<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): JULY 15, 1998
---------------------------------------------
TRANSCRYPT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-21681 47-0801192
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification Number)
4800 NW FIRST STREET, LINCOLN, NEBRASKA 68521
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (402) 474-4800
<PAGE> 2
Item 5. OTHER EVENTS.
On July 15, 1998, Transcrypt International, Inc. (the
"Company") issued 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.
A copy of the Company's press release is attached as Exhibit 99.1 and the
Company's consolidated financial statements are attached as Exhibit 99.2.
1
<PAGE> 3
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS.
None.
(b) PRO FORMA FINANCIAL INFORMATION.
None.
(c) EXHIBITS.
The following are furnished as exhibits to this report:
23.1 Consent of KPMG Peat Marwick LLP
99.1 News Release issued on July 15, 1998 by the Registrant.
99.2 Consolidated Financial Statements of the Registrant for
1997 (restated), 1996 (restated) and 1995.
2
<PAGE> 4
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: July 14, 1998 By: /s/ JOHN T. CONNOR
--------------------------------------
John T. Connor
Interim Chief Executive Officer
(Principal executive officer and duly
authorized signatory)
3
<PAGE> 5
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
23.1 Consent of KPMG Peat Marwick LLP
99.1 News Release issued on July 15, 1998 by the Registrant.
99.2 Consolidated Financial Statements of the Registrant for 1997
(restated), 1996 (restated) and 1995.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Transcrypt International, Inc.
We consent to incorporation by reference in the registration statement (No.
333-30673) on Form S-8 of Transcrypt International, Inc. (the "Company") of our
report dated June 26, 1998, relating to the consolidated balance sheets of the
Company and its subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, changes in stockholder's equity and cash
flows for each of the years in the three-year period ended December 31, 1997,
which report appears in the Current Report on form 8-K of the Company dated
July 15, 1998.
/s/ KPMG Peat Marwick LLP
Omaha, Nebraska
July 15, 1998
<PAGE> 1
EXHIBIT 99.1
PRESS RELEASE
FOR IMMEDIATE RELEASE
For Further Information:
Contact: Craig Huffaker Jim Stark
Chief Financial Officer or Director, Investor Relations
402-479-8330 402-479-8306
TRANSCRYPT INTERNATIONAL RELEASES AUDITED FINANCIAL STATEMENTS
FOR 1997, 1996 AND 1995 AND UNAUDITED FINANCIALS RESULTS FOR
THE FIRST QUARTER OF 1998
LINCOLN, NEBRASKA, JULY 15, 1998 -- Transcrypt International, Inc. released its
audited consolidated financial statements for 1997 (restated), 1996 (restated)
and 1995 and unaudited consolidated financial results for the first quarter of
1998. KPMG Peat Marwick LLP issued the report on the audited financial
statements. The Company expects to file the audited financial statements on Form
8-K with the Securities and Exchange Commission ("SEC") concurrent with the
press release. Restated revenues for 1997 were $40.4 million as compared to
restated revenues of $10.6 million in 1996. The increase in revenues was due
primarily to revenues generated by the Company's subsidiary, E. F. Johnson
Company ("EFJ") which was acquired July 31, 1997. The net loss for 1997, as
restated, was $10.9 million as compared to a net loss of $4.1 million for 1996,
as restated. The restated loss per share for 1997 and 1996 were $1.09 and $0.61
on a diluted basis, respectively.
The Company has reanalyzed its accounting policies with regard to revenue
recognition. This analysis resulted in the restatement of previously reported
financial results for 1997 and 1996. Revenues for the two-year period were
lowered by approximately $14.5 million and the net loss for the two-year period
increased by approximately $9.1 million.
Timing issues relating to the appropriate period when revenues should be
recognized represent approximately $8.9 million of the lowered revenues for the
two-year period. These timing issues relate to revenue recognition on certain
sales for which collection was determined to not be reasonably assured or was
contingent on a future event, the method of recognizing revenues under the
percentage of completion method on system contract sales at EFJ, and revenue
recognition for certain sales where a formal written agreement was not received.
Approximately $3.5 million of revenues relating to these timing issues were
recognized in the first quarter of 1998. The Company cannot project the
additional amount of revenues or the timing when additional revenues may be
recognized in the future as a result of these timing issues.
(MORE)
<PAGE> 2
Approximately $4.4 million of the lowered revenues were due to contract
disputes. The Company has filed a certified claim with a federal government
agency for payment of $2.2 million in connection with one dispute and the
Company is working to resolve several other contract disputes with customers. It
is undeterminable at this time the amount, if any, that will be collected from
these disputes.
Approximately $1.2 million of revenues have been reversed on a permanent basis
primarily where the Company has subsequently agreed to accept certain products
for return and credit.
Restatements also resulted in an adjustment of approximately $10.9 million to
the opening balance sheet of EFJ in connection with its acquisition. This
adjustment will result in higher amortization expense of goodwill in future
periods.
First Quarter 1998 Performance
Revenues for the first quarter of 1998 were $22.0 million as compared to $3.5
million, as restated, in the first quarter of 1997. Net income for the first
quarter of 1998 was $1.3 million, or $.10 per share on a diluted basis, compared
to $142,000, as restated or $.02 per share on a diluted basis, for the first
quarter of 1997. As stated above, approximately $3.5 million of the $22.0
million of revenues in the first quarter of 1998 related to timing issues.
Strengthening of Internal Controls
Craig J. Huffaker, the Company's Chief Financial Officer and Senior Vice
President of Finance said, "We have initiated tighter monitoring and control
procedures to ensure strict compliance with the Company's revenue recognition
policies moving forward. New accounting policies have been instituted in regards
to government contracts and the use of extended payments terms to customers. We
are also changing the reporting relationship for our order-processing group.
This area will report to finance."
Business Outlook
The delay in receipt of the 1997 audited consolidated financial statements, the
resignation of Coopers & Lybrand L.L.P, as the Company's independent
accountants, the ongoing investigation by the SEC and the resulting uncertainty
of the outcome of the class action lawsuits filed against the Company have
negatively impacted the Company's sales and customer confidence during the
second quarter of 1998.
The Company anticipates that revenues for the second quarter of 1998 will be
between $10 to $13 million. It is anticipated that less than $1.0 million of
second quarter revenues are related to timing issues discussed earlier in this
press release.
(MORE)
<PAGE> 3
As a result of anticipated revenues and substantial costs incurred by the
Company in the second quarter primarily in connection with the audit of the
financial statements and legal fees relating to the restatements, the SEC
investigation, the previously announced Audit Committee investigation and the
class action lawsuits, the Company expects to report a loss in the second
quarter of 1998.
As a result of the restatements, the Company was in default of certain financial
and other covenants under the Company's bank credit facility for which a waiver
has been received. The Company had cash and short-term investments as of June
30, 1998 of approximately $25 million of which $10 million was pledged as
collateral under the Company's bank credit facility. The Company's short-term
borrowings were $8.9 million also as of June 30, 1998.
As previously announced, the Company has appealed the delisting decision of its
common stock with Nasdaq. The Company intends that, if it is unsuccessful in its
appeals, it will reapply to have its stock listed on The Nasdaq Stock Market.
Transcrypt International, Inc., manufactures information security and wireless
communication products that prevent the unauthorized interception on sensitive
voice and data communication.
This press release contains forward-looking statements pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking information is subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected, including
the final results for the second quarter of 1998.
(MORE)
<PAGE> 4
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 and DECEMBER 31, 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(unaudited) (Restated)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 15,594 $ 15,384
Investments 14,150 15,900
Accounts receivable, net 14,986 16,008
Receivables - other 160 785
Cost in excess of billings on uncompleted contracts 3,144 942
Inventory 19,699 18,363
Income tax recoverable 322 1,065
Prepaid expenses 821 478
Deferred tax assets 3,528 3,523
--------- ---------
Total current assets 72,404 72,448
Property, plant and equipment, net 11,538 11,261
Deferred tax assets 3,775 4,504
Intangible assets, net of accumulated amortization 17,683 18,029
Other assets 785 452
--------- ---------
$ 106,185 $ 106,694
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 5,759 $ --
Current portion of long-term debt 162 2,545
Accounts payable 7,320 9,305
Billings in excess of cost on uncompleted contracts 5,723 6,696
Deferred revenue 1,504 1,743
Accrued expenses 5,557 7,323
--------- ---------
Total current liabilities 26,025 27,612
Long-term debt, net of current portion 2,595 2,758
Deferred revenue 859 934
--------- ---------
29,479 31,304
--------- ---------
Stockholders' equity:
Common stock 129 129
Additional paid-in capital 90,315 90,315
Retained deficit (13,738) (15,054)
--------- ---------
76,706 75,390
--------- ---------
$ 106,185 $ 106,694
========= =========
</TABLE>
(MORE)
<PAGE> 5
TRANSCRYPT INTERNATIONAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1998 and 1997 (Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31,
-------------------------------
1998 1997
----------- -----------
(Restated)
<S> <C> <C>
Revenues $ 21,988 $ 3,512
Cost of sales 12,910 1,272
----------- -----------
Gross profit 9,078 2,240
----------- -----------
Operating expenses:
Research and development 2,038 633
Sales and marketing 3,210 942
General and administrative 2,113 572
----------- -----------
Total operating expenses 7,361 2,147
----------- -----------
Income from operations 1,717 93
Other Income 16 --
Interest income 394 125
Interest expense (99) (49)
----------- -----------
Income before income taxes 2,028 169
Provision for income taxes 712 27
----------- -----------
Net income $ 1,316 $ 142
=========== ===========
Net income per share - Basic $ 0.10 $ 0.02
=========== ===========
- Diluted $ 0.10 $ 0.02
=========== ===========
Weighted average common shares - Basic 12,946,624 8,699,745
=========== ===========
- Diluted 13,621,149 9,281,849
=========== ===========
</TABLE>
###
<PAGE> 1
EXHIBIT 99.2
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Page 1
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Transcrypt International, Inc.:
We have audited the accompanying consolidated balance sheets of Transcrypt
International, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Transcrypt International, Inc. and Subsidiaries as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 2, the accompanying consolidated financial statements as of
December 31, 1996 and for the year then ended have been restated.
/s/ KPMG Peat Marwick LLP
Omaha, Nebraska
June 26, 1998
Page 2
<PAGE> 3
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,384 $ --
Investments 15,900 --
Accounts receivable, net of allowance for returns
and doubtful accounts of $2,417 and $430
in 1997 and 1996, respectively 16,008 1,256
Receivables - other 785 29
Cost in excess of billings on uncompleted contracts 942 --
Inventory 18,363 2,853
Income taxes recoverable 1,065 213
Prepaid expenses 478 60
Deferred tax assets 3,523 1,773
------------ ------------
Total current assets 72,448 6,184
Property, plant and equipment, net 11,261 4,325
Deferred tax assets 4,504 439
Intangible assets, net of accumulated amortization 18,029 422
Other assets 452 --
Deferred initial public offering costs -- 568
------------ ------------
$ 106,694 $ 11,938
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ -- $ 386
Revolving line of credit -- 1,022
Current portion of long-term debt 2,545 596
Accounts payable 9,305 1,174
Billings in excess of cost on uncompleted contracts 6,696 --
Deferred revenue 1,743 216
Accrued expenses 7,323 946
------------ ------------
Total current liabilities 27,612 4,340
Long-term debt, net of current portion 2,758 1,840
Revolving line of credit -- 792
Deferred revenue 934 --
------------ ------------
31,304 6,972
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock ($.01 par value; 3,000,000 shares
authorized; none issued) -- --
Common stock ($.01 par value; 19,400,000 voting shares
authorized, 12,729,082 issued and outstanding in 1997
and 6,565,536 issued and outstanding in 1996; 600,000
non-voting shares authorized, 217,542 issued and outstanding) 129 68
Additional paid-in capital 90,315 9,003
Accumulated deficit (15,054) (4,105)
------------ ------------
75,390 4,966
------------ ------------
$ 106,694 $ 11,938
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements
Page 3
<PAGE> 4
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996, and 1995
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues $ 40,423 $ 10,619 $ 8,128
Cost of sales 26,106 4,274 2,983
------------ ------------ ------------
Gross profit 14,317 6,345 5,145
------------ ------------ ------------
Operating costs and expenses:
Research and development 4,469 2,234 1,953
Sales and marketing 7,031 2,187 2,109
General and administrative 4,711 2,529 2,284
Special compensation expense -- 5,568 --
In-process research and development costs 9,828 -- --
------------ ------------ ------------
Total operating costs and expenses 26,039 12,518 6,346
------------ ------------ ------------
Loss from operations (11,722) (6,173) (1,201)
Other income 18 -- --
Interest income 874 31 53
Interest expense (643) (162) (190)
------------ ------------ ------------
Loss before income taxes (11,473) (6,304) (1,338)
Benefit for income taxes (524) (2,186) --
------------ ------------ ------------
Net loss $ (10,949) $ (4,118) $ (1,338)
============ ============ ============
Pro forma information:
Loss before income taxes $ (11,473) $ (6,304) $ (1,338)
Pro forma benefit for income taxes (524) (2,190) (496)
------------ ------------ ------------
Pro forma net loss $ (10,949) $ (4,114) $ (842)
============ ============ ============
Pro forma net loss per share - Basic and Diluted $ (1.09) $ (0.61) $ (0.12)
============ ============ ============
Weighted average common shares - Basic and Diluted 10,056,690 6,783,078 6,783,078
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements
Page 4
<PAGE> 5
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995
(in thousands, except units and share data)
<TABLE>
<CAPTION>
Common Stock
-------------------------------- Additional
Par Paid-in
Units Shares Value Capital
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 5,175,434 -- $ -- $ --
Distributions -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1995 5,175,434 -- -- --
Distributions -- -- -- --
Net loss -- -- -- --
Issuance of stock in exchange
for units of the Predecessor (5,175,434) 5,175,434 52 3,661
Additional shares issued in
1.3106311-for-1 stock split
effected in the form of a
stock dividend -- 1,607,644 16 (16)
Special compensation -
options issued -- -- -- 5,358
------------ ------------ ------------ ------------
Balance, December 31, 1996 -- 6,783,078 68 9,003
Net loss -- -- -- --
Initial public offering, net of
related costs -- 2,500,000 25 17,685
Issuance of shares in connection
with the purchase of the
E.F. Johnson Company -- 832,465 8 9,992
Secondary stock offering, net
of related costs -- 2,684,481 27 52,912
Exercise of stock options -- 146,600 1 228
Income tax benefit of exercise of
stock options -- -- -- 495
------------ ------------ ------------ ------------
Balance, December 31, 1997 -- 12,946,624 $ 129 $ 90,315
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated Partners'
Deficit Capital Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1994 $ -- $ 5,945 $ 5,945
Distributions -- (700) (700)
Net loss -- (1,338) (1,338)
------------ ------------ ------------
Balance, December 31, 1995 -- 3,907 3,907
Distributions -- (181) (181)
Net loss (4,105) (13) (4,118)
Issuance of stock in exchange
for units of the Predecessor -- (3,713) --
Additional shares issued in
1.3106311-for-1 stock split
effected in the form of a
stock dividend -- -- --
Special compensation -
options issued -- -- 5,358
------------ ------------ ------------
Balance, December 31, 1996 (4,105) -- 4,966
Net loss (10,949) -- (10,949)
Initial public offering, net of
related costs -- -- 17,710
Issuance of shares in connection
with the purchase of the
E.F. Johnson Company -- -- 10,000
Secondary stock offering, net
of related costs -- -- 52,939
Exercise of stock options -- -- 229
Income tax benefit of exercise of
stock options -- -- 495
------------ ------------ ------------
Balance, December 31, 1997 $ (15,054) $ -- $ 75,390
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements
Page 5
<PAGE> 6
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996, and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (10,949) $ (4,118) $ (1,338)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Special compensation expense -- 5,358 --
In-process research and development costs 9,828 -- --
Depreciation and amortization 2,206 1,580 1,625
Loss (gain) on sale of fixed assets (15) 6 (2)
Provisions for warranty and inventory reserves 1,100 114 102
Provisions for bad debts 491 82 94
Deferred taxes (706) (2,207) --
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable (9,173) 696 (673)
Cost in excess of billings on uncompleted contracts 201 -- --
Inventory (6,179) (1,733) 83
Income taxes recoverable (357) (213) --
Prepaid expenses and other assets (144) -- 113
Accounts payable (4,855) 997 (117)
Billings in excess of cost on uncompleted contracts (823) -- --
Accrued expenses 325 359 264
Deferred revenue 933 -- (96)
------------ ------------ ------------
Total adjustments (7,168) 5,039 1,393
------------ ------------ ------------
Net cash provided by (used in) operating activities (18,117) 921 55
------------ ------------ ------------
Cash flows from investing activities:
Purchases of investments (15,900) -- --
Issue notes receivable -- -- (12)
Payments received on note receivable -- -- 10
Proceeds from sale of fixed assets 15 31 37
Purchase of fixed assets (2,422) (2,119) (1,029)
Increase in intangible assets -- (581) (1)
Decrease in other assets 118 -- --
Payments on restructuring reserve (2,380) -- --
Acquisition of E.F. Johnson Company, net of cash acquired (292) -- --
Payments under noncompete agreements -- (340) (340)
------------ ------------ ------------
Net cash used in investing activities (20,861) (3,009) (1,335)
------------ ------------ ------------
Cash flows from financing activities:
Payments on revolving lines of credit, net (11,914) 1,022 --
Borrowings on term loans 2,850 1,377 1,016
Payments on term loans (7,634) (408) (867)
Principal payments on capitalized leases -- (16) (13)
Partnership distributions paid -- (181) (700)
Bank overdraft (386) 386 --
Issuance of common stock, net of issuance costs 71,217 -- --
Proceeds from the exercise of employee stock options 229 -- --
Initial public offering costs -- (384) --
------------ ------------ ------------
Net cash provided by (used in) financing activities 54,362 1,796 (564)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 15,384 (292) (1,844)
Cash and cash equivalents, beginning of period -- 292 2,136
------------ ------------ ------------
Cash and cash equivalents, end of period $ 15,384 $ -- $ 292
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements
Page 6
<PAGE> 7
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share data)
1. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed
in the preparation of these consolidated financial statements.
ORGANIZATION
Transcrypt International, 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. One percent of the profits or losses was allocated to the
general partner and the remaining 99% was allocated to the limited
partners based on their respective units of partnership interest.
Effective June 30, 1996, the assets and liabilities of the partnership
were merged tax-free into a Delaware corporation, Transcrypt
International, Inc. (the "Company"). Each respective partnership unit
was converted pro rata into common shares of the Company.
The Company is engaged in the design, manufacture and marketing of
information security products for the land mobile radio, telephony and
data security markets. Through its E.F. Johnson subsidiary, the Company
designs, develops, manufactures and markets stationary land mobile radio
transmitters/receivers and mobile and portable radios. The Company
markets its products to customers worldwide in two broad markets:
business and industrial users and public safety and other governmental
users. Management considers its operations to comprise one industry
segment.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in the consolidation. The
results of operations of E.F.Johnson Company (EFJ) are included from the
date of its acquisition, July 31, 1997.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities less than 90 days as cash equivalents. The Company places its
temporary cash investments with high credit qualified financial
institutions. Such investments are carried at cost, which approximates
fair value.
INVESTMENTS
Investments include Dutch auction securities, which are bought and held
primarily for the purpose of selling them in the near term and,
accordingly, these investments are classified as trading securities.
Trading securities are recorded at fair value and unrealized holding
gains and losses are included in earnings.
Page 7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands except share and per share data)
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INVENTORY
Inventory is recorded at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. The Company's policy
is to capitalize expenditures for major improvements and to charge to
operating expenses the cost of maintenance and repairs. Depreciation is
computed on the straight-line method over the estimated useful lives of
the assets as follows: land improvements - 15 years; buildings and
improvements - 15 to 30 years; equipment and furniture and fixtures - 3
to 7 years. The cost and related accumulated depreciation of assets
retired or otherwise disposed of are eliminated from the respective
accounts at the time of disposition. Any resulting gain or loss is
included in current operating results.
INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over fair value
of assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, 15 years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using
a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
Other intangibles are also carried at cost less applicable amortization.
Provision for amortization of other intangible assets is based upon the
estimated useful lives of the related assets and is computed using the
straight-line method. Intangible assets are being amortized over periods
from 5 to 15 years. Management reviews intangible assets whenever events
or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable.
INCOME TAXES
The Predecessor as a partnership was not subject to Federal or state
income taxes. Any tax liabilities arising from the Predecessor's
operations were the direct responsibility of the individual partners.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in
Page 8
<PAGE> 9
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
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 all years presented. The actual provision
for income taxes for 1996 included in the consolidated statements of
operations is reflective only of the results of operations for the
period that the Company was a C Corporation, July 1, 1996 through
December 31, 1996.
REVENUE RECOGNITION
Revenues are recognized when product is shipped, less an estimate for an
allowance for returns, if applicable, if collection is reasonably
assured. For shipments where collection is not reasonably assured, the
Company recognizes revenue as cash is received. If collection is
contingent on a future event, such as a reseller of product selling the
product to the end user, the Company recognizes revenue when the
contingency lapses, generally upon cash collection.
System sales under long-term contracts are accounted for under the
percentage-of-completion method. Under this method, revenues are
recognized as work on a contract progresses. The recognized revenue is
that percentage of estimated total revenue that incurred costs to date
bear to estimated total costs to complete the contract. Revisions in
cost and profit estimates are made when conditions requiring such
revisions become known. Anticipated losses on contracts are recognized
in operations as soon as such losses are determined to be probable and
reasonably estimable.
Deferred revenue includes unearned warranty fees on extended product
warranty contracts sold to customers. The Company recognizes the fees
based on the expected warranty repairs to be incurred over the life of
the contract. Deferred revenue also includes an 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.
EXPORT SALES
A significant portion of the Company's sales are made to customers
outside of the United States. Export sales are recorded and settled in
U.S. dollars. Export sales by major geographic area were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Europe $ 804 $ 1,960 $ 2,464
Middle East and Asia 7,657 1,525 2,276
Central and Latin America 6,933 2,235 1,060
------------ ------------ ------------
$ 15,394 $ 5,720 $ 5,800
============ ============ ============
</TABLE>
Page 9
<PAGE> 10
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
WARRANTY COSTS
The Company provides for warranty costs based on estimated future
expenditures that will be incurred under product guarantees and
warranties presently in force.
LOSS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (FAS 128), effective as of December 31, 1997.
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 years' EPS calculations included herein
have been restated under the provisions of FAS 128. As the years ended
December 31, 1997, 1996 and 1995 have net losses, the impact of
outstanding stock options on weighted average common shares is anti-
dilutive.
Pro forma net loss per share for 1996 and 1995 is computed on the basis
of the weighted average number of partnership interest units outstanding
during the year converted into common shares on a one-to-one ratio, and
adjusted for the stock split discussed below.
STOCK SPLIT
On September 30, 1996, the Board of Directors and the shareholders
approved an increase in the Company's authorized common shares from 10
million to 20 million shares. On November 18, 1996, the Company declared
a 1.3106311-for-1 stock split in the form of a stock dividend. All
shares and per share information have been restated to reflect the
split.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect carrying amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of
financial statement dates, as well as the reported revenues and expenses
for the years then ended. Actual results may differ from management's
estimates.
2. RESTATEMENT OF 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 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;
Page 10
<PAGE> 11
2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED:
(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. As a result, the financial statements of the Company have
been restated from amounts previously reported.
The summary of the significant changes as of December 31, 1997 and 1996
and for the years then ended is as follows:
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
----------------------------- --------------------------
As previously
Released As Previously
(unaudited) As Restated Reported As Restated
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,384 $ 15,384 $ - $ -
Investments 15,900 15,900 - -
Accounts receivable, net 24,182 16,008 4,216 1,256
Receivables - other 1,803 785 11 29
Cost in excess of billings on uncompleted contracts 3,804 942 - -
Inventory 17,855 18,363 2,261 2,853
Income taxes recoverable - 1,065 - 213
Prepaid expenses and other current assets 478 478 60 60
Deferred tax assets 3,345 3,523 196 1,773
--------- --------- ------- --------
Total current assets 82,751 72,448 6,744 6,184
Property, plant and equipment, net 11,343 11,261 4,908 4,325
Deferred tax assets 6,340 4,504 1,723 439
Intangible assets, net 7,655 18,029 38 422
Other assets 1,193 452 - -
Deferred public offering costs - - 568 568
--------- --------- ------- --------
$ 109,282 $ 106,694 $13,981 $ 11,938
========= ========= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ - $ - $ 386 $ 386
Revolving line of credit and bank notes payable - - 1,022 1,022
Current portion of long-term debt 416 2,545 596 596
Accounts payable 10,526 9,305 1,174 1,174
Billings in excess of cost on uncompleted contracts 1,370 6,696 - -
Income taxes payable - - 152 -
Deferred revenue 1,208 1,743 - 216
Accrued expenses 5,547 7,323 946 946
--------- --------- ------- --------
Total current liabilities 19,067 27,612 4,276 4,340
Long-term debt, net of current portion 4,279 2,758 1,840 1,840
Deferred revenue 1,417 934 - -
Revolving line of credit - - 792 792
--------- --------- ------- --------
24,763 31,304 6,908 6,972
--------- --------- ------- --------
Stockholders' equity:
Common stock 129 129 68 68
Additional paid-in capital 90,995 90,315 9,683 9,003
Accumulated deficit (6,605) (15,054) (2,678) (4,105)
--------- --------- ------- --------
84,519 75,390 7,073 4,966
--------- --------- ------- --------
$ 109,282 $ 106,694 $13,981 $ 11,938
========= ========= ======= ========
</TABLE>
Page 11
<PAGE> 12
2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
---------------------------------------------------------
December 31, 1997 December 31, 1996
----------------------------- --------------------------
As previously
Released As Previously
(unaudited) As Restated Reported As Restated
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues $ 51,762 $ 40,423 $ 13,775 $ 10,619
Cost of sales 27,218 26,106 4,864 4,274
----------- ----------- ----------- -----------
Gross profit 24,544 14,317 8,911 6,345
----------- ----------- ----------- -----------
Operating costs and expenses:
Research and development 4,469 4,469 2,234 2,234
Sales and marketing 8,133 7,031 2,103 2,187
General and administrative 3,382 4,711 2,414 2,529
Special compensation expense - - 5,568 5,568
In-process research and development costs 9,828 9,828 - -
----------- ----------- ----------- -----------
Total operating costs and expenses 25,812 26,039 12,319 12,518
----------- ----------- ----------- -----------
Loss from operations (1,268) (11,722) (3,408) (6,173)
Other income 35 18 - -
Interest income 841 841 30 31
Interest expense (610) (610) (162) (162)
----------- ----------- ----------- -----------
Loss before income taxes (1,002) (11,473) (3,540) (6,304)
Provision (benefit) for income taxes 2,925 (524) (1,529) (2,186)
----------- ----------- ----------- -----------
Net loss $ (3,927) $ (10,949) $ (2,011) $ (4,118)
=========== =========== =========== ===========
Pro forma information:
Loss before pro forma income taxes $ (1,002) $ (11,473) $ (3,540) $ (6,304)
Pro forma provision (benefit) for income taxes 2,925 (524) (1,393) (2,190)
----------- ----------- ----------- -----------
Pro forma net loss $ (3,927) $ (10,949) $ (2,147) $ (4,114)
=========== =========== =========== ===========
Pro forma net loss per share - Basic and Diluted $ (0.39) $ (1.09) $ (0.31) $ (0.61)
=========== =========== =========== ===========
Weighted average common shares - Basic and Diluted 10,056,690 10,056,690 6,968,712 6,783,078
=========== =========== =========== ===========
</TABLE>
Page 12
<PAGE> 13
3. ACQUISITION:
On July 31, 1997, the Company acquired all of the outstanding shares of
capital stock and certain indebtedness of EFJ for $436 in cash and
832,465 shares of common stock, with an approximate market value of
$10,000. The acquisition was accounted for by the purchase method of
accounting. Purchased in-process research and development costs of
$9,828 were written off as the technological feasibility of such
in-process technology had not yet been established and the technology
had no alternative future use. Intangibles recorded as part of the
purchase include goodwill of $10,880, core technology of $891, work
force of $1,374, customer base of $1,561, and trade names of $3,299. The
intangible assets are being amortized over 5 to 15 years (see Note 12
for discussion of restructuring reserve recorded in conjunction with the
acquisition and see Note 2 for discussion of proper allocation of
opening balance sheet for EFJ).
The operating results of EFJ are included in the Company's consolidated
results of operations from the date of acquisition. The following
unaudited pro forma financial information assumes the acquisition
occurred at the beginning of 1996. These results have been prepared for
comparative purposes only and do not purport to be indicative of what
would have occurred had the acquisition been made at the beginning of
1996, or of the results which may occur in the future.
<TABLE>
<CAPTION>
1997 1996
(unaudited) (unaudited)
<S> <C> <C>
Total revenues $ 70,959 $ 89,585
Net loss $ (9,949) $ (32,077)
Loss per share - Basic and $ (0.94) $ (4.21)
Diluted
</TABLE>
4. BILLINGS IN EXCESS OF COSTS ON UNCOMPLETED CONTRACTS:
Amounts included in the consolidated financial statements that relate to
billings on uncompleted contracts in excess of incurred costs as of
December 31, 1997 were as follows:
<TABLE>
<S> <C>
Costs on uncompleted contracts $ 31,814
Profits in uncompleted contracts 13,547
------------
45,361
Less billings 51,115
------------
$ (5,754)
============
Included in the consolidated balance sheet:
Cost in excess of billings on uncompleted contracts $ 942
Billings in excess of cost on uncompleted contracts (6,696)
------------
$ (5,754)
============
</TABLE>
Page 13
<PAGE> 14
4. BILLINGS IN EXCESS OF COSTS ON UNCOMPLETED CONTRACTS, CONTINUED:
Cost in excess of billings on uncompleted contracts includes direct
costs of manufacturing, installation, project management, engineering,
and allocable manufacturing overhead costs and accrued profits in excess
of amounts billed. Billings in excess of costs on uncompleted contracts
includes amounts billed and accrued anticipated losses on open contracts
in excess of costs and accrued profits.
5. INVENTORY:
The following is a summary of inventory at December 31, 1997 and 1996,
net of reserves for obsolescence of $4,114 and $41, respectively
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Raw materials and supplies $ 7,523 $ 1,373
Work in process 1,977 715
Finished goods 8,863 765
---------- ----------
$ 18,363 $ 2,853
========== ==========
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land and land improvements $ 262 $ 150
Buildings and improvements 4,860 1,302
Equipment 8,152 3,380
Leased equipment 136 74
Furniture and fixtures 1,255 397
Construction in progress 178 797
---------- ----------
14,843 6,100
Less accumulated depreciation and amortization 3,582 1,775
---------- ----------
$ 11,261 $ 4,325
========== ==========
</TABLE>
Page 14
<PAGE> 15
7. INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Goodwill $ 10,880 $ 290
Proprietary technology and licensing agreements 3,763 3,756
Acquired work force, customer base, trade name 6,234 117
Non-compete agreements -- 1,700
Other 1,038 43
---------- ----------
21,915 5,906
Less accumulated amortization 3,886 5,484
---------- ----------
$ 18,029 $ 422
========== ==========
</TABLE>
8. REVOLVING LINES OF CREDIT:
The Company has several lines of credit with regional banks. One is a
working capital revolving line of credit not to exceed $3,000 calculated
using a specified borrowing base of eligible inventories and accounts
receivable. This line of credit was due as of June 30, 1998 and was not
renewed. Interest for the line of credit is payable monthly at a
regional bank's national money market rate. At December 31, 1997, the
Company opened up a secured line of credit not to exceed $10,000 with
another regional bank. Interest is at a variable rate, 1.00% under the
highest prime rate published in the Wall Street Journal. This line of
credit is due on December 30, 1998. The working capital lines are
collateralized by substantially all the Company's assets and the capital
line is collateralized by certain fixed assets. EFJ had a working
capital and term loan of approximately $13,200 when it was acquired on
July 31, 1997. This loan was paid off in October 1997 with a portion of
the proceeds from the Company's secondary stock offering.
At December 31, 1997, the Company had no amounts outstanding on these
lines of credit. The weighted average interest rate was 8.5% during 1997
and 8.3% during 1996. Average borrowings under the Company's lines of
credit and the weighted average interest rate during 1997 were $761 and
8.5% and during 1996 were $256 and 8.3%. The total available credit as
of December 31, 1997 was $13,000 under the above lines.
Page 15
<PAGE> 16
9. LONG-TERM DEBT:
Long-term debt at December 31, 1997 and 1996 consists of the following
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Term note payable to bank due in monthly installments of $18 including
interest at 7.75% based on a specified rate of a regional bank. The
note was collateralized by substantially all the assets of the Company
in addition to the personal guarantees of certain stockholders
$ -- $ 251
Term note payable to bank due in monthly installments of $14 including
interest at 8% based on a specified rate of a regional bank. The note
was collateralized by essentially all the assets of the Company in
addition to personal guarantees of certain stockholders
-- 376
Installment note for equipment purchase payable to bank due in monthly
installments of $10 including daily adjusted interest at a specified
rate above the prime rate. The note was collateralized by specific
equipment and inventory. The note was guaranteed by a stockholder
-- 359
Industrial development revenue bonds (IDR) payable to bank with interest
payments due March 1 and September 1 and annual principal payments of
$140 beginning March 1, 1998 at variable interest rates with principal
due on March 1, 2017. This note is collateralized by a deed of trust 2,850 850
Construction note payable to bank, due in August 1997, including
interest at 8.75% -- 585
Capital lease obligation, due in monthly principal and interest
installments of $32 through July 31, 2002, effective interest rate of
9.1% per annum, secured by land and building 2,400 --
Other capital lease obligations 53 15
---------- ----------
5,303 2,436
Less current portion 2,545 596
---------- ----------
$ 2,758 $ 1,840
========== ==========
</TABLE>
Page 16
<PAGE> 17
9. LONG-TERM DEBT, CONTINUED:
The agreements of the term notes payable and the revolving lines of
credit discussed in Note 8 require, among other things, that the Company
maintain certain levels of working capital, net worth and debt-to-equity
ratios and limit capital expenditures, investments, other indebtedness,
distributions, mergers and acquisitions. At December 31, 1997, the
Company was in compliance with these debt covenants or had obtained the
appropriate waivers. The IDR bonds require the Company to maintain at all
times a letter of credit in an amount at least equal to 103% of the
aggregate principal amount of bonds then outstanding plus a specified
portion of interest payable.
Future minimum long-term debt payments for the next five years are $140
per annum on the IDR bonds.
The term and installment notes payable were retired using a portion of
the net proceeds from the initial public offering.
10. LEASE OBLIGATIONS:
The Company leases certain buildings and improvements under an
arrangement which is accounted for as a capital lease. The lease requires
monthly installments of $52, including an effective average annual
interest rate of 7.8% through July 31, 2002. In January 1998, the Company
exercised an option to buy the building and improvements under this
capital lease. Accordingly, the balance of $2,400 under this capital
lease has been classified as current.
The Company also leases various equipment, automobiles and buildings
under operating leases. Rent expense for the year ended December 31, 1997
was $520 and was immaterial in 1996 and 1995. Future minimum rental
payments under noncancelable operating lease agreements are as follows:
<TABLE>
<CAPTION>
Year Ending December 31
-----------------------
<S> <C>
1998 $ 610
1999 432
2000 310
2001 274
2002 4
Thereafter 8
-------
Total minimum lease payments $ 1,638
=======
</TABLE>
Page 17
<PAGE> 18
11. INCOME TAXES:
The components of the benefit for income taxes for the period ending
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Current:
Federal $ 163 $ 21
State 19 --
------- -------
182 21
------- -------
Deferred:
Federal (637) (2,207)
State (69) --
------- -------
(706) (2,207)
------- -------
$ (524) $(2,186)
======= =======
</TABLE>
The Company's effective tax rate on pretax loss differs from U.S.
federal statutory tax rate as follows.
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
<S> <C> <C> <C> <C>
U.S. federal tax at statutory tax rate $(3,901) (34.0%) $(2,143) (34.0%)
Income taxable directly to partners of the
Predecessor -- -- 4 --
In-process research and development costs 3,341 29.1 -- --
Benefit of foreign sales corporation (61) (0.5) (53) (0.7)
State taxes, net of federal benefit (33) (0.3) -- --
Non deductible amortization 49 0.4 -- --
Other 81 0.7 6 --
------- ------- ------- -------
$ (524) (4.6%) $(2,186) (34.7%)
======= ======= ======= =======
</TABLE>
Page 18
<PAGE> 19
11. INCOME TAXES, CONTINUED:
Temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities that give rise to deferred income
taxes at December 31, 1997 and 1996 relate to the following. The 1997
amounts include deferred tax assets resulting from the EFJ acquisition on
July 31, 1997:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Special compensation expense $ 1,403 $ 1,822
Allowance for bad debts 993 58
Net operating loss carryforwards 5,549 376
Difference between tax and book amortization 1,547 --
Difference between tax and book liability accruals 1,939 55
------- -------
Gross deferred tax assets 11,431 2,311
Less valuation allowance 3,000 --
------- -------
8,431 2,311
------- -------
Deferred tax liabilities:
Difference between tax and book depreciation 404 99
------- -------
Net deferred asset $ 8,027 $ 2,212
======= =======
</TABLE>
There was no valuation allowance for deferred tax assets as of January 1,
1997, 1996 and 1995. A valuation allowance of $3,000 was established at
the time of the purchase of EFJ. Any subsequently recognized tax benefits
relating to the valuation allowance as of December 31, 1997 will be
allocated to goodwill. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. In order
to fully realize the deferred tax asset, the Company will need to
generate future taxable income prior to expiration of the net operating
loss carryforwards. Taxable losses for the year ended December 31, 1997
and the six months ended December 31, 1996 were approximately ($7,800)
and ($1,300), respectively. Based upon the level of historical taxable
income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more
likely than not the Company will realize the benefits of these deductible
differences, net of existing valuation allowances at December 31, 1997.
The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
Net operating loss carryforwards, which originated in 1997 and 1996, will
begin to expire in 2011. The Company has approximately $8,600 in Federal
and state net operating loss
Page 19
<PAGE> 20
11. INCOME TAXES, CONTINUED:
carryforwards attributable to EFJ which expire in 2012. Tax regulations
limit the amount that may be utilized on annual basis to approximately
$588.
12. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Payroll, bonuses and employee benefits $1,534 $ 329
Warranty reserve 806 73
Commissions 789 101
Special compensation expense -- 210
Restructuring reserve 2,581 --
Other expenses 1,613 233
------ ------
$7,323 $ 946
====== ======
</TABLE>
In connection with the acquisition of EFJ, a portion of the purchase
price was allocated to a restructuring reserve to cover costs associated
with the purchase such as severance and relocation costs. A reserve of
$4,961 was recorded, and as of December 31, 1997, $2,380 has been
expended. The EFJ workforce was reduced by 105 employees across all lines
of the organization.
13. COMMITMENTS AND CONTINGENCIES:
The Company has been named as a defendant in several class action
lawsuits that were filed subsequent to the Company's announcement on
March 27, 1998 that the filing of its Annual Report on Form 10-K for year
ended December 31, 1997 would be delayed and that adjustments would be
made to the Company's previously announced financial results. Between
March 31, 1998 and May 27, 1998, twelve purported class action lawsuits
were filed against the Company in the United States District Court for
the District of Nebraska, and one complaint was filed in the District
Court of Scotts Bluff County, Nebraska. Certain of the complaints also
name one or more 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 complaints generally allege claims under Sections 10 and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,
and relate primarily to allegations of false and misleading financial
statements and representations and material omissions by the Company. The
Nebraska action alleges violations of Nebraska securities laws. The
complaints seek unspecified compensatory damages, punitive damages,
attorneys' fees and costs. The plaintiffs in the Federal actions have
stipulated to the consolidation of the Federal actions and the
appointment of a lead plaintiff(s). The Company is not required to answer
or otherwise respond to the federal complaints until after the lead
plaintiff(s) files a consolidated complaint.
Page 20
<PAGE> 21
13. COMMITMENTS AND CONTINGENCIES, CONTINUED:
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 complaints described above do not allege the amount of
damages and other relief that the plaintiffs are seeking, the Company
believes the amount of damages ultimately sought by the plaintiffs will
be significant. 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 believes
that the stockholder class actions are more likely to settle than proceed
to trial, judgment and appeal. Given the circumstances of these cases,
the terms of a settlement would be structured in a manner to avoid
causing the Company to seek protection under the federal bankruptcy
reorganization laws. In any circumstances where the Company could not
structure a settlement of all claims within its financial resources, it
would vigorously defend any attempt to establish the amount of liability
or to require payment beyond its resources. Many factors will ultimately
affect and determine the results of the litigation however, and the
Company can provide no assurances that the outcome will not have a
significant adverse effect on the Company's business, financial
condition, results of operations and cash flows.
In April 1998, the Securities and Exchange Commission ("SEC") issued a
formal order of investigation to determine whether violations of certain
aspects of the Federal securities laws had occurred in connection with
the Company. 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. Alternatively,
the Company has requested ratification, by
Page 21
<PAGE> 22
13. COMMITMENTS AND CONTINGENCIES, CONTINUED:
which MPO would treat the procurement as an authorized commitment. To
date, MPO has rejected ratification. The contract claim is pending, and
the Company is unable to predict whether the likelihood of a favorable
final outcome is probable or remote.
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 agreed to pay fees totaling $350 to its chairman and chief
executive officer for initiating the purchase of the net assets of
Transcrypt International, Incorporated in 1991. Payment was contingent
upon the original limited partners receiving capital distributions equal
to their original capital contributions or upon the approval of the Board
of Directors of the Company for the sale of equity interests in the
Company to the public. Payments of $70 were made as of December 31, 1995
and an additional payment of $70 was approved and paid during February
1996. These payments were accounted for as a bonus and the officer waived
his rights to receive fees to the extent of such payments. The Board of
Directors approved the payment of the remaining $210 fees on September
30, 1996. These remaining fees are included in special compensation
expense in the consolidated statements of operations. The $210 was paid
in February 1997.
In the normal course of its business activities, the Company is required
under a contract with various governmental authorities to provide letters
of credit and bonds that may be drawn upon if the Company fails to
perform under its contracts. The letters of credit, which expire on
various dates in 1998, have a total undrawn balance of $2.1 million, and
bonds which expire on various dates through 1999, totaling $22.4 million
at December 31, 1997.
As a result of the EFJ acquisition, the Company has an agreement with a
vendor to purchase certain annual dollar volume of products. In the event
the Company fails to purchase the minimum volume, it must pay a penalty
equal to 35% of the shortfall. In 1997, the Company paid $396 as a result
of this take or pay contract. Future minimum purchase quantities are as
follows: 1998 - $2,500; 1999 - $2,500; 2000 - $391. The Company does not
anticipate meeting its future minimum purchase commitments. This
shortfall was anticipated and accrued as a liability in the allocation of
the purchase price for EFJ.
The Company is in the process of converting its manufacturing and
financial information system to that currently being utilized by its
acquired subsidiary, EFJ. Once converted, the Company will then upgrade
to a newer version of the same information system or will purchase a
separate 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 from $750 to $1,500. 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 issue, 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 December 31, 1997,
Page 22
<PAGE> 23
13. COMMITMENTS AND CONTINGENCIES, CONTINUED:
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.
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 $2,250 with the total project
cost estimated at approximately $3,000.
14. OPTION PLANS:
In January 1992, the Board of Directors approved a 1992 Partnership
Interest Option Plan which provided for the granting of up to 1,297,525
units of non-qualified interest options to certain officers and key
employees. Under the Plan, the exercise price for the options was the
fair market value at the date of grant as determined by the Board of
Directors. The term of each option granted will in no event exceed 10
years from the date of grant. Effective June 30, 1996, the unit options
were converted to stock options on a one to one ratio. No options were
exercisable under the Plan provisions until the Board of Directors
approved granting of all reserved options and full vesting of the 716,916
stock options then outstanding on September 30, 1996. The vesting
resulted in a special compensation charge of $5,358 in the quarter ended
September 30, 1996.
Effective as of September 6, 1996, the Company established the 1996 Stock
Incentive Plan (the "Plan"). Any employee, including any director of the
Company, and any non-employee director or independent contractor of the
Company is eligible to be considered for the issuance of shares of common
stock, $0.01 par value per share, of the Company or of any other class of
security or right of the Company which is convertible into common stock.
The aggregate number of shares issued under the Plan shall not exceed
1,200,000. The aforementioned 716,916 options have been issued under the
Plan, all of which are vested and compensation recognized. The Plan
provides that unless otherwise provided by the Plan committee any stock
option granted shall have an exercise price not less than 100% of the
market value of a share of common stock on the date the option is granted
and that the term of such option shall be ten years from date of grant
with vesting of the options at a rate of 20% per year. In January 1997,
the Company granted stock options for an additional 325,000 shares, with
an exercise price equal to the price per share in the initial public
offering.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Had
Page 23
<PAGE> 24
14. OPTION PLANS, CONTINUED:
compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards in 1997 and 1996
consistent with the provisions of SFAS No. 123, the Company's pro forma
net loss and pro forma loss per share would have been as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Pro forma net loss - as reported $ (10,949) $ (4,114)
Pro forma net loss - as adjusted under SFAS No. 123 (11,149) (4,114)
Pro forma net loss per share - as reported:
Basic and Diluted (1.09) (.61)
Pro forma net loss per share - as adjusted under SFAS No. 123:
Basic and Diluted (1.11) (.61)
</TABLE>
Fair value of the options was not determinable prior to September 30,
1996 when the Board of Directors approved full vesting of the outstanding
options. No options were granted subsequent to September 30, 1996, during
the year ended December 31, 1996. The weighted average fair value at date
of grant for options granted during 1997 was $7.92.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for options granted:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Expected option life 10 years 10 years
Expected annual volatility 68% N/A
Risk-free interest rate 6.62% 6.50%
Dividend yield 0% 0%
</TABLE>
Page 24
<PAGE> 25
14. OPTION PLANS, CONTINUED:
The status of stock options under the Plan are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
-------- -------- -----------
<S> <C> <C> <C>
Balance at December 31, 1994 1,140,905 $ .96 --
Granted 137,617 3.05
Exercised -- --
Forfeited (813,903) 1.22
--------- --------
Balance at December 31, 1995 464,619 1.13 --
Granted 252,297 3.05
Exercised -- --
Forfeited -- --
--------- --------
Balance at December 31, 1996 716,916 1.81 716,916
Granted 459,600 10.29
Exercised (146,600) 1.57
Forfeited (146,383) 10.01
--------- --------
Balance at December 31, 1997 883,533 $ 4.90 553,933
========= ========
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER EXERCISABLE
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT WEIGHTED
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, AVERAGE
EXERCISE PRICE 1997 LIFE PRICE 1997 EXERCISE PRICE
- --------------- -------------- ----------- -------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.760 294,257 7.67 $ 0.7600 294,257 $ 0.760
$ 3.050 259,676 8.15 $ 3.0500 259,676 $ 3.050
$ 8.000 259,000 9.06 $ 8.0000 -- $ --
$ 11.375 30,000 9.58 $11.3750 -- $ --
$ 21.688 30,000 9.79 $21.6880 -- $ --
$ 23.500 10,000 9.88 $23.5000 -- $ --
$ 24.875 600 10.00 $24.8750 -- $ --
- --------------- -------- -------- -------- -------- --------
$0.76 - $24.875 883,533 8.14 $ 4.9002 553,933 $ 1.8335
=============== ======== ======== ======== ======== ========
</TABLE>
Page 25
<PAGE> 26
15. BENEFIT PLANS:
The Company has a profit sharing plan which covers substantially all
employees. Contribution levels are determined by the Board of Directors
annually. Profit sharing expense approximated $100, $60 and $27 for the
years ended December 31, 1997, 1996 and 1995, respectively.
The Company also has a 401(k) plan which covers substantially all
employees. Participants may contribute up to 10% of their annual
compensation and the Company makes matching contributions of 25% of the
amount contributed by participants. Contributions may not exceed the
maximum allowable by law. Company contributions approximated $111, $16
and $13 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Company does not currently provide post-retirement healthcare
benefits.
16. CONCENTRATIONS:
Sales to major customers were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Individual customers representing 10% or
more of consolidated sales in each year:
Customer A $ -- $ -- $ 849
Customer B $ -- $ 2,180 $ --
Customer C $ 4,374 $ -- $ --
</TABLE>
In addition, a substantial portion of the Company's revenue is from
customers in the governmental sector, both domestic and foreign. The
Company's policy does not require significant collateral or other
security to support such receivables.
In addition to being a major customer, Motorola is also a key
manufacturer of electronic components used by the Company. Purchases by
the Company from Motorola totaled approximately $3,862, $1,878, and $726
in 1997, 1996, and 1995, respectively.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents, accounts receivable,
receivable-other, cost in excess of billings on uncompleted contracts,
prepaid expenses, bank overdraft, accounts payable, billings in excess of
cost on uncompleted contracts, income taxes payable, accrued expenses
approximate fair value because of the short maturity of these
instruments. The carrying amount of long-term debt and the revolving line
of credit approximate fair value as calculated by discounting the future
cash flows of each instrument at rates currently offered to the Company
for similar debt instruments of comparable maturities by the Company's
bankers.
Page 26
<PAGE> 27
18. STOCK OFFERINGS:
On January 22, 1997, the Company completed an initial public offering of
2,900,000 shares of common stock at a price of $8.00 per share. Of the
2,900,000 shares offered, 2,500,000 shares were sold by the Company and
400,000 were sold by certain of the Company's stockholders. The Company's
net proceeds from the offering, after underwriting commissions and
expenses, were approximately $17,710.
A portion of the Company's net proceeds from the offering was used to
retire the term and installment notes payable and the revolving lines of
credit. The remaining net proceeds were used for general working capital
purposes and to support the Company's growth and business strategy.
On October 15, 1997, the Company completed a secondary public offering of
3,175,000 shares of common stock at a price of $21.00 per share. Of the
3,175,000 shares offered, 2,684,481 shares were sold by the Company and
490,519 were sold by certain of the Company's stockholders. The Company's
net proceeds from the offering, after underwriting commissions and
expenses, were approximately $52,939.
A portion of the Company's net proceeds from the offering was used to
retire the revolving credit facility and term facility of EFJ. The
remaining net proceeds have been and will be used to finance expansion
and modernization of the Company's manufacturing and administrative
facilities, and for working capital and general corporate purposes.
19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid by the Company during the years ended December 31, 1997,
1996 and 1995 amounted to $618, $163 and $190, respectively. Income taxes
paid, net of refunds, during the years ended December 31, 1997 and 1996
were $642 and $294, respectively.
During 1996, the Company made non-cash additions to property, plant and
equipment and deferred initial public offering costs of $174 and $184,
respectively.
In conjunction with the acquisition during the year ended December 31,
1997 (see Note 3) assets acquired, liabilities assumed and common stock
issued were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 30,574
Excess of cost over net tangible assets acquired 27,833
Liabilities assumed (48,115)
Common stock issued (10,000)
--------
Cash paid, net of cash received $ 292
========
</TABLE>
20. SUBSEQUENT EVENTS:
On March 27, 1998, the Company issued a press release announcing that it
would not file its 1997 Annual Report on Form 10-K with the SEC on March
31, 1998 because the audit of its 1997 financial statements was not yet
completed. The Company also announced that (i) certain accounting
principles relating primarily to revenue recognition were not yet
resolved by the Company's independent accountants, (ii) the accountants
and Company management were undertaking a review of the Company's
accounting policies and (iii) adjustments would be made to the Company's
previously announced financial results.
Page 27
<PAGE> 28
20. SUBSEQUENT EVENTS, CONTINUED:
On April 13, 1998, the Company announced that it would not file its 1997
Form 10-K on or before the extension date of April 15, 1998 due to
ongoing work being performed by the Company and its independent
accountants. The Company also announced that the Audit Committee of the
Board of Directors had retained independent counsel to conduct an
investigation.
In April 1998, 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.
On April 24, 1998, Coopers & Lybrand, L.L.P. resigned as the Company's
independent accountants. In conjunction with its resignation, Coopers &
Lybrand advised the Company that their reports with respect to the
consolidated financial statements of the Company and its subsidiaries as
of and for the years ended December 31, 1995 and 1996 were withdrawn as
of the date of their resignation.
On April 27, 1998, the Nasdaq National Market ("Nasdaq") effected a
temporary qualification trading halt in the Company's common stock. On
May 11, 1998, the common stock was delisted from the Nasdaq National
Market. The Company has appealed the Nasdaq delisting.
On May 6, 1998, the Company announced that it had engaged KPMG Peat
Marwick LLP as its independent auditors for the fiscal years ended
December 31, 1997, 1996 and 1995.
On May 18, 1998, the Company disclosed in a filing with the SEC that its
Quarterly Report on Form 10-Q for the Quarter Ended March 31, 1998 will
not be filed within the period prescribed for such report.
Effective May 31, 1998, Jeffery L. Fuller resigned as President, Chief
Executive Officer ("CEO") and Director of the Company. On June 8, 1998,
the Company announced that the Board of Directors had appointed a
committee to identify a CEO of the Company and that John T. Connor, who
serves as Chairman of the Board, had been appointed as interim CEO. Mr.
Connor accepted such appointment until the earlier of September 8, 1998
or the hiring of a permanent CEO. Mr. Connor has indicated that if a
permanent CEO is not hired by such date, he will discuss with the Board
of Directors the possibility of staying on for a longer time.
On July 8, 1998, the Company's primary bank lender, US Bank National
Association, 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.
Page 28
<PAGE> 29
20. SUBSEQUENT EVENTS, CONTINUED:
The Company has been named as a defendant in several class action
lawsuits that were filed subsequent to the Company's announcement on
March 27, 1998 that the filing of its Annual Report on Form 10-K for year
ended December 31, 1997 would be delayed and that adjustments would be
made to the Company's previously announced financial results. Between
March 31, 1998 and May 27, 1998, twelve purported class action lawsuits
were filed against the Company in the United States District Court for
the District of Nebraska, and one complaint was filed in the District
Court of Scotts Bluff County, Nebraska.
Certain of the complaints also name one or more 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 complaints generally allege claims under Sections 10 and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,
and relate primarily to allegations of false and misleading financial
statements and representations and material omissions by the Company. The
Nebraska action alleges violations of Nebraska securities laws. The
complaints seek unspecified compensatory damages, punitive damages,
attorneys' fees and costs. The plaintiffs in the Federal actions have
stipulated to the consolidation of the Federal actions and the
appointment of a lead plaintiff(s).
21. RESTATEMENT OF CONSOLIDATED UNAUDITED QUARTERLY FINANCIAL DATA:
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 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 in the third and fourth quarters of 1997,
and (v) the allocation of the purchase price of the EFJ acquisition at
July 31, 1997. As a result, the financial statements of the Company have
been restated from amounts previously reported.
The summary of the significant quarterly changes for the years ended
December 31, 1997 and 1996 is as follows:
Page 29
<PAGE> 30
21. Restatement of Consolidated Unaudited Quarterly Financial Data,
Continued:
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1997
------------------------------- -------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues $ 4,728 $ 3,512 $ 5,550 $ 2,915
Cost of sales 1,632 1,272 2,233 2,289
----------- ----------- ----------- -----------
Gross profit 3,096 2,240 3,317 626
----------- ----------- ----------- -----------
Operating expenses:
Research and development 633 633 683 683
Sales and marketing 1,086 942 879 731
General and administrative 478 572 559 651
----------- ----------- ----------- -----------
Total operating expenses 2,197 2,147 2,121 2,065
----------- ----------- ----------- -----------
Income (loss) from operations 899 93 1,196 (1,439)
Interest income 125 125 192 192
Interest expense (49) (49) (33) (33)
----------- ----------- ----------- -----------
Income (loss) before income taxes 975 169 1,355 (1,280)
Provision (benefit) for income taxes 292 27 380 (490)
----------- ----------- ----------- -----------
Net income (loss) $ 683 $ 142 $ 975 $ (790)
=========== =========== =========== ===========
Pro forma information:
Income (loss) before pro forma income taxes $ 975 $ 169 $ 1,355 $ (1,280)
Pro forma provision (benefit) for income taxes 292 27 380 (490)
----------- ----------- ----------- -----------
Pro forma net income (loss) $ 683 $ 142 $ 975 $ (790)
=========== =========== =========== ===========
Pro forma net income (loss) per share - Basic $ 0.08 $ 0.02 $ 0.10 $ (0.09)
=========== =========== =========== ===========
- Diluted $ 0.07 $ 0.02 $ 0.10 $ (0.09)
=========== =========== =========== ===========
Weighted average common shares - Basic 8,699,744 8,699,745 9,876,806 9,283,078
=========== =========== =========== ===========
- Diluted 9,177,989 9,281,849 9,876,806 9,283,078
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1997
---------------------------------- ----------------------------------
As Previously As Previously
Reported As Restated Released As Restated
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 17,555 $ 13,428 $ 23,929 $ 20,568
Cost of sales 9,623 9,561 13,731 12,984
------------ ------------ ------------ ------------
Gross profit 7,932 3,867 10,198 7,584
------------ ------------ ------------ ------------
Operating expenses:
Research and development 1,298 1,298 1,855 1,855
In-process research and development 9,828 9,828 -- --
Sales and marketing 2,721 2,361 3,447 2,997
General and administrative 1,229 1,647 1,115 1,841
------------ ------------ ------------ ------------
Total operating expenses 15,076 15,134 6,417 6,693
------------ ------------ ------------ ------------
Income (loss) from operations (7,144) (11,267) 3,781 891
Other income -- -- 35 18
Interest income 119 119 405 438
Interest expense (346) (346) (182) (215)
------------ ------------ ------------ ------------
Income (loss) before income taxes (7,371) (11,494) 4,039 1,132
Provision (benefit) for income taxes 893 (468) 1,360 407
------------ ------------ ------------ ------------
Net income (loss) $ (8,264) $ (11,026) $ 2,679 $ 725
============ ============ ============ ============
Pro forma information:
Income (loss) before pro forma income taxes $ (7,371) $ (11,494) $ 4,039 $ 1,132
Pro forma provision (benefit) for income taxes 893 (468) 1,360 407
------------ ------------ ------------ ------------
Pro forma net income (loss) $ (8,264) $ (11,026) $ 2,679 $ 725
============ ============ ============ ============
Pro forma net income (loss) per share - Basic $ (0.84) $ (1.12) $ 0.21 $ 0.06
============ ============ ============ ============
-Diluted $ (0.84) $ (1.12) $ 0.21 $ 0.06
============ ============ ============ ============
Weighted average common shares - Basic 9,844,087 9,844,087 12,849,322 12,361,944
============ ============ ============ ============
-Diluted 9,844,087 9,844,087 12,849,322 13,103,404
============ ============ ============ ============
</TABLE>
Page 30
<PAGE> 31
21. Restatement of Consolidated Unaudited Quarterly Financial Data,
Continued:
<TABLE>
<CAPTION>
March 31, 1996 June 30, 1996
-------------------------------- --------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 2,580 $ 2,442 $ 3,148 $ 2,577
Cost of sales 911 880 939 903
----------- ----------- ----------- -----------
Gross profit 1,669 1,562 2,209 1,674
----------- ----------- ----------- -----------
Operating expenses:
Research and development 436 436 649 649
Sales and marketing 431 469 404 404
General and administrative 626 626 615 615
----------- ----------- ----------- -----------
Total operating expenses 1,493 1,531 1,668 1,668
----------- ----------- ----------- -----------
Income (loss) from operations 176 31 541 6
Interest income -- -- -- --
Interest expense (18) (19) (32) (31)
----------- ----------- ----------- -----------
Income (loss) before income taxes 158 12 509 (25)
Provision (benefit) for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ 158 $ 12 $ 509 $ (25)
=========== =========== =========== ===========
Pro forma information:
Income (loss) before pro forma income taxes $ 158 $ 12 $ 509 $ (25)
Pro forma provision (benefit) for income taxes 38 5 97 (9)
----------- ----------- ----------- -----------
Pro forma net income (loss) $ 120 $ 7 $ 412 $ (16)
=========== =========== =========== ===========
Pro forma net income per share - Basic $ 0.02 $ 0.00 $ 0.06 $ (0.00)
=========== =========== =========== ===========
- Diluted $ 0.02 $ 0.00 $ 0.06 $ (0.00)
=========== =========== =========== ===========
Weighted average common shares - Basic 6,783,078 6,783,078 6,968,712 6,783,078
=========== =========== =========== ===========
-Diluted 6,968,712 7,325,492 6,968,712 6,783,078
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1996
-------------------------------- --------------------------------
As Previously As Previously
Reported As Restated Released As Restated
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 3,547 $ 2,617 $ 4,500 $ 2,983
Cost of sales 1,036 998 1,979 1,493
----------- ----------- ----------- -----------
Gross profit 2,511 1,619 2,521 1,490
----------- ----------- ----------- -----------
Operating expenses:
Research and development 602 602 547 547
Sales and marketing 671 681 597 633
General and administrative 630 695 543 593
Special compensation expense 5,568 5,568 -- --
----------- ----------- ----------- -----------
Total operating expenses 7,471 7,546 1,687 1,773
----------- ----------- ----------- -----------
Income (loss) from operations (4,960) (5,927) 834 (283)
Interest income 6 6 25 25
Interest expense (35) (35) (77) (77)
----------- ----------- ----------- -----------
Income (loss) before income taxes (4,989) (5,956) 782 (335)
Provision (benefit) for income taxes (1,759) (2,051) 230 (135)
----------- ----------- ----------- -----------
Net income (loss) $ (3,230) $ (3,905) $ 552 $ (200)
=========== =========== =========== ===========
Pro forma information:
Income (loss) before pro forma income taxes $ (4,989) $ (5,956) $ 782 $ (335)
Pro forma provision (benefit) for income taxes (1,759) (2,051) 230 (135)
----------- ----------- ----------- -----------
Pro forma net income (loss) $ (3,230) $ (3,905) $ 552 $ (200)
=========== =========== =========== ===========
Pro forma net income (loss) per share - Basic and Diluted $ (0.46) $ (0.58) $ 0.08 $ (0.03)
=========== =========== =========== ===========
Weighted average common shares - Basic and Diluted 6,968,712 6,783,078 6,968,712 6,783,078
=========== =========== =========== ===========
</TABLE>
Page 31
<PAGE> 32
In third quarter of 1997, the Company recorded a charge to "In-process
research and development costs" of $9,828 in connection with the
acquisition of E.F. Johnson, Inc.
In the third quarter of 1996, the Company recorded a charge to "Special
compensation expense" of $5,568 in connection with the vesting of stock
options and accrual of a special compensation expense.
Page 32
