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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): APRIL 24, 1998
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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
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Item 4. Changes in Registrant's Certifying Accountant.
(i) On April 24, 1998, Coopers & Lybrand L.L.P. ("Coopers") resigned
as the principal accountants of Transcrypt International, Inc. (the "Company").
On April 27, 1998, the Company issued a news release disclosing this
information, among other things. The full text of that news release is filed
herewith as Exhibit 99.1 and is incorporated by reference herein.
In conjunction with its resignation, Coopers 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and 1996, should no longer be relied upon and are withdrawn. As of the date of
this Report, the Company is in the process of retaining a new independent
accountant.
(ii) None of Coopers' reports on the financial statements of the
Company and its subsidiaries as of and for the years ended December 31, 1995 and
1996 contained any adverse opinion or a disclaimer of opinion, nor was qualified
or modified as to uncertainty, audit scope, or accounting principle. An audit
report on the financial statements of the Company and its subsidiaries as of and
for the year ended December 31, 1997 has not yet been issued.
(iii) Neither the Company's Board of Directors nor its Audit Committee
recommended the decision to change accountants.
(iv) Prior to its resignation on April 24, 1998, Coopers had been the
independent public accountant of the Company since 1992, and representatives of
Coopers have worked closely with the Company's management in connection with the
Company's financial statements. Coopers performed timely interim reviews of the
Company's quarterly financial statements since the Company's initial public
offering and reviewed significant year-end and quarter-end sales. Coopers also
worked with management in establishing appropriate accounting policies,
procedures and controls, including specific revenue recognition policies.
During the Company's two most recent fiscal years and subsequent
interim period through mid- to late-March 1998, the Company received no
indication from Coopers regarding a disagreement on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement, if not resolved to the satisfaction of Coopers,
would have caused Coopers to make reference to the subject matter of the
disagreement in connection with any of its reports, nor did the Company receive
any indication from Coopers regarding any other reportable event under Rule 304.
Coopers consented to the inclusion of its audit reports in connection with the
Company's two public offerings completed on January 22, 1997 and October 15,
1997, and provided "comfort letters" in connection with such offerings. On
February 6, 1998, the Company released its financial results for 1997 via a
public press release. The audit partner of Coopers read and took no exception to
such press release prior to its issuance.
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During late February and March 1998, Coopers informed the
Company that Coopers had received several anonymous letters and one anonymous
telephone call which, among other things, questioned the accounting practices of
the Company relating primarily to certain sales transactions and alleged
wrongdoing in connection therewith. Beginning shortly after the receipt of the
first letter, meetings were held involving management of the Company, members of
the Company's Audit Committee and the Coopers audit partner. At an Audit
Committee meeting held on March 4, 1998 attended by the Coopers audit partner,
Coopers indicated that the Company's reserve for receivables was adequate based
on information currently available to it, and that the sales transactions
referred to in the first anonymous letter had been recorded consistent with the
Company's revenue recognition procedures, as previously approved by Coopers. On
March 5, 1998, the Company issued a press release referring to the first
anonymous letter and stating that the Company continued to stand by its
previously issued financial statements and publicly announced financial results,
but was continuing to investigate these matters. The audit partner of Coopers
read and took no exception to such press release prior to its issuance.
In mid-March 1998, the Company learned that the National
Office of Coopers had become involved in the review of issues raised in the
anonymous letters. During the week of March 23, 1998, a representative of the
National Office held several meetings with Company management and one meeting
with members of the Company's Audit Committee. The Company also was advised that
the National Office representative began to review Coopers' workpapers. On March
26, 1998, in a meeting attended by the Coopers audit partner and National Office
representative, members of the Audit Committee and certain members of
management, the Company was advised orally that Coopers was still in the process
of reviewing and examining the workpapers relating to the 1997 audit and that
adjustments would be required to previously announced financial results for
1997, although Coopers stated that it was not yet in a position to quantify such
adjustments. On March 27, 1998, the Company issued a press release indicating
that its 1997 Annual Report on Form 10-K would be delayed and that adjustments
would be made to the Company's previously announced results.
In a number of subsequent meetings held in late March and in
April 1998 between Coopers and Audit Committee members and Coopers and
management of the Company, Coopers described adjustments that it was considering
recommending regarding the Company's 1997 financial statements and that such
adjustments might impact the Company's 1996 fiscal year. During this time, the
Company provided additional documentation and information to Coopers regarding
the transactions at issue.
During its meetings with Coopers, representatives of the
Company questioned Coopers regarding the basis and support for its proposed
adjustments under generally accepted accounting principles ("GAAP") and
discussed with Coopers the Company's reliance on Coopers' prior review of
certain of these transactions and audits. On April 3, 1998, the Board of
Directors of the Company met and, due to its belief that Coopers had a potential
conflict of interest in reviewing its prior work, authorized the Audit Committee
to retain another major independent accounting firm to review, under SAS No. 50,
the accounting principles applied to the transactions in question and
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report whether the accounting principles applied were in accordance with GAAP.
Such independent accountant was retained by the Company. In addition, the Audit
Committee retained independent counsel to conduct an investigation and advise
the Audit Committee in connection with certain matters, concurring with Coopers'
advice that it must do so.
On the afternoon of April 23, Company management spoke with
representatives of the other major accounting firm to discuss their SAS No. 50
review. On the morning of April 24, 1998, special counsel for the Audit
Committee contacted Coopers' outside counsel telephonically and informed such
counsel that the Company would agree to Coopers' proposed accounting treatment
of the transactions in question, and requested that Coopers proceed with
completion of the audit. Promptly thereafter, Coopers' outside counsel called
back the special counsel to the Audit Committee and informed such special
counsel that Coopers would be contacting the Audit Committee, and further that
the members of the special counsel's law firm would not be permitted to review
Coopers' workpapers that day as previously agreed. Shortly thereafter,
representatives of Coopers held a conference call with the Audit Committee
Chairman and notified the Chairman that Coopers was resigning, effective
immediately, as the Company's independent accountant, and that Coopers was
withdrawing its audit reports relating to the Company's 1995 and 1996 financial
statements.
Set forth below is a description of the disagreements between
Coopers and the Company reportable under Rule 304(a)(1)(iv). These items were
discussed between Coopers and members of the Audit Committee at various times in
late March or in April 1998. The Company has authorized Coopers to respond fully
to inquiries of the successor accountant (when retained), including inquiries
concerning these matters.
1. E.F. JOHNSON COMPANY
(a) Revenue Recognition for Systems Contracts. E.F. Johnson
Company ("EFJ") is the Company's wholly-owned, consolidated subsidiary acquired
on July 31, 1997. Certain contract revenues totaling approximately $2,626,000
were recorded by EFJ during the fourth quarter of 1997. EFJ had historically
recognized revenues on system contracts using the "percentage of completion"
method, applying the ratio of costs incurred to date to the total cost of the
system. In late March 1998, Coopers informed the Company that costs of purchased
materials, even though incurred, should not be included in the percentage of
completion calculation until installation and integration of such materials into
the system has at least begun. The Company intends to make this change, which
will result in a substantial downward adjustment in the Company's 1997 annual
and fourth quarter consolidated operating results.
(b) Revenue Recognition for License of Technology. Revenue
from a license of technology by EFJ totaling $300,000 was recorded in the fourth
quarter of 1997 based upon the electronic delivery to the customer in that
quarter of certain technical know-how and documentation. Coopers' current
position is that, since the customer had a cancellation right and the payment
terms extend beyond one year, revenue should be recognized on an installment
basis. The Company notes
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that although the purchase agreement initially contained a cancellation right,
it was amended to eliminate such right prior to issuance of the Company's 1997
financial results. Nevertheless, the Company will recognize revenue on these
sales as payments are received. This change will result in a downward adjustment
in the Company's 1997 annual and fourth quarter consolidated operating results.
(c) Opening Balance Sheet of EFJ. EFJ's finished goods and
work in process inventory at July 31, 1997 totaled approximately $3 million. In
connection with its acquisition of EFJ, the Company did not believe that it was
appropriate to adjust such inventories to allocate a portion of the purchase
price for potential manufacturing profit on these inventories. Coopers reviewed
the allocation of purchase cost of EFJ at the time of the acquisition and
provided substantial assistance to the Company in preparing the opening balance
sheet of EFJ. On March 31, 1998, Coopers informed the Company that inventories
should have been adjusted for the manufacturing profit included in inventory at
the acquisition date. The Company intends retroactively to reduce goodwill and
increase inventories of EFJ by the amount of the manufacturing profit included
in inventory at the date of acquisition, effective July 31, 1997. No final
determination has been made at this time regarding the amounts of the
adjustments. The Company believes that these changes may impact the annual and
third and fourth quarter consolidated operating results for 1997.
A second issue is whether the opening balance sheet should
have been adjusted to reduce a $500,000 bad debt reserve that was established by
EFJ with respect to a receivable from a specific customer. The Company
ultimately collected the receivable after the customer received third party
financing of $30 million in the first quarter of 1998, and the Company left the
$500,000 reserve on the books. In connection with Coopers' audit for 1997,
Coopers informed the Company that the Company could not make any adjustments
retroactively to the EFJ opening balance sheet. Coopers' current position is
that this recovery should have been reflected retroactively by reducing the
goodwill recorded in the purchase allocation and eliminating the reserve that
had been established. This change could impact the annual and the third and
fourth quarter consolidated operating results for 1997. The Company is currently
evaluating these issues, including whether Coopers' current position is
consistent with SFAS No. 38, as interpreted in Staff Accounting Bulletin No. 92.
2. TRANSCRYPT INTERNATIONAL, INC.
(a) Revenue Recognition on Certain Government Agency Sales.
The Company recorded revenues on a number of "quick ship" sales involving
national security to a federal government agency based on the shipment of
products. This quick ship process began in mid-1996 and initially involved the
receipt by the Company from the customer of oral orders that included a federal
purchase request number. Later, in the second quarter of 1997, at the
recommendation of Coopers, this process was modified to include the receipt of a
"pro forma invoice" order signed by the customer reflecting all of the material
terms and conditions of the sale. The customer, in the usual course of business,
would subsequently reduce the transaction to a formal written agreement.
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Coopers has now advised the Company that such revenues should not have been
recorded until a formal written agreement was received, on the grounds that the
federal government's commitment may not have been perfected until that time. The
Company intends to adjust its historical financial statements to delay
recognition of the full amount of these revenues until the period that a formal
written agreement was received, and intends to follow this procedure in the
future. This change will impact the timing of revenue recognition in the
Company's 1997 consolidated operating results and may impact the 1996
consolidated operating results.
In addition, the Company also recorded, during the second and
third quarters of 1997, revenues totaling approximately $2.2 million on sales
for which the Company has not received formal written agreements from the
federal government agency customer. On March 25, 1998, the customer advised the
Company in writing that the person with whom the Company had been dealing in the
past in these transactions did not have the authority to bind the government.
The customer also advised the Company that it would not ratify these
transactions pursuant to the Company's ratification request dated March 11,
1998. On March 25, 1998, the Company filed a certified claim to recover the
amounts due on these sales. Coopers' position is that in light of these facts,
these revenues must be reversed in their entirety. The Company intends to
eliminate these revenues from its consolidated 1997 operating results and will
only recognize these revenues if this claim is favorably resolved.
(b) Revenue Recognition on Sales to Certain International
Dealers and Distributors. In mid-March 1998, Coopers reevaluated a number of
sales by the Company to certain international dealers and distributors during
1997. Coopers indicated that some of the dealers and distributors appeared to
lack a commitment and ability to pay for the products, and therefore the sales
should not have been recorded on the accrual basis. This disagreement relates to
the Company's program to offer financing for the purchase of the Company's
products by certain international dealers and distributors to further develop
the Company's distribution channels. At the time of each of these sales, the
Company received a written purchase order from the customer, and the Company
believed that each of these customers had the ability to pay for the products.
The Company currently believes that potential eliminations and adjustments to
the timing of revenues involve sales totaling an estimated $2.0 million in 1997.
The Company is continuing to review this issue, including the magnitude and
timing of any adjustments in 1997, whether any additional 1997 sales would be
involved and whether any adjustments may be required to 1996 consolidated
operating results.
(c) Other Revenue Recognition Issue. The Company believes that
Coopers first raised this issue as a disagreement subsequent to its resignation
on April 24, 1998. According to Coopers, the Company recorded revenues based
upon shipments to certain customers who had an explicit right to exchange the
product for other products. Coopers' position is that revenues on these sales
should not have been recorded until a final sale was consummated. Coopers has
indicated that adjustments will impact the annual and quarterly consolidated
operating results for 1997, but does not know whether 1996 and 1995 will be
affected. The Company is currently evaluating this issue.
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(v) Set forth below is a description of the events reportable
under Rule 304(a)(1)(v). The Company, and with respect to certain matters, the
special counsel to the Audit Committee, are currently evaluating these issues:
(A) Internal Controls: Coopers has informed the Company that
it believes that the Company's internal controls over the proper recording of
revenue transactions were deficient.
(B) Reliance on management representations/association with
financial statements prepared by management: Coopers has informed the Company's
Audit Committee in meetings in late March and in April 1998 that it believes
that it was possible that illegal acts may have been committed by Company
personnel, including management. In this regard, Coopers recommended that the
Audit Committee retain independent counsel to conduct a special investigation
into possible illegal acts. The Audit Committee retained independent counsel for
such purpose and such counsel's investigation is continuing. Coopers informed
the Audit Committee that under these circumstances, it could no longer rely on
representations made by Company management.
(C) Notification of need to expand audit scope and
identification of matters that may result in changes to financial statements of
1997 or prior years: Coopers informed the Company's Audit Committee, in
conjunction with its resignation on April 24, 1998, that it would have needed to
significantly expand its audit scope to examine all revenue transactions
recorded in 1995, 1996 and 1997 and all credit memos issued in those periods and
subsequently.
Coopers has also identified the following issues which it
believes may result in significant changes to financial statements of one or
more years and quarters, which Coopers believes were unresolved as the result of
its resignation prior to completion of the expanded audit scope:
1. Issues regarding the purchase accounting for the 1997
acquisition of EFJ, including reserves established as of the acquisition date
for restructuring, doubtful accounts and contracts in process, proper valuation
of purchased in-process research and development and whether a valuation
allowance is required for deferred tax assets.
2. Issues regarding the appropriateness of recording revenues
in 1996 and 1997 for transactions where goods may have been shipped to public
warehouses, family members, employees and to the Company itself.
3. Issues regarding the verification of the physical existence
and the valuation of inventory at customer locations, where there was
substantial uncertainty regarding the customer's commitment and ability to pay
for the products, and at other locations such as public warehouses, and
inventory returned to the Company after year-end where such inventory was not
accepted or was exchanged by the customer.
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4. Issues regarding the appropriateness of recording revenues
in 1996 and 1997 for sales of newly developed products for which engineering
development may not have been complete.
5. Issues regarding reserving for sales returns and
allowances.
6. Issues regarding the possible need for a valuation
allowance with respect to the Company's consolidated deferred tax asset balance.
(D) Matter that may require a change to 1996 financial
statements: Coopers informed the Audit Committee, in conjunction with its
resignation on April 24, 1998, of the need to make an adjustment to the 1996
financial statements for the following item, but due to Coopers' resignation
such adjustment has not yet been made:
The Company recorded $240,000 of revenues for engineering
services upon invoicing in November 1996; a contract was received dated December
31, 1996. These services may not have been completed until 1997. Coopers'
position is that revenues should not be recorded until the related services have
been provided. This change could negatively impact the Company's 1996 annual and
fourth quarter consolidated operating results and positively impact 1997 annual
and quarterly consolidated operating results.
The Company has requested from Coopers a letter addressed to
the Commission stating whether it agrees with all of the above statements (as in
response to Rule 304(a)). A copy of this letter will be filed as an exhibit to
an amended Report on Form 8-K promptly upon the Company's receipt of same.
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Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements.
None required.
(b) Pro Forma Financial Information.
None required.
(c) Exhibits.
The following are furnished as exhibits to this report:
99.1 News Release issued on April 27, 1998 by the Registrant.
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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: May 4, 1998 By: /s/ JEFFERY L. FULLER
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Jeffery L. Fuller
Chief Executive Officer
(Principal executive officer and duly
authorized signatory)
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INDEX TO EXHIBITS
Exhibit No. Description
99.1 News Release issued on April 27, 1998 by the Registrant.
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EXHIBIT 99.1
TRANSCRYPT INTERNATIONAL ANNOUNCES
RESIGNATION OF INDEPENDENT AUDITORS
Transcrypt International, Inc. (Nasdaq:TRIIE) announced today that
Coopers & Lybrand, L.L.P., has resigned effective April 24, 1998, as the
Company's independent auditors. In conjunction with its resignation, Coopers &
Lybrand advised the Company that their reports with respect to the consolidated
financial statements of Transcrypt and subsidiaries as of and for the years
ended December 31, 1995 and 1996 are withdrawn. Transcrypt is in the process of
retaining new accountants. Until such time as the Company retains new
independent auditors and new auditors' reports are issued, the Company's
previously issued financial statements should not be relied upon.
As previously announced, the investigation by the independent counsel
appointed by the Audit Committee is continuing and a report by another major
accounting firm retained to review the accounting treatment of certain
transactions is expected to be made to the Audit Committee today.
Transcrypt also announced today that on April 24 the Company contacted
Nasdaq to inform it of these events. Nasdaq informed the Company that it would
effect a temporary qualification trading halt in the Common Stock of Transcrypt
through at least May 7, 1998, the date on which Nasdaq has scheduled a hearing
to determine whether the Common Stock of Transcrypt will continue to be listed
on the Nasdaq National Market. The Company expects to present at this hearing
its timetable for filing its Annual Report on Form 10-K for the year ended
December 31, 1997 and amending its prior reports filed with the Securities and
Exchange Commission.
Transcrypt International, Inc., a Lincoln, Nebraska-based manufacturer
of information security and wireless communication products, acquired the E.F.
Johnson Company in July of 1997. Transcrypt's information security products
prevent the unauthorized interception of sensitive voice and data communication.
With the acquisition of E.F. Johnson, Transcrypt has more than 800 dealers and
distributors in 108 countries worldwide, and ranks as the third largest
manufacturer of land mobile radios in the United States.
This press release contains forward-looking statements and, as such,
may involve risks and uncertainties that are subject to the safe harbor created
by the Private Securities Litigation Reform Act of 1995.
CONTACT: Jeffery L. Fuller, President & CEO, or Craig J. Huffaker, CFO,
402-474-4800, both of Transcrypt International, Inc.; or Jeffrey S. Lloyd or
Steve Hawkins, both of Sitrick and Company, 310-788-2850
