<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission file number 0-21681
TRANSCRYPT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0801192
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4800 NW FIRST 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, $.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 August 13, 1997, 10,115,543 shares of the Registrant's Common
Stock were outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,699,287 $ 0
Accounts receivable, net 7,923,373 4,215,403
Inventory, net 2,718,157 2,261,381
Prepaid expenses and other current assets 176,430 71,196
Deferred tax assets 320,287 196,234
----------- -----------
Total current assets 23,837,534 6,744,214
----------- -----------
Property, plant and equipment, at cost 8,320,682 6,672,832
Less: accumulated depreciation (2,099,066) (1,765,394)
----------- -----------
Net property, plant and equipment 6,221,616 4,907,438
----------- -----------
Deferred tax assets 1,713,190 1,723,190
Intangible assets, net 39,722 38,137
Deferred initial public offering costs 0 568,049
Other assets 39,158 0
----------- -----------
$31,851,220 $13,981,028
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 0 $ 385,694
Revolving line of credit 152,000 1,022,000
Current portion of capitalized lease obligations 6,893 13,803
Current portion of long-term debt 0 581,959
Accounts payable 1,193,043 1,174,364
Income taxes payable 52,496 151,894
Accrued expenses 1,155,920 946,406
----------- -----------
Total current liabilities 2,560,352 4,276,120
----------- -----------
Capitalized lease obligations, net of current portion 0 1,296
Long-term debt, net of current portion 2,850,000 1,838,646
Revolving line of credit 0 792,070
----------- -----------
5,410,352 6,908,132
----------- -----------
Stockholders' equity:
Common stock 92,831 67,831
Additional paid in capital 27,368,184 9,683,381
Retained deficit (1,020,147) (2,678,316)
----------- -----------
26,440,868 7,072,896
----------- -----------
$31,851,220 $13,981,028
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
<PAGE> 3
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 AND FOR THE THREE
MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $5,549,590 $3,147,614 $10,277,993 $5,727,829
Cost of sales 2,232,762 938,609 3,864,889 1,849,747
---------- ---------- ---------- ----------
Gross profit 3,316,828 2,209,005 6,413,104 3,878,082
Operating expenses:
Research and development 682,570 648,562 1,315,789 1,084,618
Sales and marketing 879,095 404,372 1,965,212 835,122
General and administrative 559,154 344,812 1,037,460 694,311
Amortization of intangible assets 0 269,895 0 546,340
---------- ---------- ---------- ----------
Total operating expenses 2,120,819 1,667,641 4,318,461 3,160,391
---------- ---------- ---------- ----------
Income from operations 1,196,009 541,364 2,094,643 717,691
---------- ----------
Net interest income (expense) 159,482 (31,883) 235,870 (50,495)
---------- ---------- ---------- ----------
Income before income taxes 1,355,491 509,481 2,330,513 667,196
Provision for income taxes 379,742 0 672,249 0
---------- ---------- ---------- ----------
Net income $ 975,749 $509,481 $ 1,658,264 $ 667,196
========== ========== ========== ==========
Pro forma information:
Income before pro forma income taxes $1,355,491 $ 509,481 $ 2,330,513 $ 667,196
Pro forma provision for income taxes 379,742 96,715 672,249 134,645
---------- ---------- ---------- ----------
Pro forma net income $975,749 $ 412,766 $ 1,658,264 $ 532,551
========== ========== ========== ==========
Pro forma net income per share $0.10 $0.06 $0.17 $0.08
========== ========== ========== ==========
Shares used to compute net income per share 9,876,806 6,968,712 9,596,406 6,968,712
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
<PAGE> 4
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
1997 1996
------------ ----------
<S> <C> <C>
Net cash flows provided by (used in) operating activities $(2,308,283) $1,275,045
------------ ----------
Cash flows from investing activities:
Purchase of fixed assets (1,572,357) (590,798)
Payments under noncompete agreement 0 (170,000)
------------ ----------
Net cash flows used in investing activities (1,572,357) (760,798)
------------ ----------
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 (3,236,738) (206,970)
Bank overdraft (385,694) 0
Partnership distributions paid 0 (181,001)
Proceeds from IPO, net 18,277,852 0
------------ ----------
Net cash flows provided by (used in) financing activities 16,579,927 (387,971)
------------ ----------
Net increase in cash and cash equivalents 12,699,287 126,276
Cash and cash equivalents, beginning of period 0 291,712
------------ ----------
Cash and cash equivalents, end of period $12,699,287 $ 417,988
============ ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<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 June 30, 1997 and for the six
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 six
months ended June 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. 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 six months ended June 30, 1996.
4. NET INCOME PER SHARE
Net income per share attributable to common stockholders has been
computed using the weighted average number of common stock and common stock
equivalent shares outstanding for the periods ended June 30, 1997.
Pro forma net income per share is computed on the basis of the
weighted average number of partnership interest units outstanding for the
periods ended June 30, 1996, converted into common shares on a one-to-one ratio,
including common stock equivalents.
4
<PAGE> 6
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, options to purchase common stock granted with exercise prices
below the assumed initial public offering price per share during the 12 months
preceding the date of the initial filing of the Registration Statement are
included in the calculation of common equivalent shares, using the treasury
stock method, as if they were outstanding for all periods presented.
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. The Company's net
proceeds from the offering, after underwriting commissions and expenses, were
approximately $17,700,000.
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 are being used
for general working capital purposes and to support the Company's growth and
business strategy.
6. INVENTORY
The following is a summary of inventory at June 30, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Raw materials and supplies, net............ $1,531,905 $1,316,932
Work in progress........................... 536,044 715,032
Finished goods............................. 650,208 229,417
---------- ----------
$2,718,157 $2,261,381
========== ==========
</TABLE>
7. REVOLVING LINES OF CREDIT
The Company has a working capital revolving line of credit not to
exceed $3,000,000, calculated using a specified borrowing base of eligible
inventories and accounts receivable. In addition, the Company has a second
revolving capital line of credit not to exceed $1,000,000, calculated using a
specified borrowing base of certain 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. As of June 30, 1997, the Company had
$152,000 outstanding on the working capital line of credit. The Company has
established an irrevocable standby letter of credit in the amount of $436,000,
payable to creditors of E.F. Johnson Company ("EF 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 EF Johnson
expiring June 12, 1998. Both of such standby letters of credit are automatically
extended annually unless notified.
5
<PAGE> 7
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 development 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 (4.5% at June 30, 1997) starting March 1, 1998 through March 1, 2007,
increasing to annual principal payments, plus interest at a variable rate, of
$145,000 due March 1, 2008 through March 1, 2016, with the remaining principal
and accrued interest due March 1, 2017. At June 30, 1997, the remaining net
proceeds of $650,000 (net of debt offering costs) were held in escrow for the
Company pending the purchase of certain fixed assets by the Company.
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 material adverse effect on the
Company.
10. SUBSEQUENT EVENT
On July 31, 1997, the Company completed the acquisition of EF
Johnson in exchange for cash consideration of $436,000 and the issuance of
832,465 shares of the Company's Common Stock, with an approximate market value
of $10,000,000. Transaction costs and restructuring costs for changes to EF
Johnson's operations are expected to approximate $5,000,000.
EF Johnson develops and manufactures wireless communications
products and systems primarily for the land mobile radio market.
6
<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 as a percentage of revenues during the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------
1997 1996
---------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues............................................... $ 5,549,590 100.0% $3,147,614 100.0%
Costs of sales......................................... 2,232,762 40.2% 938,609 29.8%
----------- ----- ---------- -----
Gross profit........................................... 3,316,828 59.8% 2,209,005 70.2%
Operating expenses:
Research and development................... 682,570 12.3% 648,562 20.6%
Sales and marketing........................ 879,095 15.8% 404,372 12.8%
General and administrative................. 559,154 10.1% 344,812 11.0%
Amortization of intangible assets.......... 0 0.0% 269,895 8.6%
----------- ----- ---------- ------
Total operating expenses....... 2,120,819 38.2% 1,667,641 53.0%
----------- ----- ---------- ------
Income from operations................................. 1,196,009 21.6% 541,364 17.2%
Interest income (expense).............................. 159,482 2.9% (31,883) (1.0)%
----------- ----- ---------- ------
Net income before income taxes......................... 1,355,491 24.4% 509,481 16.2%
Provision for income taxes............................. 379,742 6.8% 0 0.0%
----------- ----- ---------- ------
Net income............................................. $ 975,749 17.6% $ 509,481 16.2%
=========== ===== ========== ======
Income before pro forma income taxes................... $ 1,355,491 24.4% $ 509,481 16.2%
Pro forma provision for income taxes................... 379,742 6.8% 96,715 3.1%
----------- ----- ---------- ------
Pro forma net income................................... $ 975,749 17.6% $ 412,766 13.1%
=========== ===== ========== ======
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------
1997 1996
---------------------- --------------------------
Revenues............................................... $10,277,993 100.0% $ 5,727,829 100.0%
Costs of sales......................................... 3,864,889 37.6% 1,849,747 32.3%
----------- ----- ----------- ------
Gross profit........................................... 6,413,104 62.4% 3,878,082 67.7%
Operating expenses:
Research and development................... 1,315,789 12.8% 1,084,618 18.9%
Sales and marketing........................ 1,965,212 19.1% 835,122 14.6%
General and administrative................. 1,037,460 10.1% 694,311 12.1%
Amortization of intangible assets.......... 0 0.0% 546,340 9.5%
----------- ----- ----------- ------
Total operating expenses....... 4,318,461 42.0% 3,160,391 55.2%
----------- ----- ---------- ------
Income from operations................................. 2,094,643 20.4% 717,691 12.5%
Net interest income (expense).......................... 235,870 2.3% (50,495) (0.9)%
----------- ----- ---------- ------
Income before income taxes............................. 2,330,513 22.7% 667,196 11.6%
Provision for income taxes............................. 672,249 6.5% 0 0.0%
----------- ----- ----------- ------
Net income............................................. $ 1,658,264 16.1% $ 667,196 11.6%
=========== ===== =========== ======
Income before pro forma income taxes................... $ 2,330,513 22.7% $ 667,196 11.6%
Pro forma provision for income taxes................... 672,249 6.5% 134,645 2.4%
----------- ----- ----------- -------
Pro forma net income................................... $ 1,658,264 16.1% $ 532,551 9.3%
=========== ===== =========== =======
</TABLE>
7
<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
restructuring and the future performance of the Company and its EF 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 EF Johnson, the effects of the restructuring program
on the customers, vendors and employees of the Company and EF 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 reports
filed with the Securities and Exchange Commission, including under the caption
"Risk Factors" in the Company's Prospectus dated January 22, 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
The Company recognizes revenues upon shipment of products to its
customers. Revenues increased 76.3% to $5.6 million during the second quarter of
1997 and 79.4% to $10.3 million during the first six months of 1997, compared to
$3.1 million and $5.7 million, respectively, during the same periods in 1996.
These increases were attributable primarily to additional revenues associated
with several large new sales contracts in 1997 in both the Company's core
security and LMR product lines. Sales of the Company's products grew in the
second quarter of 1997 in all of its major product categories, including core
security products for the land mobile radio ("LMR") and cellular telephone
markets (particularly in international markets) as well as the Company's digital
LMR products and Phantom LMRs.
In August 1995, the Company entered into a three-year supply
agreement with Motorola to provide socket scrambler modules at fixed prices for
domestic markets. Such agreement provided for minimum purchases by Motorola of
$3.7 million of socket scrambler modules during the 18-month period beginning on
April 1, 1996 (of which $2.1 million had been purchased as of December 31,
1996). In the first quarter of 1997, this agreement was amended such that
Motorola agreed to complete its minimum purchase commitment by purchasing $1.0
million of socket scrambler modules which are exportable into certain
international markets, which obligation was satisfied by Motorola in the first
quarter of 1997. The Company believes that the opportunity to sell exportable
products into foreign markets through Motorola under the terms of the supply
agreement will, in the future, allow the Company to expand the markets in which
it serves in Latin America and Asia. Sales during the second quarter of 1997
under this agreement were approximately $150,000.
8
<PAGE> 10
International sales as a percentage of revenues for the three and
six months ended June 30, 1997 were 65.2% and 67.3% respectively, compared to
51.1% and 44.8% for the same periods in 1996. Sales of items for export to
several large customers accounted for the majority of the Company's exports in
the second quarter of 1997. 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 expanded marketing domestically of the Company's digital radio products. In
addition, domestic sales as a percentage of revenues may also increase in the
future as a result of the acquisition by the Company of the EF Johnson
subsidiary in July 1997, due to EF 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 which 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, royalty and warranty product costs. Gross profits increased to $3.3
million (59.8% gross margin) for the second quarter of 1997 and $6.4 million
(62.4% gross margin) for the first six months of 1997, compared to $2.2 million
(70.2% gross margin) and $3.9 million (67.7% gross margin), respectively, for
the same periods in 1996. Shipments of the Company's stand-alone LMR and
cellular telephone products, which generally have lower gross margins than
add-on modules and other products, continued strong during the first six months
of 1997 and increased relative to total sales. To the extent that sales of
stand-alone products increase in the future relative to add-on 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 $683,000 for the second quarter of 1997 from
$649,000 for the second quarter of 1996 due to the addition of new members of
the engineering staff. However, research and development expenses as a
percentage of sales decreased to 12.3% for the second quarter of 1997, compared
to 20.6% for the second quarter of 1996, due to greater sales in the 1997
period. The Company continues to develop APCO 25 digital LMR's and telephony
products 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.
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
9
<PAGE> 11
provisions and trade show participation. Sales and marketing expenses increased
to $879,000 (15.8% of sales) for the second quarter of 1997 and $2.0 million
(19.1% of sales) for the first six months of 1997, compared to $404,000 (12.8%
of sales) and $835,000 (14.6% of sales) for the same periods in 1996. The
increases in 1997 were due primarily to the addition of direct sales personnel
and associated expenses, advertising and tradeshows, and an additional bad debt
provision for accounts receivable reserves of $130,000 for the second quarter of
1997 and $570,000 for the first six months of 1997. The additional bad debt
provision was related to an overall increase in the Company's accounts
receivables to $8.7 million at June 30, 1997 from $4.6 million at December 31,
1996. The Company expects to continue its increased commitment to sales and
marketing during 1997 through the addition of direct sales and marketing
personnel, primarily to support the introduction of new products, including
digital LMRs.
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
$559,000 and $1.0 million for the second quarter and first six months of 1997,
compared to $345,000 and $694,000 for the same periods in 1996. These increases
were attributable primarily to the addition of several administrative employees
and costs associated with 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 its publicly-held
status and upgrades to its management information systems. General and
administrative expenses as a percentage of revenues declined to 10.1% for the
second quarter of 1997 and for the first six months of 1997, compared to 11.0%
and 12.1% for the same periods in 1996, due primarily to increased revenues in
1997.
Amortization of Intangible Assets
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 an amortization expense of $546,000 for the first six
months of 1996. These intangible assets were fully amortized as of November 30,
1996, and thus no such amortization expense was incurred in 1997.
In connection with the Company's purchase of all of the outstanding
shares of capital stock of EF Johnson effective July 31, 1997, the Company
believes that a substantial amount of goodwill related to such purchase will be
created as an intangible asset in the third quarter of 1997 and that such asset
will be amortized by the Company beginning in August 1997. The amount of such
intangible asset has not yet been determined as of the date of this filing. See
"Subsequent Event" below.
Net Interest Income or Expense
Net interest income consists of interest income earned on cash and
investable funds, net of interest expense related to amounts payable on the
Company's term and installment loans and bank lines of credit. Net interest
income was $159,000 for the second quarter of 1997 and $236,000 for the first
six months of 1997, compared to a $32,000 interest expense for the second
quarter of 1996 and a $50,000 interest expense for the first six months of 1996.
The increase in net interest income in the 1997 periods is attributable to the
repayment of certain debt during 1997 and an increase in interest income due to
10
<PAGE> 12
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 income
and pro forma net income per share calculations reflect a pro forma provision
for income taxes as if the Company had been taxed as a "C" corporation in the
second quarter of 1996 and the first six 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.
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 $750,000 and $2.3
million in the second quarter and first six months of 1997, respectively, and
generated cash of $294,000 and $1.3 million in the same periods of 1996. Cash
used in operating activities in the second quarter and first six 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 an decrease in accounts
receivable, offset in part by a decrease in accrued expenses.
The deferred tax assets totaling $2.0 million (which resulted
primarily from the stock option related special compensation expense of $5.4
million incurred in September 1996) were 6.4% and 7.7% of total assets and
stockholders' equity, respectively, at June 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.
Cash used for investing activities, attributable primarily to
capital expenditures in the first six months of 1997 and capital expenditures
and payments for non-compete agreements for the first six months of 1996,
totaled $1.6 million and $761,000, 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
second quarter of 1997. In May 1997, the Company completed construction, begun
in August 1996, of the 21,000 square foot expansion of its existing Lincoln
facility, primarily to accommodate additional manufacturing capacity. As of June
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 second half of 1997.
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
11
<PAGE> 13
and bank lines of credit and proceeds received from the Company's initial public
offering completed on January 22, 1997 totaled $16.6 million and $388,000 during
the first six 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.
At June 30, 1997 the Company had outstanding $152,000 on its working
capital line of credit, which bore an interest rate of 8.5% at such date,
payable monthly. The line of credit renews annually and the outstanding balance
is payable on May 31 of each year.
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 (4.5%
at June 30, 1997) from March 1, 1998 through March 1, 2007, increasing to annual
principal payments plus interest at a variable rate of $145,000 from March 1,
2008 through March 1, 2016, with the remaining principal and accrued interest
due on March 1, 2017. At June 30, 1997, the remaining net proceeds of $650,000
(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 of $17.7 million from the sale of Common Stock in the offering
completed on January 22, 1997, 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 1997.
In connection with the Company's acquisition of EF 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 EF 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 EF Johnson's lenders to provide additional
collateral under certain indebtedness incurred by EF 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.
12
<PAGE> 14
Subsequent Event
On July 31, 1997, the Company consummated the acquisition of all of
the outstanding shares of capital stock and certain indebtedness of EF Johnson.
In exchange, the Company paid cash consideration of $436,000 and issued 832,465
shares of the Company's Common Stock, with an approximate market value of $10
million. The Company also granted certain piggyback and demand registration
rights to the recipients of its newly issued shares, pursuant to a Registration
Rights Agreement.
EF Johnson develops and manufactures wireless communications
products and systems primarily for the land mobile radio market. EF Johnson had
net sales of $79.0 million for the fiscal year ended December 31, 1996 and $28.2
million for the six months ended June 30, 1997. EF Johnson incurred a net loss
of $26.5 million in 1996 (including a $13.5 million nonrecurring charge) and a
net loss of $5.4 million for the six months ended June 30, 1997.
As a result of the acquisition of EF Johnson, the Company will, on a
consolidated basis, experience material increases in all major balance sheet
items and in revenues and expenses. The Company intends to continue operating
the business of EF Johnson and has announced a restructuring program for EF
Johnson, including a 25% reduction in EF Johnson's workforce, the phase-out of
low margin products and services, the consolidation of EF Johnson's corporate
headquarters with that of the Company, the elimination of duplicative sales,
marketing and personnel expenses with the Company and the implementation of
stringent cash management policies and expense controls. However, the Company
cannot predict the impact on its future consolidated results of operations due
to the acquisition of EF Johnson, nor can it predict the results of the
restructuring of EF Johnson or whether any of the anticipated benefits of the
acquisition will be realized. Such matters will depend, in part, upon the timing
of the full implementation of the restructuring of EF Johnson, the effects of
the restructuring program on the customers, vendors and employees of the Company
and EF Johnson, and the market for the products and services of the Company and
EF Johnson.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
13
<PAGE> 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securityholders.
(a) On May 6, 1997, the Annual Meeting of Stockholders of the
Company (the "Annual Meeting") was held in Lincoln, Nebraska.
(b) The formal matters voted upon at the Annual Meeting were (i) the
election of two directors to serve until the election of directors in 2000 and
until their respective successors are elected and have qualified, and (ii) the
ratification of Coopers & Lybrand L.L.P. as independent public accountants for
the Company for its fiscal year ended December 31, 1997.
There were 9,065,536 shares of common stock entitled to vote at the
meeting and a total of 7,567,090 shares or 83.5% were represented in person or
by proxy at the Annual Meeting. All proposals were adopted by the stockholders.
The voting was as follows:
ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
For Withhold Authority
--------- ------------------
<S> <C> <C>
Thomas R. Larsen 7,516,890 5,200
Winston J. Wade 7,562,690 4,400
</TABLE>
RATIFICATION OF APPOINTMENT OF COOPERS AND LYBRAND L.L.P.
<TABLE>
<CAPTION>
For Against Abstain Broker non-vote
--------- ------- ------- ---------------
<S> <C> <C> <C>
7,563,010 1,000 3,080 0
</TABLE>
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 June 12, 1997 under Item
5. "Other Events" to report the execution of a letter of intent with EF Johnson
and other parties relating to the Company's acquisition of substantially all of
the assets and assumption of certain liabilities of EF Johnson.
14
<PAGE> 16
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: August 13, 1997 By: /s/ JOHN T. CONNOR
------------------------------------------
John T. Connor
Chairman of the Board of Directors
15
<PAGE> 1
EXHIBIT 11
TRANSCRYPT INTERNATIONAL, INC.
COMPUTATION OF PRO FORMA NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Pro Forma Net income $ 975,749 $ 412,766 $1,658,264 $ 532,551
PRIMARY PRO FORMA NET INCOME PER SHARE
Shares used in this computation:
Weighted average shares
outstanding 9,283,078 6,783,078 9,014,612 6,783,078
Dilutive effect of shares
under employee stock plans 593,728 185,634 581,794 185,634
Common and common
equivalent shares 9,876,806 6,968,712 9,596,406 6,968,712
Primary pro forma net
income per share $0.10 $0.06 $0.17 $0.08
FULLY-DILUTED PRO FORMA NET INCOME PER SHARE
Shares used in this computation:
Weighted average shares
outstanding 9,283,078 6,783,078 9,014,612 6,783,078
Dilutive effect of shares
under employee stock plans 600,316 185,634 601,612 185,634
Common and common
equivalent shares 9,883,394 6,968,712 9,616,224 6,968,712
Fully-diluted pro forma net
income per share $0.10 $0.06 $0.17 $0.08
</TABLE>
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,699,287
<SECURITIES> 0
<RECEIVABLES> 7,923,373
<ALLOWANCES> 737,584
<INVENTORY> 2,718,157
<CURRENT-ASSETS> 23,837,534
<PP&E> 8,320,682
<DEPRECIATION> 2,099,066
<TOTAL-ASSETS> 31,851,220
<CURRENT-LIABILITIES> 2,560,352
<BONDS> 2,850,000
0
0
<COMMON> 92,831
<OTHER-SE> 26,348,037
<TOTAL-LIABILITY-AND-EQUITY> 31,851,220
<SALES> 10,277,993
<TOTAL-REVENUES> 10,277,993
<CGS> 3,864,889
<TOTAL-COSTS> 3,864,889
<OTHER-EXPENSES> 3,642,960
<LOSS-PROVISION> 675,501
<INTEREST-EXPENSE> (235,870)
<INCOME-PRETAX> 2,330,513
<INCOME-TAX> 672,249
<INCOME-CONTINUING> 1,658,264
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,658,264
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
