<PAGE>
UNITED STATES
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
Exchange Act of 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 0-21681
TRANSCRYPT INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 47-0801192
(STATE OR OTHER JURISDICTION 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)
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 15, 1998, 12,946,624 shares of the Registrant's Common Stock
were outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,472 $ 15,384
Investments - 15,900
Accounts receivable, net 12,801 16,008
Receivables - other 429 785
Cost in excess of billings on
uncompleted contracts 1,951 942
Inventory 16,849 18,363
Income tax recoverable 322 1,065
Prepaid expenses 706 478
Deferred tax assets 3,528 3,523
--------- ---------
Total current assets 57,058 72,448
Property, plant and equipment, net 12,342 11,261
Deferred tax assets 8,526 4,504
Intangible assets, net of accumulated amortization 17,016 18,029
Other assets 447 452
--------- ---------
$ 95,389 $ 106,694
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 9,242 $ -
Current portion of long-term debt 159 2,545
Accounts payable 4,097 9,305
Billings in excess of cost on
uncompleted contracts 4,847 6,696
Deferred revenue 958 1,743
Accrued expenses 5,132 7,323
--------- ---------
Total current liabilities 24,435 27,612
Long-term debt, net of current portion 2,587 2,758
Deferred revenue 600 934
--------- ---------
27,622 31,304
--------- ---------
Stockholders' equity:
Preferred stock - -
Common stock 129 129
Additional paid-in capital 90,315 90,315
Accumulated deficit (22,677) (15,054)
--------- ---------
67,767 75,390
--------- ---------
$ 95,389 $ 106,694
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TRANSCRYPT INTERNATIONAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 1998 and 1997
(Unaudited) (in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
---------------------- --------------------
1998 1997 1998 1997
---------- --------- --------- ---------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues $ 14,325 $ 13,428 $ 50,190 $ 19,855
Cost of sales 11,220 9,561 34,983 13,123
---------- --------- --------- ---------
Gross profit 3,105 3,867 15,207 6,732
---------- --------- --------- ---------
Operating expenses:
Research and development 2,174 1,298 6,915 2,614
In-process research and development - 9,828 - 9,828
Sales and marketing 2,626 2,361 9,191 4,034
General and administrative 3,030 1,647 9,858 2,870
Restructuring charge 1,230 - 1,230 -
---------- --------- --------- ---------
Total operating expenses 9,060 15,134 27,194 19,346
---------- --------- --------- ---------
Loss from operations (5,955) (11,267) (11,987) (12,614)
Other expense (119) - (119) -
Interest income 369 119 1,050 436
Interest expense (221) (346) (483) (428)
---------- --------- --------- ---------
Loss before income taxes (5,926) (11,494) (11,539) (12,606)
Income tax benefit (2,030) (468) (3,916) (932)
---------- --------- --------- ---------
Net loss $ (3,896) $ (11,026) $ (7,623) $ (11,674)
---------- --------- --------- ---------
---------- --------- --------- ---------
Net loss per share - Basic and Diluted $ (0.30) $ (1.12) $ (0.59) $ (1.26)
---------- --------- --------- ---------
---------- --------- --------- ---------
Weighted average common shares -
Basic and Diluted 12,946,624 9,844,087 12,946,624 9,275,637
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TRANSCRYPT INTERNATIONAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
------------- ---------------
(Restated)
<S> <C> <C>
Net cash flow used in operating activities $ (14,505) $ (8,839)
---------- ---------
Cash flow from investing activities:
Purchase of fixed assets (2,997) (1,640)
Proceeds from sales of fixed assets 5 2
Purchase of intangible assets - (115)
Purchase of E.F. Johnson Company,
net of cash acquired - (291)
Sale of Investments 15,900 -
---------- ---------
Net cash provided by (used in)
investing activities 12,908 (2,044)
---------- ---------
Cash flow from financing activities:
Borrowings on revolving lines of credit 9,242 -
Issuance of industrial development revenue bonds - 2,850
Payment of industrial development revenue bonds (140) (850)
Debt issuance costs of industrial development
revenue bonds - (75)
Payment on term loans, lines of credit and
capitalized leases (2,417) (3,619)
Bank overdraft - (386)
Proceeds from IPO, net - 17,709
---------- ---------
Net cash provided by financing activities 6,685 15,629
Net increase in cash 5,088 4,747
Cash and cash equivalent, beginning of period 15,384 -
---------- ---------
Cash and cash equivalent, end of period $ 20,472 $ 4,747
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data)
1. GENERAL
The condensed consolidated balance sheet of Transcrypt International, Inc.
("Transcrypt" or the "Company") at December 31, 1997 has been taken from audited
consolidated financial statements at that date and condensed. The condensed
consolidated financial statements as of September 30, 1998 and for the three and
nine months ended September 30, 1998 and 1997 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 presented in this
quarterly report. 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 Company's Annual Report on Form 10-K for
the year ended December 31, 1997. The results of operations and cash flows for
the nine months ended September 30, 1998 are not necessarily indicative of the
results for the entire fiscal year ending December 31, 1998. Where appropriate,
items within the condensed consolidated financial statements have been
reclassified from the previous periods' presentation.
2. ORGANIZATION AND CONSOLIDATION
The Company designs and manufactures information security products, which
prevent unauthorized access to sensitive voice and data communications. These
products are based on a wide range of analog scrambling and digital encryption
technologies and are sold mainly to the land mobile radio ("LMR") and telephony
security markets. The Company also manufactures through its subsidiary, E.F.
Johnson Company ("EFJ"), wireless communications products and systems mainly for
the LMR market. Typical end-users of the Company's products include state, local
and foreign governmental agencies, including police and other public safety
departments, and industrial and commercial organizations such as taxi fleets and
railroads, and construction, oil and gas companies.
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in the consolidation.
3. NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("FAS 128"). FAS 128 requires a basic calculation
of earnings per share ("EPS"), based upon the weighted average number of
common shares outstanding during the period. FAS 128 also requires a diluted
EPS calculation that reflects the potential dilution from common stock
equivalents such as stock options. All current and prior periods' EPS
calculations included herein have been restated under the provisions of FAS
128. As each of the three and nine month periods ended September 30, 1998 and
1997 have net losses, the impact of outstanding stock options on weighted
average common shares is anti-dilutive.
4. 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 $17.7 million.
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 $52.9 million.
A portion of the Company's net proceeds from the offerings were used to
retire installment notes payable, revolving credit facility and term facility of
EFJ. The remaining net proceeds are being used to finance expansion of the
Company's administrative facilities, and for working capital and general
corporate purposes.
<PAGE>
5. INVENTORY
The following is a summary of inventory at September 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
<S> <C> <C>
Raw materials and supplies $ 7,241 $ 7,523
Work in progress 1,616 1,977
Finished goods 7,992 8,863
------- -------
$16,849 $18,363
------- -------
------- -------
</TABLE>
6. REVOLVING LINES OF CREDIT
As of September 30, 1998, the Company had a working capital revolving line
of credit not to exceed $10.0 million. The Company had borrowed $8.8 million on
this line as of September 30, 1998. The Company also had $1.0 million in
letters of credit under the revolving line of credit with $400,000 drawn against
the letters of credit. The Company obtained this line of credit as of December
31, 1997 with U.S. Bank National Association ("U.S. Bank"). The line is
collateralized by substantially all of the assets of the Company. Interest is at
a variable rate and the due date of the credit line is December 31, 1998. The
credit line carries standard restrictive covenants such as limitations on
additional borrowings, capital expenditures, acquisitions and maintenance of
specified financial ratios. On May 21, 1998 the line of credit was amended to
include additional collateral of $10.0 million in time certificates of deposits.
On July 8, 1998, U.S. Bank agreed to waive the Company's violations of its bank
credit facility arising out of the Company's failure to timely provide financial
statements, meet certain financial covenants and provide monthly borrowing base
certificates to U.S. Bank. U.S. Bank also agreed to amend the credit facility by
reducing the Company's required tangible net worth amount to $55 million from
$70 million. On August 6, 1998, U.S. Bank agreed to waive the Company's
noncompliance with the $55 million tangible net worth covenant and to reduce the
Company's required tangible net worth amount to $51 million. On October 20,
1998, U.S. Bank agreed to waive the Company's noncompliance with the $51 million
tangible net worth covenant and to reduce the Company's required tangible net
worth amount to $49 million.
The Company has received proposals for a new revolving line of credit
from several financial institutions including the Company's current bank.
While no assurance can be given, the Company believes that it will
successfully roll over its current revolving line of credit arrangement or
secure a new banking relationship prior to the expiration of the current
revolving line of credit. The new banking relationship may include the
restructuring of the Company's outstanding IDR Bonds totaling $2.7 million.
The Company cannot predict if the terms and conditions reached on a new
revolving line of credit will be more or less favorable than the current
revolving line of credit as the uncertainty of the resolution of the pending
class action lawsuits are negatively impacting the Company's ability to
finalize negotiations on a new revolving line of credit.
7. COMMITMENTS AND CONTINGENCIES
The Company has been named as a defendant in thirteen 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 purported class action was filed in the District Court of Scotts Bluff
County, Nebraska. Certain of the complaints also name one or more former or
current officers of the Company 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 10(b)
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 class action alleges violations of Nebraska securities
laws. The class action complaints seek unspecified compensatory damages,
punitive damages, attorneys' fees and costs. The federal class actions have
been consolidated and lead plaintiff appointed. The Company is not required
to answer or otherwise respond to the federal class action complaints until
after a consolidated complaint is filed.
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 one current and one former officer of the
Company. The complaint contains 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 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.
Although the class action complaints described above do not allege the
amount of damages and other relief that the class action plaintiffs are
seeking, the Company believes the amount of damages ultimately sought by the
plaintiffs will be material. In light of the Company's restatement of
financial information contained in its various registration statements and
prospectuses, the Company believes that there may be an unfavorable outcome
for at least some of the claims asserted in the lawsuits or which may be
asserted in the future against the Company. The Company is attempting to
settle the class action lawsuits with a combination of Company stock and cash
and limits of its directors and officers liability insurance. However, there
can be no assurance that a settlement can be reached. Further, the Company
cannot at this time estimate its ultimate cost if a settlement is reached or
the amount likely to be covered by insurance.
<PAGE>
Many factors will ultimately affect and determine the results of the
pending litigation including whether a settlement can be reached in the class
action lawsuits. The Company can provide no assurances that the outcome of
the pending litigation will not have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
In April 1998, the Securities and Exchange Commission (the "SEC") issued a
formal order of investigation to determine whether violations of certain aspects
of the Federal securities laws had occurred in connection with the Company. At
the present time, the Company is unable to predict whether the SEC is likely to
initiate proceedings against the Company or its affiliated parties relating to
these events.
During 1997, on the basis of product orders placed with the Company by
federal personnel within the Maryland Procurement Office ("MPO"), which acts as
the purchasing arm for various federal agencies in the Washington D.C. area, the
Company shipped approximately $2.2 million worth of encrypted radio equipment
and related items to MPO. MPO has taken the position that the person placing the
orders on behalf of MPO was not authorized to do so, and therefore, has refused
payment. In March 1998, the Company filed a certified contract claim for
payment, which has been denied by the contracting officer.
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 has converted its manufacturing and financial information
system to that currently being utilized by its acquired subsidiary, EFJ. The
Company plans to upgrade to a newer version of the same information system that
will be Year 2000 compliant. The conversion to a Year 2000 compliant system is
anticipated to be completed by mid-year 1999 with the cost estimated to be
between $750,000 and $1.5 million. These expenditures were planned and budgeted
for in an effort to upgrade the quality of the Company's manufacturing and
financial information system and not as a direct remediation of any Year 2000
issues, although that will be a valuable by-product of the upgrade. There are
other computerized systems involved in manufacturing and engineering systems. A
preliminary assessment has been made as to what effect, if any, the Year 2000
issue will have on these systems and whether or not there will be a material
effect on future financial results. As of September 30, 1998, no conclusions
have been drawn. Furthermore, the Company has not yet initiated formal
communications with all of its significant suppliers to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issue. See "ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--IMPACT OF YEAR 2000 ISSUE."
The Company has entered into contracts for the completion of a new addition
to its Lincoln, Nebraska headquarters facility. Total dollar amount of the
contracts is approximately $2.2 million with the total project cost estimated at
approximately $3.0 million.
8. RESTATEMENT OF PRIOR PERIOD CONSOLIDATED FINANCIAL STATEMENTS
On February 6, 1998, the Company issued a press release announcing its
consolidated financial results for 1997. Subsequently, it was determined to be
necessary to restate its previously released results for the three months and
year ended December 31, 1997, the Company's financial statements as of and 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 restatements for the three and nine months ended September 30, 1997
relate primarily to: (i) revenue recognition for certain sales for which
collection was determined to not be reasonably assured or was contingent on a
future event; (ii) revenue recognition for certain sales where a formal written
agreement was not received; (iii) revenue recognized on sales of certain
products which were subsequently returned to the Company; (iv) application of
the percentage of completion method on system contract sales at EFJ, and (v) the
allocation of the purchase price of the EFJ acquisition at July 31, 1997.
The summary of the significant changes for the three and nine months ended
September 30, 1997 is as follows:
<PAGE>
TRANSCRYPT INTERNATIONAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------------------------------
September 30, 1997 September 30, 1997
-------------------------- ------------------------
As Previously As Previously
Reported As Restated Reported As Restated
------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Revenues $ 17,555 $ 13,428 $ 27,833 $ 19,855
Cost of sales 9,623 9,561 13,488 13,123
------------- ----------- --------- -----------
Gross profit 7,932 3,867 14,346 6,732
Operating expenses
Research and development 1,298 1,298 2,614 2,614
In-process research and development 9,828 9,828 9,828 9,828
Sales and marketing 2,721 2,361 4,686 4,034
General and administrative 1,229 1,647 2,266 2,870
------------- ----------- --------- -----------
Total operating expenses 15,075 15,134 19,394 19,346
------------- ----------- --------- -----------
Loss from operations (7,143) (11,267) (5,048) (12,614)
Interest income 119 119 436 436
Interest expense (346) (346) (428) (428)
------------- ----------- --------- -----------
Loss before income taxes (7,371) (11,494) (5,040) (12,606)
Provision (benefit) for income taxes 893 (468) 1,565 (932)
------------- ----------- --------- -----------
Net loss $ (8,264) $ (11,026) $ (6,605) $ (11,674)
------------- ----------- --------- -----------
------------- ----------- --------- -----------
Pro Forma net loss per share -
Basic and Diluted $ (0.84) $ (1.12) $ (0.71) $ (1.26)
------------- ----------- --------- -----------
------------- ----------- --------- -----------
Weighted average common shares-
Basic and Diluted 9,844,087 9,844,087 9,294,108 9,275,637
------------- ----------- --------- -----------
------------- ----------- --------- -----------
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth certain Consolidated Statements of
Operations (in thousands) information as a percentage of revenues during the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
1998 1997
--------------------- --------------------
(Restated)
<S> <C> <C> <C> <C>
Revenues $ 14,325 100.0% $ 13,428 100.0%
Cost of sales 11,220 78.3% 9,561 71.2%
--------- ------ --------- ------
Gross profit 3,105 21.7% 3,867 28.8%
Operating expenses:
Research and development 2,174 15.2% 1,298 9.7%
In-process research and development - 0.0% 9,828 73.2%
Sales and marketing 2,626 18.3% 2,361 17.6%
General and administrative 3,030 21.2% 1,647 12.3%
Restructuring charge 1,230 8.6% - 0.0%
--------- ------ --------- ------
Total operating expenses 9,060 63.2% 15,134 112.7%
--------- ------ --------- ------
Loss from operations (5,955) (41.6)% (11,267) (83.9)%
Other expense (119) (0.8)% - 0.0%
Interest income 369 2.6% 119 0.9%
Interest expense (221) (1.5)% (346) (2.6)%
--------- ------ --------- ------
Loss before income taxes (5,926) (41.4)% (11,494) (85.6)%
Benefit for income taxes (2,030) (14.2)% (468) (3.5)%
--------- ------ --------- ------
Net loss $ (3,896) (27.2)% $ (11,026) (82.1)%
--------- ------ --------- ------
--------- ------ --------- ------
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
1998 1997
--------------------- --------------------
(Restated)
Revenues $ 50,190 100.0% $ 19,855 100.0%
Cost of sales 34,983 69.7% 13,123 66.1%
--------- ------ --------- ------
Gross profit 15,207 30.3% 6,732 33.9%
Operating expenses:
Research and development 6,915 13.8% 2,614 13.2%
In-process research and development - 0.0% 9,828 49.5%
Sales and marketing 9,191 18.3% 4,034 20.3%
General and administrative 9,858 19.6% 2,870 14.5%
Restructuring charge 1,230 2.5% - 0.0%
--------- ------ --------- ------
Total operating expenses 27,194 54.2% 19,346 97.4%
--------- ------ --------- ------
Loss from operations (11,987) (23.9)% (12,614) (63.5)%
Other expense (119) (0.2)% - 0.0%
Interest income 1,050 2.1% 436 2.2%
Interest expense (483) (1.0)% (428) (2.2)%
--------- ------ --------- ------
Loss before income taxes (11,539) (23.0)% (12,606) (63.5)%
Benefit for income taxes (3,916) (7.8)% (932) (4.7)%
--------- ------ --------- ------
Net loss $ (7,623) (15.2)% $ (11,674) (58.8)%
--------- ------ --------- ------
--------- ------ --------- ------
</TABLE>
Discussions of certain matters contained in this Quarterly Report on
Form 10-Q 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 Company's efforts to
either roll over its current line of credit, which expires December 31, 1998,
or secure a new line of credit, outcome of the pending investigation by the
SEC, the effects of the Company's restatement of its financial statements and
other recent events including the reduction in workforce program, 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 Company's
other business plans for the future. The Company's actual results,
performance and achievements may differ materially
<PAGE>
from the results, performance and achievements expressed, suggested or
implied in such forward-looking statements and from historical results due to
a number of factors, including but not limited to the results of Company's
efforts to obtain a new line of credit and terms, the impact of the reduction
in work force on the Company's business, results of operations, financial
condition and liquidity and other risks, risks detailed in "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, 1997.
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 Consolidated Financial Statements and Notes
thereto.
Restatement and Recent Events
On February 6, 1998, the Company issued a press release announcing its
consolidated financial results for 1997. Subsequently, it was determined to be
necessary to restate the Company's previously released results for the three
months and year ended December 31, 1997, the Company's financial statements as
of and 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 restatements relate primarily to: (i) revenue recognition for certain
sales for which collection was determined to not be reasonably assured or was
contingent on a future event, (ii) revenue recognition for certain sales where a
formal written agreement was not received, (iii) revenue recognized on sales of
certain products which were subsequently returned to the Company, (iv)
application of the percentage of completion method on system contract sales at
EFJ and (v) the allocation of the purchase price of the acquisition of EFJ. As a
result, the financial statements of the Company have been restated from amounts
previously reported.
A summary of the significant quarterly changes for the three and nine
months ended September 30, 1997 is set forth in Note 8 of the accompanying Notes
to Condensed Consolidated Financial Statements.
The restatement of the Company's financial statements, class action
lawsuits, SEC investigation and other recent events have had an adverse impact
on the Company's financial condition, results of operations, liquidity and cash
flows. During the quarter ended June 30, 1998, the Company experienced declining
revenues from the first quarter of 1998 and incurred substantial costs primarily
in connection with the audit and legal fees related to the restatement of the
financial statements, severance payments, class action lawsuits, SEC
investigation and Audit Committee investigation. For the quarter ended
September, 30, 1998, the Company continued to experience declining revenues from
the first quarter of 1998, but slightly improved from the second quarter of
1998, and incurred substantial costs primarily in connection with the audit and
legal fees related to the restatement of the financial statements, class action
lawsuits, SEC investigation and Audit Committee investigation, but at a reduced
rate from the second quarter of 1998. Additionally, in August 1998, the Company
implemented a plan to reduce its workforce by approximately 25%. The Company
incurred a restructuring charge in the third quarter of 1998 of approximately
$1.2 million in connection with this reduction in its work force.
These events have had, to varying degrees, an adverse impact on the
Company's relationships with its vendors and customers. A company that
manufactures radios under contract for the Company has required the Company to
supply a letter of credit before radios are shipped to the Company. The Company
did not enter into any new domestic systems contracts during the second or third
quarters of 1998. In addition, in connection with the bidding requirements on
systems contracts with governmental agencies, the bidding procedures often
include the posting of bonds. Although the issuer of the Company's bonds has
continued the maximum amount of bonding coverage available to the Company at $50
million, no assurance can be given that such amount will not be reduced in the
future. On May 21, 1998, the line of credit with U.S. Bank was amended to
include additional collateral of $10.0 million of time certificates of deposit.
On July 8, 1998, U.S. Bank agreed to waive the Company's violations of the
credit facility arising out of the Company's failure to timely provide financial
statements, meet certain financial covenants and provide monthly borrowing base
certificates. U.S. Bank also agreed to amend the credit line by reducing the
Company's required tangible net worth amount to $55 million from $70 million. On
August 6, 1998, U.S. Bank agreed to waive the Company's noncompliance with the
$55 million tangible net worth covenant and to reduce the Company's required
tangible net worth amount to $51 million. On October 20, 1998, U.S. Bank agreed
to waive the Company's noncompliance with the $51 million tangible net worth
covenant and to reduce the Company's required tangible net worth amount to $49
million.
Because of the uncertainties resulting from the restatement and other
recent events, the Company is evaluating all of its product lines, and looking
at various initiatives to reduce operating expenses in order to keep them in
line with revenues. Implementation of any plan resulting from these initiatives,
such as the reduction in workforce program, may result at some future date in
substantial up front cost.
The Company can provide no assurance that the restatement of its financial
statements and the ongoing class action lawsuits and SEC investigation,
regardless of their outcomes, will not continue to have a material adverse
effect on the Company's financial condition, results of operations, liquidity
and cash flows.
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.
<PAGE>
System sales under long-term contracts are accounted for under the
percentage-of-completion method. Under this method, revenues are recognized as
work on a contract progresses. The recognized revenue is that percentage of
estimated total revenue that incurred costs to date bear to estimated total
costs to complete the contract. Revisions in cost and profit estimates are made
when conditions requiring such revisions become known. Anticipated losses on
contracts are recognized in operations as soon as such losses are determined to
be probable and reasonably estimable.
Deferred revenue includes unearned warranty fees on extended product
warranty contracts sold to customers. The Company recognizes the fees based on
the expected warranty repairs to be incurred over the life of the contract.
Deferred revenue also includes an advanced payment received for products to be
sold to a former division of EFJ. The advance payment was negotiated as part of
the sale agreement of the division by EFJ. The advanced payment is recognized as
revenue is earned.
Revenues increased 6.7% to $14.3 million in the third quarter of 1998 and
152.8% to $50.2 million during the first nine months of 1998, compared to $13.4
million and $19.9 million respectively, during the same periods of 1997. These
increases were attributable primarily to revenues derived from the sale of EFJ
products subsequent to July 31, 1997. As a result of the uncertainty raised by
the restatement and recent events discussed above, sales of products, including
LMR systems to governmental agencies, continued to be adversely impacted in the
third quarter of 1998. Sales of products may continue to be adversely impacted
for the foreseeable future.
The Company is experiencing problems with the completion of systems
contracts for certain E.F. Johnson projects begun prior to the Company's
acquisition of EFJ. Although the Company is working to correct these system
problems, no assurance can be given that it will be successful. Even if the
Company is successful in correcting these problems, the Company will incur costs
associated with correcting the systems for which there may be no corresponding
revenues. Further, if the customer for the 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. Further, such an event or the need for the
Company to incur substantial costs to correct the system contract problems being
experienced could materially adversely affect the Company's business, financial
condition, results of operations, liquidity and cash flows.
International sales as a percentage of revenues for the three and nine
months ended September 30, 1998 were approximately 43.0% and 37.6%,
respectively, compared to 20.7% and 33.4% for the same periods in 1997. The
increase on a percentage basis in the three and nine months ended September 30
1998 is primarily due to international sales not being impacted as much as
domestic revenues by the uncertainty raised by the restatement and recent
events discussed above. As a result of the troubled Asian economies, the
Company is experiencing a decline in revenues from the region during 1998 as
compared to 1997. Middle East and Asian revenues for the first nine months of
1998 are down approximately 65% compared to the year ended 1997. While the
Company's revenue for Central and Latin America have increased approximately
61% for the first nine months of 1998 as compared for the year ended 1997.
Revenues in Europe, while a small percentage of overall sales, have increased
approximately 75% for the first nine months of 1998 compared to the year
ended 1997.
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 $3.1 million
(21.7% gross margin) for the third quarter of 1998 and $15.2 million (30.3%
gross margin) for the first nine months of 1998, compared to $3.9 million
(28.8% gross margin) and $6.7 million (33.9% gross margin), respectively, for
the same periods in 1997. The gross margin percentage for the third quarter
of 1998 declined compared to the third quarter of 1997. The decline is
primarily due to product mix and the level of sales not being sufficient to
cover the Company's manufacturing overhead. For the nine months ended
September 30, 1998, the decrease in gross margin was also due to the addition
of EFJ's revenues, which began in August 1997. EFJ products generally have a
lower gross margin compared to Transcrypt's products. Gross margins are
likely to vary in the future based primarily upon the mix of product sales
comprising revenues and the amount of revenues for that period.
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 $2.2 million in the third quarter of 1998 and $6.9 million
for the first nine months of 1998 from $1.3 million in the third quarter of 1997
and $2.6 million for the first nine months of 1997. This increase was primarily
due to the addition of EFJ and an increase in the members of the engineering
staff. Research and development expenses were down from the $2.7 million
incurred in the second quarter of 1998 and the Company believes this expense
will continue to decline in the 4th quarter of 1998.
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. As
a result of the restatement of its financial statements and recent events, the
Company may not have, either currently or in the future, adequate capital
resources or funds to respond to these changes.
<PAGE>
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 $2.6 million in the
third quarter of 1998 from $2.3 million in the third quarter of 1997, primarily
due to an increase in the number of direct sales personnel and associated
expenses. Sales and marketing expenses increased slightly as a percentage of
revenues to 18.3% in the third quarter of 1998 from 17.6% in the third quarter
of 1997. For the first nine months of 1998, sales and marketing expense was $9.2
million compared to $4.0 million in the same period in 1997 for the same reasons
as discussed above concerning the third quarter. However, sales and marketing
expense decreased as a percentage of sales to 18.3% for the first nine months of
1998 from 20.3% in the first nine months of 1997 primarily due to increased
revenues.
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 acquisition of EFJ, the Company recorded $18.0 million of
goodwill and other intangibles at the closing of this acquisition. The Company
is amortizing this amount on a straight-line basis over a period of 5 to 15
years. This amortization began in August 1997. General and administrative
expenses increased to $3.0 million in the third quarter of 1998 and to $9.9
million for the first nine months of 1998 from $1.6 million in the third quarter
of 1997 and $2.9 million for the first nine months of 1997. General and
administrative expenses as a percentage of revenues increased to 21.2% in the
third quarter of 1998 from 12.3% in the third quarter of 1997. For the first
nine months of 1998 and 1997, general and administrative expenses as a
percentage of revenues were 19.6% and 14.5% respectfully. These increases were
attributable primarily to the addition of EFJ and several administrative
employees, the amortization of goodwill and other intangibles and substantial
legal and professional fees incurred with the restatement of the Company's
financial statements and resulting class action lawsuits, severance payments,
SEC and Audit Committee investigations.
Restructuring Charge
The Company incurred a restructuring charge in the third quarter of 1998 of
approximately $1.2 million in connection with the 25% reduction in its work
force. The reduction in force utilized a voluntary severance program which,
among other things, provided outplacement services to the employees who choose
to participate in the program. Management anticipates that the reduction in
workforce will yield a savings of approximately $1.0 million on a quarterly
basis with a majority of the savings coming from reduced cost of goods sold and
the remainder of the savings impacting operating expenses.
Net Interest Income (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 $148,000 in the third quarter of 1998 as compared to ($227,000) in
the third quarter of 1997. Net interest income increased to $567,000 for the
first nine months of 1998 compared to $8,000 for the same period in 1997. With
the increase of bank debt in 1998 and the declining balance of cash and cash
equivalents, interest income declined and will continue to decline while
interest expense will increase on a quarterly basis, as it did in the third
quarter of 1998, over amounts experienced by the Company during the first half
of 1998.
Other Expense, net
Other expense, net for the third quarter of 1998 and for the first nine
months of 1998 was primarily related to the payment of minimum royalties due
under a license agreement.
Benefit for Income Taxes
The Company's effective tax benefit rate for the third quarter of 1998 was
34.3% and for the first nine months of 1998 was 33.9% compared to 4.1% and 7.4%
respectively for the same periods in 1997. The percentages for 1997 were lower
because of non-deductible expense of in-process research and development cost of
$9.8 million.
Liquidity and Capital Resources
Since January 1, 1997, the Company has financed its operations and met its
capital requirements primarily through short-term borrowings, long-term debt and
stock offerings completed on January 22, 1997 and October 15, 1997.
The Company's operating activities used cash of $14.5 million in the first
nine months of 1998 and $8.8 million in the first nine months of 1997. Cash used
in operating activities in the first nine months of 1998 consisted primarily of
a net loss plus a decrease in accounts payable and a decrease in accrued
expenses, offset in part by depreciation and amortization a decrease in
inventory, and a decrease in accounts receivable. The $8.8 million of cash used
in operating activities in the first nine months of 1997 consisted primarily of
a net loss, plus an increase in accounts receivable and inventory accounts,
offset in part by depreciation and an increase in accrued expenses.
<PAGE>
The deferred tax assets totaling $12.1 million were 12.6% and 17.8% of
total assets and stockholders' equity, respectively, at September 30, 1998. In
order to fully realize the deferred tax assets, the Company will have to
generate approximately $35.5 million in taxable income during the net operating
loss carryforward period. Management believes that it is more likely than not
that future taxable income will be sufficient to fully utilize all deferred tax
assets recorded, net of existing valuation allowances.
Cash provided by investing activities of $12.9 million in the first nine
months of 1998 was due to the sale of investments less $3.0 million of capital
expenditures. Capital expenditures for the first nine months of 1998 consisted
primarily of building construction cost, manufacturing equipment, computer
equipment and office furniture. Cash used for investing activities in the first
nine months of 1997 of $2.0 million was attributable to capital expenditures and
the acquisition of EFJ. Capital expenditures for the first nine months of 1997
consisted primarily of computer and networking equipment, office furniture and
manufacturing equipment and construction at the Company's Lincoln facility.
Financing activities provided cash of $6.7 million in the first nine months
of 1998. Financing activities consisted of $9.2 million in borrowings on the
Company's line of credit and payment of long-term debt of $2.6 million. As of
September 30, 1998, the Company had $9.2 million in outstanding indebtedness
under its line of credit with U.S. Bank. On July 8, 1998, U.S. Bank agreed to
waive the Company's violations of its bank credit facility arising out of the
Company's failure to timely provide financial statements, meet certain financial
covenants and provide monthly borrowing base certificates to U.S. Bank. U.S.
Bank also agreed to waive the Company's noncompliance with the tangible net
worth covenant of $55 million and to amend the credit facility by reducing the
Company's required tangible net worth amount to $55 million from $70 million. On
August 6, 1998, U.S. Bank agreed to waive the Company's noncompliance with the
tangible net worth covenant of $55 million and to reduce the Company's required
tangible net worth amount to $51 million. On October 20, 1998, U.S. Bank agreed
to waive the Company's noncompliance with the tangible net worth covenant of $51
million and to reduce the Company's required tangible net worth amount to $49
million.
The Company had outstanding IDR Bonds totaling $2.7 million at
September 30, 1998. The IDR is due in annual principal payments of $140,000
plus interest at a variable rate beginning March 1, 1998 through March 1,
2007, increasing to annual principal payments of $145,000 plus interest at a
variable rate due March 1, 2008 through March 1, 2016, with the remaining
principal and accrued interest due on March 1, 2017. At September 30, 1998,
the remaining net proceeds of $509,000 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 intends to retain earnings, if any, and does not anticipate
paying cash dividends in the foreseeable future.
As of September 30, 1998, the Company had approximately $20.5 million in
cash and cash equivalents, which includes $10.0 million of certificates of
deposit securing the U.S. Bank line of credit. The Company believes that its
cash, cash equivalents, investments, and lines of credit will be sufficient
to meet anticipated cash needs for working capital and capital expenditures
to mid-1999. However, if sales do not increase, vendors impose stricter
payment requirements on the Company, bond coverage is reduced, or the Company
incurs substantial costs to correct the problems being experienced in
connection with completion of systems contracts for certain of EFJ projects
begun prior to the Company's acquisition of EFJ or other unanticipated
substantial costs, the Company may be required to seek additional financing
or funding sources. No assurance can be given that the Company will be able
to obtain such additional funding or financing or be able to obtain it on
satisfactory terms. Additionally, see Note 7. COMMITMENTS AND CONTINGENCIES
above for a discussion regarding certain pending litigation the resolution of
which could materially adversely affect the Company's liquidity, future
operating results, and financial condition.
The Company has received proposals for a new revolving line of credit
from several financial institutions including the Company's current bank.
While no assurance can be given, the Company believes that it will
successfully roll over its current revolving line of credit arrangement or
secure a new banking relationship prior to the expiration of the current
revolving line of credit. The new banking relationship may include the
restructuring of the Company's outstanding IDR Bonds totaling $2.7 million.
The Company cannot predict if the terms and conditions reached on a new
revolving line of credit will be more or less favorable than the current
revolving line of credit as the uncertainty of the resolution of the pending
class action lawsuits are negatively impacting the Company's ability to
finalize negotiations on a new revolving line of credit.
Recently Issued Accounting Standards
In June 1997, FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes standards
for reporting and displaying comprehensive income and its components.
Comprehensive income includes net income and several other items that current
accounting standards require to be recognized outside of net income. SFAS 130 is
effective for years beginning after December 15, 1997. The Company currently has
no items that would cause a differentiation between net income and comprehensive
income.
In June 1997, FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 requires publicly-held enterprises to report certain information
about their operating segments, to report certain enterprise-wide information
about their products and services, their activities in different geographic
areas, and their reliance on major customers, and to also disclose certain
segment information in their interim financial statements. The basis for
determining an enterprise's operating segments is the manner in which management
operates the business. SFAS 131 is effective for financial statements for
periods beginning after December 31, 1997, however implementation is not
required for interim periods in the first year. The Company is continuing to
assess its reporting requirements under SFAS 131 as to whether or not the
Company has more than one operating segment.
<PAGE>
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
In order to correct any problems expected to arise as a result of the Year
2000 issue, the Company has supplied software updates for all of its products.
All products currently being shipped by the Company are Year 2000 compliant.
Should a customer use the Company's software with a personal computer that is
not compliant with the year 2000, at that time, the customer may experience
erroneous dates on reports, but should not experience any operational issues.
The Company has converted its manufacturing and financial information
system to the systems that were being utilized by its acquired subsidiary, EFJ.
These systems are not Year 2000 compliant. The Company plans to upgrade that
system to a newer version of the same software, which is Year 2000 compliant. A
task force has been created to complete this upgrade and information exchange
and planning with the software vendor has commenced. The Company plans to
utilize both internal and external sources to replace the software. A project
manager has been hired whose primary focus will be on Year 2000 compliance. The
conversion is anticipated to be completed by mid-year 1999 with the cost
estimated to be between $750,000 and $1.5 million. A majority of these
expenditures will be capitalized as either software or hardware purchases, with
the remaining expenditures to be expensed as incurred and are not expected to
have a material effect on the results of operations. No material expenditures on
this project have been incurred to date. The source of these funds will come
from the Company's working capital. The Year 2000 budget is not separated from
the information systems budget. The capital expenditures were planned and
budgeted for in an effort to upgrade the quality of the Company's manufacturing
and financial information systems and not as a direct remediation of any Year
2000 issues, although the upgrade has been accelerated as it will be a valuable
by-product in addressing the Company's Year 2000 issue. Ongoing and routine
upgrade purchases of personal computers are an ancillary part of being Year 2000
compliant throughout the organization. The costs of the project and the date on
which the Company plans to complete its Year 2000 compliance are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant problem areas, software vendor
availability and resources to assist the Company in this project given the
demands of many other companies addressing this issue at the same time, and
similar uncertainties.
The upgrade mentioned above only addresses the information technology part
of the Company's state of readiness with Year 2000 issues. There are other
computerized systems involved in manufacturing and engineering systems of the
Company that may contain embedded technology such as microcontrollers. A
preliminary assessment was made as to what effect, if any, the Year 2000 issue
will have on these systems and whether or not there will be a material effect on
future financial results. As of September 30, 1998, no definitive conclusions
have been drawn. Furthermore, the Company has not yet initiated formal
communications with all of its significant suppliers to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues. The Company intends to perform steps to obtain
reasonable verification and written assurances from these suppliers as to their
Year 2000 readiness by June 30, 1999. The Company believes that only three of
its suppliers are critical to avoid any business interruptions in 2000.
If these other internal computerized systems are not found to be Year 2000
compliant and these significant suppliers were to become unable to process
shipments to the Company as a result of Year 2000 issues, it may have a material
adverse effect on the Company's business, results of operations, and financial
condition. There can be no guarantee that the systems of other companies on
which the Company relies upon will be timely converted. The Company does not
currently have any contingency plans to address the event of the Company or a
major supplier not becoming Year 2000 compliant. Whether or not a contingency
plan is created will depend in part on the final evaluation of the other
internal computerized systems and the responses received from inquiries of major
suppliers.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of pending litigation, see NOTE 7. COMMITMENTS AND
CONTINGENCIES above.
ITEMS 2 - 4.
Inapplicable.
ITEM 5. OTHER INFORMATION
Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are being filed herewith:
EXHIBIT NO. DESCRIPTION
---------- -----------
11 Computation of net income per share.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on From 8-K on July 15, 1998, under Item 5.
"Other Events" to report a press release announcing the release of its
audited consolidated financial statements for 1997 (restated), 1996
(restated) and 1995, and the unaudited consolidated financial results for
the first quarter of 1998.
The Company filed a report on Form 8-K on August 13, 1998, under Item 5.
"Other Events" to report the second quarter results of operations and a
reduction in workforce plan.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
TRANSCRYPT INTERNATIONAL, INC.
Date: November 12, 1998 By: /S/ Craig J. Huffaker
-----------------------------------------
Craig J. Huffaker
Chief Financial Officer
(Principal Financial and Accounting
Officer)
<PAGE>
EXHIBIT 11
TRANSCRYPT INTERNATIONAL, INC AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------- --------------------------------------
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
(restated) (restated)
<S> <C> <C> <C> <C>
Net loss $ (3,896) $ (11,026) $ (7,623) $ (11,674)
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
NET INCOME PER SHARE - BASIC
Weighted average common shares - Basic 12,946,624 9,844,087 12,946,624 9,275,637
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Net loss per share - Basic $ (0.30) $ (1.12) $ (0.59) $ (1.26)
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
NET INCOME PER SHARE - DILUTED
Shares used in this computation:
Weighted average common shares - Basic 12,946,624 9,844,087 12,946,624 9,275,637
------------------ ------------------ ------------------ ------------------
Dilutive effect of shares under
employee stock plans (*) - - - -
------------------ ------------------ ------------------ ------------------
Weighted average common shares - Diluted 12,946,624 9,844,087 12,946,624 9,275,637
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Net loss per share - Diluted $ (0.30) $ (1.12) $ (0.59) $ (1.26)
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
</TABLE>
(*) Common stock equivalents were not included as their effect would
be anti-dilutive
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 20,472
<SECURITIES> 0
<RECEIVABLES> 12,801
<ALLOWANCES> 0
<INVENTORY> 16,849
<CURRENT-ASSETS> 57,058
<PP&E> 12,342
<DEPRECIATION> 0
<TOTAL-ASSETS> 95,389
<CURRENT-LIABILITIES> 24,435
<BONDS> 2,587
0
0
<COMMON> 129
<OTHER-SE> 67,637
<TOTAL-LIABILITY-AND-EQUITY> 95,389
<SALES> 50,190
<TOTAL-REVENUES> 50,190
<CGS> 34,983
<TOTAL-COSTS> 34,983
<OTHER-EXPENSES> 26,194<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (567)<F2>
<INCOME-PRETAX> (11,539)
<INCOME-TAX> (3,916)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,623)
<EPS-PRIMARY> (0.59)
<EPS-DILUTED> (0.59)
<FN>
<F1>Other-expenses include a $1.2 million restructuring charge.
<F2>Interest expense is net of $1,050 of Interest Income less $483 of Interest
expense.
</FN>
</TABLE>
