<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
----------
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File Number 0-21681
TRANSCRYPT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0801192
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4800 N.W. 1st STREET
LINCOLN, NEBRASKA 68521
(402) 474-4800
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive office)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(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
------ ------
As of October 30, 1997, 12,928,339 shares of the Registrant's common
stock were outstanding.
Exhibit Index is on Page 14
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,746,683 $ 0
Accounts receivable, net 21,387,915 4,215,403
Unbilled revenue 2,083,565 0
Inventory, net 13,574,861 2,261,381
Prepaid expenses and other current assets 1,364,135 71,196
Deferred tax assets 4,595,954 196,234
----------- -----------
Total current assets 47,753,113 6,744,214
----------- -----------
Property, plant and equipment, at cost 13,652,914 6,672,832
Less: accumulated depreciation (2,418,469) (1,765,394)
----------- -----------
Net property, plant and equipment 11,234,445 4,907,438
----------- -----------
Deferred tax assets 6,374,942 1,723,190
Intangible assets, net 7,469,239 38,137
Deferred public offering costs 146,651 568,049
Other assets 555,847 0
----------- -----------
$73,534,237 $13,981,028
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 0 $ 385,694
Revolving line of credit and bank notes payable 10,176,403 1,022,000
Current portion of capitalized lease obligations 34,694 13,803
Current portion of long-term debt 3.023,784 581,959
Accounts payable 12,601,098 1,174,364
Accrued expenses 9,308,404 1,098,300
Advanced billings 3,203,837 0
Technology and license purchase payable 1,342,500 0
----------- -----------
Total current liabilities 39,690,720 4,276,120
----------- -----------
Capitalized lease obligations, net of current portion 30,168 1,296
Long-term debt, net of current portion 4,457,014 1,838,646
Deferred warranty revenue 1,179,113 0
Revolving line of credit 0 792,070
----------- -----------
45,357,015 6,908,132
----------- ------------
Stockholders' equity:
Common stock 101,156 67,831
Additional paid-in capital 37,359,859 9,683,381
Retained deficit (9,283,793) (2,678,316)
----------- -----------
28,177,222 7,072,896
----------- -----------
$73,534,237 $13,981,028
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
2
<PAGE> 3
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $17,555,049 $3,547,339 $27,833,042 $ 9,275,168
Cost of sales 9,622,625 1,036,041 13,487,514 2,885,788
----------- ----------- ----------- -----------
Gross profit 7,932,424 2,511,298 14,345,528 6,389,380
Operating expenses:
Research and development 1,298,286 601,679 2,614,075 1,686,297
Write-off of research and development 9,827,696 0 9,827,696 0
Sales and marketing 2,720,647 670,817 4,685,859 1,505,939
General and administrative 1,120,758 357,163 2,158,268 1,051,474
Special compensation expense 0 5,568,250 0 5,568,250
Amortization of intangible assets 108,000 272,947 108,000 819,287
----------- ----------- ----------- -----------
Total operating expenses 15,075,387 7,470,856 19,393,898 10,631,247
Loss from operations (7,142,963) (4,959,558) (5,048,370) (4,241,867)
Net interest income (expense) (227,699) (29,100) 8,221 (79,595)
---------- ----------- ----------- -----------
Loss before income taxes (7,370,662) (4,988,658) (5,040,149) (4,321,462)
Provision (benefit) for income taxes 892,981 (1,758,539) 1,565,230 (1,758,539)
----------- ----------- ----------- -----------
Net loss $(8,263,643) $(3,230,119) $(6,605,379) $(2,562,923)
=========== =========== =========== ===========
Pro forma information:
Loss before pro forma income taxes $(7,370,662) $(4,988,658) $(5,040,149) $(4,321,462)
Pro forma provision (benefit) for income taxes 892,981 (1,758,539) 1,565,230 (1,623,260)
----------- ----------- ----------- -----------
Pro forma net loss $(8,263,643) $(3,230,119) $(6,605,379) $(2,698,202)
=========== =========== =========== ===========
Pro forma net loss per share $ (0.84) $ (0.46) $ (0.71) $ (0.38)
=========== =========== =========== ===========
Shares used to compute net loss per share 9,844,087 6,968,712 9,294,108 7,012,751
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
<PAGE> 4
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net cash flows provided by (used in) operating activities $(9,199,352) $ 1,369,179
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (1,848,850) (1,039,786)
Proceeds from sale of fixed assets 2,323 26,725
Purchase of intangible assets (114,780) (31,371)
Purchase of EF Johnson, net of cash acquired (290,668) 0
Payments under noncompete agreement 0 (340,000)
----------- -----------
Net cash flows used in investing activities (2,251,975) (1,384,432)
----------- -----------
Cash flows from financing activities:
Issuance of industrial development revenue bonds 2,850,000 0
Payment of industrial development revenue bonds (850,000) 0
Debt issuance costs of industrial development revenue bonds (75,493) 0
Payments on term loans, lines of credit, and capitalized leases (3,343,168) (249,292)
Payments on long-term debt (275,487) 0
Bank overdraft (385,694) 153,834
Partnership distributions paid 0 (181,001)
Proceeds from IPO, net 18,277,852 0
----------- -----------
Net cash flows provided by (used in) financing activities 16,198,010 (276,459)
----------- -----------
Net increase in cash equivalents 4,746,683 (291,712)
Cash and cash equivalents, beginning of period 0 291,712
----------- -----------
Cash and cash equivalents, end of period $ 4,746,683 $ 0
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
<PAGE> 5
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The condensed consolidated balance sheet of Transcrypt International,
Inc. ("Transcrypt" or the "Company") at December 31, 1996, has been taken from
audited financial statements at that date and condensed. The condensed
consolidated financial statements as of September 30, 1997, and for the nine
months then ended are unaudited and reflect all normal and recurring accruals
and adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position, operating results and cash flows for the
interim periods. The condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in the Form 10-K for the year ended December
31, 1996, of the Company. The results of operations and cash flows for the nine
months ended September 30, 1997, are not necessarily indicative of the results
for the entire fiscal year ending December 31, 1997.
Where appropriate, items within the condensed consolidated financial
statements have been reclassified from the previous periods to conform to the
current year's presentation.
2. ORGANIZATION AND CONSOLIDATION
Transcrypt International, Ltd. (the "Predecessor") was a limited
partnership formed in 1991 composed of the general partner, Transcrypt
International, Inc. (a Nebraska corporation) and various limited partners.
Effective June 30, 1996, the assets and liabilities of the partnership were
merged tax-free into a Delaware corporation, Transcrypt International, Inc. Each
respective partnership unit was converted pro rata into common shares of the
Company.
The consolidated condensed financial statements include the accounts of
the Company and its wholly owned subsidiaries. On July 31, 1997, the Company
completed the acquisition of E.F. Johnson Company (see Note 10). All significant
intercompany accounts and transactions have been eliminated in the
consolidation.
3. PRO FORMA PROVISION FOR INCOME TAXES
The pro forma provision for income taxes reflects the provision for
income taxes as if the Company had been taxed as a "C" corporation under the
Internal Revenue Code for the nine months ended September 30, 1996.
4. NET LOSS PER SHARE
Net loss per share attributable to common stockholders has been computed
using the weighted average number of common stock shares outstanding for the
period ended September 30, 1997. Common stock equivalents were not included as
their effect would be anti-dilutive.
Pro forma net loss per share is computed on the basis of the weighted
average number of partnership interest units outstanding converted into common
shares on a one-to-one ratio for the period ended September 30, 1996. Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 83, options
to purchase common stock granted with exercise prices preceding the date of the
initial public offering price per share during the 12 months included in the
calculation of common equivalent shares, using the treasury stock method, as if
they were outstanding for all periods presented.
5
<PAGE> 6
5. INITIAL PUBLIC OFFERING
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.
A portion of the Company's net proceeds from the offering was used to
retire certain term and installment notes payable and the revolving lines of
credit, as described in Notes 7 and 8. The remaining net proceeds were used for
general working capital purposes, to support the Company's growth and business
strategy, and for the subsequent acquisition of E.F. Johnson Company.
6. INVENTORY
The following is a summary of inventory at September 30, 1997, and
December 31, 1996:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Raw materials and supplies, net $ 6,561,382 $1,316,932
Work in progress 1,477,911 715,032
Finished goods 5,535,568 229,417
----------- ----------
$13,574,861 $2,261,381
=========== ==========
</TABLE>
7. REVOLVING LINES OF CREDIT AND BANK NOTES PAYABLE
Prior to July 31, 1997, and the acquisition of E.F. Johnson Company, the
Company had a working capital revolving line of credit not to exceed $3,000,000,
calculated using a specified borrowing base of eligible inventory and accounts
receivable. In addition, the Company had a second revolving capital line of
credit not to exceed $1,000,000, calculated using a specified borrowing base of
eligible fixed assets. At December 31, 1996, the Company had $1,022,000
outstanding on the working capital line of credit and $792,070 on the capital
equipment line of credit. On January 27, 1997, these revolving lines of credit
were repaid in full using a portion of the net proceeds from the initial public
offering.
Concurrent with the acquisition of E.F. Johnson, the Company assumed
responsibilities for E.F. Johnson's revolving credit facility. This includes a
working capital revolving line of credit not to exceed $35,000,000, with maximum
borrowings calculated periodically against contractual percentages of accounts
receivable and inventory. This also includes a term loan, which is secured by
machinery and equipment. On October 23, 1997, this bank debt was repaid in full
using a portion of the net proceeds from the Company's secondary offering as
described in Note 12.
On September 30, 1997, the Company had $8,526,403 outstanding in
aggregate on all lines of credit. The Company has established an irrevocable
standby letter of credit in the amount of $436,000, payable to the creditors of
E.F. Johnson and expiring July 22, 1998, and an irrevocable standby letter of
credit in the amount of $1,564,000 for performance bonds under contracts entered
into by E.F. Johnson expiring June 12, 1998. Both of such standby letters of
credit are automatically extended annually unless notified. In conjunction with
the repayment of the E.F. Johnson bank debt, the irrevocable standby letter of
credit in the amount of $436,000 was retired.
On September 23, 1997, the Company borrowed $1,650,000 in the form of a
ninety-day term note from its primary lender.
6
<PAGE> 7
8. LONG-TERM DEBT
On January 27, 1997, the two term notes payable (totaling $626,791 at
December 31, 1996) and an installment note payable (totaling $359,017 at
December 31, 1996) were repaid in full using a portion of the net proceeds from
the initial public offering.
On March 25, 1997, the industrial revenue bonds payable (totaling
$850,000 at December 31, 1996) and the construction note payable (totaling
$584,797 at December 31, 1996) were repaid through the issuance of new
industrial revenue bonds totaling $2,850,000. The new industrial revenue bonds
are due in annual principal payments of $140,000, plus interest at a variable
rate, due March 1, 2008 through March 1, 2016, with the remaining principal and
accrued interest due March 1, 2017. At September 30, 1997, the remaining net
proceeds of $487,767 (net of debt offering costs) were held in escrow for the
Company pending the purchase of certain fixed assets by the Company.
Concurrent with the acquisition of E.F. Johnson, the Company assumed
responsibility for E.F. Johnson's capital lease obligation on Waseca, Minnesota
manufacturing facility. This capital lease requires the Company to make monthly
principal and interest payments of $52,000 through July 31, 2002. As of
September 30, 1997, the unpaid principal amount was $1,847,473. In assuming this
obligation, the Company also obtained an option to purchase the manufacturing
facility for $2,400,000.
9. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in certain legal proceedings
arising in the normal course of business. Management believes that the outcome
of these matters will not have a materially adverse effect on the Company.
10. ACQUISITION
On July 31, 1997, the Company completed the acquisition of E.F. Johnson
Company in exchange for cash consideration of $436,000 and the issuance of
832,465 shares of the Company's common stock with an approximate value of
$10,000,000. The consolidated financial statements of Transcrypt reflect the
operations of E.F. Johnson beginning on such date. The acquisition is accounted
for under the purchase method of accounting. The allocation of the purchase
price resulted in an increase in intangible assets of approximately $7.1
million, which is being amortized over a 5 to 15-year period. As a result of the
acquisition, the Company incurred a $9.8 million charge for the write-off of
in-process research and development.
11. RESTRUCTURING RESERVE
A portion of the purchase price allocation of E.F. Johnson was used to
establish a $4.045 million restructuring reserve to cover the attendant expenses
of the acquisition relating to severance, relocation, and other restructuring
plans. As of September 30, 1997, approximately $2.7 million of this
restructuring reserve had been expended.
12. SUBSEQUENT EVENT
On October 20, 1997, the Company completed a secondary offering of
5,175,000 shares of common stock at a price of $21.00 per share. Of the
5,175,000 shares offered, 2,684,481 shares were sold by the Company and
2,490,519 were sold by certain of the Company's stockholders. The Company's net
proceeds from the offering, after underwriting commissions and expenses, were
approximately $52,648,000.
A portion of the Company's net proceeds from the offering was used to
retire revolving lines of credit as described in Note 7. The remaining net
proceeds are being used for working capital, to purchase the Waseca, Minnesota
manufacturing facility described in Note 8, facilities improvement potential
acquisitions, and general corporate purposes.
7
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following tables set forth certain Consolidated Statements of Income
information and such information as a percentage of revenues during the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
1997 1996
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Revenues $ 17,555,049 100.0% $ 3,547,339 100.0%
Cost of sales 9,622,625 54.8% 1,036,041 29.2%
------------ ---------- ------------ ----------
Gross Profit 7,932,424 45.2% 2,511,298 70.8%
Operating expenses:
Research and development 1,298,286 7.4% 601,679 17.0%
Write-off of research and development 9,827,696 56.0% 0 0.0%
Sales and marketing 2,720,647 15.5% 670,817 18.9%
General and administrative 1,120,758 6.4% 357,163 10.1%
Amortization of intangible assets 108,000 0.6% 272,947 7.7%
Special compensation expense 0 0.0% 5,568,250 157.0%
------------ ---------- ------------ ----------
Total operating expenses 15,075,387 85.9% 7,470,856 210.6%
------------ ---------- ------------ ----------
Loss from operations (7,142,963) (40.7)% (4,959,558) (139.8)%
Net interest expense (227,699) (1.3)% (29,100) (0.8)%
------------ ---------- ------------ ----------
Loss before income taxes (7,370,662) (42.0)% (4,988,658) (140.6)%
Provision (benefit) for income taxes 892,981 5.1% (1,758,539) (49.6)%
------------ ---------- ------------ ----------
Net loss $ (8,263,643) (47.1)% $ (3,230,119) (91.1)%
============ ========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
1997 1996
--------------------------- -----------------------------
<C> <C> <C> <C>
Revenues $27,833,042 100.0% $ 9,275,168 100.0%
Cost of sales 13,487,514 48.5% 2,885,788 31.1%
----------- ------- ------------ -------
Gross profit 14,345,528 51.5% 6,389,380 68.9%
Operating expenses:
Research and development 2,614,075 9.4% 1,686,297 18.2%
Write-off of research and development 9,827,696 35.3% 0 0.0%
Sales and marketing 4,685,859 16.8% 1,505,939 16.2%
General and administrative 2,158,268 7.8% 1,051,474 11.3%
Amortization of intangible assets 108,000 0.4% 819,287 8.8%
Special compensation expense 0 0.0% 5,568,250 60.0%
----------- ------- ------------ -------
Total operating expenses 19,393,898 69.7% 10,631,247 114.6%
----------- ------- ------------ -------
Loss from operations (5,048,370) (18.1)% (4,241,867) (45.7)%
Interest income (expense) 8,221 0.0% (79,595) (0.9)%
----------- ------- ------------ -------
Loss before income taxes (5,040,149) (18.1)% (4,321,462) (46.6)%
Provision (benefit) for income taxes 1,565,230 5.6% (1,758,539) (19.0)%
----------- ------- ------------ -------
Net loss $(6,605,379) (23.7)% $ (2,562,923) (27.6)%
=========== ======= ============ =======
Loss before pro forma income taxes (5,040,149) (18.1)% (4,321,462) (46.6)%
Pro forma provision (benefit) for
income taxes 1,565,230 5.6% (1,623,260) (17.5)%
----------- ------- ------------ -------
Pro forma net loss $(6,605,379) (23.7)% $ (2,698,202) (29.1)%
=========== ======= ============ =======
</TABLE>
8
<PAGE> 9
Discussions of certain matters contained in this Quarterly Report on
Form 10-Q may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, and as such, may involve risks
and uncertainties. These forward-looking statements relate to, among other
things, forecasts and projections regarding the anticipated benefits of the
Company's acquisition and restructuring of E.F. Johnson Company and the future
performance of the Company and its E.F. Johnson subsidiary, expectations of the
business environment in which the Company operates, perceived opportunities in
the market, and statements regarding the Company's mission and vision. The
Company's actual results, performance, and achievements may differ materially
from the results, performance, and achievements expressed or implied in such
forward-looking statements and from historical results. Some of the risks and
uncertainties that might cause such a difference include: the timing of the full
implementation of the Company's restructuring program for E.F. Johnson, the
effects of the restructuring program on the customers, vendors, and employees of
the Company and E.F. Johnson, business conditions generally, the state of the
overall economy, development of the markets for the Company's products,
including the domestic digital land mobile radio market, availability of
third-party compatible products, other competitive factors, and the risks and
uncertainties discussed in the Company's filings and reports filed with the
Securities and Exchange Commission, including those discussed under the caption
"Risk Factors" in the Company's Prospectus dated October 15, 1997, and under the
caption "Item 1. Business -- Summary of Business Considerations and Certain
Factors that may Affect Future Results of Operations and/or Stock Price"
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
The following discussion is intended to provide a better understanding
of the significant changes in trends relating to the Company's financial
condition and results of operations. Management's Discussion and Analysis should
be read in conjunction with the accompanying Condensed Consolidated Financial
Statements and Notes thereto.
Revenues
Sales are recorded as products are shipped and services are rendered
with the exception of system sales, which are generally recognized based upon
performance criteria and customer acceptance. For system sales with extended
delivery dates, sales and cost of sales are recognized under the
percentage-of-completion method as costs are incurred. Profits expected to be
realized on contracts are based on total sales value and the Company's estimates
of costs at completion. These estimates are reviewed and revised periodically
throughout the lives of the contracts, and adjustments to profits resulting from
such revisions are recorded in the accounting period in which the revisions are
made. Revenues increased 394.9% to $17.6 million during the third quarter of
1997 and 106.4% to $27.8 million during the first nine months of 1997, compared
to $3.5 million and $9.3 million, respectively, during the same periods in 1996.
These increases were attributable primarily to the addition of revenues of E.F.
Johnson Company for August and September 1997, as well as increased sales of the
Company's core security products. The Company acquired E.F. Johnson effective
July 31, 1997.
International sales as a percentage of revenues for the three and nine
months ended September 30, 1997, were 33.3% and 50.6%respectively, compared to
77.6% and 57.3% for the same periods in 1996. The Company anticipates that
international sales will continue to represent a significant portion of revenues
in the future, although domestic sales may increase as a percentage of revenues
in the future due to the Company's increased marketing emphasis on domestic
sales, including the
9
<PAGE> 10
expanded marketing domestically of the Company's digital radio products. In
addition, domestic sales as a percentage of revenues increased in the third
quarter of 1997 and will likely remain higher than historical levels in the
future as a result of the acquisition by the Company of the E.F. Johnson
subsidiary in July 1997, due to E.F. Johnson's historically greater emphasis on
domestic sales.
The Company historically has experienced, and in the future expects to
continue to experience, substantial variability in its revenues and
profitability from quarter to quarter. The level of revenues in a particular
quarter vary primarily based upon the timing of large purchase orders, due
principally to the seasonal nature of governmental budgeting processes and the
needs of competing budgetary concerns of its customers during the year. Other
factors that affect the level of revenues 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 its quarterly results are likely to vary for the foreseeable
future.
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 and royalty costs. Gross profit increased to $7.9 million (45.2% gross
margin) for the third quarter of 1997 and $14.3 million (51.5% gross margin) for
the first nine months of 1997, compared to $2.5 million (70.8% gross margin) and
$6.4 million (68.9% gross margin), respectively, for the same periods in 1996.
The increase in gross profit is due primarily to the effects of the acquisition
of E.F. Johnson. The decrease in gross margins is attributable to the
acquisition of E.F. Johnson, as E.F. Johnson's gross margin has historically
been in the range of approximately 35% to 40% while Transcrypt's gross margin
has historically been in the range of approximately 65% to 70%. To the extent
that sales of E.F. Johnson products increase in the future relative to the
Company's historical core security products, gross margins are likely to
decline.
Research and Development
Research and development expenses consist primarily of the costs
associated with research and development personnel, materials, and the
depreciation of research and development equipment and facilities. Research and
development expenses increased to $1.3 million for the third quarter of 1997 and
$2.6 million for the first nine months of 1997, compared to $602,000 and $1.7
million, respectively, for the same periods in 1996 due to the addition of new
members of the engineering staff and the acquisition of E.F. Johnson. However,
research and development expenses as a percentage of sales decreased to 7.4% for
the third quarter of 1997, compared to 17.0% for the third quarter of 1996, due
to greater sales in the 1997 period. The Company continues to devote resources
toward the development of APCO 25 digital land mobile radios ("LMRs") and
telephony and data security products. The Company anticipates that it will
continue to devote increased overall resources to research and development
during 1997 relative to 1996. As a result of the acquisition of E.F. Johnson,
the Company incurred a non-recurring $9.8 million charge in the third quarter of
1997 for the write-off of purchased in-process research and development.
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, bad debt provisions, and trade show
participation. Sales and marketing expenses increased to $2.7 million (15.5% of
sales) for the third quarter of 1997 and $4.7 million (16.8% of sales) for the
first nine months of 1997, compared to $671,000 (18.9% of sales) and $1.5
million (16.2% of sales) for the same periods in 1996. The increases in 1997
were due primarily to the addition of the sales and marketing staff of E.F.
Johnson in the third quarter of 1997, the addition of direct sales personnel and
associated expenses, advertising and tradeshows, and an additional bad debt
provision for the Company's accounts receivable reserves of $3,003,763 for the
first nine months of 1997. The additional bad debt provision was related to an
overall increase in the Company's accounts receivable to $24.8 million at
September 30, 1997, from $4.6 million at December 31, 1996.
10
<PAGE> 11
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. General and administrative expenses increased to
$1.1 million and $2.2 million for the third quarter and first nine months of
1997, compared to $357,000 and $1.1 million for the same periods in 1996. These
increases were attributable primarily to the acquisition of E.F. Johnson and
costs associated with the Company becoming, and maintaining its status as, a
publicly held company in 1997. The Company expects to continue to incur
additional general and administrative expenses in 1997 due to upgrades to its
management information systems. General and administrative expenses as a
percentage of revenues decreased to 6.4% for the third quarter of 1997 and 7.8%
for the first nine months of 1997, compared to 10.1% and 11.3% for the same
periods in 1996.
Amortization of Intangible Assets
Amortization of intangible assets decreased to $108,000 for both the
third quarter and first nine months of 1997, compared to $273,000 and $819,000
for the same periods in 1996. For the first nine months of 1996, intangible
assets consisted primarily of the costs associated with the acquisition of the
Company's business in December 1991. The Company amortized these intangible
assets on a straight-line basis over a 60-month period, which resulted in
amortization expense of $819,000 for the first nine months of 1996. These
intangible assets were fully amortized as of November 30, 1996, and thus no such
amortization expense relating to these intangible assets was incurred in 1997.
In connection with the Company's purchase of all the outstanding shares
of capital stock of E.F. Johnson effective July 31, 1997, the Company recorded
$7.1 million of intangible assets related to such purchase. The Company is
amortizing these intangibles on a straight-line basis over a 5 to 15-year
period. These intangibles resulted in amortization expense of $108,000 (or
$54,000 per month), beginning in August 1997, for the third quarter and
year-to-date 1997.
Net Interest Income or Expense
Interest income consists of interest income earned on cash and
investable funds, and interest expense relates to amounts payable on the
Company's term and installment loans and bank lines of credit. These two items
are netted for each period resulting in either net interest income or net
interest expense. Net interest expense was $228,000 for the third quarter of
1997 and net interest income was $8,000 for the first nine months of 1997,
compared to $29,000 net interest expense for the third quarter of 1996 and net
interest expense of $80,000 for the first nine months of 1996. The increase in
net interest expense during the third quarter of 1997 is due to the effects of
the acquisition of E.F. Johnson. The increase in net interest income for the
first nine months of 1997 is attributable to the repayment of certain debt
during 1997 and an increase in interest income due to investment of a portion of
the net proceeds from the Company's initial public offering in interest bearing
instruments.
Provision for Income Taxes
Prior to June 1996, the Company was organized as a partnership, and
therefore was not subject to income taxation except to the extent that its
earnings were attributed to its partners. The Company converted from a
partnership to a "C" corporation effective June 30, 1996. Pro forma net loss and
pro forma net loss per share calculations reflect a pro forma provision for
income taxes as if the Company had been taxed as a "C" corporation for the first
nine months of 1996.
The Company has benefited and continues to benefit from state tax
credits arising from a 1993 agreement with the State of Nebraska, which results
in annual state income tax credits through 1999. In addition, the Company
utilizes its foreign sales corporation subsidiary located in Guam to exempt from
income taxation a portion of the Company's foreign sales income.
Third quarter 1997 income tax provision included an additional $120,000
charge for increased tax expense relating to tax losses as a result of the
acquisition of E.F. Johnson.
11
<PAGE> 12
Non-recurring Item
Third quarter 1997 and nine months ended September 30, 1997, included a
one-time $9.8 million charge for the write-off of in-process research and
development of E.F. Johnson following the acquisition.
Liquidity and Capital Resources
The Company has financed its operations and met its capital requirements
primarily through cash flow generated from operations, short-term borrowings,
long-term debt, and an initial public offering completed on January 22, 1997.
The Company's operating activities used cash of $6.9 million and $9.2 million in
the third quarter and first nine months of 1997, respectively, and generated
cash of $94,000 and $1.4 million in the same periods of 1996. Cash used in
operating activities in the third quarter and first nine months of 1997
consisted primarily of an increase in accounts receivable and inventory
accounts, offset in part by net income plus depreciation and an increase in
accrued expenses. Cash provided by operating activities consisted primarily of
net income plus depreciation and amortization and a decrease in accounts
receivable, offset in part by a decrease in accrued expenses.
In connection with its entry into the stand-alone product market, the
Company is offering to certain of its customers extended credit terms on these
types of products. Such credit terms will likely result in increased cash used
in operating activities in the future.
Cash used for investing activities, attributable primarily to capital
expenditures in the first nine months of 1997 and capital expenditures and
payments for non-compete agreements for the first nine months of 1996, totaled
$2.3 million and $1.4 million, respectively, during such periods. Capital
expenditures consisted primarily of computer and networking equipment, office
furniture, and manufacturing equipment for both six-month periods and expenses
related to the Phase 2 expansion of the Company's Lincoln facility during the
third quarter of 1997. In May 1997, the Company completed construction, begun in
August 1996, of the 21,000-square foot expansion of its existing Lincoln
facility, primarily to accommodate additional manufacturing capacity. As of
September 30, 1997, the Company had no additional firm commitments for capital
expenditures, although the Company expects to commence construction related to
the Phase 3 expansion of its facilities in the fourth quarter of 1997.
In connection with the Company's purchase of all the outstanding shares
of capital stock of E.F. Johnson effective July 31, 1997, the Company recorded
$10.5 million of additional deferred tax assets. The deferred tax assets
totaling $11.0 million were 14.9% and 38.9% of total assets and stockholders'
equity, respectively, at September 30, 1997. Based upon the current level of
taxable income, management believes that it is more likely than not that future
taxable income will be sufficient to fully utilize all deferred tax assets
recorded.
Financing activities, which have consisted primarily of borrowings under
and payments on an industrial development revenue bond issue ("IDR"), term and
installment notes payable, a construction loan and bank lines of credit, and
proceeds received from the Company's initial public offering completed on
January 22, 1997, resulted in net cash inflows or (outflows) of $16.2 million
and ($276,000) during the first nine months of 1997 and 1996, respectively.
The Company's two term notes were secured by substantially all of the
Company's assets, with interest payable at the bank's regional money market rate
plus 0.5%. The installment note was secured specifically by equipment with
interest at the bank's national prime rate plus 0.5%. The bank lines of credit
provide for working capital and capital advances not to exceed $4.0 million,
with specific advances calculated based upon a percentage of eligible
inventories, accounts receivable and fixed assets. Interest is payable monthly
at the bank's money market rate and is collateralized by substantially all of
the Company's assets. The Company paid off all of the outstanding balances on
the two term notes, the installment note and the bank lines of credit on January
27, 1997.
12
<PAGE> 13
At September 30, 1997, the Company had outstanding $8,526,403 on its
working capital lines of credit. These lines include a working capital revolver
of $3,000,000 and a $35,000,000 working capital line of credit acquired in the
E.F. Johnson purchase. On October 23, 1997, these lines of credit were repaid
in full using a portion of the net proceeds from the Company's secondary
offering as described in Note 12.
The Company had outstanding on its IDR at December 31, 1996, a principal
amount of $850,000, which bore a fixed interest rate of 6.25%, was
non-amortizing and was scheduled to mature in January 2004. On March 25, 1997,
the $850,000 IDR and the Company's construction note payable of $870,000 were
repaid through the issuance of a new IDR totaling $2,850,000. The new IDR is due
in annual principal payments of $140,000 plus interest at a variable rate (4.06%
at September 30, 1997) from March 1, 1998 through March 1, 2007, increasing to
annual principal payments of $145,000 plus interest at a variable rate from
March 1, 2008 through March 1, 2016, with the remaining principal and accrued
interest due on March 1, 2017. At September 30, 1997, the remaining net proceeds
of $487,767 (net of debt offering costs and the aforementioned repayments) were
held in escrow for the Company pending the completion of the Company's
construction project and related purchases of certain fixed assets.
The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future.
The Company believes that cash generated from operations and the net
proceeds from the Company's recently completed secondary offering, together with
the Company's cash, cash equivalents, and lines of credit, will be sufficient to
meet its anticipated cash needs for working capital, capital expenditures, and
business expansion plans through at least 1998.
In connection with the Company's acquisition of E.F. Johnson effective
July 31, 1997, on June 12, 1997, the Company delivered an irrevocable letter of
credit with a face amount of $1.6 million to provide additional collateral under
a surety bond issued by one of E.F. Johnson's bonding companies, and on July 22,
1997, the Company delivered an irrevocable standby letter of credit with a face
amount of $436,000 to one of E.F. Johnson's lenders to provide additional
collateral under certain indebtedness incurred by E.F. Johnson. Both letters of
credit are for a term of one year but are automatically extended annually by the
issuing bank unless otherwise notified by the Company. See "Subsequent Event"
below.
Subsequent Event
On October 20, 1997, the Company completed a secondary offering of
5,175,000 shares of common stock at a price of $21.00 per share. Of the
5,175,000 shares offered, 2,684,481 shares were sold by the Company and
2,490,519 were sold by certain of the Company's stockholders. The Company's net
proceeds from the offering, after underwriting commissions and expenses, were
approximately $52,648,000. The net proceeds from the offering were or will be
used for reduction of bank indebtedness, facilities expansion and improvements,
working capital, potential acquisitions, and general corporate purposes.
On October 23, 1997, the Company used $12.5 million of the net proceeds
from the secondary offering to repay the outstanding balance of the working
capital line of credit and term loan which it had assumed as a result of the
E.F. Johnson acquisition. The Company also exercised its options to purchase the
manufacturing facility of E.F. Johnson located in Waseca, Minnesota. In
conjunction with the repayment of the E.F. Johnson debt, the irrevocable standby
letter of credit in the amount of $436,000 was retired. In addition, the Company
used $3.5 million of the net proceeds from the secondary offering to repay other
credit lines that were accessed during the third quarter.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
13
<PAGE> 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on 8-K.
(a) Exhibits
The following exhibits are being filed herewith:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11 Computation of net income per share.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on August 14, 1997, under
Item 2. "Acquisition or Disposition of Assets" to report the
consummation of the acquisition of E.F. Johnson Company effective July
31, 1997. The Company filed amendments to such Form 8-K on August 21,
1997, and September 23, 1997, to include and update the financial
statements relating to the E.F. Johnson acquisition.
14
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
TRANSCRYPT INTERNATIONAL, INC.
Date: ________________________ By: /s/ JEFFERY L. FULLER
------------------------------------
Jeffery L. Fuller
President and Chief Executive Officer
15
<PAGE> 1
EXHIBIT 11
TRANSCRYPT INTERNATIONAL, INC.
COMPUTATION OF PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Pro Forma Net Loss $(8,263,643) $(3,231,305) $(6,605,379) $(2,564,109)
PRIMARY PRO FORMA NET LOSS PER SHARE
Shares used in this computation:
Weighted average shares outstanding 9,844,087 6,968,712 9,294,108 6,968,712
Dilutive effect of shares under employee stock plans* 0 0 0 0
----------- ----------- ----------- -----------
Common and common equivalent shares 9,844,087 6,968,712 9,294,108 6,968,712
=========== =========== =========== ===========
Primary pro forma net loss per share $ (0.84) $ (0.46) $ (0.71) $ (0.38)
=========== =========== =========== ===========
FULLY-DILUTED PRO FORMA NET LOSS PER SHARE
Shares used in this computation:
Weighted average shares outstanding 9,844,087 6,968,712 9,294,108 6,968,712
Dilutive effect of shares under employee stock plans* 0 0 0 0
----------- ----------- ----------- -----------
Common and common equivalent shares 9,844,087 6,968,712 9,294,108 6,968,712
=========== =========== =========== ===========
Fully-diluted pro forma net loss per share $ (0.84) $ (0.46) $ (0.71) $ (0.38)
=========== =========== =========== ===========
</TABLE>
- ------------
* Common stock equivalents were not included as their effect would be
anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONDENSED CONSOLIDATED FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,746,683
<SECURITIES> 0
<RECEIVABLES> 21,387,915
<ALLOWANCES> 3,434,014
<INVENTORY> 13,574,861
<CURRENT-ASSETS> 47,753,113
<PP&E> 13,652,914
<DEPRECIATION> 2,418,469
<TOTAL-ASSETS> 73,534,237
<CURRENT-LIABILITIES> 39,690,720
<BONDS> 5,636,127
0
0
<COMMON> 101,156
<OTHER-SE> 28,076,066
<TOTAL-LIABILITY-AND-EQUITY> 73,534,237
<SALES> 27,833,042
<TOTAL-REVENUES> 27,833,042
<CGS> 13,487,514
<TOTAL-COSTS> 13,487,514
<OTHER-EXPENSES> 18,531,200
<LOSS-PROVISION> 862,698
<INTEREST-EXPENSE> 8,221
<INCOME-PRETAX> (5,040,149)
<INCOME-TAX> 1,565,230
<INCOME-CONTINUING> (6,605,379)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,605,379)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> (.71)
</TABLE>
