<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
TRANSCRYPT INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
<PAGE>
TRANSCRYPT INTERNATIONAL, INC.
------------------
NOTICE OF 1999
ANNUAL MEETING OF STOCKHOLDERS
AND
PROXY STATEMENT
------------------------
<TABLE>
<S> <C>
DATE: Thursday, May 20, 1999
TIME: 10:00 a.m.
PLACE: Cornhusker Hotel
333 South 13th Street
Lincoln, Nebraska
68508
</TABLE>
<PAGE>
[LOGO]
April 16, 1999
Dear Stockholder:
It is my pleasure to invite you to Transcrypt International, Inc.'s 1999
Annual Meeting of Stockholders.
We will hold the meeting on Thursday, May 20, 1999, at 10:00 a.m. at the
Cornhusker Hotel, 333 South 13th Street in Lincoln, Nebraska. In addition to the
formal items of business, we will review 1998, give an update of Transcrypt and
answer your questions.
This booklet includes the Notice of Annual Meeting and the Proxy Statement.
The Proxy Statement describes the business that we will conduct at the meeting
and provides information about Transcrypt.
Your vote is important. Whether you plan to attend the meeting or not,
please complete, date, sign and return the enclosed proxy card promptly. If you
received more than one proxy card because you own shares registered in different
names or at different addresses, please be sure to separately complete and
return each proxy card. If you attend the meeting and prefer to vote in person,
you may do so.
Please indicate on the proxy card whether or not you expect to attend the
meeting so that we can provide adequate seating.
It is my honor to thank both John T. Connor and Terry L. Fairfield for their
distinguished service to Transcrypt International. Both John and Terry have
decided not to stand for re-election to the Board of Directors at this annual
meeting after 8 years of serving on the Board for Transcrypt. I wish them the
very best in their future endeavors and thank them for their contributions.
We look forward to seeing you at the meeting.
Sincerely,
[SIGNATURE]
Michael E. Jalbert
Chairman of the Board
4800 NW 1(st) Street, Lincoln, Nebraska 68521-9918
<PAGE>
TRANSCRYPT INTERNATIONAL, INC
------------------
NOTICE OF 1999
ANNUAL MEETING OF STOCKHOLDERS
AND
PROXY STATEMENT
------------------------
<TABLE>
<S> <C>
DATE: Thursday, May 20, 1999
TIME: 10:00 a.m.
PLACE: Cornhusker Hotel
333 South 13th Street
Lincoln, Nebraska
68508
</TABLE>
Dear Stockholders:
At our Annual Meeting, we will ask you to:
- Elect two directors to each serve for a term of three years;
- Approve the amendment to our Second Amended and Restated Certificate of
Incorporation to increase the number of authorized shares of voting common
stock from 19,400,000 to 25,000,000;
- Approve the 1999 Non-Employee Director Stock Purchase Plan;
- Approve the 1999 Executive Officer Stock Purchase Plan;
- Ratify the selection of KPMG Peat Marwick LLP as independent public
accountants for 1999; and
- Transact any other business that may properly be presented at the Annual
Meeting.
Our Bylaws provide for the nomination of directors at the Meeting in the
following manner:
"Section 7. STOCKHOLDER PROPOSALS AND NOMINATIONS OF DIRECTORS. Nominations
for election to the Board of Directors of the Corporation at a meeting of the
stockholders may be made by the Board of Directors, or on behalf of the Board of
Directors by a Nominating Committee appointed by the Board of Directors, or by
any stockholder of the Corporation entitled to vote for the election of
directors at such meeting. Any nominations, other than those made by or on
behalf of the Board of Directors, and any proposal by any stockholder to
transact any corporate business . . . . shall be made by notice in writing and
mailed by certified mail to the Secretary of the Corporation and . . . .
received no later than 35 days prior to the date of the annual meeting;
provided, however, that if less than 35 days' notice of a meeting of
stockholders is given to the stockholders, such notice of proposed business or
nomination by such stockholder shall have been made or delivered to the
Secretary of the Corporation not later than the close of business on the seventh
day following the day on which the notice of a meeting was mailed. A notice of
nominations by stockholders shall set forth as to each proposed nominee who is
not an incumbent director (i) the name, age, business address and, if known,
residence address of each nominee proposed in such notice, (ii) the principal
occupation or employment of each such nominee, (iii) the number of shares of
stock of the Corporation which are beneficially owned by each such nominee and
the nominating stockholder and (iv) any other information concerning the nominee
that must be disclosed regarding nominees in proxy solicitations pursuant to
Section 14(a) of the Securities Exchange Act of 1934, as amended, and the rules
under such section."
If you were a stockholder of record at the close of business on March 29,
1999, you may vote at the Annual Meeting.
By order of the Board of Directors,
[SIGNATURE]
R. Andrew Massey
Corporate Secretary
April 16, 1999
Lincoln, Nebraska
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING............................................................ 1
Why Did You Send Me This Proxy Statement?.............................................................. 1
Who Is Entitled to Vote?............................................................................... 1
What Constitutes a Quorum?............................................................................. 1
How Many Votes Do I Have?.............................................................................. 1
How Do I Vote By Proxy?................................................................................ 1
May I Change My Vote After I Return My Proxy?.......................................................... 2
How Do I Vote in Person?............................................................................... 2
What Vote Is Required to Approve Each Proposal?........................................................ 2
Proposal 1: Elect Two Directors.................................................................... 2
Proposal 2: Approve the amendment to our Second Amended and Restated Certificate of
Incorporation...................................................................................... 2
Proposal 3: Approve the 1999 Non-Employee Director Stock Purchase Plan............................. 2
Proposal 4: Approve the 1999 Executive Officer Stock Purchase Plan................................. 2
Proposal 5: Ratify Selection of Independent Public Accountants..................................... 3
The Effect of Broker Non-Votes..................................................................... 3
What Are the Costs of Soliciting these Proxies?........................................................ 3
How Do I Obtain an Annual Report on Form 10-K?......................................................... 3
INFORMATION ABOUT TRANSCRYPT COMMON STOCK OWNERSHIP........................................................ 4
Which Stockholders Own at Least 5% of Transcrypt?...................................................... 4
How Much Stock is Owned by Directors and Executive Officers?........................................... 5
Compensation Committee Interlocks and Insider Participation............................................ 6
Did Directors, Executive Officers and Greater-Than-10% Stockholders Comply With
Section 16(a) Beneficial Ownership Reporting in 1998?................................................ 6
INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS......................................................... 7
The Board of Directors................................................................................. 7
The Committees of the Board............................................................................ 7
Directors.............................................................................................. 8
How Do We Compensate Directors?........................................................................ 9
Certain Relationships and Related Transactions......................................................... 9
Executive Officers..................................................................................... 10
How We Compensate Executive Officers................................................................... 12
Summary Compensation Table......................................................................... 12
Option Grants in Last Fiscal Year.................................................................. 13
Fiscal Year-End Option Value Table................................................................. 14
Ten-Year Option/SAR Repricings..................................................................... 14
Employment Agreements, Termination of Employment and Change of Control Arrangements.................... 15
Compensation Committee Report On Executive Compensation and Repricing of Stock Options................. 17
The Report............................................................................................. 17
Performance Graph...................................................................................... 19
Discussion of Proposals Recommended by the Board....................................................... 20
Proposal 1: Elect Two Directors.................................................................... 20
Proposal 2: Approve the amendment to our Second Amended and Restated Certificate of
Incorporation...................................................................................... 21
Proposal 3: Approve the 1999 Non-Employee Director Stock Purchase Plan............................. 22
Proposal 4: Approve the 1999 Executive Officer Stock Purchase Plan................................. 24
Proposal 5: Ratify Selection of KPMG Peat Marwick LLP as Independent Public Accountants............ 26
Information About Stockholder Proposals................................................................ 27
</TABLE>
i
<PAGE>
PROXY STATEMENT FOR TRANSCRYPT INTERNATIONAL, INC.
1999 ANNUAL MEETING OF STOCKHOLDERS
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
WHY DID YOU SEND ME THIS PROXY STATEMENT?
We sent you this Proxy Statement and the enclosed proxy card because our
Board of Directors is soliciting your proxy to vote at the 1999 Annual Meeting
of Stockholders. This Proxy Statement summarizes the information you need to
know to cast a vote at the Annual Meeting. However, you do not need to attend
the Annual Meeting to vote your shares. Instead, you may simply complete, date,
sign and return the enclosed proxy card.
WHO IS ENTITLED TO VOTE?
We will begin sending this Proxy Statement, the attached Notice of Annual
Meeting and the enclosed proxy card on or about April 16, 1999 to all
stockholders entitled to vote. At the close of business on March 29, 1999, there
were 12,946,624 shares of Transcrypt common stock outstanding, of which
12,729,082 were voting common stock and 217,542 were non-voting common stock.
Transcrypt common stock is our only class of voting stock. We are also sending
along with this Proxy Statement, the Transcrypt 1998 Annual Report, which
includes our financial statements.
WHAT CONSTITUTES A QUORUM?
The holders of a majority of the issued and outstanding shares of Transcrypt
common stock entitled to vote at the meeting must be present, in person or by
proxy, in order to constitute a quorum. We can only conduct the business of the
meeting if a quorum has been established. We will include proxies marked as
abstentions and broker non-votes in determining the number of shares present at
the meeting.
HOW MANY VOTES DO I HAVE?
Each share of Transcrypt common stock that you own entitles you to one vote.
The proxy card indicates the number of shares of Transcrypt common stock that
you own.
HOW DO I VOTE BY PROXY?
Whether you plan to attend the Annual Meeting or not, we urge you to
complete, date and sign the enclosed proxy card and to return it promptly in the
postage-prepaid envelope provided. Returning the proxy card will not affect your
right to attend the Annual Meeting and vote.
If you properly fill in your proxy card and send it to us in time to vote,
your "proxy" (one of the individuals named on your proxy card) will vote your
shares as you have directed. If you sign the proxy card but do not make specific
choices, your proxy will vote your shares as recommended by the Board of
Directors as follows:
- "FOR" the election of the two nominees for director (see page 20),
- "FOR" the approval of the amendment to our Second Amended and Restated
Certificate of Incorporation to increase the number of authorized shares
of voting common stock from 19,400,000 to 25,000,000 (see page 21),
- "FOR" the approval of the 1999 Non-Employee Director Stock Purchase Plan,
(see page 22),
- "FOR" the approval of the 1999 Executive Officer Stock Purchase Plan, (see
page 24),
- "FOR" the ratification of the selection of KPMG Peat Marwick LLP as
independent public accountants for 1999 (see page 26).
1
<PAGE>
If any other matter is presented, your proxy will vote in accordance with
the recommendation of the Board of Directors or, if no recommendation is given,
in their own discretion. At the time this Proxy Statement went to press, we knew
of no matters, which needed to be acted on at the Annual Meeting, other than
those discussed in this Proxy Statement.
MAY I CHANGE MY VOTE AFTER I RETURN MY PROXY?
Yes. If you give a proxy, you may change your vote at any time before it is
exercised. You may change your vote in any one of three ways:
- You may send Transcrypt's Secretary another proxy with a later date.
- You may notify Transcrypt's Secretary in writing before the Annual Meeting
that you have revoked your proxy.
- You may attend the Annual Meeting and vote in person.
HOW DO I VOTE IN PERSON?
If you plan to attend the Annual Meeting and vote in person, we will give
you a ballot form when you arrive.
WHAT VOTE IS REQUIRED TO APPROVE EACH PROPOSAL?
<TABLE>
<S> <C>
PROPOSAL 1:
Elect Two Directors The two nominees for director who receive the most votes
will be elected.
PROPOSAL 2:
Approve the amendment to our The affirmative vote of a majority of shares of common
Second Amended and Restated stock outstanding and entitled to vote on this proposal
Certificate of Incorporation to is required to approve the amendment to our Second
increase the number of authorized Amended and Restated Certificate of Incorporation. So,
shares of voting common stock from if you "ABSTAIN" from voting, it has the same effect as
19,400,000 to 25,000,000 if you voted against this proposal.
PROPOSAL 3:
Approve the 1999 Non-Employee The affirmative vote of a majority of shares of common
Director Stock Purchase Plan stock present in person or represented by proxy at the
Annual Meeting and entitled to vote on this proposal is
required to approve the 1999 Non-Employee Director Stock
Purchase Plan. So, if you "ABSTAIN" from voting, it has
the same effect as if you voted "against" this proposal.
PROPOSAL 4:
Approve the 1999 Executive Officer The affirmative vote of a majority of shares of common
Stock Purchase Plan stock present in person or represented by proxy at the
Annual Meeting and entitled to vote on this proposal is
required to approve the 1999 Executive Officer Stock
Purchase Plan. So, if you "ABSTAIN" from voting, it has
the same effect as if you voted "against" this proposal.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
PROPOSAL 5:
Ratify Selection of Independent The affirmative vote of a majority of shares of common
Public Accountants stock present in person or represented by proxy at the
Annual Meeting is required to ratify the selection of
independent public accountants. So, if you "ABSTAIN"
from voting, it has the same effect as if you voted
"against" this proposal.
THE EFFECT OF BROKER NON-VOTES If your broker holds your shares in its name, the broker
will be entitled to vote your shares on Proposals 1 and
5 even if it does not receive instructions from you.
Your broker is not entitled to vote on Proposals 2, 3
and 4 unless it receives instructions from you. A broker
non-vote on Proposal 2 will have the same effect as a
vote "AGAINST". A broker non-vote on Proposals 3 and 4,
would reduce the number of affirmative votes that are
necessary to approve Proposals 3 and 4.
</TABLE>
WHAT ARE THE COSTS OF SOLICITING THESE PROXIES?
We will pay all the costs of soliciting these proxies. In addition to
mailing proxy soliciting material, our directors, officers and employees also
may solicit proxies in person, by telephone or by other electronic means of
communications for which they will receive no compensation. We will ask banks,
brokers and other institutions, nominees and fiduciaries to forward the proxy
material to their principals and to obtain authority to execute proxies. We will
then reimburse them for their expenses. In addition, we have engaged Corporate
Investor Communications, Inc. to assist in the distribution and solicitation of
proxies, for which we have agreed to pay a fee of $5,000 plus reasonable
out-of-pocket expenses incurred.
HOW DO I OBTAIN AN ANNUAL REPORT ON FORM 10-K?
IF YOU WOULD LIKE A COPY OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1998, THAT WE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, WE WILL SEND YOU ONE WITHOUT CHARGE. PLEASE WRITE TO:
TRANSCRYPT INTERNATIONAL, INC.
4800 NW FIRST STREET
LINCOLN, NEBRASKA 68521
ATTENTION: INVESTOR RELATIONS
3
<PAGE>
INFORMATION ABOUT TRANSCRYPT COMMON STOCK OWNERSHIP
WHICH STOCKHOLDERS OWN AT LEAST 5% OF TRANSCRYPT?
The following table shows, as of March 29, 1999, all persons we know to be
"beneficial owners" of more than five percent of Transcrypt's common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) PERCENT OF CLASS(2)
- ------------------------------------------------------------------------ -------------------- ---------------------
<S> <C> <C>
John T. Connor(3)....................................................... 1,501,528 11.3%
4800 NW First Street
Lincoln, Nebraska 68521
Janice K. Connor(4)..................................................... 1,207,271 9.3
4800 NW First Street
Lincoln, Nebraska 68521
University of Nebraska Foundation(5).................................... 661,622 5.1
1111 Lincoln Mall, Suite 200
Lincoln Nebraska 68508
</TABLE>
- ------------------------
(1) "Beneficial ownership" is a technical term broadly defined by the SEC to
mean more than ownership in the usual sense. So, for example, you
"beneficially" own Transcrypt common stock not only if you hold it directly,
but also if you directly or indirectly (THROUGH A RELATIONSHIP, A POSITION
AS A DIRECTOR OR TRUSTEE, OR A CONTRACT OR UNDERSTANDING), have or share the
power to vote the stock, to invest it, to sell it or you currently have the
right to acquire it or the right to acquire it within 60 days of March 29,
1999.
(2) Shares of Transcrypt common stock issuable upon exercise of stock options
currently exercisable, or exercisable within 60 days of March 29, 1999, are
considered outstanding for purposes of computing the percentage of the
person or entity holding those options but are not considered outstanding
for computing the percentage of any other person or entity. We consider the
217,542 shares of our non-voting common stock held by First Commerce
Bancshares, Inc. outstanding for computing the percentage each person or
entity owns.
(3) Includes 294,257 shares, which are issuable upon the exercise of stock
options that are currently exercisable. Of the 1,501,528 shares, Mr. Connor
shares voting and investment power of 1,207,271 shares with his wife, Janice
K. Connor. Mr. Connor disclaims beneficial ownership of 440,258 shares held
by Mrs. Connor and 197,980 shares held by or in trust for other members of
the Connor family.
(4) Mrs. Connor shares voting and investment power of these with her husband,
John T. Connor. Mrs. Connor disclaims beneficial ownership of 569,033 shares
held by Mr. Connor and 197,980 shares held by or in trust for other members
of the Connor family.
(5) The information about the University of Nebraska Foundation is based on a
Schedule 13G report filed with the SEC on March 9, 1998. If you wish, you
may obtain this report from the SEC.
4
<PAGE>
HOW MUCH STOCK IS OWNED BY DIRECTORS AND EXECUTIVE OFFICERS?
The following table shows, as of March 29, 1999, the Transcrypt common stock
beneficially owned by our directors, our current chief executive officer, the
individual who was serving as our chief executive officer at the end of 1998,
and our four other most highly compensated executive officers, who earned salary
and bonus compensation in excess of $100,000 during 1998, and those shares of
common stock owned by all executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1) PERCENT OF CLASS(2)
- ------------------------------------------------------------------------ -------------------- ---------------------
<S> <C> <C>
John T. Connor(3)....................................................... 1,501,528 10.2%
Michael E. Jalbert(4)................................................... 100,000 *
Joel K. Young(4)........................................................ 35,766 *
Thomas E. Henning(5).................................................... 12,000 *
Craig J. Huffaker(4).................................................... 10,000 *
Thomas R. Thomsen(6).................................................... 12,553 *
Winston J. Wade(4)(7)................................................... 11,553 *
Thomas C. Smith(8)...................................................... 6,800 *
Edgar L. Osborn (4)..................................................... 6,000 *
Frederick G. Hamer (4).................................................. 5,000 *
Terry L. Fairfield(4)(9)................................................ 5,000 *
Thomas R. Larsen(4)..................................................... 5,000 *
All executive officers and directors as a group (17 persons)............ 1,752,653 11.9
</TABLE>
- ------------------------
* Less than 1%
(1) See footnote 1 in the table included above at page 4 under "Which
Stockholders Own at Least 5% of Transcrypt?"
(2) Shares of Transcrypt common stock issuable upon exercise of stock options
currently exercisable, or exercisable within 60 days of March 29, 1999, are
considered outstanding for computing the percentage of the person holding
those options but are not considered outstanding for computing the
percentage of any other person. We consider the 217,542 shares of our
non-voting common stock held by First Commerce Bancshares, Inc. outstanding
for computing the percentage each person owns. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power, if
any, with respect to all shares of common stock each beneficially owns.
(3) Includes 294,257 shares, which are issuable upon the exercise of stock
options that are currently exercisable. Of the 1,501,528 shares, Mr. Connor
shares voting and investment power of 1,207,271 shares with his wife, Janice
K. Connor. Mr. Connor disclaims beneficial ownership of 440,258 shares held
by Mrs. Connor and 197,980 shares held by or in trust for other members of
the Connor family.
(4) Consists solely of shares issuable upon the exercise of stock options that
are currently exercisable or exercisable within 60 days of March 29, 1999.
(5) Includes 5,000 shares issuable upon the exercise of stock options that are
exercisable within 60 days of March 29, 1999. Does not include shares held
by The Security Mutual Life Insurance Company, of which Mr. Henning serves
as President, CEO and director.
5
<PAGE>
(6) Includes 11,553 shares issuable upon the exercise of stock options that are
exercisable within 60 days of March 29, 1999.
(7) Does not include shares held by the University of Nebraska Foundation, of
which Mr. Wade serves as a director.
(8) Includes 5,000 shares issuable upon the exercise of stock options that are
exercisable within 60 days of March 29, 1999.
(9) Does not include shares held by the University of Nebraska Foundation, of
which Mr. Fairfield serves as President and CEO.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our Compensation Committee is or has been an officer
or employee of Transcrypt.
DID DIRECTORS, EXECUTIVE OFFICERS AND GREATER-THAN-10% STOCKHOLDERS COMPLY WITH
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING IN 1998?
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires our directors, executive officers, and greater-than-10%
stockholders to file reports with the SEC reflecting changes in their beneficial
ownership of Transcrypt common stock and to provide us with copies of the
reports. Based on our review of these reports and certifications furnished by
each of the reporting persons, we believe that all of these reporting persons
complied with their filing requirements for 1998.
6
<PAGE>
INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS
THE BOARD OF DIRECTORS
The Board of Directors oversees our business and affairs and monitors the
performance of management. In accordance with corporate governance principles,
the Board does not involve itself in day-to-day operations. The directors keep
themselves informed through, among other things, discussions with the Chairman,
other key executives and our principal external advisers (legal counsel, outside
auditors, investment bankers and other consultants), reading reports and other
materials that we send them and participating in Board and committee meetings.
The Board met 13 times during 1998. Each incumbent director attended at
least 75% of the total number of Board and committee meetings, of which he was a
member, held in 1998.
THE COMMITTEES OF THE BOARD
The Board has an Executive Committee, an Audit Committee, a Compensation
Committee, and a Nominating Committee.
<TABLE>
<S> <C>
THE EXECUTIVE COMMITTEE................ The Executive Committee may exercise the powers of
the Board of Directors, other than approving or
proposing to stockholders action required to be
approved by the stockholders, filling vacancies on
the Board of Directors or any of its committees,
amending the Certificate of Incorporation without
stockholder approval, adopting, amending or
repealing bylaws, or approving a plan merger not
requiring stockholder approval and is responsible
for reviewing management's performance. Messrs.
Jalbert, Connor, Fairfield and Smith currently
serve as members of the Executive Committee.
Messrs. Connor and Fairfield have decided not to
stand for re-election to the Board of Directors and
Mr. Connor's membership on the Board, Executive
Committee and Nominating Committee and Mr.
Fairfield's membership on the Board, Executive
Committee and Compensation Committee, will expire
immediately prior to this annual meeting. The
Executive Committee met eight times during 1998.
THE AUDIT COMMITTEE.................... The Audit Committee oversees actions taken by our
independent public accountants and reviews our
internal accounting controls. Messrs. Henning,
Larsen and Smith currently serve as members of the
Audit Committee. The Audit Committee met 22 times
during 1998.
THE COMPENSATION COMMITTEE............. The Compensation Committee is responsible for
determining our compensation policies and
administering our compensation plans and 1996 Stock
Incentive Plan. The Compensation Committee also
reviews the compensation levels of our employees
and makes recommendations to the Board regarding
changes in compensation. The Compensation
Committee's Report on Executive Compensation and
Repricing of Stock Options for 1998 is printed
below at pages 17-18. Messrs. Fairfield, Thomsen
and Wade currently serve as members of the
Compensation Committee. The Compensation Committee
met six times during 1998.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
THE NOMINATING COMMITTEE............... The Nominating Committee recommends candidates for
election to our Board of Directors. Messrs. Connor
and Thomsen currently serve as members of the
Nominating Committee. The Nominating Committee did
not meet in 1998. On April 9, 1999, the Nominating
Committee was reconstituted with Mr. Wade serving
as Chair and Messrs. Larsen and Thomsen elected as
Committee members.
</TABLE>
DIRECTORS
The following are the biographies of our current directors, whose terms
continue after the annual meeting except for Class III Director nominees,
Michael E. Jalbert and Thomas E. Henning, whose biographies are included below
at page 20 under "Proposal 1: Elect Two Directors."
CLASS I DIRECTORS. The following are our current Class I directors except
for Michael E. Jalbert. Although Mr. Jalbert is currently a Class I Director, he
has been nominated as a Class III Director. If he is elected as a Class III
Director at this annual meeting, he will cease effective immediately to be a
Class I Director. If Mr. Jalbert is not elected as a Class III Director at this
annual meeting, he will continue as a Class I Director. Each Class I director
was elected at Transcrypt's 1997 annual meeting of stockholders for terms
expiring in 2000 with the exception of Mr. Jalbert who was appointed as a Class
I director upon his hiring as President and CEO of Transcrypt by the Board of
Directors on March 1, 1999:
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
- ------------------------------------------------ ---------------------------------------------------------------
<S> <C>
Thomas R. Larsen (54)........................... Mr. Larsen has served as a director of Transcrypt since October
1995. Mr. Larsen has been a certified public accountant since
1975 and is currently President and Chief Executive Officer of
Larsen, Bryant & Porter, CPAs, P.C., a public accounting, tax
and consulting firm.
Winston J. Wade (60)............................ Mr. Wade has served as a director of Transcrypt since July
1996. Effective February 1999, Mr. Wade retired as Chief
Executive Officer and Chief Operating Officer of
Binariang-Malaysia, a joint venture of U.S. West International
for which he served since January of 1997. From February to
December 1996, he served as managing director of BPL U.S. West
Cellular in India. From 1963 to 1996, he held various positions
with Northwestern Bell, AT&T and U.S. West Communications. Mr.
Wade also serves as a director of the University of Nebraska
Foundation, Ameritas Variable life Insurance Company and
Binariang-Malaysia.
</TABLE>
8
<PAGE>
CLASS II DIRECTORS. The following are our current Class II directors. Each
Class II director was elected at Transcrypt's 1998 annual meeting of
stockholders for terms expiring in 2001:
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
- ------------------------------------------------ ---------------------------------------------------------------
<S> <C>
Thomas R. Thomsen (63).......................... Mr. Thomsen has served as a director of Transcrypt since July
1995. Since August 1995, he has served as Chairman of the Board
of Directors and Chief Executive Officer of Lithium Technology
Corporation ("LTC"), a public company that manufactures
rechargeable batteries. Mr. Thomsen has served as a director of
LTC since February 1995. In January 1990, Mr. Thomsen retired
as President of AT&T Technologies, after holding numerous
senior management positions including director of Sandia Labs,
Lucent Technologies, AT&T Credit Corp. and Oliveti Inc. Mr.
Thomsen also serves as a director of the University of Nebraska
Technology Park.
Thomas C. Smith (53)............................ Mr. Smith has served as a director of Transcrypt since October
1995. Since December 1985, he has been Chairman of the Board of
Directors and President of Consolidated Investment Corporation,
the parent company of Smith Hayes Financial Services
Corporation, a financial services firm, and Conley Smith Inc.,
a registered investment advisor. Mr. Smith is also the
President of Smith Hayes Financial Services Corporation. He is
a director of the Nebraska Research and Development Authority
and First Mid-America Finance Corporation. Mr. Smith is also a
director of Smith Hayes Trust, Inc., a mutual fund management
company.
</TABLE>
HOW DO WE COMPENSATE DIRECTORS?
MEETING FEES. In 1998, we paid our non-employee directors a fee of:
- $1,000 for attendance at each Board meeting;
- $500 for attendance at each telephonic Board meeting; and
- $500 for attendance at each committee meeting.
The aggregate amount in fees we paid to our non-employee directors in 1998
was $112,500. In addition, our directors are eligible to participate in the 1996
Stock Incentive Plan. We granted options to our directors to purchase an
aggregate of 30,000 shares in 1998 at an exercise price of $23.94 per share.
EXPENSES AND BENEFITS. We reimburse all directors for out-of-pocket and
travel expenses incurred in attending Board meetings.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Connor has entered into a consultant agreement with us which commenced
on March 26, 1999, for a period of one year for a fee of $100,000. Details of
this agreement can be found on page 15.
9
<PAGE>
EXECUTIVE OFFICERS
The following are the biographies of our current executive officers, except
for Mr. Jalbert, our President and CEO, whose biography is included below under
"Proposal 1: Elect Two Directors."
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
- ------------------------------------------------ ---------------------------------------------------------------
<S> <C>
Frederick G. Hamer (55)......................... Mr. Hamer joined Transcrypt from E.F. Johnson as Vice President
of International Sales in July 1997 and currently serves as
Vice President of System Sales. From October 1992 through June
1995, he served as Vice President, International for E.F.
Johnson. Mr. Hamer served as Vice President, Sales and
Distribution for E.F. Johnson from March 1983 through October
1992 and June 1995 to January 1996. From January 1997 to July
1997, Mr. Hamer served as Vice President, Sales and Marketing
for E.F. Johnson. In addition, Mr. Hamer was Vice President of
Sales and Marketing for Dispatch Industries, Inc. from January
1996 through December 1997.
Craig J. Huffaker (53).......................... Mr. Huffaker, a certified public accountant, joined Transcrypt
as Senior Vice President and Chief Financial Officer in January
1998. From July 1996 to January 1998, he served as Vice
President and Chief Financial Officer of Tie Communications,
Inc., and from August 1994 to April 1996, served as Senior Vice
President and Chief Financial Officer of TSW International,
Inc. Mr. Huffaker served as Senior Vice President and Chief
Financial Officer of Applied Immune Sciences, Inc. from
November 1991 to August 1994.
Christopher S. Litras (45)...................... Mr. Litras joined Transcrypt as Vice President of Human
Resources in June of 1998. From 1988 to 1998, he served as Vice
President of Human Resources at the Manfield/ Dover Operations
and Director of Human Resources and Information Systems at
Eastern Stainless Corporation for ARMCO, Inc. Prior to joining
ARMCO, Inc., he worked for USX Corporation where he held
multiple positions in Human Resources and Operations from 1975
to 1988.
R. Andrew Massey (29)........................... Mr. Massey, an attorney, joined Transcrypt in December 1997 and
has served as Corporate Secretary since June 1998. From
November 1995 to July 1997, he served as a legal assistant to
the Nebraska Public Service Commission.
Edgar L. Osborn (45)............................ Mr. Osborn joined Transcrypt as Senior Vice President of Sales
and Chief Operating Officer in March of 1998. In June 1998, he
was appointed acting President of Transcrypt and as of February
28, 1999 Mr. Osborn's title has been Senior Vice President of
Sales and Marketing for Transcrypt's EFJohnson Division. Mr.
Osborn served as Director of Marketing and Sales and later as
Vice President of Westinghouse Industry Products International
Company, Inc. for Westinghouse Electric Corporation
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
- ------------------------------------------------ ---------------------------------------------------------------
from 1995 to March 1998. From 1992 to 1995, he held numerous
positions with Harris Corporation, a manufacturer and developer
of wireless communications. From 1990 to 1992, he served as
Market Manager for Ericsson General Electric.
<S> <C>
Rebecca L. Schultz (37)......................... Ms. Schultz has served as Treasurer of Transcrypt since June of
1996. From 1996 to 1998, Ms. Schultz served as Senior Director
of Human Resources and Corporate Secretary. From 1991 to 1995,
Ms. Schultz served as Controller of the Company.
Craig F. Szczutkowski (44)...................... Mr. Szczutkowski joined Transcrypt in September of 1998 as
Senior Vice President of Product and Market Development and
currently serves as Senior Vice President, Product Development
and Engineering. Prior to joining Transcrypt, Mr. Szczutkowski
served as Vice President of International Business Development
for Ericsson, Inc. Private Radio Systems from 1995 to 1998.
From 1983 to 1995, Mr. Szczutkowski served in various sales and
marketing management positions with Ericsson--GE Mobile
Communications, Inc. Mr. Szczutkowski has been awarded seven
U.S. patents for radio and digital voice security products.
Michael P. Wallace (37)......................... Mr. Wallace joined Transcrypt as Vice President of Operations
in February 1994. From December 1989 to February 1994, he
served as the Electric Card Assembly and Test Engineering
Manager of Scientific Atlanta Inc., a manufacturer and
distributor of broadband communications products.
Joel K. Young (34).............................. Mr. Young was appointed Vice President of Information Security
Sales and Marketing in September 1998. Mr. Young joined
Transcrypt as Vice President Engineering in February 1996 and
was appointed Vice President of Marketing and Engineering in
June 1997. From 1986 to January 1996, he held numerous
positions with AT&T, the former AT&T Bell Laboratories and
telecommunications research companies, and specialized in
signaling, network implementation and voice processing. He
served most recently as District Manager AT&T Business
Communication Services. Mr. Young has been awarded five U.S.
patents on various telecommunications systems and techniques.
</TABLE>
11
<PAGE>
HOW WE COMPENSATE EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table shows the compensation paid during the last three years
to (or for such shorter period that we employed the individual) for the two
individuals who served as our chief executive officer during 1998 and the four
most highly compensated officers who earned salary and bonus compensation in
excess of $100,000 during 1998 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION ALL OTHER
--------------------------------------------- AWARDS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS (1)
- ------------------------------------------- ---- --------- --------- --------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$ -- $ --
John T. Connor (2)......................... 1998 $ 200,000 $ -- -- 2,375
Chairman and Interim CEO 1997 196,539 40,000 210,000(3) -- 3,923
1996 172,885 50,000
Craig J. Huffaker (4)...................... 1998 $ 164,904 $ -- $ 124,162(5)
Senior Vice President and CFO 1997 N/A 50,000 $ --
1996 N/A
Frederick G. Hamer......................... 1998 $ 148,269 $ 26,068(6) $ -- -- $ 100,000
Vice President of System Sales 1997 62,000(7) 13,742(6) -- 20,000 100,000
1996 N/A
Edgar L. Osborn (4)........................ 1998 $ 143,750 $ -- $ 45,417(5)
Acting President and Chief Operating 1997 N/A
Officer 1996 N/A 50,000 $ --
Joel K. Young.............................. 1998 $ 136,250 $ 15,738(6) $ -- -- $ --
Vice President of Information Security 1997 107,885 14,573 -- 20,000 3,000
Sales and Marketing 1996 88,461(8) 2,000 36,852(5) 32,766 --
$ -- -- $ 335,964
Jeffery L. Fuller (9)...................... 1998 $ 97,917 $ -- -- 125,000 5,178
President, CEO and Chief Operating Officer 1997 182,308 53,000 -- -- 2,090
1996 156,923 35,000
</TABLE>
- ------------------------
(1) Amounts shown for John T. Connor include (a) for 1997, $2,375 in 401K plan
matching contributions and (b) for 1996, $1,000 in 401K plan matching
contributions and $2,923 for for group term life insurance.
Amounts shown for Fredrick G. Hamer include (a) for 1998, a final $100,000
change of control payment to Mr. Hamer under his employment contract as a
result of the acquisition of E.F. Johnson and (b) for 1997, $100,000 change
of control payment to Mr. Hamer under his employment contract.
Amount shown for Joel K. Young for 1997 include $3,000 in 401K plan matching
contributions.
Amounts shown for Jeffery L. Fuller include (a) for 1998, $333,785 under a
Severance Agreement and Mutual Release with the Company of which $2,525
related to 401K matching contributions and $2,180 for group term life
insurance, see "Employment Agreements Termination of Employment and Change
of Control Arrangements"; (b) for 1997, $2,375 in 401K plan matching
contributions, $2,803 for group term life and (c) for 1996, $2,090 in 401K
plan matching contributions.
12
<PAGE>
(2) Mr. Connor served as Chief Executive Officer during 1996 and through July
1997 and was Interim Chief Executive Officer from June 1998 through February
1999. Mr. Connor served as Chairman of the Board until March 25, 1999.
(3) Represents remaining $210,000 paid to Mr. Connor for deferred fees payable
under his employment contract.
(4) Mr. Huffaker and Mr. Osborn joined the Company in January 1998 and in March
1998, respectively.
(5) Represents amounts paid for moving allowances.
(6) Represents sales commissions paid to Messrs. Hamer and Young.
(7) Represents salary at the rate of $100,000 per year beginning in August 1997.
(8) Represents salary at the rate of $100,000 per year beginning in February
1996.
(9) Mr. Fuller resigned from all positions with Transcrypt effective May 31,
1998. He served as President and Chief Operating Officer during 1996 and
through July 1997. He served as Chief Executive Officer and President from
July 1997 through May 31, 1998.
The following table sets forth information concerning stock options granted
to the Named Executive Officers during 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM (1)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ----------------------
NAME GRANTED (2) 1998 PRICE DATE 5% 10%
- -------------------------------------- ----------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Craig J. Huffaker..................... 50,000(3) 26.3% $ 5.75 1/19/08 $ 180,807 $ 458,201
Edgar L. Osborn....................... 30,000 15.8 10.50 3/30/08 198,102 502,029
20,000 10.5 2.69 10/27/08 33,810 85,680
</TABLE>
- ------------------------
(1) The amounts shown are hypothetical gains based on the indicated assumed
rates of appreciation of the common stock, compounded annually over a
ten-year period and assuming that the closing price was the market value of
the common stock on the date of grant. The actual value (if any) that an
executive officer receives from a stock option will depend upon the amount
by which the market price of our common stock exceeds the exercise price of
the option on the date of exercise. We cannot assure that the common stock
will appreciate at any particular rate or at all in future years.
(2) Options vest 20% per year, at the end of each year, for five years
commencing on the date of grant. Options were granted pursuant to the terms
of the 1996 Stock Incentive Plan.
(3) These options were originally granted on January 19, 1998 and were repriced
from $25.00 to $5.75 per share on July 20, 1998.
13
<PAGE>
The following table sets forth the number and value of stock options held by
the Named Executive Officers and at December 31, 1998.
FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR-END AT YEAR-END (1)
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------- ----------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John T. Connor......................... -- -- 294,257 -- $ 604,110 $ --
Edgar L. Osborn........................ -- -- -- 50,000 $ -- $ 2,500
Craig J. Huffaker...................... -- -- 10,000 40,000 $ -- $ --
Frederick G. Hamer..................... -- -- 5,000 20,000 $ -- $ --
Joel K. Young.......................... -- -- 35,766 16,000 $ -- $ --
Jeffery L. Fuller...................... -- -- 133,829 -- $ -- --
</TABLE>
- ------------------------
(1) Solely for purposes of this table, the fair market value per share of common
stock is assumed to be $2.813, the closing price of the common stock as
reported on the NASD OTC Bulletin Market on December 31, 1998.
The following table sets forth information concerning the repricing of
options of executive officers. Except for Mr. Huffaker, no other executive
officers have had options repriced since we became a public reporting company
under the Securities Exchange Act of 1934 on January 22, 1997.
<TABLE>
<CAPTION>
TEN-YEAR OPTION/SAR REPRICINGS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF LENGTH OF
SECURITIES MARKET PRICE EXERCISE ORIGINAL OPTION
UNDERLYING OF STOCK AT PRICE AT TERM REMAINING
OPTIONS/SARS TIME OF TIME OF NEW AT THE DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT
- -------------------------------- --------------- ------------- ------------- ------------- ----------- ---------------
Craig J. Huffaker............... July 20, 1998 50,000(1) $ 5.75 $ 25.00 $ 5.75 9 years
Senior Vice President and CFO
</TABLE>
- ------------------------
(1) Consists of shares issuable pursuant to options originally granted under the
1996 Stock Incentive Plan on January 19, 1998.
14
<PAGE>
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
We entered into an employment agreement with John T. Connor, our former
Chairman and interim CEO, for a term beginning on July 23, 1997 and ending
December 31, 1999. The agreement set forth a base salary of $200,000 per year
and provided for a quarterly bonus of (1) 20% of his salary if Transcrypt met or
exceeded quarterly sales goals and (2) 20% of his salary if Transcrypt met or
exceeded quarterly profit goals, which goals are based upon Board-approved
plans. The agreement provided for certain benefits to Mr. Connor, including paid
vacations, pension benefits, qualified profit-sharing plans, employee group
insurance and disability insurance. The agreement included a Non-compete
Agreement, which is effective during the term of the agreement. On January 29,
1997, the Board of Directors and Mr. Connor eliminated Mr. Connor's quarterly
bonus provisions based on Transcrypt sales and profitability goals effective
August 1, 1997.
On February 23, 1999, we entered into a consulting and termination of
employment agreement, which concluded Mr. Connor's employment on March 25, 1999.
At that time, Mr. Connor became an independent consultant to Transcrypt for a
period of one year for a fee of $100,000. As a consultant, Mr. Connor will
perform services for Transcrypt requested by the new CEO, Mr. Jalbert. The
agreement provides for the payment of any unused vacation, and allows Mr. Connor
to pay for continued coverage under Transcrypt's group health insurance.
Additionally, Mr. Connor will have until February 1, 2002 to exercise his vested
stock options.
We entered into an employment agreement with Jeffery L. Fuller, our former
President and CEO, for a term beginning July 31, 1997 and ending on December 31,
1999. Mr. Fuller's employment was terminated effective May 31, 1998, pursuant to
a Severance Agreement and Mutual Release dated June 2, 1998, described further
below. The employment agreement set forth a base salary of $200,000 per year and
provided for an annual bonus in an amount to be determined by the Board of
Directors, provided Transcrypt met or exceeded certain performance objectives
provided to the Board of Directors. Mr. Fuller was entitled, at a minimum, to
receive a bonus of 20% of his quarterly salary if Transcrypt met or exceeded its
quarterly sales goals and 20% of his quarterly salary if Transcrypt met or
exceeded its quarterly profit goals. The agreement also provided for certain
benefits to Mr. Fuller, including paid vacations, pension benefits, qualified
profit-sharing plans, employee group insurance and disability insurance. The
agreement includes a Non-compete Agreement, effective during the term of the
agreement. On January 29, 1998, the Board of Directors increased Mr. Fuller's
base annual salary to $235,000 effective January 1, 1998.
On July 29, 1997, we entered into an employment agreement with Frederick G.
Hamer, Vice President of Sales. Mr. Hamer's employment provided for a base
salary of $150,000 and commission payments based on sales if Transcrypt achieved
its quarterly plans. Under the agreement, Mr. Hamer received two change of
control payments of $100,000, one payment was made 30 days after the effective
date of the employment agreement and the second made on the first anniversary
date of his employment with Transcrypt on July 31, 1998 in connection with our
acquisition of E.F. Johnson. The agreement also provided for certain benefits,
including paid vacations, pension benefits, qualified profit-sharing plans,
employee group insurance and disability insurance. This agreement expired on
July 31, 1998 and Mr. Hamer continues to be employed on an at-will basis as Vice
President of Sales. Mr. Hamer has entered into a Non-compete Agreement effective
during the term of the employment agreement and for two years thereafter.
On September 30, 1996, we entered into employment agreements with Michael P.
Wallace and Joel K. Young, each of whom is a Transcrypt Vice President, and C.
Eric Baumann, who was a Transcrypt Vice President until his resignation
effective May 31, 1998. The agreements set forth base salaries and provided for
annual bonuses to be determined by the Board of Directors, and provided for
certain benefits, including paid vacations, pension benefits, qualified
profit-sharing plans, employee group insurance and disability insurance. The
term of each such agreement was for two years, unless otherwise terminated
according to the terms of the agreements. Each of these individuals entered into
a Non-compete
15
<PAGE>
Agreement effective during the term of each individual's employment agreement.
These employment agreements expired effective September 30, 1998.
On January 5, 1999, we entered into a letter agreement with Mr. Wallace, the
current Vice President of Operations, for a term ending on March 31, 1999. The
term of the agreement was subsequently extended to June 30, 1999. Under the
agreement, in the event Mr. Wallace is terminated due to the elimination of his
current position and is not offered suitable employment, he would be entitled to
receive his base salary, continuation of his current medical insurance and
outplacement services for a period of six months. In addition, Mr. Wallace would
have six months from the date of his termination to exercise any options that
had vested on or before the date of his termination. Further, under the
agreement, Mr. Wallace agrees to release any rights he may have in a claim or
cause of action against Transcrypt, to return all Transcrypt property and
confidential information and not to use of divulge and confidential information
without prior consent of the CEO.
In connection with their resignation from Transcrypt, Messrs. Baumann and
Fuller each entered into a Severance Agreement and Mutual Release with
Transcrypt effective May 31, 1998. The agreements provided compensation to Mr.
Fuller of approximately $333,785 and to Mr. Baumann of $158,756, less applicable
payroll taxes, for all unpaid monetary compensation for the period of June 1,
1998 through September 30, 1999 for Mr. Fuller and June 1, 1998 through March
31, 1999 for Mr. Baumann. Messrs. Fuller and Baumann will also receive the same
medical, dental, disability and life insurance benefits which each has received
from Transcrypt in the past until the earlier to occur of September 30, 1999 for
Mr. Fuller and March 31, 1999 for Mr. Baumann or each individual's procurement
of employment elsewhere. The severance agreements set forth that no additional
shares of Transcrypt common stock held by Messrs. Fuller and Baumann pursuant to
stock options shall vest or become vested after May 31, 1998. Any vested stock
options held by Messrs. Fuller and Baumann which are not exercised on or before
September 30, 1999 for Mr. Fuller or March 31, 1999 for Mr. Baumann shall
expire. The agreements also provide that the Indemnification Agreements
previously entered into between each of Messrs. Fuller and Baumann and
Transcrypt shall remain in full force and effect, subject to certain
modifications. The agreements also include provisions concerning (1)
non-competition and non-solicitation for the period ending September 30, 1999
for Mr. Fuller and March 31, 1999 for Mr. Baumann, (2) unauthorized disclosure
of certain trade secrets or confidential information, and (3) mutual releases of
certain claims.
On March 1, 1999, we entered into an employment agreement with Michael E.
Jalbert, our Chairman, President and CEO for a term beginning on March 1, 1999
and ending March 1, 2001. The employment agreement will automatically renew for
a two-year period at the expiration of its original term, unless Transcrypt or
Mr. Jalbert gives the other notice that they do not intend to renew the
agreement by November 1 preceding the March 1 termination date. The agreement
sets forth a base salary of $295,000 per year and provides for an annual bonus
in an amount targeted at 50% of base salary, if Transcrypt meets or exceeds
certain performance objectives set by the Board of Directors. Additionally, Mr.
Jalbert was paid a signing bonus of $150,000 and will receive an additional
bonus of $100,000 on the first anniversary of his employment date. The agreement
provides for certain benefits to Mr. Jalbert, including paid vacations, car
allowance, participation in our qualified profit sharing plans, and employee
group and disability insurance. The agreement provides for the grant to Mr.
Jalbert of 400,000 stock options of which 25% vest immediately and 25% vesting
on each subsequent anniversary of his employment over the next 3 years. In the
event of termination of the employment agreement after a change in control, as
defined in the agreement, (1) all of Mr. Jalbert's unvested options shall vest
immediately, (2) Transcrypt shall pay Mr. Jalbert a lump sum severance payment
equal to three years of base salary and will consider providing a transaction
bonus, and (3) Mr. Jalbert will continue to receive all benefits for one year
after termination. A change in control is defined in the agreement as a change
in the ownership of Transcrypt or a sale, assignment or transfer of all or
substantially all of its assets which results in a forced change in the majority
of the Board of Directors. The agreement provided for Mr. Jalbert to enter
concurrently into a separate confidentiality and Non-compete Agreement,
effective during the term of the agreement.
16
<PAGE>
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION AND REPRICING OF STOCK OPTIONS
The following Compensation Committee Report on Executive Compensation shall
not be deemed to be "soliciting material" or to be "filed" with the SEC or
subject to Regulations 14A or 14C or to the liabilities of Section 18 of the
Exchange Act and shall not be deemed incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Exchange Act,
notwithstanding any general incorporation by reference of this Proxy Statement
into any other document.
THE REPORT
The Compensation Committee of the Board of Directors (the "Committee") is
composed of three directors who are not also Transcrypt employees. The Committee
establishes Transcrypt's overall compensation and employee benefits and the
specific compensation of our executive officers. It is the Committee's goal to
implement executive officer compensation programs that further our business
objectives and that attract, retain and motivate the best qualified executive
officers.
We adopt and administer our executive compensation policies and specific
executive compensation programs in accordance with the principal goal of
maximizing return on stockholders' equity. The Committee believes that we can
best achieve our performance goal, and the long-term interests of our
stockholders generally by attracting and retaining management of high quality,
and that such management will require commensurate compensation. The Committee
believes that our executive officer compensation policies are consistent with
this policy.
Certain of our executive officers, including our current President and Chief
Executive Officer, Michael E. Jalbert, and the two individuals who served as our
Chief Executive Officer during 1998 John T. Connor and Jeffery L. Fuller, have
and had written, employment agreements with us (see "Employment Agreements,
Termination of Employment and Change of Control Arrangements" on pages 14-15
above). The Committee determines the levels of compensation granted in such
employment agreements, and the levels of compensation granted to other executive
officers from time to time based on factors that the Committee considers
appropriate. As indicated below, our overall financial performance is a key
factor the Committee considers in setting compensation levels for executive
officers.
The Committee determines annual compensation levels for executive officers,
including the Chief Executive Officer, and compensation levels which may be
implemented from time to time based primarily on its review and analysis of the
following factors: (1) the responsibilities of the position, (2) the performance
of the individual and his or her general experience and qualifications, (3) our
overall financial performance (including return on equity, levels of general and
administrative expense and budget variances) for the previous year and the
contributions to such performance measures by the individual or his or her
department, (4) the officer's total compensation during the previous year, (5)
compensation levels that comparable companies in similar industries (wireless
communications and information security) pay, (6) the officer's length of
service with us, and (7) the officer's effectiveness in dealing with external
and internal audiences. In addition, the Committee receives the recommendations
of the Chief Executive Officer with respect to the compensation of other
executive officers, which the Committee reviews in light of the above factors.
The Committee believes, based on a review of relevant compensation surveys, that
the base compensation of the executive officers is competitive with companies of
similar size and with comparable operating results in similar industries.
Another component of compensation for certain of our executive officers in 1998
was composed of sales commissions. No bonuses were paid to our Named Executive
Officers in 1998 for their performance other than sales commissions paid to
Messrs. Hamer and Young.
While the Committee establishes compensation levels based on the
above-described criteria, the Committee also believes that encouraging equity
ownership by executive officers further aligns the interests of the officers
with the performance objectives of our stockholders and enhances our ability to
17
<PAGE>
attract and retain highly qualified personnel on a basis competitive with
industry practices. We granted stock options pursuant to the 1996 Stock
Incentive Plan to four executive officers who joined us in 1998 to help achieve
this objective, and to provide additional compensation to the officers to the
extent that the price of the common stock increases over fair market value on
the date of grant. The Committee currently structures awards granted under the
1996 Stock Incentive Plan to qualify as "performance-based compensation" under
Section 162(m) of the Internal Revenue Code of 1986, as amended. Section 162(m)
allows us to preserve our right to take a tax deduction for compensation
attributable to these awards if certain requirements, which include the
achievement of certain performance goals, are met. Through the 1996 Stock
Incentive Plan, there will be an additional direct relationship between our
performance and benefits to executive officer Plan participants.
In July 1998, the Compensation Committee reviewed the executive officers'
outstanding stock options and determined that it was in the best interests of
Transcrypt and its stockholders to reprice options to purchase 50,000 shares of
Transcrypt common stock granted to Mr. Huffaker in January 1998 at an exercise
price of $25.00 per share. The Compensation Committee set the new exercise price
at $5.75 per share, the fair market value of Transcrypt common stock on July 20,
1998. Mr. Huffaker joined Transcrypt on January 19, 1998 and was granted the
option for the 50,000 shares at the then current market price of Transcrypt
common stock. This was prior to Transcrypt's public announcement in March 1998
that it would have to restate certain of its previously released financial
statements. As a result of the subsequent restatement of Transcrypt's financial
statements and the resulting class action lawsuits, SEC investigation and
various other events related to the restatement, Transcrypt's common stock price
declined. During this period, Mr. Huffaker's efforts were instrumental to the
management and resolution of the various issues related to the restatement.
Consequently, the Compensation Committee felt that Mr. Huffaker's options, with
an exercise price substantially above the current market price of Transcrypt's
common stock, would not sufficiently incentivize Mr. Huffaker. In recognition of
Mr. Huffaker's contribution to the resolution of the matters related to the
restatement of Transcrypt's financial statements, the Committee determined that
it would be in the best interests of Transcrypt and its stockholders to reprice
his options.
The principles that guided the Committee in determining our other executive
officers' compensation during the 1998 fiscal year also included the motivation
of employees to attain the highest level of performance and the ability to
attract, and retain qualified employees.
Members of the Compensation Committee of the Board of Directors:
Terry L. Fairfield, Chairman
Thomas R. Thomsen
Winston J. Wade
Dated: March 25, 1999
18
<PAGE>
PERFORMANCE GRAPH
The graph below compares the yearly cumulative return to stockholders (STOCK
PRICE APPRECIATION PLUS REINVESTED DIVIDENDS) for Transcrypt common stock with
the comparable return of two indexes: the Nasdaq Stock Market and the Nasdaq
Electronic Components Index. Points on the graph represent the performance
between January 22, 1997 and December 31, 1998. We used an eleven-month period
for 1997 since we went public, and began trading as a company, on January 22,
1997.
COMPARISON OF 23 MONTH CUMULATIVE TOTAL RETURN*
AMONG TRANSCRYPT INTERNATIONAL, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ ELECTRONIC COMPONENTS INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TRANSCRYPT INTERNATIONAL,
INC. NASDAQ STOCK MARKET (U.S.) NASDAQ ELECTRONIC COMPONENTS
<S> <C> <C> <C>
1/22/97 $100 $100 $100
3/97 $91 $95 $101
6/97 $139 $112 $108
9/97 $272 $131 $140
12/97 $311 $123 $105
3/98 $137 $143 $115
6/98 $42 $147 $107
9/98 $33 $133 $112
12/98 $35 $173 $162
</TABLE>
* $100 INVESTED on 1/22/97 in Transcrypt common stock or on 12/31/96 in
index-including reinvestment of dividends. Fiscal year ending Decmeber 31.
19
<PAGE>
DISCUSSION OF PROPOSALS RECOMMENDED BY THE BOARD
PROPOSAL 1: ELECT TWO DIRECTORS
The Board has nominated two directors for election at the Annual Meeting.
Mr. Henning is currently serving as one of our Class III Directors and Mr.
Jalbert is currently serving as one of our Class I Directors. Although Mr.
Jalbert is currently a Class I Director, he has been nominated as a Class III
Director. If he is elected as a Class III Director at this annual meeting, he
will cease effective immediately to be a Class I Director. If Mr. Jalbert is not
elected as a Class III Director at this annual meeting, he will continue as a
Class I Director. If you elect them, they will hold office until the annual
meeting in 2002 or until their successors have been elected or until they
resign. The Board is presently seeking additional qualified directors with
business experience that would prove an asset to the Board.
We know of no reason why any nominee may be unable to serve as a director.
If any nominee is unable to serve, your proxy may vote for another nominee
proposed by the Board, or the Board may reduce the number of directors to be
elected. If any director resigns, dies or is otherwise unable to serve out his
term, or the Board increases the number of directors, the Board may fill the
vacancy until the next annual meeting at which the Class that the director has
been appointed to will be elected.
NOMINEES
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
- ------------------------------------------ ---------------------------------------------------------------------
<S> <C>
Thomas E. Henning (46) Mr. Henning was appointed to serve the remaining term as director for
Harold S. Myers, a former director of Transcrypt who passed away in
December 1996. Mr. Henning previously served as director of
Transcrypt from February 1993 through July 1996. Mr. Henning has,
since February 1995, served as President, Chief Executive Officer and
director of The Security Mutual Life Insurance Company, a life
insurance, annuity and pension products company, and also serves as a
director of National Bank of Commerce, a subsidiary of First Commerce
Bancshares, Inc., a publicly held, exchange-listed bank holding
company. From March 1990 to February 1995, Mr. Henning served as
President and Chief Operating Officer of The Security Mutual Life
Insurance Company.
Michael E. Jalbert (54)................... Mr. Jalbert was appointed to serve as a director upon his hiring as
President and Chief Executive Officer on March 1, 1999. Mr. Jalbert
was elected Chairman of the Board of Directors on March 25, 1999.
Prior to joining Transcrypt, Mr. Jalbert served as President and
Chief Executive Officer of Microdyne Corporation, a Nasdaq listed
company, from March 1997 to February 1999. From 1995 to 1997, Mr.
Jalbert served as President and Chief Executive Officer of IDB
Communications. From 1992 to 1995, Mr. Jalbert was President of the
CSD division of Diversey Corporation. Mr. Jalbert joined the Diversey
Corporation from West Chemical Corporation, where he was President
and Chief Operating Officer from 1987 to 1992.
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION OF THE
TWO NOMINEES FOR DIRECTOR.
20
<PAGE>
PROPOSAL 2: APPROVE THE AMENDMENT TO OUR SECOND AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED VOTING SHARES
OF COMMON STOCK FROM 19,400,000 TO 25,000,000.
We are currently authorized by our Second Amended and Restated Certificate
of Incorporation to issue up to 19,400,000 shares of voting common stock. We are
also authorized to issue 600,000 shares of non-voting common stock. As of March
29, 1999, a total of 12,729,082 shares of voting common stock were outstanding
and 217,542 shares of non-voting common stock were outstanding. The 217,542
shares of non-voting common stock are currently owned by First Commerce
Bancshares, Inc. The Second Amended and Restated Certificate of Incorporation
currently provides that when shares of non-voting common stock cease to be owned
by First Commerce Bancshares, they will become shares of voting common stock and
that Transcrypt will have the authority to issue 20,000,000 shares of voting
common stock.
On March 25, 1999, the Board of Directors unanimously approved an amendment
to our Second Amended and Restated Certificate of Incorporation to increase the
number of authorized shares of voting common stock, $.01 par value, from
19,400,000 to 25,000,000. The proposed amendment would eliminate the provision
which calls for an increase in the authorized shares of voting common stock when
the shares of non-voting common stock cease to be owned by First Commerce
Bancshares.
Only 6,670,918 shares of voting common stock currently remain available for
issuance. Of the shares of voting common stock currently available for issuance,
1,888,400 shares of voting common stock are reserved for issuance under our 1996
Stock Incentive Plan and if you approve the 1999 Non-Employee Director Stock
Purchase Plan and Executive Officer Stock Purchase Plan, an additional 200,000
shares will be reserved for issuance under those plans. We have also previously
announced that during the fourth quarter of 1998 we established a special
provision of $10 million relating to the federal and state class action lawsuits
pending in Nebraska against Transcrypt and certain of its current and former
officers. While no settlement agreement has been reached, the $10 million
special provision is our best estimate of the amount that would be necessary for
us to contribute to settle the class actions. As previously stated, we would
anticipate satisfying any settlement by issuing shares of voting common stock to
class members rather than using our cash reserves. Based on recent prices for
our common stock, this would require the issuance of between approximately
3,000,000 to 4,000,000 shares of voting common stock. If all these shares of
voting common stock were issued under our plans and in connection with the class
action lawsuits, we would then only have between approximately 1,582,518 and
582,518 shares of voting common stock available for future issuance.
Consequently, under certain circumstances, we may not be able to issue
additional shares of common stock if necessary to raise additional funds to meet
our cash needs for working capital and capital expenditures, for any resolution
of our pending class action lawsuits, financing transactions, stock dividends,
stock splits in the form of stock dividends or for other corporate purposes
without first obtaining the approval of the stockholders. The proposed increase
in the number of authorized shares of voting common stock will afford us
additional flexibility to take advantage of business and financial needs and
opportunities without the delay and expense of seeking stockholder approval for
the authorization of additional stock.
The additional shares of voting common stock authorized by the proposed
amendment would have the same rights and privileges as the shares of voting
common stock currently authorized and issued. Our stockholders do not have
preemptive rights under our Second Amended and Restated Certificate of
Incorporation and will not have such rights with respect to the additional
authorized shares of voting common stock. Except for certain transactions
requiring stockholder approval under the Delaware General Corporation Law, the
Board of Directors may approve the issuance of authorized shares of common stock
at such times, to such persons and for all such consideration as it determines
without prior approval of or ratification by the stockholders.
21
<PAGE>
Other than for the possibility of issuing new shares of voting common stock
under our stock option or benefit plans, in connection with the pending class
action lawsuits and upon the sale of non-voting common stock by First Commerce
Bancshares, we have no present arrangements, commitments, understandings or
pending negotiations of the issuance of additional shares of newly authorized
voting common stock. The increase in the number of authorized shares of voting
common stock is not intended to deter or to prevent a change in control,
however, under certain circumstances, we could use the additional shares to
create voting impediments or to frustrate persons seeking to effect a takeover
or otherwise gain control of Transcrypt. We could also privately place the
additional shares with purchasers who might side with our Board of Directors in
opposing a hostile takeover bid although we have no present intention to do so.
Although our Board of Directors is required to make any determination to issue
shares of common stock based on its judgment as to the best interests of our
stockholders, the Board could act in a manner that could discourage an
acquisition attempt or other transaction that some, or a majority, of you might
believe to be in your best interests or in which you might receive a premium for
your shares above the then current market price of your shares.
Appendix A to this Proxy Statement sets forth the text of the specific
provision of the Second Amended and Restated Certificate of Incorporation to be
amended and the proposed amendment described above.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSED AMENDMENT
TO OUR SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION.
PROPOSAL 3: APPROVE THE 1999 NON-EMPLOYEE DIRECTOR STOCK PURCHASE PLAN
The Board of Directors adopted the 1999 Non-Employee Director Stock Purchase
Plan (the "Director Plan") on March 2, 1999, subject to your approval at the
Annual Meeting.
The Director Plan is designed to further align the interest of directors and
stockholders through increased ownership of Transcrypt common stock. The
Director Plan would enable our directors who are not also our employees to make
an election to receive all or a portion of their annual fees for services as a
member of the Board of Directors in shares of Transcrypt common stock at current
market prices. We believe that the Director Plan will aid us in reaching our
goal for each director to own at least 1,000 shares of common stock by year end
1999 and at least 5,000 shares by the end of their fifth year as a director.
While we recognize the possible dilutive effect on the stockholders, we believe,
on balance, the incentive that is provided by the opportunity for non-employee
directors to participate in the growth and earnings of Transcrypt through the
ability to receive Transcrypt common stock is important to our success and,
accordingly, will benefit Transcrypt and its stockholders.
A description of the material provisions of the proposed Director Plan
follows. We have also included, for your review, the full text of the Director
Plan which is attached to this Proxy Statement as Appendix B.
DESCRIPTION OF DIRECTOR PLAN
GENERAL PLAN INFORMATION
PURPOSE. The purposes of the Director Plan are to attract, motivate and
retain non-employee directors who elect to participate in the Director Plan by
offering them opportunities to increase their stock ownership in Transcrypt.
SUMMARY OF THE DIRECTOR PLAN. The Director Plan allows non-employee
directors of Transcrypt to elect voluntarily to receive all or a portion of
their fees for services as a member of the Board of Directors in shares of
Transcrypt common stock. Benefits of a participant under the Director Plan are
not assignable or transferable, except as provided in the Director Plan or by
applicable law, and the shares of common stock deliverable may be subject to
restrictions on transfer under applicable state or federal securities laws,
unless such shares are duly registered prior to issuance.
22
<PAGE>
EFFECTIVE DATE AND DURATION OF THE DIRECTOR PLAN. The Director Plan shall
become effective on the date the stockholders approve the Director Plan.
Participants may make elections under the Director Plan beginning with the first
quarter after the effective date. Unless earlier terminated by the Board, the
Director Plan will continue indefinitely subject to the continued availability
of either treasury shares or authorized, but unissued, shares of common stock.
However, no such termination shall affect the prior rights under the Director
Plan of anyone to whom shares have been transferred prior to such termination.
AMENDMENTS. The Board shall have the right to amend the Director Plan in
whole or in part; provided, however, that no amendment shall cancel or otherwise
adversely affect in any way any participant's rights with respect to any
outstanding amounts that the participant has elected to receive in shares of
common stock.
ADMINISTRATION. The Director Plan shall be administered by the Board or a
committee (the "Committee") of individuals appointed by the Board to administer
the Director Plan. The participating members of the Committee shall be
"non-employee directors" as defined in Rule 16b-3 under the Exchange Act, or any
successor rule or definition adopted by the SEC ("Rule 16b-3"), as to decisions
in respect of participants who are subject to Section 16 of the Exchange Act.
Subject to the provisions of the Director Plan, the Committee shall have the
authority to construe and interpret the Director Plan; to resolve questions
concerning the amount of benefits payable to a participant; to make all other
determinations required by the Director Plan; to maintain all necessary records
for the administration of the Director Plan; and to make and publish forms,
rules and procedures for the administration of the Director Plan.
SHARES SUBJECT TO DIRECTOR PLAN
NUMBER. The maximum number of shares of common stock that may be delivered
under the Director Plan is 100,000, subject to adjustment. Common stock which
may be issued under the Director Plan may be either treasury shares or
authorized, but unissued, shares of common stock.
ADJUSTMENT. In the event of any change in the outstanding shares of common
stock by reason of any stock dividend, stock split, recapitalization, merger,
consolidation, combination or other reorganization, exchange of shares, sale of
all or substantially all of the assets of Transcrypt, split-up, split-off,
spin-off, extraordinary redemption, liquidation or similar corporate change or
change in capitalization or any distribution to holders of our common stock
(other than normal periodic cash dividends), the Committee shall make such
proportionate and equitable adjustments consistent with the effect of such event
on stockholders generally, as it determines to be necessary or appropriate, so
as to preserve the benefits intended.
ELIGIBILITY
Only our non-employee directors are eligible to participate under the
Director Plan.
PARTICIPATION
A participant may join the Director Plan by providing us with written notice
of his or her election to participate and the portion and components of his
annual fees for services as a member of the Board, in increments of 25%, not to
exceed an aggregate of 100%, that he or she wishes to receive in shares of
common stock.
All fees paid pursuant to the Director Plan will be credited each quarter to
a share account. All amounts credited to a participant's account shall be at all
times fully vested and not subject to risk of forfeiture. Shares of common stock
issuable to a participant pursuant to the Director Plan shall be transferred to
such participant within 30 business days following the end of the quarter in
which any such compensation otherwise would have been paid and shall be valued
at the average fair market value of the common stock, as provided in the
Director Plan, during the last 10 trading days preceding the last business day
of such quarter. If a participant's service terminates, a participant's account
shall be distributed as soon as practicable in shares of common stock valued at
the average fair market value, but not later than 30
23
<PAGE>
business days after termination. A participant's election to join the Director
Plan shall be irrevocable for the year.
TAX EFFECTS OF DIRECTOR PLAN PARTICIPATION
The following discussion is only a summary of the principal federal income
tax consequences of the common stock to be granted under the Director Plan, and
is based on existing federal law (including administrative regulations and
rulings) which is subject to change, in some cases retroactively. This
discussion is also qualified by the particular circumstances of individual
participants, which may substantially alter or modify the federal income tax
consequences herein discussed.
A participant who elects to receive shares of common stock will recognize
ordinary compensation income in the amount of the fair market value of such
shares as of the date they are credited to his or her account and any cash
received in lieu of fractional shares. In addition, Transcrypt will be entitled
to a deduction for the amount included in the income of a participant.
The Director Plan is not a qualified plan under Section 401(a) of the
Internal Revenue Code of 1986, as amended.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE 1999
NON-EMPLOYEE DIRECTOR STOCK PURCHASE PLAN.
PROPOSAL 4: APPROVE THE 1999 EXECUTIVE OFFICER STOCK PURCHASE PLAN
The Board of Directors adopted the 1999 Executive Officer Stock Purchase
Plan (the "Executive Officer Plan") on March 2, 1999, subject to your approval
at the Annual Meeting.
The Executive Officer Plan is designed to further align the interest of
executive officers and stockholders through increased ownership of Transcrypt
common stock. The Executive Officer Plan would enable our executive officers,
who are selected by a designated committee to participate in the Executive
Officer Plan, to make an election to receive up to 2.5% of their annual
compensation in shares of Transcrypt common stock at 90% of fair market value.
We believe that the Executive Officer Plan will aid us in reaching our goal to
increase each executive officer's ownership of Transcrypt common stock. In
addition, the Executive Officer Plan will assist us in attracting and retaining
experienced and capable executive officers who can make significant
contributions to the growth and success of Transcrypt. While we recognize the
possible dilutive effect on the stockholders, we believe, on balance, the
incentive that is provided by the opportunity for executive officers to
participate in the growth and earnings of Transcrypt through the ability to
receive Transcrypt common stock is important to our success and, accordingly,
will benefit Transcrypt and its stockholders.
A description of the material provisions of the proposed Executive Officer
Plan follows. We have also included, for your review, the full text of the
Executive Officer Plan which is attached to this Proxy Statement as Appendix C.
DESCRIPTION OF EXECUTIVE OFFICER PLAN
GENERAL PLAN INFORMATION
PURPOSE. The purposes of the Executive Officer Plan are to attract,
motivate and retain selected executive officers who elect to participate in the
Executive Officer Plan by offering them opportunities to increase their stock
ownership in Transcrypt.
SUMMARY OF THE EXECUTIVE OFFICER PLAN. The Executive Officer Plan allows
selected executive officers of Transcrypt to elect voluntarily to receive up to
2.5% of their annual compensation in shares of Transcrypt common stock. Benefits
of a participant under the Executive Officer Plan are not assignable or
transferable, except as provided in the Executive Officer Plan or by applicable
law, and the shares of common stock deliverable may be subject to restrictions
on transfer under applicable state or federal securities laws, unless such
shares are duly registered prior to issuance.
24
<PAGE>
EFFECTIVE DATE AND DURATION OF THE EXECUTIVE OFFICER PLAN. The Executive
Officer Plan shall become effective on the date the stockholders approve the
Executive Officer Plan. Participants may make elections under the Executive
Officer Plan beginning with the first quarter after the effective date. Unless
earlier terminated by the Board, the Executive Officer Plan will continue
indefinitely subject to the continued availability of either treasury shares or
authorized, but unissued, shares of common stock. However, no such termination
shall affect the prior rights under the Executive Officer Plan of anyone to whom
shares have been transferred prior to such termination.
AMENDMENTS. The Board shall have the right to amend the Executive Officer
Plan in whole or in part; provided, however, that no amendment shall cancel or
otherwise adversely affect in any way any participant's rights with respect to
any outstanding amounts that the participant has elected to receive in shares of
common stock.
ADMINISTRATION. The Executive Officer Plan shall be administered by the
Board or a committee (the "Committee") of individuals appointed by the Board to
administer the Executive Officer Plan. The participating members of the
Committee shall be "non-employee directors" as defined in Rule 16b-3 under the
Exchange Act, or any successor rule or definition adopted by the SEC ("Rule
16b-3"), as to decisions in respect of participants who are subject to Section
16 of the Exchange Act. Subject to the provisions of the Executive Officer Plan,
the Committee shall have the authority to select executive officers for
participation in the Executive Officer Plan; to construe and interpret the
Executive Officer Plan; to resolve questions concerning the amount of benefits
payable to a participant; to make all other determinations required by the
Executive Officer Plan; to maintain all necessary records for the administration
of the Executive Officer Plan; and to make and publish forms, rules and
procedures for the administration of the Executive Officer Plan.
SHARES SUBJECT TO EXECUTIVE OFFICER PLAN
NUMBER. The maximum number of shares of common stock that may be delivered
under the Executive Officer Plan is 100,000, subject to adjustment. Common stock
which may be issued under the Executive Officer Plan may be either treasury
shares or authorized, but unissued, shares of common stock.
ADJUSTMENT. In the event of any change in the outstanding shares of common
stock by reason of any stock dividend, stock split, recapitalization, merger,
consolidation, combination or other reorganization, exchange of shares, sale of
all or substantially all of the assets of Transcrypt, split-up, split-off,
spin-off, extraordinary redemption, liquidation or similar corporate change or
change in capitalization or any distribution to holders of our common stock
(other than normal periodic cash dividends), the Committee shall make such
proportionate and equitable adjustments consistent with the effect of such event
on stockholders generally, as it determines to be necessary or appropriate, so
as to preserve the benefits intended.
ELIGIBILITY
Only our executive officers selected by the Committee are eligible to
participate under the Executive Officer Plan.
PARTICIPATION
A participant may join the Executive Officer Plan by providing us with
written notice of his or her election to participate and the portion of his
compensation, not to exceed 2.5% of annual compensation, that he or she wishes
to receive in shares of common stock.
All fees paid pursuant to the Executive Officer Plan will be credited each
quarter to a share account. All amounts credited to a participant's account
shall be at all times fully vested and not subject to risk of forfeiture. Shares
of common stock issuable to a participant pursuant to the Executive Officer Plan
shall be transferred to such participant within 30 business days following the
end of the quarter in which any such compensation otherwise would have been paid
and shall be valued at 90% of the average fair market value
25
<PAGE>
of the common stock, as provided in the Executive Officer Plan, during the last
10 trading days preceding the last business day of such quarter. If a
participant's service terminates, a participant's account shall be distributed
as soon as practicable in shares of common stock valued at the average fair
market value, but not later than 30 business days after termination. A
participant's election to join the Executive Officer Plan shall be irrevocable
for the year.
TAX EFFECTS OF EXECUTIVE OFFICER PLAN PARTICIPATION
The following discussion is only a summary of the principal federal income
tax consequences of the common stock to be granted under the Executive Officer
Plan, and is based on existing federal law (including administrative regulations
and rulings) which is subject to change, in some cases retroactively. This
discussion is also qualified by the particular circumstances of individual
participants, which may substantially alter or modify the federal income tax
consequences herein discussed.
A participant who elects to receive shares of common stock will recognize
ordinary compensation income in the amount of the fair market value of such
shares as of the date they are credited to his or her account and any cash
received in lieu of fractional shares. In addition, Transcrypt will be entitled
to a deduction for the amount included in the income of a participant. Tax
withholding obligations and payroll tax obligations will apply.
The Executive Officer Plan is not a qualified plan under Section 401(a) of
the Internal Revenue Code of 1986, as amended.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE 1999
EXECUTIVE OFFICER STOCK PURCHASE PLAN.
PROPOSAL 5: RATIFY THE SELECTION OF KPMG PEAT MARWICK LLP AS INDEPENDENT PUBLIC
ACCOUNTANTS FOR 1999
We are asking you to ratify the Board's selection of KPMG PEAT MARWICK LLP,
certified public accountants, ("KPMG") as independent public accountants for
1999.
On May 5, 1998, we retained KPMG as our principal accountants, replacing
Coopers & Lybrand L.L.P. now known as PriceWaterhouseCoopers L.L.P. ("Coopers")
which, on April 24, 1998, resigned as our principal accountants. In conjunction
with its resignation, Coopers advised us that their reports with respect to our
consolidated financial statements, as of and for the years ended December 31,
1995 and 1996, should no longer be relied upon and were withdrawn. Neither our
Board of Directors nor Audit Committee recommended the decision to change
accountants. KPMG was retained to audit our financial statements for the fiscal
years ended December 31, 1997 and 1998, and to reaudit our financial statements
for the fiscal years ended December 31, 1995 and 1996. Our Board of Directors
and Audit Committee unanimously recommended and approved the engagement of KPMG.
We have selected KPMG to audit our financial statements for 1999.
None of Coopers' reports on our consolidated financial statements as of and
for the years ended December 31, 1995 and 1996 or KPMG's reports on our
consolidated financial statements as of and for the years ended December 31,
1997 or 1998, contained any adverse opinion or a disclaimer of opinion, nor was
qualified or modified as to uncertainty, audit scope, or accounting principle.
During March and April 1998, we had a number of disagreements with Coopers
and reportable events that were reportable under Item 304(a) (1) (iv) and Item
304(a) (1) (v) of Regulation S-K promulgated by the SEC. These disagreements and
reportable events are described in our Current Report on Form 8-K filed with the
SEC on May 4,1998 (the "Initial 8-K"). The full text of the Initial 8-K, other
than the exhibit, is attached hereto as Appendix D. We have modified the text as
originally set forth in the Initial 8-K to add a number before each paragraph.
On May 18, 1998, we received the response of Coopers to the Initial 8-K. The May
18, 1998 response of Coopers was included as Exhibit 16 to our Current Report on
Form 8-K/A (Amendment No.1) filed with the SEC on May 20, 1998 ("Amendment to
the Initial 8-K"). A copy of the Amendment to the Initial 8-K is attached hereto
as Appendix E, except that the Initial 8-K which was
26
<PAGE>
attached to Coopers' response is not included because it is set forth in full in
Appendix D to the Proxy Statement. We authorized Coopers to respond fully to any
inquiries by KPMG.
Prior to engaging KPMG as our principal accountants, we retained KPMG to
perform a review under SAS No. 50 of the accounting principles applied by us to
certain transactions that were the subject of a disagreement with Coopers. KPMG
completed its preliminary review on April 28, 1998 and presented its preliminary
conclusions orally to our Audit Committee on such date, which conclusions
generally concurred with the views previously expressed by Coopers.
During our two most recent fiscal years ended December 31, 1997 and during
the interim period subsequent thereto until our consultations with KPMG
described above, we had not consulted with KPMG with respect to the application
of accounting principles to any specified transactions or the specific type of
audit opinion that might be rendered on our financial statements, and no written
report or oral advice was given to us other than a general discussion of
proposed services and anticipated fees, nor did we consult with KPMG during such
period with respect to the subject of any disagreement under Item 304(a)(l)(iv)
or reportable event under Item 304(a)(l)(v) of Regulation S-K.
A representative of KPMG will attend the Annual Meeting and be able to make
a statement and to answer your questions.
We are submitting this proposal to you because the Board believes that such
action follows sound corporate practice. If you do not ratify the selection of
independent public accountants, the Board will consider it a direction to
consider selecting other public accountants. However, even if you ratify the
selection, the Board may still appoint new independent public accountants at any
time during the year if it believes that such a change would be in the best
interests of Transcrypt and our stockholders.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" RATIFICATION OF THE SELECTION OF
KPMG PEAT MARWICK LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR 1999.
INFORMATION ABOUT STOCKHOLDER PROPOSALS
If you wish to submit proposals to be included in our 2000 proxy statement,
we must receive them, in a form which complies with the applicable securities
laws, on or before December 18, 1999. In addition, in the event a stockholder
proposal is not submitted to us prior to March 2, 2000, the proxy to be
solicited by the Board of Directors for the 2000 Annual Meeting will confer
authority on the holders of the proxy to vote the shares in accordance with
their best judgment and discretion if the proposal is presented at the 2000
Annual Meeting without any discussion of the proposal in the proxy statement for
such meeting. Please address your proposals to Transcrypt International, Inc.,
4800 NW First Street, Lincoln, Nebraska 68521. Attention: Corporate Secretary.
By order of the Board of Directors,
[LOGO]
R. Andrew Massey
CORPORATE SECRETARY
April 16, 1999
27
<PAGE>
APPENDIX A
PROPOSED AMENDMENT OF
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
TRANSCRYPT INTERNATIONAL, INC.
Section 4.1 of the Second Amended and Restated Certificate of Incorporation
of the Corporation which currently reads as follows:
"The Corporation is authorized to issue three classes of shares designated,
respectively, "Common Stock," "Non-Voting Common Stock" and "Preferred Stock."
The number of shares of Common Stock which the Corporation is authorized to
issue is nineteen million four hundred thousand (19,400,000) shares, par value
$0.01 per share. The number of shares of Non-Voting Common Stock which the
Corporation is authorized to issue is six hundred thousand (600,000), par value
$0.01 per share. The number of shares of Preferred Stock which the Corporation
is authorized to issue is three million (3,000,000) shares, par value $0.01 per
share. All issued and outstanding shares of Non-Voting Common Stock will become
Common Stock when it ceases to be owned by First Commerce Bancshares, Inc., its
subsidiaries or affiliates, or any of their successors and the Corporation will
have the authority to issue twenty million (20,000,000) shares of Common Stock,
all of which will be voting Common Stock."
is hereby amended in full to read as follows:
"The Corporation is authorized to issue three classes of shares designated,
respectively, "Common Stock," "Non-Voting Common Stock" and "Preferred Stock."
The number of shares of Common Stock which the Corporation is authorized to
issue is twenty-five million (25,000,000) shares, par value $0.01 per share. The
number of shares of Non-Voting Common Stock which the Corporation is authorized
to issue is six hundred thousand (600,000), par value $0.01 per share. The
number of shares of Preferred Stock which the Corporation is authorized to issue
is three million (3,000,000) shares, par value $0.01 per share. Each issued
share of Non-Voting Common Stock will become Common Stock when it ceases to be
owned by First Commerce Bancshares, Inc., its subsidiaries or affiliates, or any
of their successors."
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APPENDIX B
TRANSCRYPT INTERNATIONAL, INC.,
1999 NON-EMPLOYEE DIRECTOR STOCK PURCHASE PLAN
1. PURPOSES AND AUTHORIZED SHARES.
The purposes of this Transcrypt International, Inc., 1999 Non-Employee Director
Stock Purchase Plan (the "Plan") are to attract, motivate and retain Eligible
Non-Employee Directors of the Company who elect to participate in this Plan by
offering them opportunities to increase their stock ownership in the Company. An
aggregate number not to exceed 100,000 shares of Common Stock (subject to
adjustments described in the Plan) may be delivered pursuant to this Plan. Such
Common Stock may be either treasury shares or authorized, but unissued, shares
of Common Stock.
2. DEFINITIONS.
Whenever the following terms are used in this Plan they shall have the meaning
specified below unless the context clearly indicates to the contrary:
ACCOUNT or ACCOUNTS means the Participant's Share Account.
APPLICABLE PERCENTAGE means the percentage of Eligible Compensation subject to
payment in Shares.
AVERAGE FAIR MARKET VALUE means the average of the Fair Market Values of a share
of Common Stock during the last 10 trading days preceding the last business day
of the Quarter, or the date specified in Section 5.2.2 or Section 5.3.3 (if
applicable).
BOARD means the Board of Directors of the Company.
CODE means the Internal Revenue Code of 1986, as amended.
COMMON STOCK means the common stock of the Company, par value $.01.
COMMITTEE means the Board or a committee of the Board acting under delegated
authority from the Board.
COMPANY means Transcrypt International, Inc., a Delaware corporation, and its
successors and assigns.
EFFECTIVE DATE means the date of stockholder approval of the Plan.
ELIGIBLE COMPENSATION means retainer and meeting fees for services as a
director.
ELIGIBLE NON-EMPLOYEE DIRECTOR means a member of the Board, who is not an
officer or employee of the Company or a subsidiary, and who is compensated in
the capacity as a director and (with reference to any outstanding Account
balance under this Plan) any person who has an Account balance under this Plan
by reason of his or her prior status as an Eligible Non-Employee Director.
EXCHANGE ACT means the Securities and Exchange Act of 1934, as amended from time
to time.
FAIR MARKET VALUE means the market price of the Common Stock on the applicable
date, determined by the Committee as follows:
(i) If the Common Stock was traded over-the-counter on the date in question but
was not traded on the Nasdaq system or the Nasdaq National Market System, then
the Fair Market Value shall be equal to the mean between the last reported
representative bid and asked prices quoted for such date by the principal
automated inter-dealer quotation system on which the Common Stock is quoted or,
if the Common Stock is not quoted on any such system, by the "Pink Sheets"
published by the National Quotation Bureau, Inc.;
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(ii) If the Common Stock was traded over-the-counter on the date in question and
was traded on the Nasdaq system or the Nasdaq National Market System, then the
Fair Market Value shall be equal to the last-transaction price quoted for such
date by the Nasdaq system or the Nasdaq National Market System;
(iii) If the Common Stock was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite transactions report for such date; and
(iv) If none of the foregoing provisions is applicable, then the Fair Market
Value shall be determined by the Committee in good faith on such basis as it
deems appropriate.
In all cases, the determination of Fair Market Value by the Committee shall be
conclusive and binding on all persons.
PARTICIPANT means any person who elects to participate in this Plan or otherwise
has an Account balance under this Plan.
PLAN means this Transcrypt International, Inc., 1999 Non-Employee Director Stock
Purchase Plan, as amended from time to time.
QUARTER means each calendar quarter during the term of this Plan, commencing
with the beginning of the first calendar quarter after the Effective Date.
SHARES means treasury shares or authorized, but unissued, shares of Common
Stock.
SHARE ACCOUNT means an Account established under Section 5.1 pursuant to an
election under Section 4.
3. PARTICIPATION.
Each Eligible Non-Employee Director may elect to receive Shares in lieu of cash
compensation, under and subject to Section 4 of this Plan, for all or a portion
of his or her Eligible Compensation for any Quarter.
4. SHARE ELECTIONS.
On or before the December 31 immediately preceding each calendar year (or, in
the case of a person who first becomes an Eligible Non-Employee Director during
the calendar year, within 30 days after becoming an Eligible Non-Employee
Director), each Eligible Non-Employee Director may make an irrevocable election
to receive all or a portion of his or her Eligible Compensation for the calendar
year in Shares. In the case of the first Plan year, an Eligible Non-Employee
Director may make such election within 30 days after the Effective Date.
The portions of the Eligible Compensation subject to payment in Shares shall be
limited to increments of 0%, 25%, 50%, 75% or 100% (the "Applicable
Percentage"). All elections shall be in writing on forms provided by the
Company. If an election is made under this Section 4 and is not revoked or
changed with respect to the following calendar year by the end of the applicable
calendar year, the election will be deemed a continuing one.
5. ACCOUNTS.
5.1. SHARE ACCOUNTS.
If an Eligible Non-Employee Director has made a Share election under Section 4,
an amount equal to the Applicable Percentage of the Eligible Compensation shall
be withheld from fees during each Quarter and credited to a Share Account,
payable as provided in Section 5.3.
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5.2. IMMEDIATE VESTING AND ACCELERATED CREDITING.
5.2.1. Amounts Vest Immediately. All amounts credited to an Eligible
Non-Employee Director's Account shall be at all times fully vested and not
subject to a risk of forfeiture.
5.2.2. Acceleration of Crediting of Accounts. The crediting of the rights to
payment of each Participant in respect of his or her Account shall be
accelerated if an Eligible Non-Employee Director ceases to serve as a director
of the Company. In such case, the Average Fair Market Value shall be determined
as of the date of termination of service.
5.3. DISTRIBUTION OF SHARES.
5.3.1. Time and Manner of Distribution of Accounts. The Shares payable under
this Plan in respect of Share Accounts shall be delivered as soon as practicable
after completion of the Quarter (or shorter service period, in the event of
termination of service), but no later than 30 business days following (x) the
end of the Quarter or (y) the date of termination of service, if applicable. The
number of Shares deliverable shall be determined by (i) dividing the amount of
the Share Account (after crediting all amounts contemplated hereby) by the
Average Fair Market Value of the Company's Common Stock, and (ii) rounding the
number of Shares determined down to the nearest whole number of such Shares.
Cash shall be paid in lieu of fractional shares.
5.3.2. Acceleration of Share Account Distribution on Termination of Service. If
a Participant's service terminates, a Participant's Share Account (including
accelerated benefits under Section 5.2(b)), if any, shall be distributed as soon
as practicable, but no later than 30 business days thereafter, and the number
and valuation of the Shares will be based on the amount in the Account divided
by the Average Fair Market Value.
5.3.3. Acceleration. The Committee by declaration may accelerate any payment
date (using for valuation purposes the Average Fair Market Value as of the date
of its decision) in extraordinary circumstances where it determines that such
action is necessary or advisable to prevent a forfeiture or permit the
realization of intended benefits and is otherwise fair to the Participant and
the Company.
5.4. ADJUSTMENTS IN CASE OF CHANGES IN COMMON STOCK.
If there shall occur any change in the outstanding shares of the Company's
Common Stock by reason of any stock dividend, stock split, recapitalization,
merger, consolidation, combination or other reorganization, exchange of shares,
sale of all or substantially all of the assets of the Company, split-up,
split-off, spin-off, extraordinary redemption, liquidation or similar corporate
change or change in capitalization or any distribution to holders of the
Company's Common Stock (other than normal periodic cash dividends), the
Committee shall make such proportionate and equitable adjustments consistent
with the effect of such event on stockholders generally, as the Committee
determines to be necessary or appropriate, in the number, kind and/or character
of shares of Common Stock or other securities, property and/or rights
contemplated hereunder, including any appropriate adjustments to the market
prices used in the determination of the number of Shares, and in rights in
respect of Share Accounts credited under this Plan so as to preserve the
benefits intended.
6. ADMINISTRATION.
6.1. THE ADMINISTRATOR.
The Administrator of this Plan shall be the Board as a whole or a Committee as
appointed from time to time by the Board to serve as administrator of this Plan.
The participating members of any Committee so acting shall include, as to
decisions in respect of Participants who are subject to Section 16 of the
Exchange Act, only those members who are Non-Employee Directors (as defined in
Rule 16b-3 promulgated under
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the Exchange Act). Members of the Committee shall not receive any additional
compensation for administration of this Plan.
6.2. COMMITTEE ACTION.
A member of the Committee shall not vote or act upon any matter which relates
solely to himself or herself as a Participant in this Plan. Action of the
Committee with respect to the administration of this Plan shall be taken
pursuant to a majority vote or (assuming compliance with Section 6.1) by
unanimous written consent of its members.
6.3. RIGHTS AND DUTIES; DELEGATION AND RELIANCE; DECISIONS BINDING.
Subject to the limitations of this Plan, the Committee shall be charged with the
general administration of this Plan and the responsibility for carrying out its
provisions, and shall have powers necessary to accomplish those purposes,
including, but not by way of limitation, the following:
6.3.0.1. To construe and interpret this Plan;
6.3.0.2. To resolve any questions concerning the amount of benefits payable to a
Participant (except that no member of the Committee shall participate in a
decision relating solely to his or her own benefits);
6.3.0.3. To make all other determinations required by this Plan;
6.3.0.4. To maintain all the necessary records for the administration of this
Plan; and
6.3.0.5. To make and publish forms, rules and procedures for the administration
of this Plan.
The determination of the Committee made in good faith as to any disputed
question or controversy and the Committee's determination of benefits payable to
Participants, including decisions as to adjustments under Section 5.4, shall be
conclusive and binding for all purposes of this Plan. In performing its duties,
the Committee shall be entitled to rely on information, opinions, reports or
statements prepared or presented by: (1) officers or employees of the Company
whom the Committee believes to be reliable and competent as to such matters; and
(ii) counsel (who may be employees of the Company), independent accountants and
other persons as to matters which the Committee believes to be within such
persons' professional or expert competence. The Committee shall be fully
protected with respect to any action taken or omitted by it in good faith
pursuant to the advice of such persons. The Committee may delegate ministerial,
bookkeeping and other non-discretionary functions to individuals who are
officers or employees of the Company.
6.4. TAX WITHHOLDING.
To the extent the Committee deems tax withholding to be required with respect to
any amounts payable under this Plan under the Code or any other federal, state,
local or foreign law, the Committee may withhold such amounts and make
appropriate payments to the relevant tax authorities.
7. PLAN CHANGES AND TERMINATION.
7.1. AMENDMENTS.
The Board shall have the right to amend this Plan in whole or in part from time
to time or may at any time suspend or terminate this Plan; provided, however,
that, except as contemplated by Section 5.4, no amendment or termination shall
cancel or otherwise adversely affect in any way, without his or her written
consent, any Participant's rights with respect to then outstanding Accounts. Any
amendments authorized hereby shall be stated in an instrument in writing, and
all Participants shall be bound by the amendment upon receipt of notice of the
amendment.
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7.2. TERM.
It is the current expectation of the Company that this Plan shall continue
indefinitely, but subject to the continued availability of authorized Shares in
accordance with Section 1 above. Continuance of this Plan, however, is not
assumed as a contractual obligation of the Company. If the Board of Directors
decides to discontinue or terminate this Plan, it shall notify the Committee and
Participants in this Plan of its action in writing, and this Plan shall be
terminated at the time set forth in the notice. All Participants shall be bound
thereby. No benefits shall accrue under this Plan in respect of Eligible
Compensation earned after a discontinuance or termination of this Plan.
8. MISCELLANEOUS.
8.1. LIMITATION ON PARTICIPANT'S RIGHTS.
Participation in this Plan shall not give any person the right to serve as a
member of the Board or any rights or interests other than as herein provided.
This Plan shall create only a contractual obligation on the part of the Company
as to amounts payable hereunder and shall not be construed as creating a trust.
This Plan, in and of itself, has no assets. Participants shall have only the
rights of a general unsecured creditor of the Company with respect to amounts
credited and benefits payable, if any, on their Share Accounts. Participants
shall not be entitled to receive actual dividends or to vote Shares until after
delivery of a certificate representing the Shares.
8.2. BENEFICIARIES.
8.2.1. Beneficiary Designation. Upon forms provided by and subject to conditions
imposed by the Company, each Participant may designate in writing the
Beneficiary or Beneficiaries (as defined in Section 8.2.2) whom such Participant
desires to receive any amounts payable under this Plan after his or her death.
The Company and the Committee may rely on the Participant's designation of a
Beneficiary or Beneficiaries last filed in accordance with the terms of this
Plan.
8.2.2. Definition of Beneficiary. A Participant's "Beneficiary" or
"Beneficiaries" shall be the person, persons, trust or trusts (or similar
entity) designated by the Participant or, in the absence of a designation,
entitled by will or the laws of descent and distribution to receive the
Participant's benefits under this Plan in the event of the Participant's death,
and shall mean the Participant's executor or administrator if no other
Beneficiary is identified and able to act under the circumstances.
8.3. BENEFITS NOT TRANSFERABLE; OBLIGATIONS BINDING UPON SUCCESSORS.
Benefits of a Participant under this Plan shall not be assignable or
transferable and any purported transfer, assignment, pledge or other encumbrance
or attachment of any payments or benefits under this Plan, or any interest
therein, other than by operation of law or pursuant to Section 8.2, shall not be
permitted or recognized. Shares deliverable under this Plan may be subject to
restrictions on transfer under applicable securities laws, unless the Shares are
duly registered prior to issuance. Obligations of the Company under this Plan
shall be binding upon successors of the Company.
8.4. GOVERNING LAW; SEVERABILITY.
The validity of this Plan or any of its provisions shall be construed,
administered and governed in all respects under the laws of the State of
Delaware. If any provisions of this Plan shall be held by a court of competent
jurisdiction to be invalid or unenforceable, the remaining provisions hereof
shall continue to be fully effective.
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8.5. COMPLIANCE WITH LAWS.
This Plan and the offer, issuance and delivery of shares of Common Stock under
this Plan are subject to compliance with all applicable federal and state laws,
rules and regulations (including but not limited to state and federal securities
law) and to such approvals by any listing agency or any regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
this Plan shall be subject to prior registration or restrictions as the Company
may deem necessary or desirable to assure compliance with all applicable legal
requirements, and the person acquiring such securities shall, if requested by
the Company, provide such assurances and representations to the Company as it
may reasonably request to assure such compliance.
8.6. PLAN CONSTRUCTION.
It is the intent of the Company that transactions pursuant to this Plan satisfy
and be interpreted in a manner that satisfies the applicable conditions for
exemption under Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3") so
that the distribution of Shares hereunder will be entitled to the benefits of
Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act and
will not be subjected to avoidable liability thereunder. The Committee may,
subject to Sections 8.5, permit elections by individual directors that would not
qualify for exemption under Section 16(b) of the Exchange Act, so long as the
availability of any exemption thereunder for other directors under this Plan is
not compromised.
8.7. HEADINGS NOT PART OF PLAN.
Headings and subheadings in this Plan are inserted for reference only and are
not to be considered in the construction of the provisions hereof.
8.8. STOCKHOLDER APPROVAL.
This Plan shall become effective upon adoption of the Plan by the Board and
approval of the Company's stockholders in conformity with the bylaws of the
Company.
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APPENDIX C
TRANSCRYPT INTERNATIONAL, INC.,
1999 EXECUTIVE OFFICER STOCK PURCHASE PLAN
1. PURPOSES AND AUTHORIZED SHARES.
The purposes of this Transcrypt International, Inc., 1999 Executive Officer
Stock Purchase Plan (the "Plan") are to attract, motivate and retain Eligible
Executive Officers of the Company who elect to participate in this Plan by
offering them opportunities to increase their stock ownership in the Company. An
aggregate number not to exceed 100,000 shares of Common Stock (subject to
adjustments described in the Plan) may be delivered pursuant to this Plan. Such
Common Stock may be either treasury shares or authorized, but unissued, shares
of Common Stock.
2. DEFINITIONS.
Whenever the following terms are used in this Plan they shall have the meaning
specified below unless the context clearly indicates to the contrary:
ACCOUNT OR ACCOUNTS means the Participant's Share Account.
APPLICABLE PERCENTAGE means the percentage of Eligible Compensation subject to
payment in Shares.
AVERAGE FAIR MARKET VALUE means the average of the Fair Market Values of a share
of Common Stock during the last 10 trading days preceding the last business day
of the Quarter, or the date specified in Section 5.2 (b) or Section 5.3(c) (if
applicable).
BOARD means the Board of Directors of the Company.
CODE means the Internal Revenue Code of 1986, as amended.
COMMON STOCK means the common stock of the Company, par value $.01.
COMMITTEE means the Board or a committee of the Board acting under delegated
authority from the Board.
COMPANY means Transcrypt International, Inc., a Delaware corporation, and its
successors and assigns.
EFFECTIVE DATE means the date of stockholder approval of the Plan.
ELIGIBLE COMPENSATION means an Eligible Executive Officer's annual base salary
(as determined on January 1 of the calendar year to which the election hereunder
applies) for services as an officer of the Company.
ELIGIBLE EXECUTIVE OFFICER means an officer of the Company who is compensated in
the capacity as an executive officer, and who is selected for participation in
the Plan by the Committee, and (with reference to any outstanding Account
balance under this Plan) any person who has an Account balance under this Plan
by reason of his or her prior status as an Eligible Executive Officer.
EXCHANGE ACT means the Securities Exchange Act of 1934, as amended from time to
time.
FAIR MARKET VALUE means the market price of the Common Stock on the applicable
date, determined by the Committee as follows:
(i) If the Common Stock was traded over-the-counter on the date in question but
was not traded on the Nasdaq system or the Nasdaq National Market System, then
the Fair Market Value shall be equal to the mean between the last reported
representative bid and asked prices quoted for such date by the principal
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automated inter-dealer quotation system on which the Common Stock is quoted or,
if the Common Stock is not quoted on any such system, by the "Pink Sheets"
published by the National Quotation Bureau, Inc.;
(ii) If the Common Stock was traded over-the-counter on the date in question and
was traded on the Nasdaq system or the Nasdaq National Market System, then the
Fair Market Value shall be equal to the last-transaction price quoted for such
date by the Nasdaq system or the Nasdaq National Market System;
(iii) If the Common Stock was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite transactions report for such date; and
(iv) If none of the foregoing provisions is applicable, then the Fair Market
Value shall be determined by the Committee in good faith on such basis as it
deems appropriate.
In all cases, the determination of Fair Market Value by the Committee shall be
conclusive and binding on all persons.
PARTICIPANT means any person selected for participation in this Plan by the
Committee and who elects to participate in this Plan or otherwise has an Account
balance under this Plan.
PLAN means this Transcrypt International, Inc., 1999 Executive Officer Stock
Purchase Plan, as amended from time to time.
QUARTER means each calendar quarter during the term of this Plan, commencing
with the beginning of the first calendar quarter after the Effective Date.
SHARES means treasury shares or authorized, but unissued, shares of Common
Stock.
SHARE ACCOUNT means an Account established under Section 5.1 pursuant to an
election under Section 4.
3. PARTICIPATION.
Each Eligible Executive Officer may elect to receive Shares in lieu of cash
compensation under and subject to Section 4 of this Plan for a portion of his or
her Eligible Compensation for any calendar year. The Committee shall select
which employees shall be Eligible Executive Officers for a calendar year in its
sole discretion by so notifying such persons in writing.
4. SHARE ELECTIONS.
On or before the December 31 immediately preceding each calendar year (or, in
the case of a person who first becomes an Eligible Executive Officer during the
calendar year, within 30 days after becoming an Eligible Executive Officer) each
Eligible Executive Officer may make an irrevocable election to receive a portion
of his or her Eligible Compensation for the calendar year in Shares. In the case
of the first Plan year, an Eligible Executive Officer may make such election
within 30 days after the Effective Date.
The portions of the Eligible Compensation subject to payment in Shares shall be
limited to no more than 2.5% of Eligible Compensation of the applicable calendar
year (the "Applicable Percentage"). All elections shall be in writing on forms
provided by the Company.
5. ACCOUNTS.
5.1 SHARE ACCOUNTS.
If an Eligible Executive Officer has made a Share election under Section 4, an
amount equal to the Applicable Percentage of the Eligible Compensation shall be
withheld from base salary during each Quarter and credited to a Share Account,
payable as provided in Section 5.3.
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5.2 IMMEDIATE VESTING AND ACCELERATED CREDITING.
(a) Amounts Vest Immediately. All amounts credited to an Eligible Executive
Officer's Account shall be at all times fully vested and not subject to a risk
of forfeiture.
(b) Acceleration of Crediting of Accounts. The crediting of the rights to
payment of each Participant in respect of his or her Account shall be
accelerated if an Eligible Executive Officer ceases to serve as an officer or
employee of the Company. In such case, the Average Fair Market Value shall be
determined as of the date of termination of service.
5.3 DISTRIBUTION OF SHARES.
(a) Time and Manner of Distribution of Accounts. The Shares payable under this
Plan in respect of Share Accounts shall be delivered as soon as practicable
after completion of the applicable Quarter (or shorter service period, in the
event of termination of service), but no later than 30 business days following
(x) the end of the Quarter or (y) the date of termination of service, if
applicable. The number of Shares deliverable shall be determined by (i) dividing
the amount of the Share Account (after crediting all amounts contemplated
hereby) by 90% of the Average Fair Market Value of the Company's Common Stock,
and (ii) rounding the number of Shares determined down to the nearest whole
number of such Shares. Cash shall be paid in lieu of fractional shares.
(b) Acceleration of Share Account Distribution on Termination of Service. If a
Participant's service terminates, a Participant's Share Account (including
accelerated benefits under Section 5.2(b)), if any, shall be distributed as soon
as practicable, but not later than 30 business days thereafter, and the number
and valuation of the Shares will be based on the amount in the Account divided
by 90% of Average Fair Market Value.
(c) Acceleration. The Committee by declaration may accelerate any payment date
(using for valuation purposes the Average Fair Market Value as of the date of
its decision) in extraordinary circumstances where it determines that such
action is necessary or advisable to prevent a forfeiture or permit the
realization of intended benefits and is otherwise fair to the Participant and
the Company.
5.4 ADJUSTMENTS IN CASE OF CHANGES IN COMMON STOCK.
If there shall occur any change in the outstanding shares of the Company's
Common Stock by reason of any stock dividend, stock split, recapitalization,
merger, consolidation, combination or other reorganization, exchange of shares,
sale of all or substantially all of the assets of the Company, split-up,
split-off, spin-off, extraordinary redemption, liquidation or similar corporate
change or change in capitalization or any distribution to holders of the
Company's Common Stock (other than normal periodic cash dividends), the
Committee shall make such proportionate and equitable adjustments consistent
with the effect of such event on stockholders generally, as the Committee
determines to be necessary or appropriate, in the number, kind and/or character
of shares of Common Stock or other securities, property and/or rights
contemplated hereunder, including any appropriate adjustments to the market
prices used in the determination of the number of Shares, and in rights in
respect of Share Accounts credited under this Plan so as to preserve the
benefits intended.
6. ADMINISTRATION.
6.1 THE ADMINISTRATOR.
The Administrator of this Plan shall be the Board as a whole or a Committee as
appointed from time to time by the Board to serve as administrator of this Plan.
The participating members of any Committee so acting shall include, as to
decisions in respect of Participants who are subject to Section 16 of the
Exchange Act, only those members who are Non-Employee Directors (as defined in
Rule 16b-3 promulgated under
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the Exchange Act). Members of the Committee shall not receive any additional
compensation for administration of this Plan.
6.2 COMMITTEE ACTION.
A member of the Committee shall not vote or act upon any matter which relates
solely to himself or herself as a Participant in this Plan. Action of the
Committee with respect to the administration of this Plan shall be taken
pursuant to a majority vote or (assuming compliance with Section 6.1) by
unanimous written consent of its members.
6.3 RIGHTS AND DUTIES; DELEGATION AND RELIANCE; DECISIONS BINDING.
Subject to the limitations of this Plan, the Committee shall be charged with the
general administration of this Plan and the responsibility for carrying out its
provisions, and shall have powers necessary to accomplish those purposes,
including, but not by way of limitation, the following:
(1) To construe and interpret this Plan;
(2) To resolve any questions concerning the amount of benefits payable to a
Participant (except that no member of the Committee shall participate in a
decision relating solely to his or her own benefits);
(3) To make all other determinations required by this Plan;
(4) To maintain all the necessary records and procedures for the administration
of this Plan; and
(5) To make and publish forms, rules and procedures for the administration of
this Plan.
The determination of the Committee made in good faith as to any disputed
question or controversy and the Committee's determination of benefits payable to
Participants, including decisions as to adjustments under Section 5.4, shall be
conclusive and binding for all purposes of this Plan. In performing its duties,
the Committee shall be entitled to rely on information, opinions, reports or
statements prepared or presented by: (i) officers or employees of the Company
whom the Committee believes to be reliable and competent as to such matters;
(ii) counsel (who may be employees of the Company), independent accountants and
other persons as to matters which the Committee believes to be within such
persons' professional or expert competence. The Committee shall be fully
protected with respect to any action taken or omitted by it in good faith
pursuant to the advice of such persons. The Committee may delegate ministerial,
bookkeeping and other non-discretionary functions to individuals who are
officers or employees of the Company.
6.4 TAX WITHHOLDING.
To the extent the Committee deems tax withholding to be required with respect to
any amounts payable under this Plan under the Code or any other federal, state,
local or foreign law, the Committee may withhold such amounts and make
appropriate payments to the relevant tax authorities.
7. PLAN CHANGES AND TERMINATION.
7.1 AMENDMENTS.
The Board shall have the right to amend this Plan in whole or in part from time
to time or may at any time suspend or terminate this Plan; provided, however,
that, except as contemplated by Section 5.4, no amendment or termination shall
cancel or otherwise adversely affect in any way, without his or her written
consent, any Participant's rights with respect to then outstanding Accounts. Any
amendments authorized hereby shall be stated in an instrument in writing, and
all Participants shall be bound by the amendment upon receipt of notice of the
amendment.
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7.2 TERM.
It is the current expectation of the Company that this Plan shall continue
indefinitely, but subject to the continued availability of authorized shares in
accordance with Section 1 above. Continuance of this Plan, however, is not
assumed as a contractual obligation of the Company. If the Board of Directors
decides to discontinue or terminate this Plan, it shall notify the Committee and
Participants in this Plan of its action in writing, and this Plan shall be
terminated at the time set forth in the notice. All Participants shall be bound
thereby. No benefits shall accrue under this Plan in respect of Eligible
Compensation earned after a discontinuance or termination of this Plan.
8. MISCELLANEOUS
8.1 LIMITATION ON PARTICIPANTS' RIGHTS.
Participation in this Plan shall not give any person the right to serve as an
officer or employee of the Company or any of its subsidiaries or any rights or
interests other than as herein provided. This Plan shall create only a
contractual obligation on the part of the Company as to amounts payable
hereunder and shall not be construed as creating a trust. This Plan, in and of
itself, has no assets. Participants shall have only the rights of a general
unsecured creditor of the Company with respect to amounts credited and benefits
payable, if any, on their Share Accounts. Participants shall not be entitled to
receive actual dividends or to Shares until after delivery of a certificate
representing the Shares.
8.2 BENEFICIARIES.
(a) Beneficiary Designation. Upon forms provided by and subject to conditions
imposed by the Company, each Participant may designate in writing the
Beneficiary or Beneficiaries (as defined in Section 8.2(b)) whom such
Participant desires to receive any amounts payable under this Plan after his or
her death. The Company and the Committee may rely on the Participant's
designation of a Beneficiary or Beneficiaries last filed in accordance with the
terms of this Plan.
(b) Definition of Beneficiary. A Participant's "Beneficiary" or "Beneficiaries"
shall be the person, persons, trust or trusts (or similar entity) designated by
the Participant or, in the absence of a designation, entitled by will or by laws
of descent and distribution to receive the Participant's benefits under this
Plan in the event of the Participant's death, and shall mean the Participant's
executor or administrator if no other Beneficiary is identified and able to act
under the circumstances.
8.3 BENEFITS NOT TRANSFERABLE; OBLIGATIONS BINDING UPON SUCCESSORS.
Benefits of a Participant under this Plan shall not be assignable or
transferable and any purported transfer, assignment, pledge or other encumbrance
or attachment of any payments or benefits under this Plan, or any interest
therein, other than by operation of law or pursuant to Section 8.2, shall not be
permitted or recognized. Shares deliverable under this Plan may be subject to
restrictions on transfer under applicable securities laws, unless the Shares are
duly registered prior to issuance. Obligations of the Company under this Plan
shall be binding upon successors of the Company.
8.4 GOVERNING LAW; SEVERABILITY.
The validity of this Plan or any of its provisions shall be construed,
administered and governed in all respects under the laws of the State of
Delaware. If any provisions of this Plan shall be held by a court of competent
jurisdiction to be invalid or unenforceable, the remaining provisions hereof
shall continue to be fully effective.
C-5
<PAGE>
8.5 COMPLIANCE WITH LAWS.
This Plan and the offer, issuance and delivery of shares of Common Stock under
this Plan are subject to compliance with all applicable federal and state laws,
rules and regulations (including but not limited to state and federal securities
law) and of such approvals by any listing agency or any regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
this Plan shall be subject to prior registration or such restrictions as the
Company may deem necessary or desirable to assure compliance with all applicable
legal requirements, and the person acquiring such securities shall, if requested
by the Company, provide such assurance and representations to the Company as it
may reasonably request to assure such compliance.
8.6 PLAN CONSTRUCTION.
It is the intent of the Company that transactions pursuant to this Plan satisfy
and be interpreted in a manner that satisfies the applicable conditions for
exemption under Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3") so
that the distribution of Shares hereunder will be entitled to the benefits of
Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act and
will not be subjected to avoidable liability thereunder. The Committee may,
subject to Section 8.5, permit elections by individual officers that would not
quality for exemption under Section 16(b) of the Exchange Act, so long as the
availability of any exemption thereunder for other officers this Plan is not
compromised.
8.7 HEADINGS NOT PART OF PLAN.
Headings and subheadings in this Plan are inserted for reference only and are
not to be considered in the construction of the provisions hereof.
8.8 STOCKHOLDER APPROVAL.
This Plan shall become effective upon adoption of the Plan by the Board and
approval of the Company's stockholders in conformity with the bylaws of the
Company.
C-6
<PAGE>
APPENDIX D
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
------------------
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 24, 1998
------------------------
TRANSCRYPT INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 0-21681 47-0801192
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification Number)
</TABLE>
4800 NW FIRST STREET, LINCOLN, NEBRASKA 68521
(Address of Principal Executive Offices and Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (402) 474-4800
<PAGE>
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
1. (i) On April 24, 1998, Coopers & Lybrand L.L.P. ("Coopers") resigned as the
principal accountants of Transcrypt International, Inc. (the "Company"). On
April 27, 1998, the Company issued a news release disclosing this information,
among other things. The full text of that news release is filed herewith as
Exhibit 99.1 and is incorporated by reference herein.
2. In conjunction with its resignation, Coopers advised the Company that their
reports with respect to the consolidated financial statements of the Company and
its subsidiaries, as of and for the years ended December 31, 1995 and 1996,
should no longer be relied upon and are withdrawn. As of the date of this
Report, the Company is in the process of retaining a new independent accountant.
3. (ii) None of Coopers' reports on the financial statements of the Company and
its subsidiaries as of and for the years ended December 31, 1995 and 1996
contained any adverse opinion or a disclaimer of opinion, nor was qualified or
modified as to uncertainty, audit scope, or accounting principle. An audit
report on the financial statements of the Company and its subsidiaries as of and
for the year ended December 31, 1997 has not yet been issued.
4. (iii) Neither the Company's Board of Directors nor its Audit Committee
recommended the decision to change accountants.
5. (iv) Prior to its resignation on April 24, 1998, Coopers had been the
independent public accountant of the Company since 1992, and representatives of
Coopers have worked closely with the Company's management in connection with the
Company's financial statements. Coopers performed timely interim reviews of the
Company's quarterly financial statements since the Company's initial public
offering and reviewed significant year-end and quarter-end sales. Coopers also
worked with management in establishing appropriate accounting policies,
procedures and controls, including specific revenue recognition policies.
6. During the Company's two most recent fiscal years and subsequent interim
period through mid- to late-March 1998, the Company received no indication from
Coopers regarding a disagreement on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Coopers, would have caused
Coopers to make reference to the subject matter of the disagreement in
connection with any of its reports, nor did the Company receive any indication
from Coopers regarding any other reportable event under Rule 304. Coopers
consented to the inclusion of its audit reports in connection with the Company's
two public offerings completed on January 22, 1997 and October 15, 1997, and
provided "comfort letters" in connection with such offerings. On February 6,
1998, the Company released its financial results for 1997 via a public press
release. The audit partner of Coopers read and took no exception to such press
release prior to its issuance.
7. During late February and March 1998, Coopers informed the Company that
Coopers had received several anonymous letters and one anonymous telephone call
which, among other things, questioned the accounting practices of the Company
relating primarily to certain sales transactions and alleged wrongdoing in
connection therewith. Beginning shortly after the receipt of the first letter,
meetings were held involving management of the Company, members of the Company's
Audit Committee and the Coopers audit partner. At an Audit Committee meeting
held on March 4, 1998 attended by the Coopers audit partner, Coopers indicated
that the Company's reserve for receivables was adequate based on information
currently available to it, and that the sales transactions referred to in the
first anonymous letter had been recorded consistent with the Company's revenue
recognition procedures, as previously approved by Coopers. On March 5, 1998, the
Company issued a press release referring to the first anonymous letter and
stating that the Company continued to stand by its previously issued financial
statements and publicly announced financial results, but was continuing to
investigate these matters. The audit partner of Coopers read and took no
exception to such press release prior to its issuance.
D-1
<PAGE>
8. In mid-March 1998, the Company learned that the National Office of Coopers
had become involved in the review of issues raised in the anonymous letters.
During the week of March 23, 1998, a representative of the National Office held
several meetings with Company management and one meeting with members of the
Company's Audit Committee. The Company also was advised that the National Office
representative began to review Coopers' workpapers. On March 26, 1998, in a
meeting attended by the Coopers audit partner and National Office
representative, members of the Audit Committee and certain members of
management, the Company was advised orally that Coopers was still in the process
of reviewing and examining the workpapers relating to the 1997 audit and that
adjustments would be required to previously announced financial results for
1997, although Coopers stated that it was not yet in a position to quantify such
adjustments. On March 27, 1998, the Company issued a press release indicating
that its 1997 Annual Report on Form 10-K would be delayed and that adjustments
would be made to the Company's previously announced results.
9. In a number of subsequent meetings held in late March and in April 1998
between Coopers and Audit Committee members and Coopers and management of the
Company, Coopers described adjustments that it was considering recommending
regarding the Company's 1997 financial statements and that such adjustments
might impact the Company's 1996 fiscal year. During this time, the Company
provided additional documentation and information to Coopers regarding the
transactions at issue.
10. During its meetings with Coopers, representatives of the Company questioned
Coopers regarding the basis and support for its proposed adjustments under
generally accepted accounting principles ("GAAP") and discussed with Coopers the
Company's reliance on Coopers' prior review of certain of these transactions and
audits. On April 3, 1998, the Board of Directors of the Company met and, due to
its belief that Coopers had a potential conflict of interest in reviewing its
prior work, authorized the Audit Committee to retain another major independent
accounting firm to review, under SAS No. 50, the accounting principles applied
to the transactions in question and report whether the accounting principles
applied were in accordance with GAAP. Such independent accountant was retained
by the Company. In addition, the Audit Committee retained independent counsel to
conduct an investigation and advise the Audit Committee in connection with
certain matters, concurring with Coopers' advice that it must do so.
11. On the afternoon of April 23, Company management spoke with representatives
of the other major accounting firm to discuss their SAS No. 50 review. On the
morning of April 24, 1998, special counsel for the Audit Committee contacted
Coopers' outside counsel telephonically and informed such counsel that the
Company would agree to Coopers' proposed accounting treatment of the
transactions in question, and requested that Coopers proceed with completion of
the audit. Promptly thereafter, Coopers' outside counsel called back the special
counsel to the Audit Committee and informed such special counsel that Coopers
would be contacting the Audit Committee, and further that the members of the
special counsel's law firm would not be permitted to review Coopers' workpapers
that day as previously agreed. Shortly thereafter, representatives of Coopers
held a conference call with the Audit Committee Chairman and notified the
Chairman that Coopers was resigning, effective immediately, as the Company's
independent accountant, and that Coopers was withdrawing its audit reports
relating to the Company's 1995 and 1996 financial statements.
12. Set forth below is a description of the disagreements between Coopers and
the Company reportable under Rule 304(a)(1)(iv). These items were discussed
between Coopers and members of the Audit Committee at various times in late
March or in April 1998. The Company has authorized Coopers to respond fully to
inquiries of the successor accountant (when retained), including inquiries
concerning these matters.
1. E.F. JOHNSON COMPANY
13. (a) Revenue Recognition for Systems Contracts. E.F. Johnson Company ("EFJ")
is the Company's wholly-owned, consolidated subsidiary acquired on July 31,
1997. Certain contract revenues totaling approximately $2,626,000 were recorded
by EFJ during the fourth quarter of 1997. EFJ had historically
D-2
<PAGE>
recognized revenues on system contracts using the "percentage of completion"
method, applying the ratio of costs incurred to date to the total cost of the
system. In late March 1998, Coopers informed the Company that costs of purchased
materials, even though incurred, should not be included in the percentage of
completion calculation until installation and integration of such materials into
the system has at least begun. The Company intends to make this change, which
will result in a substantial downward adjustment in the Company's 1997 annual
and fourth quarter consolidated operating results.
14. (b) Revenue Recognition for License of Technology. Revenue from a license of
technology by EFJ totaling $300,000 was recorded in the fourth quarter of 1997
based upon the electronic delivery to the customer in that quarter of certain
technical know-how and documentation. Coopers' current position is that, since
the customer had a cancellation right and the payment terms extend beyond one
year, revenue should be recognized on an installment basis. The Company notes
that although the purchase agreement initially contained a cancellation right,
it was amended to eliminate such right prior to issuance of the Company's 1997
financial results. Nevertheless, the Company will recognize revenue on these
sales as payments are received. This change will result in a downward adjustment
in the Company's 1997 annual and fourth quarter consolidated operating results.
15. (c) Opening Balance Sheet of EFJ. EFJ's finished goods and work in process
inventory at July 31, 1997 totaled approximately $3 million. In connection with
its acquisition of EFJ, the Company did not believe that it was appropriate to
adjust such inventories to allocate a portion of the purchase price for
potential manufacturing profit on these inventories. Coopers reviewed the
allocation of purchase cost of EFJ at the time of the acquisition and provided
substantial assistance to the Company in preparing the opening balance sheet of
EFJ. On March 31, 1998, Coopers informed the Company that inventories should
have been adjusted for the manufacturing profit included in inventory at the
acquisition date. The Company intends retroactively to reduce goodwill and
increase inventories of EFJ by the amount of the manufacturing profit included
in inventory at the date of acquisition, effective July 31, 1997. No final
determination has been made at this time regarding the amounts of the
adjustments. The Company believes that these changes may impact the annual and
third and fourth quarter consolidated operating results for 1997.
16. A second issue is whether the opening balance sheet should have been
adjusted to reduce a $500,000 bad debt reserve that was established by EFJ with
respect to a receivable from a specific customer. The Company ultimately
collected the receivable after the customer received third party financing of
$30 million in the first quarter of 1998, and the Company left the $500,000
reserve on the books. In connection with Coopers' audit for 1997, Coopers
informed the Company that the Company could not make any adjustments
retroactively to the EFJ opening balance sheet. Coopers' current position is
that this recovery should have been reflected retroactively by reducing the
goodwill recorded in the purchase allocation and eliminating the reserve that
had been established. This change could impact the annual and the third and
fourth quarter consolidated operating results for 1997. The Company is currently
evaluating these issues, including whether Coopers' current position is
consistent with SFAS No. 38, as interpreted in Staff Accounting Bulletin No. 92.
2. TRANSCRYPT INTERNATIONAL, INC.
17. (a) Revenue Recognition on Certain Government Agency Sales. The Company
recorded revenues on a number of "quick ship" sales involving national security
to a federal government agency based on the shipment of products. This quick
ship process began in mid-1996 and initially involved the receipt by the Company
from the customer of oral orders that included a federal purchase request
number. Later, in the second quarter of 1997, at the recommendation of Coopers,
this process was modified to include the receipt of a "pro forma invoice" order
signed by the customer reflecting all of the material terms and conditions of
the sale. The customer, in the usual course of business, would subsequently
reduce the transaction to a formal written agreement. Coopers has now advised
the Company that such revenues should not have been recorded until a formal
written agreement was received, on the grounds that the federal government's
commitment may not have been perfected until that time. The Company intends to
D-3
<PAGE>
adjust its historical financial statements to delay recognition of the full
amount of these revenues until the period that a formal written agreement was
received, and intends to follow this procedure in the future. This change will
impact the timing of revenue recognition in the Company's 1997 consolidated
operating results and may impact the 1996 consolidated operating results.
18. In addition, the Company also recorded, during the second and third quarters
of 1997, revenues totaling approximately $2.2 million on sales for which the
Company has not received formal written agreements from the federal government
agency customer. On March 25, 1998, the customer advised the Company in writing
that the person with whom the Company had been dealing in the past in these
transactions did not have the authority to bind the government. The customer
also advised the Company that it would not ratify these transactions pursuant to
the Company's ratification request dated March 11, 1998. On March 25, 1998, the
Company filed a certified claim to recover the amounts due on these sales.
Coopers' position is that in light of these facts, these revenues must be
reversed in their entirety. The Company intends to eliminate these revenues from
its consolidated 1997 operating results and will only recognize these revenues
if this claim is favorably resolved.
19. (b) Revenue Recognition on Sales to Certain International Dealers and
Distributors. In mid-March 1998, Coopers reevaluated a number of sales by the
Company to certain international dealers and distributors during 1997. Coopers
indicated that some of the dealers and distributors appeared to lack a
commitment and ability to pay for the products, and therefore the sales should
not have been recorded on the accrual basis. This disagreement relates to the
Company's program to offer financing for the purchase of the Company's products
by certain international dealers and distributors to further develop the
Company's distribution channels. At the time of each of these sales, the Company
received a written purchase order from the customer, and the Company believed
that each of these customers had the ability to pay for the products. The
Company currently believes that potential eliminations and adjustments to the
timing of revenues involve sales totaling an estimated $2.0 million in 1997. The
Company is continuing to review this issue, including the magnitude and timing
of any adjustments in 1997, whether any additional 1997 sales would be involved
and whether any adjustments may be required to 1996 consolidated operating
results.
20. (c) Other Revenue Recognition Issue. The Company believes that Coopers first
raised this issue as a disagreement subsequent to its resignation on April 24,
1998. According to Coopers, the Company recorded revenues based upon shipments
to certain customers who had an explicit right to exchange the product for other
products. Coopers' position is that revenues on these sales should not have been
recorded until a final sale was consummated. Coopers has indicated that
adjustments will impact the annual and quarterly consolidated operating results
for 1997, but does not know whether 1996 and 1995 will be affected. The Company
is currently evaluating this issue.
21. (v) Set forth below is a description of the events reportable under Rule
304(a)(1)(v). The Company, and with respect to certain matters, the special
counsel to the Audit Committee, are currently evaluating these issues:
22. (A) Internal Controls: Coopers has informed the Company that it believes
that the Company's internal controls over the proper recording of revenue
transactions were deficient.
23. (B) Reliance on management representations/association with financial
statements prepared by management: Coopers has informed the Company's Audit
Committee in meetings in late March and in April 1998 that it believes that it
was possible that illegal acts may have been committed by Company personnel,
including management. In this regard, Coopers recommended that the Audit
Committee retain independent counsel to conduct a special investigation into
possible illegal acts. The Audit Committee retained independent counsel for such
purpose and such counsel's investigation is continuing. Coopers informed the
Audit Committee that under these circumstances, it could no longer rely on
representations made by Company management.
D-4
<PAGE>
24. (C) Notification of need to expand audit scope and identification of matters
that may result in changes to financial statements of 1997 or prior years:
Coopers informed the Company's Audit Committee, in conjunction with its
resignation on April 24, 1998, that it would have needed to significantly expand
its audit scope to examine all revenue transactions recorded in 1995, 1996 and
1997 and all credit memos issued in those periods and subsequently.
25. Coopers has also identified the following issues which it believes may
result in significant changes to financial statements of one or more years and
quarters, which Coopers believes were unresolved as the result of its
resignation prior to completion of the expanded audit scope:
26. 1. Issues regarding the purchase accounting for the 1997 acquisition of EFJ,
including reserves established as of the acquisition date for restructuring,
doubtful accounts and contracts in process, proper valuation of purchased
in-process research and development and whether a valuation allowance is
required for deferred tax assets.
27. 2. Issues regarding the appropriateness of recording revenues in 1996 and
1997 for transactions where goods may have been shipped to public warehouses,
family members, employees and to the Company itself.
28. 3. Issues regarding the verification of the physical existence and the
valuation of inventory at customer locations, where there was substantial
uncertainty regarding the customer's commitment and ability to pay for the
products, and at other locations such as public warehouses, and inventory
returned to the Company after year-end where such inventory was not accepted or
was exchanged by the customer.
29. 4. Issues regarding the appropriateness of recording revenues in 1996 and
1997 for sales of newly developed products for which engineering development may
not have been complete.
30. 5. Issues regarding reserving for sales returns and allowances.
31. 6. Issues regarding the possible need for a valuation allowance with respect
to the Company's consolidated deferred tax asset balance.
32. (D) Matter that may require a change to 1996 financial statements: Coopers
informed the Audit Committee, in conjunction with its resignation on April 24,
1998, of the need to make an adjustment to the 1996 financial statements for the
following item, but due to Coopers' resignation such adjustment has not yet been
made:
33. The Company recorded $240,000 of revenues for engineering services upon
invoicing in November 1996; a contract was received dated December 31, 1996.
These services may not have been completed until 1997. Coopers' position is that
revenues should not be recorded until the related services have been provided.
This change could negatively impact the Company's 1996 annual and fourth quarter
consolidated operating results and positively impact 1997 annual and quarterly
consolidated operating results.
34. The Company has requested from Coopers a letter addressed to the Commission
stating whether it agrees with all of the above statements (as in response to
Rule 304(a)). A copy of this letter will be filed as an exhibit to an amended
Report on Form 8-K promptly upon the Company's receipt of same.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS.
None required.
(b) PRO FORMA FINANCIAL INFORMATION.
None required.
(c) EXHIBITS.
The following are furnished as exhibits to this report:
99.1 News Release issued on April 27, 1998 by the Registrant.
D-5
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
TRANSCRYPT INTERNATIONAL, INC.
By: /s/ JEFFERY L. FULLER
-----------------------------------------
Jeffery L. Fuller
Chief Executive Officer
(Principal executive officer and duly
Date: May 4, 1998 authorized signatory)
</TABLE>
D-6
<PAGE>
APPENDIX E
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
CURRENT REPORT
------------------------
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
Date of Report (Date of earliest event reported): April 24, 1998
TRANSCRYPT INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 0-21681 47-0801192
<S> <C> <C>
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification Number)
</TABLE>
4800 NW FIRST STREET, LINCOLN, NEBRASKA 68521
(Address of Principal Executive Offices and Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (402) 474-4800
<PAGE>
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On May 18, 1998, Transcrypt International, Inc. (the "Company") received the
response of its former auditors, Coopers & Lybrand L.L.P. ("Coopers"), to the
Company's Current Report on Form 8-K filed with the Commission on May 4, 1998,
which Form 8-K announced that Coopers had resigned as the Company's independent
public accountant and had withdrawn its opinion on the Company's 1995 and 1996
financial statements, among other things. The March 18, 1998 response of
Coopers, annexed hereto as Exhibit 16, is incorporated in its entirety by
reference in response to this Item 4. The position of the Company on disputed
issues is set forth in its May 4, 1998 Form 8-K filing, which is incorporated
herein by this reference. The Company does not agree with Coopers'
characterization of certain events in its response or the implications of
Coopers' statements.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS.
None required.
(b) PRO FORMA FINANCIAL INFORMATION.
None required.
(c) EXHIBITS.
The following are furnished as exhibits to this report:
16 Letter from Coopers & Lybrand L.L.P. to the Commission dated May 18,
1998.
E-2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
TRANSCRYPT INTERNATIONAL, INC.
By: /s/ JEFFERY L. FULLER
-----------------------------------------
Jeffery L. Fuller
CHIEF EXECUTIVE OFFICER
(Principal executive officer and duly
Date: May 20, 1998 authorized signatory)
</TABLE>
E-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------
<S> <C>
16 Letter from Coopers & Lybrand L.L.P. to the Commission dated May 18, 1998.
</TABLE>
E-4
<PAGE>
EXHIBIT 16
[LETTERHEAD OF COOPERS & LYBRAND, L.L.P., OMAHA, NEBRASKA OFFICE]
May 18, 1998
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
Ladies and Gentlemen:
We have read the statements made by Transcrypt International, Inc. (the
"Registrant") in its Form 8-K report that we understand the Registrant filed
with the Commission pursuant to Item 4 of Form 8-K on May 4, 1998 (copy
attached). We disagree with many of the Registrant's statements in its Form 8-K,
as we set forth below. Some of the reasons why we disagree with the Registrant's
statements are also set forth below. For ease in referring to specific portions
of the Form 8-K, we have numbered each of the Registrant's paragraphs as shown
in the attached copy of the Form 8-K and refer to the Registrant's statements by
those paragraph numbers.
1. In its fifth paragraph, the Registrant states that Coopers & Lybrand
L.L.P. ("C&L") worked with the Registrant's management in establishing
appropriate accounting policies, procedures and controls, including specific
revenue recognition policies. We do not agree with this statement. While C&L
commented on certain internal control matters over the years, C&L did not work
with the Registrant's management to establish accounting policies and procedures
for the Registrant, including the Registrant's revenue recognition policies. In
its fifth paragraph, the Registrant also indicates that C&L performed timely
interim reviews of the Registrant's quarterly financial statements since the
Registrant's initial public offering and reviewed significant year-end and
quarter-end sales. We would respond that, in accordance with AICPA standards, an
accountant's "review" of quarterly financial statements is substantially less in
scope than an audit, and such a review does not necessarily involve the
examination of documentary evidence related to any "reviewed" transaction.
Furthermore, with respect to the Registrant's year-end sales, the only year-end
since the Registrant's initial public offering was December 31, 1997. C&L
resigned prior to completing its audit procedures for the Registrant's year
ending December 31, 1997, and therefore the Registrant was not entitled to take
comfort that any transactions had been audited even though C&L was in the
process of performing certain audit procedures. Moreover, the Registrant was
aware that C&L, while conducting its audit procedures for year-end 1997, had
uncovered numerous issues with respect to improperly recorded transactions.
Further discussion of these points is set forth below.
2. In its sixth paragraph, the Registrant states that until mid-to-late
March 1998 it had received no indication from C&L of "disagreements" or other
"reportable events" under Rule 304 (actually, Item 304 of SEC Regulation S-K).
We do not agree with this statement, nor do we agree with the implications of
the Registrant's further statement in this paragraph that the C&L audit partner
had read the Registrant's February 6, 1998 press release announcing the
Registrant's financial results for 1997 and took no exception to it prior to
issuance. Starting on December 31, 1997, when C&L identified and reported to the
Registrant's management the percentage-of-completion issue at the Registrant's
E.F. Johnson subsidiary, and on a continuing basis thereafter, C&L raised
numerous questions to the Registrant's management relating to the Registrant's
revenue recognition and other issues as C&L identified them during the course of
its audit, which was never completed, of the Registrant's financial results for
1997. Moreover, the Registrant's management was aware at the time it issued its
February 6, 1998 press release that none of these issues had been resolved to
C&L's satisfaction. Prior to February 6, the C&L audit partner had discussed
with the Registrant's senior management the fact that there were numerous open
issues and incomplete audit procedures remaining in the audit. Indeed, on the
morning of February 6 before the press release was issued, the C&L audit partner
specifically discussed with the Registrant's senior management one of the
principal open issues. Further, the Registrant's management also was aware at
that time of its
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delays in completing its closing process and that it had not provided C&L with
sufficient time to complete critical audit procedures before the Registrant
issued its February 6 press release. For example, the Registrant had not
provided its 1997 consolidating schedules to C&L until late in the evening of
February 5, 1998. The Registrant issued its press release at approximately 10:00
a.m. on February 6. C&L also at no time provided any assurance to the Registrant
that C&L had audited the financial results for 1997 that the Registrant
announced in its February 6 press release. Further, despite C&L's numerous
requests to the Registrant from January 1998 on for additional documentation and
information to help C&L resolve the many accounting issues and questions it had
identified with respect to the Registrant's 1997 financial results, the
Registrant's management failed to provide C&L with any additional documentation
or information until after late February 1998, when C&L received the first
anonymous letter alleging wrongful revenue recognition by the Registrant. After
late February 1998, management was still very slow in providing C&L with the
documentation and information C&L had requested to complete its audit. Even
after the anonymous letters began to arrive in late February 1998, the
Registrant's management-- expressing incredulity that anyone would question its
accounting practices--focused on finding out who had sent the anonymous letters,
rather than on the more important question, with which C&L was concerned, of
whether the allegations in the letters had any factual basis. In fact, as C&L
discovered, virtually all of the allegations in the anonymous letters proved to
be accurate. As C&L's attempts to audit the Registrant continued, management's
misdirected focus became increasingly apparent. Over time, the numerous
questions and possible accounting misstatements by the Registrant that C&L had
earlier identified and reported to management eventually reached the level of
"disagreements" and other "reportable events" as C&L discussed with the
Registrant's management and ultimately with the Audit Committee.
3. In its seventh paragraph, the Registrant states that at a March 4, 1998
meeting with the Registrant's Audit Committee the C&L audit partner indicated
that the Registrant's reserve for receivables was adequate based on the
information that C&L had available at the time and that the sales referred to in
the first anonymous letter had been recorded consistent with the Registrant's
revenue recognition procedures, as previously approved by C&L. We disagree with
this statement. Concerning the Registrant's reserves for receivables, C&L had
specifically expressed concern during the March 4, 1998 meeting with the
Registrant's Audit Committee regarding the adequacy of the Registrant's reserves
for receivables because of unanswered confirmations and lack of subsequent cash
collections. In addition, while it was the Registrant's position at the March 4
meeting that the Registrant's underestimate of its reserves for receivables at
Transcrypt was offset by an overestimate of reserves at the E.F. Johnson
subsidiary the Registrant had acquired during 1997, C&L subsequently learned of
erroneous accounting for an E.F. Johnson receivable collected after the
acquisition, which resulted in the Registrant's overall understatement of
reserves (which is discussed in the formal "disagreement" disclosed in the
Registrant's sixteenth paragraph). In addition, at the time of the March 4 Audit
Committee meeting, the sales referenced in the first anonymous letter (which
sales also are the subject of the formal "disagreement" that the Registrant
disclosed in its eighteenth paragraph) continued to be an open item in C&L's
audit for which C&L had not received information that it had previously
requested, i.e., a written contract or confirmation from the government. C&L had
previously told the Registrant's management on several occasions that there had
to be some resolution of this issue before the Registrant's Form 10-K could be
filed. The Registrant's management knew this issue had not been resolved by
March 4, 1998, and C&L did not in any way advise the Registrant's Audit
Committee on March 4, 1998 that this issue had been resolved, as the Registrant
implies in its seventh paragraph. Our comments below in response to the
Registrant's seventeenth and eighteenth paragraphs deal further with these
sales. Our comments above in response to the Registrant's fifth paragraph also
apply here in response to the implication of Registrant's seventh paragraph that
C&L had approved revenue recognition procedures of the Registrant. In its
seventh paragraph, the Registrant additionally states that before it had issued
its March 5, 1998 press release saying that it continued to stand by its
previously issued financial statements and its previously announced financial
results, the C&L audit partner had read this press release and took no exception
to it. We disagree with the implications of this
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statement. While the C&L audit partner knew the Registrant's position on March 5
was that the Registrant was continuing to stand by its 1997 financial results
that the Registrant had announced on February 6, 1998, the C&L audit partner had
never approved or audited those financial results, as the Registrant's
management was well aware. In fact, at the time of the March 5 press release,
the Registrant's management was well aware that no resolution had been reached
of the numerous accounting issues and questions that C&L had raised to
management.
4. In its eighth paragraph, the Registrant discusses that in mid-March 1998
it learned that the National Office of C&L had become involved in the review of
issues raised in the anonymous letters. We disagree with the implications of
this paragraph that C&L's National Office became involved solely to review the
issues raised by the anonymous letters. C&L's local office had specifically
requested the assistance of C&L's National Office after C&L had received the
anonymous letters. C&L's local office had requested the assistance of C&L's
National Office not only on the issues raised by the anonymous letters, but also
on the many other broader issues relating to the Registrant's accounting. This
broader scope included the many still open and unresolved issues that C&L had
previously identified to the Registrant's management. To provide this broad
assistance, it was necessary for the C&L National Office partner to review the
working papers that C&L's local office had prepared to date. In further response
to the Registrant's eighth paragraph, we would also point out that, during the
referenced meetings with the Registrant's management and with the Audit
Committee the week of March 23, 1998, the local C&L audit partner always
attended these meetings along with the representative of C&L's National Office.
5. In its ninth paragraph, the Registrant states that during late March and
in April 1998 it provided additional documentation and information to us
regarding the transactions at issue. We disagree with any implication in this
statement that during this time period the Registrant had provided C&L with all
of the documentation and information that C&L had requested. Starting in January
1998 and continuing until April 24, 1998, when C&L resigned, there were at all
times outstanding documentation and information requests that C&L had made to
the Registrant that the Registrant had failed to satisfy. During the week of the
March 27, 1998 press release described in the Registrant's eighth paragraph, the
Registrant's management had engaged another accounting firm, TenEyck Associates,
Inc. ("TenEyck"), to review certain accounting issues that C&L had raised to
date for which the Registrant's management disagreed with C&L. Only after
consulting with TenEyck (and after receiving the March 25, 1998 letter from the
government customer referenced in the Registrant's eighteenth paragraph) did the
Registrant's management finally appear to acknowledge that it would have to
record adjustments to its previously announced financial results. Moreover, in
many cases the additional documentation and information the Registrant provided
C&L during this time period in response to C&L's requests only led C&L to make
additional requests for more documentation and information from the Registrant
because of the incomplete and questionable explanations that the Registrant
provided to C&L.
6. In its tenth paragraph, the Registrant states that on April 3, 1998, its
Board of Directors authorized the Audit Committee to engage another major
accounting firm to conduct a review, under SAS No. 50, of the accounting
principles C&L had proposed for the transactions in question because the Board
believed that C&L had a potential conflict of interest in reviewing its prior
work. We disagree with certain aspects of this statement and the implications of
the statement. The Registrant did not engage the other major accounting firm,
which was KPMG Peat Marwick ("KPMG"), to review C&L's prior work; rather, KPMG
was engaged to review C&L's accounting conclusions with which C&L understood the
Registrant's management disagreed. Further, we disagree with the Registrant's
statement that C&L had any potential conflict of interest in reviewing its prior
work. Since C&L's 1997 audit of the Registrant was in progress and had not been
completed, it was necessary and appropriate under normal audit procedures for
C&L to review its prior work to date, in conjunction with its continuing
examination of the Registrant's financial records, particularly in light of the
new information of which C&L had become aware as a result of its ongoing
inquiries and the anonymous letters. Moreover, until the Registrant had so
stated in its May 4, 1998 Form 8-K, neither the Board, the Audit Committee nor
KPMG had ever advised C&L of any belief
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that C&L had a conflict of interest in reviewing its prior work to date in order
to try to complete its audit. We would also note that KPMG was the second
accounting firm the Registrant had engaged in a period of a few weeks to try to
obtain an accounting opinion different from what C&L had advised. It is C&L's
understanding that both of the other accounting firms that the Registrant
consulted with during this period--TenEyck and KPMG--agreed with C&L's opinions
on the accounting principles at issue. In its tenth paragraph, the Registrant
further states that the Audit Committee retained independent counsel to conduct
an investigation and advise the Audit Committee in connection with certain
matters, concurring with C&L's advice that it must do so. We believe this
statement by the Registrant requires further elaboration to be fully accurate.
On April 2, 1998, the day preceding the April 3 Board meeting that the
Registrant also discusses in this paragraph, the C&L audit partner and two C&L
National Office partners held a meeting with the Registrant's Audit Committee
(which is made up of three outside Directors of the Registrant). C&L had
initiated this meeting with the Audit Committee and had specifically requested
that the Audit Committee not permit the Registrant's management and counsel to
attend the meeting. C&L advised the Audit Committee at this private April 2
meeting that C&L had identified possible fraud by the Registrant, and that the
fraud possibly had been committed by, or at the direction of, the Registrant's
most senior management. C&L explained to the Audit Committee during the meeting
details of the primary circumstances and events that had led C&L to reach this
conclusion of possible fraud, including the fact, among others, that in late
March 1998 C&L's investigations had led it to a non-anonymous and apparently
credible source who expressly told C&L that the Registrant's management had
intentionally manipulated sales revenues. During the April 2 meeting, C&L told
the Audit Committee that, because of the possibility of fraud and illegal acts,
(1) in C&L's opinion, the Audit Committee should retain special counsel who was
independent of the Registrant and its management to conduct an investigation to
determine whether fraud or other illegal acts in fact had occurred; and (2) if
the Audit Committee did not do this, C&L would resign. In response, the
Registrant's outside counsel made repeated attempts to convince C&L and the
Audit Committee that the Audit Committee did not need to retain special counsel.
On April 7, 1998, the same three C&L partners had a telephonic meeting with the
Audit Committee in which C&L repeated its position that, if the Audit Committee
did not retain special counsel to investigate the possible fraud, C&L would
resign. With that, the Audit Committee then retained special counsel.
7. In its eleventh paragraph, the Registrant states that on the morning of
April 24, 1998, the Audit Committee's special counsel telephoned C&L's outside
counsel and informed C&L's outside counsel that "the Company would agree with
Coopers' proposed accounting treatment of the transactions in question" and
requested that C&L proceed with completion of the audit. We disagree with the
quoted portion of this statement. Until late in the day on April 24, 1998, no
one had suggested to C&L or its outside counsel that the Registrant (as opposed
to KPMG) had now decided to agree with C&L's proposed accounting treatment of
the transactions in question that KPMG was reviewing under SAS No. 50. Moreover,
based on what the Registrant itself states in later paragraphs of the Form 8-K,
specifically its fifteenth, sixteenth and nineteenth paragraphs, concerning
reportable "disagreements" with C&L, the Registrant still is continuing to
evaluate whether it agrees with C&L's proposed accounting treatment for some of
the transactions involved in KPMG's review under SAS No. 50. Furthermore, C&L
had made its decision to resign on the evening of the prior day, April 23. Early
the morning of April 24, at approximately 8:30 a.m. (or approximately one hour
before the Audit Committee's special counsel spoke with C&L's outside counsel),
C&L telephoned the Audit Committee Chairman and requested that a conference call
be set up as soon as possible that morning between C&L and the Audit Committee.
C&L's purpose in requesting this conference call was to inform the Audit
Committee of C&L's resignation decision. Because of C&L's resignation decision,
C&L also decided to postpone for the time being the appointment that happened to
be that day for the Audit Committee's special counsel to review the working
papers and to continue its debriefing of C&L's audit partner pursuant to C&L's
volunteered and ongoing efforts to assist the special counsel in the
investigation that C&L had requested into the Registrant's possible fraud.
Notably, due to a number of factors, C&L's ecision to resign would not have been
altered even if C&L had been able to learn on the evening of April 23 or the
morning of April 24 that the Registrant now agreed with C&L's
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proposed accounting treatment of the transactions in question. C&L had assumed
for some time that the Registrant's management would ultimately face the reality
that it had to agree with C&L's proposed accounting adjustments. C&L had already
decided a month earlier--during the week of March 23, 1998-- that, if the
Registrant's management refused to agree to the accounting adjustments C&L
believed were necessary, C&L would take exception to or render an adverse
opinion on the Registrant's financial statements for 1997. Accordingly, the
exercise the Registrant's management was going through to obtain yet a third
opinion on the proper accounting treatment was not important to C&L. C&L knew at
the time of its decision to resign that KPMG appeared to be in agreement with
C&L on the issues involved in the SAS No. 50 review. C&L also had understood for
approximately a month that the other accounting firm the Registrant's management
had engaged, TenEyck, appeared to be in agreement with C&L on the issues. The
factors, among others, that did lead to C&L's decision to resign included the
following: (a) the unresolved issues relating to C&L's concerns about the
integrity of the Registrant's management and possible fraud, which concerns
arose while C&L was attempting to do its audit for year-end 1997; (b) the
repeated attempts by the Registrant, Audit Committee and their counsel to
pressure C&L to complete its audit prior to May 7, 1998, when the Registrant had
been ordered to appear at a NASDAQ delisting hearing due to the Registrant's
late Form 10-K; (c) the concerns C&L had that, prior to the Registrant's desired
May 7, 1998 audit deadline, the Audit Committee's special counsel was not likely
to have sufficient time and opportunity to conduct the thorough and
comprehensive investigation that C&L had envisioned when it had requested the
Audit Committee to retain special counsel to investigate the possible fraud and
illegal acts, much less permit C&L sufficient time and opportunity before the
May 7, 1998 delisting hearing to review the special counsel's findings and
conclusions and to determine if C&L agreed with them; (d) the numerous examples
of the Registrant's management presenting information to C&L that C&L later
learned constituted distortions of the truth and half-truths, while the
Registrant's management continued to resist making the necessary corrections to
the financial results it had reported for 1997; and (e) the increasingly
apparent indications C&L would need to extend its audit procedures far beyond
normal audit procedures, and also beyond the audit for calendar year 1997 to
include calendar years 1995 and 1996, due to C&L's concerns about the integrity
of the Registrant's management at all levels and possible fraud.
8. In its twelfth paragraph, the Registrant states it is setting forth the
"disagreements" between C&L and the Registrant that are reportable under Rule
304 (actually, Item 304 of SEC Regulation S-K) that C&L and members of the Audit
Committee discussed at various times in late March or in April 1998. We disagree
with any implication of this statement that, as the Registrant claimed in its
sixth paragraph, C&L had not given any indication to the Registrant regarding
any disagreements at an earlier time. We accordingly refer here to our response
above to the Registrant's sixth paragraph.
9. In its thirteenth paragraph, the Registrant discusses the reportable
disagreement it had with C&L concerning application of the
percentage-of-completion accounting method to the systems contracts of the
Registrant's E.J. Johnson subsidiary. We disagree with the implications of the
Registrant's discussion in this paragraph that E.F. Johnson's consistent
practice, prior to its July 31, 1997 acquisition by the Registrant, was to
include major purchased components in the percentage-of-completion calculation
when such components had not yet begun to be installed into the system. This was
not E.F. Johnson's prior practice before its acquisition by the Registrant.
Further, the costs the Registrant had included in its percentage-of-completion
calculation for this contract had not, in C&L's opinion, even been incurred
during 1997. In December 1997, the Registrant had ordered the components at
issue from several vendors, with the request that each vendor issue the
Registrant a "pro forma invoice" by December 31, 1997, in an apparent attempt by
the Registrant to demonstrate that it had incurred the costs in 1997. Each of
these pro forma invoices in fact was dated December 30 or 31, 1997. However, the
components were not delivered to the Registrant by December 31, 1997. In fact,
the components were not even scheduled for delivery until April 1998 at the
earliest. Moreover, C&L believes it unlikely that the vendors had even
manufactured the component parts by December 31, 1997. Even if such components
actually had been manufactured in only two or three weeks during late December,
then C&L believes that they should not be included in a cost-to-cost calculation
of the percentage of completion because they would not be special purpose
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component parts. Rather, they would be "off-the-shelf" components that should
not be included in a percentage-of-completion calculation, which is intended to
measure the revenue earned by the Registrant's substantive efforts toward
completion. Further, we also disagree with the Registrant's implication in its
thirteenth paragraph that it was not until late March 1998 that C&L first
informed the Registrant of C&L's position in this regard. To the contrary, C&L
informed the Registrant in early January 1998 and again prior to the February 6,
1998 press release that inclusion of significant uninstalled materials in the
percentage-of-completion calculation for E.F. Johnson's system contracts was not
appropriate.
10. In its fourteenth paragraph, the Registrant discusses the reportable
disagreement it had with C&L concerning revenue the Registrant had recorded in
the fourth quarter of 1997 under a license contract containing a cancellation
right. The Registrant states that C&L's "current" position is that, because the
customer had a cancellation right and the payment terms extend beyond one year,
revenue should be recognized on an installment basis. The Registrant also states
that it amended the contract to eliminate the cancellation right before issuing
its 1997 financial results. We disagree with the implications of these
statements. C&L at no time agreed with the Registrant's position that the
revenue from this license agreement could be recorded in 1997 if the contract
subsequently was amended to eliminate the customer's cancellation right. The
Registrant had recorded the revenue for this contract on the last day of the
year, December 31, 1997. The terms of the original contract gave the customer
the right until February 15, 1998 to cancel the contract; the contract
additionally set forth a payment schedule over a three-year period for the
customer to pay the Registrant, with the customer's first payment not due until
February 15, 1998, when the cancellation right expired. The Registrant, in
January 1998, in an attempt to have the contract revenue apply to its 1997
revenues, contacted the customer and, on January 30, 1998-- only two weeks
before the customer's cancellation right was to expire anyway under the original
terms of the contract--the Registrant and the customer agreed to amend the
contract to delete the customer's cancellation right. C&L received a copy of the
amended contract in mid-March 1998 and concluded, based on all of these facts,
that the Registrant was not entitled to recognize any revenue from this contract
in 1997 and, further, that when the Registrant could properly recognize revenue
from this contract beginning in 1998, it must be recognized on an installment
basis.
11. In its sixteenth paragraph, the Registrant discusses the reportable
disagreement it had with C&L of whether the opening balance sheet after the
Registrant's acquisition of E.F. Johnson Company should have been adjusted to
reduce a $500,000 bad debt reserve established by E.F. Johnson and left on the
books, although the receivable was collected in the first quarter of 1998. The
Registrant does not mention that if goodwill and the bad debt reserve of E.F.
Johnson are reduced by $500,000, as C&L believes would be appropriate, it is
C&L's further opinion that the Registrant's consolidated bad debt reserve
potentially could be understated by an amount substantially in excess of
$500,000. Further, C&L disagrees with the Registrant's implication that C&L,
after reaching a final audit opinion on this issue, had later changed its
position. Retroactive adjustments to acquisition date balance sheets are not
ordinarily made as a result of changes in circumstances that occur subsequent to
the acquisition date. Occasionally, as was the case for the Registrant, however,
facts are discovered subsequent to the acquisition that indicate the
circumstances were different on the acquisition date than originally believed.
In the course of C&L's audit for 1997, C&L learned additional information that
indicated the retroactive adjustment in question was necessary as it was not due
to a change of circumstances after the acquisition.
12. In its seventeenth paragraph, the Registrant discusses its reportable
disagreement with C&L concerning recognition of revenue on certain government
agency sales. We disagree with implications of certain aspects of this
paragraph. The Registrant states that the government agency customer at issue,
in the usual course of business, would subsequently reduce the transaction to a
formal written agreement. However, the events described in the Registrant's
eighteenth paragraph demonstrate why the Registrant's assertions that recording
revenue on shipments prior to receipt of a contract is not an appropriate
accounting policy. The Registrant also states that C&L has now advised the
Registrant that these revenues should not have been recorded until a formal
written agreement was received. However, the Registrant
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fails to point out that it had never informed C&L until late April 1998 that, in
May 1997, the government
agency customer at issue had notified the Registrant by letter that the agency's
contact person with whom the Registrant was dealing was not authorized to
contractually commit the government agency. In late April 1998, the Registrant
received a letter from the government agency that enclosed a copy of this May
1997 letter. The Registrant's management had informed and assured C&L on
numerous occasions prior to late April 1998 that the Registrant's recording of
revenue on shipments before receipt of a contract was appropriate for
transactions with this government agency due to the unique circumstances
involved, including the agency's need for quick shipments for national security
reasons. Had C&L known about the government's May 1997 letter to the Registrant,
C&L never would have initially accepted management's practice of recording
revenues before receipt of a formal written contract for these transactions.
13. In its eighteenth paragraph, the Registrant discusses its reportable
disagreement with C&L concerning the specific transactions with the government
agency customer referenced in the preceding paragraph. We disagree with certain
aspects of the Registrant's statements in this paragraph and with implications
of the Registrant's statements. The Registrant states that on March 25, 1998
this government agency customer advised the Registrant that the agency's
employee with whom the Registrant had been dealing was not authorized to
contractually bind the government, thereby implying that the Registrant first
learned this on March 25, 1998. However, this is not true. As noted above, the
government agency had sent a letter in May 1997 to the Registrant advising that
this agency employee was not authorized to contractually commit the government
agency. Further, the Registrant also had been orally informed of this in a
meeting with the government agency in mid-March 1998. In its eighteenth
paragraph, the Registrant also fails to mention that, when it had recognized the
revenue from these transactions in the second and third quarters of 1997, it had
shipped the products at issue for this government agency to a public warehouse.
C&L subsequently learned in late February 1998 or in March 1998 that these
products remained in the public warehouse and, to the best of C&L's knowledge as
of the date it resigned, continue to remain there. The Registrant further fails
to mention that it had not manufactured many of the products in question, but
rather that another company had supplied a significant majority of the products
and was paid by the Registrant because the other company had refused to ship
products to the government agency without a binding contract.
14. In its nineteenth paragraph, the Registrant refers to its reportable
disagreement with C&L concerning the registrant's recognition of revenue on
shipments to certain international dealers and distributors. We take issue with
several aspects of this paragraph. The Registrant states that in mid-March 1998
C&L "reevaluated" these sales that the Registrant made during 1997, implying
that C&L had previously audited these sales. As C&L's response above to the
Registrant's fifth paragraph points out, there is a significant difference under
AICPA standards between an accountant's quarterly review procedures and its
audit procedures at year-end. For example, the quarterly reviews would not
rdinarily include examination of the customer credit files. The Registrant does
not mention in this paragraph that it had failed to perform ordinary credit
review procedures prior to its agreement to advance substantial amounts of
credit to these dealers and distributors, as C&L learned in conducting its audit
procedures for year-end 1997. The Registrant also fails to note that C&L's
position, with which the Registrant disagreed, is that certain of these
shipments by the Registrant to public freight forwarders are in substance
consigned inventory, rather than sales, because the shipments are not in any
distribution channel and, in at least one instance, the product was shipped back
to the Registrant after year-end 1997.
15. In its twentieth paragraph, the Registrant discusses its reportable
disagreement with C&L regarding shipments to customers who had the explicit
right to exchange the products shipped for other products. The Registrant states
that it believes C&L did not disclose this issue to the Registrant until after
C&L resigned. We disagree with this statement. In early April 1998, some weeks
before C&L resigned on April 24, 1998, C&L specifically informed the
Registrant's management and its Audit Committee about this issue after C&L had
reviewed one of the Registrant's customer files that disclosed the customer's
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express right to exchange the products the Registrant was shipping for other
products. In mid-April 1998, C&L repeated this information to the Audit
Committee's special counsel and an Audit Committee member in conjunction with
C&L's efforts to assist the special counsel's investigation of the possible
fraud.
16. In its twenty-second paragraph, the Registrant discloses the reportable
event that C&L had informed the Registrant that the Registrant's internal
controls for recording of sales revenue were deficient. C&L would add that it
discussed the Registrant's lack of internal controls for revenue recognition
with the Registrant's Audit Committee in March 1998.
17. In its twenty-third paragraph, the Registrant discusses the reportable
event relating to C&L's disclosure to the Audit Committee that C&L had
identified possible fraud and illegal acts at the Registrant, which possibly
involved the Registrant's management. C&L's discussion in more detail of this
issue is set forth above in response to the Registrant's tenth paragraph and
should be referenced. C&L would also clarify in response to the Registrant's
statements in its twenty-third paragraph that, as of April 2, 1998, when C&L
reported the possible fraud and illegal acts to the Audit Committee, C&L also
indicated to the Audit Committee on that date that C&L felt it could no longer
rely on representations of the Registrant's management under the circumstances
existing at that time.
18. In its twenty-fourth paragraph, the Registrant discusses C&L's need to
expand the scope of its audit, which the Registrant states C&L indicated only at
the time of its resignation on April 24, 1998. However, C&L had informed the
Audit Committee at meetings in late March and early April 1998 that C&L's audit
scope would have to be significantly expanded.
19. In its twenty-fifth paragraph, the Registrant discloses that C&L had
identified issues that may result in significant changes to the Registrant's
financial statements of one or more years and quarters that C&L "believes" were
unresolved as the result of its resignation prior to completion of the expanded
audit scope. However, for clarification, C&L would state that these issues in
fact existed and were unresolved at the time of C&L's resignation.
20. In its twenty-seventh paragraph, the Registrant describes one of the
specific unresolved issues C&L had dentified as being issues regarding the
appropriateness of the Registrant's recording of revenues in 1996 and 1997 for
transactions where the Registrant "may" have shipped goods to itself, to public
warehouses, to family members and to employees. However, at the time of its
resignation, C&L did not believe it was merely "possible" that in 1997 the
Registrant had made shipments to itself, to public warehouses and to employees'
family members. C&L learned when conducting its audit procedures for 1997 that
the Registrant in fact had made some shipments of this nature during 1997. C&L
had not resolved at the time of its resignation whether the Registrant had
improperly recorded revenues in 1997 for such transactions.
21. In its twenty-ninth paragraph, the Registrant describes one of the
specific unresolved issues C&L had identified as being issues regarding the
appropriateness of recording revenues in 1996 and 1997 for sales of newly
developed products for which engineering development may not have been complete.
C&L would more fully describe these issues as regarding the appropriateness of
the Registrant's recording of revenues in 1996 and 1997 for sales of newly
developed products for which, given the large volume of defects found and
merchandise returned by customers, engineering development may not have been
complete at the time the Registrant began marketing the products.
22. In its thirtieth paragraph, the Registrant describes one of the specific
unresolved issues C&L had identified as being issues regarding reserving for
sales returns and allowances. C&L would more fully describe these issues as
regarding the adequacy of the Registrant's reserves for inventory returns and
allowances given the large volume of merchandise returned by customers due to
product defects and other return arrangements.
23. In its thirty-first paragraph, the Registrant describes one of the
specific unresolved issues C&L had identified as being issues regarding the
possible need for a valuation allowance with respect to the
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<PAGE>
Registrant's consolidated deferred tax asset balance. C&L would more fully
describe these issues as regarding the possible need for a valuation allowance
with respect to the Registrant's consolidated deferred tax asset balance given
the history of losses experienced both by Transcrypt and by E.F. Johnson.
24. The Registrant's thirty-third paragraph discusses a reportable event
regarding reversal of $240,000 for engineering services revenue that the
Registrant recorded in November 1996 under a contract dated December 31, 1996.
These services were for the same government agency discussed in the Registrant's
eighteenth paragraph. In the Registrant's thirty-second paragraph, the
Registrant states that C&L had disclosed the need to make this adjustment in
conjunction with C&L's resignation on April 24, 1998. However, the Registrant
does not note that, at C&L's request, the Registrant had provided C&L in late
March 1998 with a list of all revenues the Registrant had recorded for this
government agency in 1996. This list reflected the November 1996 billing and the
December 31, 1996 contract date, but the list did not indicate when the
Registrant had provided the services in question to the government agency. Only
on April 22, 1998, after C&L had repeatedly requested the Registrant to supply
this information, did the Registrant finally provide C&L with the information
that allowed C&L to determine that the Registrant had performed all or most of
the services in 1997. Further, the Registrant states in this thirty-third
paragraph that these services "may not" have been completed until 1997. We
disagree with this statement. As noted, all or most of these services were
performed in 1997. Finally, the Registrant states in this paragraph that this
accounting change "could" negatively impact the Registrant's 1996 annual and
fourth quarter consolidated operating results. However, it is C&L's position
that this change is required and that it will negatively impact 1996 results.
Very truly yours,
/s/ COOPERS & LYBRAND L.L.P.
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COOPERS & LYBRAND L.L.P.
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TRANSCRYPT INTERNATIONAL, INC.
PROXY SOLICITED BY BOARD OF DIRECTORS PROXY
- ------------------------------------------------------------
Thomas R. Larsen, Thomas R. Thomsen and Thomas C. Smith, and each of them, with
full power of substitution, are hereby appointed proxy to vote all the stock of
Transcrypt International, Inc. which the undersigned is entitled to vote at the
Annual Meeting of Stockholders on May 20, 1999, and at any adjournments thereof,
to be held at the Cornhusker Hotel located at 333 South 13th Street, Lincoln,
Nebraska 68508.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION OF DIRECTORS,
"FOR" THE PROPOSED AMENDMENT TO OUR SECOND AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION, "FOR" THE APPROVAL OF THE 1999 NON-EMPLOYEE DIRECTOR STOCK
PURCHASE PLAN, "FOR" THE APPROVAL OF THE 1999 EXECUTIVE OFFICER STOCK PURCHASE
PLAN AND "FOR" THE RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS.
SEE REVERSE FOR VOTING INSTRUCTIONS
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2, 3, 4 AND 5.
<TABLE>
<S> <C> <C> <C>
1. Election of 01 Thomas E. Henning 02 Michael E. Jalbert / / Vote FOR all nominees / / Vote WITHHELD from all
directors: nominees
</TABLE>
<TABLE>
<S> <C>
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE,
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.)
</TABLE>
<TABLE>
<S> <C> <C> <C>
2.Approval of the amendment to our second amended and restated certificate of / / For / / Against / /
incorporation. Abstain
3.Approval of the 1999 Non-Employee Director Stock Purchase Plan / / For / / Against / /
Abstain
4.Approval of the 1999 Executive Officer Stock Purchase Plan / / For / / Against / /
Abstain
5.Ratification of the selection of KPMG Peat Marwick LLP as Independent Public Accountants / / For / / Against / /
for Fiscal 1999. Abstain
</TABLE>
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF INCLUDING
PROCEDURAL AND OTHER MATTERS RELATING TO THE CONDUCT OF THE MEETING.
Address Change? Mark Box / / Indicate changes below: Dated:
- ---------------------------, 1999
<TABLE>
<S> <C>
</TABLE>
Signature(s) in Box
(If there are co-owners both must
sign)
THE SIGNATURE(S) SHOULD BE EXACTLY
AS THE NAME(S) APPEAR PRINTED TO
THE LEFT. IF A CORPORATION, PLEASE
SIGN THE CORPORATION NAME IN FULL
BY A DULY AUTHORIZED OFFICER AND
INDICATE THE OFFICE OF THE SIGNER.
WHEN SIGNING AS EXECUTOR,
ADMINISTRATOR, FIDUCIARY, ATTORNEY,
TRUSTEE OR GUARDIAN, OR AS
CUSTODIAN FOR A MINOR, PLEASE GIVE
FULL TITLE AS SUCH. IF A
PARTNERSHIP, SIGN IN THE
PARTNERSHIP NAME.
