<PAGE> 1
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 JUNE 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 July 31, 1998, 12,946,624 shares of the Registrant's Common
Stock were outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 and DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,895 $ 15,384
Investments 3,000 15,900
Accounts receivable, net 9,970 16,008
Receivables - other 163 785
Cost in excess of billings on uncompleted contracts 4,139 942
Inventory 19,593 18,363
Income tax recoverable 322 1,065
Prepaid expenses 955 478
Deferred tax assets 3,528 3,523
------------- -------------
Total current assets 64,565 72,448
Property, plant and equipment, net 12,372 11,261
Deferred tax assets 6,497 4,504
Intangible assets, net of accumulated amortization 17,267 18,029
Other assets 514 452
------------- -------------
$ 101,215 $ 106,694
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 9,117 $ --
Current portion of long-term debt 160 2,545
Accounts payable 5,210 9,305
Billings in excess of cost on uncompleted contracts 4,965 6,696
Deferred revenue 1,306 1,743
Accrued expenses 5,533 7,323
------------- -------------
Total current liabilities 26,291 27,612
Long-term debt, net of current portion 2,592 2,758
Deferred revenue 669 934
------------- -------------
29,552 31,304
------------- -------------
Stockholders' equity:
Common stock 129 129
Additional paid-in capital 90,315 90,315
Accumulated deficit (18,781) (15,054)
------------- -------------
71,663 75,390
------------- -------------
$ 101,215 $ 106,694
============= =============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS (continued)
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 1998 and 1997
(Unaudited) (in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
------------------------------------ ------------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues $ 13,877 $ 2,915 $ 35,865 $ 6,427
Cost of sales 10,853 2,289 23,763 3,561
------------- ------------- ------------- -------------
Gross profit 3,024 626 12,102 2,866
------------- ------------- ------------- -------------
Operating expenses
Research and development 2,703 683 4,741 1,316
Sales and marketing 3,355 731 6,565 1,673
General and administrative 4,715 651 6,828 1,223
------------- ------------- ------------- -------------
Total operating expenses 10,773 2,065 18,134 4,212
------------- ------------- ------------- -------------
Loss from operations (7,749) (1,439) (6,032) (1,346)
Other income 97 -- 113 --
Interest income 174 192 568 317
Interest expense (163) (33) (262) (82)
------------- ------------- ------------- -------------
Loss before income taxes (7,641) (1,280) (5,613) (1,111)
Benefit for income taxes (2,598) (490) (1,886) (463)
------------- ------------- ------------- -------------
Net loss $ (5,043) $ (790) $ (3,727) $ (648)
============= ============= ============= =============
Net loss per share - Basic and Diluted $ (0.39) $ (0.09) $ (0.29) $ (0.07)
============= ============= ============= =============
Weighted average common shares -
Basic and Diluted 12,946,624 9,283,078 12,946,624 8,991,412
============= ============= ============= =============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS (continued)
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1998 and 1997
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------- -------------
1998 1997
------------- -------------
(Restated)
<S> <C> <C>
Net cash flow used in operating activities $ (9,674) $ (2,923)
------------- -------------
Cash flow from investing activities:
Purchase of fixed assets (2,281) (1,185)
Sale of investments 12,900 --
------------- -------------
Net cash provided by (used in) investing activities 10,619 (1,185)
------------- -------------
Cash flow from financing activities:
Borrowings on revolving lines of credit 9,117 --
Issuance of industrial development revenue bonds -- 2,850
Payment of industrial development revenue bonds -- (850)
Debt issuance costs of industrial development revenue bonds -- (75)
Payment on term loans, lines of credit and capitalized leases (2,551) (2,442)
Bank overdraft -- (386)
Proceeds from IPO, net -- 17,710
------------- -------------
Net cash provided by financing activities 6,566 16,807
Net increase in cash 7,511 12,699
Cash and cash equivalent, beginning of period 15,384 --
============= =============
Cash and cash equivalent, end of period $ 22,895 $ 12,699
============= =============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE> 5
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 June 30, 1998 and for the
three and six months ended June 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 six months ended June 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
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 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 for the three and six
months ended June 30, 1998 and 1997, 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 six month periods ended June 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> 6
5. INVENTORY
The following is a summary of inventory at June 30, 1998 and December
31, 1997:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Raw materials and supplies $ 9,008 $ 7,523
Work in progress 1,237 1,977
Finished goods 9,348 8,863
------------- -------------
$ 19,593 $ 18,363
============= =============
</TABLE>
6. REVOLVING LINES OF CREDIT
As of June 30, 1998, the Company had a working capital revolving line
of credit not to exceed $10.0 million. The Company had borrowed $9.1 million on
this line as of June 30, 1998. 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.
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 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 federal
actions have recently been consolidated. The Company is not required to answer
or otherwise respond to the federal complaints until after a consolidated
complaint is filed.
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. The Company has directors' and officers' liability
insurance that may cover a portion of the legal fees incurred and certain of the
damages sought in connection with the class action lawsuits. 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 (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.
<PAGE> 7
Alternatively, the Company has requested ratification, by 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. As a result, revenue will be recorded on a cash basis if and when
received.
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 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 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 June 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.
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. RECENT EVENTS
On August 6, 1998, the Company announced that it was implementing a
plan to reduce its workforce by approximately 25%. Initially, the Company will
offer a voluntary severance program to its employees, which will, among other
things provide outplacement services to those employees who choose to
participate in the program. The Company anticipates that it will take a
restructuring charge in the third quarter of 1998 of approximately $1.4 million
in connection with the reduction in its work force.
9. 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 six months ended June 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; and (iii) revenue recognized on sales of certain
products which were subsequently returned to the Company.
The summary of the significant changes for the three and six months
ended June 30, 1997 is as follows:
<PAGE> 8
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 SIX MONTHS ENDED
June 30, 1997 June 30, 1997
----------------------------------- -----------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 5,550 $ 2,915 $ 10,278 $ 6,427
Cost of sales 2,233 2,289 3,865 3,561
------------- ------------- ------------- -------------
Gross profit 3,317 626 6,413 2,866
------------- ------------- ------------- -------------
Operating expenses
Research and development 683 683 1,316 1,316
Sales and marketing 879 731 1,965 1,673
General and administrative 559 651 1,037 1,223
------------- ------------- ------------- -------------
Total operating expenses 2,121 2,065 4,318 4,212
------------- ------------- ------------- -------------
Income (loss) from operations 1,196 (1,439) 2,095 (1,346)
Interest income 192 192 317 317
Interest expense (33) (33) (82) (82)
------------- ------------- ------------- -------------
Income (loss) before income taxes 1,355 (1,280) 2,330 (1,111)
Provision (benefit) for income taxes 380 (490) 672 (463)
------------- ------------- ------------- -------------
Net income (loss) $ 975 $ (790) $ 1,658 $ (648)
============= ============= ============= =============
Net income (loss) per share - Basic and Diluted $ 0.10 $ (0.09) $ 0.17 $ (0.07)
============= ============= ============= =============
Weighted average common shares -
Basic and Diluted 9,876,806 9,283,078 9,596,406 8,991,412
============= ============= ============= =============
</TABLE>
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth certain Consolidated Statements of
Operations information as a percentage of revenues during the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
(Restated)
<S> <C> <C> <C> <C>
Revenues $ 13,877 100.0% $ 2,915 100.0%
Cost of sales 10,853 78.2% 2,289 78.5%
------------- ------------- ------------- -------------
Gross profit 3,024 21.8% 626 21.5%
------------- ------------- ------------- -------------
Operating expenses
Research and development 2,703 19.5% 683 23.4%
Sales and marketing 3,355 24.2% 731 25.1%
General and administrative 4,715 34.0% 651 22.3%
------------- ------------- ------------- -------------
Total operating expenses 10,773 77.6% 2,065 70.8%
------------- ------------- ------------- -------------
Loss from operations (7,749) (55.8)% (1,439) (49.4)%
Other income 97 0.7% -- 0.0%
Interest income 174 1.3% 192 6.6%
Interest expense (163) (1.2)% (33) (1.1)%
------------- ------------- ------------- -------------
Loss before income taxes (7,641) (55.1)% (1,280) (43.9)%
Benefit for income taxes (2,598) (18.7)% (490) (16.8)%
------------- ------------- ------------- -------------
Net loss $ (5,043) (36.3)% $ (790) (27.1)%
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
(Restated)
<S> <C> <C> <C> <C>
Revenues $ 35,865 100.0% $ 6,427 100.0%
Cost of sales 23,763 66.3% 3,561 55.4%
------------- ------------- ------------- -------------
Gross profit 12,102 33.7% 2,866 44.6%
------------- ------------- ------------- -------------
Operating expenses
Research and development 4,741 13.2% 1,316 20.5%
Sales and marketing 6,565 18.3% 1,673 26.0%
General and administrative 6,828 19.0% 1,223 19.0%
------------- ------------- ------------- -------------
Total operating expenses 18,134 50.6% 4,212 65.5%
------------- ------------- ------------- -------------
Loss from operations (6,032) (16.8)% (1,346) (20.9)%
Other income 113 0.3% -- 0.0%
Interest income 568 1.6% 317 4.9%
Interest expense (262) (0.7)% (82) (1.3)%
------------- ------------- ------------- -------------
Loss before income taxes (5,613) (15.7)% (1,111) (17.3)%
Benefit for income taxes (1,886) (5.3)% (463) (7.2)%
------------- ------------- ------------- -------------
Net loss $ (3,727) (10.4)% $ (648) (10.1)%
============= ============= ============= =============
</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 anticipated restructuring charge in the third
quarter of 1998, the outcome of pending class action litigation involving the
Company, the outcome of the pending investigation by the SEC, the effects of the
Company's restatement of its financial statements 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
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 timing of and the costs incurred in
connection with the reduction in workforce program, the impact of the reduction
in workforce program on the Company's business, results of operations, financial
condition and liquidity and other 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.
<PAGE> 10
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 six
months ended June 30, 1997 is set forth in Note 9 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. As a result primarily of the
foregoing, the Company had a net loss of $5.0 million in the second quarter of
1998 and a $3.7 million net loss in the first six months of 1998.
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 quarter
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. The issuer of the Company's bonds has indicated that it may,
following its review of the Company's restated financial statements, reduce the
maximum amount of bonding coverage available to the Company. 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.
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
may result at some future date in substantial up front cost.
In this regard, on August 6, 1998, the Company announced that it was
implementing a plan to reduce its workforce by approximately 25%. Initially, the
Company will offer a voluntary severance program to its employees, which will,
among other things provide outplacement services to those employees who choose
to participate in the program. The Company anticipates that it will take a
restructuring charge in the third quarter of 1998 of approximately $1.4 million
in connection with the reduction in its work force.
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.
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.
<PAGE> 11
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 376.1% to $13.9 million in the second quarter of
1998 and 458.0% to $35.9 million during the first six months of 1998, compared
to $2.9 million and $6.4 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. Approximately $2.4 million of revenues
for the second quarter of 1998 and approximately $5.9 million of revenues for
the first six months of 1998 related to timing issues associated with the
restatement as indicated above. As a result of the uncertainty raised by the
restatement and recent events, sales of products, including LMR systems to
governmental agencies, were adversely impacted in the second quarter of 1998 as
compared to the first quarter of 1998 in which revenues were $22.0 million.
Sales of products may continue to be adversely impacted during the remainder of
1998.
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 six
months ended June 30, 1998 were approximately 38.1% and 35.5%, respectively,
compared to 44.0% and 59.9% for the same periods in 1997. The decline on a
percentage basis in the three and six months ended June 30, 1998 is primarily
due to the inclusion of EFJ, which has a larger percentage of its sales to
domestic markets. As a result of the troubled Asian economies, the Company
expects a decline in revenues from the region during 1998 as compared to 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 increased to $3.0
million (21.8% gross margin) for the second quarter of 1998 and $12.1 million
(33.7% gross margin) for the first six months of 1998, compared to $626,000
(21.5% gross margin) and $2.9 million (44.6% gross margin), respectively, for
the same periods in 1997. The gross margin percentage for the second quarter of
1998 was slightly higher compared to the second quarter of 1997. In the second
quarter of 1997, inventory obsolescence was charged to cost of goods sold for
products returned by a customer which was not sellable to other customers which
contributed to the lower gross profit for the quarter. The gross profit margin
in the second quarter of 1998 was down from the 41.3% gross profit margin in the
first quarter of 1998 primarily due to product mix, lower revenues and a reserve
taken for inventory obsolescence. For the six months ended June 30, 1998, the
decrease in gross margin was primarily 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 $2.7 million in the second quarter of 1998 and
$4.7 million for the first six months of 1998 from $683,000 in the second
quarter of 1997 and $1.3 million for the first six months of 1997. This increase
was primarily due to the addition of EFJ and an increase in the members of the
engineering staff. However, research and development expenses as a percentage of
revenues decreased to 19.5% in the second quarter of 1998 and 13.2% for the
first six months of 1998 from 23.4% in the second quarter of 1997 and 20.5% for
the first six months of 1997. The Company anticipates that overall research and
development expenses will increase during 1998 relative to 1997.
The information security and wireless communications product markets in
which the Company competes are rapidly evolving and can be expected to further
evolve in the future as a result of changing technology, industry standards and
customer requirements. The Company's ability to compete effectively will depend
upon its ability to anticipate and react to these changes in a timely manner. 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 to respond to these changes.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and related
costs of sales personnel, including sales commissions and travel expenses, and
costs of advertising, public relations, bad debt provisions and trade show
participation. Sales and marketing expenses increased to $3.4 million in the
second quarter of 1998 from $731,000 in the second quarter of 1997, primarily
due to the acquisition of EFJ and an increase in the number of direct sales
personnel and associated expenses. Sales and marketing expenses decreased
slightly as a percentage of revenues to 24.2% in the second quarter of 1998 from
25.1% in the second quarter of 1997. For the first six months of 1998, sales and
marketing expense was $6.6 million compared to $1.7 million in the same period
in 1997. However, sales and marketing expense decreased as a percentage of sales
to 18.3% for the first six months of 1998 from 26.0% in the first six months of
1997 primarily due to increased revenues.
<PAGE> 12
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 $4.7 million in the second quarter of 1998 and to $6.8
million for the first six months of 1998 from $651,000 in the second quarter of
1997 and $1.2 million for the first six months of 1997. General and
administrative expenses as a percentage of revenues increased to 34.0% in the
second quarter of 1998 from 22.3% in the second quarter of 1997. For the first
six months of 1998 and 1997, general and administrative expenses were 19.0%.
These increases were attributable primarily to the addition of EFJ and several
administrative employees, the amortization of goodwill and other intangibles and
$2.6 million of expenses incurred in the second quarter of 1998 related to legal
and other professional fees relating to the restatement, severance payments,
class action lawsuits, SEC investigation, and the Audit Committee investigation.
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 $11,000 in the second quarter of 1998 as compared to $159,000 in the
second quarter of 1997. Net interest income increased to $306,000 for the first
six months of 1998 compared to $235,000 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 second
quarter of 1998, over amounts experienced by the Company during the first
quarter of 1998.
Other Income, net
Other income, net for the second quarter of 1998 and for the first six
months of 1998 was primarily related to appreciation of investments. No sales
of investments occurred during the comparable periods in 1997.
Provision for Income Taxes
The Company's effective tax benefit rate for the second quarter of 1998
was 34.0% and for the first six months of 1998 was 33.6% compared to 38.3% and
41.7% respectively for the same periods in 1997.
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 $9.7 million in the
first six months of 1998 and $2.9 million in the first six months of 1997. Cash
used in operating activities in the first six months of 1998 consisted primarily
of a net loss plus an increase in inventory, a decrease in accounts payable and
a decrease in accrued expenses, offset in part by depreciation and amortization
and a decrease in accounts receivable. Cash used in operating activities in the
first six months of 1997 of $2.9 million consisted primarily of a net loss, plus
an increase in accounts receivable and inventory accounts, a net loss, offset in
part by depreciation and an increase in accrued expenses. The Company has
initiated a program to reduce its current inventory levels in order to provide
additional liquidity to the Company.
The deferred tax assets totaling $10.0 million were 9.9% and 14.0% of
total assets and stockholders' equity, respectively, at June 30, 1998. In order
to fully realize the deferred tax assets, the Company will have to generate
approximately $29.5 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 $10.6 million in the first six
months of 1998 was due to the sale of investments less $2.3 million of capital
expenditures. Capital expenditures for the first six months of 1998 consisted
primarily of building construction cost, manufacturing equipment, computer
equipment and office furniture. Cash used for investing activities in the first
six months of 1997 of $1.2 million was attributable to capital expenditures.
Capital expenditures for the first six months of 1997 consisted primarily of
computer and networking equipment, office furniture and manufacturing equipment
and construction at the Company's Lincoln facility in both quarters.
Financing activities provided cash of $6.6 million in the first six
months of 1998. Financing activities consisted of $9.1 million in borrowings on
the Company's line of credit and payment of long-term debt of $2.6 million. As
of June 30, 1998, the Company had $9.1 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.
<PAGE> 13
The Company had outstanding IDR Bonds totaling $2.8 million at June 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 June 30, 1998, the remaining net proceeds of $503,000
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 June 30, 1998, the Company had approximately $15.9 million in
unrestricted cash, cash equivalents, and investments, not including the $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 through 1998. However, if sales continue to decline,
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, 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.
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.
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 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 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 June 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.
<PAGE> 14
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 "ITEM 3. LEGAL
PROCEEDINGS" contained in the Annual Report Form 10-K for the year ended
December 31, 1997.
ITEMS 2 - 4.
Inapplicable.
ITEM 5. OTHER INFORMATION
The date of the Company's 1998 Annual Meeting of Stockholders has been
delayed more than 30 days from the date of the previous year's Annual Meeting
which was held on May 6, 1997. The proxy materials for the Company's 1997 Annual
Meeting originally indicated that proposals of stockholders must be received by
the Company by December 5, 1997 in order to be included in proxy materials for
the 1998 Annual Meeting. However, because of the delay in the convening of the
1998 Annual Meeting, the Company will accept stockholder proposals after
December 5, 1997. At this time, the Company anticipates that the Annual Meeting
will be held on October 27, 1998, instead of October 22, 1998 as previously
reported. As a result, in accordance with the rules and regulations promulgated
under the Exchange Act, stockholder proposals intended to be included in the
proxy materials for the 1998 Annual Meeting must be received by the Company a
reasonable time before the Company begins to print and mail its proxy materials
for the 1998 Annual Meeting. In addition, in the event a stockholder proposal is
not submitted to the Company in a reasonable time before the Company begins to
print and mail proxy materials, the proxy to be solicited by the Board of
Directors for the 1998 Annual Meeting will confer authority on the holders of
the proxy to vote shares in accordance with their best judgement and discretion
if the proposal is presented at the 1998 Annual Meeting without any discussion
of the proposal in the proxy statement for such meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are being filed herewith:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11 Computation of net income per share.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on May 4, 1998, under Item 4.
"Changes in Registrant's Certifying Accountant" to report the
resignation of Coopers and Lybrand L.L.P. as the Company's certifying
accountants and provide the Company's position on disputed issues. The
Company filed an amendment to such Form 8-K on May 20, 1998; to include
the response of Coopers & Lybrand L.L.P. to the Company's position of
disputed issues.
The Company filed a report on Form 8-K on May 12, 1998, under Item 4.
"Changes in Registrant's Certifying Accountant" to report retaining
KPMG Peat Marwick LLP as the Company's certifying accountant.
The Company filed a report on Form 8-K on June 10, 1998, under Item 5.
"Other Events" to report the resignation of the Company's Chief
Executive Officer and a management restructuring.
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
TRANSCRYPT INTERNATIONAL, INC.
Date: August 12, 1998 By: /s/ Craig J. Huffaker
---------------------
Craig J. Huffaker
Chief Financial Officer
(Principal Financial and Accounting
Officer)
<PAGE> 1
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 Six Months Ended
------------------------------- ------------------------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
(restated) (restated)
<S> <C> <C> <C> <C>
Net Loss $ (5,043) $ (790) $ (3,727) $ (648)
============= ============= ============= =============
NET INCOME PER SHARE - BASIC
Weighted average common shares - Basic 12,946,624 9,283,078 12,946,624 8,991,412
============= ============= ============= =============
Net loss per share - Basic $ (0.39) $ (0.09) $ (0.29) $ (0.07)
============= ============= ============= =============
NET INCOME PER SHARE - DILUTED
Shares used in this computation:
Weighted average common shares - Basic 12,946,624 9,283,078 12,946,624 8,991,412
Dilutive effect of shares under employee stock plans (*) -- -- -- --
------------- ------------- ------------- -------------
Weighted average common shares - Diluted 12,946,624 9,283,078 12,946,624 8,991,412
============= ============= ============= =============
Net loss per share - Diluted $ (0.39) $ (0.09) $ (0.29) $ (0.07)
============= ============= ============= =============
</TABLE>
(*) Common stock equivalents were not included as their effect would be
anti-dilutive
<TABLE> <S> <C>
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 22,895
<SECURITIES> 3,000
<RECEIVABLES> 10,133
<ALLOWANCES> 0
<INVENTORY> 19,593
<CURRENT-ASSETS> 64,565
<PP&E> 12,372
<DEPRECIATION> 0
<TOTAL-ASSETS> 101,215
<CURRENT-LIABILITIES> 26,291
<BONDS> 2,592
0
0
<COMMON> 129
<OTHER-SE> 71,534
<TOTAL-LIABILITY-AND-EQUITY> 101,215
<SALES> 35,865
<TOTAL-REVENUES> 35,865
<CGS> 23,763
<TOTAL-COSTS> 23,763
<OTHER-EXPENSES> 18,134<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (306)<F1>
<INCOME-PRETAX> (5,613)
<INCOME-TAX> (1,886)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,727)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
<FN>
<F1>INTEREST EXPENSE IS NET OF $568 OF INTEREST INCOME LESS $262 OF INTEREST
EXPENSE.
<F2>OTHER EXPENSES INCLUDE $2.6 MILLION OF COSTS INCURRED IN THE SECOND QUARTER OF
1998 RELATED TO LEGAL AND OTHER PROFESSIONAL FEES RELATING TO THE RESTATEMENT,
SEVERANCE PAYMENTS, CLASS ACTION LAWSUITS, SEC INVESTIGATION AND THE AUDIT
COMMITTEE INVESTIGATION.
</FN>
</TABLE>
