss ................................ $ (22,294) $ (10,949) $ (4,118)
------------ ------------ ------------
------------ ------------ ------------
Pro forma net loss per share - Basic and Diluted . $ (1.72) $ (1.09) $ (0.61)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares - Basic and Diluted 12,946,624 10,056,690 6,783,078
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to the consolidated financial statements
F-3
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT UNITS AND SHARE DATA)
<TABLE>
<CAPTION>
Common Stock
------------ Additional
Par Paid-in Accumulated Partners'
Units Shares Value Capital Deficit Capital Total
--------- --------- --------- ---------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.................. 5,175,434 -- $ -- $ -- $ -- $ 3,907 $ 3,907
Distributions............................... -- -- -- -- -- (181) (181)
Net loss.................................... -- -- -- -- (4,105) (13) (4,118)
Issuance of stock in exchange for
units of the Predecessor.................. (5,175,434) 5,175,434 52 3,661 -- (3,713) --
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 -- -- 5,358
--------- -------- ----- -------- -------- ------- --------
Balance, December 31, 1996.................. -- 6,783,078 68 9,003 (4,105) -- 4,966
Net loss.................................... -- -- -- -- (10,949) -- (10,949)
Initial public offering, net of related costs -- 2,500,000 25 17,685 -- -- 17,710
Issuance of shares in connection
with the purchase of the E.F. Johnson
Company..................................... -- 832,465 8 9,992 -- -- 10,000
Secondary stock offering, net of related costs -- 2,684,481 27 52,912 -- -- 52,939
Exercise of stock options................... -- 146,600 1 228 -- -- 229
Income tax benefit of exercise of stock
options.................................. -- -- -- 495 -- -- 495
--------- -------- ----- -------- -------- ------- --------
Balance, December 31, 1997.................. -- 12,946,624 129 90,315 (15,054) -- 75,390
Net loss.................................... -- -- -- -- (22,294) -- (22,294)
--------- --------- -------- --------- ----------- --------- ----------
Balance, December 31, 1998.................. -- 12,946,624 $ 129 $ 90,315 $ (37,348) -- $ 53,096
--------- --------- -------- --------- ----------- --------- ----------
--------- --------- -------- --------- ----------- --------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements
F-4
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................................. ($22,294) ($10,949) ($ 4,118)
-------- -------- --------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Special compensation expense ..................................... -- -- 5,358
In-process research and development costs ........................ -- 9,828 --
Provision for litigation settlement .............................. 10,000 -- --
Depreciation and amortization .................................... 4,596 2,206 1,580
Loss (gain) on sale of fixed assets .............................. (102) (15) 6
Provisions for inventory reserves ................................ 978 1,100 114
Provisions for bad debts ......................................... 922 202 289
Deferred taxes ................................................... (4,349) (706) (2,207)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable .......................................... 5,979 (8,884) 489
Cost in excess of billings on uncompleted contracts .......... (274) 201 --
Inventory .................................................... 3,478 (6,179) (1,733)
Income taxes recoverable ..................................... 1,065 (357) (213)
Prepaid expenses and other assets ............................ (74) (144) --
Accounts payable ............................................. (6,685) (4,855) 997
Billings in excess of cost on uncompleted contracts .......... (2,155) (823) --
Accrued expenses ............................................. (1,138) 325 359
Deferred revenue ............................................. (987) 933 --
-------- -------- --------
Total adjustments ........................................ 11,254 (7,168) 5,039
-------- -------- --------
Net cash provided by (used in) operating activities ...... (11,040) (18,117) 921
-------- -------- --------
Cash flows from investing activities:
Purchases of investments ................................................. -- (15,900) --
Sale of investments ...................................................... 15,900 -- --
Proceeds from sale of fixed assets ....................................... 111 15 31
Purchase of fixed assets ................................................. (3,504) (2,422) (2,119)
Increase in intangible assets ............................................ (407) -- (581)
Decrease in other assets ................................................. 41 118 --
Payments on restructuring reserve ........................................ (1,084) (2,380) --
Acquisition of E.F. Johnson Company, net of cash acquired ................ -- (292) --
-------- -------- --------
Payments under noncompete agreements ..................................... -- -- (340)
-------- -------- --------
Net cash provided by (used in) investing activities ...... 11,057 (20,861) (3,009)
-------- -------- --------
Cash flows from financing activities:
Proceeds on revolving lines of credit, net ............................... 7,426 (11,914) 1,022
Proceeds from long term debt ............................................. -- 2,850 1,377
Payments on long term debt ............................................... (2,540) (7,634) (408)
Principal payments on capitalized leases ................................. (25) -- (16)
Partnership distributions paid ........................................... -- -- (181)
Bank overdraft ........................................................... -- (386) 386
Issuance of common stock, net of issuance costs .......................... -- 71,217 --
Proceeds from the exercise of employee stock options ..................... -- 229 --
Initial public offering costs ............................................ -- -- (384)
-------- -------- --------
Net cash provided by financing activities ................ 4,861 54,362 1,796
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .......................... 4,878 15,384 (292)
Cash and cash equivalents, beginning of period ................................ 15,384 -- 292
-------- -------- --------
-------- -------- --------
Cash and cash equivalents, end of period ...................................... $ 20,262 $ 15,384 $ --
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to the consolidated financial statements
F-5
<PAGE>
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.
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 telephony markets.
Through its E.F. Johnson subsidiary, the Company designs, develops, manufactures
and markets stationary land mobile radio transmitters/receivers and mobile and
portable radios. The Company markets its products to customers worldwide in two
broad markets: business and industrial users and public safety and other
governmental users. Management considers its operations to comprise two industry
segments. One segment consists of business conducted in the information security
industry and the second business segment competes in the wireless communication
industry.
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. The results of
operations of E.F. Johnson Company (EFJ) are included from the date of its
acquisition, July 31, 1997.
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. Cash and cash equivalents
includes the certificate of deposits as discussed in Note 7.
INVESTMENTS
Investments include Dutch auction securities, which are bought and held
primarily for the purpose of selling them in the near term and, accordingly,
these investments are classified as trading securities. Trading securities are
recorded at fair value and unrealized holding gains and losses are included in
earnings.
INVENTORY
Inventory is recorded at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
F-6
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over fair value
of assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, 15 years. Other intangibles are also carried at cost
less applicable amortization. Provision for amortization of other intangible
assets is based upon the estimated useful lives of the related assets and is
computed using the straight-line method. Intangible assets are being
amortized over periods from 5 to 15 years.
The Company assesses the recoverability of goodwill and other intangible
assets by determining whether amortization of the balances over the remaining
lives can be recovered through undiscounted future operating cash flows. The
amount of impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability will be impacted
if estimated future operating cash flows are not achieved.
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.
F-7
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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
recognizes revenue when the contingency lapses, generally upon cash collection.
System sales under long-term contracts are accounted for under the
percentage-of-completion method. Under this method, revenues are recognized as
work on a contract progresses. The recognized revenue is that percentage of
estimated total revenue that incurred costs to date bear to estimated total
costs to complete the contract. Revisions in cost and profit estimates are made
when conditions requiring such revisions become known. Anticipated losses on
contracts are recognized in operations as soon as such losses are determined to
be probable and reasonably estimable.
Deferred revenue includes unearned warranty fees on extended product
warranty contracts sold to customers. The Company recognizes the fees based on
the expected warranty repairs to be incurred over the life of the contract.
Deferred revenue also includes an advanced payment received for products to be
sold to a former division of EFJ. The advance payment was negotiated as part of
the sale agreement of the division by EFJ. The advanced payment is recognized as
revenue is earned.
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.
LOSS PER SHARE
Basic earnings per share (EPS) is calculated based upon the weighted average
number of common shares outstanding during the period. The diluted EPS
calculation reflects the potential dilution from common stock equivalents such
as stock options. As the years ended December 31, 1998, 1997 and 1996 have net
losses, the impact of outstanding stock options on diluted EPS is anti-dilutive.
Pro forma net loss per share for 1996 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 1.3106311-for-1
stock split in the form of a stock dividend. All shares and per share
information have been restated to reflect the split.
F-8
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
STOCK OPTION PLAN
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant of options to employees, only if the current market price of the
underlying stock exceeded the exercise price.
2. ACQUISITION:
On July 31, 1997, the Company acquired all of the outstanding shares of
capital stock and certain indebtedness of EFJ for $436 in cash and 832,465
shares of common stock, with an approximate market value of $10,000. The
acquisition was accounted for by the purchase method of accounting. Purchased
in-process research and development costs of $9,828 were written off as the
technological feasibility of such in-process technology had not yet been
established and the technology had no alternative future use. Intangibles
recorded as part of the purchase include goodwill of $10,880, core technology of
$891, work force of $1,374, customer base of $1,561, and trade names of $3,299.
The intangible assets are being amortized over 5 to 15 years.
The operating results of EFJ are included in the Company's consolidated
results of operations from the date of acquisition. The following unaudited pro
forma financial information assumes the acquisition occurred at the beginning of
1996. These results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition been
made at the beginning of 1996, or of the results, which may occur in the future.
<TABLE>
<CAPTION>
1997 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Total revenues............................... $ 70,959 $ 89,585
Net loss..................................... $ (9,949) $ (32,077)
Loss per share-- Basic and Diluted........... $ (0.94) $ (4.21)
</TABLE>
F-9
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
3. BILLINGS IN EXCESS OF COSTS ON UNCOMPLETED CONTRACTS:
Amounts included in the consolidated financial statements that relate to
billings on uncompleted contracts in excess of incurred costs as of December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Costs on uncompleted contracts ............ $ 30,615 $ 31,814
Profits in uncompleted contracts .......... 10,501 13,547
-------- --------
41,116 45,361
Less billings ............................. 44,441 51,115
-------- --------
$ (3,325) $ (5,754)
-------- --------
-------- --------
Included in the consolidated balance sheet:
Cost in excess of billings on uncompleted
contracts ............................... $ 1,216 $ 942
Billings in excess of cost on uncompleted
contracts ............................... (4,541) (6,696)
-------- --------
$ (3,325) $ (5,754)
-------- --------
-------- --------
</TABLE>
Cost in excess of billings on uncompleted contracts includes direct costs of
manufacturing, installation, project management, engineering, and allocable
manufacturing overhead costs and accrued profits in excess of amounts billed.
Billings in excess of costs on uncompleted contracts includes amounts billed and
accrued anticipated losses (anticipated losses were $3,644 and $3,530 at
December 31, 1998 and 1997, respectively, of which $3,773 was established in
connection with the E.F. Johnson acquisition described in Note 2) on open
contracts in excess of costs and accrued profits.
4. INVENTORY:
The following is a summary of inventory at December 31, 1998 and 1997, net
of reserves for obsolescence of $3,146 and $4,114, respectively
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Raw materials and supplies.................... $ 6,267 $ 7,523
Work in process............................... 1,337 1,977
Finished goods................................ 6,303 8,863
-------- --------
$ 13,907 $ 18,363
-------- --------
-------- --------
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land and land improvements.......................... $ 262 $ 262
Buildings and improvements.......................... 7,245 4,860
Equipment........................................... 9,033 8,152
Leased equipment.................................... 74 136
Furniture and fixtures.............................. 1,317 1,255
Construction in progress............................ 209 178
-------- -------
18,140 14,843
Less accumulated depreciation and amortization.... 6,255 3,582
-------- -------
$ 11,885 $11,261
-------- -------
-------- -------
</TABLE>
F-10
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
6. INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Goodwill............................................... $ 10,880 $10,880
Proprietary technology and licensing agreements........ 400 3,763
Acquired work force, customer base, trade name......... 6,234 6,234
Other.................................................. 1,446 1,038
-------- -------
18,960 21,915
Less accumulated amortization........................ 2,249 3,886
-------- -------
$ 16,711 $18,029
-------- -------
-------- -------
</TABLE>
7. REVOLVING LINES OF CREDIT:
The Company has a line of credit with a regional bank. It is a secured line
of credit not to exceed $10,000. Interest was 6.18% at December 31, 1998 and is
at a variable rate of 1.25% over the interest rate earned on the $10,000 cash
collateral used as security on the bank line of credit. This line of credit was
due on December 31, 1998 and was renewed until August 31, 1999. The working
capital line is collateralized by substantially all the Company's assets
including $10,000 in certificate of deposits with the bank.
At December 31, 1998, the Company had $7,230, outstanding on the revolving
line of credit. At December 31, 1997, the Company had no amounts outstanding on
this line of credit. Average borrowings under the Company's line of credit and
the weighted average interest rate during 1998 were $6,564 and 6.94% and during
1997 were $761 and 8.5%. The total available credit as of December 31, 1998 was
$2,574 under the above line. The Company had an additional fixed line of credit
with the same regional bank. It is a secured line of credit for $196. The
interest rate was 7.75% at December 31, 1998. This line of credit and applicable
accrued interest was paid off on February 10, 1999.
8. LONG-TERM DEBT:
Long-term debt at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
Industrial development revenue bonds (IDR) payable to bank with interest
payments due March 1and September 1 and annual principal payments of $140 beginning March 1, 1998
at variable interest rates with principal due on March 1, 2017. This note is collateralized
by a deed of trust on a building ................................................................. $2,710 $2,850
Capital lease obligation, due in monthly principal and interest installments of
$32 through July 31, 2002, effective interest rate of 9.1% per annum, secured by land and
building ......................................................................................... -- 2,400
Other capital lease obligations .................................................................. 28 53
------ ------
2,738 5,303
Less current portion ............................................................................. 2,732 2,545
------ ------
------ ------
$ 6 $2,758
------ ------
------ ------
</TABLE>
The revolving lines of credit discussed in Note 7 require, among other
things, that the Company maintain certain levels of net worth. At December 31,
1998, the Company was in compliance with these debt covenants or had obtained
the appropriate waivers. The IDR bonds require the Company to maintain at all
times a letter of credit in an amount at least equal to 103% of the aggregate
principal amount of bonds then outstanding plus a specified portion of interest
payable.
F-11
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
8. LONG-TERM DEBT: (CONTINUED)
Subsequent to the year ended December 31, 1998, the Company pledged cash
collateral of $2.8 million as additional security on its long-term indebtedness.
$2.6 million of long-term debt was reclassified to a current liability on the
Company's balance sheet at December 31,1998 pending the Company's efforts to
refinance the debt.
9. LEASE OBLIGATIONS:
The Company leases various equipment, automobiles and buildings under
operating leases. Rent expense was $706 and $520 for the years ended December
31, 1998 and 1997, respectively and was immaterial in 1996. Future minimum
rental payments under non-cancelable operating lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-----------------------
<S> <C>
1999......................................... $ 308
2000......................................... 220
2001......................................... 149
2002......................................... 54
2003......................................... 10
Thereafter................................... 4
-------
Total minimum lease payments....... $ 745
-------
-------
</TABLE>
10. INCOME TAXES:
The components of the benefit for income taxes for the period ending
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal ... $ 433 $ 163 $ 21
State ..... -- 19 --
------- ------- -------
------- ------- -------
433 182 21
------- ------- -------
------- ------- -------
Deferred:
Federal ... (4,349) (637) (2,207)
State ..... -- (69) --
------- ------- -------
(4,349) (706) (2,207)
------- ------- -------
$(3,916) $ (524) $(2,186)
------- ------- -------
------- ------- -------
</TABLE>
F-12
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
10. INCOME TAXES: (CONTINUED)
The Company's effective tax rate on pretax loss differs from U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
1998 Percent 1997 Percent 1996 Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. federal tax at statutory tax rate ........... $(8,911) 34.0 $(3,901) 34.0 $(2,143) 34.0
Income taxable directly to partners of Predecessor -- -- -- -- 4 --
Increase in valuation allowance .................. 5,013 19.1 -- -- -- --
In-process research and development costs ........ -- -- 3,341 29.1 -- --
Benefit of foreign sales corporation ............. -- -- (61) (0.5) (53) (0.7)
State taxes, net of federal benefit .............. -- -- (33) (0.3) -- --
Non deductible amortization ...................... 251 0.1 49 0.4 -- --
Other ............................................ (269) (0.1) 81 0.7 6 --
------- ----- ------- ---- ------- ----
$(3,916) (14.9) $ (524) (4.6) $(2,186) (34.7)
------- ----- ------- ---- ------- ----
------- ----- ------- ---- ------- ----
</TABLE>
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to deferred income taxes at
December 31, 1998 and 1997 relate to the following.
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Special compensation expense ..................... $ 1,403 $ 1,403
Allowance for bad debts .......................... 525 993
Net operating loss carryforwards ................. 12,255 5,549
Provision for litigation settlement .............. 3,400 --
Difference between tax and book amortization ..... 1,538 1,547
Difference between tax and book liability accruals 2,452 1,939
------- -------
Gross deferred tax assets ........................ 21,573 11,431
Less valuation allowance ......................... 8,013 3,000
------- -------
13,560 8,431
------- -------
Deferred tax liabilities:
Difference between tax and book depreciation ..... 1,184 404
------- -------
Net deferred asset .................................. $12,376 $ 8,027
------- -------
------- -------
</TABLE>
There was no valuation allowance for deferred tax assets as of January 1,
1997 and 1996. A valuation allowance of $3,000 was established at the time of
the purchase of EFJ. An additional $5,013 was added to the valuation allowance
during 1998. Any subsequently recognized tax benefits relating to $3,000 of the
valuation allowance as of December 31, 1998 will be allocated to goodwill. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. In order to fully realize
the deferred tax asset, the Company will need to generate future taxable income
prior to expiration of the net operating loss carryforwards. Taxable losses for
the year ended December 31, 1998 and December 31, 1997 and the six
F-13
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
10. INCOME TAXES: (CONTINUED)
months ended December 31, 1996 were approximately $16,950, $7,800 and $1,300,
respectively. Based upon the level of historical taxable income and projections
for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of existing valuation
allowances at December 31, 1998. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
Net operating loss carryforwards, which originated in 1998, 1997 and 1996,
will begin to expire in 2011. The Company has approximately $8,600 in Federal
and state net operating loss carryforwards attributable to EFJ which expire in
2012. Tax regulations limit the amount that may be utilized on these acquired
net operating losses on an annual basis to approximately $588.
11. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Payroll, bonuses and employee benefits $1,361 $1,534
Warranty reserve ..................... 530 806
Commissions .......................... 65 789
Restructuring reserve ................ 1,800 2,581
Other expenses ....................... 1,345 1,613
------ ------
$5,101 $7,323
------ ------
------ ------
</TABLE>
In August 1998, the Company announced a voluntary reduction in force for
which the Company took a restructuring reserve of $1,230 to cover costs
associated with severance and other related costs to reduce the workforce by
approximately 125 employees. As of December 31, 1998, $927 has been expended. In
connection with the acquisition of EFJ, a portion of the purchase price was
allocated to a restructuring reserve in 1997 to cover costs associated with the
purchase such as severance and relocation costs. A reserve of $4,961 was
recorded, and as of December 31, 1998, $3,464 has been expended.
12. COMMITMENTS AND CONTINGENCIES:
The Company has been named as a defendant in 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, as
amended, also name one or more officers of the Company and
PriceWaterhouseCoopers, LLP 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.
F-14
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES:
The federal class actions generally allege claims under Sections 11 and 15
of the Securities Act of 1933 and 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 class action complaints seek unspecified
compensatory damages, attorneys' fees and costs. The federal class actions have
been consolidated and lead plaintiff appointed. The amended federal class action
complaint was filed on March 4, 1999 and the Company is required to answer or
otherwise respond to the complaint by March 27, 1999.
Although the class action complaints 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 material. 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 is attempting to settle the class action lawsuits with a
combination of Company stock and cash up to the limits of its directors' and
officers' liability insurance. In the quarter ended December 31, 1998, the
Company recorded a special provision of $10.0 million relating to the federal
and state class action lawsuits pending in Nebraska against the Company and
certain of its current and former officers. As previously disclosed, the
Company is in ongoing settlement discussions regarding these lawsuits. While
no settlement agreement has been reached, the $10.0 million special provision
is the Company's best estimate of the amount that would be necessary for the
Company to contribute to settle the class actions. The Company would
anticipate satisfying any settlement by issuing shares of common stock to the
class members rather than using its cash reserves. Despite the taking of the
special provision, the Company can give no assurances whether any settlement
can be reached, what the terms of any settlement would be or whether the
Company would be required to contribute more than $10.0 million. 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.
On November 4, 1998, Physician's Mutual Insurance Company filed an action in
the District Court of Douglas County, Nebraska against the Company,
PriceWaterhouseCoopers, LLP and two former officers of the Company. The
complaint contains common law causes of action for fraudulent misrepresentation,
fraudulent concealment and negligent misrepresentation against the defendants
arising from the same facts and circumstances underlying the class actions. The
complaint seeks damages in an amount to be proved at trial, but which is
currently alleged to be approximately $850,000. The Company is unable to predict
the likelihood of the outcome or range or amount of potential liability that may
arise therefrom.
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.
F-15
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES: (Continued)
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 enforcement action against the Company or its affiliated parties
relating to these events.
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.
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 1999,
have a total undrawn balance of $128, and bonds which expire on various dates
through 1999, totaling $24,500 at December 31, 1998. As of December 31, 1998 no
bonds have been drawn upon and the Company's bonding capacity remains at
$50,000.
As a result of the EFJ acquisition, the Company has an agreement with a
vendor to purchase certain annual dollar volume of products. In the event the
Company fails to purchase the minimum volume, it must pay a penalty equal to 35%
of the shortfall. Future minimum purchase quantities are as follows: 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. In 1998, the Company incurred
$666 as a result of this take or pay contract.
13. 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 then outstanding 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 non-employee 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 as amended in October 1998, shall not exceed
2,000,000. As of December 31, 1998 the Company 962,933 shares have been issued
under the Plan. 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
with vesting of the options at a rate of 20% per year.
F-16
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
13. OPTION PLANS: (Continued)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1998, 1997
and 1996 consistent with the provisions of SFAS No. 123, the Company's pro forma
net loss and pro forma loss per share would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Pro forma net loss-- as reported ............................. $ (22,294) $(10,949) $(4,114)
Pro forma net loss-- as adjusted under SFAS No. 123 .......... (23,010) (11,149) (4,114)
Pro forma net loss per share-- as reported:
Basic and Diluted .......................................... (1.72) (1.09) (.61)
Pro forma net loss per share-- as adjusted under SFAS No. 123:
Basic and Diluted .......................................... (1.78) (1.11) (.61)
</TABLE>
Fair value of the options was not determinable prior to September 30, 1996
when the Board of Directors approved full vesting of the outstanding options. No
options were granted subsequent to September 30, 1996, during the year ended
December 31, 1996. The weighted average fair value per option at date of grant
durring 1998 and 1997 was $11.33 and $7.92, respectively.
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 granted:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Expected option life............................. 10 years 10 years 10 years
Expected annual volatility....................... 110% 68% N/A
Risk-free interest rate.......................... 4.65% 6.62% 6.50%
Dividend yield................................... 0% 0% 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, 1995 464,619 $ 1.13 --
Granted ................................................ 252,297 3.05 --
Exercised .............................................. -- --
Forfeited .............................................. -- --
------- --------- -------
Balance at December 31, 1996 716,916 1.81 716,916
Granted ................................................ 459,600 10.29
Exercised .............................................. (146,600) 1.57
Forfeited .............................................. (146,383) 10.01
------- --------- -------
Balance at December 31, 1997 883,533 4.90 553,933
Granted ................................................ 215,000 7.72
Exercised .............................................. -- -- --
Forfeited .............................................. (135,600) 5.12
------- ---------
Balance at December 31, 1998 ............................. 962,933 $ 4.94 627,933
------- --------- -------
------- --------- -------
</TABLE>
F-17
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
13. OPTION PLANS: (Continued)
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER EXERCISABLE
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, AVERAGE
EXERCISE PRICE 1998 LIFE PRICE 1998 EXERCISE PRICE
- ----------------- -------------- ----------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.76 -- 0.76 294,257 6.67 $ 0.76 294,257 $ 0.76
2.69 -- 2.75 85,000 9.78 2.71 0 0.00
3.05 -- 3.05 259,676 7.15 3.05 259,676 3.05
3.94 -- 8.00 204,000 8.43 7.20 56,000 8.00
10.50 -- 21.69 80,000 8.88 13.62 10,000 15.50
23.50 -- 23.50 10,000 8.88 23.50 2,000 23.50
23.94 -- 23.94 30,000 9.08 23.94 6,000 23.94
-------------------------- ------- ------ -------- ------- ---------
0.76 -- 23.94 962,933 7.73 $ 4.94 627,933 $ 2. 88
-------------------------- ------- ------ -------- ------- ---------
-------------------------- ------- ------ -------- ------- ---------
</TABLE>
14. BENEFIT PLANS:
The Company has a profit sharing plan which covers substantially all
employees. Contribution levels are determined by the Board of Directors
annually. Profit sharing expense approximated $0, $100 and $60 for the years
ended December 31, 1998, 1997 and 1996, respectively.
The Company also has a 401(k) plan which covers substantially all employees.
Participants may contribute up to 10% of their annual compensation and the
Company makes matching contributions of 50% for the first 6% of the amount
contributed by participants. Contributions may not exceed the maximum allowable
by law. Company contributions approximated $372, $111 and $16 for the years
ended December 31, 1998, 1997 and 1996, respectively.
15. CONCENTRATIONS:
No customer accounted for sales 10% or greater in 1998. Sales to major
customers were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Individual customers representing 10% or more of
consolidated sales in each year:
Motorola, Inc....................................... $ -- $ 2,180
Modern Scientific and Electronic Corporation........ $ 4,374 $ --
</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.
In addition to being a customer, Motorola is also a key manufacturer of
electronic components used by the Company. Purchases by the Company from
Motorola totaled approximately $1,244, $3,862 and $1,878 in 1998, 1997, and
1996, respectively.
F-18
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents, accounts receivable,
receivables-other, cost in excess of billings on uncompleted contracts, income
taxes recoverable, prepaid expenses, accounts payable, billings in excess of
cost on uncompleted contracts and 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.
17. STOCK OFFERINGS:
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
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 October 15, 1997, the Company completed a secondary public offering of
3,175,000 shares of common stock at a price of $21.00 per share. Of the
3,175,000 shares offered, 2,684,481 shares were sold by the Company and 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
the revolving credit facility and term facility of EFJ. The remaining net
proceeds have been and will be used to finance expansion and modernization of
the Company's manufacturing and administrative facilities, and for working
capital and general corporate purposes.
18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid by the Company during the years ended December 31, 1998, 1997
and 1996 amounted to $514, $618 and $163, respectively. Income taxes paid, net
of refunds, during the years ended December 31, 1998 and 1997 were $0 and $642,
respectively.
During 1996, the Company made non-cash additions to property, plant and
equipment and deferred initial public offering costs of $174 and $184,
respectively.
In conjunction with the acquisition during the year ended December 31, 1997
(see Note 2) assets acquired, liabilities assumed and common stock issued were
as follows:
<TABLE>
<S> <C>
Fair value of assets acquired............................... $ 30,574
Excess of cost over net tangible assets acquired............ 27,833
Liabilities assumed......................................... (48,115)
Common stock issued......................................... (10,000)
---------
Cash paid, net of cash received................... $ 292
---------
---------
</TABLE>
F-19
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
19. SEGMENT AND RELATED INFORMATION:
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, in 1998. The statement allows, and the
Company has chosen, the adoption of this statement for the year ended December
31, 1998 and 1997.
The Company's reporting segments are strategic business units that offer
different products and services. Management considers its operations to comprise
two industry segments. One segment consists of business conducted in the
information security industry, which comprises the design, manufacture and sale
of devices that prevent the unauthorized interception on sensitive voice and
data communication. The second business segment competes in the wireless
communication industry where the Company designs, develops, manufactures and
markets stationary land mobile radio transmitters/receivers, mobile and portable
radios and complete radio communication systems.
The following table is a summary of unaudited annual results for the years
ended December 31, 1998, 1997 and 1996. E.F. Johnson was acquired on July 31,
1997, the Company prior to the acquisition was comprised solely of the
Information Security business segment.
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------------------------------------
IN THOUSANDS 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES
Information Security ...................... $10,925 $10,586 $10,619
Wireless Communication .................... 51,116 29,837 --
------- ------- -------
TOTAL SALES ............................... 62,041 40,423 10,619
------- ------- -------
COST OF GOODS SOLD
Information Security ...................... 5,105 5,919 4,274
Wireless Communication .................... 39,800 20,187 --
------- ------- -------
TOTAL COST OF GOODS SOLD .................. 44,905 26,106 4,274
------- ------- -------
GROSS MARGIN
Information Security ...................... 5,820 4,667 6,345
Wireless Communication .................... 11,316 9,650 --
------- ------- -------
TOTAL GROSS MARGIN ........................ $17,136 $14,317 $ 6,345
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
GROSS MARGIN PERCENTAGE
Information Security ...................... 53.3% 44.1% 59.8%
Wireless Communication .................... 22.1% 32.3% 0.0%
------- ------- -------
TOTAL GROSS MARGIN PERCENTAGE ............. 27.6% 35.4% 59.8%
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
19. SEGMENT AND RELATED INFORMATION: (Continued)
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.
Export sales by major geographic area were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Europe............................. $ 1,902 $ 804 $ 1,960
Middle East and Asia............... 3,953 7,657 1,525
Central and Latin America.......... 16,859 6,933 2,235
-------- ------- -------
$ 22,714 $15,394 $ 5,720
-------- ------- -------
-------- ------- -------
</TABLE>
20. UNAUDITED QUARTERLY FINANCIAL DATA:
The following table sets forth unaudited condensed operating results
for each of the eight quarters in the two-year period ending December 31, 1998.
This information has been prepared on the same basis as the financial statements
appearing elsewhere in this report. The Company's operating results for any one
quarter are not indicative of results for any future period.
Earnings per share for each quarter are computed independently of
earnings per share for the year. The sum of the quarterly may not equal the
earnings per share for the year because of (i) transactions affecting the
weighted average number of common shares outstanding in each quarter and (ii)
the uneven distribution of earnings during the year.
F-21
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
20. UNAUDITED QUARTERLY FINANCIAL DATA: (Continued)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC.31,
--------- -------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1998
Revenues .................................................. $ 21,988 $ 13,877 $ 14,325 $ 11,851
Income (loss) from operations ............................. 1,717 (7,749) (5,955) (14,924)
Interest (expense) income and other income, net ........... 311 108 29 254
-------- -------- -------- ----------
Net income (loss) before income taxes ..................... 2,028 (7,641) (5,926) (14,670)
Provision (benefit) for income taxes ...................... 712 (2,598) (2,030) --
-------- -------- -------- ----------
Net income (loss) ......................................... $ 1,316 $ (5,043) $ (3,896) $ (14,670)
-------- -------- -------- ----------
-------- -------- -------- ----------
Net income (loss) per share
Basic ..................................................... $ 0.10 $ (0.39) $ (0.30) $ (1.13)
-------- -------- -------- ----------
-------- -------- -------- ----------
Diluted ................................................... $ 0.10 $ (0.39) $ (0.30) $ (1.13)
-------- -------- -------- ----------
-------- -------- -------- ----------
1997
Revenues .................................................. $ 3,512 $ 2,915 $ 13,428 $ 20,568
Income (loss) from operations ............................. 93 (1,439) (11,267) 891
Interest (expense) income and other income, net ........... 76 159 (227) 241
-------- -------- -------- ----------
Net income (loss) before income taxes ..................... 169 (1,280) (11,494) 1,132
Provision (benefit) for income taxes ...................... 27 (490) (468) 407
-------- -------- -------- ----------
Net income (loss) ......................................... $ 142 $ (790) $(11,026) $ 725
-------- -------- -------- ----------
-------- -------- -------- ----------
Net income (loss) per share
Basic ..................................................... $ 0.02 $ (0.09) $ (1.12) $ 0.06
-------- -------- -------- ----------
-------- -------- -------- ----------
Diluted ................................................... $ 0.02 $ (0.09) $ (1.12) $ 0.06
-------- -------- -------- ----------
-------- -------- -------- ----------
</TABLE>
The Company incurred a charge of $1.2 million for restructuring the
workforce in the third quarter ended September 30, 1998.
In the quarter ended September 30, 1997, the Company incurred a charge of
$9.8 million for in-process research and development cost in connection with its
acquisition of EFJ.
In the quarter ended December 31, 1998, a special provision of $10.0
million was made for the potential settlement of the pending class action
litigation and no provision was made for future tax benefits in connection
with the loss. The tax benefit was fully offset by an increase in the
valuation allowance (See Note 10).
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Transcrypt International, Inc.
The audits referred to in our report dated February 12, 1999, included the
related financial statement schedule as of December 31, 1998, and for each of
the years in the three-year period ended December 31, 1998, included in Form
10-K. 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
February 12, 1999
S-1
<PAGE>
SCHEDULE II -- 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 doubtful accounts for the:
Year Ended December 31, 1996 $181,659 $288,596 -- $40,004 $430,251
Year Ended December 31, 1997 $430,251 $202,321 $2,337,291 $553,361 $2,416,502
Year Ended December 31, 1998 $2,416,502 $921,684 -- $1,341,395 $1,996,791
Inventory Obsolescence Reserve for the:
Year Ended December 31, 1996 $82,041 $127,650 -- $170,842 $38,849
Year Ended December 31, 1997 $38,849 $2,636,107 $5,187,000 $3,747,526 $4,114,430
Year Ended December 31, 1998 $4,114,430 $977,688 -- $1,946,186 $3,145,932
Allowance for Restructuring Reserve for
the:
Year Ended December 31, 1997 -- -- $4,960,500 $2,379,424 $2,581,076
Year Ended December 31, 1998 $2,581,076 $1,230,000 -- $2,010,412 $1,800,664
Allowance for Warranty Reserve for the:
Year Ended December 31, 1996 $64,455 $24,142 -- $15,282 $73,315
Year Ended December 31, 1997 $73,315 $408,687 $706,244 $381,757 $806,489
Year Ended December 31, 1998 $806,489 $264,539 -- $540,881 $530,147
</TABLE>
S-2
<PAGE>
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 Registration Statement on Form S-1,
No. 333-14351, declared effective on January 22, 1997
(hereinafter the "January 1997 Registration Statement")).
3.2 Amended and Restated Bylaws of the Company (incorporated herein
by reference to Exhibit 3.2 to the January 1997 Registration
Statement).
4.1 Form of Common Stock certificate (incorporated herein by
reference to Exhibit 4.1 to the January 1997 Registration
Statement).
4.2 Registration Rights Agreement, dated as of July 31, 1997, by and
among NorAm Energy Corp., Intek Diversified Corporation and the
Company (incorporated herein by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K, File No. 0-21681, filed
with the SEC on August 14, 1997).
10.1 RESERVED
10.1.1 Employment Agreement between the Company and John T. Connor dated
as of July 31, 1997 (incorporated herein by reference to Exhibit
10.1.1 to the Company's Registration Statement on Form S-1, No.
333-35469, declared effective October 15, 1997 (hereinafter the
"October 1997 Registration Statement")).
10.2 RESERVED
10.2.1 Employment Agreement between the Company and Jeffery L. Fuller
dated as of July 31, 1997 (incorporated herein by reference to
Exhibit 10.2.1 to the October 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 the January 1997
Registration Statement).
10.3.1 Employment Agreement between the Company and Frederick G. Hamer
dated as of July 29, 1997 (incorporated herein by reference to
Exhibit 10.3.1 to the Company's Annual Report on Form 10-K for
the Year Ended December 31, 1997, File No. 0-21681 (hereinafter
"1997 Form 10-K")).
10.4 Transcrypt International, Inc. 1996 Stock Incentive Plan, as
amended.
10.5 Form of Indemnification Agreement between the Company and each
executive officer and director of the Company (incorporated
herein by reference to Exhibit 10.5 to the January 1997
Registration Statement).
10.6 License Agreement for APCO 25 Compliant Product between Motorola,
Inc. and the Company dated as of August 2, 1994 (incorporated
herein by reference to Exhibit 10.6 to the January 1997
Registration Statement).
10.7* Amendment, dated as of June 28, 1996, to License Agreement for
APCO Project 25 Compliant Product between Motorola, Inc. and the
Company dated as of August 2, 1994 (incorporated herein by
reference to Exhibit 10.7 to the January 1997 Registration
Statement).
10.8 OEM Agreement between Motorola, Inc. and the Company dated as of
August 2, 1994 (incorporated herein by reference to Exhibit 10.8
to the January 1997 Registration Statement).
10.9* Amendment, dated as of July 15, 1996, to OEM Agreement between
Motorola, Inc. and the Company dated as of August 2, 1994
(incorporated herein by reference to Exhibit 10.9 to the January
1997 Registration Statement).
10.10* Private Label/Supplier Agreement for Analog Scrambling Modules
between Motorola, Inc. and the Company dated as of August 8, 1995
(incorporated herein by reference to Exhibit 10.10 to the January
1997 Registration Statement).
10.10.1* Second Amendment, dated March 31, 1997, to Private Label/Supplier
Agreement for Analog Scrambling Modules between Motorola, Inc.
and the Company dated as of August 8, 1995 (incorporated herein
by reference to Exhibit 10.10.1 to the Company's Quarterly Report
on Form 10-Q for the Quarter Ended March 31, 1997, File No.
0-21681 (hereinafter "1Q 1997 Form 10-Q")).
10.11* Motorola Cellular Subscriber Products Sales Agreement, dated as
of June 13, 1996, by and between Motorola, Inc. and the Company
(incorporated herein by reference to Exhibit 10.11 to the January
1997 Registration Statement).
10.12 License Agreement for APCO Fed Project 25 Algorithm between
Digital Voice Systems, Inc. and the Company, dated as of August
14, 1995 (incorporated herein by reference to Exhibit 10.12 to
the January 1997 Registration Statement).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.13 Consigned Inventory Agreement between Arrow/Schweber Electronics
Group and the Company, dated as of June 22, 1994 (incorporated
herein by reference to Exhibit 10.13 to the January 1997
Registration Statement).
10.14- RESERVED
10.16
10.17 Amended and Restated Loan Agreement, dated as of May 18, 1994, by
and between Norwest Bank Nebraska, N.A., and the Company
(incorporated herein by reference to Exhibit 10.17 to the January
1997 Registration Statement).
10.18 First Amendment, dated as of June 1, 1995, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company (incorporated herein
by reference to Exhibit 10.18 to the January 1997 Registration
Statement).
10.19 Second Amendment, dated as of April 10, 1996, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company (incorporated herein
by reference to Exhibit 10.19 to the January 1997 Registration
Statement).
10.20- RESERVED
10.23
10.24 Form of Adoption Agreement for Nonstandardized 401(k) Profit
Sharing Plan (incorporated herein by reference to Exhibit 10.24
to the January 1997 Registration Statement).
10.25 Defined Contribution Master Plan and Trust Agreement of Norwest
Bank Nebraska, N.A., Master Plan Sponsor (incorporated herein by
reference to Exhibit 10.25 to the January 1997 Registration
Statement).
10.26 Third Amendment, dated as of October 22, 1996, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company, together with
Modification of Note (incorporated herein by reference to Exhibit
10.26 to the January 1997 Registration Statement).
10.27 Fourth Amendment, dated as of November 19, 1996, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company, together with
Commercial Installment Note, dated November 19, 1996
(incorporated herein by reference to Exhibit 10.27 to the January
1997 Registration Statement).
10.27.1 Fifth Amendment, dated as of March 1, 1997, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company (incorporated herein
by reference to Exhibit 10.27.1 to the 1Q 1997 Form 10-Q).
10.28 Construction Loan, dated November 15, 1996, by and between
Norwest Bank Nebraska, N.A., and the Company, together with
related documents (incorporated herein by reference to Exhibit
10.28 to the Company's Annual Report on Form 10-K for the Year
Ended December 31, 1996, File No. 0-21681 (hereinafter "1996 Form
10-K")).
10.29 Commercial Installment Note, dated January 9, 1997, related to
Amended and Restated Loan Agreement, dated as of May 18, 1994, by
and between Norwest Bank Nebraska, N.A., and the Company
(incorporated herein by reference to Exhibit 10.29 to the 1996
Form 10-K).
10.30 Commercial Installment Note secured by equipment, dated December
23, 1996, by and between Norwest Bank Nebraska, N.A., and the
Company, together with Security Agreement (incorporated herein by
reference to Exhibit 10.30 to the 1996 Form 10-K).
10.31 Nebraska Investment Finance Authority $2,850,000 Variable Rate
Demand Industrial Development Revenue Bond (Transcrypt
International, Inc. Project), Series 1997, dated as of March 25,
1997 (incorporated herein by reference to Exhibit 10.31 to the 1Q
1997 Form 10-Q).
10.32 Trust Indenture, dated as of March 1, 1997, for $2,850,000
Variable Rate Demand Industrial Development Revenue Bond
(Transcrypt International, Inc. Project), Series 1997, between
Nebraska Investment Finance Authority as Issuer and Norwest Bank
Nebraska, N.A. as Trustee (incorporated herein by reference to
Exhibit 10.32 to the 1Q 1997 Form 10-Q).
10.33 Loan Agreement, dated as of March 1, 1997, for $2,850,000
Variable Rate Demand Industrial Development Revenue Bond
(Transcrypt International, Inc. Project), Series 1997, between
Nebraska Investment Finance Authority as Issuer and the Company
(incorporated herein by reference to Exhibit 10.33 to the 1Q 1997
Form 10-Q).
10.34- RESERVED
10.35
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.36 License Agreement, dated as of January 15, 1997, between E.F.
Johnson Company and Johnson Data Telemetry Corporation
(incorporated herein by reference to Exhibit 10.36 to the October
1997 Registration Statement).
10.37 Loan Agreement, dated as of December 31, 1997, by and between
U.S. Bank National Association d/b/a First Bank N.A., and the
Company, together with related documents. (incorporated herein by
reference to Exhibit 10.37 to the 1997 Form 10-K).
10.38 First Amendment to Loan Agreement dated May 21, 1998 by and
between U.S. Bank National Association and the Company, together
with related documents. (incorporated herein by reference to
Exhibit 10.38 to the 1997 Form 10-K).
10.39 Severance Agreement and Mutual Release between the Company and
Jeffery L. Fuller dated June 2, 1998 (incorporated herein by
reference to Exhibit 10.39 to the 1997 Form 10-K).
10.40 Severance Agreement and Mutual Release between the Company and
Charles E. Baumann dated June 2, 1998 (incorporated herein by
reference to Exhibit 10.40 to the 1997 Form 10-K).
10.41 Consulting Agreement and Termination of Employment Agreement
between the Company and John T. Connor dated February 23, 1999.
10.42 Employment Agreement between the Company and Michael E. Jalbert
dated March 1, 1999.
10.43 Employment Agreement between the Company and Michael P. Wallace
dated March 25, 1999.
11.1 Statement re: Computation of Per Share Earnings.
21 Subsidiaries of the Registrant. (incorporated herein by reference
to Exhibit 21 to the 1997 Form 10-K).
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
</TABLE>
- ------------------
* Confidential treatment has previously been granted by the SEC as to a portion
of this exhibit.
<PAGE>
EXHIBIT 10.4
TRANSCRYPT INTERNATIONAL, INC.
1996 STOCK INCENTIVE PLAN,
AS AMENDED
Section 1. PURPOSE OF PLAN
The purpose of this 1996 Stock Incentive Plan ("Plan") of
Transcrypt International, Inc., a Delaware corporation (the "Company"), is to
enable the Company to attract, retain and motivate its employees, non-employee
directors and independent contractors by providing for or increasing the
proprietary interests of such employees, non-employee directors and independent
contractors in the Company.
Section 2. PERSONS ELIGIBLE UNDER PLAN
Any person, including any director of the Company, who is an
employee of the Company or any of its subsidiaries (an "Employee"), and any
non-employee director (a "Non-Employee Director") or independent contractor of
the Company (an "Independent Contractor," or, together with the Employees and
the Non-Employee Directors, the "Eligible Persons") shall be eligible to be
considered for the grant of Awards (as hereinafter defined) hereunder.
Section 3. AWARDS
(a) The Committee (as hereinafter defined), on behalf
of the Company, is authorized under this Plan to enter into any type of
arrangement with an Eligible Person that is not inconsistent with the
provisions of this Plan and that, by its terms, involves or might
involve the issuance of (i) shares of Common Stock, $.01 par value per
share, of the Company or of any other class of security of the Company
which is convertible into shares of the Company's Common Stock
("Shares") or (ii) a right or interest with an exercise or conversion
privilege at a price related to the Shares or with a value derived from
the value of the Shares, which right or interest may, but need not,
constitute a "Derivative Security," as such term is defined in Rule
16a-1 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as such Rule may be amended from time to time.
The entering into of any such arrangement is referred to herein as the
"grant" of an "Award."
(b) Awards are not restricted to any specified form
or structure and may include, without limitation, sales or bonuses of
stock, restricted stock, stock options, reload stock options, stock
purchase warrants, other rights to acquire stock, securities
convertible into or redeemable for stock, stock appreciation rights,
limited stock appreciation rights, phantom stock, dividend equivalents,
performance units or performance shares, and an Award may consist of
one such security or benefit, or two or more of them in tandem or in
the alternative. The terms upon which an Award is granted shall be
evidenced by a written agreement executed by the Company and the
Eligible Person to whom such Award is granted.
<PAGE>
(c) Subject to paragraph (d)(ii) below, Awards may be
issued, and Shares may be issued pursuant to an Award, for any lawful
consideration as determined by the Committee, including, without
limitation, services rendered by the Eligible Person.
(d) Subject to the provisions of this Plan, the
Committee, in its sole and absolute discretion, shall determine all of
the terms and conditions of each Award granted under this Plan, which
terms and conditions may include, among other things:
(i) provisions permitting the Committee to allow or
require the recipient of such Award, including any Eligible Person who
is a director or officer of the Company, or permitting any such
recipient the right, to pay the purchase price of the Shares or other
property issuable pursuant to such Award, or such recipient's tax
withholding obligation with respect to such issuance, or both, in whole
or in part, by any one or more of the following means:
(a) the delivery of cash;
(b) the delivery of other property deemed
acceptable by the Committee;
(c) the delivery of previously owned shares
of capital stock of the Company (including
"pyramiding") or other property;
(d) a reduction in the amount of Shares or
other property otherwise issuable pursuant to such
Award; or
(e) the delivery of a promissory note of the
Eligible Person or of a third party, the terms and
conditions of which shall be determined by the
Committee;
(ii) provisions specifying the exercise or settlement
price for any option, stock appreciation right or similar
Award, or specifying the method by which such price is
determined, provided that the exercise or settlement price of
any option, stock appreciation right or similar Award shall be
not less than the fair market value of a Share on the date
such Award is granted;
(iii) provisions relating to the exercisability
and/or vesting of Awards, lapse and non-lapse restrictions
upon the Shares obtained or obtainable under Awards or under
the Plan and the termination, expiration and/or forfeiture of
Awards;
(iv) provisions conditioning or accelerating the
grant of an Award or the receipt of benefits pursuant to such
Award, either automatically or in the discretion of the
Committee, upon the occurrence of specified events, including,
without limitation, the achievement of performance goals, the
exercise or settlement of a previous Award, the satisfaction
of an event or condition within the control of the recipient
of the Award or within the control of others, a change of
control of the Company, an acquisition of a specified
percentage of the voting power of the Company, the dissolution
or liquidation
<PAGE>
of the Company, a sale of substantially all of the property
and assets of the Company or an event of the type described in
Section 7 hereof; and/or
(v) provisions required in order for such Award to
qualify as an incentive stock option ("Incentive Stock
Option") under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
(e) Unless otherwise provided by the Committee in the
written agreement evidencing an Award, the terms of any stock option or
stock appreciation right granted under the Plan shall provide:
(i) that the term of such option or stock
appreciation right shall be ten years from the date of grant;
(ii) that, upon an Employee ceasing to be employed by
the Company for any reason other than death or disability, or
a Non-Employee Director ceasing to be a Non-Employee Director
of the Company, an option or stock appreciation right shall
not become exercisable to an extent greater than it could have
been exercised on the date the Employee's employment by the
Company, or the Non-Employee Director's incumbency, as the
case may be, ceased;
(iii) that the option or stock appreciation right
shall expire ninety (90) days after the Employee ceases to be
employed with the Company or a Non-Employee Director ceases to
be a Non-Employee Director of the Company; and
(iv) that the amount of compensation the
optionee or holder of the stock appreciation right could receive under
the option or stock appreciation right is based solely on an increase
in value of the Shares after the date of grant or award.
Section 4. STOCK SUBJECT TO PLAN
(a) Subject to adjustment as provided in Section 7
hereof, at any time, the aggregate number of Shares issued and issuable
pursuant to all Awards (including all Incentive Stock Options) granted
under this Plan shall not exceed 2,000,000.
(b) The aggregate number of Shares subject to Awards
granted during any calendar year to any one Eligible Person (including
the number of shares involved in Awards having a value derived from the
value of Shares) shall not exceed 400,000. Such aggregate number of
shares shall be subject to adjustment under Section 7 only to the
extent that such will not affect the status of any Award intended to
qualify as "performance based compensation" under Section 162(m) of the
Code.
(c) Subject to adjustment as provided in Section 7
hereof, the aggregate number of Shares issued and issuable pursuant to
all Incentive Stock Options granted under this Plan shall not exceed
1,200,000; provided, however, that such aggregate number of shares
shall be subject to adjustment under Section 7 only to the extent that
such adjustment will not affect the status of any Incentive Stock
Option under Section 422 of the Code. Such maximum number does not
include the number of Shares subject to the unexercised portion of any
Incentive Stock Option granted under this Plan that expires or is
terminated.
<PAGE>
(d) The aggregate number of Shares issued under this
Plan at any time shall equal only the number of shares actually issued
upon exercise or settlement of an Award and shall not include Shares,
or rights with respect to shares, that have been canceled or returned
to the Company upon forfeiture of an Award or in payment or
satisfaction of the purchase price, exercise price or tax withholding
obligation of an Award.
Section 5. NATURE AND DURATION OF PLAN
(a) This Plan is intended to constitute an unfunded
arrangement for a select group of management or other key employees.
(b) No Awards shall be made under this Plan after
December 31, 2006. Although Shares may be issued after December 31,
2006 pursuant to Awards made prior to such date, no Shares shall be
issued under this Plan after December 31, 2016.
Section 6. ADMINISTRATION OF PLAN
(a) This Plan shall be administered by one or more
committees of the Board (any such committee, the "Committee"). If no
persons are designated by the Board to serve on the Committee, the Plan
shall be administered by the Board and all references herein to the
Committee shall refer to the Board. The Board shall have the discretion
to appoint, add, remove or replace members of the Committee, and shall
have the sole authority to fill vacancies on the committee. Unless
otherwise provided by the Board: (i) with respect to any Award for
which such is necessary and desired for such Award to be exempted by
Rule 16b-3 of the Exchange Act, the Committee shall consist of two or
more directors, each of whom is a "non-employee director" (as such term
is defined in Rule 16b-3 promulgated under the Exchange Act, as such
Rule may be amended from time to time), (ii) with respect to any Award
that is intended to qualify as "performance based compensation" under
Section 162(m) of the Code, the Committee shall consist of two or more
directors, each of whom is an "outside director" (as such term is
defined under Section 162(m) of the Code), and (iii) with respect to
any other Award, the Committee shall consist of one or more directors
(any of whom also may be an Eligible Person who has been granted or is
eligible to be granted Awards under the Plan).
(b) Subject to the provisions of this Plan, the
Committee shall be authorized and empowered to do all things necessary
or desirable in connection with the administration of this Plan with
respect to the Awards over which such Committee has authority,
including, without limitation, the following:
(i) adopt, amend and rescind rules and regulations
relating to this Plan;
(ii) determine which persons are Eligible Persons and
to which of such Eligible Persons, if any, and when Awards
shall be granted hereunder;
(iii) grant Awards to Eligible Persons and determine
the terms and conditions thereof, including the number of
Shares subject thereto and the circumstances under which
Awards become exercisable or vested or are forfeited or
<PAGE>
expire, which terms may but need not be conditioned upon the
passage of time, continued employment, the satisfaction of
performance criteria, the occurrence of certain events
(including events which the Board or the Committee determine
constitute a change of control), or other factors;
(iv) at any time cancel an Award with the consent of
the holder and grant a new Award to such holder in lieu
thereof, which new Award may be for a greater or lesser number
of Shares and may have a higher or lower exercise or
settlement price;
(v) determine whether, and the extent to which
adjustments are required pursuant to Section 7 hereof; and
(vi) interpret and construe this Plan, any rules and
regulations under the Plan and the terms and conditions of any
Award granted hereunder.
All decisions, determinations, and interpretations of the Committee shall be
final and conclusive upon any Eligible Person to whom an Award has been granted
and to any other person holding an Award.
(c) The Committee may, in the terms of an Award or
otherwise, temporarily suspend the issuance of Shares under an Award if
the Committee determines that securities law considerations so warrant.
(d) The Committee from time to time may permit a
recipient holding any stock option granted by the Company to surrender
for cancellation any unexercised portion of such option and receive in
exchange an option or other Award for such number of Shares as may be
designated by the Committee. The Committee may, with the consent of the
person entitled to exercise any outstanding option, amend such option,
including reducing the exercise price of any option and/or extending
the term thereof.
Section 7. ADJUSTMENTS
If the outstanding securities of the class then subject to
this Plan are increased, decreased or exchanged for or converted into cash,
property or a different number or kind of shares or securities, or if cash,
property or shares or securities are distributed in respect of such outstanding
securities, in either case as a result of a reorganization, merger,
consolidation, recapitalization, restructuring, reclassification, dividend
(other than a regular, quarterly cash dividend) or other distribution, stock
split, reverse stock split, spin-off or the like, or if substantially all of the
property and assets of the Company are sold, then, unless the terms of such
transaction shall provide otherwise, the Committee shall make appropriate and
proportionate adjustments in (i) the number and type of shares or other
securities or cash or other property that may be acquired pursuant to Awards
theretofore granted under this Plan and the exercise or settlement price of such
Awards, and (ii) the maximum number and type of shares or other securities that
may be issued pursuant to such Awards thereafter granted under this Plan. The
foregoing adjustments shall be applied to any Awards or Incentive Stock Options
only to the extent permitted by Sections 162(m) and 422 of the Code,
respectively.
<PAGE>
Section 8. AMENDMENT AND TERMINATION OF PLAN
The Board may amend or terminate this Plan at any time and in
any manner; provided, however, that no such amendment or termination shall
deprive the recipient of any Award theretofore granted under this Plan, without
the consent of such recipient, of any of his or her rights thereunder or with
respect thereto; provided, further, that if an amendment to the Plan would
affect the Plan's compliance with Rule 16b-3 under the Exchange Act or Section
422 or 162(m) or other applicable provisions of the Code, the amendment shall be
approved by the Company's stockholders to the extent required to comply with
Rule 16b-3 under the Exchange Act, Sections 422 and 162(m) of the Code, or other
applicable provisions of or rules under the Code.
Section 9. EFFECTIVE DATE OF PLAN
This Plan shall be effective as of the date upon which it was
approved by the Board, subject however to approval of the plan by the
affirmative votes of the holders of a majority of the securities of the Company
present, or represented, and entitled to vote at a meeting duly held in
accordance with the laws of the State of Delaware.
Section 10. COMPLIANCE WITH OTHER LAWS AND REGULATIONS
The Plan, the grant and exercise of Awards thereunder, and the
obligation of the Company to sell and deliver shares under such Awards, shall be
subject to all applicable federal and state laws, rules and regulations and to
such approvals by any governmental or regulatory agency as may be required. The
Company shall not be required to issue or deliver any certificates for shares of
Common Stock prior to the completion of any registration or qualification of
such shares under any federal or state law or issuance of any ruling or
regulation of any government body which the Company shall, in its sole
discretion, determine to be necessary or advisable. Any adjustments provided for
in Section 7 shall be subject to any shareholder action required by Delaware
corporate law.
Section 11. NO RIGHT TO COMPANY EMPLOYMENT
Nothing in this Plan or as a result of any Award granted
pursuant to this Plan shall confer on any individual any right to continue in
the employ of the Company or interfere in any way with the right of the Company
to terminate an individual's employment at any time. The agreement evidencing an
Award may contain such provisions as the Committee may approve with reference to
the effect of approved leaves of absence.
Section 12. LIABILITY OF COMPANY
The Company and any affiliate which is in existence or
hereafter comes into existence shall not be liable to an Eligible Person or
other persons as to:
(a) The Non-Issuance of Shares. The non-issuance or
sale of shares as to which the Company has been unable to obtain from
any regulatory body having jurisdiction the authority deemed by the
Company's counsel to be necessary to the lawful issuance and sale of
any shares hereunder; and
<PAGE>
(b) Tax Consequences. Any tax consequence expected,
but not realized, by any Eligible Person or other person due to the
issuance, exercise, settlement, cancellation or other transaction
involving any Award granted hereunder.
Section 13. GOVERNING LAW
This Plan and any Awards and agreements hereunder shall be
interpreted and construed in accordance with the laws of the State of Delaware
and applicable federal law.
<PAGE>
EXHIBIT 10.41
CONSULTING AGREEMENT AND
TERMINATION OF EMPLOYMENT AGREEMENT
This CONSULTING AGREEMENT and TERMINATION OF EMPLOYMENT AGREEMENT (the
"Agreement") is made and executed the 23 day of February 1999, between JOHN T.
CONNOR ("Connor") and TRANSCRYPT INTERNATIONAL, INC., a Delaware corporation
(the "Company").
WHEREAS, Connor is presently serving as interim Chief Executive Officer
("CEO") at the request of the Board of Directors and Chairman of the Company
pursuant, in part, to an Employment Agreement dated July 23, 1997 (the
"Employment Agreement") attached as Exhibit "A" hereto.
NOW, THEREFORE, the parties hereby agree as follows:
AMENDMENT TO EMPLOYMENT AGREEMENT. Section 1 of the Employment
Agreement is modified in its entirety to read as follows:
Section 1. CONSULTING AGREEMENT AND TERM. The term of the
Employment Agreement as Chairman of the Board is terminated as of the
end of the day of March 25, 1999 due to the hiring of a new CEO and the
consolidation of the President and Chairman of the Board positions. The
interim CEO role also ends as of the date of employment of the new CEO.
Upon the expiration of the Employment Agreement on December 31, 1998,
and following the cessation of Employee's employment, the Company shall provide
the following:
(a) UNUSED VACATION. The Company will pay Employee the full amount
of Employee's accrued but unused vacation time, which is
agreed upon to be 360 hours at December 31, 1998, plus any
vacation earned in 1999.
(b) COMPANY PROPERTY. The Company will give Employee the laptop
computer, fax machine, printer and cellular phone which belong
to the Company but which the Employee currently utilizes in
his consultant and board status.
(c) OPTIONS. It is agreed upon that the date for exercise of
Employee's option will continue until February, 2002 under the
terms of the Option Agreement dated February 1, 1992. This is
provided due to Connor's dual board and officer status for a
seven (7) year period.
<PAGE>
(d) INDEMNIFICATION. It is agreed that the Indemnification
Agreement entered into between the parties on October 7, 1996
will remain in full force and effect during the term of this
Agreement.
The following sections are added to the Employment Agreement as
follows:
SECTION 16. CONSULTING AGREEMENT. Employee and the Company hereby enter
into a Consulting Agreement (hereinafter and for the purposes of all services
the Employee shall perform as an independent contractor under the Consulting
Agreement and for the purposes of all provisions of this Agreement which apply
to the Company and the Employee after December 31, 1998, the Employee shall be
referred to herein as "Consultant").
The terms of the Consulting Agreement are as follows:
(a) SERVICES. Consultant will perform services at the direction of
the new CEO of the Company as an independent contractor.
(b) TERM. The term of the Consulting Agreement shall commence on
March 26, 1999 and run for one year, to March 25, 2000.
Consultant shall not be required to perform more than 500
hours of services for the Company during the term of the
Consulting Agreement.
(c) COMPENSATION. Consultant shall be compensated $100,000.000,
paid in equal installments on a monthly basis, for services
performed pursuant to the Consulting Agreement.
(d) LOCATION. Consultant will perform the majority of his services
pursuant to the Consulting Agreement while located in the
State of Florida. Consultant shall not have an office at the
Company, but will perform his services under the Consulting
Agreement in whatever location Consultant determines is
appropriate at his sole discretion.
(e) SECRETARIAL SUPPORT. Upon Consultant's reasonable request, the
Company will provide Consultant secretarial support services
utilized by Consultant in conjunction with his performance of
services pursuant to the Consulting Agreement.
(f) EXPENSES. Upon the Consultant's reasonable request, the
Company will reimburse the Consultant for travel expenses and
other out-of-pocket expenses incurred by the Consultant in
conjunction with his performance of services pursuant to the
Consulting Agreement.
<PAGE>
(g) BENEFITS. Except as specifically set forth in this Agreement,
the Consultant, as an independent contractor providing
services pursuant to the Consulting Agreement, shall not be
eligible for any employee benefits offered by the Company and
shall not be eligible to participate in any of the Company's
employee benefit plans, except Section 17 as stated below.
SECTION 17. HEALTH INSURANCE UPON TERMINATION. Upon the expiration of
the Employment Agreement on March 25, 1999, the Company shall continue to
provide health insurance for Consultant pursuant to the Company's Health
Insurance Plan, for all his dependents, including any surviving eligible
dependents, as long as Consultant has had a minimum of seven (7) years as a
Transcrypt employee and seven (7) years as a Board of Director. Consultant's
participation in the Company's Health Insurance Plan shall be subject to the
same restrictions and limitations as are applicable to current employees of the
Company participating in the Health Insurance Plan including, without
limitation, the Company's right to modify, amend, change or discontinue the
Health Insurance Plan in any way, at any time and for any reason. The Company
hereby specifically reaffirms and reserves its right to modify, amend, change or
discontinue the Health Insurance Plan in any way, at any time and for any
reason. Cost of insurance will be at rates offered to other employees.
ENTIRE AGREEMENT. This Agreement contains the entire understanding and
agreement between the Company and Connor and supersedes any prior agreements and
negotiations between them pertaining to Connor's terms and conditions of
employment with the Company. There are no representations, warranties, promises,
covenants or understandings between the Company and Connor with respect to such
employment other than those expressly set forth in this Agreement. This
Agreement takes precedence over other conflicting agreements with Connor. This
Agreement specifically modifies the Employment Agreement between the parties as
specified herein.
GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Nebraska.
NON-ASSIGNABILITY; SUCCESSORS. The obligations of Connor under this
Agreement are not assignable by him. Except as provided in the immediately
preceding sentence, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their successors.
<PAGE>
SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions of this
Agreement, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
/s/ John T. Connor
-------------------------------------------
John T. Connor, Chairman of the Board
/s/ Terry Fairfield
-------------------------------------------
Terry Fairfield, Vice Chairman of the Board
<PAGE>
EXHIBIT 10.42
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made by and between MICHAEL
E. JALBERT ("Employee") and TRANSCRYPT INTERNATIONAL, INC., a Delaware
corporation ("Company") this 18th day of February, 1999.
The Company wishes to employ Employee as Chairman, President and Chief
Executive Officer ("CEO") of the Company on the terms set forth in this
Agreement, and Employee desires to be employed by Company in this capacity.
Company and Employee desire to set forth in writing the terms and conditions of
their agreements and understandings.
THEREFORE, in consideration of the mutual promises set forth herein, it
is mutually agreed between the parties as follows:
SECTION 1. EMPLOYMENT TERM. The Company hereby employs the Employee and
the Employee hereby accepts employment as President and CEO of the Company on
the terms of this Agreement, commencing as of the date hereof and continuing for
a period of two (2) years, until March 1, 2001, unless terminated earlier in
accordance with the provisions set forth herein. It is expected that you will be
elected Chairman of the Board at the next scheduled board meeting on March 25,
1999. Following the initial term of employment, this Agreement may be renewed
for additional two (2) year terms. At the expiration of each term (the initial
two year term or each two year extension period), employment shall be
automatically renewed for an additional two (2) year term unless written notice
to the contrary is given by the Company or the Employee by November 1st of each
year preceding the March 1st termination date. The provisions of the Agreement
shall apply during the initial term and any renewals of the term.
SECTION 2. DUTIES AND AUTHORITY. The Employee's duties shall be as
determined by the Board of Directors. The duties of Chairman, President and CEO
are generally set forth in the job description for such position, and such
duties may change from time to time.
SECTION 3. COMPENSATION.
A. BASE SALARY. Employee will receive a base salary of Two
Hundred Ninety-Five Thousand Dollars ($295,000.00) per year,
paid biweekly, as long as Employee is employed with the
Company. Such base salary will be subject to annual review,
taking into consideration employee's performance during the
preceding year, base salary adjustments for the executive
staff and other internal and external factors as described in
the corporate bylaws and public document filings.
<PAGE>
B. BONUS. Employee will receive a signing bonus of One
Hundred Fifty Thousand Dollars ($150,000.00) at the date of
employment as a result of compensation lost from Employee's
current employer. If the Company meets or exceeds the annual
objectives set forth for Employee by the Board of Directors,
then the Employee will receive an annual bonus at the
discretion of the Board of Directors, which shall be targeted
at fifty percent (50%) of base salary. The bonus will be paid
annually in February. Employee will also receive an additional
$100,000.00 bonus on the first year anniversary of his date of
employment.
C. STOCK INCENTIVE OPTIONS. The Company grants to Employee an
option to purchase Four Hundred Thousand (400,000) Shares of
Common Stock at a strike price to be set at the closing price
of TRII stock on the first day of employment (March 1, 1999).
The terms of said Option Agreement is set forth in the
Non-Qualified Stock Option Agreement, attached as Exhibit A.
In the event of any inconsistencies or conflict between the
Agreement and Exhibit A, then the terms of this Agreement
shall control. The Company will take all steps necessary to
ensure that all shares are freely transferable, subject to any
volume restrictions imposed by federal law on the transfer of
Employee's shares. One hundred thousand (100,000) of the
shares will vest upon Employee's first day of employment. One
hundred thousand (100,000) of the shares will vest upon
Employee's first anniversary with the Company. One hundred
thousand (100,000) of the shares will vest upon Employee's
second anniversary with the Company. One hundred thousand
(100,000) of the shares will vest upon Employee's third
anniversary with the Company.
D. ADDITIONAL BENEFITS. Employee also will receive such
additional employee benefits commensurate with his position,
including those that the Company may from time to time make
available to its executive officers, including 4 weeks paid
vacation, qualified profit-sharing plans, employee group
insurance and disability insurance. In addition, the Company
shall provide Employee a one million dollar ($1,000,000) life
insurance policy with the beneficiary(ies) of such policy
selected by Employee.
<PAGE>
E. WITHHOLDINGS. All payments made to Employee pursuant to
this Agreement shall be reduced by all required federal, state
and local withholdings for taxes and similar charges and by
all contributions or payments required to be made by Employee
in connection with any employee benefit plan maintained by the
Company.
SECTION 4. RELOCATION REIMBURSEMENT. Employee will be provided a
relocation package pursuant to the Relocation Policy for Officers, attached as
Exhibit B, except that the Company will also provide a travel allowance for
Employee's spouse in connection with the relocation, provide two house hunting
trips, and will cover the costs of moving the Employee's motor vehicles and
storing for a reasonable period of time Employee's household goods (should
storage be necessary). Employee is expected to permanently relocate to Lincoln,
Nebraska within one year of the date of this Agreement.
SECTION 5. REIMBURSEMENT FOR EXPENSES. Employee is expected to incur
certain expenses on behalf of the Company for travel, promotion, telephone,
entertainment and similar items. The Company will reimburse the Employee for all
ordinary, necessary and reasonable amounts of such expenses, as determined by
the Board of Directors, incurred by Employee. Such amounts shall be payable
promptly upon receipt of reasonable written documentation signed by the Employee
itemizing such expenses.
SECTION 6. INDEMNIFICATION. Employee shall be indemnified and held
harmless by the Company to the fullest extent authorized by the General
Corporation Law of the State of Delaware, as the same exists or may hereafter be
amended (however, in the case of any such amendment, only to the extent that
such amendment permits the Company to provide broader indemnification rights
than such law permitted the Company to provide prior to such amendment). The
Company's bylaws, attached as Exhibit C, contain an indemnification procedure
for directors and officers of the Company. Generally, if Employee is made or is
threatened to be made a party to any action, suit or proceeding relating to his
employment or service as a director of the Company, he shall have the right to
select individual counsel and he shall be indemnified and held harmless by the
Company against all expenses, liability and loss reasonably incurred in
connection with such action. Employee has the right to bring suit against the
Company if a claim made in accordance with the Company's bylaws is not paid in
full within sixty (60) days after a written claim has been received, except in
the case of a claim for an advancement of expenses, in which case the applicable
period is twenty (20) days. The Company shall also maintain directors' and
officers' liability insurance in an amount sufficient to cover any claims made
against Employee.
<PAGE>
SECTION 7. TERMINATION / SEVERANCE
A. The Company shall have the right to terminate this
Agreement, upon thirty (30) days written notice, if the
following events occur:
1. The determination by the Board of Directors that the
Employee has become disabled, and cannot complete the
essential functions of the position with reasonable
accommodation and is unable to continue his service
to the Company; or
2. The Employee's death; or
3. The determination by the Board of Directors that
there is "good cause" for termination of this
Agreement. For purposes of the Agreement, "good
cause" means the Employee's willful neglect of his
duties under this Agreement and the job duties as
assigned by the Board of Directors, theft or
misappropriation of the Company's assets by the
Employee, fraud of the Employee or gross
insubordination. The Company shall provide Employee
written notice of and a reasonable opportunity to
cure anything that the Company believes constitutes
willful neglect of duties or gross insubordination.
Upon termination pursuant to section 7A1 or 7A2, the Company shall pay
Employee (or, in the event of termination due to Employee's death, his
estate), a lump sum severance payment equal to one year's base salary
(at the time of termination). In addition, in the event of termination
under section 7A1, the Company shall continue to provide all benefits
described herein for one year after termination. No severance payment
or benefit continuation will be provided if employee is terminated
pursuant to section 7A3.
B. Either party may terminate this Agreement upon (60) days'
prior written notice without good cause. In the event of a
termination by the Company without good cause the Company
shall continue to provide all benefits for one year after
termination and shall pay Employee a lump sum severance
payment equal to the greater of: 1) his annual base salary (at
the time of termination) or, 2) his base salary (at the time
of termination) for the remaining term of the then current
Agreement. If the Company elects not to renew the Agreement
for two new periods of two years each (i.e., beyond February
2005), the Company shall pay Employee a lump sum severance
payment equal to his
<PAGE>
annual base salary (at the time of termination), and shall
continue to provide all benefits for one year after
termination. If the employee terminates the Agreement within
the first twelve (12) months, he must repay the net amount of
the $150,000 signing bonus he receives after paying taxes on
that bonus and cancel any vested options. Upon commencement of
full time employment with a different company as described in
the attached non-compete agreement, or full time self
employment, all benefits shall cease. Employee's COBRA
termination date shall be the date all benefits cease.
All cash severance amounts described in sections 7A through 7B shall be
paid to Employee upon the termination of his employment.
C. Change in Control. For the purposes of this Agreement, "change
in control" means: 1) A change in the ownership of the shares
of the Company that results in a change in a majority of the
board of directors; or, 2) a sale, assignment or transfer of
all or substantially all of the assets of the Company. If
there is a change in control, then the Company may terminate
this Agreement upon thirty (30) days written notice. If there
is a change in control and a material diminishment in the
employee's position, duties, or responsibilities, that is not
mutually agreed among the parties, then Employee may terminate
this Agreement upon thirty (30) days written notice. Upon
notice of termination by either party pursuant to this section
7C, all of Employee's stock options shall vest immediately.
Upon termination by either party pursuant to this section 7C,
the Company shall pay to Employee a lump sum severance payment
equal to three years of base salary (at the time of
termination), and shall consider providing a transaction
bonus. In addition, the Company shall continue to provide all
benefits for one year after termination.
SECTION 8. AUTOMOBILE ALLOWANCE. The Company shall pay a car allowance
of $750.00 per month during the term of this Agreement.
SECTION 9. ENTIRE AGREEMENT. This Agreement contains the entire
understanding and agreement between the Company and the Employee and supersedes
any prior agreements and negotiations between them pertaining to the Employee's
terms and conditions of employment with the Company. There are no
representations, warranties, promises, covenants or understandings between the
Company and the Employee with respect to such employment other than those
expressly set forth in this Agreement. This Agreement takes precedence over
other conflicting agreements with the Employee.
<PAGE>
SECTION 10. GOVERNING LAW. This Agreement shall be governed by the laws
of the State of Nebraska.
SECTION 11. NON-ASSIGNABILITY; SUCCESSORS. The obligations of the
Employee under this Agreement are not assignable by him. This Agreement is
personal in nature and may not be assigned by the Company without the written
consent of the Employee, except that the consent of the Employee shall not be
reasonably withheld in connection with the sale to any person, partnership,
corporation or other entity of substantially all the assets of the company,
provided that the assignee assumes all the liabilities of the Company hereunder.
Except as provided in the immediately preceding sentence, this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
successors.
SECTION 12. NOTICES. Any notice required to be given in writing by any
party to this Agreement may be personally delivered or mailed by registered or
certified mail to the last known address of the party to be notified. Any such
notice personally delivered shall be effective upon delivery and any such notice
mailed shall be effective four (4) business days after the date of mailing by
registered or certified mail with postage prepaid to the last known address of
the party to be notified.
SECTION 13. SEVERABILITY. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions of
this Agreement, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
SECTION 14. HEADINGS. The Section and other headings contained in this
Agreement are for reference purposes only and shall not affect the
interpretation of this Agreement.
SECTION 15. CONSTRUCTION. Whenever required by the context, references
to the singular shall include the plural, and the masculine gender shall include
the feminine gender.
SECTION 16. RESTRICTIVE COVENANTS. Employee shall execute, concurrently
with this Agreement, a Confidentiality and Non Compete Agreement in the form
attached as Exhibit D.
SECTION 17. AMENDMENTS. No changes, modifications, waivers, discharges,
amendments or additions to this Employment Agreement shall be binding unless it
is in writing and signed by the Company and the Employee.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf and the Employee has signed his name hereto, effective as
of the date first written above.
TRANSCRYPT INTERNATIONAL, INC., a Delaware corporation
BY: /s/ Thomas R. Thomsen
-------------------------------------------------
THOMAS R. THOMSEN
Its DIRECTOR, CHAIR OF SEARCH COMMITTEE
-------------------------------------------------
/s/ Michael E. Jalbert
-------------------------------------------------
Michael E. Jalbert
<PAGE>
EXHIBIT 10.43
RETENTION AND SEVERANCE AGREEMENT
This Agreement is dated and effective as of March 30, 1999 ("Effective Date")
by and between Transcrypt International, a Delaware corporation ("Company"), and
Michael Wallace, an Executive of the Company and Vice President of Operations
("Executive").
BACKGROUND
WHEREAS, the Company is engaged in, among other things, the development of a
manufacturing strategy;
WHEREAS, the Executive is engaged in the Company's Vice President of
Manufacturing and in his position, Executive will have a critical role in the
development of the future direction of the Company's organization
WHEREAS, the Company has identified Executive's position in the Company as one
that may be eliminated or redefined in the Company's organization; and
WHEREAS, the Company desires to obtain for its benefit Executive's full
cooperation in the Company's manufacturing strategy and organization changes.
WHEREAS, a number of lawsuits have been filed in federal and state courts in
which the Company, the Executive and others are or were named as defendants
("Civil Litigations").
WHEREAS, the Securities and Exchange Commission ("SEC") has begun an
investigation to determine whether violations of the securities laws were
committed by the Company and/or its officers and directors ("the SEC
Investigation"), which investigation might lead to further investigative,
administrative, enforcement or other legal actions or proceedings;
NOW, THEREFORE, in consideration of the promises and of the mutual covenants
contained herein, the parties hereby agree as follows:
1. SEVERANCE EVENT. Executive shall be entitled to receive Severance Benefits,
as described herein, if during the term set forth in Section 3 upon the
occurrence of (a "Severance Event"):
(a) the Company eliminates Executive's current position with Company and
Executive declines or fails to response to the Company's offer of another
Company position within seven (7) working days; or,
(b) the Company eliminates the Executive's current position with Company
and does not offer the Executive another position with the Company.
<PAGE>
2. PAYMENT.
(a) Upon the occurrence of a Severance Event as set forth in Section 1, the
Company shall continue to pay to the Executive, bi-weekly the same salary
Executive was being paid prior to the Severance Event for a period of six (6)
months. Said payment shall be made to Executive, with all required federal and
state tax and other withholdings, including but not limited to, medical and
dental insurance co-payments. The Company will not continue to contributed to
Executive's 401(k) account. The Company shall pay reasonable expense reports
submitted by Executive within ten (10) days after the Severance Event.
(b) Within ten (10) days of the occurrence of a Severance Event as set forth
above, the Executive shall return to the Company all of the Company's property
in his possession, including, but not limited to, the Company's credit card,
cellular phones, Company Car and computer. The Company shall return any personal
property to the Executive within the same ten (10) day period. The Company and
Executive agree that Executive shall have the right to purchase his Company
owned car, which he used during his employment with the Company, at the then
current national published Kelley Blue Book value.
(c) Upon the occurrence of a Severance Event as set forth above, the Company
shall provide the Executive with career transition services for the purposes of
locating other employment, through a career transition consultant selected by
the Company for a period of up to six months following the occurrence of a
Severance Event. The career transition services shall be paid, controlled and
directed by the Company.
(d) Executive has previously promised and agreed to pay to the Company the
principal sum of TWENTY-SEVEN THOUSAND SIX HUNDRED SEVEN DOLLARS AND 58 CENTS
($27,607.58) along with the simple rate of interest of seven percent (7%) per
year ("House Note"). Upon the occurrence of a Severance Event, Executive shall
have the House Note extended under the same terms and conditions for a period of
six (6) months. Notwithstanding anything to the contrary in this section, if
Executive breaches any provision of the House Note or breaches any provision of
this Agreement, all of the unpaid principal and accrued interest thereupon shall
become immediately due and payable without notice.
3. TERM AND TERMINATION.
(a) Subject to the remainder of this Section, the term of this Agreement
shall be deemed to have commenced as of the Effective Date and shall, unless
mutually extended by the parties in writing, expire on June 30, 1999.
(b) On June 30, 1999, if there has been no occurrence of a Severance Event as
set forth above, the Parties hereby agree that this Agreement shall immediately
and automatically terminate and shall have not legal effect.
(c) The failure of the Company or Executive to perform any obligation assumed
by it hereunder, after giving reasonable written notice of at least ten (10)
days by the other party of such
<PAGE>
non-performance, shall entitle the party giving notice to terminate this
Agreement upon written notice to the non-performing party.
(d) This Retention and Severance Agreement shall immediately and
automatically terminate upon the first to occur of:
(i) the determination by the Board of Directors that the Executive has
become disabled and shall not be able to continue his service to the
Company;
(ii) the Executive's death; or,
(iii) a determination by the Board of Directors that the Executive has
engaged or participated in (i) theft or embezzlement, or attempted
theft or embezzlement, of money or property of the Company or any
subsidiary, the perpetration or attempted perpetration of fraud on
the Company or any subsidiary, or the unauthorized appropriation of
or attempt to misappropriate, any tangible or intangible assets or
property of the Company or any subsidiary, (ii) any act or acts of
disloyalty, dishonesty, misconduct, moral turpitude, or other act or
acts injurious to the interest, property, operation, business or
reputation of the Company or any subsidiary; or,
(iv) the Executive has been convicted of a crime the commission of which
results in injury to the Company or any subsidiary; or,
(v) the Executive has materially violated any restriction on the
disclosure or use of confidential information of the Company or any
subsidiary, or on competition with the Company; or, any subsidiary,
or any of their businesses then conducted or planned to be
conducted, in each case as determined in the reasonable judgment or
the Board of Directors.
4. COOPERATION/CONFIDENTIALITY.
(a) COOPERATION. The Parties promise and agree to cooperate with each
other, their agents and attorneys in connection with the foregoing Civil
Litigations and SEC Investigation and any other litigation, proceedings,
investigations, actions or claims, arising out of or relating to the Executive's
employment with the Company or the period during which Executive was employed
with the Company. Said cooperation shall include, but is not limited to,
providing such information and materials that the Company or the Executive or
their respective attorneys may reasonably require in such actions and
proceedings, including the appearance at depositions, hearings, administrative
proceedings, and trial if requested. The Company and Executive agree that said
cooperation shall be provided at no charge or cost to the other, except for
reasonable out-of-pocket travel expenses if required.
5. INSURANCE.
Upon the occurrence of a Severance Event as set forth Section 1, the Company
shall continue to
<PAGE>
offer the Executive the same medical, dental, disability and life insurance
benefits, which the Executive currently receives from the Company at the same
price as such benefits are supplied to other Company employees, which
continuation shall be for a period not to exceed a period of six (6) month
period, or until such time as the Executive obtains employment elsewhere,
whichever occurs first. The Executive agrees to provide the Company with
written notice within three days of acceptance of employment elsewhere.
6. STOCK OPTION AGREEMENTS.
(a) Upon the occurrence of a Severance Event as set forth Section 1, the
Executive will hold vested options to purchase up to 35,766 shares of the
Company's common stock less any options exercised between the effective date and
the date of the Severance Event (the "Vested Options") and the parties agree
that no additional shares shall vest or become vested after June 30, 1999.
(b) EXERCISE OF VESTED OPTIONS. The Parties agree that the latest date on
which any Vested Options may be exercised shall be seven (7) months following
the occurrence of a Severance Event or January 31, 2000, whichever is the first
to occur. Any Vested Options which are not exercised pursuant to this section
shall expire. The Executive acknowledges that by virtue of his employment with
the Company that he possesses material non-public information concerning the
Company, its prospects and operations. Accordingly, the Executive hereby agrees
that he will not exercise any Vested Options without the prior written consent
of Company, which consent shall not be unreasonably withheld, with such
obligation lasting until three (3) days after the issuance of the financial
press release for the first quarter after relisting of the Company's stock. In
the event the Company declines to give its consent to such exercise, the time
period in which Executive has to exercise the Vested Options shall be extended
by an equal period of time.
7. EXECUTIVE COVENANTS.
7.1 UNAUTHORIZED DISCLOSURE OF TRADE SECRETS OR CONFIDENTIAL INFORMATION. The
Executive agrees and understands that due to the Executive's position with the
Company, the Executive has been exposed to, and has received, confidential and
proprietary information of the Company relating to the Company's business or
affairs some of which constitutes trade secrets.
(a) For purposes of this Agreement, the 'Confidential Information' shall mean
information, regardless of form, falling within one or more of the following
categories: (a) trade secrets, including any technical or non-technical data,
or other business information, which (i) derives economic value, actual or
potential, from not being generally known to, and not being readily
ascertainable through proper means by, other persons who can obtain economic
value from its use; and (ii) is the subject of reasonable efforts on the part
of the Company to maintain its secrecy; (b) technical know-how, product
specifications, engineering data, and other information related to hardware
design and construction; (c) computer source code, flowcharts, design
documents and specifications, and other related documentation; (d) systems,
plans, processes, procedures, data files, or research and development
information;
<PAGE>
(e) customer and vendor lists, marketing plans and surveys, and other
marketing information; and (f) other similar information which the
Company considers and treats as confidential.
(b) Notwithstanding the previous section, Confidential Information shall not
include any information that is: (a) available from public sources or in the
public domain, through no fault of Employee; (b) received at any time from
any third party without breach of a non-disclosure obligation to the Company;
(c) readily discernible from publicly-available products or literature; or
(d) approved for disclosure by prior written permission of a corporate
officer of the Company.
(c) Executive's obligation to not disclose the Confidential Information
shall: (a) be effective contemporaneously with Executive's first access to
Confidential Information of, whether before or after the date of this
Agreement; (b) subject to subsection (c) below, with respect to any
particular disclosure of an item of Confidential Information made under this
Agreement during the Term, the obligations of Executive shall survive for a
period of three (3) years after the date of any Severance Event (the
"Confidentiality Period"); (c) with respect to any item of Confidential
Information constituting a trade secret of the Company, the Confidentiality
Period shall furthermore extend for so long as the Company continues to exert
reasonable efforts, in light of the circumstances, to maintain the item's
secrecy. Upon written request of Executive from time to time, the Company
will provide written notice stating whether or not it still considers any
particular disclosed item of Confidential Information to be a trade secret
under this Agreement, and therefore subject to the continuing obligations
hereunder.
7.2 NON-SOLICITATION. By and in consideration of the Company's entering into
this Agreement, the Executive agrees that the Executive will not, for the period
ending six (6) months for the occurrence of a Severance Event or December 31,
1999, which ever is the earlier to occur, directly or indirectly, whether for
his own account or for the account of any other person (i) solicit, divert or
endeavor to entice away from the Company or any of its affiliates, any Customers
or Clients of the Company, or otherwise engage in any activity intended to
terminate, disrupt or interfere with any person's or entities' relationship with
the Company or any of its affiliates, or (ii) solicit for employment or
recommend to any subsequent employer of the Executive the solicitation for
employment of, any person who, at the time of such solicitation, is employed by
the Company or any affiliate thereof. "Customers" and/or "Clients" shall mean
those persons and entities who, at any time during the Executive's employment
with the Company or at any time up of the occurrence of a Severance Event are or
were customers, distributors or suppliers of the Company or any of its
affiliates or predecessors.
7.3 REMEDIES. The Executive agrees that any breach of the terms of this Section
would result in irreparable injury and damage to the Company for which the
Company would have no adequate remedy at law; the Executive therefore also
agrees that in the event of said breach or any threat of breach, the Company
shall be entitled to an immediate injunction and restraining order to prevent
such breach and/or threatened breach and/or continued breach by the Executive
and/or any and all persons and/or entries acting for and/or with the Executive,
without having to prove damages, in addition to any other remedies to which the
Company may be entitled at law or in equity. The Executive and Company further
expressly agree that in the event of any judicial determination of a breach of
Section 7, the Company shall no longer be obligated to advance
<PAGE>
costs and indemnify the Executive in any proceedings, actions or litigations
arising out of or related to Executive's employment with the Company. The
terms of this paragraph shall not prevent the Company from pursuing any other
available remedies for any breach or threatened breach hereof, including but
not limited to the recovery of damages from the Executive.
8. WAIVER AND GENERAL RELEASE.
8.1 CONSULTATION WITH ATTORNEY. The Executive has been advised to consult with
an attorney before signing this Agreement, and hereby warrants that he has done
so.
8.2 WAIVER OF RIGHTS. Executive understands and agrees that he is waiving any
rights he may have had, now has, or in the future may have to pursue any and all
remedies available to him under any causes of action, including without
limitation, claims of wrongful discharge, breach of contract, breach of the
covenant of good faith and fair dealing, misrepresentation, violation of public
policy, defamation, physical injury, emotional distress, claims under Title VII
of the 1964 Civil Rights Act, as amended, the Nebraska Fair Employment and
Housing Act, the Equal Pay Act of 1963, the Age Discrimination in Employment
Act, all waivable sections of the All State Fair Employment laws, including but
not limited to the provisions of the Neb. Rev. Stat. 20-131, 20-168, 48-215-231,
48-1004, and 48-1122-27, all waivable sections of the All Minnesota State
employment laws, including but not limited to the provisions 181.08, 181.09,
181.10, 181.101, 181.11, 181.13, 181.14, 181.145, 181.15, the Minnesota Equal
Pay for Equal Work Law and Minnesota Prompt Payment Act, the Federal and State
Family and Medical Leave Acts, the Civil Rights Act of 1866, the Employment
Retirement Income and Security Acts of 1976 ("ERISA"), and any other applicable
laws and regulations relating to employment or employment discrimination.
8.3 MUTUAL RELEASE. The Executive hereby expressly waives any and all claims,
demands, and causes of action which he has, claims to have, or may have, whether
known or unknown, including but not limited to those referred to in Section 8.2,
against the Company and all of its past, present and future corporate parents,
divisions, subsidiaries, affiliates, related entities, successors, assigns,
directors, officers, attorneys, Executives and agents. As used in this
Agreement, "claims," "demands," and "causes of action" include, but are not
limited to, contract claims, whether express or implied, tort claims, equitable
claims, claims for breach of fiduciary duty, fraud claims, claims arising out of
federal, state or local laws, regulations or ordinances prohibiting
discrimination on account of race, sex, sexual orientation, religion, age or
national origin, including claims under the Age Discrimination in Employment
Act, wage claims, claims for vacation pay, overtime pay, severance pay, back
pay, fringe benefits, debts, accounts, compensatory damages, punitive damages,
and/or liquidated damages.
9. MISCELLANEOUS.
9.1 BINDING EFFECT: ASSIGNMENT. This Agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective heirs, executors,
representatives, estates, successors and assigns, including any successor or
assign to all or substantially all of the business and/or assets of the Company,
whether direct or indirect, by purchase, merger, consolidation, acquisition of
stock, or otherwise; PROVIDED, HOWEVER, that the Executive, or any beneficiary
or legal representative of the Executive, shall not assign all or any portion of
the Executive's rights
<PAGE>
or obligations under this Agreement without the prior written consent of the
Company.
9.2 NOTICES. Whenever notice is required to be given under the terms of this
Agreement, such notice shall be in writing and delivered by hand or by
registered or certified mail, postage prepaid, or transmitted by telex, telegram
or telecopier, addressed as follows:
(a) If to the Company, to it at:
Transcrypt International, Inc.
Attn: Chief Financial Officer
4800 N.W. 1st Street
Lincoln, Nebraska 68521
Tel: (402) 474-4800
Fax: (402) 474-8383
(b) If to the Executive, to him at:
Michael Wallace
18170 Jamaica Path
Lakeville, MN 55044
or to such other address as either party shall have specified for itself from
time to time to the other party in writing. All such notices shall be
conclusively deemed to be received and shall be effective, if sent by hand
delivery, upon receipt, or if sent by registered or certified mail, upon
receipt, or if transmitted by telex, telegram or telecopier (which shall be
followed promptly by hand delivery), upon confirmation of such transmission
9.3 GOVERNING LAW. This Agreement and the rights and obligations of the parties
hereto shall be construed and enforced in accordance with and governed by the
laws of the State of Nebraska without giving effect to the conflict of law
principles thereof.
9.4 SEVERABILITY. If any term or other provision of this Agreement, or any
application thereof to any circumstances is invalid, illegal or incapable of
being enforced by any rule of law or public policy, in whole or in part,
provision or application shall to that extent be severable and shall nor affect
other provisions or applications of this Agreement.
9.5 ENTIRE AGREEMENT. This Agreement contains the entire understanding of the
Parties hereto with respect to its subject matter hereof and supersedes all
prior agreements and understandings, oral or written, between them as to such
subject matter, including, but not limited to, any and all employment
agreements, whether written, oral or implied.
9.6 OBLIGATION TO TELL THE TRUTH. Nothing herein shall prevent or be construed
to prevent either party from responding truthfully to inquiries from
governmental agencies or authorities or otherwise compelled by law.
9.7 NO ADMISSION. Nothing in this Agreement shall be construed as an admission
of fraud,
<PAGE>
liability or wrongdoing by the Executive, and the Executive expressly denies
any fraud, liability or wrongdoing.
9.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one instrument.
9.9 PLURALS: GENDER: HEADINGS. Under this Agreement, unless the context
otherwise requires, words in the singular number or in the plural number shall
each include the singular number and the plural number, and the use of any
gender shall Include all genders. The headings in this Agreement are for
reference purpose only and shall not limit or otherwise affect the meaning or
interpretation of this Agreement.
9.10 FURTHER ASSURANCES. Each party hereto shall do and perform or cause to be
done and performed all further acts and things and shall execute and deliver an
other agreements, certificates, instruments, and documents as any other party
hereto reasonably may request in order to carry out the intent and accomplish
the purposes of this Agreement and the consummation of the transactions
contemplated hereby.
9.11 AMENDMENT AND MODIFICATION. This Agreement may not be amended, nor may any
provision hereof be modified or waived, except by an instrument in writing duly
signed by the party to be charged.
9.12 WAIVER. No provision of this Agreement may be waived or discharged unless
such waiver or discharge is agreed to in writing and signed by the affected
party, and no waiver or discharge of any breach by any party hereto of any
provision of this Agreement to be performed by such party, shall be deemed a
waiver or discharge of any other provisions or a waiver or discharge of any
breach of any other provisions, respectively, at the same or at any prior or
subsequent time.
9.13 INTERPRETATION. For purposes of interpretation this Agreement shall be
deemed to have been jointly drafted by the Executive and the Company.
9.14 DEFINITIONS.
(a) The term "affiliate" shall mean, with respect to any person, any other
person directly or indirectly controlling, controlled by, or under common
control with such person.
(b) The term "person" shall mean an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentally thereof.
9.15 WARRANTIES.
(a) Each party entering into this Agreement, and each person executing
this Agreement on behalf of any party, has full authority to do so and to make
the covenants, promises, representations, and warranties set forth herein.
<PAGE>
(b) There are no other agreements or understandings between the parties
relating to the matters and releases referred to in this Agreement other than as
set forth herein. The mutual obligations and undertakings of the parties
expressly set forth in this Agreement are the sole and only consideration of
this Agreement, and no representations, promises or inducements of any nature
whatsoever have been made by the parties other than as appear in this Agreement.
(c) This Agreement has been read carefully by each of the parties and its
contents are known and understood by each of the parties. This Agreement is
signed freely and voluntarily by each party hereto.
9.16 ATTORNEYS' FEES. In the event of any litigation between the parties in
connection with the enforcement, interpretation or defense of this Agreement, or
the defense of any claim barred by this Agreement, the prevailing party or
parties shall be entitled to reimbursement from the other party of all
reasonable costs and expenses incurred by it in connection with the litigation,
including attorneys' fees.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the dates provided below.
/S/ CHRISTOPHER S. LITRAS
---------------------------------------
Christopher S. Litras
Vice President of Human Resources
Transcrypt International, Inc.,
/S/ MICHAEL P. WALLACE
---------------------------------------
Michael Wallace
<PAGE>
EXHIBIT 11
TRANSCRYPT INTERNATIONAL, INC AND SUBSIDIARIES
COMPUTATION OF PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Net loss $ (22,294) $ (10,949) $ (4,114)
----------- ----------- ----------
----------- ----------- ----------
NET LOSS PER SHARE - BASIC
Weighted average common shares - Basic 12,946,624 12,946,624 9,844,087
----------- ----------- ----------
----------- ----------- ----------
Net loss per share - Basic $ (1.72) $ (0.85) $ (0.42)
----------- ----------- ----------
----------- ----------- ----------
NET LOSS PER SHARE - DILUTED
Shares used in this computation:
Weighted average common shares - Basic 12,946,624 12,946,624 9,844,087
----------- ----------- ----------
----------- ----------- ----------
Dilutive effect of shares under employee stock plans (*) -- -- --
----------- ----------- ----------
Weighted average common shares - Diluted 12,946,624 12,946,624 9,844,087
----------- ----------- ----------
----------- ----------- ----------
Net loss per share - Diluted $ (1.72) $ (0.85) $ (0.42)
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
* Common stock equivalents were not included as their effect would be
anti-dilutive.
<PAGE>
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 February 12, 1999 relating to the consolidated balance sheets of
the Company and its subsidiaries as of December 31, 1998, 1997 and 1996 and the
related consolidated statements of operations, changes in stockholder's equity
and cash flows for each of the years in the three-year period ended December 31,
1998, which report appears in the Annual Report on Form 10-K of the Company
dated March 30, 1999.
/s/ KMPG Peat Marwick LLP
Omaha, Nebraska
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TRANSCRYPT
INTERNATIONAL, INC'S CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
CONSOLIDATED CONDENSED 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,262
<SECURITIES> 0
<RECEIVABLES> 11,889
<ALLOWANCES> 1,997
<INVENTORY> 13,907
<CURRENT-ASSETS> 50,986
<PP&E> 18,140
<DEPRECIATION> 6,255
<TOTAL-ASSETS> 87,212
<CURRENT-LIABILITIES> 33,560
<BONDS> 0
0
0
<COMMON> 129
<OTHER-SE> 53,096
<TOTAL-LIABILITY-AND-EQUITY> 87,212
<SALES> 62,041
<TOTAL-REVENUES> 62,041
<CGS> 44,905
<TOTAL-COSTS> 44,905
<OTHER-EXPENSES> 44,047<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (655)<F2>
<INCOME-PRETAX> (26,210)
<INCOME-TAX> (3,916)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,294)
<EPS-PRIMARY> (1.72)
<EPS-DILUTED> (1.72)
<FN>
<F1>OTHER EXPENSES INCLUDES A $1.2 MILLION RESTRUCTURING CHARGE AND A $10.0 MILLION
SPECIAL PROVISION FOR THE POTENTIAL SETTLEMENT OF THE PENDING CLASS ACTION
LAWSUITS.
<F2>INTEREST EXPENSE IS NET OF $1,304 OF INTEREST INCOME LESS $649 OF INTEREST
EXPENSE.
</FN>
</TABLE>
