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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 2000.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 0-21681
TRANSCRYPT INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 47-0801192
(State or other jurisdiction (I.R.S. Employee
of incorporation or organization) Identification No.)
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4800 NW 1ST STREET
LINCOLN, NEBRASKA 68521
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (402) 474-4800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting Common Stock held by
non-affiliates of the Registrant, based upon the last sale price of the Common
Stock on March 9, 2000, as reported in the Over the Counter Bulletin Board
market was approximately $65,649,782. Shares of Common Stock held by each
executive officer and director and each person owning more than 5% of the
outstanding Common Stock of the Registrant have been excluded in that such
persons may be deemed to be affiliates of the Registrant. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. Number of shares outstanding of the Registrant's Common Stock, as of
March 9, 2000: 12,954,124.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 2000 Annual
Meeting of Stockholders to be filed within 120 days of the fiscal year ended
December 31, 1999 are incorporated by reference in Items 10, 11, 12 and 13 of
Part III of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
Unless the context otherwise provides, all references in this Annual Report
on Form 10-K to the "Company" includes Transcrypt International, Inc.
("Transcrypt"), its predecessor entities, and its subsidiaries, including E.F.
Johnson Company, on a combined basis, and all references to "E.F. Johnson" refer
to E.F. Johnson Company.
In addition to the historical information contained herein, certain matters
discussed in this Annual Report may constitute forward-looking statements under
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). These statements may involve risks and uncertainties. These
forward-looking statements relate to, among other things, the outcome of pending
class action litigation involving the Company, the outcome of the pending
investigation by the Securities and Exchange Commission (the "SEC"), the effects
of the Company's restatement of its financial statements on the Company's
product development efforts, future sales levels and customer confidence, the
Company's future financial condition, liquidity and business prospects
generally, perceived opportunities in the marketplace for the Company's products
and its products under development, expectations regarding the Company's efforts
to resolve Year 2000 issues and the effects of a failure to resolve such issues
and the Company's other business plans for the future. The actual outcomes of
these matters may differ significantly from the outcomes expressed or implied in
these forward-looking statements. For a discussion of some of the factors that
might cause such a difference, see "--Summary of Business Considerations and
Certain Factors That May Affect Future Results of Operations and/or Stock Price"
below.
GENERAL
The Company is a manufacturer of wireless communications products and
systems and information security products. Through its E.F. Johnson subsidiary,
the Company designs, develops, manufactures and markets (1) stationary land
mobile radio ("LMR") transmitters/receivers (base stations or repeaters) and
(2) mobile and portable radios. The Company sells its LMR products and systems
mainly to two broad markets: (1) commercial users and (2) public safety and
other governmental users. Through its Secure Technologies division, the Company
designs and manufactures information security products which prevent
unauthorized access to sensitive voice communications. These products are based
on a wide range of analog scrambling and digital encryption technologies and are
sold mainly to the LMR and telephony security markets.
In July 1997, the Company expanded its presence in the wireless
communications market by acquiring E.F. Johnson, an established provider of
products and systems for the LMR market. This acquisition was made through the
issuance of shares of Transcrypt common stock ("Common Stock"), the payment of
cash and the assumption of certain indebtedness of E.F. Johnson. The total value
of the cash and shares paid at the time of acquisition was approximately
$10.4 million.
Prior to June 30, 1996, the Company operated as a partnership. In
December 1991, the Company acquired the business of its predecessor, which was
founded in 1978. The Company's principal business offices are located at 4800 NW
1st Street, Lincoln, Nebraska 68521, and its phone number is (402) 474-4800.
RESTATEMENT OF FINANCIAL STATEMENTS AND RELATED EVENTS
In 1998, the Company restated its previously released results for the year
ended December 31, 1997, the Company's financial statements for the year ended
December 31, 1996 and the financial statements as of and for each of the
quarterly periods ended March 31, June 30, September 30 and December 31 during
1997 and 1996. The restatement of the Company's financial statements and other
events relating to the
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restatement, including the filing of class action lawsuits against the Company
and the initiation of an SEC investigation (See "Item 3. Legal Proceedings.")
which occurred subsequent to March 31, 1998, have had and continue to have an
adverse impact on the Company's business, financial condition, results of
operations, liquidity and cash flows.
RECENT DEVELOPMENTS
On February 14, 2000, the Company announced the formation of three new
business units at its E.F. Johnson subsidiary to further strengthen its position
in the wireless systems and digital radio products market. The new State, Local,
and Commercial business unit will be focused on marketing, sales, and turnkey
delivery of high level public safety and commercial private wireless
communications networks. The new Federal business unit will be focused on the
sales of E.F. Johnson's digital APCO Project 25 products to Federal government
agencies. The new Value Added Services and Original Equipment Manufacturer
("OEM") business unit was formed to consolidate E.F. Johnson's OEM production
services and engineering design and support services. The Company also announced
that it would also open offices in the Washington, D.C. area to exploit
opportunities in the Federal and commercial markets.
WIRELESS COMMUNICATIONS INDUSTRY
OVERVIEW
The mobile wireless communications industry began in the mid-1930s when
police departments began using land mobile radio systems to enable immediate
communication between headquarters and officers patrolling the community. As
(1) other public safety agencies and commercial enterprises recognized the
benefit of immediate communications with their field personnel,
(2) technological advances made LMR systems more affordable, and (3) increasing
amounts of spectrum were allocated for LMR use, LMR dispatch service expanded
beyond its traditional police and fire applications to become an integral
communications service for a variety of government and commercial enterprises.
Today, in addition to dispatch-oriented LMR service, many other forms of mobile
wireless communication technologies have emerged and are continuing to be
developed to meet the varied communication needs of an increasingly mobile
society. These include paging, wireless data, cellular telephone and personal
communication services.
COMMERCIAL SYSTEMS MARKET
Commercial users include large industrial and other private enterprises,
such as utility, construction and oil companies, railroads and universities that
require rapid communications among personnel spread out over relatively large
geographic areas. While many commercial LMR users purchase and operate entire
systems for their own use, a large segment of the commercial market consists of
specialized mobile radio ("SMR") operators such as Nextel Corp. and Centennial
Communications, and their customers. SMR operators build and lease private LMR
systems on a for-profit basis. They sell airtime to end-users whose mobile
communication needs can be served by renting or purchasing subscriber units as
opposed to purchasing an entire system, or who are unable to obtain a FCC
license to operate their own system. Traditionally, end-users of SMR services
have included taxi fleets and smaller construction and delivery service
companies. Currently, many SMR operators in the larger metropolitan markets,
such as Nextel Corp., are also offering more consumer-oriented, cellular-like
SMR services.
There are two general types of LMR systems serving commercial users,
(1) conventional and (2) trunked. Both operate on the specific frequency bands
that the FCC has allocated for such types of systems. Conventional LMR systems
use a single channel to transmit and receive information. All users have
unrestricted access, similar to a "party" telephone line, and the user must
monitor the system and wait until the channel is unoccupied. Trunked systems,
including the Company's logic trunked radio ("LTR-Registered Trademark-")
product, combine multiple channels so that when a user begins transmitting, an
unoccupied
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channel is automatically selected. Conventional LMR systems are relatively
inefficient compared to trunked systems.
The development of trunked LMR systems and the allocation of additional
frequency spectrum in the 1970s triggered significant growth in LMR use for
commercial applications. In recent years, technological developments by E.F.
Johnson and others have enabled LMR systems to be "networked," involving
multiple "sites" linked together through a switch to provide extended
geographical coverage. In addition, many trunked subscriber units are capable of
functioning as mobile telephones through interconnections to the public switched
telephone network. With the creation of LTR-Net-TM- in 1997, the Company has
developed a networking system that is backward compatible to the standard
LTR-Registered Trademark- protocol. LTR-Net-TM- allows systems operators to link
sites together and provide telephone interconnection, individual and group
calling, electronic serial numbers and improved system security in an advanced
commercially focused trunking system.
PUBLIC SAFETY AND OTHER GOVERNMENT USERS MARKET
Public safety and other government users include state and local agencies,
such as law enforcement, fire and emergency medical personnel, and military and
non-military federal governmental agencies. Many of these users operate LMR
equipment which complies with specifications established by the Association of
Public Safety Communications Officials International Inc. ("APCO"), while the
remainder operate mostly conventional and non-APCO trunked LMRs. The most widely
used APCO standard is the "APCO 16" standard established in 1979, which includes
specifications for 800 MHz transmission, analog voice modulation, and trunking
functions for using the frequency spectrum. In 1988, E.F. Johnson entered the
market for APCO 16 products with its Multi-Net-Registered Trademark- system.
In 1995, the APCO Advisory Board promulgated a new standard known as Project
25. Project 25 specifies features and signaling for narrow band digital voice
and data, and conventional and trunking modes of operation. The standard has
been adopted by the U.S. Federal government, which specified a conversion to
Project 25 by the year 2005. Although public safety agencies are not currently
required by the FCC or APCO to purchase Project 25 compliant LMR systems or
otherwise adopt the Project 25 standard, the Company believes that Project 25
compatibility will be one of the key purchasing factors for public safety and
other government LMR users. Furthermore, as LMR users upgrade their existing
APCO 16 systems to comply with FCC-imposed bandwidth limitations, the Company
expects that demand for Project 25 compliant LMR systems will increase, due in
part to the fact that Project 25 systems can potentially be configured for
compatibility with older APCO 16 mobile and portable radios, allowing early
adopters of the Project 25 standard to purchase new equipment without replacing
all of their subscriber radios. Additionally, the Company's Project 25 radios
can be used on most Motorola APCO 16 systems using the Smartnet-TM-protocol,
which E.F. Johnson licensed from Motorola. However, to date the Project 25
market is developing slowly which the Company believes is primarily due to the
higher cost of Project 25 compliant system infrastructure and radios.
INFORMATION SECURITY INDUSTRY
OVERVIEW
The electronic information security industry is generally comprised of
products designed to protect the transmission of sensitive voice and data
communications through both wireless and wireline mediums. Without such
protection, many forms of electronic communications, such as LMR and telephone
conversations and remote data communications, are vulnerable to interception and
theft.
The information security industry originated from the need to secure
sensitive wireless military communications. By the late 1970s, the availability,
quality and cost of information security devices had improved so that the use of
these devices became economically and functionally feasible for non-military
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governmental users (such as law enforcement, fire, emergency medical and other
public safety personnel) and large commercial users (such as railroads,
construction and oil companies).
Initially, all electronic communications were transmitted in analog format.
Analog transmissions typically consist of a voice or other signal modulated
directly onto a continuous radio "carrier" wave. An analog transmission can be
made secure by (1) "scrambling" or manipulating the original signal at the point
of transmission and (2) reconstituting the original signal at the receiving end.
By the late 1980s, accelerating use of wireless communications devices, such as
LMRs and cellular telephones, resulted in increased demand for limited radio
spectrum. In response to this demand, and enabled by the low-cost availability
of digital signal processors ("DSPs"), electronics manufacturers developed
spectrally efficient (I.E., low-bandwidth) digital communications devices. In
digital communications, an analog signal is "digitized," or converted into a
series of discrete information "bits" in the form of ones and zeroes prior to
transmission. Digital transmissions can be made secure by a process known as
"encryption," which involves (1) the use of a mathematical algorithm to
rearrange the bit-stream prior to transmission and (2) a decoding algorithm to
reconstitute the transmitted information back into its original form at the
receiving end.
Manufacturers of information security products such as the Company typically
charge higher prices for devices featuring more advanced levels of security.
Therefore, the types of end-users at each level of security tend to vary based
upon the importance of the information that the end-user wants to secure.
Typical users of the most basic form of scrambler, the frequency inversion
scrambler, include taxi dispatchers, other types of consumer businesses and
transportation companies. Typical users for medium-level security devices
include commercial users and international customers who do not need an export
license. High-level scrambling and encryption devices are used primarily by
public safety agencies, federal government personnel and international customers
who have obtained the required export license.
LAND MOBILE RADIO SECURITY MARKET
One of the earliest applications of information security technology outside
of the military was in protecting LMR voice communications. LMRs consist of
(1) hand-held or (2) mobile (vehicle mounted) two-way radios. A typical LMR
system consists of one or more base control stations networked with each other
and with hand-held and/or mobile LMRs. As with all other major forms of wireless
communications devices, LMRs transmit information in either analog or digital
format, although there is an increasing migration to the digital format.
TELEPHONY SECURITY MARKET
Since its inception in 1983, cellular telephone service has grown rapidly
and become available to most of the United States population. Cellular telephone
subscribers and revenues have grown rapidly in recent years and are expected to
grow in the future. This increased volume has raised significant new security
and privacy issues and an increased sensitivity to the potential risks involved
in intercepted signals. Unprotected wireless transmissions generally provide
minimal or no security and allow eavesdropping by even casual listeners with
compatible scanners.
In recent years, the cellular industry has been migrating, on an accelerated
basis, away from analog devices towards digital forms of communications, which
are commonly referred to as Personal Communication Services ("PCS"). Similar to
the LMR industry, this migration has occurred principally due to (1) increased
spectrum efficiency, (2) perception of greater voice security and
(3) additional capabilities for advanced features and data communications. PCS
technology typically uses variable rate voice coding, which maximizes the
efficiency of transmissions by only transmitting critical pieces of information
and omitting other information, such as pauses in a conversation. In the area of
voice security, digital telephony is functionally more secure than analog
telephony. While there are some characteristics that make digital transmissions
more difficult to intercept, most digital services do not use any type of active
encryption
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technology. However, unlike analog scanning technology, digital scanners are not
yet widely available. The increased use of digital devices has resulted and will
likely continue to result in reduced demand for add-on voice security devices,
such as those produced by the Company.
WIRELESS COMMUNICATIONS PRODUCTS
The Company sells its wireless communications products primarily to LMR
dealers, SMR operators, governmental entities, and commercial industry.
End-users include commercial concerns and public safety and other government
users desiring point to multi-point communications. Most of these types of
products are sold under the "E.F. Johnson" brand name. To increase its product
offering to its wireless customers, the Company has incorporated its encryption
technology into some of its wireless communications radio products. The
following discussion summarizes the types of products typically sold to both of
these types of users.
COMMERCIAL USERS
The Company serves the commercial market primarily with its
LTR-Registered Trademark- and analog conventional LMR product lines. Management
believes that significant niche markets continue to exist for analog
conventional LMR products with value added technology, such as signaling
protocols and scrambling technology.
The LTR-Registered Trademark- product line incorporates the E.F. Johnson
LTR-Registered Trademark- trunking protocols and includes (1) sub-audible
signaling, which automatically selects a clear or unoccupied channel, (2) open
architecture that is compatible with other analog products and (3) transmission
trunking which provides efficient use of the channels. In December 1997, the
Company completed the design of a trunked LMR system known as "LTR-Net-TM-,"
which uses its LTR-Registered Trademark- trunking system in a wide-area
networked configuration, allowing linked communications over a much larger
geographic area than a single trunked system while also providing a much needed
array of user features and security functions. During 1999, the company
delivered a number of LTR-Net-TM- systems, including one that provides statewide
coverage.
The Company's products for the SMR market include mobile radios, portable
radios and repeaters, along with other infrastructure to provide a complete SMR
system. The Company targets smaller regional SMR operators which offer a
combination of dispatch and interconnect services and the traditional local SMR
operators and dealers who serve local businesses primarily with dispatch
service. In serving this market, the Company relies heavily on its network of
dealers, many of whom are authorized by the Company as service centers and
provide installation, maintenance, repair and warranty service. The Company
believes that the end-users of these products value (1) the low cost of point to
multi-point communications, (2) flexibility of networking, and (3) support and
responsiveness of the Company and its dealers.
Competition in the domestic commercial market has been increasing. New 800
MHz SMR frequencies are not available and existing channels are filling up. SMR
operator's with licenses for 900 MHz channels have been slow to develop their
build outs. There has been consolidation in both of these SMR marketplaces. A
large number of SMR systems have been converting from analog to digital, which
has resulted in the increasing availability of used analog radios and repeaters
in the marketplace. These factors have contributed to reduced market demand for
new and existing products. Competitors have been reducing their prices and
therefore putting pressure on the Company's prices and margins in this market.
PUBLIC SAFETY AND OTHER GOVERNMENT USERS
The Company serves public safety and other government users primarily with
its APCO 16 Multi-Net-TM- analog trunking system and Project 25 digital product
lines. The Company believes that its Multi-Net-TM- system, which links together
multiple sites for wide-area coverage using a proprietary architecture, is a
high-quality, cost-effective alternative to comparable APCO 16 systems produced
by other manufacturers. The Company's system offers many features specifically
designed for public safety
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users, such as (1) emergency queuing, (2) over 8,000 unique identification
codes, (3) automatic subscriber identification, (4) five levels of priority
access, (5) simulcast, and (6) a wide area system configuration. The Company
provides a broad line of Multi-Net-TM- products, including repeaters, radio
network terminals, system management modules, dispatcher consoles, audio and
data link and related accessories. E.F. Johnson Multi-Net-TM- systems are sold
both domestically and internationally. The Company's Project 25 compliant
analog/digital radios are compatible and interoperable with older analog radio
systems, as well as with Motorola's proprietary analog APCO 16 trunking
technology (SmartNet-TM- and Smartzone-TM-) and proprietary digital encryption
algorithms. In August 1996, the Company introduced a hand held digital radio
complying with the Project 25 "common air interface" standard and also featuring
advanced core scrambling and digital encryption technologies. The Company's
Project 25 radios contain, as standard features, voice scrambling and/or digital
encryption technology. The Company believes that such backward compatibility
with most of Motorola's APCO 16 trunking technology will provide early adopters
of the Project 25 standard, such as the federal government and many public
safety agencies, with the ability to purchase new equipment without replacing
entire older systems. During 1999, the Company also introduced new products that
operate in the analog mode on existing Motorola Smartnet-TM- and Smartzone-TM-
trunking systems. The Company believes these products, being lower cost than
digital Project 25 radios, will provide a competitive alternative for existing
Smartnet-TM- and Smartzone-TM- customers.
INFORMATION SECURITY PRODUCTS
OVERVIEW
Transcrypt first entered the information security market in 1978 with
simple, transistor-based add-on scrambling modules for use in analog LMRs using
basic single-inversion scrambling techniques. Transcrypt marketed these products
primarily to public safety agencies and international governments. Since that
time, the Company has further developed and improved upon its core information
security technologies, which have at various times been implemented into the
Company's scrambler modules and other products within its major information
security product families, (1) LMR Security and (2) Telephony Security.
The core technologies currently available to the Company for incorporation
in its products include the following methods, which are listed in increasing
order of sophistication of security technique: (1) frequency inversion
(inverting or otherwise adjusting the phase of a signal based on a consistent
method), (2) rolling code transmission (incrementally stepping codes),
(3) hopping code transmission (changing broadcast frequencies multiple times per
second based upon an algorithm) and (4) digital encryption (encoding a digital
bit-stream based upon a mathematical encryption algorithm).
As with all of the Company's information security products, the use of
scrambling and encryption equipment is required on both the transmitting and
receiving sides of communications in order to operate in secure mode. For
example, in order to achieve secure LMR communications, it would be necessary
for both the transmitting and receiving equipment, including hand-held, mobile
devices and base stations, to be equipped with one of the Company's modules,
whether as an add-on installation or in the form of one of the Company's
complete LMRs. In the Company's telephony family, a scrambled cellular telephone
may communicate in secure mode only with (1) another of the Company's secure
cellular telephones, (2) a PBX interchange or cellular service provider that has
installed one of the Company's Voice Privacy Exchange Units or (3) a landline
telephone equipped with one of the Company's external desktop units. However,
all of the Company's products can be used in the clear, non-scrambled mode with
equipment that does not contain a security device.
LAND MOBILE RADIO SECURITY
The Company offers a variety of add-on LMR scrambling products featuring its
core technologies at varying levels of security. Add-on scramblers are available
in two packages, (1) a modular package consisting of a circuit board that is
designed to be permanently soldered into existing circuitry and (2) a
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socket package designed for installation in sockets with standard pin
configurations which original equipment manufacturers ("OEM") may install.
Products sold by the Company are compatible with sockets of OEM
manufacturers, including ICOM America, Inc., Motorola, Kenwood, and Midland. The
Company also produces modules that add signaling features to radios, including
"man-down" (emergency signal broadcast if radio position becomes horizontal),
"stun-kill" (disables lost or stolen radios remotely) and "over-the-air
reprogramming" (changes encryption and scrambling codes remotely). In
December 1997, the Company introduced an LMR encryption module for use as an
add-on or in OEM equipment that uses the U.S. digital encryption standard known
as "DES." This module uses the widely recognized DES algorithm for encoding
transmissions.
TELEPHONY SECURITY
The Company's add-on scramblers for cellular telephones typically consist of
a modular circuit board designed to be permanently soldered into existing
telephone circuitry. The add-on scrambler product line includes a model designed
specifically for Motorola, Nokia, and Qualcomm telephones, which feature
advanced digital signal processing technology. With the increased deployment of
digital or PCS systems by cellular service providers, the demand for add-on
voice security products for analog equipment has resulted and will likely
continue to result in reduced demand for add-on voice security devices for
analog telephones, such as those produced by the Company.
The Company offers cellular telephones upgraded to include the Company's
advanced add-on scrambling modules. The Company believes that offering cellular
telephone security through a complete telephone product offers certain
advantages over add-on scrambler sales. These advantages include (1) presenting
the customer with a single vendor, (2) overcoming customer resistance to
surrendering their telephones during installations and (3) allowing the Company
to market cellular security directly to cellular service providers. In the area
of landline telephone voice security, the Company has, since 1995, produced
landline scrambling and encryption devices for installation between the handset
and telephone base, which have been purchased primarily by overseas government
and corporate users. In 1997, the Company introduced a line of complete landline
telephones with built-in voice security capability.
PRODUCTS UNDER DEVELOPMENT
Consistent with the Company's development efforts for its existing products,
the Company designs new products around common wireless technologies using
common signal processing platforms and circuitry. Using this approach, the
Company has generally been able to incorporate improvements in core technologies
into its new products more quickly and with relatively lower development costs
compared to developing entire products separately. The following discussion
contains a summary of the Company's principal products under development. The
Company cannot assure that it will be able to successfully develop any of these
products or, if developed, that any such products will be commercially viable or
result in material sales.
WIRELESS COMMUNICATIONS
The Company plans to develop in 2000, for expected shipment during 2001,
additional models of its hand-held digital radios containing different features,
as well as a line of mobile digital radios, which are intended to comply with
the Project 25 standard. The Company has undertaken the development of Project
25 infrastructure equipment, including Project 25 trunking infrastructure. The
Company believes Project 25 trunking will be more widely implemented as costs
come down and additional competitively priced equipment becomes available. In
addition, the Company is analyzing the potential of applying standard Internet
Protocol switching techniques for voice and data interconnectivity between
wireless sites.
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LAND MOBILE RADIO SECURITY
The LMR security products under development are new versions of the
Company's SC20-DES module for deployment in different models of radios,
including sockets in certain new model Motorola radios introduced in late 1998.
From time to time, the Company also has under development a number of custom
security modules, including those incorporating custom encryption and scrambling
algorithms.
TELEPHONY SECURITY
No new telephony security products are under development at this time.
CUSTOMERS
Purchasers of the Company's wireless communications and information security
products include public safety agencies and police forces, federal government
agencies, foreign governments, the military, cellular service providers, LMR
manufacturers and business and corporate users in finance, manufacturing and
media/entertainment, among other industries. The Company's customers use
information security products in a variety of situations involving differing
security needs. For example, domestic and international police forces typically
have a medium to high need for security, while military users which are often
faced with hostile and determined threats typically have a very high need for
security. No customer accounted for more than 10% of the Company's revenues
during 1999.
SALES AND MARKETING
The following discussion summarizes the Company's current sales and
marketing approaches for its different products:
WIRELESS COMMUNICATIONS
The Company's sales and marketing functions for LMR systems focus on the
Americas, including the North American and Latin American markets. Other
international markets are covered by distributors, agents, and manufacturer's
representatives. For North American sales, the Company uses a direct sales force
of account executives and sales managers, who sell Company products primarily in
(1) the state and local government markets, (2) the Federal markets, and (3) to
larger dealers and SMR operators, and telemarketing personnel who sell primarily
to smaller dealers and SMR operators. The Company's international sales are made
through a specialized international direct sales force and by Company authorized
dealer/distributors. In 1999, the Company decided to close its Hong Kong office
due to cost and market considerations, and to focus on its markets in the
Americas.
LTR-Registered Trademark- and conventional LMR products are sold in North
America primarily to independently owned and operated dealers, some of which are
also SMR operators. The dealers typically carry other competitive product lines
as well. These products are distributed internationally primarily through
dealers and distributors located in more than 45 countries. Many of the dealers
also are authorized as service centers and provide installation, maintenance,
repair and warranty service. The Company provides comprehensive dealer support,
including cooperative advertising programs, advertising materials, sales and
service training, and technical support.
The majority of system sales of LMR products to both commercial and
governmental purchasers involves soliciting and responding to "requests for
proposals," commonly referred to as "RFPs." The RFP process for system sales has
a relatively long cycle time. The period from proposal requirements to contract
award typically takes at least one year, and depending on the size of the
system, it can take multiple years for complete installation and acceptance of
the project. Public sector end-users issuing RFPs often require suppliers of LMR
systems to supply a bond from an approved surety company at the time that the
bid is submitted and at the time that the contract is awarded.
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A number of factors can limit the availability of such bonds, including the
applicant's financial condition and operating results, the applicant's record
for completing similar systems contracts in the past and the extent to which the
applicant has bonds in place for other projects. During 1999, the Company
focused on the completion of systems contracts for certain E.F. Johnson projects
begun prior to the Company's acquisition of E.F. Johnson. The Company believes
that it has substantially corrected these systems problems. However, if a
customer for a systems contract declares an event of default under the
outstanding bond related to the system contract, the issuer of the Company's
bonds could reduce the maximum amount of bond coverage available to the Company,
or impose additional restrictions with respect to the issuance of bonds on
behalf of the Company. A reduction in the amount of bond coverage available to
the Company or any restrictions imposed in connection with the issuance of bonds
would adversely affect the Company's ability to bid on new system contracts in
the future. In early 2000, the Company negotiated an agreement with a bonding
insurer that provides for up to $20 million in new bonding capability at
competitive terms.
INFORMATION SECURITY
The Company sells its add-on products domestically primarily to distributors
and dealers, OEMs and self-servicing end-users, through sales managers while
complete radio products are sold domestically primarily to end-users.
Furthermore, the Company is continuing to market radio and other complete
products to its existing add-on customer base.
The Company conducts international sales through its sales managers, who
focus on specific regions of the world outside of the United States. The
majority of international sales are made by the sales managers in conjunction
with a Company-authorized distributor, which typically provides a local contact
and arranges for technical training in foreign countries. See "--Summary of
Business Considerations and Certain Factors That May Affect Future Results of
Operations and/or Stock Price--Risks Associated with International Sales."
The Company distributes its add-on information security products to both
(1) end-users in the LMR and telephony markets and (2) distributors, such as LMR
dealers, that resell these products to end-users. Currently, the Company sells
self-branded, complete, analog secure cellular telephones primarily through
distributors and cellular service resellers.
The Company's basic marketing strategy has been to increase market awareness
of the need for information security products and to convey the technical
capabilities of its products. The telephony security products marketing staff
conducts promotions through a mix of print advertising, trade shows, direct mail
campaigns, press releases and presentation material, and distribution of
demonstration and loaner equipment, which are sometimes coordinated with product
launches and trade shows.
CUSTOMER SERVICE
For the Secure Technologies division product line, the Company provides
toll-free telephone access for customers with technical or other problems. The
Company will customize product training for its customers using a classroom
approach or seminars at either or both the customer's site and the Company's
Lincoln facility. The Company offers a standard warranty on all products, which
covers parts and labor for a period of one year from purchase, with an extended
warranty service option available at an additional cost.
The Company installs, for a fee, all models of scrambler modules into
customers' LMRs and telephones. Scrambler modules that the Company does not
install are generally installed by local radio and cellular telephone dealers.
The Company documents installation instructions for its products in OEM devices
and has developed these instructions for more than 2,500 OEM products, including
almost all commercially available two-way radio models sold worldwide.
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For the E.F. Johnson product line, the Company's customer service group
provides after-sales service and support, including technical support through a
toll-free telephone number, on-site technical personnel for repairs and
applications issues, 24-hour turnaround for spare parts and extensive product
training. Product training includes classes and seminars available at both the
customer's site and Waseca manufacturing facility. Such training provides
assistance to the end-user in the use, operation and application of LMR products
and systems, and trains other end-users and dealers to perform network
programming changes and preventive maintenance and repair to products and
systems. LMR products and systems are generally sold with a one year warranty
which covers parts and labor in North America and parts internationally. Broader
warranty and service coverage is provided in certain instances to private
systems customers on a contractual basis, usually for an additional charge.
MOTOROLA RELATIONSHIP
Motorola is a key manufacturer of electronic components used by the Company.
These components include microprocessors and components used in most of the
Company's scramblers and LMRs, which the Company purchases through an
electronics wholesaler.
The Company has obtained from Motorola a royalty-bearing, irrevocable,
non-exclusive, worldwide license (the "IPR License") to manufacture products
containing certain proprietary LMR and digital encryption technology. The
Company believes this technology will be important to the success of certain of
its existing and proposed Project 25 compliant LMR products. The IPR License
includes rights to use Motorola's proprietary analog APCO 16 trunking technology
(SmartNet-TM-), Project 25 required products and certain Motorola digital
encryption algorithms in LMR products. The digital encryption technology may
also be incorporated into certain other information security products. In
addition, E.F. Johnson, prior to its acquisition by the Company, obtained a
license to certain proprietary technology from Motorola relating to the
development of Project 25 compliant digital LMRs. This license covered
infrastructure and other Project 25 technology. Subsequent to the acquisition,
Motorola agreed to expand the coverage of Transcrypt's license to SmartNet-TM-
to cover E.F. Johnson's products.
During 1999, Motorola purchased approximately $4 million worth of E.F.
Johnson Project 25 mobile radio products. At this time, the Company cannot
guarantee that there will be further sales of this product line to Motorola, but
it is conducting active discussions on enhanced offerings related to this
purchase. Also during 1999, the Company signed a Memorandum of Understanding
with Motorola for the exploration of joint development projects and the license
of E.F. Johnson technology.
In addition to the direct benefits of the IPR License to the Company's
Project 25 development efforts, the Company believes that sales of its Project
25 digital LMR products have been, and expect that such sales will in the
foreseeable future be, substantially dependent upon Motorola's dominant position
as a market leader in the Project 25 marketplace. Motorola is the largest
manufacturer of Project 25 compliant LMR products and has been the principal
public supporter of the Project 25 digital transmission standard for the LMR
market. Any reduction in such support could lead to reduced demand for Project
25 compliant LMR systems generally. See "--Summary of Business Considerations
and Certain Factors That May Affect Future Results of Operations and/or Stock
Price--Reliance on Motorola."
INTELLECTUAL PROPERTY
Transcrypt presently holds registered copyrights that cover software
containing algorithms for frequency hopping, scrambling and signaling
technologies for LMR and cellular telephony. Transcrypt has been granted 11
patents relating to high-end scrambling and encryption techniques and methods of
integrating after-market devices, such as the Company's modules, into OEM
products, and has applied for nine additional domestic patents in this area.
Transcrypt also holds three registered trademarks related to the "Transcrypt"
name and product names. In addition to the rights held by Transcrypt, E.F.
Johnson currently holds or has been assigned at least 23 U.S. patents, 10
pending applications for U.S. patents, 11
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patents in foreign countries and 8 pending applications for patents in foreign
countries. These patents and applications cover a broad range of technologies,
including trunking protocols and a high-speed data interface for LMR
communications. Furthermore, E.F. Johnson holds numerous registered trademarks
related to the "E.F. Johnson" name and product names. In addition to copyright
and patent laws, the Company relies on trade secret law and employee and
third-party non-disclosure agreements to protect its proprietary intellectual
property rights.
RESEARCH AND DEVELOPMENT
As of December 31, 1999, the Company had a research and development staff of
48 individuals, including 39 engineers. The Company organizes research and
development efforts along its two main product lines, (1) information security
and (2) wireless communications products. During 1999, the engineering staffs
were realigned to allow focus on research and development of products for E.F.
Johnson and Secure Technologies separately. While engineering staffs will
combine efforts when appropriate, the Company believes that this more focused
environment will foster a more efficient approach to new product development.
WIRELESS COMMUNICATIONS
The Company's wireless communications research and development organization
have expertise in radio frequency technology, computer architecture, switch
architecture, networking, software, and analog and digital hardware designs.
Ongoing engineering efforts are focused on adding additional features to
existing product lines and developing new and innovative platforms.
Cross-disciplinary planning groups involving marketing, manufacturing and
engineering are used for product planning and definition. Present research and
development efforts are involved in upgrading existing product lines, including
the development of next generation repeaters, network switching equipment, and
mobile and portable radios for the Company's principal product lines. The
Company also has a staff of systems applications design, manufacturing, and
customer service engineers that focus on design and implementation of customized
radio systems.
INFORMATION SECURITY
The Company's research and development personnel in the information security
area have expertise in various fields, including cryptography, analog hardware,
digital hardware, and object-oriented software. The research and development
staff designs and develops products incorporating digital signal processing,
voice coding (including improved multi-band excitation), encryption, spectral
manipulation and rotation, systems simulation and mixed signal scrambling.
MANUFACTURING
The Company's manufacturing operation generally consists of the procurement
of commercially available (1) subassemblies, (2) parts, and (3) components, such
as integrated circuits, printed circuit boards and plastic and metal parts, and
their assembly into finished products. Certain components and subassemblies are
manufactured by vendors to the Company's specific design criteria. The Company
inspects components and subassemblies for mechanical and electrical compliance
to its specifications in order to ensure high yield and quality.
The Company produces many of its wireless communications products, including
its Project 25 compliant products, at its Waseca, Minnesota facility. The
Company assembles its information security products at its facility in Lincoln,
Nebraska. During 1999, the Company consolidated its surface mount printed
circuit board assembly at its Waseca, Minnesota location. The Company is
continuing to evaluate alternative manufacturing strategies to reduce costs and
improve efficiencies.
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MATERIALS AND SUPPLIERS
WIRELESS COMMUNICATIONS
Certain components and subassemblies used in the Company's wireless
communications products are presently available only from a single supplier or a
limited group of suppliers. To date, the Company has been able to obtain
adequate supplies of key components and subassemblies in a timely manner from
existing sources. Currently, Motorola is the sole supplier of a number of the
semiconductors used in certain of the Company's LMR products. Although
historically the Company has not experienced a disruption of Motorola's supply
of this product, disruption or termination of Motorola's supply of this product
would have a material adverse effect on the Company's operations.
Most of the Company's newer analog LMRs for the commercial market have been
manufactured by Icom Japan ("ICOM") under contract by the Company. Products
produced by ICOM have included hand-held portable radios that operate in both
conventional and trunked mode and more recently, mobile units as well. In
general, the Company and ICOM have jointly developed new products produced by
ICOM for the Company. Although historically the Company has not experienced a
disruption in ICOM's ability to supply these products, disruption or termination
would have a material adverse effect on the Company's ability to supply certain
LMRs to its customers. ICOM requires that the Company supply a letter of credit
before products are shipped to the Company. In addition to the Company's
relationship with ICOM, the Company began development projects with Kukjae of
Korea and Tokyo Wireless of Japan for products expected to be available for
shipment during 2000. Should a long-term relationship develop with either or
both of these firms, the Company can expect that relationship to be similar to
its relationship with ICOM, particularly with respect to its ability to supply
products to its customers.
With respect to other electronic parts, components and subassemblies, the
Company believes that alternative sources could be obtained to supply these
products, if necessary. Nevertheless, a prolonged inability to obtain certain
components and subassemblies could impair customer relationships and could have
an adverse effect on the Company's operating results. See "--Summary of Business
Considerations and Certain Factors That May Affect Future Results of Operations
and/or Stock Price--Dependence on Suppliers."
INFORMATION SECURITY
The Company obtains most of its electronic parts and components for
information security and radio products from one principal distributor,
Arrow/Schwebber Electronics Group. The Company believes that concentrating its
purchases through one principal distributor lowers procurement costs and
enhances the ability to control the quality of these components and
subassemblies. The distributor stores several months' supply of basic
components, such as microprocessors, flash, and digital signaling processors,
on-site at the Company's manufacturing location on a consignment basis, which
reduces inventory maintenance costs. Additionally, the Company acquires from
other manufacturers certain high-end subassemblies, such as radio frequency
boards for use in complete LMR units that the Company manufactures. See
"--Summary of Business Considerations and Certain Factors That May Affect Future
Results of Operations and/or Stock Price--Dependence on Suppliers."
GOVERNMENT REGULATION AND EXPORT CONTROLS
WIRELESS COMMUNICATIONS
The Company's stand alone wireless products are subject to regulation by the
FCC under the Communications Act of 1934, as amended, and the FCC's rules and
policies as well as the regulations of the telecommunications regulatory
authority in each country where the Company sells its products. These
regulations are in the form of general approval to sell products within a given
country for operation in a given frequency band, one-time equipment
certification, and, at times, local approval for installation. In
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addition, the construction, operation and acquisition of wireless communications
systems, as well as certain aspects of the performance of mobile communications
products, are regulated by the FCC and foreign regulatory authorities. Many of
these governmental regulations are highly technical and subject to change. The
Company believes that it and its products are in material compliance with all
governmental rules and policies in the jurisdictions where the Company sells its
products.
In the United States, all of Transcrypt's wireless products are subject to
FCC Part 15 rules on unlicensed spread spectrum operation. In those countries
that have accepted certain worldwide standards, such as the FCC rulings or those
from the European Telecommunications Standards Institute, Transcrypt has not
experienced significant regulatory issues in bringing its products to market.
Approval in these markets involves retaining local testing agencies to verify
specific product compliance. However, many developing countries, including
certain markets in Asia, have not fully developed or have no frequency
allocation, equipment certification or telecommunications regulatory standards.
The majority of the systems operated by E.F. Johnson's customers must comply
with the rules and regulations governing what has traditionally been
characterized as "private radio" or private carrier communications systems.
Licenses are issued to use frequencies on either a shared or exclusive basis,
depending upon the frequency band in which the system operates. Some of the
channels designated for exclusive use are employed on a for-profit basis; others
are used to satisfy internal communications requirements. Most SMR systems in
operation today use 800 MHz channels. Within the top 50 metropolitan markets,
900 MHz frequencies licensed for exclusive use systems have been made available
to both SMR and non-SMR licensees. Additional channels designated for exclusive
use were made available in the 220 MHz band for both commercial and
non-commercial systems.
Generally, SMR licenses are issued for five-year terms, initially in blocks
of five channels, and may be renewed upon showing compliance with FCC rules and
may be revoked for cause. Such licenses typically are subject to channel
"loading" or usage requirements, such as loading a minimum of 70 subscriber
units for each channel within the initial five-year term. If an SMR licensee
fails to meet its loading requirements in an area where existing applications
are pending on a wait list, the FCC may cancel the license, in whole or in part,
or deny a request to renew or expand the license. Other than loading
requirements, private systems are subject to similar restrictions. For example,
licenses for private systems are also issued for five-year terms, may be renewed
upon showing compliance with FCC rules, and may be revoked for cause. In 1999,
the FCC ruled to relax the build-out requirements, which was a contributing
factor in some frequency holding customers delaying their SMR system purchases.
E.F. Johnson also offers products in bands below 800 MHz where multiple
users in the same geographic area share channels. In this "shared" or
conventional spectrum, there is no requirement for loading the channel to any
particular level in order to retain use of the frequencies. These channels are
generally used by entities satisfying traditional dispatch requirements in,
among others, the transportation and services industries. In addition, some
customers are applying trunking capabilities to their channels in the UHF
(primarily 450-470 MHz) frequency band.
The FCC is considering a number of regulatory changes that could affect the
wireless communications industry and the Company's business. Therefore, the
regulatory environment is inherently uncertain and changes in the regulatory
structure and laws and regulations, both in the United States and
internationally, can adversely affect the Company and its customers. Such
changes could make existing or planned products of the Company obsolete or
unsaleable in one or more markets, which could have a material adverse effect on
the Company.
The FCC, through the Public Safety Wireless Advisory Committee, is
considering regulatory measures to facilitate a transition by public safety
agencies to a more competitive, innovative environment so that the agencies may
gain access to higher-quality transmission, emerging technologies, and broader
services, including interoperability. In August 1998, the FCC adopted rules for
licensing the largest block of spectrum ever allocated at one time for public
safety. The FCC established rules for licensing 24 megahertz
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in the 700 MHz band and established a band plan for use of this spectrum. In
accordance with this rule, in January 1999 the FCC established a Public Safety
National Coordination Committee (NCC) to advise it on issues relating to the use
of the 700 MHz public safety spectrum. The Committee would be responsible for
formulating a national interoperability plan, recommending technical standards
to achieve interoperability spectrum, and providing policy recommendations on an
advisory basis to the regional planning committees in order to facilitate the
development of coordinated plans. The NCC has recommended that Project 25 be
established as the interim interoperability mode for digital voice
communications in this new band. The Committee's recommendations could affect
products manufactured by the Company. Management cannot predict the outcome of
the FCC review or any specific changes in the spectrum of FCC policies, or any
potential effect on the Company's sales.
INFORMATION SECURITY
The Company's information security products have been subject to export
restrictions administered by the Department of State and the Department of
Commerce, which permit the export of encryption products only with the required
level of export license. U.S. export laws also prohibit the export of encryption
products to a number of specified hostile countries. Recent changes in export
policy will allow export of any encryption products to non-governmental
entities, while foreign government entities will still be subject to license
restrictions. Although to date the Company has been able to secure most required
U.S. export licenses, including for export to approximately 120 countries since
1978, there can be no assurance that the Company will continue to be able to
secure such licenses in a timely manner in the future or at all. Based on prior
experience in securing export approvals, the Company believes that it maintains
good relations with federal government agencies with jurisdiction over its
products. Additionally, in certain foreign countries, the Company's distributors
are required to secure licenses or formal permission before encryption products
can be imported.
Management cannot predict whether any new legislation regarding export
controls will be enacted, what form it will take or how the Executive Order or
any such legislation will impact international sales of the Company's products.
COMPETITION
WIRELESS COMMUNICATIONS
In North America, Motorola, Kenwood and Com-Net Ericsson are the leading
providers of LMR equipment. The remainder of the LMR market is divided among a
large number of suppliers who focus on particular segments of the market. The
Company believes it is the third largest provider of public safety radio systems
in North America. However, the Company's share of this market is relatively
small in comparison to sales by Motorola and Com-Net Ericsson.
The Company competes in the wireless communications market on the basis of
price, technology and the flexibility, support and responsiveness provided by
the Company and its dealers. The Company is also experiencing reduced demand for
and downward pricing pressure on its wireless communication analog products sold
to commercial users. Management believes that this is due to several factors.
These include the fact that (1) no new 800 MHz SMR frequencies are being made
available and existing channels are filling up; (2) SMR operator's with licenses
for 900 MHz channels have been slow to develop their build outs; (3) there has
been consolidation in both of these SMR marketplaces; and (4) a large number of
SMR systems have been converting from analog to digital which has resulted in
the increasing availability of used analog radios and repeaters in the
marketplace. Most of the Company's competitors in wireless communications have
financial, technical, marketing, sales, manufacturing, distribution and other
resources substantially greater than those of the Company.
In addition, many of the Company's competitors also possess entrenched
market positions, other intellectual property rights and substantial
technological capabilities. In the North American SMR market,
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the Company's competitors include Motorola, Com-Net Ericsson, Uniden America
Corporation ("Uniden"), Kenwood U.S.A. Corp., ICOM America, Inc., Relm
Corporation and Midland International Corp. The Company believes that cellular
telephones and personal communication services devices provide, to some extent,
the same functionality as SMRs and other LMRs and, as such, may compete with its
products. The Company believes that the international wireless communications
market is fragmented, with Motorola, Kenwood, Nokia, and Ericsson the dominant
suppliers. The Company also competes with Uniden, Hitachi Denshi, Ltd. and Tait
in Asia.
As of March 12, 2000, the Company, Motorola, Relm Communications, King
Radio, and Racal Communications are believed to be the current suppliers of
Project 25 LMR products. Companies which have announced or are anticipated to
announce the availability of Project 25 compliant products or digital LMRs
include ADI and Daniels Communications.
Many of the Company's competitors have substantially greater financial,
technical, marketing, distribution and other resources, greater name recognition
and longer-standing relationships with customers than the Company. Competitors
with greater financial resources are better able to engage in sustained price
reductions in order to gain market share. Any period of sustained price
reductions would have a material adverse effect on the Company's financial
condition and results of operations. The Company cannot assure that it will be
able to compete successfully in the future or that competitive pressures will
not materially and adversely affect its financial condition and results of
operations.
INFORMATION SECURITY
The markets for information security products are highly competitive.
Significant competitive factors in these markets include product quality and
performance, including (1) the effectiveness of security features, (2) the
quality of the resulting voice or data signal, (3) the development of new
products and features, (4) price, (5) name recognition and (6) the quality and
experience of sales, marketing and service personnel. A number of companies
currently offer add-on scramblers for LMRs that compete with the Company's
add-on information security products, including Selectone Corp., Midian
Electronics Inc., and MX-COM Inc. Also, Motorola and Com-net Ericsson offer
high-end, proprietary digital encryption for their LMR products. Cycomm
International Inc./Privaphone and Motorola offer add-on security products for
cellular telephones. Competitors to the Company's secure landline telephone
products include AT&T Corporation/Datatek, Motorola, Cycomm International Inc.,
Cylink Corporation and TCC (Technical Communications Corporation).
BACKLOG
The Company presently ships a small amount of information security products
against backlog, due to the typically short manufacturing cycle of these
products. Because of generally longer manufacturing cycle times required for the
production of complete wireless communication products, the Company's backlog
for wireless communication products has been larger than for its security
products. At December 31, 1999, E.F. Johnson had a total backlog of
approximately $13.0 million. However, the Company does not believe that its
backlog figures are indicative of actual sales of products in future periods.
EMPLOYEES
At December 31, 1999, the Company had 330 full-time equivalent employees,
including 65 at its Lincoln, Nebraska facility, 241 at its Waseca, Minnesota
facility, and 24 field sales people, sales managers or staff located in the
sales territories in which they serve. The Company also uses temporary
employees, independent contractors and consultants when necessary to manage
fluctuations in demand. None of the Company's employees are covered by a
collective bargaining agreement.
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SUMMARY OF BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS OF
OPERATIONS AND/OR STOCK PRICE
Certain matters discussed in this Annual Report may constitute
forward-looking statements under Section 27A of the Securities Act and 21E of
the Exchange Act. These forward-looking statements relate to, among other
things, the outcome of pending class action litigation involving the Company,
the outcome of the pending investigation by the SEC, the effects of the
Company's restatement of its financial statements on the Company's product
development efforts, future sales levels and customer confidence, the Company's
future financial condition, liquidity and business prospects generally,
perceived opportunities in the marketplace for the Company's products and its
products under development, and the effects of a failure to resolve such issues
and the Company's other business plans for the future. The actual outcomes of
these matters may differ significantly from the outcomes expressed or implied in
these forward-looking statements. The following is a summary of some of the
important factors that could affect the Company's future results of operations
and its stock price, and should be considered carefully.
SECURITIES CLASS ACTION CLAIMS
The Company has been named as a defendant in class action lawsuits that were
filed subsequent to the Company's announcement on March 27, 1998 that the filing
of its Annual Report on Form 10-K for year ended December 31, 1997 would be
delayed and that adjustments would be made to the Company's previously announced
financial results. Between March 31, 1998 and May 27, 1998, twelve purported
class action lawsuits were filed against the Company in the United States
District Court for the District of Nebraska, and one complaint was filed in the
District Court of Scotts Bluff County, Nebraska. Certain of the complaints, as
amended, also name one or more current employees and former officers of the
Company and PriceWaterhouseCoopers, LLP as additional defendants. The longest
class period alleged in any of the class complaints is the period from
January 22, 1997 through April 24, 1998.
The federal class actions generally allege claims under Sections 11 and 15
of the Securities Act of 1933 and Sections 10 and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and relate primarily
to allegations of false and misleading financial statements and representations
and material omissions by the Company. The Nebraska action alleges violations of
Nebraska securities laws. The class action complaints seek unspecified
compensatory damages, attorneys' fees and costs. The federal class actions have
been consolidated and lead plaintiff appointed.
In July 1999, the Company announced that a memorandum of understanding had
been signed with plaintiff's counsel to settle the pending federal consolidated
class action lawsuits and its state class action lawsuit. The parties
subsequently memorialized the terms of the memorandum of understanding in a
stipulation of settlement. The stipulation of settlement creates a settlement
fund for distribution to class members and class counsel consisting of
(a) 4,460,000 shares of Transcrypt common stock and (b) at least $3,850,000 and
up to $8,850,000 to be paid by Transcrypt's insurance carriers (depending on the
outcome of an arbitration between plaintiffs and one of the insurance carriers).
Transcrypt would also pay $2,000,000 to the class if there is a purchase of a
majority of Transcrypt by acquisition or merger that occurs before January 1,
2001.
In January 2000, Honorable Warren K. Urbom of the United States District
Court for the District of Nebraska preliminarily approved a settlement of the
pending stockholder class action suits. The settlement, if finally approved,
will also result in the dismissal of the stockholder class action suit pending
in the District Court for Scotts Bluff County, Nebraska. The court has scheduled
a hearing for final approval of the settlement for March 27, 2000.
The Company has reserved for the issuance of the number of shares of Common
Stock to be distributed if the Court finally approves the settlement. However,
no assurance can be given that the Court will finally approve the settlement,
and if the settlement is not finally approved, that the outcome of the
litigation will not have a material adverse effect on the Company's business,
financial condition, results of
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operations, and cash flows. For further information regarding legal proceedings,
see "ITEM 3. LEGAL PROCEEDINGS."
SEC INVESTIGATION
In April 1998, the Securities and Exchange Commission ("SEC") issued a
formal order of investigation to determine whether violations of certain aspects
of the federal securities laws had occurred in connection with the Company. As
part of this investigation, the SEC is also examining the conduct of certain
former officers of the Company. The Company has an obligation to defend and/or
indemnify certain former employees. The Company has discussed possible
settlement of the investigation or any pending enforcement action against the
Company or its affiliated parties relating to these events. At this time, it is
unknown whether the Company will settle the SEC formal order of investigation.
In addition, it is unknown what actions will be taken against former officers
and, therefore, the Company cannot determine the exposure of any future
obligations to defend and/or indemnify these former officers. The SEC has the
authority to impose a variety of sanctions against the Company and
Company-affiliated parties. Such sanctions could include monetary penalties,
imposition of a cease and desist order and issuance of removal and prohibition
orders against Company-affiliated persons, among other things.
EFFECTS OF RESTATEMENT, CLASS ACTION LAWSUITS AND SEC INVESTIGATION ON THE
COMPANY'S BUSINESS
The restatement of the Company's financial statements, class action lawsuits
and the SEC investigation have had an adverse impact on the Company's business,
financial condition, results of operations, liquidity and cash flows. Subsequent
to March 31, 1998, the Company experienced declining revenues, substantial
operating losses, and substantially reduced liquidity. However, the Company
experienced an increase in revenues on a quarter to quarter basis after the
first quarter of 1999. Despite this improvement, there can be no assurance that
this trend will continue in the future.
The Company can provide no assurance that the restatement of its financial
statements and the ongoing class action lawsuits and SEC investigation,
regardless of their outcomes, will not continue to have a material adverse
effect on the Company's business, financial condition, results of operations,
liquidity and cash flows. See "ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
COMPETITION
The information security and wireless communications equipment industries,
and the LMR market segment in particular, are highly competitive. Competition in
the sale of stand-alone and digital products is more intense than for add-on and
analog products. In addition, other wireless communication technologies,
including cellular telephone, paging, SMR, satellite communications and PCS
(personal communication services) currently compete and are expected to compete
in the future with certain of the Company's stand-alone products. Furthermore,
other manufacturers have announced or are anticipated to announce the
availability of APCO Project 25 compliant products or digital land mobile
radios.
In addition, the competition in the domestic commercial market has been
increasing because of reduced demand for radios due to the absence of new 800
MHz SMR frequencies being made available, the slow build out of 900 MHz channels
and the consolidation in both 800 MHz and 900 MHz SMR marketplaces reducing the
number of potential buyers. There are also a large number of SMR systems
converting from analog to digital, which has resulted in the increasing
availability of used analog radios and repeaters in the marketplace.
Some of the Company's competitors or potential competitors have
significantly greater financial, managerial, technical and marketing resources
than the Company. Accordingly, the Company cannot assure that (1) it will be
able to continue to compete effectively in its markets, (2) competition will not
intensify, or (3) future competition will not have a material adverse effect on
the Company. In addition,
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the Company cannot assure that new competitors will not arise and begin to
compete in the markets for the Company's products.
Motorola, Nokia, Kenwood, and Com-Net Ericsson hold a dominant position in
the market for wireless communication products, especially in the LMR and
cellular telephone market segments. In North America, Motorola, Kenwood and
Com-Net Ericsson are the leading providers of LMR equipment. While the Company
believes that it is the third-largest supplier in the North American specialized
LMR equipment market, the Company's share of this market is relatively small in
comparison to Motorola and Com-Net Ericsson. In addition, Motorola, Kenwood, and
Com-Net Ericsson have financial, technical, marketing, sales, manufacturing,
distribution and other resources substantially greater than those of the
Company, and have entrenched market positions in certain segments of the North
American LMR market. Finally, certain of the Company's competitors, including
Motorola and Com-Net Ericsson, have established trade names, trademarks, patents
and other intellectual property rights and substantial technological
capabilities.
The Company believes that the wireless communications equipment industry is
undergoing a period of consolidation which (1) may involve the acquisition or
merger of some of the significant manufacturers of these types of products and
(2) a concentration of market share in a relatively few companies. The Company
cannot assure that consolidations in the industry would not result in the
strengthening of its existing competitors or the creation of new competitors,
some of which may have significantly greater financial, managerial, technical
and marketing resources than the Company. See "--Competition."
RELIANCE ON MOTOROLA
The Company is dependent on continuing access to certain Motorola products,
electrical components and proprietary intellectual property. Although the
Company believes that its relationship with Motorola is good, the Company cannot
assure that Motorola will continue to supply products, electrical components and
proprietary intellectual property to the Company on the scale or at the price
that it now does. In addition, Motorola may increasingly perceive the Company as
a competitor. This perception could impact Motorola's willingness to do business
with the Company. Although the Company has certain contractual relationships
with Motorola as a customer, most of these agreements are subject to termination
in certain circumstances and expire by their terms within one to ten years. Any
reduction of the Company's contractual relations with Motorola or a decision by
Motorola to reduce or eliminate the provision of products, components and
technology to the Company could have a material adverse effect on the Company.
See "--Motorola Relationship."
TRANSITION FROM ANALOG TO DIGITAL PRODUCTS
The LMR and cellular telephone markets are migrating from analog to digital
equipment. This migration is primarily due to bandwidth capacity constraints,
availability of additional features, and the perception that digital
transmissions are more secure than analog transmissions. As a result, the
Company is seeking to upgrade many of E.F. Johnson's LMR products to be
compatible with digital LMR communications standards, including APCO Project 25.
However, the Company cannot assure that it will be able to effect this
transition on a timely basis or that digital products will compete successfully
in the LMR marketplace. The failure of products to compete successfully in the
marketplace would have a material adverse effect on the Company. In addition,
there has been delay in the LMR marketplace acceptance of digital communications
standards. This delay may continue to adversely affect sales of the Company's
APCO Project 25 products. Furthermore, the transition from analog to digital
communications is resulting in, and in the future is likely to continue to
result in, a decrease in demand for the Company's add-on security modules, as
customers may perceive digital communications to be more secure than
communications using analog devices.
19
<PAGE>
RAPIDLY EVOLVING MARKETS
The information security and wireless communications products markets in
which the Company competes are rapidly evolving and can be expected to further
evolve in the future as a result of changing technology, industry standards and
customer requirements. The Company's ability to compete effectively will depend
upon its ability to anticipate and react to these changes in a timely manner.
The Company may not have, either currently or in the future, adequate capital or
human resources to respond to these changes.
The development of new technologies by existing or future competitors may
place the Company at a competitive disadvantage by rendering some or all of its
existing or new products obsolete. The Company has invested heavily in the
introduction of LMR radios that comply with the APCO Project 25 standard. Some
manufacturers have adopted and actively support other digital LMR transmission
standards for the public safety marketplace. The widespread acceptance of one or
more other standards in the public safety market would have a material adverse
effect on the Company. See "--Competition."
Technological developments in the digital LMR industry include the use of
digital trunking, digital simulcast and digital voting technologies. These
technologies have led a number of manufacturers to change the architectures and
methodologies used in designing, developing, and implementing large LMR systems.
In order for the Company to develop and integrate these new technologies into
its products, the Company has made a substantial investment in capital and human
resources. However, there can be no assurance that such resources will be
readily available to the Company in the future.
The failure of the Company to incorporate these technologies into its LMR
products could in the future place the Company's LMR products at a competitive
disadvantage to those offered by other manufacturers and possibly make the
Company's hand-held and mobile LMRs incompatible with systems developed by other
manufacturers, which would have a material adverse effect on the Company.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
In 1999 and 1998, international sales constituted approximately 22.6% and
36.6% of revenues, respectively. International sales are subject to a number of
risks not found in domestic sales. These risks include (1) unexpected changes in
regulatory requirements, (2) tariffs and other trade barriers, (3) political and
economic instability in foreign markets, (4) difficulties in establishing
foreign distribution channels, (5) longer payment cycles, (6) uncertainty in the
collection of accounts receivable, (7) increased costs associated with
maintaining international marketing efforts and (8) difficulties in protecting
intellectual property. In particular, the purchase of Company products by
international customers presents increased risks of, among other things, delayed
or reduced collection of revenues. Because most of the Company's sales are
denominated in U.S. dollars, fluctuations in the value of international
currencies relative to the U.S. dollar may also affect the price,
competitiveness and profitability of the Company's products sold in
international markets. Furthermore, the uncertainty of monetary exchange values
has caused, and may in the future cause, some foreign customers to delay new
orders or delay payment for existing orders. Troubled economic conditions, such
as that recently experienced in Asia and in Latin America, could result in lower
revenues for the Company.
Some of the Company's information security products are subject to export
controls under U.S. law, which in most cases requires the approval of the
Department of Commerce in order to ship internationally. The Company cannot
assure that such approvals will be available to it or its products in the future
in a timely manner or at all or that the federal government will not revise its
export policies or the list of products and countries for which export approval
is required. The Company's inability to obtain required export approvals would
adversely affect the Company's international sales, which would have a material
adverse effect on the Company. In addition, foreign companies not subject to
United States export restrictions may have a competitive advantage in the
international information security market. The Company cannot predict the impact
of these factors on the international market for its products. See "--Government
Regulation and Export Controls."
20
<PAGE>
RELIANCE ON PUBLIC SECTOR MARKETS
Public safety agencies and other governmental entities comprise a
significant portion of the Company's current and anticipated customer base.
Because there is an unknown amount of governmental customers that purchase
through dealers for the Company's Information Security segment, the Company
cannot determine the percentage of its products that are ultimately sold to
governmental agencies. However, the Company believes that domestic and
international governments are the end-users of most of its products. As the
transition in the Company's Information Security product line from add-on to
stand-alone products progresses and as competition for such sales intensifies,
the Company expects that it will increasingly be subject to competitive bidding
requirements for sales to governmental customers, which can be expected to
result in lower prices and longer sales cycles with resulting lower margins.
The Company's wireless communication segment public safety sales accounted
for approximately 44% of total sales for the Company in 1999. The Company
entered into three major new domestic systems contracts during 1999, and sold a
number of Y2K related system upgrades. The RFP bidding cycle and contract award
stage can take six months to two years before a contract is awarded and the
governmental customers funding process for these systems can delay the bidding
cycle as well.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its future success will depend in part on its
ability to attract, motivate and retain highly skilled engineering, technical,
managerial and marketing personnel. Competition for such personnel is intense
and the Company competes in the market for such personnel against numerous
companies, including larger, more established companies with significantly
greater financial resources than the Company. The Company currently has openings
for engineers and other personnel, and it cannot assure that it will be
successful in attracting, motivating or retaining such personnel.
DEPENDENCE ON SUPPLIERS
Most of the Company's current and proposed products require essential
electronic components supplied by outside vendors. Certain components may be
available from only one supplier and may occasionally be in short supply. For
example, in late 1993 and early 1994, there was a shortage of certain Motorola
surface-mount microprocessors, which resulted in a substantial increase in the
cost of these components. In 1998 and 1999, certain RF semiconductors and RF
power modules were discontinued by Motorola and other manufacturers. The
Company's inability to obtain these and other key components could result in
lost sales, the need to maintain excessive inventory levels, higher component
costs, or the need to redesign certain affected electronic sub-assemblies, which
could increase the cost of producing the Company's products and have a material
adverse effect on the Company.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced, and expects to continue to experience,
quarterly variations in its results of operations as a result of many factors.
These factors include the timing of customer orders, the timing of the receipt
of cash payment on sales which are recorded on a cash basis, the timing of the
introduction of new products, the timing and mix of product sales, general
economic conditions and specific economic conditions in the information security
and wireless communications industry. See "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Quarterly Results of
Operations."
REGULATORY ENVIRONMENT
Wireless communications and encryption products are subject to regulation by
United States and foreign laws and international treaties. The regulatory
environment is uncertain and changes in the regulatory structure and laws and
regulations can adversely affect the Company and its customers. Such changes
could make the Company's existing or planned products obsolete or unsaleable in
one or more
21
<PAGE>
markets, which could have a material adverse effect on the Company. See "--Risks
Associated with International Sales" and "--Government Regulation and Export
Controls."
ENVIRONMENTAL REGULATION
The Company is subject to various federal, state and local environmental
statutes, ordinances and regulations relating to the use, storage, handling and
disposal of certain toxic, volatile or otherwise hazardous substances and wastes
used or generated in the manufacturing and assembly of the Company's products.
Under these laws, the Company may become liable for the costs of removal or
remediation of certain hazardous substances or wastes that have been or are
being released on or in the Company's facilities, or have been or are being
disposed of offsite as wastes. Such laws may impose liability without regard to
whether the Company knew of, or caused, the release of such hazardous substances
or wastes.
During 1999, the Company completed the sale of its facility in Waseca,
Minnesota (see Item 2. Properties). As a part of that sale, the Company agreed
to pay for the cost of the initial testing for potential contaminants, as well
as for subsequent monitoring of the site, if warranted. The Company has set up a
reserve of $80,000 to cover the cost of the testing and monitoring. While the
Company feels that this amount is adequate to cover any potential liability
associated with this issue, there is no guarantee that it will fully cover all
costs and liabilities that may arise in the future.
The Company cannot assure that any environmental assessments the Company has
undertaken with respect to its facilities have revealed all potential
environmental liabilities, that any prior owner or operator of the Company's
properties did not create any material environmental condition not known to the
Company, or that an environmental condition that could result in penalties,
expenses, or liability to the Company does not otherwise exist in any one or
more of the Company's facilities. In addition, the amount of hazardous
substances or wastes produced or generated by the Company may increase in the
future depending on changes in the Company's operations. Any failure by the
Company to comply with present or future environmental laws could subject it to
the imposition of substantial fines, suspension of production, alteration of
manufacturing processes or cessation of operations, any of which could have a
material adverse effect on the Company. Compliance with such environmental laws
could require the Company to acquire expensive remediation equipment or to incur
substantial expenses. Furthermore, the presence of hazardous substances on a
property or at certain offsite locations could result in the Company incurring
substantial liabilities as a result of a claim by a private third-party for
personal injury or a claim by an adjacent property owner for property damage.
The imposition of any of the foregoing liabilities could materially adversely
affect the Company.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF THIRD-PARTY CLAIMS
OF INFRINGEMENT
The Company currently holds a number of domestic and international patents
and has on file applications for additional patents. Although the Company
assesses the advisability of patenting any technological development, the
Company has historically relied, in the information security area, primarily on
(1) copyright and trade secret law and (2) employee and third-party
non-disclosure agreements to protect its proprietary intellectual property and
rights. The protection afforded by such means may not be as complete as patent
protection. In addition, the laws of some countries do not protect trade
secrets. There are limitations on the availability of patent protection as a
means to protect the Company's products. Even when patent protection can be
obtained, there are often limitations on the enforceability of such patent
rights. The Company's inability to preserve all of its proprietary intellectual
property and rights could have a material adverse effect on the Company. See
"--Intellectual Property."
RISKS PRESENTED BY THE YEAR 2000 ISSUE
The Company was able to assess its systems and products, and took the
necessary steps to ensure that no significant impact would result from the year
2000 date change. As a result, the Company has not, to date, experienced any
material impact due to the Y2K date change. While it does not expect to
experience
22
<PAGE>
any latent effects, it cannot ensure that its systems or those of third parties
with which it interacts will be entirely free of any such occurrences.
The Company did not experience any material Year 2000 system failure or
miscalculations causing disruptions of operations. In addition, we have not
received a significant amount of customer notification regarding experiencing
erroneous dates on usage reports or Year 2000 operational issues. It is still
possible for customers to have issues with previously shipped products. See
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Results of the Year 2000 Issue."
ITEM 2. PROPERTIES
The Company occupies a portion of a 76,500 square foot multi-story
administrative and manufacturing facility located at 4800 NW 1st Street,
Lincoln, Nebraska, 68521, which is located in the University of Nebraska
Technology Park. The Company sold this facility and approximately 10 acres of
surrounding land during August 1999 for approximately $5.2 million. In
conjunction with the sale, the Company leased approximately 23,000 square feet
of the facility for five years, and for which the company will pay approximately
$231,000 during 2000. On January 28, 1998, the Company purchased the 250,000
square-foot manufacturing facility located on a 20-acre site in Waseca,
Minnesota. During December 1999, the Company sold the Waseca facility for
approximately $2.7 million. In conjunction with the sale, the Company leased
136,000 square feet of the facility for five years, and for which the company
will pay approximately $962,000 during 2000. In addition, the Company owns a
facility in Garner, Iowa, which it leases to a third party. The Company also
leases additional sales and service facilities in Burnsville, Minnesota, and
Miami, Florida. During 2000, the Company plans to lease office space for
executive, administrative, and sales personnel in Washington, D.C.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in class action lawsuits that were
filed subsequent to the Company's announcement on March 27, 1998 that the filing
of its Annual Report on Form 10-K for year ended December 31, 1997 would be
delayed and that adjustments would be made to the Company's previously announced
financial results. Between March 31, 1998 and May 27, 1998, twelve purported
class action lawsuits were filed against the Company in the United States
District Court for the District of Nebraska, and one complaint was filed in the
District Court of Scotts Bluff County, Nebraska. Certain of the complaints, as
amended, also name one or more current employees and former officers of the
Company and PriceWaterhouseCoopers, LLP as additional defendants. The longest
class period alleged in any of the class complaints is the period from
January 22, 1997 through April 24, 1998.
The federal class actions generally allege claims under Sections 11 and 15
of the Securities Act of 1933 and Sections 10 and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and relate primarily
to allegations of false and misleading financial statements and representations
and material omissions by the Company. The Nebraska action alleges violations of
Nebraska securities laws. The class action complaints seek unspecified
compensatory damages, attorneys' fees and costs. The federal class actions have
been consolidated.
In July 1999, the Company announced that a memorandum of understanding had
been signed with plaintiff's counsel to settle the pending federal consolidated
class action lawsuits and its state class action lawsuit. The parties
subsequently memorialized the terms of the memorandum of understanding in a
stipulation of settlement. The stipulation of settlement agreement creates a
settlement fund for distribution to class members and class counsel consisting
of (a) 4,460,000 shares of Transcrypt common stock and (b) at least $3,850,000
and up to $8,850,000 to be paid by Transcrypt's insurance carriers (depending on
the outcome of an arbitration between plaintiffs and one of the insurance
carriers). Transcrypt would also pay $2,000,000 to the class if there is a
purchase of a majority of Transcrypt by acquisition or merger that occurs before
January 1, 2001.
23
<PAGE>
In January 2000, Honorable Warren K. Urbom of the United States District
Court for the District of Nebraska preliminarily approved a settlement of the
pending stockholder class action suits. The settlement class period is defined
as persons that purchased stock during the period from January 22, 1997 through
April 24, 1998. The settlement, if finally approved, will also result in the
dismissal of the stockholder class action suit pending in the District Court for
Scotts Bluff County, Nebraska. The preliminary approval precludes any persons
from asserting any claims of indemnity or contribution against Transcrypt or any
of its current or former officers, directors, or employees. The Court has
scheduled a hearing for final approval of the settlement for March 27, 2000. In
addition, the Honorable Randall L Lippstreau of the District Court for Scotts
Bluff County, Nebraska, has entered an order that is effective on the final
approval of the settlement by Judge Urbom, which dismisses the action against
the Company and certain former employees is the class action pending in District
Court for Scotts Bluff County, Nebraska.
The Company has reserved for the issuance of the number of shares of Common
Stock to be distributed if the court finally approves the settlement. However,
no assurance can be given that the Court will finally approve the settlement,
and that if the settlement is not finally approved, that the outcome of the
litigation will not have a material adverse effect on the Company's business,
financial condition, results of operations, and cash flows.
On November 4, 1998, Physician's Mutual Insurance Company filed an action in
the District Court of Douglas County, Nebraska against the Company,
PriceWaterhouseCoopers, LLP and two former officers of the Company. The
complaint contains common law causes of action for fraudulent misrepresentation,
fraudulent concealment and negligent misrepresentation against the defendants
arising from the same facts and circumstances underlying the class actions. The
complaint seeks damages in an amount to be proved at trial, but which is
currently alleged to be approximately $850,000. The Company is unable to predict
the likelihood of the outcome or range or amount of potential liability that may
arise therefrom.
The Company may in the future be the subject of additional lawsuits or
claims in connection with the events or facts surrounding its restatement of
previously announced financial results. The Company is unable to predict when or
whether such additional lawsuits or claims may be initiated or the likelihood of
the outcome or range or amount of potential liability that may arise therefrom.
In April 1998, the Securities and Exchange Commission ("SEC") issued a
formal order of investigation to determine whether violations of certain aspects
of the federal securities laws had occurred in connection with the Company. As
part of this investigation, the SEC is also examining the conduct of certain
former officers of the Company. The Company has an obligation to defend and/or
indemnify certain former employees. The Company has discussed possible
settlement of the investigation or any pending enforcement action against the
Company or its affiliated parties relating to these events. At this time, it is
unknown whether the Company will settle the SEC formal order of investigation.
In addition, it is unknown what actions will be taken against former officers
and, therefore, the Company cannot determine the exposure of any future
obligations to defend and/or indemnify these former officers. The SEC has the
authority to impose a variety of sanctions against the Company and
Company-affiliated parties. Such sanctions could include monetary penalties,
imposition of a cease and desist order and issuance of removal and prohibition
orders against Company-affiliated persons, among other things.
The Company is involved in certain other legal proceedings incidental to the
normal conduct of its business. The Company does not believe that any
liabilities relating to such other legal proceedings are likely to be,
individually or in the aggregate, material to the Company's business, financial
condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the stockholders during the fourth quarter of
1999.
24
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was quoted on The Nasdaq Stock Market as a
National Market issue under the symbol "TRII" from the completion of the
Company's initial public offering on January 22, 1997 through May 11, 1998. The
Nasdaq Stock Market halted trading in the Company's Common Stock effective
April 27, 1998 and delisted the Common Stock on May 11, 1998 based on its review
of events regarding the Company and as a result of the Company's failure to
timely file its periodic reports and audited financial statements for the 1997
fiscal year. The Common Stock on August 28, 1998 began trading on the Over the
Counter ("OTC") Bulletin Board under the symbol "TRII".
The following table sets forth, in the periods indicated, the high and low
sales prices per share of the Common Stock, as reported by all markets for the
periods presented. As of December 31, 1999, the Company had 213 stockholders of
record.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1998
First Quarter............................................. $27.25 $8.87
Second Quarter............................................ $11.06 $3.00
Third Quarter............................................. $ 7.00 $1.50
Fourth Quarter............................................ $ 3.69 $1.88
1999
First Quarter............................................. $ 5.00 $2.50
Second Quarter............................................ $ 3.25 $1.38
Third Quarter............................................. $ 3.31 $1.34
Fourth Quarter............................................ $ 3.75 $2.00
</TABLE>
The last sale price of the Common Stock on December 31, 1999, as reported in
the OTC Bulletin Board, was $3.00.
DIVIDENDS
The Company has never paid and has no present intention of paying cash
dividends on its Common Stock. Any determination in the future to pay dividends
will depend on the Company's financial condition, capital requirements, results
of operations, contractual limitations and any other factors deemed relevant by
the Company's Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company is
qualified by reference to, and should be read together with, the Consolidated
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Annual Report on Form 10-K. The Consolidated Statement of Operations data for
the years ended December 31, 1999, 1998 and 1997 and the Consolidated Balance
Sheet data as of December 31, 1999 and 1998 are derived from the Consolidated
Financial Statements of the Company included elsewhere in this Annual Report on
Form 10-K. The Consolidated Statement of Operations data for the years ended
25
<PAGE>
December 31, 1996 and 1995 and the Consolidated Balance Sheet data as of
December 31, 1997, 1996, and 1995 are derived from financial statements not
included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1996 1997(8) 1998 1999
--------- --------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Revenues............................. $ 8,128 $ 10,619 $ 40,423 $ 62,041 $ 53,520
Cost of sales........................ 2,983 4,274 26,106 44,905 36,059
--------- --------- ---------- ---------- ----------
Gross profit......................... 5,145 6,345 14,317 17,136 17,461
--------- --------- ---------- ---------- ----------
Operating costs and expenses:
Research and development........... 1,953 2,234 4,469 8,812 5,724
Sales and marketing................ 2,109 2,187 7,031 11,476 8,282
General and administrative(1)...... 2,284 2,529 4,711 12,529 9,601
Special compensation expense(2).... -- 5,568 -- -- --
In-process research and development
costs(3)......................... -- -- 9,828 -- --
Restructuring charge (4)........... -- -- -- 1,230 523
Provision for litigation settlement
(5).............................. -- -- -- 10,000 (2,221)
--------- --------- ---------- ---------- ----------
Total operating costs and
expenses..................... 6,346 12,518 26,039 44,047 21,909
--------- --------- ---------- ---------- ----------
Loss from operations................. (1,201) (6,173) (11,722) (26,911) (4,448)
Interest income (expense), net....... (137) (131) 231 655 386
Other income......................... -- -- 18 46 235
Benefit for income taxes............. -- (2,186) (524) (3,916) --
--------- --------- ---------- ---------- ----------
Net Loss............................. $ (1,338) $ (4,118) $ (10,949) $ (22,294) $ (3,827)
========= ========= ========== ========== ==========
Loss before pro forma taxes.......... $ (1,338) $ (6,304) $ (11,473) $ (26,210) $ (3,827)
Pro forma benefit from taxes (6)..... (496) (2,190) (524) (3,916) --
--------- --------- ---------- ---------- ----------
Pro forma net loss................... $ (842) $ (4,114) $ (10,949) $ (22,294) $ (3,827)
========= ========= ========== ========== ==========
Pro forma net loss per share
(7)--Basic and Diluted............. $ (0.12) $ (0.61) $ (1.09) $ (1.72) $ (0.30)
========= ========= ========== ========== ==========
Weighted average common shares--Basic
and Diluted (7).................... 6,783,078 6,783,078 10,056,690 12,946,624 12,947,795
========= ========= ========== ========== ==========
Consolidated Balance Sheet Data:
Working capital...................... $ 1,684 $ 1,844 $ 44,836 $ 17,426 $ 26,793
Total assets......................... $ 7,523 $ 11,938 $ 106,694 $ 87,212 $ 85,521
Long-term debt and capitalized lease
obligations, net of current
portion............................ $ 1,847 $ 2,632 $ 2,758 $ 6 $ 197
Stockholders' equity................. $ 3,907 $ 4,966 $ 75,390 $ 53,096 $ 49,286
</TABLE>
- ------------------------
(1) Includes amortization of intangible assets. For years prior to 1997,
includes the amortization of intangible assets related to the acquisition of
the Company's business in December 1991. Commencing in August 1997,
amortization of intangible assets related to the acquisition of E.F. Johnson
began. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Results of Operations--General and
Administrative."
(2) Represents a non-recurring, non-cash compensation expense of $5.4 million
resulting from the vesting in September 1996 of 716,916 stock options for 10
executive officers and key employees of the
26
<PAGE>
Company at a weighted average exercise price of $1.81 per share, and the
accrual of a special compensation expense of $210,000 in September 1996.
(3) Represents a non-recurring, non-cash expense of $9.8 million due to the
write-off of purchased in-process research and development costs associated
with the acquisition of E.F. Johnson.
(4) Represents a charge for a 25% reduction in workforce taken in the third
quarter of 1998, and a charge for the closing of E.F. Johnson's Hong Kong
office taken in the second quarter of 1999.
(5) Represents a special provision taken in the fourth quarter of 1998 for
potential class action litigation settlement, and the reversal of a portion
of that reserve in the second quarter of 1999.
(6) Prior to June 30, 1996, the Company operated as a partnership. The Pro Forma
provision for income taxes reflects the provision for income taxes as if the
Company had been taxed as a Subchapter "C" corporation under the Internal
Revenue Code.
(7) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute pro
forma and net loss per share.
(8) Statement of Operations Data reflects the operations of E.F. Johnson since
the date of its acquisition on July 31, 1997.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K, including the following Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contains forward-looking statements that may involve risks and uncertainties.
The Company's actual results may differ significantly from those discussed
herein. Factors that might cause such a difference include, but are not limited
to, those discussed under "ITEM 1. BUSINESS--Summary of Business Considerations
and Certain Factors That May Affect Future Results of Operations and/or Stock
Price." The following discussion should be read together with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Annual Report on Form 10-K.
OVERVIEW
The Company is a manufacturer of wireless communications products and
systems and information security products. Through the E.F. Johnson subsidiary,
the Company designs, develops, manufactures and markets (1) stationary LMR
transmitters/receivers (base stations or repeaters), (2) mobile and portable
radios, and (3) communications systems comprising products from (1) and
(2) along with other system elements to provide turnkey communication system
solutions. The Company sells its LMR products and systems mainly to two broad
markets: (1) commercial users and (2) public safety and other governmental
users. Through it's Secure Technologies division, the Company designs and
manufactures information security products that prevent unauthorized access to
sensitive voice communications. These products are based on a wide range of
analog scrambling and digital encryption technologies and are sold mainly to the
LMR and telephony security markets.
On July 31, 1997, the Company acquired the outstanding shares of capital
stock and assumed certain indebtedness of E.F. Johnson. In exchange, the Company
paid cash consideration of $436,000 and issued 832,465 shares of Common Stock.
The acquisition was accounted for under the purchase method of accounting.
In 1998, the Company restated its previously released results for the year
ended December 31, 1997, the Company's financial statements for the year ended
December 31, 1996 and the financial statements as of and for each of the
quarterly periods ended March 31, June 30, September 30 and December 31 during
1997 and 1996. The restatement of the Company's financial statements and other
events relating to the restatement, including the class action lawsuits and the
SEC investigation which occurred subsequent to March 31, 1998, have had an
adverse impact on the Company's business, financial condition, results of
operations, liquidity and cash flows. These events have had, to varying degrees,
an adverse impact on the Company's relationships with its customers and vendors.
The Company continues to evaluate its product lines, and has implemented and is
continuing to look at various initiatives to reduce operating expenses in order
to keep them in line with revenues. During the third quarter of 1998, the
Company implemented a reduction in workforce. In addition, during the second
quarter of 1999, the Company closed its Hong Kong office. Implementation of any
other plan resulting from these initiatives in the future may result in
substantial up front costs and cash expenditures. The Company can provide no
assurance that the ongoing class action and securities lawsuits and SEC
investigation, regardless of their outcomes, will not continue to have a
material adverse effect on the Company's business, financial condition, results
of operations, liquidity and cash flows.
During 1999, the Company replaced a significant portion of its senior
management, including its Chairman and Chief Executive Officer, the Chief
Financial Officer, and several positions at the Vice President level. The new
management has continued the process begun in 1998 of evaluating product lines
and implementing initiatives to reduce operating expenses, reemphasize processes
and procedures, and refocus the organization on its core competencies. While the
Company has shown considerable improvement in areas such as cost control (as
evidenced by improved gross margin and lower indirect expenses)
28
<PAGE>
and customer relationships (as evidenced by the three new major systems
contracts awarded during 1999), there can be no assurances that these efforts
will result in a significant improvement in the Company's business, financial
condition, results of operations, liquidity and cash flows.
RESULTS OF OPERATIONS
The following table sets forth certain Consolidated Statement of Operations
information as a percentage of revenues during the periods indicated. These
results include the results of E.F. Johnson only since July 31, 1997, the date
it was acquired.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 64.6% 72.4% 67.4%
----- ----- -----
Gross profit................................................ 35.4% 27.6% 32.6%
----- ----- -----
Operating costs and expenses:
Research and development.................................... 11.1% 14.2% 10.7%
Sales and marketing......................................... 17.4% 18.5% 15.5%
General and administrative.................................. 11.7% 20.2% 17.9%
In-process research and development costs................... 24.3% -- --
Restructuring charge........................................ -- 2.0% 1.0%
Provision for litigation settlement......................... -- 16.1% (4.2%)
----- ----- -----
Total operating costs and expenses.......................... 64.4% 71.0% 40.9%
----- ----- -----
Loss from operations........................................ (29.0)% (43.4)% (8.3)%
Interest income (expense), net.............................. 0.6% 1.1% 0.7%
Other income................................................ -- .1% 0.4%
Benefit for income taxes.................................... (1.3)% (6.3)% 0.0%
----- ----- -----
Net loss.................................................... (27.1)% (35.9)% (7.2)%
===== ===== =====
Pro forma net loss.......................................... (27.1)% (35.9)% (7.2)%
===== ===== =====
</TABLE>
REVENUES
Revenues are recognized when product is shipped, less an estimate for an
allowance for returns, if applicable, if collection is reasonably assured. For
shipments where collection is not reasonably assured, the Company recognizes
revenue as cash is received. If collection is contingent on a future event, such
as a reseller of product selling the product to the end user, the Company
recognizes revenue when the contingency lapses, generally upon cash collection.
System sales under long-term contracts are accounted for under the
percentage of completion method. Under this method, revenues are recognized as
work on a contract progresses. The recognized revenue is that percentage of
estimated total revenue that incurred costs to date bear to estimated total
costs to complete the contract. Revisions in cost and profit estimates are made
when conditions requiring such revisions become known. Anticipated losses on
contracts are recognized in operations as soon as such losses are determined to
be probable and reasonably estimable.
Deferred revenue includes unearned warranty fees on extended product
warranty contracts sold to customers. The Company recognizes the fees based on
the expected warranty repairs to be incurred over the life of the contract.
Deferred revenue also includes an advance payment received for products to be
sold to Motorola. The advance payment was negotiated as part of an agreement to
produce certain products during 2000, and is recognized as revenue is earned.
29
<PAGE>
Revenues declined by 14% to $53.5 million in 1999 from $62.0 million in
1998. Of total revenues for 1999, the wireless communication segment comprised
85.8%, and the information security segment comprised 14.2%. This decline in
revenues is primarily the result of factors associated with the restatement in
1998 of the Company's financial statements for 1997 and 1996. The general
disruption of the Company's business caused by the restatements resulted in a
decline in revenues on a quarter to quarter basis throughout 1998 and into the
first quarter of 1999. Revenues declined from $22.0 million in the first quarter
of 1998, which was prior to the restatement, to $9.7 million in the first
quarter of 1999. However, the Company experienced an increase in revenues on a
quarter to quarter basis after the first quarter of 1999, ending with
$15.8 million in revenues during the fourth quarter of 1999.
Approximately $1.8 million of 1999 revenues were derived from systems
contracts and other sales that were primarily related to repairs, replacements,
and solutions for potential Y2K related issues. Revenues from this source cannot
be expected to continue in the future. In addition, the Company has made a
decision to eliminate its physical presence in the Asian market, and focus its
marketing and sales efforts primarily on the North, Central, and South American
markets (the "Americas"). This decision could result in lower revenues in both
the near term and long term. The Company generated $2.7 million in revenues from
the Asian and Middle East market during 1999.
Revenues increased 53.5% to $62.0 million in 1998 from $40.4 million in
1997. Of total revenues for 1998, the information security segment comprised
17.6% and the wireless communication segment comprised 82.4%. The increase in
revenue was attributable primarily to revenues derived from the sale of E.F.
Johnson products subsequent to July 31, 1997. As a result of the uncertainty
raised by the restatement which was completed in the third quarter of 1998 and
other related events, sales of products, including LMR systems to governmental
agencies, were adversely impacted during 1998. Revenues declined from
$22.0 million in the first quarter of 1998 to $13.9 million in the second
quarter, $14.3 million in the third quarter and $11.9 million in the fourth
quarter of 1998. Further, the Company did not enter into any major new domestic
systems contracts during 1998. However, during the first quarter of 1999, the
Company was awarded two contracts in the domestic public safety market.
The Company is also experiencing reduced demand for and downward pricing
pressure on its wireless communication analog products sold to commercial users.
Management believes that this is due to several factors. These include the fact
that (1) no new 800 MHz SMR frequencies are being made available and existing
channels are filling up; (2) SMR operator's with licenses for 900 MHz channels
have been slow to develop their build outs; (3) there has been consolidation in
both of these SMR marketplaces; and (4) a large number of SMR systems have been
converting from analog to digital which has resulted in the increasing
availability of used analog radios and repeaters in the marketplace. As a result
of these issues, domestic commercial sales declined by approximately 40% between
1998 and 1999. The Company anticipates that revenues will stabilize at 1999
levels in the near term, and return to a growth trend in the future.
International sales as a percentage of revenues in 1999 were 22.6%, compared
to 36.6% in 1998 and 38.1% in 1997. The Company experienced a 32.1% decline in
revenues from the Middle East and Asian regions during 1999 as compared to 1998
primarily from its wireless communications segment and as a result of the effect
of the decision to exit the Asian market. The Company expects this trend to
continue as it refocuses its efforts on the Americas. The Company also
experienced a 55% decline in revenues from the Central and Latin American region
during 1999 as compared to 1998. This decline was primarily due to the
termination of a relationship with a distributor focused on the region that
exited the LMR market, as well as the completion of a significant system
implementation contract in Brazil. The Company anticipates that revenues derived
from the Latin American region will increase as it focuses its sales and
marketing efforts on the Americas.
30
<PAGE>
GROSS PROFIT
Cost of sales includes materials, labor, depreciation and overhead costs
associated with the production of the Company's products, as well as shipping,
royalty and warranty product costs. Gross profit was $17.5 million (32.6% gross
margin) in 1999, compared to $17.1 million (27.6% gross margin) in 1998 and
$14.3 million (35.4% gross margin) in 1997. Gross margins for the wireless
communications segment were 27.4% in 1999, 22.1% in 1998 and 32.3% in 1997.
Gross margins for the information security segment were 64.4% in 1999, 53.3% in
1998 and 44.1% in 1997.
The increase in overall gross margins from 1998 to 1999 is primarily the
result of the realignment of the Company's infrastructure and general cost
cutting that occurred as part of the restructuring instituted during 1998. The
Company benefited from revenues associated with systems contracts at its E.F.
Johnson subsidiary, which tend to have higher margins. In addition, there were
several contracts associated with Y2K at E.F. Johnson, which also tend to have
higher margins. Also, the Company incurred approximately $1.0 million in costs
during 1998 that was associated with correcting systems contract problems for
certain E.F. Johnson projects that were begun prior to Transcrypt's acquisition
of E.F. Johnson. While costs associated with this issue were not significant
during 1999, the Company expects cash outlays during 2000 and beyond in order to
finalize solutions to these problems, for which adequate reserves have been
provided. However, the Company set aside approximately $3.7 million in a reserve
to cover those expenses. Finally, the Company benefited from the sale at a
reduced value of surplus inventory at its Secure Technologies division that had
previously been written down. As a result of these surplus inventory sales,
gross margin as a percent of revenue was unusually high, and should not be
expected to continue.
The overall decline in gross margin percentage from 1998 to 1997 was due to
a number of factors. These include (1) the inclusion of E.F. Johnson's revenues,
which has historically had lower gross margins than Transcrypt's business, for a
full year in 1998 compared to five months in 1997; (2) the decline in sales of
domestic system contracts to the public safety market, which provides a higher
margin than the commercial portion of E.F. Johnson's wireless segment;
(3) product mix and the level of sales not being sufficient to fully absorb the
Company's manufacturing overhead; (4) a shift in the Company's information
security product segment from primarily add-on products to more radios and
cellular phones incorporating the Company's encryption products, which tend to
have a lower gross margin; and (5) the approximately $1.0 million in costs to
correct systems contract problems in 1998 for certain E.F. Johnson projects
begun prior to the Company's acquisition of E.F. Johnson.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of costs associated with
research and development personnel, materials and the depreciation of research
and development equipment and facilities. The Company expenses all research and
development costs as they are incurred. Research and development expenses
decreased 35.1% in 1999 to $5.7 million from $8.8 million in 1998, which equates
to 10.7% of sales in 1999 compared to 14.2% in 1998.
During 1999, the Company separated the research and development efforts of
the E.F. Johnson subsidiary and the Secure Technologies division. These efforts
are now in line with the market segments that they serve. Previously, one group
of engineers served the needs of both entities.
Research and development expenses declined during 1999 due to reductions in
the overall number of engineers at both the E.F. Johnson subsidiary and the
Secure Technologies division. The Company also implemented a new product
development process in 1998 that requires a reduced amount of resources and is
intended to speed up the Company's ability to deliver products to market, which
also aided in reducing expenses. That implementation continued into 1999. As of
December 31, 1999, the Company had numerous openings for engineers in its
Research and Development departments. While expenses in this area are expected
to increase as a result of higher staffing levels and increased focus on new
product
31
<PAGE>
development, the Company expects these costs to remain at a ratio of expenses to
revenues as was experienced during 1999.
Research and development expenses increased 97.2% in 1998 to $8.8 million
from $4.5 million in 1997. The increase is attributable to the inclusion of E.F.
Johnson for a full year in 1998, as compared to only five months in 1997.
Research and development expenses were 14.2% of sales in 1998 compared to 11.1%
in 1997.
The information security and wireless communications product markets in
which the Company competes are rapidly evolving and can be expected to further
evolve in the future as a result of changing technology, industry standards and
customer requirements. The Company's ability to compete effectively will depend
upon its ability to anticipate and react to these changes in a timely manner.
The Company may not have, either currently or in the future, adequate capital or
human resources to respond to these changes.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and related costs
of sales personnel, including sales commissions and travel expenses, and costs
of advertising, public relations and trade show participation. Sales and
marketing expenses decreased 27.8% to $8.3 million in 1999, compared to
$11.5 million in 1998. These amounts represent 15.5% of sales in 1999, and 18.5%
of sales in 1998. The decrease in 1999 was due primarily to the restructuring
instituted during 1998, which began the process of bringing the Company's sales
and marketing efforts more in line with the needs of the market. The Company
anticipates expenses in the sales and marketing area to continue to decline as a
percentage of revenue going forward as the Company continues to bring its
operating expenses in line with future revenue expectations.
Sales and marketing expenses increased 63.2% to $11.5 million in 1998,
compared to $7.0 million in 1997. These amounts represent 18.5% of sales in 1998
and 17.4% of sales in 1997. The increase in 1998 was due primarily to a full
year of E.F. Johnson sales and marketing expenses compared to only five months
of E.F. Johnson sales and marketing expenses in 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries and other
expenses associated with the Company's management, accounting, finance and
administrative functions, and amortization of intangible assets. In connection
with Transcrypt's purchase of all of the outstanding shares of capital stock of
E.F. Johnson, the Company recorded $18.0 million of goodwill and other
intangibles at the closing of this acquisition. The Company is amortizing this
amount on a straight-line basis over a period of 5 to 15 years. This
amortization began in August 1997.
General and Administrative expenses declined by 23.4% to $9.6 million in
1999 from $12.5 million in 1998. As a percent of revenues, G&A expenses were
17.9% of revenues in 1999 as compared to 20.2% of revenues in 1998. The lower
expenses are primarily the result of the restructuring begun in 1998, which
brought the administrative organization more in line with the needs of the
Company. This trend should continue, as a percent of revenue, as the Company
furthers the implementation of the plan begun in 1998.
General and administrative expenses increased 165.9% to $12.5 million during
1998, from $4.7 million in 1997. The increase is attributable primarily to the
inclusion of EFJ for a full year in 1998 compared to only five months in 1997,
the addition of several administrative employees, the amortization of goodwill
and other intangibles relating to the E.F. Johnson acquisition for a full year,
severance payments and substantial legal and professional fees incurred in
connection with the restatement of the Company's financial statements and
related class action lawsuits, and SEC and Audit Committee investigations. On a
32
<PAGE>
percentage of revenue basis, general and administrative expenses were 20.2% in
1998 compared to 11.7% in 1997.
RESTRUCTURING CHARGES
The Company incurred a restructuring charge in the third quarter of 1998 of
approximately $1.2 million in connection with the 25% reduction in its
workforce. The reduction in force utilized a voluntary severance program which,
among other things, provided outplacement services to the employees who chose to
participate in the program. In addition, during the second quarter of 1999, the
Company established a reserve of approximately $0.5 million primarily to cover
the costs of closing E.F. Johnson's Hong Kong office, which was completed during
1999.
PROVISION FOR LITIGATION SETTLEMENT
In December 1998, the Company took a special provision of $10.0 million
relating to the federal and state class action lawsuits pending in Nebraska
against the Company and certain of its current and former officers. During
June 1999, the Company revised its estimated costs related to the settlement of
actions against it. The result was a $2.2 million reduction of the special
provision to $7.8 million. In addition, the Company incurred expenses of
$0.3 million during 1999 related to this issue, which were applied against the
reserve. As of December 31, 1999, the litigation reserve had a balance of
$6.0 million, and other associated reserves had a total balance of
$1.5 million. The Company is in ongoing settlement discussions regarding these
lawsuits. While no settlement agreement has been finalized, the Honorable Warren
K. Urbom of the United States District Court for the District of Nebraska
preliminarily approved a settlement. The settlement, if finally approved, will
also result in a dismissal of the stockholder class action suit pending in the
District Court for Scotts Bluff County, Nebraska. The preliminary approval
precludes any persons from asserting any claims of indemnity of contribution
against Transcrypt or any of its current or former officers, directors, or
employers. The Court has scheduled a hearing for final approval of the
settlement on March 27, 2000. The settlement is subject to a number of
contingencies, including final court approval of the settlement.
NET INTEREST INCOME OR EXPENSE
Net interest income consists of interest income earned on cash and invested
funds, net of interest expense related to amounts payable on its term and
installment loans and bank lines of credit. Net interest income was $386,000 in
1999 compared to $655,000 in 1998. Net interest expense was $231,000 in 1997.
The decrease in net interest income in 1999 is due primarily to the decrease in
interest income as the Company's cash, cash equivalents and investments declined
throughout 1998. The increase in net interest income in 1998, as compared to
1997, is due primarily to an increase in interest income from the investment of
the net proceeds from the Company's initial and secondary public offerings in
interest-bearing instruments for the full year of 1998, and a repayment of
certain debt during 1997. The Company expects net interest income to continue to
decline in 2000 as the cost of the Company's borrowings continues to increase.
PROVISION FOR INCOME TAXES
The Company's benefit for income taxes was zero in 1999, $3.9 million in
1998, and $524,000 in 1997. The Company did not recognize a tax benefit
associated with its loss during 1999 because the amount of the Deferred Tax
Assets shown on the Consolidated Balance Sheet is management's estimate of the
amount that is more likely than not to be realized. The Company has total
Deferred Tax Assets of $21.4 million, which is partly offset by a $9.0 million
valuation allowance. In the future, management will continue to analyze the
amount of the deferred tax assets expected to be realized.
33
<PAGE>
The increase in the benefit for income taxes in 1998 from 1997 is a result
of a larger operating loss in 1998 as compared to 1997 and the write-off of
in-process research and development costs in 1997 of $9.8 million not being tax
deductible.
The Company benefits from state tax credits arising from a 1993 agreement
with the State of Nebraska (the "Nebraska Agreement") to create at least 30 new
jobs and invest at least $3.0 million in new equipment prior to December 31,
1999. This agreement results in annual state income tax credits through 1999 of
(1) ten percent of the purchase price of new equipment, (2) a refund of sales
taxes (currently at a rate of 6.0%) paid on purchases of new equipment during
each year, and (3) beginning on January 1, 1996, a credit of five percent of the
annual compensation paid to the new employees exceeding the base year's
aggregate compensation. The Company believes that sufficient tax credits will be
available through the life of the Nebraska Agreement to offset a substantial
portion of its potential Nebraska state income tax liability during such period.
In addition, the Company utilizes its foreign sales corporation subsidiary
located in Guam to exempt from income taxation a portion of its foreign sales
income.
NET LOSS
The Company had a net loss of $3.8 million during 1999. However, this amount
includes a $0.5 million restructuring expense and $2.2 million of income from a
reduction in a litigation reserve set up during the previous year. Without these
two items, the net loss would have been approximately $5.5 million. During 1998,
the Company had a net loss of $22.2 million, which included $1.2 million of
restructuring charges and a $10.0 million provision for litigation settlement.
Without these two items, the Company would have had a net loss of approximately
$11.4 million (net of tax benefit). During 1997, the Company had a net loss of
$10.9 million. This loss included a $9.8 million charge for in-process research
and development. Without this item, the Company would have had a net loss of
approximately $1.6 million (net of tax benefit).
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited financial information in
dollars and as a percentage of revenues for the Company for the eight quarters
ended December 31, 1999. In the opinion of the Company's management, this
information has been prepared on the same basis as the audited Consolidated
Financial Statements appearing elsewhere in this Annual Report on Form 10-K and
includes all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the unaudited results set forth herein. The
operating results for any quarter are not necessarily indicative of results for
any subsequent period or for the entire fiscal year.
34
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1998 1998 1998 1999 1999 1999 1999
- ------------------------------------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $21,988 $13,877 $14,325 $ 11,851 $ 9,709 $12,727 $15,323 $15,760
Cost of sales......................... 12,910 10,853 11,220 9,922 7,735 8,646 9,917 9,762
------- ------- ------- -------- ------- ------- ------- -------
Gross profit.......................... 9,078 3,024 3,105 1,929 1,974 4,081 5,406 5,998
------- ------- ------- -------- ------- ------- ------- -------
Operating costs and expenses:
Research and development.............. 2,038 2,703 2,174 1,897 1,714 1,510 1,220 1,279
Sales and marketing................... 3,210 3,355 2,626 2,285 1,726 2,396 1,885 2,275
General and administrative(1)......... 2,113 4,715 3,030 2,671 2,634 2,460 2,287 2,220
Restructuring charge(2)............... -- -- 1,230 -- -- 523 -- --
Provision for litigation
settlement(3)....................... -- -- -- 10,000 -- (2,221) -- --
------- ------- ------- -------- ------- ------- ------- -------
Total operating costs and expenses.... 7,361 10,773 9,060 16,853 6,074 4,668 5,392 5,774
------- ------- ------- -------- ------- ------- ------- -------
Income (loss) from operations......... 1,717 (7,749) (5,955) (14,924) (4,100) (587) 14 224
Interest (expense) income and other
income, net......................... 311 108 29 253 143 251 135 93
Net income (loss) before income
taxes............................... 2,028 (7,641) (5,926) (14,671) (3,957) (336) 149 317
------- ------- ------- -------- ------- ------- ------- -------
Provision (benefit) for income
taxes............................... 712 (2,598) (2,030) -- -- -- -- --
------- ------- ------- -------- ------- ------- ------- -------
Net income (loss)..................... $ 1,316 $(5,043) $(3,896) $(14,671) $(3,957) $ (336) $ 149 $ 317
======= ======= ======= ======== ======= ======= ======= =======
Net income (loss) per share
Basic................................. $ 0.10 $ (0.39) $ (0.30) $ (1.13) $ (0.31) $ (0.03) $ 0.01 $ 0.02
======= ======= ======= ======== ======= ======= ======= =======
Diluted............................... $ 0.10 $ (0.39) $ (0.30) $ (1.13) $ (0.31) $ (0.03) $ 0.01 $ 0.02
======= ======= ======= ======== ======= ======= ======= =======
Weighted average common shares
Basic................................. 12,947 12,947 12,947 12,947 12,947 12,947 12,947 12,951
======= ======= ======= ======== ======= ======= ======= =======
Diluted............................... 13,621 12,947 12,947 12,947 12,947 12,947 13,203 13,250
======= ======= ======= ======== ======= ======= ======= =======
As a Percentage of Revenues
Revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 58.7 78.2 78.3 83.7 79.7 67.9 64.7 61.9
------- ------- ------- -------- ------- ------- ------- -------
Gross profit.......................... 41.3 21.8 21.7 16.3 20.3 32.1 35.3 38.1
Operating costs and expenses:
Research and development.............. 9.3 19.5 15.2 16.0 17.7 11.9 8.0 8.1
Sales and marketing................... 14.6 24.2 18.3 19.3 17.8 18.8 12.3 14.5
General and administrative(1)......... 9.6 34.0 21.2 22.5 27.1 19.3 14.9 14.1
Restructuring charge(2)............... 0.0 0.0 8.6 0.0 0.0 4.1 0.0 0.0
Provision for litigation
settlement(3)....................... 0.0 0.0 0.0 84.4 0.0 (17.4) 0.0 0.0
------- ------- ------- -------- ------- ------- ------- -------
Total operating costs and expenses.... 33.5 77.6 63.3 142.2 62.6 36.7 35.2 36.7
------- ------- ------- -------- ------- ------- ------- -------
Income (loss) from operations......... 7.8 (55.8) (41.6) (125.9) (42.3) (4.6) 0.1 1.4
Interest (expense) income and other
income, net......................... 1.4 0.8 0.2 2.1 1.5 2.0 0.9 0.6
Provision (benefit) for income
taxes............................... 3.2 (18.7) (14.2) 0.0 0.0 0.0 0.0 0.0
------- ------- ------- -------- ------- ------- ------- -------
Net income (loss)..................... 6.0% (36.3)% (27.2)% (123.8)% (40.8)% (2.6)% 1.0% 2.1%
======= ======= ======= ======== ======= ======= ======= =======
</TABLE>
- ------------------------------
(1) Includes amortization of intangible assets. For years prior to 1997,
reflects the amortization of intangible assets related to the acquisition of
the Company's business in December 1991. Commencing in August 1997,
amortization of intangible assets related to the acquisition of E.F. Johnson
began.
(2) Represents a charge for a 25% reduction in workforce taken in the third
quarter of 1998, and the closing of the E.F. Johnson Hong Kong office during
the second quarter of 1999.
(3) Represents a special provision taken in the fourth quarter of 1998 for
potential class action litigation settlement and subsequent partial reversal
during the second quarter of 1999.
The Company historically has experienced, and expects to continue
experiencing, substantial variability in its results of operations from quarter
to quarter. The level of revenues in a particular quarter varies
35
<PAGE>
primarily based upon the timing of customer purchase orders, due principally to
the seasonal nature of governmental budgeting processes and the needs of
competing budgetary concerns of the Company's customers during the year. Other
factors which affect the results of operations in a particular quarter include
the timing of the introduction of new products, general economic conditions, the
timing and mix of product sales and specific economic conditions in the
information security and wireless communications industries. The Company
believes that quarterly results are likely to vary for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
Since January 1, 1997, the Company has financed its operations and met its
capital requirements primarily through short-term borrowings, long-term debt and
stock offerings completed on January 22, 1997 and October 15, 1997.
The Company's operating activities generated cash of $0.7 million in 1999,
used $11.0 million of cash during 1998, and used $18.1 million of cash during
1997. During 1999, cash generated by operations and cash used as a result of
increases in accounts receivable, costs in excess of billings on completed
contracts, and inventory were offset by cash generated from increases in
accounts payable and deferred revenue. Deferred revenue includes $3.6 million in
advance payments from Motorola for products that are to be shipped during 2000.
During 1999, $4.9 million in cash was provided by investing activities.
Specifically, $7.9 million was provided by the sales of the Lincoln and Waseca
facilities. This was offset by $1.6 million in payments on restructuring
activities, $1.0 million in fixed asset purchases, and $0.3 million in other
investing activities. Also during 1999, the Company used $4.3 million in
financing activities, primarily for payments on long-term debt and the Company's
line of credit with US Bank.
Cash used in operating activities in 1998 consisted primarily of a loss from
operations and reductions to accounts payable, accrued expenses and billings in
excess of cost on uncompleted contracts off-set by decreases in accounts
receivable, inventory and an increase in a special provision for litigation
settlement. The Company incurred approximately $3.0 million (net of
reimbursement from the Company's insurance carrier) on legal, audit and
severance payments during 1998 related to the restatement, class action
lawsuits, the audit committee investigation and SEC investigation, which
adversely impacted cash flows. Cash flows may continue to be adversely impacted
by the uncertainty of sales volumes.
Cash provided from investing activities were attributable primarily to the
sale of investments in 1998 offset in part by capital expenditures related to
the completion of the Company's Phase III expansion of its corporate
headquarters in Lincoln, Nebraska. The net amount of cash provided from
investing activities in 1998 was $11.1 million.
The deferred tax assets totaling $12.4 million for each of the years ended
December 31, 1999 and 1998, resulted primarily from the E.F. Johnson acquisition
in 1997, net operating loss carryforwards, and stock option related special
compensation expense of $5.4 million incurred in September 1996. Deferred tax
assets were 14.4% and 25.1% of total assets and stockholders' equity,
respectively, at December 31, 1999. The Company believes that it is more likely
than not that future taxable income will be sufficient to utilize deferred tax
assets recorded, net of existing valuation allowances at December 31, 1999.
Approximately $3.0 million of the deferred tax assets relate to $8.6 million of
federal and state net operating loss carryforwards attributable to its acquired
E.F. Johnson subsidiary. A valuation allowance was established at the time of
the purchase of E.F. Johnson for this amount. Any subsequently recognized tax
benefits relating to this portion of the valuation allowance as of December 31,
1999 will be allocated to goodwill.
Net operating loss carryforwards, which originated in 1999, 1998, 1997, and
1996, will begin to expire in 2011. The Company has approximately $8.6 million
in Federal and state net operating loss carryforwards attributable to EFJ, which
expire in 2012. Tax regulations limit the amount that may be utilized on these
acquired net operating losses on an annual basis to approximately $588,000.
36
<PAGE>
The Company's financing activities have consisted primarily of borrowings
under and payments on an industrial development revenue bond issue ("IDR"), term
and installment notes payable, bank lines of credit and proceeds from an initial
public offering and secondary public offering completed in January 1997 and
October 1997, respectively. Such activities used $4.3 million of cash in 1999,
generated $4.9 million in 1998, and generated $54.3 million in 1997. The amount
generated in 1997 was reduced by the liquidation of the revolving credit line
and term loans of $15.7 million assumed in the E.F. Johnson acquisition.
In the normal course of its business activities, the Company is required
under contracts with various governmental authorities to provide letters of
credit or bonds that may be drawn upon if the Company fails to perform under its
contracts. The letters of credit, which expire on various dates in 2000, have a
total undrawn balance of $1,981. Of this total, $1,172 for one specific contract
is collateralized by a cash reserve. Bonds, which expire on various dates
through 2000, totaled $12,680 at December 31, 1999. In early 2000, the Company
obtained a commitment from a major insurance company that provides for up to
$20 million in new bonding arrangements at favorable rates and terms.
The Company has a line of credit with a regional bank. It is a secured line
of credit not to exceed $10.0 million. Interest was 7.62% at December 31, 1999
and is at a variable rate of 1.25% over the interest rate earned on the
$10.0 million on certificates of deposits pledged as security on the bank line
of credit. This line of credit is due on June 1, 2000. The working capital line
is collateralized by substantially all the Company's assets including
$10.0 million in a certificate of deposit with the bank.
At December 31, 1999, the Company had $5.8 million outstanding on the
revolving line of credit. Average borrowings under the Company's line of credit
and the weighted average interest rate during 1999 were $7.0 million and 6.35%.
The total available credit as of December 31, 1999 was $4.2 million under the
above line.
The Company currently intends to retain earnings, if any, and does not
anticipate paying cash dividends in the foreseeable future.
The Company does not anticipate any additional expenditures to ensure that
its systems are ready for processing information during the Year 2000.
As of December 31, 1999, the Company had approximately $21.6 million in cash
and cash equivalents, which includes $10.0 million of certificates of deposit
pledged as security on its line of credit. There was approximately $4.2 million
available under its bank line of credit at December 31, 1999. The Company's bank
line of credit expires on June 1, 2000 and the Company is currently in the
process of either renewing the current line of credit or securing a replacement
facility. The Company believes that its cash, cash equivalents, and lines of
credit will be sufficient to meet anticipated cash needs for working capital and
for capital expenditures through 2000. However, if sales do not increase and
operating losses do not decline, or the Company incurs unanticipated substantial
costs, the Company may be required to seek additional financing or funding
sources, including possible sale of securities. No assurance can be given that
the Company will be able to obtain such additional funding or financing, or a
renewal of its line of credit or be able to obtain financing on satisfactory
terms. Additionally, see "Pending Litigation" below for a discussion regarding
certain pending litigation, the resolution of which could materially adversely
affect the Company's liquidity, operating results and financial condition.
PENDING LITIGATION
The Company has been named as a defendant in class action lawsuits that were
filed subsequent to the Company's announcement on March 27, 1998 that the filing
of its Annual Report on Form 10-K for year ended December 31, 1997 would be
delayed and that adjustments would be made to the Company's previously announced
financial results. Between March 31, 1998 and May 27, 1998, twelve purported
class action lawsuits were filed against the Company in the United States
District Court for the District of
37
<PAGE>
Nebraska, and one complaint was filed in the District Court of Scotts Bluff
County, Nebraska. Certain of the complaints, as amended, also name one or more
current employees and former officers of the Company and PriceWaterhouseCoopers,
LLP as additional defendants. The longest class period alleged in any of the
class complaints is the period from January 22, 1997 through April 24, 1998.
The federal class actions generally allege claims under Sections 11 and 15
of the Securities Act of 1933 and Sections 10 and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and relate primarily
to allegations of false and misleading financial statements and representations
and material omissions by the Company. The Nebraska action alleges violations of
Nebraska securities laws. The class action complaints seek unspecified
compensatory damages, attorneys' fees and costs. The federal class actions have
been consolidated.
In July 1999, the Company announced that a memorandum of understanding had
been signed with plaintiff's counsel to settle the pending federal consolidated
class action lawsuits and its state class action lawsuit. The parties
subsequently memorialized the terms of the memorandum of understanding in a
stipulation of settlement. The stipulation of settlement agreement creates a
settlement fund for distribution to class members and class counsel consisting
of (a) 4,460,000 shares of Transcrypt common stock and (b) at least $3,850,000
and up to $8,850,000 to be paid by Transcrypt's insurance carriers (depending on
the outcome of an arbitration between plaintiffs and one of the insurance
carriers). Transcrypt would also pay $2,000,000 to the class if there is a
purchase of a majority of Transcrypt by acquisition or merger that occurs before
January 1, 2001.
In January 2000, Honorable Warren K. Urbom of the United States District
Court for the District of Nebraska preliminarily approved a settlement of the
pending stockholder class action suits. The settlement class period is defined
as persons that purchased stock during the period from January 22, 1997 through
April 24, 1998. The settlement, if finally approved, will also result in the
dismissal of the stockholder class action suit pending in the District Court for
Scotts Bluff County, Nebraska. The preliminary approval precludes any persons
from asserting any claims of indemnity or contribution against Transcrypt or any
of its current or former officers, directors, or employees. The Client has
scheduled a hearing for final approval of the settlement for March 27, 2000. In
addition, the Honorable Randall L Lippstreau of the District Court for Scotts
Bluff County, Nebraska has entered an order that is effective on the final
approval of the settlement by Judge Urbom. This order dismisses the action
against the Company and certain former employees in the class action pending in
District Court for Scotts Bluff County, Nebraska.
The Company has reserved for the issuance of the number of shares of Common
Stock to be distributed if the court finally approves the settlement. However,
no assurance can be given that the Court will finally approve the settlement,
and that if the settlement is not finally approved the outcome of the litigation
will not have a material adverse effect on the Company's business, financial
condition, results of operations, and cash flows.
On November 4, 1998, Physician's Mutual Insurance Company filed an action in
the District Court of Douglas County, Nebraska against the Company,
PriceWaterhouseCoopers, LLP and two former officers of the Company. The
complaint contains common law causes of action for fraudulent misrepresentation,
fraudulent concealment and negligent misrepresentation against the defendants
arising from the same facts and circumstances underlying the class actions. The
complaint seeks damages in an amount to be proved at trial, but which is
currently alleged to be approximately $850,000. The Company is unable to predict
the likelihood of the outcome or range or amount of potential liability that may
arise therefrom.
In April 1998, the Securities and Exchange Commission ("SEC") issued a
formal order of investigation to determine whether violations of certain aspects
of the federal securities laws had occurred in connection with the Company. As
part of this investigation, the SEC is also examining the conduct of certain
former officers of the Company. The Company has an obligation to defend and/or
indemnify certain former employees. The Company has discussed possible
settlement of the investigation or any pending enforcement action against the
Company or its affiliated parties relating to these events. At this
38
<PAGE>
time, it is unknown whether the Company will settle the SEC formal order of
investigation. In addition, it is unknown what actions will be taken against
former officers and, therefore, the Company cannot determine the exposure of any
future obligations to defend and/or indemnify these former officers. The SEC has
the authority to impose a variety of sanctions against the Company and
Company-affiliated parties. Such sanctions could include monetary penalties,
imposition of a cease and desist order and issuance of removal and prohibition
orders against Company-affiliated persons, among other things.
The Company is involved in certain other legal proceedings incidental to the
normal conduct of its business. The Company does not believe that any
liabilities relating to such other legal proceedings are likely to be,
individually or in the aggregate, material to the Company's business, financial
condition, results of operations or cash flows.
The Company may in the future be the subject of additional lawsuits or
claims in connection with the events or facts surrounding its restatement of
previously announced financial results. The Company is unable to predict when or
whether such additional lawsuits or claims may be initiated or the likelihood of
the outcome or range or amount of potential liability that may arise therefrom.
RECENTLY ISSUED ACCOUNTING STANDARDS
As of the date of this filing, there were no recently issued accounting
standards that impact the Company.
RESULTS OF THE YEAR 2000 ISSUE
The Company did not experience any material Year 2000 system failure or
miscalculations causing disruptions of operations resulting for computer
programs being written using two digits rather than four to define the
applicable year. In addition, we have not received a significant amount of
customer notification regarding experiencing erroneous dates on usage reports or
Year 2000 operational issues. It is still possible for customers to have issues
with previously shipped products. The Year 2000 Compliance Manager will continue
to respond in writing to any possible solutions to any Year 2000 Product issues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does a significant amount of business in foreign countries. The
Company sales in these foreign countries are denominated in United States
dollars. Certain sales in foreign countries may be secured with irrevocable
letters of credit.
The Company has a line of credit with a regional bank, which carries a
variable interest rate that changes based on changes in certain time
certificates of deposits issued by the lender.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K" for the Company's Consolidated Financial Statement, and the notes
thereto, and the financial statement schedules filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for under this item has been previously reported by
the Company in its (1) Current Report on Form 8-K filed with the SEC on May 4,
1998, (2) Current Report on Form 8-K filed with the SEC on May 12, 1998 and
(3) Amendment No. 1 to Current Report on Form 8-K filed with the SEC on May 20,
1998.
39
<PAGE>
PART III
Incorporated by reference in Items 10 to 13 below are certain sections of
the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A with the SEC within 120 days after December 31, 1999.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Incorporated by reference in this Annual Report is the information required
by this Item 10 contained in the sections entitled "Discussion of Proposals
Recommended by the Board--Proposal 1: Elect Two Directors," "Information About
Directors and Executive Officers" and "Information About Transcrypt Common Stock
Ownership--Did Directors, Executive Officers and Greater-Than-10% Stockholders
Comply With Section 16(a) Beneficial Ownership Reporting in 1999?" of the
Company's definitive proxy statement, to be filed pursuant to Regulation 14A
with the SEC within 120 days after December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference in this Annual Report is the information required
by this Item 11 contained in the sections entitled "Information About Directors
and Executive Officers" and "Information About Transcrypt Common Stock
Ownership--Compensation Committee Interlocks and Insider Participation" of the
Company's definitive proxy statement, to be filed pursuant to Regulation 14A
with the SEC within 120 days after December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference in this Annual Report is the information required
by this Item 12 contained in the section entitled "Information About Transcrypt
Common Stock Ownership" of the Company's definitive proxy statement, to be filed
pursuant to Regulation 14A with the SEC within 120 days after December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference in this Annual Report is the information required
by this Item 13 contained in the section entitled "Information About Directors
and Executive Officers--Certain Relationships and Related Transactions" of the
Company's definitive proxy statement, to be filed pursuant to Regulation 14A
with the SEC within 120 days after December 31, 1999.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are included in this report at the page numbers
indicated.
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C> <C>
1. FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets as of December 31, 1999 and F-2
1998........................................................
Consolidated Statements of Operation for the Years ended F-3
December 31, 1999, 1998 and 1997............................
Consolidated Statements of Changes in Stockholders' Equity F-4
for the Years ended December 31, 1999, 1998 and 1997........
Consolidated Statements of Cash Flows for the Years ended F-5
December 31, 1999, 1998 and 1997............................
Notes to Consolidated Financial Statements.................. F-6 to F-20
2. SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES
Independent Auditor's Report................................ S-1
Schedule II--Valuation and Qualifying Accounts and S-2
Reserves....................................................
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
3. EXHIBITS
(1) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS:
The following is a summary of the Company's executive compensation plans and
arrangements, which are required to be filed as exhibits to this Annual Report
on Form 10-K:
1. Transcrypt International, Inc. 1999 Non Employee Director Stock Purchase
Plan (Exhibit 10.1 below).
2. Transcrypt International, Inc. 1999 Executive Officer Stock Purchase Plan
(Exhibit 10.2 below).
3. Transcrypt International, Inc. 1996 Stock Incentive Plan, as amended.
Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, File No. O-21681
(hereinafter known as the "1998 Form 10-K").
4. Form of Indemnification Agreement between the Company and each executive
officer and director of the Company. Incorporated herein by reference to
Exhibit 10.5 to the Company's Registration Statement on Form S-1,
No. 333-14351, declared effective January 22, 1997.
5. Consulting Agreement and Termination of Employment Agreement between the
Company and John T. Connor dated February 23, 1999. Incorporated herein by
reference to Exhibit 10.41 to the 1998 Form 10-K
6. Employment Agreement between the Company and Michael E. Jalbert dated
March 1, 1999. Incorporated herein by reference to Exhibit 10.42 to the 1998
Form 10-K.
7. Employment Agreement between the Company and Mike Wallace dated March 1,
1999. Incorporated herein by reference to Exhibit 10.43 to the 1998
Form 10-K.
8. Employment Agreement between the Company and George R. Spiczak dated
April 1, 1999. Incorporated herein by reference to Exhibit 10.44 to the 2Q
1999 Form 10-Q.
41
<PAGE>
9. Employment Agreement between the Company and Massoud Safavi dated
October 19, 1999 (Exhibit 10.45 below).
10. Chief Executive Officer Nonqualified Stock Option Agreement dated
October 19, 1999 between Transcrypt International, Inc. and Michael E.
Jalbert (Exhibit 10.46 below).
11. Promissory Note dated January 7, 2000 between Transcrypt
International, Inc. and Michael E. Jalbert (Exhibit 10.47 below).
(2) EXHIBIT INDEX:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
3.1 Second Amended and Restated Certificate of Incorporation of
the Company filed on September 30, 1996 with the Secretary
of State of the State of Delaware (incorporated herein by
reference to Exhibit 3.1 to the Company's Quarterly Report
on Form 10-Q for the Quarter Ended June 30, 2999, File No.
O-21681 (hereinafter the "2Q 1999 Form 10-Q")
3.2 Amended and Restated Bylaws of the Company (incorporated
herein by reference to Exhibit 3.2 to the Registration
Statement on Form S-1, No. 333-14351, declared effective on
January 22, 1997 (hereinafter the "January 1997 Registration
Statement")).
4.1 Form of Common Stock certificate (incorporated herein by
reference to Exhibit 4.1 to the January 1997 Registration
Statement).
4.2 Registration Rights Agreement, dated as of July 31, 1997, by
and among NorAm Energy Corp., Intek Diversified Corporation
and the Company (incorporated herein by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K, File No.
0-21681, filed with the SEC on August 14, 1997).
10.1 Transcrypt International, Inc. 1999 Non Employee Director
Stock Plan.
10.2 Transcrypt International, Inc. 1999 Executive Officer Stock
Purchase Plan.
10.3 RESERVED
10.4 Transcrypt International, Inc. 1996 Stock Incentive Plan, as
amended. Incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998, File No. O-21681 (hereinafter known as
the "1998 Form 10-K")
10.5 Form of Indemnification Agreement between the Company and
each executive officer and director of the Company
(incorporated herein by reference to Exhibit 10.5 to the
January 1997 Registration Statement).
10.6 License Agreement for APCO 25 Compliant Product between
Motorola, Inc. and the Company dated as of August 2, 1994
(incorporated herein by reference to Exhibit 10.6 to the
January 1997 Registration Statement).
10.7* Amendment, dated as of June 28, 1996, to License Agreement
for APCO Project 25 Compliant Product between Motorola, Inc.
and the Company dated as of August 2, 1994 (incorporated
herein by reference to Exhibit 10.7 to the January 1997
Registration Statement).
10.8 OEM Agreement between Motorola, Inc. and the Company dated
as of August 2, 1994 (incorporated herein by reference to
Exhibit 10.8 to the January 1997 Registration Statement).
10.9* Amendment, dated as of July 15, 1996, to OEM Agreement
between Motorola, Inc. and the Company dated as of August 2,
1994 (incorporated herein by reference to Exhibit 10.9 to
the January 1997 Registration Statement).
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.10 RESERVED
10.11 RESERVED
10.12 License Agreement for APCO Fed Project 25 Algorithm between
Digital Voice Systems, Inc. and the Company, dated as of
August 14, 1995 (incorporated herein by reference to
Exhibit 10.12 to the January 1997 Registration Statement).
10.13 Consigned Inventory Agreement between Arrow/Schweber
Electronics Group and the Company, dated as of June 22, 1994
(incorporated herein by reference to Exhibit 10.13 to the
January 1997 Registration Statement).
10.14- RESERVED
10.23
10.24 Form of Adoption Agreement for Nonstandardized 401(k) Profit
Sharing Plan (incorporated herein by reference to Exhibit
10.24 to the January 1997 Registration Statement).
10.25 Defined Contribution Master Plan and Trust Agreement of
Norwest Bank Nebraska, N.A., Master Plan Sponsor
(incorporated herein by reference to Exhibit 10.25 to the
January 1997 Registration Statement).
10.26- RESERVED
10.35
10.36 License Agreement, dated as of January 15, 1997, between
E.F. Johnson Company and Johnson Data Telemetry Corporation
(incorporated herein by reference to Exhibit 10.36 to the
October 1997 Registration Statement).
10.37 Loan Agreement, dated as of December 31, 1997, by and
between U.S. Bank National Association d/b/a First Bank
N.A., and the Company, together with related documents.
(incorporated herein by reference to Exhibit 10.37 to the
1997 Form 10-K).
10.38 First Amendment to Loan Agreement dated May 21, 1998 by and
between U.S. Bank National Association and the Company,
together with related documents (incorporated herein by
reference to Exhibit 10.38 to the 1997 Form 10-K).
10.39- RESERVED
10.40
10.41 Consulting Agreement and Termination of Employment Agreement
between the Company and John T. Connor dated February 23,
1999 (incorporated herein by reference to Exhibit 10.41 to
the 1998 Form 10-K).
10.42 Employment Agreement between the Company and Michael E.
Jalbert dated March 1, 1999 (incorporated herein by
reference to Exhibit 10.42 to the 1998 Form 10-K).
10.43 Employment Agreement between the Company and Mike Wallace
dated March 30, 1999 (incorporated herein by reference to
Exhibit 10.42 to the 1998 Form 10-K).
10.44 Employment Agreement between the Company and George Spiczak
dated April 1, 1999 (incorporated herein by reference to
Exhibit 10.44 to the 2Q 1999 Form 10-Q).
10.45 Employment Agreement between the Company and Massoud Safavi
dated October 19, 1999.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.46 Chief Executive Officer Nonqualified Stock Option Agreement
dated October 19, 1999 between the Company and Michael E.
Jalbert.
10.47 Promissory Note dated January 7, 2000 between the Company
and Michael E. Jalbert.
10.48 Second Amendment to Loan Agreement by and between U.S. Bank
National Association and the Company dated August 31, 1999.
10.49 Lease Agreement between the Company and Waseca Properties,
LLC dated December 30, 1999.
11.1 Statement re: Computation of Per Share Earnings.
21 Subsidiaries of the Registrant (incorporated herein by
reference to Exhibit 21 to the 1997 Form 10-K).
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Confidential treatment has previously been granted by the SEC as to a portion
of this exhibit.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1999.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
See Item 14(a)(3) above.
(d) ADDITIONAL FINANCIAL STATEMENTS
See page S-2 to this Annual Report on Form 10-K for Schedule II--Valuation
and Qualifying Accounts and Reserves.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
TRANSCRYPT INTERNATIONAL, INC.
BY: /S/ MICHAEL E. JALBERT
-----------------------------------------
Michael E. Jalbert
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
Dated: March 22, 2000
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman of the Board of
/s/ MICHAEL E. JALBERT Directors, President and
------------------------------------------- Chief Executive Officer March 22, 2000
Michael E. Jalbert (Principal Executive
Officer)
Senior Vice President of
/s/ MASSOUD SAFAVI Finance and Chief Financial
------------------------------------------- Officer (Principal Financial March 22, 2000
Massoud Safavi and Accounting Officer)
/s/ EDWARD H. BERSOFF Director
------------------------------------------- March 22, 2000
Edward H. Bersoff
/s/ THOMAS R. LARSEN Director
------------------------------------------- March 22, 2000
Thomas R. Larsen
/s/ THOMAS C. SMITH Director
------------------------------------------- March 22, 2000
Thomas C. Smith
/s/ THOMAS R. THOMSEN Director
------------------------------------------- March 22, 2000
Thomas R. Thomsen
/s/ WINSTON J. WADE Director
------------------------------------------- March 22, 2000
Winston J. Wade
</TABLE>
45
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Transcrypt International, Inc.
We have audited the accompanying consolidated balance sheets of Transcrypt
International, Inc. and Subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Transcrypt International, Inc. and Subsidiaries as of December 31, 1999 and
1998, and the consolidated results of operations and cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Omaha, Nebraska
February 11, 2000
F-1
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 21,571 $ 20,262
Accounts receivable, net of allowance for returns and
doubtful accounts of $1,570 and $1,997 in 1999 and 1998,
respectively............................................ 12,675 9,287
Receivables--other........................................ 316 605
Cost in excess of billings on uncompleted contracts....... 2,298 1,216
Inventory................................................. 16,447 13,907
Prepaid expenses.......................................... 500 552
Deferred tax assets....................................... 2,395 5,157
-------- --------
Total current assets.................................. 56,202 50,986
Property, plant, and equipment, net......................... 3,766 11,885
Deferred tax assets......................................... 9,981 7,219
Intangible assets, net of accumulated amortization.......... 15,011 16,711
Other assets................................................ 561 411
-------- --------
$ 85,521 $ 87,212
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit.................................. $ 5,809 $ 7,426
Current portion of long-term debt......................... 116 2,732
Accounts payable.......................................... 8,514 2,620
Billings in excess of cost on uncompleted contracts....... 5,116 4,541
Deferred revenue.......................................... 4,090 1,140
Accrued expenses.......................................... 5,764 5,101
Provision for litigation settlement....................... -- 10,000
-------- --------
Total current liabilities............................. 29,409 33,560
Provision for litigation settlement....................... 5,996 --
Long-term debt, net of current portion.................... 197 6
Deferred revenue.......................................... 633 550
-------- --------
36,235 34,116
======== ========
Commitments and contingencies
Stockholders' equity:
Preferred stock ($.01 par value; 3,000,000 shares
authorized; none issued)................................ -- --
Common stock ($.01 par value; 25,000,000 voting shares
authorized, 12,736,582 issued and outstanding; 600,000
non voting shares authorized, 217,542 issued and
outstanding)............................................ 130 129
Additional paid-in capital................................ 90,331 90,315
Accumulated deficit....................................... (41,175) (37,348)
-------- --------
49,286 53,096
-------- --------
$ 85,521 $ 87,212
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-2
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues.............................................. $ 53,520 $ 62,041 $ 40,423
Cost of sales......................................... 36,059 44,905 26,106
----------- ----------- -----------
Gross profit...................................... 17,461 17,136 14,317
----------- ----------- -----------
Operating expenses:
Research and development.............................. 5,724 8,812 4,469
Sales and marketing................................... 8,282 11,476 7,031
General and administrative............................ 9,601 12,529 4,711
In-process research and development................... -- -- 9,828
Restructuring charge.................................. 523 1,230 --
Provision for litigation settlement................... (2,221) 10,000 --
----------- ----------- -----------
Total operating expenses.......................... 21,909 44,047 26,039
----------- ----------- -----------
Loss from operations.............................. (4,448) (26,911) (11,722)
Other income.......................................... 235 46 18
Interest income....................................... 920 1,304 874
Interest expense.................................... (534) (649) (643)
----------- ----------- -----------
Loss before income taxes.......................... (3,827) (26,210) (11,473)
Income tax benefit.................................. -- (3,916) (524)
----------- ----------- -----------
Net loss........................................ $ (3,827) $ (22,294) $ (10,949)
=========== =========== ===========
Net loss per share--Basic and Diluted................. $ (0.30) $ (1.72) $ (1.09)
=========== =========== ===========
Weighted average common shares--Basic and Diluted..... 12,947,795 12,946,624 10,056,690
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
F-3
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT UNITS AND SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL
PAR PAID-IN ACCUMULATED
SHARES VALUE CAPITAL DEFICIT TOTAL
---------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996................. 6,783,078 $ 68 $ 9,003 $ (4,105) $ 4,966
Net loss................................... -- -- -- (10,949) (10,949)
Initial public offering, net of related
costs.................................... 2,500,000 25 17,685 -- 17,710
Issuance of shares in connection with the
purchase of the E.F. Johnson Company..... 832,465 8 9,992 -- 10,000
Secondary stock offering, net of related
costs.................................... 2,684,481 27 52,912 -- 52,939
Exercise of stock options.................. 146,600 1 228 -- 229
Income tax benefit of exercise of stock
options.................................. -- -- 495 -- 495
---------- ---- ------- -------- --------
Balance, December 31, 1997................. 12,946,624 129 90,315 (15,054) 75,390
Net loss................................... -- -- -- (22,294) (22,294)
---------- ---- ------- -------- --------
Balance, December 31, 1998................. 12,946,624 $129 $90,315 $(37,348) $ 53,096
Exercise of stock options.................. 7,500 1 16 -- 17
Net loss................................... -- -- -- (3,827) (3,827)
---------- ---- ------- -------- --------
Balance, December 31, 1999................. 12,954,124 $130 $90,331 $(41,175) $ 49,286
========== ==== ======= ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
F-4
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (3,827) $(22,294) $(10,949)
-------- -------- --------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Special compensation expense............................ -- -- --
In-process research and development costs............... -- -- 9,828
Provision for litigation settlement..................... (2,221) 10,000 --
Depreciation and amortization........................... 4,260 4,596 2,206
Gain on sale of fixed assets............................ (803) (102) (15)
Provisions for inventory reserves....................... 829 978 1,100
Provisions for bad debts................................ 104 922 202
Deferred taxes.......................................... -- (4,349) (706)
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable................................... (3,492) 5,979 (8,884)
Cost in excess of billings on uncompleted contracts... (1,082) (274) 201
Inventory............................................. (3,369) 3,478 (6,179)
Income taxes recoverable.............................. -- 1,065 (357)
Prepaid expenses and other assets..................... 341 (74) (144)
Accounts payable...................................... 5,894 (6,685) (4,855)
Billings in excess of cost on uncompleted contracts... 575 (2,155) (823)
Accrued expenses...................................... 498 (1,138) 325
Deferred revenue...................................... 3,033 (987) 933
-------- -------- --------
Total adjustments................................... 4,567 11,254 (7,168)
-------- -------- --------
Net cash provided by (used in) operating
activities.......................................... 740 (11,040) (18,117)
-------- -------- --------
Cash flows from investing activities:
Purchases of investments.................................. -- -- (15,900)
Sale of investments....................................... -- 15,900 --
Proceeds from sale of fixed assets........................ 7,889 111 15
Purchase of fixed assets.................................. (1,046) (3,504) (2,422)
Increase in intangible assets............................. (141) (407) --
Increase (decrease) in other assets....................... (150) 41 118
Payments on restructuring reserve......................... (1,618) (1,084) (2,380)
Acquisition of E.F. Johnson Company, net of cash
acquired................................................ -- -- (292)
-------- -------- --------
Net cash provided by (used in) investing
activities.......................................... 4,934 11,057 (20,861)
-------- -------- --------
Cash flows from financing activities:
(Payments) proceeds on revolving lines of credit, net..... (1,617) 7,426 (11,914)
Proceeds from long term debt.............................. -- -- 2,850
Payments on long term debt................................ (2,710) (2,540) (7,634)
Principal payments on capitalized leases.................. (55) (25) --
Bank overdraft............................................ -- -- (386)
Issuance of common stock, net of issuance costs........... -- -- 71,217
Proceeds from the exercise of employee stock options...... 17 -- 229
-------- -------- --------
Net cash (used in) provided by financing
activities.......................................... (4,365) 4,861 54,362
-------- -------- --------
Net increase in cash and cash equivalents................... 1,309 4,878 15,384
Cash and cash equivalents, beginning of period.............. 20,262 15,384 --
-------- -------- --------
Cash and cash equivalents, end of period.................... $ 21,571 $ 20,262 $ 15,384
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
F-5
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed in
the preparation of these consolidated financial statements.
ORGANIZATION
Transcrypt International, Inc. (the "Company") is a Delaware corporation
which is engaged in the design, manufacture, and marketing of information
security products for the land mobile radio and telephony markets. Through its
E.F. Johnson subsidiary (EFJ), the Company designs, develops, manufactures, and
markets stationary land mobile radio transmitters/receivers and mobile and
portable radios. The Company markets its products to customers worldwide in two
broad markets: business and industrial users and public safety and other
governmental users. Management considers its operations to comprise two industry
segments. One segment consists of business conducted in the information security
industry (Transcrypt Secure Technologies) and the second business segment
competes in the wireless communication industry (EFJ).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidation. The results of
operations of EFJ are included from the date of its acquisition, July 31, 1997.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
less than 90 days as cash equivalents. The Company places its temporary cash
investments with high credit qualified financial institutions. Such investments
are carried at cost, which approximates fair value.
INVENTORY
Inventory is recorded at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. The Company's policy is
to capitalize expenditures for major improvements and to charge to operating
expenses the cost of maintenance and repairs. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets as follows:
land improvements--15 years; buildings and improvements--15 to 30 years;
equipment and furniture and fixtures--3 to 7 years. The cost and related
accumulated depreciation of assets retired or otherwise disposed of are
eliminated from the respective accounts at the time of disposition. Any
resulting gain or loss is included in current operating results.
INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over fair value of
assets acquired, is amortized on a straight-line basis over the expected periods
to be benefited, which is 15 years. Other intangibles are also carried at cost
less applicable amortization. Provision for amortization of other intangible
assets is
F-6
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
based upon the estimated useful lives of the related assets and is computed
using the straight-line method. Intangible assets are being amortized over
periods from 5 to 15 years. The Company assesses the recoverability of goodwill
and other intangible assets by determining whether the amortization of the
balances over its remaining lives can be recovered through undiscounted future
operating cash flows. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability will be impacted if estimated future operating cash flows are not
achieved.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
REVENUE RECOGNITION
Revenues are recognized when product is shipped, less an estimate for an
allowance for returns, if applicable, if collection is reasonably assured. For
shipments where collection is not reasonably assured, the Company recognizes
revenue as cash is received. If collection is contingent on a future event, such
as a reseller of product selling the product to the end user, the Company
recognizes revenue when the contingency lapses, generally upon cash collection.
System sales under long-term contracts are accounted for under the
percentage-of-completion method. Under this method, revenues are recognized as
work on a contract progresses. The recognized revenue is that percentage of
estimated total revenue that incurred costs to date bear to estimated total
costs to complete the contract. Revisions in cost and profit estimates are made
when conditions requiring such revisions become known. Anticipated losses on
contracts are recognized in operations as soon as such losses are determined to
be probable and reasonably estimable.
Deferred revenue includes unearned warranty fees on extended product
warranty contracts sold to customers. The Company recognizes the fees based on
the expected warranty repairs to be incurred over the life of the contract.
Deferred revenue also includes an advance payment received for products to be
sold to Motorola. The advanced payment is recognized as revenue is earned.
Finally, deferred revenue includes the deferred gain discussed in Note 9.
WARRANTY COSTS
The Company provides for warranty costs based on estimated future
expenditures that will be incurred under product guarantees and warranties
presently in force.
F-7
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
LOSS PER SHARE
Basic earnings per share (EPS) is calculated based upon the weighted average
number of common shares outstanding during the period. The diluted EPS
calculation reflects the potential dilution from common stock equivalents such
as stock options. As the years ended December 31, 1999, 1998 and 1997 have net
losses, the impact of outstanding stock options on diluted EPS is anti-dilutive.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect carrying amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of financial statement
dates, as well as the reported revenues and expenses for the years then ended.
Actual results may differ from management's estimates.
STOCK OPTION PLAN
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations, in accounting for its
fixed plan stock options.
2. ACQUISITION:
On July 31, 1997, the Company acquired all of the outstanding shares of
capital stock and certain indebtedness of EFJ for $436 in cash and 832,465
shares of common stock, with an approximate market value of $10,000. The
acquisition was accounted for by the purchase method of accounting. Purchased
in-process research and development costs of $9,828 were written off as the
technological feasibility of such in-process technology had not yet been
established and the technology had no alternative future use. Intangibles
recorded as part of the purchase include goodwill of $10,880, core technology of
$891, work force of $1,374, customer base of $1,561, and trade names of $3,299.
The intangible assets are being amortized over 5 to 15 years. See also Note 18.
The operating results of EFJ are included in the Company's consolidated
results of operations from the date of acquisition. The following unaudited pro
forma financial information assumes the acquisition occurred at the beginning of
1997. These results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition been
made at the beginning of 1996, or of the results, which may occur in the future.
<TABLE>
<CAPTION>
1997
-----------
(UNAUDITED)
<S> <C>
Total revenues.............................................. $70,959
Net loss.................................................... (9,949)
Loss per share--Basic and Diluted........................... $ (0.94)
</TABLE>
F-8
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
3. BILLINGS IN EXCESS OF COSTS ON UNCOMPLETED CONTRACTS:
Amounts included in the consolidated financial statements that relate to
billings on uncompleted contracts in excess of incurred costs as of
December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Costs on uncompleted contracts............................ $34,497 $30,615
Profits in uncompleted contracts.......................... 13,252 10,501
------- -------
47,749 41,116
Less billings............................................. 50,567 44,441
------- -------
$(2,818) $(3,325)
======= =======
Included in the consolidated balance sheet:
Cost in excess of billings on uncompleted contracts....... $ 2,298 $ 1,216
Billings in excess of cost on uncompleted contracts....... (5,116) (4,541)
------- -------
$(2,818) $(3,325)
======= =======
</TABLE>
Cost in excess of billings on uncompleted contracts includes direct costs of
manufacturing, installation, project management, engineering, and allocable
manufacturing overhead costs and accrued profits in excess of amounts billed.
Billings in excess of costs on uncompleted contracts includes amounts billed and
accrued anticipated losses (anticipated losses were $3,442 and $3,644 at
December 31, 1999 and 1998, respectively, of which $3,773 was established in
connection with the E.F. Johnson acquisition described in Note 2) on open
contracts in excess of costs and accrued profits.
4. INVENTORY:
The following is a summary of inventory at December 31, 1999 and 1998, net
of reserves for obsolescence of $3,719 and $3,146, respectively
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw materials and supplies................................ $ 9,027 $ 6,267
Work in process........................................... 1,816 1,337
Finished goods............................................ 5,604 6,303
------- -------
$16,447 $13,907
======= =======
</TABLE>
F-9
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
5. PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment consists of the following at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land and land improvements................................. $ 58 $ 262
Buildings and improvements................................. 262 7,245
Equipment.................................................. 8,870 9,107
Furniture and fixtures..................................... 1,265 1,317
Construction in progress................................... 441 209
------ -------
10,896 18,140
Less accumulated depreciation and amortization............. 7,130 6,255
------ -------
$3,766 $11,885
====== =======
</TABLE>
6. INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Goodwill.................................................. $10,880 $10,880
Proprietary technology and licensing agreements........... 400 400
Acquired work force, customer base, trade name............ 6,234 6,234
Other..................................................... 1,587 1,446
------- -------
19,101 18,960
Less accumulated amortization............................. 4,090 2,249
------- -------
$15,011 $16,711
======= =======
</TABLE>
7. REVOLVING LINES OF CREDIT:
The Company has a line of credit with a regional bank. It is a secured line
of credit not to exceed $10,000. Interest was 7.62% at December 31, 1999 and is
at a variable rate of 1.25% over the interest rate earned on the $10,000 cash
collateral used as security on the bank line of credit. This line of credit was
due on August 31, 1999 and was renewed until June 1, 2000. The working capital
line is collateralized by substantially all the Company's assets including
$10,000 in certificate of deposits with the bank.
At December 31, 1999 and 1998, the Company had $5,809 and $7,426,
respectively, outstanding on the revolving line of credit. Average borrowings
under the Company's line of credit and the weighted average interest rate during
1999 were $6,995 and 6.35% and during 1998 were $6,564 and 6.94%. The total
available credit as of December 31, 1999 was $4,191 under the above line. The
Company had an additional fixed line of credit with the same regional bank in
the amount of $196, which was paid off in 1999.
The revolving line of credit requires, among other things, that the Company
maintain certain levels of net worth. At December 31, 1999, the Company was in
compliance with these debt covenants or had obtained the appropriate waivers.
F-10
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
8. LONG-TERM DEBT:
Long-term debt at December 31, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Industrial development revenue bonds paid in full during
1999...................................................... $ -- $2,710
Other capital lease obligations............................. 313 28
---- ------
313 2,738
Less current portion........................................ 116 2,732
---- ------
$197 $ 6
==== ======
</TABLE>
9. LEASES:
Effective May 19, 1999 and December 30, 1999, the Company entered into
sale-leaseback transactions involving the facilities in Lincoln, Nebraska and
Waseca, Minnesota, respectively. Under the terms of the Lincoln agreement, the
Company leases a minor portion of the facility under a five year operating
lease. Under Statement of Financial Accounting Standard (SFAS) No. 98,
ACCOUNTING FOR LEASES, the gain on the sale of the building of $330 was realized
in current year income and is included in other income in the statements of
operations.
Under the terms of the Waseca agreement, the Company leases less than
substantially all but more than a minor portion of the facilities under a five
year operating lease. Under SFAS No. 98, the gain on the sale of the building
was deferred and will be realized on a straight-line basis over the life of the
lease. The deferred gain of $528 is included in deferred revenue at
December 31, 1999.
The Company is obligated under various capital leases for certain machinery
and equipment that expire at various dates during the next three years. At
December 31, 1999 and 1998, the gross amount of plant and equipment and related
accumulated depreciation recorded under capital leases were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Machinery and equipment..................................... $543 $203
Accumulated depreciation.................................... (235) (181)
---- ----
$308 $ 22
==== ====
</TABLE>
The Company also leases various equipment, automobiles and buildings under
operating leases. Rent expense was $792, $706, and $520 for the years ended
December 31, 1999, 1998, and 1997, respectively.
F-11
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
9. LEASES: (CONTINUED)
Future minimum rental payments under noncancelable operating lease agreements
and future minimum capital lease payments as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31 LEASES LEASES
- ----------------------- --------- --------
<S> <C> <C>
2000....................................................... $1,503 $142
2001....................................................... 1,403 121
2002....................................................... 1,302 95
2003....................................................... 1,250 --
2004....................................................... 1,083 --
Thereafter................................................. -- --
------ ----
6,541 358
Less amounts representing interest......................... -- (45)
------ ----
Total...................................................... $6,541 $313
====== ====
</TABLE>
10. INCOME TAXES:
The components of the benefit for income taxes for the years ending
December 31, 1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal............................................. $ -- $ 433 $ 163
State............................................... -- -- 19
------ ------- -----
-- 433 182
------ ------- -----
Deferred:
Federal............................................. -- (4,349) (637)
State............................................... -- -- (69)
------ ------- -----
-- (4,349) (706)
------ ------- -----
$ -- $(3,916) $(524)
====== ======= =====
</TABLE>
The Company's effective tax rate on pretax loss differs from U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
1999 PERCENT 1998 PERCENT 1997 PERCENT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
U.S. federal tax at statutory tax
rate............................... $(1,301) (34.0) $(8,911) (34.0) $(3,901) (34.0)
Income taxable directly to partners
of Predecessor..................... -- -- -- -- -- --
Increase in valuation allowance...... 1,021 26.7 5,013 19.1 -- --
In-process research and development
costs.............................. -- -- -- -- 3,341 29.1
Benefit of foreign sales
corporation........................ -- -- -- -- (61) (0.5)
State taxes, net of federal
benefit............................ -- -- -- -- (33) (0.3)
Non deductible amortization.......... 251 6.6 251 0.1 49 0.4
Other................................ 29 0.7 (269) (0.1) 81 0.7
------- ----- ------- ----- ------- -----
$ -- 0% $(3,916) (14.9)% $ (524) (4.6)%
======= ===== ======= ===== ======= =====
</TABLE>
F-12
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
10. INCOME TAXES:
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to deferred income taxes at
December 31, 1999 and 1998 relate to the following.
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets and liabilities:
Special compensation expense.............................. $ 1,403 $ 1,403
Allowance for bad debts................................... 457 525
Net operating loss carryforwards.......................... 14,343 12,255
Provision for litigation settlement....................... 2,038 3,400
Difference between tax and book amortization.............. 1,500 1,538
Difference between tax and book depreciation.............. 21 (1,184)
Difference between tax and book liability accruals........ 1,648 2,452
------- -------
Gross deferred tax assets................................. 21,410 20,389
Less valuation allowance.................................. 9,034 8,013
------- -------
$12,376 $12,376
======= =======
</TABLE>
There was no valuation allowance for deferred tax assets as of January 1,
1997. A valuation allowance of $3,000 was established at the time of the
purchase of EFJ. An additional $1,021 and $5,013 was added to the valuation
allowance during 1999 and 1998, respectively. Any subsequently recognized tax
benefits relating to $3,000 of this valuation allowance as of December 31, 1999
will be allocated to goodwill. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. In order to fully realize the deferred tax asset, the
Company will need to generate future taxable income prior to expiration of the
net operating loss carryforwards. Taxable losses for the years ended
December 31, 1999, 1998 and 1997 were approximately $3,003, $16,950, and $7,800,
respectively. Based upon the level of historical taxable income and projections
for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of existing valuation
allowances at December 31, 1999. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
Net operating loss carryforwards, which originated in 1999, 1998, 1997, and
1996, will begin to expire in 2011. The Company has approximately $8,600 in
Federal and state net operating loss carryforwards attributable to EFJ, which
expire in 2012. Tax regulations limit the amount that may be utilized on these
acquired net operating losses on an annual basis to approximately $588.
F-13
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
11. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Payroll, bonuses and employee benefits...................... $1,463 $1,361
Warranty reserve............................................ 503 530
Commissions................................................. 362 65
Restructuring reserve....................................... 705 1,800
Other expenses.............................................. 2,731 1,345
------ ------
$5,764 $5,101
====== ======
</TABLE>
In August 1998, the Company announced a voluntary reduction in force for
which the Company took a restructuring reserve of $1,230 to cover costs
associated with severance and other related costs to reduce the workforce by
approximately 125 employees. In addition, during June 1999 the Company incurred
a restructuring charge of approximately $523 primarily due to the closure of the
EFJ sales office in Hong Kong. As of December 31, 1999, all of these costs have
been expended. In connection with the acquisition of EFJ, a portion of the
purchase price was allocated to a restructuring reserve in 1997 to cover costs
associated with the purchase such as severance, relocation costs and contractual
obligations. A reserve of $4,961 was recorded, and as of December 31, 1999,
$4,256 has been expended.
12. COMMITMENTS AND CONTINGENCIES:
As previously disclosed, the Company has been named as a defendant in class
action lawsuits that were filed subsequent to the Company's announcement on
March 27, 1998 that the filing of its Annual Report on Form 10-K for year ended
December 31, 1997 would be delayed and that adjustments would be made to the
Company's previously announced financial results. Between March 31, 1998 and
May 27, 1998, twelve purported class action lawsuits were filed against the
Company in the United States District Court for the District of Nebraska, and
one complaint was filed in the District Court of Scotts Bluff County, Nebraska.
Certain of the complaints, as amended, also name one or more current and former
officers of the Company and PriceWaterhouseCoopers, LLP as defendants. The
longest class period alleged in any of the class complaints is the period from
January 22, 1997 through April 24, 1998.
The federal class actions generally allege claims under Sections 11 and 15
of the Securities Act of 1933 and Sections 10 and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and relate primarily
to allegations of false and misleading financial statements and representations
and material omissions by the Company. The Nebraska action alleges violations of
Nebraska securities laws.
In July 1999, the Company announced that a memorandum of understanding had
been signed with lead plaintiffs' counsel to settle the pending stockholder
class action suits against the Company and certain of its current or former
officers. The parties subsequently memorialized the terms of the memorandum of
understanding in a stipulation of settlement. The stipulation of settlement will
create a settlement fund for distribution to class members and class counsel
consisting of (a) 4,460,000 shares of Transcrypt common stock and (b) at least
$3,850 and up to $8,850 to be paid by Transcrypt's insurance carriers (depending
on the outcome of an arbitration between plaintiffs and one of the insurance
carriers). Transcrypt would also pay $2,000 to the class if there is a purchase
of Transcrypt by acquisition or merger that occurs before January 1, 2001.
F-14
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
In January 2000, Honorable Warren K. Urbom of the United States District
Court for the District of Nebraska preliminarily approved the settlement. The
settlement, if finally approved, will also result in a dismissal of the
stockholder class action suit pending in the District Court for Scotts Bluff
County, Nebraska. The preliminary approval precludes any persons from asserting
any claims of indemnity of contribution against Transcrypt or any of its current
or former officers, directors, or employers. The court has scheduled a hearing
for final approval of the settlement on March 27, 2000. The settlement is
subject to a number of contingencies, including final court approval of the
settlement.
On November 4, 1998, Physician's Mutual Insurance Company filed an action in
the District Court of Douglas County, Nebraska against the Company,
PriceWaterhouseCoopers, LLP and two former officers of the Company. The
complaint contains common law causes of action for fraudulent misrepresentation,
fraudulent concealment, and negligent misrepresentation against the defendants
arising from the same facts and circumstances underlying the class actions. The
complaint seeks damages in an amount to be proved at trial, but which is
currently alleged to be approximately $850.
In the quarter ended December 31, 1998, the Company recorded a special
provision of $10 million related to actions pending against the Company. Upon
entering the memorandum of understanding, the Company revised its estimated
costs related to the settlement of actions against the Company. This lowered the
Company's operating expenses by $2.2 million in the second quarter of 1999 as
the settlement was for an amount less than previously provided. The remaining
reserves for litigation settlement and related costs include $1,560 included in
accrued expenses and $5,996 included in the provision for litigation settlement.
The remaining reserves for litigation settlement have been classified as long
term to the extent that they will be extinguished through the issuance of common
stock of the Company.
In April 1998, the Securities and Exchange Commission ("SEC") issued a
formal order of investigation to determine whether violations of certain aspects
of the federal securities laws had occurred in connection with the Company. As
part of this investigation, the SEC is also examining the conduct of certain
former officers of the Company. The Company has an obligation to defend and/or
indemnify certain former employees. The Company has discussed possible
settlement of the investigation or any pending enforcement action against the
Company or its affiliated parties relating to these events. At this time, it is
unknown whether the Company will settle the SEC formal order of investigation.
In addition, it is unknown what actions will be taken against former officers
and, therefore, the Company cannot determine the exposure of any future
obligations to defend and/or indemnify these former officers. The SEC has the
authority to impose a variety of sanctions against the Company and
Company-affiliated parties. Such sanctions could include monetary penalties,
imposition of a cease and desist order and issuance of removal and prohibition
orders against Company-affiliated persons, among other things.
The Company is involved in certain other legal proceedings incidental to the
normal conduct of its business. The Company does not believe that any
liabilities relating to such other legal proceedings are likely to be,
individually or in the aggregate, material to the Company's business, financial
condition, results of operations or cash flows.
In the normal course of its business activities, the Company is required
under a contract with various governmental authorities to provide letters of
credit and bonds that may be drawn upon if the Company fails to perform under
its contracts. The letters of credit, which expire on various dates in 2000,
have a total undrawn balance of $1,981. Of this total, $1,172 for one specific
contract is collateralized by a cash reserve.
F-15
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Bonds, which expire on various dates through 2000, totaled $12,680 at
December 31, 1999. As of December 31, 1999 no bonds have been drawn upon.
As a result of the EFJ acquisition, the Company has an agreement with a
vendor to purchase a certain annual dollar volume of products. In the event the
Company fails to purchase the minimum volume, it must pay a penalty equal to 35%
of the shortfall. The agreement expires in 2000 and future minimum purchase
quantities through the end of the agreement equals $391. The Company does not
anticipate meeting its future minimum purchase commitments. This shortfall was
anticipated and accrued as a liability in the allocation of the purchase price
for EFJ. At the end of the year, the Company has accrued restructuring and other
reserves of $705 for the 1999 liability and $133 for the 2000 liability as a
result of this take or pay contract.
The Company did not experience any material Year 2000 system failure or
miscalculations causing disruptions of operations resulting from computer
programs being written using two digits rather than four to define the
applicable year. In addition, we have not received a significant amount of
customer notification regarding experiencing erroneous dates on usage reports or
Year 2000 operational issues. It is still possible for customers to have issues
with previously shipped products. The Year 2000 Compliance Manager will continue
to respond in writing to any possible solutions to any Year 2000 Product issues.
13. OPTION PLANS:
Effective as of September 6, 1996, the Company established the 1996 Stock
Incentive Plan (the "Plan"). Any employee, including any director of the Company
and any non employee director or independent contractor of the Company, is
eligible to be considered for the issuance of shares of common stock, $0.01 par
value per share, of the Company or of any other class of security or right of
the Company which is convertible into common stock. As of December 31, 1999, the
remaining shares available to be issued under this Plan are 243,739. The Plan
provides that, unless otherwise provided by the Plan committee, any stock option
granted shall have an exercise price not less than 100% of the market value of a
share of common stock on the date the option is granted and that the term of
such option shall be ten years from date of grant with vesting of the options at
a rate of 20% per year.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant date for
awards in 1999, 1998 and 1997 consistent with the provisions of SFAS No. 123,
the Company's pro forma net loss and pro forma loss per share would have been as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss--as reported............................. $(3,827) $(22,294) $(10,949)
Pro forma net loss--as adjusted under SFAS No. 123.......... (5,123) (23,010) (11,149)
Pro forma net loss per share--as reported:
Basic and Diluted....................................... (0.30) (1.72) (1.09)
Pro forma net loss per share--as adjusted under SFAS No.
123:
Basic and Diluted....................................... (0.40) (1.78) (1.11)
</TABLE>
The weighted average fair value per option at date of grant during 1999,
1998, and 1997 was $2.23, $11.33, and $7.92, respectively.
F-16
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
13. OPTION PLANS: (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for options granted:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected option life........................... 10 years 10 years 10 years
Expected annual volatility..................... 138% 110% 68%
Risk-free interest rate........................ 6.80% 4.65% 6.62%
Dividend yield................................. 0% 0% 0%
</TABLE>
The status of stock options under the Plan are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
--------- --------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1995.............. 464,619 $1.13
Granted............................... 252,297 3.05
Exercised............................. -- --
Forfeited............................. -- --
---------
Balance at December 31, 1996.............. 716,916 1.81 716,916
Granted............................... 459,600 10.29
Exercised............................. (146,600) 1.57
Forfeited............................. (146,383) 10.01
---------
Balance at December 31, 1997.............. 883,533 4.90 553,933
Granted............................... 215,000 7.72
Exercised............................. -- --
Forfeited............................. (135,600) 5.12
---------
Balance at December 31, 1998.............. 962,933 4.94 627,933
Granted............................... 920,000 2.39
Exercised............................. (7,500) 2.25
Forfeited............................. (273,272) 5.26
---------
Balance at December 31, 1999.............. 1,602,161 3.44 874,927
=========
</TABLE>
F-17
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
13. OPTION PLANS: (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER EXERCISABLE
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, AVERAGE
EXERCISE PRICE 1999 LIFE PRICE 1998 EXERCISE PRICE
- ------------------------ -------------- ----------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.760 -- 0.760 294,257 5.67 $0.760 294,257 $0.760
1.438 -- 2.125 205,000 9.49 1.455 175,000 1.438
2.250 -- 2.250 307,500 9.61 2.250 116,666 2.250
2.688 -- 2.750 70,000 8.78 2.710 14,000 2.710
2.984 -- 2.984 400,000 9.16 2.984 100,000 2.984
3.050 -- 8.000 240,404 6.45 5.508 147,004 4.588
10.500 -- 21.688 50,000 8.06 14.975 14,000 16.893
23.500 -- 23.500 10,000 7.88 23.500 4,000 23.500
23.938 -- 23.938 25,000 8.08 23.938 10,000 23.938
--------- -------
0.760 -- 23.938 1,602,161 8.17 3.435 874,927 2.650
========= =======
</TABLE>
14. BENEFIT PLANS:
The Company has a profit sharing plan, which covers substantially all
employees. Contribution levels are determined annually by the Board of
Directors. Profit sharing expense approximated $0, $0 and $100 for the years
ended December 31, 1999, 1998, and 1997, respectively.
The Company also has a 401(k) plan, which covers substantially all
employees. Participants may contribute up to 15% of their annual compensation
and the Company makes matching contributions of 40% for the first 6% of the
amount contributed by participants. Contributions may not exceed the maximum
allowable by law. Company contributions approximated $236, $372, and $111 for
the years ended December 31, 1999, 1998, and 1997, respectively.
15. CONCENTRATIONS:
No customer accounted for sales 10% or greater in 1999 or 1998. Sales to one
customer represented 10.8% of 1997 sales.
In addition, a substantial portion of the Company's revenue is from
customers in the governmental sector, both domestic and foreign. The Company's
policy does not require significant collateral or other security to support such
receivables. However, the Company typically requests collateral on certain
foreign sales that carry higher than normal risk characteristics.
In addition to being a customer, Motorola is also a key manufacturer of
electronic components used by the Company. Purchases by the Company from
Motorola totaled approximately $808, $1,244, and $3,862 in 1999, 1998, and 1997,
respectively.
F-18
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents, accounts receivable,
receivables-other, cost in excess of billings on uncompleted contracts, prepaid
expenses, accounts payable, billings in excess of cost on uncompleted contracts,
and accrued expenses approximate fair value because of the short maturity of
these instruments. The carrying amount of long-term debt and the revolving line
of credit approximate fair value as calculated by discounting the future cash
flows of each instrument at rates currently offered to the Company for similar
debt instruments of comparable maturities by the Company's bankers.
17. STOCK OFFERINGS:
On January 22, 1997, the Company completed an initial public offering of
2,900,000 shares of common stock at a price of $8.00 per share. Of the 2,900,000
shares offered, 2,500,000 shares were sold by the Company and 400,000 were sold
by certain of the Company's stockholders. The Company's net proceeds from the
offering, after underwriting commissions and expenses, were approximately
$17,710.
A portion of the Company's net proceeds from the offering was used to retire
term and installment notes payable and the revolving lines of credit. The
remaining net proceeds were used for general working capital purposes and to
support the Company's growth and business strategy.
On October 15, 1997, the Company completed a secondary public offering of
3,175,000 shares of common stock at a price of $21.00 per share. Of the
3,175,000 shares offered, 2,684,481 shares were sold by the Company and 490,519
were sold by certain of the Company's stockholders. The Company's net proceeds
from the offering, after underwriting commissions and expenses, were
approximately $52,939.
A portion of the Company's net proceeds from the offering was used to retire
the revolving credit facility and term facility of EFJ. The remaining net
proceeds have been and will be used to finance expansion and modernization of
the Company's manufacturing and administrative facilities, and for working
capital and general corporate purposes.
18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid by the Company during the years ended December 31, 1999, 1998,
and 1997 amounted to $559, $514, and $618, respectively. Income taxes paid, net
of refunds, during the years ended December 31, 1999, 1998, and 1997 were $0,
$0, and $642 respectively.
During 1999, the Company made non-cash additions to property, plant, and
equipment of $340.
In conjunction with the acquisition during the year ended December 31, 1997
(see Note 2) assets acquired, liabilities assumed and common stock issued were
as follows:
<TABLE>
<S> <C>
Fair value of assets acquired............................... $30,574
Excess of cost over net tangible assets acquired............ 27,833
Liabilities assumed......................................... (48,115)
Common stock issued......................................... (10,000)
-------
Cash paid, net of cash received............................. $ 292
=======
</TABLE>
F-19
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
19. SEGMENT AND RELATED INFORMATION:
The Company's reporting segments are strategic business units that offer
different products and services. Management considers its operations to comprise
two industry segments. One segment consists of business conducted in the
information security industry (Transcrypt Secure Technologies), which comprises
the design, manufacture and sale of devices that prevent the unauthorized
interception on sensitive voice and data communication. The second business
segment competes in the wireless communication industry (EFJ) where the Company
designs, develops, manufactures and markets stationary land mobile radio
transmitters/receivers, mobile and portable radios and complete radio
communication systems.
The following table is a summary of unaudited annual results for the years
ended December 31, 1999, 1998 and 1997. E.F. Johnson was acquired on July 31,
1997. Prior to the acquisition, the Company was comprised solely of the
Information Security business segment.
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
IN THOUSANDS 1999 1998 1997
- ------------ ------------ ------------ ------------
<S> <C> <C> <C>
SALES
Information Security.................................... $ 7,575 $10,925 $10,586
Wireless Communication.................................. 45,945 51,116 29,837
------- ------- -------
TOTAL SALES............................................. 53,520 62,041 40,423
------- ------- -------
COST OF GOODS SOLD
Information Security.................................... 2,699 5,105 5,919
Wireless Communication.................................. 33,360 39,800 20,187
------- ------- -------
TOTAL COST OF GOODS SOLD................................ 36,059 44,905 26,106
------- ------- -------
GROSS MARGIN
Information Security.................................... 4,876 5,820 4,667
Wireless Communication.................................. 12,585 11,316 9,650
------- ------- -------
TOTAL GROSS MARGIN...................................... $17,461 $17,136 $14,317
======= ======= =======
Gross margin percentage
Information Security.................................... 64.4% 53.3% 44.1%
Wireless Communication.................................. 27.4% 22.1% 32.3%
------- ------- -------
TOTAL GROSS MARGIN PERCENTAGE........................... 32.6% 27.6% 35.4%
======= ======= =======
</TABLE>
F-20
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
19. SEGMENT AND RELATED INFORMATION: (CONTINUED)
EXPORT SALES
A significant portion of the Company's sales are made to customers outside
of the United States. Export sales are recorded and settled in U.S. dollars.
Export sales by major geographic area were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Europe........................................... $ 1,918 $ 1,902 $ 804
Middle East and Asia............................. 2,684 3,953 7,657
Central and Latin America........................ 7,516 16,859 6,933
------- ------- -------
$12,118 $22,714 $15,394
======= ======= =======
</TABLE>
20. UNAUDITED QUARTERLY FINANCIAL DATA:
The following table sets forth unaudited condensed operating results for
each of the eight quarters in the two-year period ending December 31, 1999. This
information has been prepared on the same basis as the consolidated financial
statements appearing elsewhere in this report. The Company's operating results
for any one quarter are not indicative of results for any future period.
Earnings per share for each quarter are computed independently of earnings
per share for the year. The sum of the quarterly may not equal the earnings per
share for the year because of (i) transactions
F-21
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
20. UNAUDITED QUARTERLY FINANCIAL DATA: (CONTINUED)
affecting the weighted-average number of common shares outstanding in each
quarter and (ii) the uneven distribution of earnings during the year.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC.31,
--------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1999
Revenues............................................... $ 9,709 $12,727 $15,323 $ 15,760
Income (loss) from operations.......................... (4,100) (587) 14 224
Interest (expense) income and other income, net........ 143 251 135 93
------- ------- ------- --------
Net income (loss) before income taxes.................. (3,957) (336) 149 317
Provision (benefit) for income taxes................... -- -- -- --
------- ------- ------- --------
Net income (loss)...................................... $(3,957) $ (336) $ 149 $ 317
======= ======= ======= ========
Net income (loss) per share
Basic.................................................. $ (0.31) $ (0.03) $ 0.01 $ 0.02
======= ======= ======= ========
Diluted................................................ $ (0.31) $ (0.03) $ 0.01 $ 0.02
======= ======= ======= ========
1998
Revenues............................................... $21,988 $13,877 $14,325 $ 11,851
Income (loss) from operations.......................... 1,717 (7,749) (5,955) (14,924)
Interest (expense) income and other income, net........ 311 108 29 254
------- ------- ------- --------
Net income (loss) before income taxes.................. 2,028 (7,641) (5,926) (14,670)
Provision (benefit) for income taxes................... 712 (2,598) (2,030) --
------- ------- ------- --------
Net income (loss)...................................... $ 1,316 $(5,043) $(3,896) $(14,670)
======= ======= ======= ========
Net income (loss) per share
Basic.................................................. $ 0.10 $ (0.39) $ (0.30) $ (1.13)
======= ======= ======= ========
Diluted................................................ $ 0.10 $ (0.39) $ (0.30) $ (1.13)
======= ======= ======= ========
</TABLE>
The Company incurred a charge of $1.2 million for restructuring the
workforce in the third quarter ended September 30, 1998. In the quarter ended
December 31, 1998, a special provision of $10.0 million was made for the
potential settlement of pending class action litigation. Also during that
quarter, no provision was made for future tax benefits in connection with the
loss. The tax benefit was fully offset by an increase in the valuation allowance
(See Note 10). In the second quarter of 1999, the Company signed a memorandum of
understanding to settle the class action litigation for which the $10.0 million
special provision was made in the second quarter of 1998. The Company reduced
the special provision by $2.2 million to reflect a lower than anticipated
settlement.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Transcrypt International, Inc.
The audits referred to in our report dated February 11, 2000 included the
related financial statement schedule as of December 31, 1999, and for each of
the years in the three-year period ended December 31, 1999 included in
Form 10-K. The financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits. In our opinion, such financial
statement schedule when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ KMPG LLP
Omaha, Nebraska
February 11, 2000
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING EXPENSES TO OTHER DEDUCTIONS END
OF PERIOD (PROVISIONS) ACCOUNTS (WRITE-OFFS) OF PERIOD
---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
for the:
Year Ended December 31, 1997... $ 430,251 $ 202,321 $2,337,291 $ 553,361 $2,416,502
Year Ended December 31, 1998... 2,416,502 921,684 -- 1,341,395 1,996,791
Year Ended December 31, 1999... 1,996,791 246,698 -- 673,877 1,569,612
Inventory Obsolescence Reserve
for the:
Year Ended December 31, 1997... $ 38,849 $2,636,107 $5,187,000 $3,747,526 $4,114,430
Year Ended December 31, 1998... 4,114,430 977,688 -- 1,946,186 3,145,932
Year Ended December 31, 1999... 3,145,932 957,841 -- 385,059 3,718,714
Allowance for Restructuring Reserve
for the:
Year Ended December 31, 1997... $ -- $ -- $4,960,500 $2,379,424 $2,581,076
Year Ended December 31, 1998... 2,581,076 1,230,000 -- 2,010,412 1,800,664
Year Ended December 31, 1999... 1,800,664 523,485 -- 1,618,952 705,197
Allowance for Warranty Reserve
for the:
Year Ended December 31, 1997... $ 73,315 $ 408,687 $ 706,244 $ 381,757 $ 806,489
Year Ended December 31, 1998... 806,489 264,539 -- 540,881 530,147
Year Ended December 31, 1999... 530,147 450,260 -- 477,601 502,806
</TABLE>
S-2
<PAGE>
INDEX OF ATTACHED EXHIBITS
The following documents are included in this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<S> <C>
10.1 Transcrypt International, Inc. 1999 Non Employee Director
Stock Plan.
10.2 Transcrypt International, Inc. 1999 Executive Officer Stock
Purchase Plan.
10.45 Employment Agreement between the Company and Massoud Safavi
dated October 19, 1999.
10.46 Chief Executive Officer Nonqualified Stock Option Agreement
dated October 19, 1999 between the Company and Michael E.
Jalbert.
10.47 Promissory Note dated January 7, 2000 between the Company
and Michael E. Jalbert.
10.48 Second Amendment to Loan Agreement by and between U.S. Bank
National Association and the Company dated August 31,
1999.
10.49 Lease Agreement between the Company and Waseca Properties,
LLC dated December 30, 1999.
11.1 Statement re: Computation of Per Share Earnings.
21 Subsidiaries of the Registrant (incorporated herein by
reference to Exhibit 21 to the 1997 Form 10-K).
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 10.1
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 June 30, 2000.
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:
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(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.;
(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.
After the Effective date and 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.
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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.
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.
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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 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.
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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.
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.
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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.
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 on the Effective Date, subject to 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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EXHIBIT 10.2
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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 June 30, 2000.
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:
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(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.;
(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.
After the Effective Date and 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.
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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.
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.
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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 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.
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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.
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.
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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.
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 on the Effective Date, subject to 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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EXHIBIT 10.45
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EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made by and between MASSOUD
SAFAVI ("Employee") and TRANSCRYPT INTERNATIONAL, INC., a Delaware corporation
("Company") this 10th day of September 1999.
The Company wishes to employ Employee as Senior Vice President and
Chief Financial Officer on the terms set forth in this Agreement also to be
named to the Board of Directors, and Employee desires to be employed by Company
in this capacity. Company and Employee desire to set forth in writing the terms
and conditions of their agreements and understandings.
THEREFORE, in consideration of the mutual promises set forth herein, it
is mutually agreed between the parties as follows:
SECTION 1. EMPLOYMENT TERM. The Company hereby employs the Employee and
the Employee hereby accepts employment as
Senior Vice President and Chief Financial Officer on the terms of this
Agreement, commencing as of the date hereof and continuing for a period of two
(2) years, until October 15, 2001, unless terminated earlier in accordance with
the provisions set forth herein. Following the initial term of employment, this
Agreement may be renewed for additional one (1) year terms. At the expiration of
each term (the initial two year term or each one year extension period),
employment shall be automatically renewed for an additional one (1) year term
unless written notice to the contrary is given by the Company or the Employee
sixty (60) days preceding the October 15th termination date. The provisions of
the Agreement shall apply during the initial term and any renewals of the term.
SECTION 2. DUTIES AND AUTHORITY. The Employee's duties shall be as
determined by the Chief Executive Officer. The duties of Chief Financial Officer
are generally set forth in the job description for such position, and such
duties may change from time to time.
SECTION 3. COMPENSATION.
A. BASE SALARY. Employee will receive a minimum base
salary of Two Hundred Thousand ($200,000.00) per year, paid
biweekly, as long as Employee is employed with the Company.
Such base salary will be subject to annual review, taking into
consideration employee's performance during the preceding year,
base salary adjustments for the executive staff and other
internal and external factors as described in the corporate
bylaws and public document filings.
B. BONUS. Employee will receive a signing bonus of
Seventy Five Thousand ($75,000.00), upon signing his employment
agreement and Seventy five Thousand $75,000.00 on the one-year
anniversary of signing his
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employment agreement. Following the first year of employment
and if the Company meets or exceeds the annual objectives set
forth for Employee by the Chief Executive Officer, then the
Employee will receive an annual bonus at the discretion of the
Board of Directors, in line with the Company's bonus program
for executives. The bonus, if awarded, will be paid annually in
February.
C. STOCK INCENTIVE OPTIONS. The Company grants to Employee
an option to purchase Two Hundred Thousand (200,000)
Shares of Common Stock at a strike price to be set by the
Compensation Committee and per the Company's Stock Option
Incentive Program. The terms of said Option Agreement is set
forth in the Non-Qualified Stock Option Agreement, attached as
Exhibit A. In the event of any inconsistencies or conflict
between the Agreement and Exhibit A, then the terms of this
Agreement shall control. The Company will take all steps
necessary to ensure that all shares are freely transferable,
subject to any volume restrictions imposed by federal law on
the transfer of Employee's shares. Sixty Six Thousand Six
Hundred Sixty Six (66,666) of the shares will vest upon
Employee's first day of employment. One Hundred Thirty Three
Thousand Three Hundred Thirty Four (133,334) of the shares will
vest through the vesting period set forth in the Non-Qualified
Stock Option Agreement.
D. ADDITIONAL BENEFITS. Employee also will receive such
additional employee benefits commensurate with his position,
including those that the Company may from time to time make
available to its executive officers, including 4 weeks paid
vacation, qualified profit-sharing plans, employee group
insurance and disability insurance.
E. WITHHOLDINGS. All payments made to Employee pursuant to this
Agreement shall be reduced by all required federal, state
and local withholdings for taxes and similar charges and
by all contributions or payments required to be made by
Employee in connection with any employee benefit plan
maintained by the Company.
SECTION 4. LOCATION. Initial offices will be at the Company's operating
facilities in Waseca, MN or Lincoln, NE, but will be made permanent in the
greater Washington, DC area by the first quarter of calendar year 2000.
SECTION 5. REIMBURSEMENT FOR EXPENSES. Employee is expected to incur
certain expenses on behalf of the Company for travel, promotion, telephone,
entertainment and similar items. The Company will reimburse the Employee for all
ordinary, necessary and reasonable amounts of such expenses, as determined by
the Board of Directors, incurred by Employee. Such amounts shall be payable
promptly upon receipt of reasonable written documentation signed by the Employee
itemizing such expenses.
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SECTION 6. INDEMNIFICATION. Employee shall be indemnified and held
harmless by the Company to the fullest extent authorized by the General
Corporation Law of the State of Delaware, as the same exists or may hereafter be
amended (however, in the case of any such amendment, only to the extent that
such amendment permits the Company to provide broader indemnification rights
than such law permitted the Company to provide prior to such amendment). The
Company's bylaws, attached as Exhibit C, contain an indemnification procedure
for directors and officers of the Company. Generally, if Employee is made or is
threatened to be made a party to any action, suit or proceeding relating to his
employment or service as a director of the Company, he shall have the right to
select individual counsel and he shall be indemnified and held harmless by the
Company against all expenses, liability and loss reasonably incurred in
connection with such action. Employee has the right to bring suit against the
Company if a claim made in accordance with the Company's bylaws is not paid in
full within sixty (60) days after a written claim has been received, except in
the case of a claim for an advancement of expenses, in which case the applicable
period is twenty (20) days. The Company shall also maintain directors' and
officers' liability insurance in an amount sufficient to cover any claims made
against Employee.
SECTION 7. TERMINATION / SEVERANCE
A. The Company shall have the right to terminate this
Agreement, upon thirty (30) days written notice, if the
following events occur:
1. The reasonable determination by the Chief Executive Officer
that the Employee has become disabled, and cannot complete
the essential functions of the position with reasonable
accommodation and is unable to continue his service to the
Company; or
2. The Employee's death; or
3. The reasonable determination by the Chief Executive Officer
that there is "good cause" for termination of this
Agreement. For purposes of the Agreement, "good cause"
means the Employee's willful neglect of his duties under
this Agreement and the job duties as assigned by the Chief
Executive Officer, theft or misappropriation of the
Company's assets by the Employee, fraud of the Employee
or gross insubordination. The Company shall provide
Employee written notice of and a reasonable opportunity
to cure anything that the Company believes constitutes
willful neglect of duties or gross insubordination.
B. Either party may terminate this Agreement upon (60) days' prior
written notice without good cause. In the event of a
termination by the Company without good cause the Company shall
continue to provide all benefits for one year after termination
and shall pay Employee a lump sum severance payment equal to
the greater of: 1) his annual base salary (at the time of
termination) or, 2) his base
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salary (at the time of
termination) for the remaining term of the then current
Agreement. If the employee terminates the Agreement within the
first twelve- (12) months, he must repay the $75,000 signing
bonus he receives and cancel any vested options. Upon
commencement of full time employment with a different company
as described in the attached non-compete agreement, or full
time self employment, all benefits shall cease. Employee's
COBRA termination date shall be the date all benefits cease.
All cash severance amounts described in sections 7A through 7B shall be
paid to Employee upon the termination of his employment.
C. Change in Control. For the purposes of this Agreement,
"change in control" means: 1) A change in the ownership of the
shares of the Company that results in a change in a majority of
the board of directors; or, 2) a sale, assignment or transfer of
all or substantially all of the assets of the Company. If there
is a change in control, then the Company may terminate this
Agreement upon thirty (30) days written notice. If there is a
change in control and a material diminishment in the employee's
position, duties, or responsibilities, that is not mutually
agreed among the parties, then Employee may terminate this
Agreement upon thirty (30) days written notice. Upon notice of
termination by either party pursuant to this section 7C, all of
Employee's stock options shall vest immediately. Upon termination
by either party pursuant to this section 7C, the Company shall
pay to Employee a lump sum severance payment equal to two years
of base salary (at the time of termination), and shall consider
providing a transaction bonus. In addition, the Company shall
continue to provide all benefits for one year after termination.
SECTION 8. AUTOMOBILE ALLOWANCE. The Company shall pay a car allowance
of $550.00 per month during the term of this Agreement.
SECTION 9. ENTIRE AGREEMENT. This Agreement contains the entire
understanding and agreement between the Company and the Employee and supersedes
any prior agreements and negotiations between them pertaining to the Employee's
terms and conditions of employment with the Company. There are no
representations, warranties, promises, covenants or understandings between the
Company and the Employee with respect to such employment other than those
expressly set forth in this Agreement. This Agreement takes precedence over
other conflicting agreements with the Employee.
SECTION 10. GOVERNING LAW. This Agreement shall be governed by the laws
of the State of Nebraska.
SECTION 11. NON-ASSIGNABILITY; SUCCESSORS. The obligations of the
Employee under this Agreement are not assignable
by him. This Agreement is personal in nature and may not be assigned by the
Company without the written consent of the Employee, except that the consent of
the Employee shall not be reasonably withheld in connection with the sale to any
person, partnership, corporation or other entity of substantially all the assets
of the company, provided that the assignee assumes all the liabilities of the
Company hereunder. Except as provided in the immediately preceding sentence,
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their successors.
SECTION 12. NOTICES. Any notice required to be given in writing by any
party to this Agreement may be personally delivered or mailed by registered or
certified mail to the last known address
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of the party to be notified. Any such notice personally delivered shall be
effective upon delivery and any such notice mailed shall be effective four (4)
business days after the date of mailing by registered or certified mail with
postage prepaid to the last known address of the party to be notified.
SECTION 13. SEVERABILITY. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions of
this Agreement, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
SECTION 14. HEADINGS. The Section and other headings contained in this
Agreement are for reference purposes only and shall not affect the
interpretation of this Agreement.
SECTION 15. CONSTRUCTION. Whenever required by the context, references
to the singular shall include the plural, and the masculine gender shall include
the feminine gender.
SECTION 16. RESTRICTIVE COVENANTS. Employee shall execute, concurrently
with this Agreement, a Confidentiality and Non Compete Agreement in the form
attached as Exhibit D.
SECTION 17. AMENDMENTS. No changes, modifications, waivers, discharges,
amendments or additions to this Employment Agreement shall be binding unless it
is in writing and signed by the Company and the Employee.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf and the Employee has signed his name hereto, effective as
of the date first written above.
TRANSCRYPT INTERNATIONAL, INC., a Delaware corporation
BY: /s/ MICHAEL E. JALBER
----------------------------------
Its CEO
----------------------------------
/S/ MASSOUD SAFAVI
-----------------------------------
MASSOUND SAFAVI
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EXHIBIT 10.46
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TRANSCRYPT INTERNATIONAL, INC.
CHIEF EXECUTIVE OFFICER 1999
NONQUALIFIED STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement") is made and entered into as
of the Date of Grant indicated below by and between Transcrypt International,
Inc., a Delaware corporation (the "Company"), and Michael E. Jalbert
("Participant").
WHEREAS, Participant is Chief Executive Officer of the
Company; and
WHEREAS, pursuant to authority granted by the Board of
Directors of the Company (the "Board"), the Compensation Committee of the Board
(the "Committee") has approved the grant to Participant of an option to purchase
shares of the common stock, $.01 par value of the Company (the "Common Stock"),
on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals and
the covenants set forth herein, the parties hereto hereby agree as follows:
1. Grant Of Option; Certain Terms and Conditions. The Company hereby
grants to Participant, and Participant hereby accepts, as of the Date of Grant,
an option to purchase the number of shares of Common Stock indicated below (the
"Option Shares") at the Exercise Price per share indicated below, which option
shall expire at 5:00 p.m., Nebraska time, on the Expiration Date indicated
below, shall become exercisable to purchase, and shall vest with respect to, the
number of Option Shares set forth under vesting schedule below, and shall be
subject to all of the terms and conditions set forth in this Agreement (the
"Option").
Date of Grant: October 19, 1999
Number of shares purchasable: 200,000
Exercise Price per share: $ 1.4375
Expiration Date: October 19, 2009
Vesting Schedule:
100,000 Option Shares October 19, 1999
33,333 Option Shares October 19, 2000
33,333 Option Shares October 19, 2001
33,334 Option Shares October 19, 2002
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The Option is not intended to qualify as an incentive stock option under Section
422 of the Internal Revenue Code of 1986, as amended.
2. Termination and Acceleration of Option.
(a) Termination of Employment.
(i) Retirement. If Participant's employment is
terminated by reason of Participant's retirement with the approval of the
Committee or in accordance with the Company's then current retirement policy
("Retirement"), then (A) the portion of the Option that has not vested on or
prior to the date of such termination of employment shall terminate on such date
and (B) the remaining vested portion of the Option shall terminate upon the
earlier of the Expiration Date or three years after the date of such termination
of employment (the "Termination Date of the Option").
(ii) Death or Permanent Disability. If Participant's
employment is terminated by reason of the death or Disability (as hereinafter
defined) of Participant, then (A) the portion of the Option that has not vested
on or prior to the date of such termination of employment shall terminate on
such date and (B) the remaining vested portion of the Option shall terminate
upon the earlier of the Expiration Date or the first anniversary of the date of
such termination of employment (the "Termination Date of the Option").
"Disability" shall mean the inability, due to illness, accident, injury,
physical or mental incapacity or other disability, of Participant to carry out
effectively his or her duties and obligations to the Company and to participate
effectively and actively in the management of the Company for a period of at
least 90 consecutive days or for shorter periods aggregating at least 120 days
(whether or not consecutive) during any twelve month period, as determined in
the reasonable judgment of the Committee. Any determination by the Committee
that Participant does or does not have a Disability shall be final and binding
upon the Company and Participant.
(iii) Termination for Cause. If Participant's
employment is terminated for Cause (as hereinafter defined) then (A) the portion
of the Option that has not vested on or prior to the date of such termination of
employment and (B) the remaining vested portion of the Option shall terminate
immediately on the date of such termination of employment (the "Termination Date
of the Option"). "Cause" shall mean (i) your theft or embezzlement, or attempted
theft or embezzlement, or money or property of the Company or a subsidiary, your
perpetration or attempted perpetration of fraud, or your participation in a
fraud or attempted fraud, on the Company or a subsidiary or your unauthorized
appropriation of, or your attempt to misappropriate, any tangible or intangible
assets or property of the Company or a subsidiary, (ii) any act or acts of
disloyalty, dishonesty, misconduct, moral turpitude, or any other act or acts by
you injurious to the interest, property, operations, business or reputation of
the Company or a subsidiary, (iii) your conviction of a crime the commission of
which results in injury to the Company or a subsidiary, or (iv) any material
violation of any restriction on the disclosure or use of confidential
information of the Company or a subsidiary, or in competition with the Company
or a subsidiary, or any of their businesses then conducted or planned to be
conducted, in each case as determined in the reasonable judgment of the Board or
Committee.
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(iv) Other Termination. If Participant's employment
is terminated for any reason other than Retirement, death or Disability, or
Cause, then (A) the portion of the Option that has not vested on or prior to the
date of such termination of employment shall terminate on such date and (B) the
remaining vested portion of the Option shall terminate upon the earlier of the
Expiration Date or 30 days after the date of such termination of employment (the
"Termination Date of the Option").
(b) Death Following Termination of Employment. Notwithstanding
anything to the contrary contained in this Agreement, if Participant shall die
at any time after the termination of his or her employment and prior to the
applicable Termination Date of the Option, then the remaining vested potion, if
any, of the Option as of the date of termination of employment shall terminate
on the earlier of the Expiration Date or the first anniversary of the date of
such death.
(c) Change in Responsibilities. If Participant's duties, responsibilities or
authorities as an employee or officer of the Company are materially reduced
compared to the duties, responsibilities and authorities of the Participant at
the Date of Grant, as a result of a change in position within the Company or
otherwise, then, unless the Committee, in its sole discretion, shall otherwise
determine, and provided that the Participant continues to be an employee of the
Company or a subsidiary of the Company after such reduction in duties,
responsibilities or authorities, (A) the portion of the Option that has not
vested on or prior to the date of such reduction in duties, responsibilities or
authorities shall terminate on the date of such reduction and (B) the remaining
vested portion of the Option shall be unaffected by such reduction and continue
in effect, subject to this Agreement.
(d) Change in Control Causing Acceleration of Option. Upon a
change in the ownership of the shares of the Company that results in i) a change
in a majority of the board of directors; or, ii) a sale, assignment or transfer
of all or substantially all of the assets of the Company (the "Change in
Control"), and the Change in Control causes a material diminishment in the
Participant's position, duties, or responsibilities, that is not mutually agreed
among the parties, then Participant may give written notification that
Participant is terminating Participant's Employment Agreement, in accordance
with Participant's Employment Agreement dated February 18, 1999, and the
Participant's stock options shall vest immediately.
(e) Other Events Causing Acceleration of Options. The Board, in its sole
discretion, may accelerate the exercisability of the Option at any time and for
any reason.
(f) Other Events Causing Termination of Option.
Notwithstanding anything to the contrary contained in this Agreement, the Option
shall terminate upon the consummation of any of the following events, or, if
later, the thirtieth day following the first date upon which such event shall
have been approved by both the Board and the stockholders of the Company:
(i) the dissolution or liquidation of the Company; or
(ii) a sale of substantially all of the property and
assets of the Company, unless the terms of such sale shall provide otherwise.
3. Adjustments. In the event that the outstanding securities
of the class then subject to the Option are increased, decreased or exchanged
for or converted
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into cash, property or a different number or kind of securities, or cash,
property or securities are distributed in respect of such outstanding
securities, in either case as a result of a reorganization, merger,
consolidation, recapitalization, reclassification, dividend (other than a
regular cash dividend) or other distribution, stock split, reverse stock split
or the like, or in the event that substantially all of the property and assets
of the Company are sold, then, unless the terms of such transactions shall
provide otherwise or such event shall cause the Option to terminate pursuant to
Section 2(f) hereof, the Committee shall make appropriate and proportionate
adjustments in the number and type of shares or other securities or cash or
other property that may thereafter be acquired upon the exercise of the Option
and the Exercise Price per share specified herein; provided, however, that any
such adjustments in the Option shall be made without changing the aggregate
Exercise Price of the then unexercised portion of the Option.
4. Exercise. The Option shall be exercisable during
Participant's lifetime only by Participant or by his or her guardian or legal
representative, and after Participant's death only by the person or entity
entitled to do so under Participant's last will and testament or applicable
intestate law. The Option may only be exercised by the delivery to the Company
of a written notice of such exercise, which notice shall specify the number of
Option Shares to be purchased (the "Purchased Shares") and the aggregate
Exercise Price for such shares (the "Exercise Notice"), together with either:
(a) payment in full of such aggregate
Exercise Price in case or by check payable
to the Company; or
(b) by the delivery to the Company of a certificate
or certificates representing shares of Common Stock, duly endorsed or
accompanied by a duly executed stock powers, which delivery effectively
transfers to the Company good and valid title to such shares, free and clear of
any pledge, commitment, lien, claim or other encumbrance (such shares to be
valued on the basis of the aggregate Fair Market Value (as defined below)
thereof on the date of such exercise), provided that the Company is not then
prohibited from purchasing or acquiring such shares of Common Stock; or
(c) by the delivery, concurrently with such exercise
and in accordance with applicable law and regulations, irrevocable instructions
to a broker promptly to deliver to the Company a specified dollar amount of the
proceeds of a sale of or a loan secured by the Purchased Shares issuable upon
exercise of such option.
5. Fair Market Value. For purposes of the Agreement, the term
"Fair Market Value" shall mean the market price of the Common Stock on the
applicable date, determined by the Committee as follows:
(a) 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 Common Stock is not quoted on any such system, by the "Pink Sheets" published
by the National Quotation Bureau, Inc.;
(b) 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;
(c) 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
(d) 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.
6. Payment of Withholding Taxes. As a condition to the
exercise of an Option, Participant shall make such arrangements as the Committee
may require for the satisfaction of any federal, state, local or foreign
withholding tax obligations that arise in connection with such exercise. The
Participant shall also make such arrangements as the Committee may require for
the satisfaction of any federal, state, local or foreign withholding tax
obligations that may arise in connection with the disposition of Option Shares
acquired by exercising an Option. The Committee may permit the Participant to
satisfy all or part of his or her tax obligations related to the Option or
Option Shares by having the Company withhold a portion of any Option Shares that
otherwise would be issued to him or her or by surrendering any shares of Common
Stock that previously were acquired by him or her. Such shares of Common Stock
or Option Shares shall be valued at their Fair Market Value on the date when
taxes otherwise would be withheld in cash. The payment of taxes by assigning
shares of Common Stock to the Company, if permitted by the Committee, shall be
subject to such restrictions as the Committee may impose.
7. Notices. All notices and other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be deemed given if delivered personally or five days after mailing by certified
or registered mail, postage prepaid, return receipt requested, to the Company at
4800 NW 1st Street, Lincoln, Nebraska 68521-9918, Attention: Chief Financial
Officer, or to Participant at the address set forth beneath his or her signature
on the signature page hereto, or at such other addresses as they may designate
by written notice in the manner aforesaid.
8. Stock Exchange Requirements; Applicable Laws.
Notwithstanding anything to the contrary in this Agreement, no shares of stock
purchased
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upon exercise of the Option, and no certificate representing all or any part of
such shares, shall be issued or delivered if (a) such shares have not been
admitted to listing upon official notice of issuance on each stock exchange upon
which shares of that class are then listed or (b) in the opinion of counsel to
the Company, such issuance or delivery would cause the Company to be in
violation of or to incur liability under any federal, state or other securities
law, or any requirement of any stock exchange listing agreement to which the
Company is a party, or any other requirement of law or of any administrative or
regulatory body having jurisdiction over the Company. Notwithstanding any other
provision of this Agreement to the contrary, Participant will not offer, sell or
otherwise dispose of any Option Shares in any manner which would: (i) require
the Company to file any registration statement with the Securities and Exchange
Commission (or any similar filing under state law) or to amend or supplement any
such filing or (ii) violate or cause the Company to violate the Securities Act
of 1933, as amended, the rules and regulation promulgated thereunder or any
other state of federal law. You further understand that the certificates for any
Option Shares you purchase will bear such legends as the Company deems necessary
or desirable in connection with the Securities Act or other rules, regulations
or laws.
9. Nontransferability. Neither the Option nor any interest
therein may be sold, assigned, conveyed, gifted, pledged, hypothecated or
otherwise transferred in any manner other than by will or the laws of descent
and distribution.
10. Interpretation. The interpretation and construction by the
Committee of the Option and such rules and regulations as may be adopted by the
Committee for the purpose of administering this Option shall be final and
binding upon Participant.
11. Stockholder Rights. No person or entity shall be entitled
to vote, receive dividends or be deemed for any purpose the holder of any Option
Shares until the Option shall have been duly exercised to purchase such Option
Shares in accordance with the provisions of this Agreement.
12. Employment or Contract Rights. No provision of this
Agreement or of the Option granted hereunder shall (a) confer upon Participant
any right to continue in the employ of or contract with the Company or any of
its subsidiaries, (b) affect the right of the Company and each of its
subsidiaries to terminate the employment or contract of Participant, with or
without cause, or (c) confer upon Participant any right to participate in any
employee welfare or benefit plan or other program of the Company or any of its
subsidiaries other than the Plan. Participant hereby acknowledges and agrees
that the Company and each of its subsidiaries may terminate the employment or
contract of Participant at any time and for any reason, or for no reason, unless
Participant and the Company or such subsidiary are parties to a written
employment agreement that expressly provides otherwise.
13. Amendment of Agreement. This Agreement may be modified
or amended only by an instrument of equal formality signed by the parties or
their duly authorized agents.
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14. Liability of Company. The Company and any affiliate which
is in existence or hereafter comes into existence shall not be liable to
Participant or any other persons as to:
(a) The non-issuance or sale of shares as to which the Company
has been unable to obtain from any regulatory body having jurisdiction the
authority deemed by the Company's counsel to be necessary to the lawful issuance
and sale of any shares hereunder; and
(b) Any tax consequence expected, but not realized, by
Participant or any other person due to the issuance, exercise, settlement,
cancellation or other transaction involving this Option.
15. Compliance with other Laws and Regulations. The Agreement,
the grant and exercise of the Option hereunder, and the obligation of the
Company to sell and deliver Option Shares hereunder, shall be subject to all
applicable federal and state laws, rules and regulations and to such approvals
by any governmental or regulatory agency as may be required. The Company shall
not be required to issue or deliver any certificates for shares of Common Stock
prior to the completion of any registration or qualification of such shares
under any federal or state law or issuance of any ruling or regulation of any
government body which the Company shall, in its sole discretion, determine to be
necessary or advisable. Any adjustments provided for in Section 3 hereof shall
be subject to any stockholder action required by Delaware corporate law.
16. Successors and Assigns. All terms and conditions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns.
17. Governing Law. This Agreement shall be interpreted and
construed in accordance with the laws of the State of Delaware and applicable
federal law.
IN WITNESS WHEREOF, the Company and Participant have duly
executed this Agreement as of the Date of Grant.
TRANSCRYPT INTERNATIONAL, INC.
BY /s/ THOMAS R. THOMSEN
---------------------------------
Thomas R. Thomsen
Vice Chairman of Board of Directors
Chair of the Compensation Committee
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PARTICIPANT
/s/ MICHAEL E. JALBERT
---------------------------------
Michael E. Jalbert
Chairman and CEO
---------------------------------
Street Address
---------------------------------
City, State and Zip Code
---------------------------------
Social Security Number
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EXHIBIT 10.47
- -------------
PROMISSORY NOTE
---------------
$175,000.00 January 7, 2000
FOR VALUE RECEIVED, Michael E. Jalbert (the "Borrower") promises to pay
to the order of Transcrypt International, Inc., a Delaware corporation ("the
"Lender"), the principal sum of One Hundred Seventy-Five Thousand Dollars
($175,000.00), with no interest (except as otherwise provided herein). Said
principal amount shall be due and payable on or before February 28, 2003.
Payments due hereunder shall be personally delivered by the Borrower to Lender
at 4800 N.W. 1st Street, Lincoln, Nebraska 68521, or to such other address as
Lender may designate in writing.
Payments on the outstanding principal balance owed hereunder shall be
paid by Borrower to Lender on or before the last day of February in calendar
years 2001 and 2002. The amount of each payment shall be equal to fifty percent
(50%) of the amount of any bonus paid to Borrower by Lender, net of any
applicable standard taxes and/or deductions, in each such calendar year.
Borrower hereby expressly authorizes the Lender to withhold and retain said
amounts from any bonus to be paid to Borrower by Lender in calendar years 2001
and 2002 for the purpose of applying said amounts toward payment and
satisfaction of the obligations owed to Lender by Borrower hereunder. The entire
remaining unpaid principal balance owed hereunder shall be due and payable in a
single lump sum on or before February 28, 2003.
Borrower shall have the right to prepay the principal amount due
hereunder at any time, in whole or in part, without penalty or premium;
PROVIDED, HOWEVER, any partial prepayment shall not postpone the due date of any
subsequent payment contemplated hereunder.
Upon the occurrence of any Event of Default (as hereinafter defined),
the principal amount then due shall, from the date of such Event of Default,
bear interest at an annual rate equal to the then-current one-year Treasury Bill
interest rate as of the date of Default, as published in THE WALL STREET
JOURNAL, until paid in full.
Borrower acknowledges and agrees that an event of default shall be
deemed to have occurred hereunder upon the occurrence of any one or more of the
following events (an "Event of Default"):
(a) The failure of Borrower to pay Lender any portion of the
principal balance owed hereunder when due;
(b) The failure or refusal of the Borrower to punctually and
properly perform, observe and comply with any covenant,
agreement or condition contained herein;
(c) The termination of Borrower's employment with Lender because
of death, resignation, removal or any other cause or reason
whatsoever; or
(d) Borrower shall (i) be adjudicated a bankrupt or insolvent, or
admit in writing his inability to pay his debts as they
mature, (ii) make an assignment for the benefit of creditors,
(iii) apply for or consent to the appointment of any
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receiver, trustee or similar officer for all or a substantial
part of his property, or such receiver, trustee or similar
officer shall be appointed without the application or consent
of Borrower and such appointment shall continue undischarged
for a period of twenty-four (24) hours, or (iv) institute (by
petition, application, answer, consent or otherwise) any
bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar
proceeding under the laws of any jurisdiction or any such
proceeding shall be instituted (by petition, application or
otherwise) against Borrower and shall remain undismissed for a
period of twenty-four (24) hours.
Upon the occurrence of an Event of Default, the Lender may, at its
option, declare the entire principal balance owing hereunder immediately due and
payable, without further notice, demand or presentment, all of which are hereby
waived by the Borrower. Failure to exercise this option shall not constitute a
waiver by the Lender of the right to exercise the same upon the occurrence of
any subsequent Event of Default.
In the event default is made in the prompt payment of any amount when
due or declared due pursuant to this Promissory Note, and this Promissory Note
is placed in the hands of an attorney for collection or to defend or enforce any
of the legal holder's rights hereunder, or if the same is collected through any
judicial proceeding whatsoever, then Borrower, together with all other parties
liable for payment hereof, agrees to pay to the legal holder all professional
fees, together with all court costs and expenses incurred by such holder in
connection with such proceeding, except to the extent such obligations are
prohibited by law.
Borrower hereby covenants and agrees to hold harmless and indemnify
Lender, upon demand by Lender, from and against any and all costs, expenses,
charges, taxes, penalties or other liability of any nature imposed on or
incurred by Lender relating to, resulting from or arising in connection with the
loan to Borrower evidenced hereby, including, without limitation, any and all
costs, expenses and charges of any nature relating to the imputation of interest
on amounts loaned to Borrower hereunder.
Borrower hereby waives presentment and demand for payment, protest,
notice of protest and nonpayment or dishonor, notice of acceleration and notice
of intent to accelerate, diligence in collecting and grace, and consents to all
extensions, without notice for any period or periods of time and partial
payments, before or after maturity hereof, without prejudice to the rights of
the Lender arising hereunder.
THIS NOTE, AND ALL OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH,
REPRESENT THE FINAL AND ENTIRE AGREEMENT BETWEEN THE PARTIES PERTAINING TO THE
SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
SUBSEQUENT OR CONTEMPORANEOUS ORAL AGREEMENTS. THERE ARE NO ORAL AGREEMENTS
BETWEEN THE PARTIES PERTAINING TO THE SUBJECT MATTER HEREOF.
This Note shall be governed by and construed in accordance with the
laws of the State of Nebraska.
This Promissory Note and all provisions herein are binding upon
Borrower and his heirs, personal representatives, executors and assigns, and
shall inure to the benefit of Lender and its successors and assigns. Borrower
shall not assign any right or delegate any obligation arising hereunder without
the prior written consent of Lender. Lender does not by
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any act, delay, omission or otherwise waive any of its rights or remedies, and
no waiver of any kind pertaining to the obligations arising hereunder shall be
valid or enforceable against Lender unless such waiver is in writing and signed
by an authorized representative of Lender.
IN WITNESS WHEREOF, the Borrower has executed and delivered this
Promissory Note on the date herein above first set forth.
BORROWER:
/s/ MICHAEL E. JALBERT
---------------------
Michael E. Jalbert
STATE OF NEBRASKA )
) ss.
COUNTY OF LANCASTER )
The foregoing instrument was acknowledged before me this ____ day of
___________________, 2000, by Michael E. Jalbert.
---------------------------------------
Notary Public
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EXHIBIT 10.48
- -------------
PROMISSORY NOTE
Borrower: Transcrypt International, Inc. Lender: U.S. Bank National
4800 NW 1st Street Association
Lincoln, NE 68521-9918 Lincoln Main
233 South 13th Street
Lincoln, NE 68508
- -------------------------------------------------------------------------------
Principal Amount: $10,000,000.00 Initial Rate: 6.320% Date of Note:
August 31, 1999
PROMISE TO PAY. Transcrypt International, Inc. ("Borrower") promises to pay to
U.S. Bank National Association ("Lender"), or order, In lawful money of the
United States of America, the principal amount of Ten Million & 00/100 Dollars
($10,000,000.00) or so much as may be outstanding, together with Interest on the
unpaid outstanding principal balance of each advance. INTEREST SHALL BE
CALCULATED FROM THE DATE OF EACH ADVANCE until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid Interest on June 1, 2000. In addition, Borrower will pay
regular monthly payments of accrued unpaid Interest beginning September 30,
1999, and all subsequent Interest payments are due on the last day of each month
after that. The annual Interest rate for this Note is computed on a 365/360
basis; that Is, by applying the ratio of the annual Interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied FIRST to accrued unpaid Interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The Interest rate on this Note Is subject to change from
time to time based on changes In an Independent Index, which is the Interest
Rate on certain Time Certificates of Deposit Issued by Lender (the "Index"). The
Index is not necessarily the lowest rate charged by Lender on its loans. If the
Index becomes unavailable during the term of this loan, Lender may designate a
substitute Index after notice to Borrower. Lender will tell Borrower the current
Index rate upon Borrower's request. Borrower understands that Lender may make
loans based on other rates as well. The Interest rate change will not occur more
often than each 30 days. The Index currently is 5.070% per annum. The Interest
rate to be applied to the unpaid principal balance of this Note will be at a
rate of 1.250 percentage points over the Index, resulting In an Initial rate of
6.320% per annum. NOTICE: Under no circumstances will the interest rate on this
Note be more than the maximum rate allowed by applicable law.
PREFPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by Lender
in writing, relieve Borrower of Borrower's obligation to continue to make
payments of accrued unpaid Interest. Rather, they will reduce the principal
balance due.
DEFAULT. Borrower will be In default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained In this Note or
any agreement related to this Note, or In any other agreement or loan Borrower
has with Lender. (c) Any representation or statement made or furnished to Lender
by Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (d) Borrower becomes
Insolvent, a receiver Is appointed for any part of Borrower's property, Borrower
makes an assignment for the benefit of creditors, or any proceeding Is commenced
either by Borrower or against Borrower under any bankruptcy or Insolvency laws.
(e) Any creditor tries to take any of Borrower's property on or in which Lender
has a lien or security Interest. This includes a garnishment of any of
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Borrower's accounts with Lender. (f) Any guarantor dies or anyf of the other
events described in this default section occurs with respect to any guarantor of
this Note. (g) A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness Is Impaired. (h) Lender in good faith deems Itself Insecure.
If any default, other than a default In payment; is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lenders sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid Interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, Including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, Increase the variable Interest rate on this Note to 4.250
percentage points over the Index. The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals and any anticipated post-judgment collection services. If not prohibited
by applicable law, Borrower also will pay any court costs. In addition to all
other sums provided by law. This Note has been delivered to Lender and accepted
by Lender in the State of Nebraska. If there is a lawsuit, Borrower agrees upon
Lender's request to submit to the jurisdiction of the courts of Lancaster
County, the State of Nebraska. This Note shall be governed by and construed In
accordance with the laws of the State of Nebraska.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security Interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and Interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on this Note against any and all such accounts.
COLLATERAL. This Note is secured by FS/SA and TCD's.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or by an authorized person. Lender
may, but need not require that all oral requests be confirmed in writing. All
communications, instructions, or directions by telephone or otherwise to Lender
are to be directed to Lender's office shown above. The following party or
parties are authorized to request advances under the line of credit until Lender
receives from Borrower at Lender's address shown above written notice of
revocation of their authority: Craig Huftaker, Mike Jalbert, George Spiczak,
Glenn Oorlog, Jim Stark, Patti Montgomery, Scot Costaer and Rick D. Schmitz.
Borrower agrees to be liable for all sums either. (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this Note
at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including dally computer print-outs. Lender will have no
obligation to advance funds under this Note If: (a) Borrower or any guarantor is
in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks. claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender, (d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender, or (e) Lender in good faith
deems itself insecure under this Note or any other agreement between Lender and
Borrower.
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PURPOSE OF LOAN. Support inventory and receivables.
YEAR 2000. Borrower has reviewed and assessed its business operations and
computer systems and applications to address the "year 2000 problem" (that is,
that computer applications and equipment used by Borrower, directly or
indirectly through third parties, may be unable to properly perform
date-sensitive functions before, during and after January 1, 2000). Borrower
reasonably believes that the year 2000 problem will not result in a materiel
adverse change in Borrower's business condition (financial or otherwise),
operations, properties or prospects or ability to repay Lender. Borrower agrees
that this representation will be true and correct on and shall be deemed made by
Borrower on each date Borrower requests any advance under this Agreement or Note
or delivers any information to Lender. Borrower will promptly deliver to Lender
such information relating to this representation as Lender requests from time to
time.
PRIOR NOTE. f42.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated In writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
Transcrypt International, Inc.
By: /s/ CRAIG J. HUFFAKER
-------------------------------------------
Craig J. Huffaker, Sr. Vice President & CFO
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EXHIBIT 10.49
LEASE AGREEMENT BETWEEN
WASECA PROPERTIES, L.L.C., AS LANDLORD
AND TRANSCRYPT INTERNATIONAL, INC., AS TENANT
DATED AS OF DECEMBER 30, 1999
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
RECITALS..........................................................................................................1
AGREEMENT
1. RECITALS.................................................................................................1
2. PREMISES.................................................................................................1
3. TERM AND RENEWAL.........................................................................................2
4. BASE RENT................................................................................................3
5. ADDITIONAL RENT..........................................................................................4
5A. OPERATING EXPENSES EXCLUSIONS............................................................................6
6. UTILITIES AND SERVICES...................................................................................8
7. MAINTENANCE AND REPAIRS..................................................................................9
8. ALTERATIONS AND LEASEHOLD IMPROVEMENTS..................................................................10
9. INSURANCE AND INDEMNITY.................................................................................10
10. ASSIGNMENT AND SUBLETTING...............................................................................13
11. SUBORDINATION...........................................................................................13
12. DAMAGE AND DESTRUCTION..................................................................................13
13. CONDEMNATION............................................................................................14
14. ACCESS..................................................................................................15
15. DEFAULT BY TENANT.......................................................................................15
15A. LANDLORD REMEDIES.......................................................................................16
16. ESTOPPEL CERTIFICATES...................................................................................16
17. HOLDING OVER............................................................................................17
18. SURRENDER...............................................................................................17
19. NOTICES.................................................................................................17
</TABLE>
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<TABLE>
<S> <C>
20. QUIET ENJOYMENT AND USE.................................................................................18
21. HAZARDOUS SUBSTANCES....................................................................................18
22. SIGNS...................................................................................................20
23. LIENS...................................................................................................20
24. DEFAULT BY LANDLORD.....................................................................................20
24A. TENANT REMEDIES.........................................................................................21
25. ATTORNEYS' FEES/SELF HELP...............................................................................21
26. COMPLIANCE WITH LAWS....................................................................................22
27. RECORDING...............................................................................................22
28. LEASEHOLD MORTGAGES.....................................................................................22
29. LANDLORD REPRESENTATIONS AND WARRANTIES.................................................................23
30. NOVATION IN THE EVENT OF SALE...........................................................................23
31. SECURITY DEPOSIT........................................................................................23
32. MISCELLANEOUS PROVISIONS................................................................................24
33. NO OFFER................................................................................................25
34. FORCE MAJEURE...........................................................................................25
35. ARBITRATION.............................................................................................26
</TABLE>
EXHIBIT A - LEGAL DESCRIPTION OF THE ENTIRE PREMISES
EXHIBIT B - DEPICTION OF THE BUILDING INCLUDING THE PREMISES, COMMON AREAS
AND SHARED AREAS
EXHIBIT B-1 - TEMPORARY STORAGE
EXHIBIT C - DEPICTION OF EXCLUSIVE PARKING AREAS FOR TENANTS, EMPLOYEES,
INVITEES, LICENSEES AND GUESTS
EXHIBIT D - GEOTHERMAL SYSTEM
EXHIBIT E - LIST OF OPERATING EXPENSES
EXHIBIT E-1 - CURRENT LIST OF OPERATING EXPENSES
EXHIBIT F - LIST OF OPERATING EXPENSES APPLICABLE TO TENANT
EXHIBIT G - ELECTRICAL USAGE
EXHIBIT H - FORM OF SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT
EXHIBIT I - FORM OF MEMORANDUM OF LEASE
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LEASE
THIS LEASE ("Lease") is made and entered into as of the 30th
day of December, 1999, by and between WASECA PROPERTIES, LLC, a Minnesota
limited liability company ("Landlord"), and TRANSCRYPT INTERNATIONAL, INC., a
Delaware corporation ("Tenant").
RECITALS
- --------
A. Landlord is the owner of certain improved real property located
at 299 Johnson Avenue, Waseca, Minnesota, legally described on Exhibit A
attached hereto ("Entire Premises").
B. The Entire Premises is improved with a building of approximately
246,924 square feet, which building consists of several rentable areas, Common
Areas, and Shared Areas, all as depicted on Exhibit B, attached hereto. The
Entire Premises is also improved with a driveway area, including areas for
loading and unloading trucks, and parking for occupants of the building and
their employees, invitees and licensees.
C. Landlord, on even date herewith, purchased the Entire Premises from
Tenant, and such transaction was completed on the condition that Landlord and
Tenant would enter into this Lease for some of the rentable area of the building
previously occupied by Tenant.
D. In addition to the Lease as described herein, the Entire Premises is
currently subject to certain other leases with Johnson Components, Inc., Data
Radio, formerly known as Johnson Data Telemetry Corporation, and Diversified
Credit Union. There is also other rentable area that is not subject to any lease
at this time.
AGREEMENT
- ---------
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by Landlord and Tenant,
Landlord and Tenant hereby covenant and agree as follows:
1. RECITALS. The Recitals are incorporated herein for all
purposes.
2. PREMISES. The Premises subject to this Lease are depicted
on Exhibit B attached hereto which Premises consist, for purposes of this
Lease, of 122,164 square feet. In addition to leasing the Premises, Landlord
hereby grants to Tenant its employees, invitees, licensees and other visitors
the right to use the Common Areas ("Common Areas") of the Entire Premises
including without limitation (a) sidewalks and lobby; (b) the main entrance
of the Entire Premises; (c) the parking lot area within the Entire Premises
for use by Tenant, its employees, visitors and agents; (d) loading dock areas
for loading and unloading trucks; (e) exclusive rights to use the parking
areas as designated on Exhibit C; and (f) the areas designated as Common
Areas on EXHIBIT B WHICH ARE IN THE BUILDING. Such right to use is granted to
the Tenant on the condition the Tenant conforms to and obeys such reasonable
rules and regulations concerning the Tenant's use of the Common Areas in
conjunction with the rights granted as such reasonable rules and regulations
may be promulgated (and with reasonable notice to Tenant, changed from time
to time) by Landlord, provided that such rules are uniformly applied to all
tenants and are not in conflict with this Lease. Except for the
aforementioned rights, the Tenant is not deemed to be in control or
possession of the Common Areas. Finally, Tenant has the right to use some
Shared Areas as depicted on Exhibit B which consists of Areas E through BB
("Shared Areas"). For purposes of determining Base Rent as defined below and
certain other costs and expenses all as set forth below, 53.2% of the Common
Areas, or 1985 square feet and 11,729 square feet of the Shared Areas will be
added to the square footage of the Premises. The square footage of Shared
Areas added herein is by agreement of Landlord and Tenant based on the
equitable use of such areas by Tenant at the present time. Landlord and
Tenant agree that such square footage cannot increase, but Landlord
acknowledges that it will make all reasonable efforts to acquire tenants for
rentable but currently unrented space in the building, or when the terms of
other leases expires to replace such tenants with tenants that will use the
Shared Area so that the square footage of the
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Shared Areas assigned to Tenant hereunder shall decrease over the term of
this Lease. Such decrease shall occur at such time as there is a change in
the use allocation of the Shared Areas. Landlord shall have the right upon
reasonable notice (no less than 3 months) to Tenant to terminate the use of
part or all of the mezzanine as Shared Areas for use by Tenant and others to
provide expansion space to another tenant, Data Radio. At all times, Tenant
will be provided with a minimum of 2,500 square feet for a shared Lunchroom
Area with Kitchen with such area either in its current location or at some
other location in the building but adjacent to the Premises. Any and all work
required in connection with such change will be paid by Landlord and there
would be an appropriate reduction in the square footage assigned to Tenant
for Shared Areas. In addition, Landlord reserves the right to reduce the size
of the Common Areas to provide Data Radio with expansion space. If this
occurs there will be an appropriate adjustment in the number of square feet
of Common Areas assigned to Tenant hereunder. Adding together the square
footage of the Premises, the Common Area and the Shared Area, the total
square footage of the Premises, as of the date hereof, is 135,878 square feet.
In addition to the rights described above, Tenant will have
the exclusive right to use the tower(s) located on the Entire Premises for
its exclusive use; the FCC Site located on the Entire Premises for its
exclusive use; and all antennae and related equipment located on the building
for its exclusive use. These uses are all at no additional cost to Tenant.
In addition, Tenant will have the right to use Area 2 as
identified on EXHIBIT B-1 attached hereto for purposes of temporary storage
for 2 months at no additional cost or rent to Tenant.
3. TERM AND RENEWAL
a. The term of this Lease ("Term") is for a period of five (5)
years commencing on January 1, 2000 (the "Commencement Date") and ending on
December 31, 2004.
b. Tenant shall have the option to renew the Lease for an
additional five (5) year period at the greater of Base Rent as defined at
Paragraph 5 below $3.00 per square foot in the Premises or the market rate for
base rent in the Waseca, Minnesota area prevailing at the time of the
commencement of the renewal Term. Tenant agrees to notify Landlord at least six
(6) months prior to the end of the Term of the Lease if it wishes to renew for
the additional five (5) year period. If Tenant exercises the renewal option,
then at least five (5) months prior to the expiration of the initial Term,
Landlord and Tenant shall meet and attempt to come to an agreement as to the
current fair market value for the Premises. If Landlord and Tenant have not
reached agreement on the prevailing market rental rate at least four (4) months
prior to the expiration of the initial Term, then Landlord and Tenant shall each
select a real estate broker having no less than seven (7) years experience in
commercial leasing in the Waseca, Minnesota area. Those two brokers will then
meet (at least two (2) months prior to the expiration of the initial Term) to
determine the prevailing market rental rate and if they cannot reach agreement
on the prevailing market rental rate, then each broker will pick a third broker,
who shall make its determination (at least one (1) month prior to the expiration
of the initial Term) of the prevailing market rental rate. The Base Rent for the
renewal Term shall be the average of the two brokers' determinations that are
closest to each other. If the market rental rate is greater than $3.00 per
square foot in the Premises, Tenant, upon notification of such market rate, can
elect to rescind its notification as to the renewal Term and in such event, this
Lease will terminate as of the end of the Term. If and only if the Lease is
renewed the renewal Term will, for all purposes, be considered part of the Term.
Landlord and Tenant agree that the Lease is to remain in effect for six (6)
months after Tenant's notice of rescission is given and the Base Rent during
such six (6) month period shall be at the current Base Rent. To the extent that
this six (6) month period extends the initial Term, the parties agree that such
Term shall be so extended and Tenant will not be deemed to be holding over and
all of the other terms and conditions of this Lease applicable to the initial
Term shall apply.
4. BASE RENT
a. The total annual rental (herein called "Base Rent") for the
Premises shall be Three and 00/100 Dollars ($3.00) per square foot in the
Premises which is determined to include the Premises and 1,185 square feet of
Common Areas and 11,729 square feet of Shared Area so that the total
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annual base rent is $3.00 multiplied by 135,878 square feet, which equals
$407,634.00. The Base Rent will be paid in monthly installments of $33,970.00.
Any change in the Base Rent because of the change in the size of the Premises,
the Common Areas or the Shared Areas must be approved by both parties and be the
subject of a written amendment executed by both parties. Landlord acknowledges
that it has the obligation hereunder to use all reasonable efforts to decrease
the square footage of the Shared Areas assigned to Tenant under this Lease. All
monthly payments of Base Rent will be paid in advance, on the first day of each
and every calendar month during the Term.
b. All additional sums of money, other than Base Rent, if any,
which become due under this Lease (the "Additional Rent") together with the Base
Rent are referred to as "Rent". All Rent due or to become due hereunder shall be
paid to Landlord at Waseca Properties, LLC, 1224 West 96th Street, Bloomington,
Minnesota 55431, Attn: Jay, or at such other place as Landlord shall designate
by giving written notice to that effect to Tenant.
5. ADDITIONAL RENT
Tenant shall pay to Landlord Tenant's Share of certain expenses as
described below. For purposes of this Lease, Tenant's Share means 55.1% of
certain costs which percentage is based on a ratio in which the numerator is the
number of square feet in the Premises and the Shared Areas assigned to Tenant
and the denominator is the number of total square feet in the Entire Premises
less the total Common Areas including areas exclusively used by Landlord. The
sum of all tenant's shares including Landlord for unrented but rentable areas
will equal 100%. As described below, Tenant's Share shall be modified if it is
more appropriate to charge Tenant for actual costs for some services. Tenant's
Share will be changed if either the numerator or the denominator changes.
However, Landlord cannot decrease the denominator without Tenant's consent if
such decrease results in the Tenant's Share percentage being increased.
Additional Rent shall be paid for certain costs as follows:
a. Tenant shall pay within 30 days of receipt of notice
Tenant's Share of the Real Estate taxes. The notice provided by Landlord shall
include a copy of the applicable tax statement. The term "Real Estate Taxes"
shall mean all real estate taxes, all special assessments and any taxes in lieu
thereof which may be levied upon or assessed against the Entire Premises of
which the Premises are a part, excluding interest and penalties from the late
payment or nonpayment of real estate taxes by Landlord. Tenant, in addition to
all other payments to Landlord by Tenant required hereunder shall pay to
Landlord, in each year during the term of this Lease, Tenant's Share of such
real estate taxes and assessments paid in the first instance by Landlord.
Any tax year commencing during any calendar year shall be
deemed to correspond to such calendar year. In the event the taxing authorities
include in such real estate taxes and assessments the value of any improvements
made by Tenant, or of machinery, equipment, fixtures, inventory or other
personal property or assets of Tenant, then Tenant shall pay all the taxes
attributable to such items in addition to its share of said aforementioned real
estate taxes and assessments. A photostatic copy of the tax statement submitted
by Landlord to Tenant shall be sufficient evidence of the amount of taxes and
assessments assessed or levied against the Entire Premises of which the Premises
are a part.
b. A sum equal to Tenant's Share of the annual aggregate
operating expenses incurred by Landlord in the operation, maintenance, repair
and cleaning of the Entire Premises. The term "Operating Expenses" shall include
but not be limited to all utilities including gas, oil, electricity, water and
sewer, building maintenance, Premises cleaning, changing light bulbs, repair,
replacement and care of all Common Area lighting, Common Area plumbing, and
landscaping, parking and landscaped areas, signs, snow removal, non-structural
repair and maintenance of the roofs and exterior of the Building, insurance
premiums, management fee, wages and fringe benefits of personnel employed or
contracted for such work and costs of equipment purchased and used for such
purposes. Tenant shall be solely responsible for any capital improvements made
by Landlord which are solely required by Tenant's particular and unique use of
the Premises. Notwithstanding the above, Landlord acknowledges that Landlord
will be responsible for the cost of any improvements in connection with moving
the "Staging Area" and the Tenant will pay none of
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such costs, except Tenant will have the right to move all of its Tenant
Equipment and Fixtures to a new Staging Area within the Premises capable of
being moved and Tenant will pay for the costs of moving such Equipment and
Fixtures. In addition, if such Staging Area is not moved by Landlord within the
first 3 months of the Term, then Landlord can move such Staging Area only upon 4
months notice to Tenant in advance of such work. Tenant will provide basic plans
and specifications for the new "Staging Area" by January 14, 2000. Landlord's
expenditures for capital improvements which are permitted to be capitalized
shall only be included as operating expenses to the extent of depreciation
allowable for tax purposes in such year. Maintenance, repair and installation of
Tenant's special equipment will be billed directly. Levels of maintenance and
cleaning shall match levels in place under the Tenant's occupancy which precedes
this Lease.
c. Tenant shall pay Tenant's Share of Operating Expenses
monthly based upon Landlord's estimate of such expenses. Prior to commencement
of this Lease and prior to the commencement of each calendar year thereafter
commencing during the term of this Lease or any renewal or extension thereof,
Landlord shall estimate for each calendar year (i) the total amount of Operating
Expenses, (ii) Tenant's Share of Operating Expenses for such calendar year; and
(iii) the computation of the monthly additional rent payable during such
calendar year. Said estimates will be in writing and will be delivered or mailed
to Tenant. The amount of Tenant's Share of Operating Expenses for each calendar
year, so estimated, shall be payable as Additional Rent, in equal monthly
installments, in advance, on the first day of each month during such calendar
year. In the event that such estimate is delivered to Tenant before the first
day of January of such calendar year, said amount, so estimated, shall be
payable as Additional Rent in equal monthly installments, in advance on the
first day of each month during such calendar year. In the event that such
estimate is delivered to Tenant after the first day of January of such calendar
year, said amount, so estimated, shall be payable as Additional Rent in equal
monthly installments, in advance, on the first day of each month over the
balance of such calendar year, with the number of installments being equal to
the number of full lease months remaining in such calendar year. The monthly
payments of Additional Rent required hereunder for the calendar year beginning
January 1, 2000 will be based on the 1999 estimate of operating expenses and
Landlord will prepare an estimate for calendar year 2000 by no later than
February 29, 1999 and when such estimate has been completed, appropriate
adjustments between Landlord and Tenant will be made in connection with the
payments made by Tenant for the first two months of the Term.
d. Upon completion of each calendar year during the term of
this Lease, or any renewal or extension thereof, Landlord shall cause its
accountants to determine the actual amount of the Operating Expenses payable in
the just completed calendar year and Tenant's Share thereof and deliver a
statement of the amounts thereof to Tenant. If Tenant has underpaid its share of
Operating Expenses for such calendar year, Tenant shall pay the balance of its
share of same within thirty (30) days after the receipt of such statement. If
Tenant has overpaid its share of Operating Expenses for such calendar year,
Landlord shall either (i) refund such excess, or (ii) credit such excess against
the most current monthly installment or installments due Landlord for its
estimate of Tenant's Share of Operating Expenses for the then current calendar
year. A pro rata adjustment shall be made for a fractional calendar year
occurring during the term of this Lease, except for the first year, or any
renewal or extension thereof based upon the number of days of the term of the
Lease during said calendar year as compared to three hundred sixty-five (365)
days and all additional sums payable by Tenant or credits due Tenant as a result
of the provisions of this Paragraph 5 shall be adjusted accordingly. Landlord
reserves the right to separately meter Tenant's space or to otherwise modernize
the utilities in order to reduce operating costs. Tenant will pay Landlord
Tenant's Share of expenditures, of an approximately Thirty-one Thousand Dollars
($31,000) amount for Geo-Thermal System improvement for Teratherm, cooling tower
controls and chiller efficiency improvement as set forth on EXHIBIT D. Tenant
agrees to pay its Tenant's Share of such expenditures, with payment to be made
within 30 days of receipt of a statement for such amount from Landlord so long
as such work is completed by September 30, 2000.
e. If appropriate, Tenant's Share of certain Operating
Expenses shall be calculated based on the best objective estimate of actual
usage. Categories of Operating Expenses (Common Area and direct) are set forth
on EXHIBIT E. Current and projected Operating Expenses for all tenants are set
forth on EXHIBIT E-1 attached hereto. Current and projected Operating Expenses
for Tenant are set forth on EXHIBIT F.
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Appropriate adjustment will be made to reflect actual costs associated with
different actual usage such as fewer or more shifts and weekend usage which
shall take into account whether other Tenants also are operating at that time
and whether costs are higher or lower such as for weekend or holiday overtime.
Appropriate adjustments also shall be made to reflect actual costs associated
with particular operations of a Tenant which result in cost savings or
additional costs. The parties agree that the allocations will be adjusted
annually to reflect actual usage, including additional work days, more or fewer
shifts and other changes in usage. The parties acknowledge and agree that the
term Operating Expenses is intended to cover all services provided to Tenant by
Landlord, including CAM (Common Area Maintenance), and that the amount charged
shall be increased by the Tenant's Share of any additional services discovered
or initiated by the parties and shall be reduced proportionately for any
services terminated by the Tenant. CAM shall include the following items:
Maintenance of Central Heating and Cooling Plant, Pest Control, Exterior
Repairs, Snow Plowing, Landscaping, Roof Repairs, Parking Lot Maintenance,
Exterior Lighting, Structural Repairs, Cleaning and Maintenance of Lobby and
Other Common Areas, Common Signage, Common Area Fire Extinguishers, Window
Washing, Fire Sprinkler System Maintenance, Common Area Utilities, Cleaning,
Maintenance, Paper Supplies, Heating and Cooling.
f. Tenant shall have the right at its sole expense to audit
the Operating Expenses and the allocation of Tenant's Share. Tenant shall notify
Landlord in writing of any disagreement with the calculation of Tenant's Share
of the items included in Operating Expenses. If Landlord and Tenant are not able
to reach agreement with respect to any such disputed matter, Tenant shall be
entitled to refer the disputed matter to binding arbitration pursuant to
Paragraph 35 below.
5A. OPERATING EXPENSES EXCLUSIONS
Notwithstanding anything in the Lease to the contrary, the
term "Operating Expenses" shall exclude Base Rent and the following items:
a. CAPITAL COSTS. Landlord's capital costs for improvements
(other than expenditures made to modernize utilities as provided for in
Paragraph 5(d) above), alterations, and/or replacements, including, without
limitation, any financing-related fees, costs and expenses, and professional
fees and disbursements incurred in connection therewith; rentals and other
expenses incurred in leasing systems, elevators, or other equipment ordinarily
considered to be of a capital nature, except that Operating Expenses shall
include the annual depreciation applicable to such items as set forth in
Subparagraph (l) below;
b. FINANCING COSTS. Any and all of Landlord's payments for
loan principal or interest, together with expenses thereto related in connection
with financing;
c. LANDLORD'S TAXES. Any and all of Landlord's income, excise,
franchise taxes, excess profit taxes, and any and all taxes which do not
uniquely pertain to the Premises or Tenant's specific use thereof or similar
taxes on Landlord's business;
d. SALARIES. Salaries of Landlord's employees who are not
engaged in the day-to-day operation management and maintenance of the Premises,
including, without limitation, the salaries of employees not engaged full-time
in such management who are executive managers, bookkeepers, accountants, clerks,
marketing representatives, administrative assistants, secretaries and brokers;
e. ENFORCEMENT COSTS. Any and all of Landlord's costs to
compel full performance under leases with all prior, existing and prospective
Tenants at the Building, including, without limitation, all legal fees costs and
expenses to collect rent arrears and recover possession except that Landlord's
costs to compel performance by Tenant shall be paid by Tenant;
f. LEASING COSTS. Any and all of Landlord's costs to lease
space in the Building to all prior, existing and prospective tenants, including,
without limitation: consulting and marketing fees, advertising expenses,
brokerage commissions, legal fees, vacancy costs, rent or other rent
concessions,
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and/or refurbishment or improvement expenses; and costs of preparing, improving
or altering any space in preparation for occupancy of any new or renewal Tenant;
rent for management or leasing offices;
g. COSTS OTHERWISE RECOVERED. The cost of any items for which
Landlord is reimbursed by insurance or for which Landlord is reimbursed pursuant
to clauses in leases with other tenants of the Building substantially the same
as the clause, if any, in the Lease requiring Tenant to pay a proportionate
share of operating expenses or operating costs of the Property or Building;
items and services for which Tenant reimburses Landlord or pays to third parties
or that Landlord provides selectively to one or more tenants of the Building
other than Tenant; items and services that Landlord provides to one or more
tenants of the Building in substantially greater quantities than provided to
Tenant to the extent of the excess as reasonably determined;
h. ADDITIONS. The cost of any additions or capital
improvements to the Building subsequent to the date of original construction,
except for such capital improvements as are in connection with the reduction of
operating expenses;
i. RECORDATION AND TRANSFER FEES. Any documentary and transfer
taxes imposed in connection with the Lease or any other lease;
j. BAD DEBT COSTS. Any and all collection costs, including
legal fees and bad debt losses or reserves;
k. Excessive Management Fees. Property management fees in
excess of five percent (5%) of gross rentals generated by the Property;
l. GENERAL. Operating Expenses shall be calculated using
generally accepted accounting principles consistently applied. If Landlord makes
an expenditure for a capital improvement, replacement or repair to the Premises
or Building which would be considered an Operating Expense (subject to the
exceptions specified above) (hereinafter "Capital Replacement"), and if, under
generally accepted accounting principles, such expenditure is not a current
expense, then the cost shall be amortized over a period equal to the useful life
of such Capital Replacement, determined in accordance with generally accepted
accounting principles, and the amortized costs allocated to each calendar year
during the Term shall be treated as an operating expense.
6. UTILITIES AND SERVICES
Landlord shall perform and or provide all the services as
described in paragraph 5b. above, including, but not limited to, reasonable
water, electrical service and functioning air compressor, janitorial service
under specifications as determined from time to time between the parties,
security as determined from time to time between the parties, and heating,
ventilating and air-conditioning to the Premises. Landlord acknowledges that
because of Tenant's use of the Premises, Landlord's failure to provide all such
services, including, but not limited to, the unavailability of water, electrical
service, HVAC and an air compressor for even a short period of time will have
serious impact on Tenant's ability to operate its business in the Premises.
Therefore upon notification from Tenant of any problem with such utilities or
services, Landlord will reasonably respond. If Landlord through an agent or
otherwise has not responded within a reasonable period, Tenant will have the
right, but not the obligation, to engage a professional or consultant to remedy
the problem and any costs of such professional or consultant shall be paid by
Landlord and included as an Operating Expense. If Landlord fails to pay such
consultant in a timely manner, Tenant can make such payment and deduct such
payment along with a fee of 5 percent of such cost from the Rent due and payable
to Landlord for the next monthly installment and all subsequent monthly
installments until the Tenant has been reimbursed in full. In addition, if
Landlord or any agent or consultant (regardless of which party engaged the agent
or consultant) does not or cannot remedy the problem within 2 days of the
occurrence, and such problem materially impacts the Tenant's ability to run its
business, Tenant's obligation to pay Rent shall abate for each day that the
problem exists until such problem has been remedied. Landlord and Tenant agree
that they will use their best
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efforts to establish a preapproved list of professionals and/or consultants to
provide the services required hereunder to minimize the potential of a delay in
resolving any problems.
7. MAINTENANCE AND REPAIRS
Tenant shall, at all times throughout the term of this Lease,
keep and maintain the Premises in a clean, safe, sanitary and condition
consistent with the condition the Premises were delivered to Tenant and in
compliance with all applicable laws, codes, ordinances, rules and regulations,
subject to any available "grandfathering" to the extent that Landlord is not
otherwise obligated to maintain the Premises hereunder. Tenant's obligations
hereunder shall include but not be limited to paying their share of the
maintenance, repair and replacement, if necessary, of heating and air
conditioning fixtures, equipment, and systems, all lighting and plumbing
fixtures and equipment, other fixtures, motors and machinery, all interior
walls, partitions, doors and windows, including the regular painting thereof,
all exterior entrances, windows, doors and docks and the replacement of all
broken glass. Service levels provided by Landlord upon this Agreement shall
match the levels provided under the occupancy by Tenant which precedes this
Lease with this exception that maintenance and repair of Tenant's equipment will
only be provided subject to an additional charge to be determined by the Parties
under a separate agreement. Notwithstanding the above, Landlord shall be
responsible for maintaining the central heating and cooling plant and shall
maintain electrical distribution equipment to the Premises and replacement, if
necessary, of major components of the heating and cooling plant, building
electrical system and building plumbing system such as building piping. When
used in this provision, the term "repairs" shall include replacement or renewals
when necessary, and all such repairs made by the Landlord shall be no less than
equal in quality and class to the original work. The Tenant shall keep and
maintain all portions of the Premises in a clean and orderly condition, free of
accumulation of dirt and rubbish. Tenant's obligations under this Paragraph 7
are subject to damage by casualty to the extent covered by Landlord's insurance
and condemnation.
If Tenant fails, refuses or neglects to maintain or repair
the Premises as required in this Lease after notice shall have been given
Tenant, Landlord may make such repairs without liability to Tenant for any loss
or damage that may accrue to Tenant's merchandise, fixtures or other property or
to Tenant's business by reason thereof, provided Landlord exercises reasonable
care, and upon completion thereof, Tenant shall pay to Landlord all costs
incurred by Landlord in making such repairs upon presentation to Tenant of bill
therefor.
Landlord shall repair, at its expense, the structural
portions of the Building, provided however where structural repairs are required
to be made by reason of the negligence or willful misconduct of Tenant and not
covered by insurance, required hereunder whether or not in force the costs
thereof shall be borne by Tenant and payable by Tenant to Landlord upon demand.
The Landlord shall be responsible for all outside
maintenance of the Common Areas of the Premises, including landscaping grounds
and parking areas. All such maintenance which is the responsibility of the
Landlord shall be provided as reasonably necessary to the comfortable use and
occupancy of Premises during business hours, except Saturdays, Sundays and
holidays, upon the condition that the Landlord shall not be liable for damages
for failure to do so due to causes beyond its control.
Notwithstanding anything to the contrary, this Paragraph 7
does not require Tenant to put or maintain the Premises in a condition better
than the condition as of the date of the Lease.
8. ALTERATIONS AND LEASEHOLD IMPROVEMENTS
a. Without Landlord's prior written consent (which consent
shall not be unreasonably withheld), Tenant will not make any alterations,
installations, modifications or additions to the Premises (hereinafter
collectively called "Alterations") which affect the structural integrity of the
Premises or which affect the roof or adversely affect the mechanical or
electrical systems (collectively "Structural Alterations"). All such work shall
be done in a good and workmanlike manner and in accordance with all applicable
laws. Tenant shall provide lien waivers to Landlord covering all contractors
and/or subcontractors that provide labor and materials during alteration.
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b. All leasehold improvements shall be at Tenant's sole cost
and expenses, with Landlord's prior written approval. All leasehold improvements
shall be made by a licensed, bonded and insured contractor and Tenant shall
provide Landlord with lien waivers upon completion of any work.
9. INSURANCE AND INDEMNITY
a. Tenant's Insurance.
(i) Tenant, at its sole cost and expense, shall
obtain and maintain in effect as long as this Lease remains in
effect and during such other time as Tenant occupies the
Premises or any part thereof, insurance policies providing at
least the following coverage: general liability insurance, in
occurrence form, insuring Tenant against liability for injury
to, or death of, a person or persons, and for damage to or
destruction of property, occasioned by or arising out of, or
in connection with, the use or occupancy of the Premises or
the business operated by Tenant thereon, and including
contractual liability coverage for Tenant's insurable
indemnity obligations under this Lease (other than those
contained in Paragraph 23 hereof), to afford protection with a
minimum combined single limit of liability of at least One
Million Dollars ($1,000,000).
(ii) Such policies will be maintained in financially
reputable companies duly licensed in the State of Minnesota,
and will be written as primary policy coverage and not
contributing with, or in excess of, any coverage which
Landlord shall carry. Tenant shall deposit certificates of
such required insurance with Landlord prior to the earlier to
occur of (a) the Commencement Date of this Lease, or (b)
Tenant's occupancy of the Premises, which certificates or
other evidence shall contain a provision stating that such
policy or policies shall not be canceled or materially altered
with respect to the Premises except after thirty (30) days'
written notice to Landlord. Tenant shall have the right to
provide the coverage required hereunder under blanket
policies. Landlord will be named as an Additional Insured
and/or Loss Payee in any such policies.
(iii) All furnishings, fixtures, equipment, and property of
every kind and description of Tenant and of persons claiming by or through
Tenant which may be on the Premises shall be at the sole risk and hazard of
Tenant and no part of loss or damage thereto for whatever cause is to be charged
to or borne by Landlord.
b. Landlord's Insurance.
(i) Landlord, at its sole cost and expense, shall obtain and
maintain in effect so long as this Lease remains in effect, general liability
insurance, in occurrence form, insuring Landlord against any and all liability
for injury to or death of a person or persons, and for damage to or destruction
of property, occasioned by or arising out of or in connection with the ownership
or management of the Premises, and including contractual liability coverage for
Landlord's indemnity obligations under this Lease (other than those contained in
Paragraph 23 hereof), to afford protection with a minimum combined single limit
of liability of at least One Million Dollars ($1,000,000);
(ii) Standard all-risk property and casualty insurance,
insuring the building(s) and all other improvements on the Entire Premises
against those risks normally encompassed in an all-risk policy, including, but
not limited to, (aa) loss or damage by fire; (bb) loss or damage from such other
risks or hazards now or hereafter embraced by an "Extended Coverage
Endorsement", (cc) loss for flood if the Entire Premises are in a designated
flood or flood insurance area; and (dd) removal after casualty, as well as such
other risks as a reasonably prudent owner of similarly situated properties
similar to the Entire Premises would normally insure against, such insurance to
provide for the payment of full replacement cost in the event of a total
destruction of the Entire Premises so as to ensure the availability of
sufficient funds to repair and restore the Entire Premises to its condition
immediately prior to any damage or destruction; and
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(iii) To the extent that Landlord has any employees who enter
the Premises to perform any work or provide any services thereon, Landlord shall
also, at its sole cost and expense, maintain workers' compensation and similar
insurance offering statutory coverage and containing statutory limits and
employers liability insurance in form and amount deemed reasonable by Tenant in
the exercise of its prudent business judgment.
(iv) Such policies will be maintained in financially reputable
companies duly licensed in the State of Minnesota, and will be written as
primary policy coverage and not contributing with, or in excess of, any coverage
which Tenant shall carry. Landlord shall deposit certificates of such required
insurance with Tenant prior to the earlier to occur of (a) the Commencement Date
of this Lease, or (b) Tenant's occupancy of the Premises, which certificates or
other evidence shall contain a provision stating that such policy or policies
shall not be canceled or materially altered with respect to the Premises except
after thirty (30) days' written notice to Tenant. Landlord shall have the right
to provide the coverage required hereunder under blanket policies. Tenant will
be named as an Additional Insured and/or Loss Payee in any such policies.
c. Waiver of Recovery
Neither Landlord nor Tenant shall be liable to the
other or to any insurance company insuring the other party (by way of
subrogation or otherwise) for any loss or damage to any structure, building, or
other tangible property, or any resulting loss of income, even though such
damage or loss might have been occasioned by the negligence of Landlord or
Tenant or any of their agents or employees, if any such loss or damage is
covered by insurance benefiting the party suffering such loss or damage or was
required of such party to be covered by insurance pursuant to this Lease. Except
to the extent that the provisions of Paragraph 13 are applicable, this waiver
covers deductibles as well, i.e., the insured party is liable for any and all
deductibles in its insurance policies and it shall not be entitled to any
payment or reimbursement thereof, except, a reasonable deductible amount for
casualty insurance can be included as an Operating Expense so long as such
deductible amount is included for all tenants.
d. Indemnity
Except if and to the extent that such party
is released from liability to the other party hereto pursuant to the provisions
of Paragraph 9c above,
(i) Landlord does hereby assume liability for, and
does hereby agree to indemnify, protect, defend, save and hold
harmless Tenant, its officers, directors, agents and
employees, from and against any and all liabilities,
obligations, claims, actions, demands, fines, suits,
judgments, penalties, damages and losses (including all of the
costs, fees and expenses connected therewith or incident
thereto) arising out of Landlord's breach of this Lease or the
negligent or unlawful act or omission or willful misconduct of
Landlord, its officers, partners, employees, agents or
contractors as it relates to the Premises; and
(ii) Tenant does hereby assume liability for, and
does hereby agree to indemnify, protect, defend, save and hold
harmless Landlord its officers, directors, agents and
employees, from and against any and all liabilities,
obligations, claims, actions, demands, fines, suits,
judgments, penalties, damages and losses (including all of the
costs, fees and expenses connected therewith or incident
thereto) Tenant's breach of this Lease or arising out of the
negligent or unlawful act or omission or willful misconduct of
Tenant, its officers, employees, agents or contractors as they
relate to Tenant's use and/or occupancy of the Premises.
10. ASSIGNMENT AND SUBLETTING
Tenant shall not assign this Lease or sublet all or any part of the Premises
without the prior written consent of Landlord, which consent shall not be
unreasonably withheld, conditioned or delayed if the proposed assignee or
subtenant is of equal or greater creditworthiness than Tenant and the use is not
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incompatible with the Building. Notwithstanding the foregoing, however, Tenant
may assign or sublet this Lease, without Landlord's prior written consent, to
any corporation or other entity which controls Tenant, which Tenant controls or
is directly or indirectly controlled by or under common control with Tenant or
merges with Tenant. If Tenant shall assign this Lease or any part thereof,
Tenant shall be released from responsibilities for all Tenant obligations under
the Lease, if such obligations are assumed by assignee in writing.
11. SUBORDINATION
Tenant agrees upon request of Landlord to subordinate this
Lease and its rights hereunder (excluding Tenant's rights to the use and
application of insurance and condemnation proceeds as set forth in this Lease)
to the lien of any mortgage, deed of trust or other voluntary hypothecation
arising out of any security instrument duly executed by Landlord charged against
the Premises, or any portion or portions thereof, and to execute at any time and
from time-to-time such documents as may be reasonably required to effectuate
such subordination; provided, however, that Tenant shall not be required to
effectuate any such subordination or other document hypothecating any interest
in the Premises unless the mortgagee or beneficiary named in such mortgage or
deed of trust shall first enter into a Subordination, Non-Disturbance and
Attornment Agreement in such form and content substantially similar to that
attached as EXHIBIT H and if there is or will be, as of the Commencement Date of
this Lease, any mortgage in effect with respect to the Premises, or any portion
or portions thereof, which would thereby be superior to this Lease, Landlord
shall obtain and deliver to Tenant, prior to the Commencement Date of this
Lease, a Subordination Non-Disturbance and Attornment Agreement in such form and
content substantially similar to that attached as EXHIBIT H duly executed on
behalf of each such lessor, mortgagee and beneficiary.
12. DAMAGE AND DESTRUCTION
a. If the Premises should be damaged or destroyed by fire,
tornado or other casualty, Tenant shall give immediate written notice thereof to
Landlord.
b. If the Premises should be totally destroyed by fire,
tornado or other casualty, or if it should be so damaged thereby that rebuilding
or repairing the Premises to substantially the same condition, as immediately
prior to such damage, cannot (in the reasonable estimation of Tenant's architect
or contractor) be completed within ninety (90) days after the date upon which
Landlord is notified by Tenant of such damage, or are not substantially
completed within said ninety (90) days, then Tenant may, at its option,
terminate this Lease effective upon the date of the occurrence of such damage.
In such case, all insurance proceeds payable incidental thereto shall be
retained by Landlord.
c. If the Premises should be damaged by any peril covered by
the insurance to be provided by Landlord pursuant to the provisions of this
Lease, and rebuilding of or repairs to the Premises to substantially the same
condition as immediately prior to such damage can (in the reasonable estimation
of Landlord's architect or contractor) be completed within ninety (90) days
after the date upon which Landlord is notified by Tenant of such damage or if
Tenant elects not to terminate this Lease as provided in Paragraph 12.b,
Landlord will proceed with reasonable diligence to rebuild and repair the
Premises to substantially the condition in which it existed immediately prior to
such damage, except that Landlord will not be required to rebuild, repair or
replace any part of the partitions, fixtures, additions and other improvements
which may have been placed in, on or about the Premises by Tenant. The Rent
payable hereunder shall be equitably abated from the date of damage or
destruction in the proportion and to the extent that the Premises are unusable
by Tenant for Tenant's Intended Use.
13. CONDEMNATION
a. If, during the Term of this Lease, the Entire Premises
shall be taken for any public or quasi-public use as the result of the exercise
of the power of eminent domain or by sale in lieu of eminent domain (hereinafter
referred to as the "Proceedings"), this Lease shall terminate upon vesting of
title in the Proceedings and any prepaid Rent and other prepaid charges paid by
Tenant to Landlord shall be refunded to Tenant.
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b. If, during the Term of this Lease, or any extension or
renewal thereof, less than the Entire Premises shall be taken in any such
Proceedings, this Lease will, upon vesting of title in the Proceedings,
terminate as to the portion of the Premises so taken, Tenant may, at its option,
terminate this Lease as to the remainder of the Premises. Such termination shall
be effected by notice in writing given not more than sixty (60) days after the
date of vesting of title in such Proceedings, and shall specify a date not more
than sixty (60) days after the giving of such notice as the date for such
termination.
c. If a taking as described in Subparagraph 13.b occurs and
this Lease is not terminated as described therein, this Lease will, upon vesting
of title in the Proceedings, terminate as to the parts so taken but shall
continue in full force and effect as to that portion of the Premises remaining,
and Landlord shall, at Landlord's cost, diligently pursue the restoration of the
remaining Premises so that they are as closely as possible to their condition
immediately prior to the taking by eminent domain, and shall use the amount of
the condemnation proceeds received by Landlord ("Landlord's Condemnation Award")
therefor.
d. In no event shall Landlord be required to repair or
replace: (i) Tenant's personal property such as wall coverings, carpeting, and
window treatments merchandise (except to the extent Landlord's Condemnation
Award contains an amount allocated for reimbursement for such personal
property); or (ii) Tenant's furnishings, operating equipment, trade fixtures, or
merchandise (except to the extent Landlord's Condemnation Award contains an
amount allocated for reimbursement for such personal property).
e. In the event of any termination of this Lease, or any part
thereof, as a result of any such Proceedings, Tenant shall pay to Landlord Rent
payable hereunder with respect to that portion of the Premises as taken in such
Proceedings justly apportioned to the date of such termination. If this Lease
continues as to that portion of the Premises not taken, Tenant shall continue to
pay the Rent payable hereunder, as in this Lease provided, subject to an
abatement of a just and proportionate part of the Rent payable hereunder
according to the extent and nature of such taking.
f. Landlord shall at all times keep Tenant fully advised of
any Proceedings or threat thereof. Any award or compensation arising out of such
taking shall belong to and be paid to Landlord except with respect to any
separate award made to Tenant for its leasehold improvements and fixtures,
relocation expenses and other damages or costs pursuant to a separate
independent action taken by Tenant against the condemning authority.
14. ACCESS
Landlord's agents, employees, contractors, prospective purchasers, existing
and prospective mortgagees and, during the last six (6) months of the Term (as
the same may have been extended), prospective tenants, shall have the right to
enter the Premises at reasonable times with prior reasonable notice to Tenant
for the purpose of inspecting the same; provided, however, any such party
entering upon the Premises shall cause as little inconvenience, annoyance and
disturbance to Tenant as may be reasonably possible under the circumstances and
shall comply with all reasonable security regulations and procedures as may then
be in effect with respect to Tenant's operations on the Premises. Tenant may
require that an employee or agent be present at any inspection or other entry of
the Premises by Landlord or its agents (except in the case of an emergency).
15. DEFAULT BY TENANT
If Tenant at any time during the Term of this Lease shall:
a. Default in the payment of any installment of Rent or any
other sum specifically to be paid by Tenant hereunder and such default shall not
have been cured within fifteen (15) days after Landlord shall have given to
Tenant written notice specifying such default; or
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b. Default in the observance or performance of any of Tenant's
other covenants hereunder (other than the covenant to pay Rent or any other sum
herein specified to be paid by Tenant) and such default shall not have been
cured within thirty (30) days after Landlord shall have given to Tenant written
notice specifying such default; provided, however, that if the default
complained of shall be of such a nature that the same cannot be completely
remedied or cured within such thirty (30) day period, then such default shall
not be an enforceable default against Tenant for the purposes of this Paragraph
15 if Tenant shall have commenced curing such default within such period and
shall proceed with reasonable diligence and in good faith to remedy such default
complained; or
c. Finally, and without further possibility of appeal or
review, (i) be adjudicated bankrupt or insolvent, or (ii) have a receiver or
trustee appointed for all or substantially all of its business or assets on the
ground of Tenant's insolvency, or (iii) suffer an order to be entered approving
a petition filed against Tenant seeking reorganization of Tenant under the
Federal Bankruptcy Laws or any other applicable law or statute of the United
States or any State thereof; or
d. Make an assignment for the benefit of its creditors, or
file a voluntary petition in bankruptcy or a petition or answer seeking
reorganization or arrangement under the Federal Bankruptcy Laws or any other
applicable law or statute of the United States or any state thereof, or shall
file a petition to take advantage of any insolvency act or shall consent to the
appointment of a receiver or trustee, of all or a substantial part of its
business and property;
15A. LANDLORD REMEDIES
Upon the happening of any one or more of such events of
default and the expiration of the applicable period of time for curing such
default, Landlord may, without further notice to Tenant and without further
demand for Rent due or for the observance or performance of any of said terms,
conditions or agreements, elect to do one or more of the following: (a) perform,
on behalf and at the expense of Tenant, any obligation of Tenant under this
Lease which Tenant has failed to perform, the actual and reasonable cost of
which performance by Landlord shall be deemed Additional Rent and shall be
payable by Tenant to Landlord upon demand (together with interest thereon at a
rate of interest equal to eight percent (8%) per annum ("Default Rate"); (b)
terminate this Lease and re-enter said Premises and remove all persons and
property therefrom, using legal process as may be necessary, and recover the
cost thereof, and again possess said Premises as its own; or (c) exercise any
other right or remedy available to Landlord at law or in equity. In the event
Landlord re-enters the Premises and removes Tenant (if Tenant is still in
possession) from the Premises, regardless of whether or not Landlord shall have
terminated this Lease, Tenant will nevertheless remain liable for all Rent which
may then be due and which shall thereafter become due for the balance of the
Term less the fair rental value of the Premises for the balance of the Term with
such amount reduced to present value using a discount rate of 8%.
All monies due under this Lease from Tenant to Landlord shall
be due on demand, unless otherwise specified, and if not paid by the fifth day
of the month shall result in the imposition of a service charge for late payment
in the amount of ten percent (5%) of the amount due.
16. ESTOPPEL CERTIFICATES
Upon execution of this Lease, Tenant will execute and deliver a reasonable
Estoppel Certificate and Tenant shall, within twenty (20) days after written
request of Landlord, execute, acknowledge and deliver to Landlord or to
Landlord's mortgagee, proposed mortgagee, and lessor or proposed purchaser of
the Premises, any reasonable estoppel certificates requested by Landlord which
shall state whether this Lease is in full force and effect and whether any
changes may have been made to the original of this Lease; whether the term of
this Lease has commenced and full Rent is accruing; whether there are any
defaults by Landlord and, if so, the nature of such defaults; whether Tenant is
in possession of the Premises and all improvements to be provided by Landlord
have been completed; whether Rent has been paid more than thirty (30) days in
advance; whether there are any liens, charges, or offsets against Rent due or to
become due; and whether the address shown on such estoppel certificate is
accurate. Landlord agrees that, within twenty (20) days after written request of
Tenant, Landlord shall execute, acknowledge and deliver to
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Tenant a similar certificate.
17. HOLDING OVER
In the extent Tenant remains in possession of the Premises after the
expiration of the Term (except if Tenant remains in possession because Tenant
has given notice of renewing the Lease under paragraph 3b hereof and the fair
market rent for the renewal Term has not been established, or if Tenant rescinds
its notice renewing the Lease and the Lease is in the six (6) month extension
period as described in paragraph 3(b)) hereof, it shall be deemed to be a tenant
from month-to-month only, at one hundred twenty-five percent (125%) of the
monthly installment of Base Rent in effect during the last month of the expired
Term. Except as aforesaid, such tenancy shall be upon and subject to the terms
of this Lease. Either party may terminate such tenancy by giving to the other at
least thirty (30) days' prior written notice of its intent to terminate.
18. SURRENDER
Tenant agrees to quit and surrender possession of the Premises
to Landlord at the expiration of the Term in as good condition as on the
Commencement Date except for the following (a) ordinary wear and tear, (b)
Alterations not removed as permitted hereunder, (c) any appropriation or taking
under power of eminent domain or by paramount authority, (d) damage by fire or
other casualty, and (e) any condition arising or existing by reason of
Landlord's failure to repair or maintain the Premises as required of it
hereunder. Tenant will have the right to remove all Tenant fixtures and personal
property from the Premises so long as Tenant repairs, at Tenant's cost, all
damages to the Entire Premises caused by such removal.
19. NOTICES
All notices, requests, demands or other communications with respect to this
Lease, whether or not herein expressly provided for, shall be in writing and
shall be deemed to have been duly given either (a) forty-eight (48) hours after
being mailed by United States first-class certified or registered mail, postage
prepaid, return receipt requested, or (b) the next business day after being
deposited (in time for delivery by such service on such business day) with
Federal Express or another national courier service with instruction for
overnight delivery, for delivery to the parties at the following addresses
(which such addresses may be changed by either party by giving written notice
thereof to the other):
If to Landlord:
Waseca Properties LLC
1224 West 96th Street
Bloomington, MN 55431
Attn: Jay
With a copy to: Roundbank
Attn: Larry Thompson
200 Second Street N.E.
P.O. Box 667
Waseca, MN 56093
If to Tenant: Transcrypt International
Attn: Senior Vice President of Facilities
4800 N.W. First
Lincoln, Nebraska 68521
With a copy to: Briggs and Morgan, P.A.
Attn: Real Estate Section
W2200 First National Bank Building
332 Minnesota Street
St. Paul, MN 55101
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20. QUIET ENJOYMENT AND USE
Landlord covenants and agrees that Tenant, so long as it shall not be in
default hereunder beyond any applicable cure period, shall and may, at all times
during the Term, peaceably and quietly have, hold, occupy and enjoy the Premises
(subject to the Permitted Encumbrances) pursuant to the terms of this Lease.
Landlord acknowledges that Tenant can use the Premises for manufacturing,
research and development, warehousing, distribution, office and all related
uses.
21. HAZARDOUS SUBSTANCES
a. Landlord shall indemnify, protect, hold harmless and defend
(with counsel selected by the "Tenant's Parties" as defined below) Tenant and
its subsidiary corporations and investment entities (and each of their
subsidiary corporations and investment entities), predecessors and successors in
interest, assigns, subtenants, officers, directors, employees, managers,
attorneys, accountants, agents and servants, and each of them in all capacities
including, individually (collectively the "Tenant's Parties"), from and against
all claims, costs, damages (including, without limitation, any and all sums paid
for settlement of claims, attorneys' fees, consultant and expert fees and
consequential damages), fines, judgments, penalties, losses, liabilities and
expenses suffered or incurred by the Indemnified Parties, or any of them,
arising directly or indirectly out of or as a consequence of the actual or
suspected use, storage, handling, generation, transportation, manufacture,
production, release, discharge, disposal or presence of "Hazardous Substances"
(as hereinafter defined) on, in, under or about the Premises or the air, soil or
groundwater thereof not caused by Tenant, its employees, contractors or agents
based on an occurrence from and after the date of this Lease. Landlord's
indemnification shall expressly survive the expiration or earlier termination of
this Lease. Notwithstanding anything to the contrary that may be contained in
this Lease, Landlord's indemnification shall not include any consequential
damages (e.g., use and profits) incurred by Tenant, but shall expressly include,
without limitation, any and all costs incurred due to any investigation of the
site or any cleanup, removal or restoration mandated by or pursuant to any
Environmental Laws. Landlord's indemnification shall survive any expiration or
termination of the Term.
b. From and after the date of this Lease, Tenant shall not
cause or permit any Hazardous Substances to be used, stored, handled, generated,
transported, manufactured, produced, released, discharged or disposed of in, on
or about the Premises by Tenant, its agents, employees, contractors or invitees,
except for such Hazardous Substances as are commonly used in a manufacturing,
warehouse/office setting (such as normal quantities of substances like
pesticides; janitorial supplies, copier toner, etc., for example) or as are
normally utilized in the environment of Tenant's Intended Use and are necessary
to Tenant's business. Tenant shall provide Landlord with a list of all Hazardous
Substances permitted on the Premises and shall update such list for any
additional Hazardous Substances introduced on or about the Premises. Any such
Hazardous Substances permitted on the Premises as hereinabove provided, and all
containers therefor, shall be used, kept, stored and disposed of in a manner
that complies with all "Environmental Laws" (as hereinafter defined). Tenant
shall indemnify and hold Landlord harmless from any and all claims, costs,
damages, fines, judgments, penalties, losses, expenses or liabilities
(including, without limitation, any and all sums paid for settlement of claims,
attorneys' fees, consultant and expert fees) arising during or after the Term
from or in connection with the use, storage, handling, generation, transaction,
manufacture, production, release, discharge, disposal or presence of Hazardous
Substances in, on or about the Premises by Tenant, Tenant's agents, employees,
contractors or invitees only during the Term. Notwithstanding anything to the
contrary that may be contained in this Lease, Tenant's indemnification shall not
include any consequential damages (e.g., loss of rent, use and profits) incurred
by Landlord, but shall expressly include, without limitation, any and all costs
incurred due to any investigation of the site or any cleanup, removal or
restoration mandated by or pursuant to any Environmental Laws. Tenant's
indemnification shall survive any expiration or termination of the Term for
claims made up to one (1) year after the expiration or termination of the Term.
c. The parties hereby expressly acknowledge and agree that
nothing herein shall be construed as creating any liability, obligation,
covenant, representation or warranty upon Tenant whatsoever for any
environmental or other condition that may have existed on, at, under or in
the
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vicinity of the Premises prior to the date of this Lease notwithstanding
Tenant's prior ownership or occupancy, except Tenant has retained responsibility
for certain corrective actions relating to a wastewater treatment pond located
on the Entire Premises all as set forth under the terms of the separate
agreement between Landlord and Tenant. Landlord does hereby expressly covenant
not to sue Tenant or any of Tenant's Parties with respect to any matter or thing
arising out of the environmental, health, safety or other condition on, at,
under or in the vicinity of the Premises which existed prior to Tenant's
occupancy under this Lease. Landlord hereby releases and discharges Tenant and
Tenant's Parties from any and all claims, costs, damages, fines, judgments,
penalties, losses, expenses or liabilities (including, without limitation, any
and all sums paid for settlement of claims, attorneys' fees, consultant and
expert fees) of any kind, whether known or unknown, which Landlord had, has or
at any time may have based any matter or thing arising out of the environmental,
health, safety or other condition on, at, under or in the vicinity of the
Premises which existed prior to Tenant's occupancy under this Lease.
d. As used herein, "Hazardous Substances" means any chemical,
compound, material, mixture, living organism or substance that is now or
hereafter defined or listed in, or otherwise classified pursuant to, any
"Environmental Laws" as a "hazardous substance", "hazardous material",
"hazardous waste", "extremely hazardous waste", "infectious waste", "toxic
substance", "toxic pollutant" or any other formulation intended to define, list,
or classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity or toxicity, including any petroleum
polychlorinated biphenyls ("PCBs"), asbestos, radon, natural gas, natural gas
liquids, liquified natural gas or synthetic gas usable for fuel (or mixtures of
natural gas and such synthetic gas). The term "Environmental Laws" means any and
all present and future federal, state and local laws (whether under common law,
statute, rule, regulation or otherwise), requirements under permits issued with
respect thereto, and other requirements of "Governmental Authorities" (as
hereinafter defined) relating to the environment, or to any Hazardous Substance
or to any activity involving Hazardous Substances, including without limitation
the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. ss. 9601 et seq., as amended (CERCLA), the Resource Conservation and
Recovery Act, as amended 42 U.S.C. ss. 6901 et seq., the Clean Water Act, 33
U.S.C. ss. 1251 et seq., the Clean Air Act, 42 U.S.C. ss. 7401 et seq., the
Toxic Substance Control Act, 15 U.S.C. ss. 2601 et seq., and the Safe Drinking
Water Act, 42 U.S.C. ss.ss. 300f through 300j, as all of the foregoing may be
amended from time to time.
22. SIGNS
Subject to Landlord's prior consent, which consent shall not be unreasonably
withheld or delayed, Tenant may install or construct any sign or signs on the
Entire Premises which Tenant deems desirable, provided that such sign complies
with all applicable laws and ordinances and with the Permitted Encumbrances.
Landlord approves all of Tenants' signs currently located on the Entire
Premises.
23. LIENS
a. Landlord shall keep the Premises free from any liens
arising out of any work performed, materials, furnished or obligations incurred
by or on behalf of Landlord and shall indemnify, defend and hold Tenant harmless
from all claims, costs and liabilities, including reasonable attorneys' fees and
costs, in connection with or arising out of any such lien or claim of lien.
Landlord shall cause any such lien imposed on the Premises to be released of
record by payment or posting of a proper bond within thirty (30) days after
written request by Tenant. Landlord also hereby waives any liens or lien rights
which it may have by statute or at common law with respect to any of Tenant's
trade fixtures, equipment or other property.
b. Tenant shall keep the Premises free from any liens arising
out of any work performed, materials furnished or obligations incurred by or on
behalf of and shall indemnify, defend and hold Landlord harmless from all
claims, costs and liabilities, including reasonable attorneys' fees and costs,
in connection with or arising out of any such lien or claim of lien. Tenant
shall cause any such lien imposed on the Premises to be released of record by
payment or posting of a proper bond within thirty (30) days after written
request by Landlord.
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24. DEFAULT BY LANDLORD
a. Landlord is in default under the terms of this Lease if Landlord fails in
the performance of any of its obligations under this Lease, and such failure
continues for a period of fifteen (15) days after Tenant shall have given
Landlord written notice specifying such failure in the event of a default which
may be cured solely by the payment of money and thirty (30) days after Tenant
shall have given Landlord written notice specifying any such failure which may
not be cured solely by the payment of money; provided that if such non-monetary
default complained of is of such a nature that the same cannot be completely
remedied or cured within such thirty (30) day period, then such default shall
not give Tenant the right to cure as hereinafter provided if Landlord shall have
commenced curing such default within such thirty (30) day period, and shall
proceed with reasonable diligence and in good faith to remedy the default
complained of.
24A. TENANT REMEDIES
a. Including Tenant's specific rights as set forth under
paragraph 6 hereof, Tenant has the right (but not the obligation) to cure such
nonperformance. If Landlord is in default under any of its obligations under
this Lease and such default materially interferes with Tenant's Intended Use,
Tenant shall be entitled to an abatement of Rent hereunder in proportion to the
extent of and during the period of any such interference.
b. If Tenant expends any sums in curing Landlord's default
pursuant to Subparagraph a. above, all reasonable sums incurred by Tenant
(together with interest accruing thereon at the Default Rate from and after the
date that Tenant expends any such sums) (collectively "Tenant's Expenditures")
shall be reimbursed by Landlord to Tenant within thirty (30) days following
Landlord's receipt of written demand therefor accompanied by supporting
invoices. If Landlord fails to repay Tenant's Expenditures when due, Tenant may
deduct an amount from each monthly installment of Base Rent that becomes due for
the remainder of the Term.
c. Notwithstanding anything to the contrary that may be
contained above, nothing herein shall be construed as preventing or restricting
Tenant from exercising any and all other rights and remedies available to Tenant
at law or in equity, even if such other rights and remedies conflict with or
contradict those set forth above, and further, all rights and remedies herein
described are cumulative and Tenant may exercise any one or all of them.
25. ATTORNEYS' FEES/SELF HELP
a. If either party brings any action or legal proceeding for
damages for an alleged breach of any provision of this Lease, to recover Rent or
other sums due, to terminate the tenancy of the Premises or to enforce, protect
or establish any term, condition or covenant of this Lease or right of either
party, the prevailing party shall be entitled to recover as a part of such
action or proceedings, or in a separate action brought for that purpose,
reasonable attorneys' fees and costs, at trial, on appeal and in bankruptcy, to
be fixed and determined by the court in such action or proceeding.
b. If either party ("Defaulting Party") is in default under
this Lease, the other party ("Nondefaulting Party") may, without being obligated
and without waiver of the default, cure the default. The Nondefaulting Party may
enter the Premises to cure the default. The Defaulting Party will pay the
Nondefaulting Party, upon demand, all reasonable costs, expenses and
disbursements incurred by the Nondefaulting Party to cure the default, together
with interest on all sums so expended at the Default Rate. The Nondefaulting
Party has the right to offset against any sums due from it hereunder any sums
advanced by the Nondefaulting Party to cure any defaults hereunder by the
Defaulting Party.
26. COMPLIANCE WITH LAWS
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a. Landlord is currently, in compliance with, and will, at all
times during the Term, at its sole cost and expense, promptly comply with all
governmental laws, ordinances, rules or regulations applicable (including but
not limited to any modifications required to be made pursuant to the Americans
With Disabilities Act or otherwise) to the structure of the Building(s), the
parking lot, driveways, walkways and roadways, including without limitation all
Environmental Laws. Further, Landlord shall be responsible for any and all
expenditures for the required compliance arising from the nature of the use of
the Premises generally (meaning, if such compliance applies to office/warehouse
uses generally, as opposed to Tenant's particular business being conducted
thereon). However, notwithstanding any of the foregoing, Landlord shall not be
responsible for any compliance or costs relating to any Alterations made by
Tenant.
b. Tenant is in compliance with, and will, at all times during
the Term and at its sole cost and expense, promptly comply with all governmental
laws, ordinances, rules or regulations applicable (including but not limited to
any modifications required to be made), subject to any available
"grandfathering," to the particular manner in which Tenant conducts its business
on the Premises or which arise out of any Alterations made by Tenant; however,
in no event shall Tenant be required to make any Structural Alterations or
Alterations which are required to be made by Landlord, Landlord expressly
agreeing to make such Alterations.
27. RECORDING
At such time as Landlord delivers executed copies of this
Lease to Tenant, Landlord shall also deliver an executed short form
memorandum of this Lease substantially in the form attached as EXHIBIT I
modified only to the extent necessary to make it suitable for recording in
the jurisdiction where the Premises are located. Either Landlord or Tenant
may, if it so desires, record such memorandum at its own cost and expense. In
no event, however, shall this Lease be recorded.
28. LEASEHOLD MORTGAGES
Tenant may, without the prior written consent of Landlord,
subject the leasehold estate created by this Lease, as amended from time to
time, and its personal property, equipment and trade fixtures to a leasehold
mortgage and/or security agreement to secure financing or other obligations
which Tenant may obtain or incur. In connection with any such leasehold mortgage
and/or security agreement, Landlord will, promptly following receipt of written
request therefor, provide to Tenant's lender(s) an estoppel agreement confirming
whether or not this Lease has been amended, whether or not there are any uncured
defaults under this Lease, and such other matters pertaining to this Lease as
such lender(s) may reasonably require. In addition, Landlord will agree to
provide Tenant's lender(s) with written notice of any defaults by Tenant under
this Lease and the same opportunity to cure such defaults as herein provided to
Tenant before Landlord exercises its remedies under this Lease, and to provide
Tenant's lender(s) with a reasonable opportunity to enter upon the Premises for
the purpose of removing any property of Tenant which has been pledged as
collateral to Tenant's lender(s) or which has been subjected to any such
leasehold mortgage and/or security agreement.
29. LANDLORD REPRESENTATIONS AND WARRANTIES
a. Landlord hereby represents and warrants to Tenant that
it has good and marketable title to the Land, Building and Premises subject
only to the Permitted Encumbrances.
b. Landlord hereby represents and warrants to Tenant that the
Land is not located within an area designated by the Secretary of Housing and
Urban Development, the Army Corps of Engineers or any other governmental or
quasi-governmental agency as a "wetland" or special flood hazard area.
c. Parking. Landlord hereby represents and warrants to
Tenant that there are located upon the Entire Premises for the nonexclusive
and exclusive use by Tenant and exclusive, sufficient parking spaces and that
the Entire Premises complies with applicable zoning requirements for use of
all tenants of the
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building(s) and their visitors and invitees and are not and will not be used in
connection with the occupancy of any other building, whether or not owned by
Landlord.
30. NOVATION IN THE EVENT OF SALE
In the event of the sale of the Premises, Landlord shall be
and hereby is relieved of all of the covenants and obligations created hereby
accruing from and after the date of sale so long as the buyer assumes all
Landlord obligations in writing. Landlord, in the event of a sale of the
Premises, shall cause to be included in this agreement of sale and purchase a
covenant whereby the purchaser of the Premises assumes and agrees to carry out
all of the covenants and obligations of Landlord herein.
31. SECURITY DEPOSIT
As additional security for Tenant's obligation to pay Rent
under this Lease, Tenant has as of the date hereof, deposited in an account at
Roundbank, Waseca, Minnesota, the amount of $203,817.00 (6 months Base Rent) as
a security deposit in connection with Tenant's obligation to pay Rent under this
Lease ("Security Deposit"). This Security Deposit account shall be in the name
of Landlord and shall be retained during the initial Term but not the Renewal
Term of this Lease. This Security Deposit will earn interest at the rate per
annum equal to 6 month Certificates of Deposit issued by Northeast Bank of
Minneapolis as such rate changes from time to time during the Term which
interest will not be included in the term "Security Deposit" and which interest
will be paid to Tenant quarterly by the Bank or Landlord. If Tenant defaults in
its obligation to pay Rent under this Lease such failure constitutes a default
under the provisions of Paragraph 15 of this Lease after any applicable notice
has been given and the notice period has run, Landlord can upon written notice
to Tenant apply so much of the Security Deposit as necessary against Tenant's
obligation to pay Rent. Landlord's application of the Security Deposit as
described herein, will not constitute Landlord's waiver of any of Landlord's
rights or remedies under this Lease or Landlord election of any specific remedy
to the exclusion of any other remedies available to Landlord under this Lease at
law or in equity. However in determining any damages for a Tenant default,
Tenant will receive a credit for so much of the Security Deposit as has been
applied by Landlord under this provision. If Landlord sells or otherwise conveys
the Entire Premises, for non-collateral security purposes, Landlord will
transfer the Security Deposit to the transferee for the benefit of Tenant.
Landlord is released from any obligation or liability to return the Security
Deposit to Tenant after such transfer if such transferee assumes all of
Landlord's obligations under the Lease and acknowledges receipt of the Security
Deposit from Landlord in writing with a notice to Tenant. In such event Tenant
will look solely to the transferee for the return of the Security Deposit. At
the end of the initial Term, Tenant will have the right to apply any unused
Security Deposit against monthly installments of Rent equal to the amount of the
unused Security Deposit. At the end of the Term or any earlier termination of
this Lease, any unused Security Deposit shall be returned to Tenant within 3
days of such event.
32. MISCELLANEOUS PROVISIONS
a. Time Periods. All periods of time referred to in this Lease
shall include all Saturdays, Sundays and state or national holidays, unless the
period of time specifies business days. However, if the date or last date to
perform any act or give notice or approval shall fall on a Saturday, Sunday or
state or national holiday, such act, notice or approval will be timely if
performed or given on the next succeeding day which is not a Saturday, Sunday or
state or national holiday.
b. The waiver by Landlord or Tenant of any breach of any term,
condition or covenant of this Lease will not be deemed to be a waiver of such
provision or any subsequent breach of the same or any other term, condition or
covenant of this Lease. No covenant, term or condition of this Lease will be
deemed to have been waived by Landlord or Tenant unless such waiver is in
writing and signed by the waiving party.
c. Severability. If any provision of this Lease is held to be
invalid, void or unenforceable, the remaining provisions hereof shall not be
affected or impaired, and such remaining provisions shall remain in full force
and effect.
G-20
<PAGE>
d. All Exhibits referred to herein are attached hereto and
incorporated by reference.
e. Any fully executed copy of this Lease shall be deemed an original for all
purposes.
f. The covenants and agreements contained in this Lease shall be binding on
the parties hereto and on their respective successors and permitted assigns.
g. Captions. The captions and headings used in this Lease are for the
purpose of convenience only and shall not be construed to limit or extend the
meaning of any part of this Lease.
h. This Lease is the only agreement regarding the leasing of the Premises
between the parties, and there are no agreements or representations on the
leasing of the Premises between the parties except as expressed herein.
i. This Lease is intended to express the mutual intent of the parties
hereto, and no rule of strict construction shall be applied against either
Landlord or Tenant.
j. Time is of the essence in every particular of this Lease in respect to
the promises, covenants and agreements, terms and conditions of either Landlord
or Tenant. The foregoing will not operate, however, to reduce the time period
allocated for the performance of any obligation or the curing of any default if
a time period is specified in the Lease for the performance of such obligation
or the curing of such default.
k. All references herein to the Landlord and Tenant mean the
persons who from time to time occupy the positions, respectively, of the
Landlord and Tenant, although this will not be construed as relieving any
person, firm or corporation of any liability incurred by him, her or it, by
reason of or in connection with his, her or its having been Landlord or Tenant
at one time or another.
l. This Lease shall be governed in all respects by the laws of
the State of Minnesota.
m. Each party hereby represents and warrants to the other that the person or
entity signing this Lease on behalf of such party is duly authorized to execute
and deliver this Lease and to legally bind the party on whose behalf this Lease
is signed to all of the terms, covenants and conditions contained in this Lease.
n. Notwithstanding anything to the contrary in the Lease,
Landlord shall have the duty to mitigate damages in the event of default, INTER
ALIA, by using reasonable efforts to re-let the Premises.
o. Landlord hereby disclaims, waives and acknowledges that it
has no right to any statutory or other lien upon any and all property owned by
Tenant to the fullest extent permissible by law.
33. NO OFFER
The submission of this Lease for examination or the negotiation of the
transaction described herein or the execution of this Lease by only one of the
parties will not in any way constitute an offer to lease on behalf of either
Landlord or Tenant, and this Lease shall not be binding on either party until
duplicate originals thereof, duly executed on behalf of both parties, have been
delivered to each of the parties hereto.
34. FORCE MAJEURE
Neither Landlord nor Tenant will be deemed in default with
respect to any provision, covenant or condition of this Lease on the part of
either of them, respectively, to be performed if the performance thereof will be
delayed, interfered with or rendered impossible because of any strike, lock-out,
civil commotion, war, war-like operation, invasion, insurrection, rebellion,
hostility, revolution, military or usurped power, sabotage, inability to obtain
any necessary material or service, unusual, severe and adverse
G-21
<PAGE>
weather conditions or other cause beyond the control of the party obligated to
execute such performance; further, however, that such performance shall be
resumed with due diligence and reasonable dispatch as soon as the contingency
causing such delay or impossibility shall abate; and provided further, however,
that nothing in this paragraph contained shall operate or be construed to
relieve either party of any obligation for the payment of money promptly as the
same shall be due.
35. ARBITRATION
If any dispute shall arise between Landlord and Tenant with
reference to the interpretation of this Lease, their respective rights and
obligations hereunder or with respect to any future determination to be made
pursuant to the Lease (such as Tenant's Share of Operating Costs and the amount
of Additional Rent), such dispute, upon the written request of either party,
shall be submitted to an arbitrator chosen by the parties. If the parties are
unable to agree upon an arbitrator, each party shall select an arbitrator and
these two arbitrators shall select the Chief Arbitrator. If the two arbitrators
fail to agree in the selection of a Chief Arbitrator within thirty (30) days of
their appointment, each of them shall name two prospective arbitrators, of whom
the other shall decline one and the final selection of a Chief Arbitrator shall
be made among the two remaining names by drawing that arbitrators name out of a
hat in the presence of the Landlord and Tenant. The parties may agree upon any
individual as an arbitrator but if they are unable to agree, ALL arbitrators
must have a relationship with an institutional arbitration entity such as the
American Arbitration Association, Endispute, or Judicate. The arbitrator shall
interpret this Lease as an honorable engagement and not merely a legal
obligation; they are relieved of all judicial formalities and may abstain from
following the strict rules of law, and they shall make their award with a view
to effecting the general purpose of the Lease in a reasonable manner rather than
in accordance with a literal interpretation of the language. Insofar as
appropriate, the arbitrators shall take into account the parties prior
understanding including, for example, the manner in which the Tenant's Share of
Operating Expenses has been determined. Each party shall submit its case to its
arbitrator within thirty (30) days of the appointment of the arbitrator.
The decision in writing of the arbitrators, when filed with
the parties hereto, shall be final and binding on both parties. If the
arbitrators are unable to reach a unanimous decision, the Chief Arbitrator shall
issue the decision which need not be consistent with either of the other two
arbitrators. The deliberations of the arbitrators shall be confidential and no
dissenting opinion shall be rendered in writing or orally. Judgment may be
entered upon the final decision of the arbitrators in any court having
jurisdiction. The expenses of arbitration shall be borne equally by Landlord and
Tenant except that each shall bear their own expenses and if more than one
arbitrator is required, each party shall bear the expense of its own arbitrator
and shall jointly and equally bear with the other party the expense of the Chief
Arbitrator and of the arbitration. Said arbitration shall take place in
Minneapolis, Minnesota, unless some other place is mutually agreed upon by the
parties.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Lease as of the day and year first above written.
LANDLORD:
WASECA PROPERTIES, LLC
By: _________________________________
Title: ______________________________
TENANT:
TRANSCRYPT INTERNATIONAL, INC.
By: _________________________________
Title: ______________________________
G-22
<PAGE>
EXHIBIT 11
TRANSCRYPT INTERNATIONAL, INC AND SUBSIDIARIES
COMPUTATION OF PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
-------------------------------- ---------------
1998 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
Net loss $ (3,827) $ (22,294) $ (10,949)
============ =========== ============
NET LOSS PER SHARE - BASIC
Weighted average common shares - Basic 12,947,795 12,946,624 10,056,690
============ =========== ============
Net loss per share - Basic $ (1.30) $ (1.72) $ (1.09)
============ =========== ============
NET LOSS PER SHARE - DILUTED
Shares used in this computation:
Weighted average common shares - Basic 12,947,795 12,946,624 10,056,690
============ =========== ============
Dilutive effect of shares under employee stock plans(*) - - -
------------ ----------- ------------
Weighted average common shares - Diluted 12,947,795 12,946,624 10,056,690
============ =========== ============
Net loss per share - Diluted $ (1.30) $ (1.72) $ (1.09)
================ =============== ===============
</TABLE>
* Common stock equivalents were not included as their effect would be
anti-dilutive.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Transcrypt International, Inc.
We consent to incorporation by reference in the registration statement (No.
333-30673) on Form S-8 of Transcrypt International, Inc. (the "Company") of our
report dated February 11, 2000 relating to the consolidated balance sheets of
the Company and its subsidiaries as of December 31, 1999, 1998, and 1997 and the
related consolidated statements of operations, changes in stockholder's equity
and cash flows for each of the years in the three-year period ended December 31,
1999, which report appears in the Annual Report on Form 10-K of the Company
dated March 22, 2000.
/s/ KMPG LLP
Omaha, Nebraska
March 22, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TRANSCRYPT
INTERNATIONAL, INC.'S CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
CONSOLIDATED CONDENSED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 21,571
<SECURITIES> 0
<RECEIVABLES> 14,245
<ALLOWANCES> 1,570
<INVENTORY> 16,447
<CURRENT-ASSETS> 56,202
<PP&E> 10,896
<DEPRECIATION> 7,130
<TOTAL-ASSETS> 85,521
<CURRENT-LIABILITIES> 29,409
<BONDS> 0
0
0
<COMMON> 130
<OTHER-SE> 49,156
<TOTAL-LIABILITY-AND-EQUITY> 85,521
<SALES> 53,520
<TOTAL-REVENUES> 53,520
<CGS> 36,059
<TOTAL-COSTS> 36,059
<OTHER-EXPENSES> 21,909<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (386)<F2>
<INCOME-PRETAX> (3,827)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,827)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
<FN>
<F1>Other expenses includes a $0.5 million restructuring charge and a $2.2 million
reversal of a special provision taken during 1998 for the potential settlement
of pending class action lawsuits.
<F2>Interest expenxe is net of $920 of Interest Income less $534 of Interest
expense.
</FN>
</TABLE>
