<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
--------------------------------
Form 10-Q/A
(Amendment No. 1)
(Mark One)
[X] Quarterly report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to _______________
Commission File Number 0-21681
TRANSCRYPT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0801192
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4800 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 [ ] NO [X]
As of April 15, 1997, 9,283,078 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
MARCH 31, 1997 AND DECEMBER 31, 1996
(As Restated, See Note 11)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,025,895 $ --
Accounts receivable, net 2,003,889 1,256,800
Inventory 3,806,090 2,852,571
Income taxes recoverable -- 213,329
Prepaid expenses and other current assets 217,495 88,692
Deferred tax assets 2,060,628 1,773,140
------------ ------------
Total current assets 22,113,997 6,184,532
------------ ------------
Property, plant and equipment, at cost 6,975,111 6,100,051
Less: accumulated depreciation (1,962,147) (1,774,966)
------------ ------------
Net property, plant and equipment 5,012,964 4,325,085
------------ ------------
Deferred tax assets 515,157 438,983
Intangible assets, net 394,355 421,470
Deferred public offering costs -- 568,049
------------ ------------
$ 28,036,473 $ 11,938,119
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ -- $ 385,694
Revolving line of credit and bank notes payable -- 1,022,000
Current portion of long-term debt 11,037 595,762
Accounts payable 869,487 1,174,364
Accrued expenses 1,219,728 1,162,011
Income taxes payable 41,167 --
------------ ------------
Total current liabilities 2,141,419 4,339,831
------------ ------------
Long-term debt, net of current portion 2,850,000 1,839,942
Deferred revenue 226,559 --
Revolving line of credit -- 792,070
------------ ------------
5,217,978 6,971,843
------------ ------------
Stockholders' equity:
Common stock 92,831 67,831
Additional paid-in capital 26,687,670 9,002,962
Accumulated deficit (3,962,006) (4,104,517)
------------ ------------
22,818,495 4,966,276
------------ ------------
$ 28,036,473 $ 11,938,119
============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE> 3
TRANSCRYPT INTERNATIONAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited And As Restated, See Note 11)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues $ 3,511,946 $ 2,441,612
Cost of sales 1,272,360 880,061
----------- -----------
Gross profit 2,239,586 1,561,551
Operating expenses:
Research and development 633,219 436,056
Sales and marketing 941,467 468,673
General and administrative 572,242 625,944
----------- -----------
Total operating expenses 2,146,928 1,530,673
----------- -----------
Income from operations 92,658 30,878
Interest income 125,475 --
Interest expense (49,087) (18,612)
----------- -----------
Income before income taxes 169,046 12,266
Provision for income taxes 26,535 --
----------- -----------
Net income $ 142,511 $ 12,266
=========== ===========
Pro forma information:
Income before pro forma income taxes $ 169,046 $ 12,266
Pro forma provision for income taxes 26,535 4,375
----------- -----------
Pro forma net income $ 142,511 $ 7,891
=========== ===========
Pro forma net income per share - Basic $ 0.02 $ 0.00
=========== ===========
- Diluted $ 0.02 $ 0.00
=========== ===========
Weighted average common shares - Basic 8,699,745 6,783,078
=========== ===========
- Diluted 9,281,849 7,325,492
=========== ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE> 4
TRANSCRYPT INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited And As Restated, See Note 11)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net cash flow provided by (used in) operating activities $ (2,655,417) $ 939,432
------------ ------------
Cash flow from investing activities:
Purchase of fixed assets (687,879) (164,983)
Payment under noncompete agreement -- (85,000)
------------ ------------
Net cash used in investing activities (687,879) (249,983)
------------ ------------
Cash flow from financing activities:
Issuance of industrial development revenue bonds 2,850,000 --
Payment of industrial development revenue bonds (850,000) --
Debt issuance costs of industrial development revenue bonds (75,493) --
Payment on term loans, lines of credit and capitalized leases (1,879,330) (100,800)
Bank overdraft (385,694) --
Proceeds from IPO, net 17,709,708 --
------------ ------------
Net cash provided by (used in) financing activities 17,369,191 (100,800)
Net increase in cash 14,025,895 588,649
Cash and cash equivalent, beginning of period -- 291,712
------------ ------------
Cash and cash equivalent, end of period $ 14,025,895 $ 880,361
============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE> 5
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited And as Restated, See Note 11)
1. GENERAL
The condensed consolidated balance sheet of Transcrypt International,
Inc. ("Transcrypt" or the "Company") at December 31, 1996 has been taken from
restated audited financial statements at that date and condensed. The condensed
consolidated financial statements as of March 31, 1997 and for the three months
ended March 31, 1997 and 1996 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
restated 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/A (Amendment
No. 1) for the year ended December 31, 1996. The results of operations and cash
flows for the three months ended March 31, 1997 are not necessarily indicative
of the results for the entire fiscal year ending December 31, 1997.
Where appropriate, items within the condensed consolidated financial
statements have been reclassified from the previous periods to conform to the
current year's presentation.
2. ORGANIZATION AND CONSOLIDATION
Transcrypt International, Ltd. (the "Predecessor") was a limited
partnership formed in 1991 composed of the general partner, Transcrypt
International, Inc., a Nebraska corporation, and various limited partners.
Effective June 30, 1996, the assets and liabilities of the partnership were
merged tax-free into a Delaware corporation, Transcrypt International, Inc. Each
respective partnership unit was converted pro rata into common shares of the
Company.
The restated condensed 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.
3. PRO FORMA PROVISION FOR INCOME TAXES
The pro forma provision for income taxes reflects the provision for
income taxes as if the Company had been taxed as a C Corporation under the
Internal Revenue Code of 1986, as amended, for the three months ended March 31,
1996.
4. PRO FORMA 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
<PAGE> 6
such as stock options. All current and prior periods' EPS calculations included
herein have been restated under the provisions of FAS 128. Pro forma net income
per share - diluted includes incremental shares for outstanding stock options of
582,104 and 542,414 shares for the three months ended March 31, 1997 and 1996,
respectively.
Pro forma net income per share for 1996 is computed on the basis of the
weighted average number of partnership interest units outstanding during the
period 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 stockholders
approved an increase in the Company's authorized common shares from 10 million
to 20 million. 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.
5. INITIAL PUBLIC OFFERING
On January 22, 1997, the Company completed an initial public offering
of 2,900,000 shares of common stock at a price of $8.00 per share. Of the
2,900,000 shares offered, 2,500,000 shares were sold by the Company and 400,000
were sold by certain of the Company's stockholders. The Company's net proceeds
from the offering, after underwriting commissions and expenses, were
approximately $17,710,000.
A portion of the Company's net proceeds from the offering was used to
retire certain term and installment notes payable and the revolving lines of
credit, as described in Notes 7 and 8. As of April 21, 1997, the remaining net
proceeds were being used for general working capital purposes and to support
the Company's growth and business strategy.
6. INVENTORY
The following is a summary of inventory at March 31, 1997 and December
31, 1996:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
---------- ----------
<S> <C> <C>
Raw materials and supplies $1,739,282 $1,373,415
Work in progress 291,523 715,032
Finished goods 1,775,285 764,124
---------- ----------
$3,806,090 $2,852,571
========== ==========
</TABLE>
<PAGE> 7
7. REVOLVING LINES OF CREDIT
As of March 31, 1997, the Company had a working capital revolving line
of credit not to exceed $3,000,000, calculated using a specified borrowing base
of eligible inventories and accounts receivable. In addition, the Company had a
second revolving capital line of credit not to exceed $1,000,000, calculated
using a specified borrowing base of certain eligible fixed assets. At December
31, 1996, the Company had $1,022,000 outstanding on the working capital line of
credit and $792,070 outstanding on the capital line of credit. On January 27,
1997, these revolving lines of credit were repaid in full using a portion of the
net proceeds from the initial public offering.
8. LONG-TERM DEBT
On January 27, 1997, two term notes payable (totaling $626,791 at
December 31, 1996) and an installment note payable (totaling $359,017 at
December 31, 1996) were repaid using a portion of the net proceeds from the
initial public offering.
On March 25, 1997, industrial development revenue bonds payable
(totaling $850,000 at December 31, 1996) and a construction note payable
(totaling $584,797 at December 31, 1996) were repaid through the issuance of new
industrial revenue bonds totaling $2,850,000. The new industrial revenue bonds
are due in annual principal payments of $140,000, plus interest at a variable
rate (3.5% at March 31, 1997), starting 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 March 1, 2017. At March 31, 1997, the remaining net
proceeds of $1,054,252 (net of debt offering costs) were held in escrow for the
Company pending the completion of the construction project and related purchase
of certain fixed assets by the Company.
9. COMMITMENTS AND CONTINGENCIES
For discussion of Commitments and Contingencies see Note 13 of the
Notes to the Company's Consolidated Financial Statements contained in the
Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission (the "SEC") on July 15, 1998.
10. SUBSEQUENT EVENTS
On July 31, 1997, the Company completed the acquisition of E.F. Johnson
Company ("EFJ") in exchange for cash consideration of $436,000 and the issuance
of 832,465 shares of the Company's common stock, with an approximate market
value of $10,000,000. As of April 21, 1997, transaction costs and restructuring
costs for changes to EFJ's operations were expected to approximate $5,000,000.
EFJ develops and manufactures wireless communications products and
systems primarily for the land mobile radio market.
<PAGE> 8
On October 20, 1997, the Company completed a secondary offering of
5,175,000 shares of common stock at a price of $21.00 per share. Of the
5,175,000 shares offered, 2,684,481 shares were sold by the Company and
2,490,519 were sold by certain of the Company's stockholders. The Company's net
proceeds from the offering, after underwriting commissions and expenses, were
approximately $52,939,000.
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.
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.
<PAGE> 9
On July 8, 1998, the Company's primary bank lender, U.S. Bank National
Association ("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.
The Company has been named as a defendant in several class action and
other 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 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. 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.
<PAGE> 10
11. 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 for the quarters ended March 31, 1997 and 1996, and the
year ended December 31, 1996, 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. As
a result, the financial statements of the Company have been restated from
amounts previously reported.
The summary of the significant restatements as of March 31, 1997 and
December 31, 1996 and for the three months ended March 31, 1997 and 1996 is as
follows:
<PAGE> 11
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
As of March 31, 1997 As of December 31, 1996
------------------------------- -------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
------------ ------------ ------------ ------------
ASSETS (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 14,025,895 $ 14,025,895 $ -- $ --
Accounts Receivable, net 5,970,533 2,003,889 4,215,403 1,256,800
Inventory 2,855,133 3,806,090 2,261,381 2,852,571
Income taxes recoverable -- -- -- 213,329
Prepaid expenses and other current assets 217,495 217,495 71,196 88,692
Deferred tax assets 293,924 2,060,628 196,234 1,773,140
------------ ------------ ------------ ------------
Total current assets 23,362,980 22,113,997 6,744,214 6,184,532
------------ ------------ ------------ ------------
Property, plant and equipment, at cost 7,603,486 6,975,111 6,672,832 6,100,051
Less: accumulated depreciation (1,922,599) (1,962,147) (1,765,394) (1,774,966)
------------ ------------ ------------ ------------
Net property, plant and equipment 5,680,887 5,012,964 4,907,438 4,325,085
------------ ------------ ------------ ------------
Deferred tax assets 1,723,190 515,157 1,723,190 438,983
Intangible assets, net 36,022 394,355 38,137 421,470
Deferred public offering costs -- -- 568,049 568,049
============ ============ ============ ============
$ 30,803,079 $ 28,036,473 $ 13,981,028 $ 11,938,119
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ -- $ -- $ 385,694 $ 385,694
Revolving line of credit and bank notes payable -- -- 1,022,000 1,022,000
Current portion of long-term debt 11,037 11,037 595,762 595,762
Accounts payable 869,487 869,487 1,174,364 1,174,364
Accrued expenses 1,190,092 1,219,728 946,406 1,162,011
Income taxes payable 406,390 41,167 151,894 --
------------ ------------ ------------ ------------
Total current liabilities 2,477,006 2,141,419 4,276,120 4,339,831
------------ ------------ ------------ ------------
Long-term debt, net of current portion 2,850,000 2,850,000 1,839,942 1,839,942
Deferred revenue -- 226,559 -- --
Revolving line of credit -- -- 792,070 792,070
------------ ------------ ------------ ------------
5,327,006 5,217,978 6,908,132 6,971,843
------------ ------------ ------------ ------------
Stockholders' equity:
Common stock 92,831 92,831 67,831 67,831
Additional paid-in capital 27,379,139 26,687,670 9,683,381 9,002,962
Accumulated deficit (1,995,897) (3,962,006) (2,678,316) (4,104,517)
------------ ------------ ------------ ------------
25,476,073 22,818,495 7,072,896 4,966,276
============ ============ ============ ============
$ 30,803,079 $ 28,036,473 $ 13,981,028 $ 11,938,119
============ ============ ============ ============
</TABLE>
<PAGE> 12
TRANSCRYPT INTERNATIONAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------
March 31, 1997 March 31, 1996
----------------------------- ------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 4,728,403 $ 3,511,946 $ 2,580,215 $ 2,441,612
Cost of sales 1,632,127 1,272,360 911,138 880,061
----------- ----------- ----------- -----------
Gross profit 3,096,276 2,239,586 1,669,077 1,561,551
----------- ----------- ----------- -----------
Operating expenses:
Research and development 633,219 633,219 436,056 436,056
Sales and marketing 1,086,117 941,467 430,750 468,673
General and administrative 478,306 572,242 625,944 625,944
----------- ----------- ----------- -----------
Total operating expenses 2,197,642 2,146,928 1,492,750 1,530,673
----------- ----------- ----------- -----------
Income from operations 898,634 92,658 176,327 30,878
Interest income 125,475 125,475 -- --
Interest expense (49,087) (49,087) (18,612) (18,612)
----------- ----------- ----------- -----------
Income before income taxes 975,022 169,046 157,715 12,266
Provision for income taxes 292,507 26,535 -- --
=========== =========== =========== ===========
Net income $ 682,515 $ 142,511 $ 157,715 $ 12,266
=========== =========== =========== ===========
Pro forma information:
Income before pro forma income taxes $ 975,022 $ 169,046 $ 157,715 $ 12,266
Pro forma provision for income taxes 292,507 26,535 37,930 4,375
=========== =========== =========== ===========
Pro forma net income $ 682,515 $ 142,511 $ 119,785 $ 7,891
=========== =========== =========== ===========
Pro forma net income per share - Basic $ 0.08 $ 0.02 $ 0.02 $ 0.00
=========== =========== =========== ===========
- Diluted $ 0.07 $ 0.02 $ 0.02 $ 0.00
=========== =========== =========== ===========
Weighted average common shares - Basic 8,699,744 8,699,745 6,783,078 6,783,078
=========== =========== =========== ===========
- Diluted 9,177,989 9,281,849 6,968,712 7,325,492
=========== =========== =========== ===========
</TABLE>
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth certain restated Consolidated
Statements of Operations information as a percentage of revenues during the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------
1997 1996
------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenues $ 3,511,946 100.0% $ 2,441,612 100.0%
Cost of sales 1,272,360 36.2% 880,061 36.0%
----------- ------- ----------- -------
Gross profit 2,239,586 63.8% 1,561,551 64.0%
Operating expenses
Research and development 633,219 18.0% 436,056 17.9%
Sales and marketing 941,467 26.8% 468,673 19.2%
General and administrative 572,242 16.3% 625,944 25.6%
----------- ------- ----------- -------
Total operating expenses 2,146,928 61.1% 1,530,673 62.7%
----------- ------- ----------- -------
Income from operations 92,658 2.6% 30,878 1.3%
Interest income 125,475 3.6% -- 0.0%
Interest expense (49,087) (1.4)% (18,612) (0.8)%
----------- ------- ----------- -------
Income before income taxes 169,046 4.8% 12,266 0.5%
Provision for income taxes 26,535 0.8% -- 0.0%
----------- ------- ----------- -------
Net income $ 142,511 4.1% $ 12,266 0.5%
=========== ======= =========== =======
Income before pro forma income taxes 169,046 4.8% 12,266 0.5%
Pro forma provision for income taxes 26,535 0.8% 4,375 0.2%
----------- ------- ----------- -------
Pro forma net income $ 142,511 4.1% $ 7,891 0.3%
=========== ======= =========== =======
</TABLE>
Discussions of certain matters contained in this Quarterly Report on Form
10-Q/A may constitute forward-looking statements under Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements may involve risks and uncertainties.
These forward-looking statements relate to, among other things, expectations of
the business environment in which the Company operates, projections of future
performance, both in domestic and international markets, perceived opportunities
in the market, and statements regarding the Company's mission and vision. The
Company's actual results, performance and achievements may differ materially
from the results, performance and achievements expressed or implied in such
forward-looking statements and from historical results. Among the factors that
could cause such a difference include the following: business conditions
generally, the state of the overall economy, development of the markets for the
Company's products, including the domestic digital land mobile radio market,
availability of third-party compatible products, other competitive factors, and
the risks and uncertainties discussed in the Company's reports filed with the
Securities and Exchange Commission, including under the caption "ITEM 1.
BUSINESS -- Summary of Business Considerations and Certain Factors That May
Affect Future Results of Operations and/or Stock Price" contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
The following discussion is intended to provide a better understanding of
the significant changes in trends relating to the Company's financial condition
and results of operations. Management's Discussion and Analysis should be read
in conjunction with the accompanying Consolidated Financial Statements and Notes
thereto.
<PAGE> 14
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.
Costs associated with the installation and servicing of equipment are
charged to expense as incurred and allowances are provided for returns. The
Company defers income for prepayments of significant initial engineering costs,
which are components of the selling price of certain products sold. Also
included in deferred revenue are prepayments from foreign customers for which
goods cannot be shipped until certain export regulations are met.
Revenues increased 43.8% to $3.5 million during the first quarter of 1997
from $2.4 million during the first quarter of 1996. This increase was
attributable primarily to revenues in the first quarter of 1997 associated with
several large sales contracts and the completion of the remaining minimum
shipments of socket scrambler modules to Motorola called for under an agreement
with the Company. Sales of the Company's core security products for the land
mobile radio ("LMR") and cellular telephone markets continued to grow in the
first quarter of 1997, particularly in international markets, while sales of the
Company's recently introduced digital LMRs were not significant in the first
quarter of 1997.
In August 1995, the Company entered into a three-year supply agreement with
Motorola to provide socket scrambler modules at fixed prices for domestic
markets. Such agreement provided for minimum purchases by Motorola of $3.7
million of socket scrambler modules during the 18-month period beginning on
April 1, 1996 (of which $2.1 million had been purchased as of December 31,
1996). In the first quarter of 1997, this agreement was amended such that
Motorola agreed to complete its minimum purchase commitment by purchasing $1.0
million of socket scrambler modules, which are exportable into certain
international markets. Although Motorola has no further minimum purchase
requirement under the agreement, as of April 21, 1997, the Company believed that
the opportunity to sell exportable products into foreign markets through
Motorola under the terms of the supply agreement would, in the future, allow the
Company to expand the markets in which it serves in Latin American and Asia.
International sales as a percentage of revenues were approximately 73.0%
and 36.5% during the first quarters of 1997 and 1996, respectively. The Company
believes that the proportion of international sales in the first quarter of 1997
was unusually high, reflecting sales of items for export to several large
customers, including Motorola. As of April 21, 1997, the Company anticipated
that international sales would continue to represent a significant portion of
revenues in the future, although domestic sales might increase as a percentage
of revenues in the future due to the Company's increased marketing emphasis on
domestic sales, including the expanded marketing domestically of the Company's
digital radio products in 1997.
<PAGE> 15
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 $2.2 million in
the first quarter of 1997 from $1.6 million in the first quarter of 1996. In
addition, gross margin remained relatively constant, decreasing to 63.8% in the
first quarter of 1997 from 64.0% in the first quarter of 1996. The gross margin
declined as a result of product mix. Shipments of the Company's stand-alone LMR
and cellular telephone products continued in the first quarter of 1997, which
generally have lower gross margins than add-on modules and other products.
Overall margins remained relatively strong since the Company's core add-on
products continued to account for a significant portion of sales during the
quarter. Future gross margins are likely to vary based predominantly upon the
mix of products comprising 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 $633,000 in the first quarter of 1997 from $436,000 in the
first quarter of 1996. This increase was due primarily to expenses related to
the continuing development of the Company's APCO 25 digital LMRs and telephony
products, and expanded development efforts related to the Company's proposed
data security products. Research and development expenses as a percentage of
revenues increased to 18.0% in the first quarter of 1997 from 17.9% in the first
quarter of 1996. As of April 21, 1997, the Company anticipated that it would
continue to devote increased overall resources to research and development
during 1997 relative to 1996.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and related
costs of sales personnel, including sales commissions and travel expenses, and
costs of advertising, public relations, bad debt provisions and trade show
participation. Sales and marketing expenses increased to $941,000 in the first
quarter of 1997 from $469,000 in the first quarter of 1996, primarily due to the
addition of direct sales personnel and associated expenses. Sales and marketing
expenses increased as a percentage of revenues to 26.8% in the first quarter of
1997 from 19.2% in the first quarter of 1996, due to the large increase in
expenditures in the first quarter of 1997. As of April 21, 1997, the Company
expected to continue its increased commitment to sales and marketing during 1997
through the addition of direct sales and marketing personnel, primarily to
support the introduction of new products, including digital LMRs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries and
other expenses associated with the Company's management, accounting, finance and
administrative functions and amortization of intangible assets. General and
administrative expenses decreased to $572,242 in the
<PAGE> 16
first quarter of 1997 from $625,944 in the first quarter of 1996. Amortization
expense decreased to $27,000 in the first quarter of 1997 from $276,000 in the
first quarter of 1996, which was partially offset by an increase in cost
attributable primarily to the addition of several administrative employees and
costs associated with becoming a publicly-held company in the first quarter of
1997. Amortization expense for the first three months of 1997 included the
amortization of a license fee with Motorola. 1996 intangible assets consisted
primarily of the costs associated with the acquisition of the Company's business
in December 1991. The Company amortized these intangible assets on a
straight-line basis over a 60-month period, which resulted in an amortization
expense of $276,000 in the first quarter of 1996. As of April 21, 1997, the
Company expected to continue to incur additional general and administrative
expenses in 1997 due to costs associated with being a publicly-held company and
upgrades to the Company's management information systems. General and
administrative expenses as a percentage of revenues decreased to 16.3% in the
first quarter of 1997 from 25.6% in the first quarter of 1996.
NET INTEREST INCOME (EXPENSE)
Net interest income (expense) 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 $76,000 in the first quarter of 1997 and net interest expense was
($19,000) in the first quarter of 1996.
PROVISION FOR INCOME TAXES
Prior to June 1996, the Company was organized as a partnership, and
therefore was not subject to income taxation except to the extent that its
earnings were attributed to its partners. The Company converted from a
partnership to a "C" corporation effective June 30, 1996. Pro forma net income
and pro forma net income per share calculations reflect a pro forma provision
for income taxes as if the Company had been taxed as a "C" corporation in the
first quarter of 1996.
The Company has benefited and continues to benefit from state tax credits
arising from a 1993 agreement with the State of Nebraska, which results in
annual state income tax credits through 1999. In addition, the Company utilizes
its foreign sales corporation subsidiary located in Guam to exempt from income
taxation a portion of the Company's foreign sales income.
LIQUIDITY AND CAPITAL RESOURCES
As of April 21, 1997, the Company had financed its operations and met its
capital requirements primarily through short-term borrowings, long-term debt, an
initial public offering completed on January 22, 1997, and cash flow generated
from operations in years prior to 1997. The Company's operating activities used
cash of $2.7 million in the first quarter of 1997 and generated cash of $939,000
in the first quarter of 1996. Cash used in operating activities in the first
quarter of 1997 consisted primarily of an increase in accounts receivable and
inventory and a decrease in accounts payable offset in part by net income plus
depreciation and an increase in accrued expenses. Cash provided by operating
activities in the first quarter of 1996 consisted primarily of net income plus
depreciation and amortization and a decrease in accounts receivable, offset in
part by a decrease in accrued expenses.
<PAGE> 17
The deferred tax assets totaling $2.6 million (which resulted primarily
from the stock option related special compensation expense of $5.4 million
incurred in September 1996) were 9.2% and 11.3% of total assets and
stockholders' equity, respectively, at March 31, 1997. Management believes that
it is more likely than not that future taxable income will be sufficient to
fully utilize all deferred tax assets recorded.
Cash used for investing activities, attributable primarily to capital
expenditures, totaled $688,000 and $250,000 in the first quarter of 1997 and
1996, respectively. Capital expenditures consisted primarily of computer and
networking equipment, office furniture and manufacturing equipment for both
quarters and expenses related to the construction at the Company's Lincoln
facility in the first quarter of 1997. In August 1996, the Company began
construction of a 21,000 square foot expansion of its existing Lincoln facility
at an estimated final cost of $1.0 million, primarily to accommodate additional
manufacturing capacity. As of April 21, 1997, the expansion was expected to be
completed in the second quarter of 1997. As of March 31, 1997, the Company had
no additional firm commitments for capital expenditures, but the Company still
expected to purchase additional computer equipment and replace its current
management information system in 1997.
Financing activities, which have consisted primarily of borrowings under
and payments on an industrial development revenue bond issue ("IDR"), term and
installment notes payable, a construction loan and bank lines of credit and
proceeds received from the Company's initial public offering completed on
January 22, 1997 totaled $17.4 million cash provided and $101,000 cash used
during the first quarters of 1997 and 1996, respectively.
The Company's two term notes were secured by substantially all of the
Company's assets, with interest payable at the bank's regional money market rate
plus 0.5%. The installment note was secured specifically by equipment with
interest at the bank's national prime rate plus 0.5%. The bank lines of credit
provided for working capital and capital advances not to exceed $4.0 million,
with specific advances calculated based upon a percentage of eligible
inventories, accounts receivable and fixed assets. As of April 21, 1997,
interest was payable monthly at the bank's money market rate and the lines of
credit were collateralized by substantially all of the Company's assets. The
Company paid off all of the outstanding balances on the two term notes, the
installment note and the bank lines of credit on January 27, 1997.
At March 31, 1997, the Company had outstanding a construction loan to fund
the expansion of its existing Lincoln facility, with an outstanding principal
balance of $585,000. Interest on this loan was payable monthly at the bank's
national money market rate plus 0.5% with the principal balance maturing in
August 1997.
The IDR outstanding at December 31, 1996 totaled $850,000 in principal
amount, bore a fixed interest rate of 6.25%, was non-amortizing and was
scheduled to mature in January 2004. On March 25, 1997, the existing IDR of
$850,000 and the construction note payable of $892,000 were repaid through the
issuance of a new IDR totaling $2,850,000. The new IDR is due in annual
principal payments of $140,000, plus interest at a variable rate (3.5% at March
31, 1997), 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 March 31, 1997, the remaining net proceeds of $1.1
million (net of
<PAGE> 18
debt offering costs and the aforementioned repayments) were held in escrow for
the Company pending the completion of the Company's construction project and
related purchases of certain fixed assets.
As of April 21, 1997, the Company intended to retain earnings, if any, to
support its growth strategy and did not anticipate paying cash dividends in the
foreseeable future.
As of April 21, 1997, the Company believed that cash generated from
operations and the net proceeds of $17.7 million from the sale of common stock
in the initial public offering completed on January 22, 1997, together with the
Company's cash, cash equivalents and lines of credit, would be sufficient to
meet its anticipated cash needs for working capital, capital expenditures and
business expansion plans through at least 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
<PAGE> 19
PART II. OTHER INFORMATION
ITEMS 1 - 5.
Not applicable.
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>
10.10.1* Second Amendment, dated March 31, 1997, to Private Label/Supplier
Agreement for Analog Scrambling Modules between Motorola, Inc.
and the Company dated as of August 8, 1995. (1)
10.27.1 Fifth Amendment, dated as of March 1, 1997, to Amended and
Restated Loan Agreement, dated as of May 18, 1994, by and between
Norwest Bank Nebraska, N.A., and the Company. (1)
10.31 Nebraska Investment Finance Authority $2,850,000 Variable Rate
Demand Industrial Development Revenue Bond (Transcrypt
International, Inc. Project), Series 1997, dated as of March 25,
1997. (1)
10.32 Trust Indenture, dated as of March 1, 1997, for $2,850,000
Variable Rate Demand Industrial Development Revenue Bond
(Transcrypt International, Inc. Project), Series 1997, between
Nebraska Investment Finance Authority as Issuer and Norwest Bank
Nebraska, N.A. as Trustee. (1)
10.33 Loan Agreement, dated as of March 1, 1997, for $2,850,000
Variable Rate Demand Industrial Development Revenue Bond
(Transcrypt International, Inc. Project), Series 1997, between
Nebraska Investment Finance Authority as Issuer and the Company.
(1)
11 Computation of pro forma net income per share.
27 Financial Data Schedule
</TABLE>
- ----------
(1) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 filed with the SEC on
April 21, 1997.
* Confidential treatment has previously been granted by the SEC as to
a portion of this exhibit.
<PAGE> 20
(B) REPORTS ON FORM 8-K
The registrant filed no reports on Form 8-K during the quarter ended
March 31, 1997.
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 28, 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 PRO FORMA NET INCOME PER SHARE
(Unaudited And As Restated, See Note 11)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 31, March 31,
1997 1996
--------- ----------
<S> <C> <C>
Pro Forma Net Income $ 142,511 $ 7,891
========= ==========
PRO FORMA NET INCOMED PER SHARE - BASIC
Weighted average common shares - Basic 8,699,745 6,783,078
========= ==========
Pro forma net income per share - Basic $ 0.02 $ 0.00
========= ==========
PRO FORMA NET INCOMED PER SHARE - DILUTED
Shares used in this computation:
Weighted average common shares - Basic 8,699,745 6,783,078
Diluted effect of shares under employee stock plans 582,104 542,414
========= ==========
Weighted average common shares - Diluted 9,281,849 7,325,492
========= ==========
Pro forma net income per share - Diluted $ 0.02 $ 0.00
========= ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TRANSCRYPT
INT'L INC.'S CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED
BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 14,026
<SECURITIES> 0
<RECEIVABLES> 2,004
<ALLOWANCES> 0
<INVENTORY> 3,806
<CURRENT-ASSETS> 22,114
<PP&E> 6,975
<DEPRECIATION> 1,962
<TOTAL-ASSETS> 28,036
<CURRENT-LIABILITIES> 2,141
<BONDS> 2,850
0
0
<COMMON> 93
<OTHER-SE> 22,726
<TOTAL-LIABILITY-AND-EQUITY> 28,036
<SALES> 3,512
<TOTAL-REVENUES> 3,512
<CGS> 1,272
<TOTAL-COSTS> 1,272
<OTHER-EXPENSES> 2,147
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (99)<F1>
<INCOME-PRETAX> 169
<INCOME-TAX> 27
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
<FN>
<F1>INTEREST EXPENSE IS NET OF $125 INTEREST INCOME AND $49 OF INTEREST EXPENSE.
</FN>
</TABLE>
