<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): MAY 4, 1998
---------------------------------------------
TRANSCRYPT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-21681 47-0801192
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification Number)
4800 NW FIRST STREET, LINCOLN, NEBRASKA 68521
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (402) 474-4800
<PAGE> 2
Item 4. Changes in Registrant's Certifying Accountant.
On May 18, 1998, Transcrypt International, Inc. (the "Company")
received the response of its former auditors, Coopers & Lybrand L.L.P.
("Coopers"), to the Company's Current Report on Form 8-K filed with the
Commission on May 4, 1998, which Form 8-K announced that Coopers had resigned as
the Company's independent public accountant and had withdrawn its opinion on the
Company's 1995 and 1996 financial statements, among other things. The March 18,
1998 response of Coopers, annexed hereto as Exhibit 16, is incorporated in its
entirety by reference in response to this Item 4. The position of the Company on
disputed issues is set forth in its May 4, 1998 Form 8-K filing, which is
incorporated herein by this reference. The Company does not agree with Coopers'
characterization of certain events in its response or the implications of
Coopers' statements.
1
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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:
16 Letter from Coopers & Lybrand L.L.P. to the
Commission dated May 18, 1998.
2
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
TRANSCRYPT INTERNATIONAL, INC.
Date: May 20, 1998 By: /s/ JEFFERY L. FULLER
-----------------------------------
Jeffery L. Fuller
Chief Executive Officer
(Principal executive officer and
duly authorized signatory)
<PAGE> 5
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
16 Letter from Coopers & Lybrand L.L.P. to the Commission dated
May 18, 1998.
<PAGE> 1
EXHIBIT 16
[LETTERHEAD OF COOPERS & LYBRAND, L.L.P., OMAHA, NEBRASKA OFFICE]
May 18, 1998
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
Ladies and Gentlemen:
We have read the statements made by Transcrypt International, Inc. (the
"Registrant") in its Form 8-K report that we understand the Registrant filed
with the Commission pursuant to Item 4 of Form 8-K on May 4, 1998 (copy
attached). We disagree with many of the Registrant's statements in its Form 8-K,
as we set forth below. Some of the reasons why we disagree with the Registrant's
statements are also set forth below. For ease in referring to specific portions
of the Form 8-K, we have numbered each of the Registrant's paragraphs as shown
in the attached copy of the Form 8-K and refer to the Registrant's statements by
those paragraph numbers.
1. In its fifth paragraph, the Registrant states that Coopers & Lybrand
L.L.P. ("C&L") worked with the Registrant's management in establishing
appropriate accounting policies, procedures and controls, including specific
revenue recognition policies. We do not agree with this statement. While C&L
commented on certain internal control matters over the years, C&L did not work
with the Registrant's management to establish accounting policies and procedures
for the Registrant, including the Registrant's revenue recognition policies. In
its fifth paragraph, the Registrant also indicates that C&L performed timely
interim reviews of the Registrant's quarterly financial statements since the
Registrant's initial public offering and reviewed significant year-end and
quarter-end sales. We would respond that, in accordance with AICPA standards, an
accountant's "review" of quarterly financial statements is substantially less in
scope than an audit, and such a review does not necessarily involve the
examination of documentary evidence related to any "reviewed" transaction.
Furthermore, with respect to the Registrant's year-end sales, the only year-end
since the Registrant's initial public offering was December 31, 1997. C&L
resigned prior to completing its audit procedures for the Registrant's year
ending December 31, 1997, and therefore the Registrant was not entitled to take
comfort that any transactions had been audited even though C&L was in the
process of performing certain audit procedures. Moreover, the Registrant was
aware that C&L, while conducting its audit procedures for year-end 1997, had
uncovered numerous issues with respect to improperly recorded transactions.
Further discussion of these points is set forth below.
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Securities and Exchange Commission
May 18, 1998
Page 2
2. In its sixth paragraph, the Registrant states that until mid-to-late
March 1998 it had received no indication from C&L of "disagreements" or other
"reportable events" under Rule 304 (actually, Item 304 of SEC Regulation S-K).
We do not agree with this statement, nor do we agree with the implications of
the Registrant's further statement in this paragraph that the C&L audit partner
had read the Registrant's February 6, 1998 press release announcing the
Registrant's financial results for 1997 and took no exception to it prior to
issuance. Starting on December 31, 1997, when C&L identified and reported to the
Registrant's management the percentage-of-completion issue at the Registrant's
E.F. Johnson subsidiary, and on a continuing basis thereafter, C&L raised
numerous questions to the Registrant's management relating to the Registrant's
revenue recognition and other issues as C&L identified them during the course of
its audit, which was never completed, of the Registrant's financial results for
1997. Moreover, the Registrant's management was aware at the time it issued its
February 6, 1998 press release that none of these issues had been resolved to
C&L's satisfaction. Prior to February 6, the C&L audit partner had discussed
with the Registrant's senior management the fact that there were numerous open
issues and incomplete audit procedures remaining in the audit. Indeed, on the
morning of February 6 before the press release was issued, the C&L audit partner
specifically discussed with the Registrant's senior management one of the
principal open issues. Further, the Registrant's management also was aware at
that time of its delays in completing its closing process and that it had not
provided C&L with sufficient time to complete critical audit procedures before
the Registrant issued its February 6 press release. For example, the Registrant
had not provided its 1997 consolidating schedules to C&L until late in the
evening of February 5, 1998. The Registrant issued its press release at
approximately 10:00 a.m. on February 6. C&L also at no time provided any
assurance to the Registrant that C&L had audited the financial results for 1997
that the Registrant announced in its February 6 press release. Further, despite
C&L's numerous requests to the Registrant from January 1998 on for additional
documentation and information to help C&L resolve the many accounting issues and
questions it had identified with respect to the Registrant's 1997 financial
results, the Registrant's management failed to provide C&L with any additional
documentation or information until after late February 1998, when C&L received
the first anonymous letter alleging wrongful revenue recognition by the
Registrant. After late February 1998, management was still very slow in
providing C&L with the documentation and information C&L had requested to
complete its audit. Even after the anonymous letters began to arrive in late
February 1998, the Registrant's management -- expressing incredulity that anyone
would question its accounting practices -- focused on finding out who had sent
the anonymous letters, rather than on the more important question, with which
C&L was concerned, of whether the allegations in the letters had any factual
basis. In fact, as C&L discovered, virtually all of the allegations in the
anonymous letters proved to be accurate. As C&L's attempts to audit the
Registrant continued, management's misdirected focus became increasingly
apparent. Over time, the numerous questions and possible accounting
misstatements by the Registrant that C&L had earlier identified and reported to
management eventually reached the level of
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Securities and Exchange Commission
May 18, 1998
Page 3
"disagreements" and other "reportable events" as C&L discussed with the
Registrant's management and ultimately with the Audit Committee.
3. In its seventh paragraph, the Registrant states that at a March 4,
1998 meeting with the Registrant's Audit Committee the C&L audit partner
indicated that the Registrant's reserve for receivables was adequate based on
the information that C&L had available at the time and that the sales referred
to in the first anonymous letter had been recorded consistent with the
Registrant's revenue recognition procedures, as previously approved by C&L. We
disagree with this statement. Concerning the Registrant's reserves for
receivables, C&L had specifically expressed concern during the March 4, 1998
meeting with the Registrant's Audit Committee regarding the adequacy of the
Registrant's reserves for receivables because of unanswered confirmations and
lack of subsequent cash collections. In addition, while it was the Registrant's
position at the March 4 meeting that the Registrant's underestimate of its
reserves for receivables at Transcrypt was offset by an overestimate of reserves
at the E.F. Johnson subsidiary the Registrant had acquired during 1997, C&L
subsequently learned of erroneous accounting for an E.F. Johnson receivable
collected after the acquisition, which resulted in the Registrant's overall
understatement of reserves (which is discussed in the formal "disagreement"
disclosed in the Registrant's sixteenth paragraph). In addition, at the time of
the March 4 Audit Committee meeting, the sales referenced in the first anonymous
letter (which sales also are the subject of the formal "disagreement" that the
Registrant disclosed in its eighteenth paragraph) continued to be an open item
in C&L's audit for which C&L had not received information that it had previously
requested, i.e., a written contract or confirmation from the government. C&L had
previously told the Registrant's management on several occasions that there had
to be some resolution of this issue before the Registrant's Form 10-K could be
filed. The Registrant's management knew this issue had not been resolved by
March 4, 1998, and C&L did not in any way advise the Registrant's Audit
Committee on March 4, 1998 that this issue had been resolved, as the Registrant
implies in its seventh paragraph. Our comments below in response to the
Registrant's seventeenth and eighteenth paragraphs deal further with these
sales. Our comments above in response to the Registrant's fifth paragraph also
apply here in response to the implication of Registrant's seventh paragraph that
C&L had approved revenue recognition procedures of the Registrant. In its
seventh paragraph, the Registrant additionally states that before it had issued
its March 5, 1998 press release saying that it continued to stand by its
previously issued financial statements and its previously announced financial
results, the C&L audit partner had read this press release and took no exception
to it. We disagree with the implications of this statement. While the C&L audit
partner knew the Registrant's position on March 5 was that the Registrant was
continuing to stand by its 1997 financial results that the Registrant had
announced on February 6, 1998, the C&L audit partner had never approved or
audited those financial results, as the Registrant's management was well aware.
In fact, at the time of the March 5 press release, the Registrant's management
was well aware that no resolution had been reached of the numerous accounting
issues and questions that C&L had raised to management.
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Securities and Exchange Commission
May 18, 1998
Page 4
4. In its eighth paragraph, the Registrant discusses that in mid-March
1998 it learned that the National Office of C&L had become involved in the
review of issues raised in the anonymous letters. We disagree with the
implications of this paragraph that C&L's National Office became involved solely
to review the issues raised by the anonymous letters. C&L's local office had
specifically requested the assistance of C&L's National Office after C&L had
received the anonymous letters. C&L's local office had requested the assistance
of C&L's National Office not only on the issues raised by the anonymous letters,
but also on the many other broader issues relating to the Registrant's
accounting. This broader scope included the many still open and unresolved
issues that C&L had previously identified to the Registrant's management. To
provide this broad assistance, it was necessary for the C&L National Office
partner to review the working papers that C&L's local office had prepared to
date. In further response to the Registrant's eighth paragraph, we would also
point out that, during the referenced meetings with the Registrant's management
and with the Audit Committee the week of March 23, 1998, the local C&L audit
partner always attended these meetings along with the representative of C&L's
National Office.
5. In its ninth paragraph, the Registrant states that during late March
and in April 1998 it provided additional documentation and information to us
regarding the transactions at issue. We disagree with any implication in this
statement that during this time period the Registrant had provided C&L with all
of the documentation and information that C&L had requested. Starting in January
1998 and continuing until April 24, 1998, when C&L resigned, there were at all
times outstanding documentation and information requests that C&L had made to
the Registrant that the Registrant had failed to satisfy. During the week of the
March 27, 1998 press release described in the Registrant's eighth paragraph, the
Registrant's management had engaged another accounting firm, TenEyck Associates,
Inc. ("TenEyck"), to review certain accounting issues that C&L had raised to
date for which the Registrant's management disagreed with C&L. Only after
consulting with TenEyck (and after receiving the March 25, 1998 letter from the
government customer referenced in the Registrant's eighteenth paragraph) did the
Registrant's management finally appear to acknowledge that it would have to
record adjustments to its previously announced financial results. Moreover, in
many cases the additional documentation and information the Registrant provided
C&L during this time period in response to C&L's requests only led C&L to make
additional requests for more documentation and information from the Registrant
because of the incomplete and questionable explanations that the Registrant
provided to C&L.
6. In its tenth paragraph, the Registrant states that on April 3, 1998,
its Board of Directors authorized the Audit Committee to engage another major
accounting firm to conduct a review, under SAS No. 50, of the accounting
principles C&L had proposed for the transactions in question because the Board
believed that C&L had a potential conflict of interest in reviewing its
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Securities and Exchange Commission
May 18, 1998
Page 5
prior work. We disagree with certain aspects of this statement and the
implications of the statement. The Registrant did not engage the other major
accounting firm, which was KPMG Peat Marwick ("KPMG"), to review C&L's prior
work; rather, KPMG was engaged to review C&L's accounting conclusions with which
C&L understood the Registrant's management disagreed. Further, we disagree with
the Registrant's statement that C&L had any potential conflict of interest in
reviewing its prior work. Since C&L's 1997 audit of the Registrant was in
progress and had not been completed, it was necessary and appropriate under
normal audit procedures for C&L to review its prior work to date, in conjunction
with its continuing examination of the Registrant's financial records,
particularly in light of the new information of which C&L had become aware as a
result of its ongoing inquiries and the anonymous letters. Moreover, until the
Registrant had so stated in its May 4, 1998 Form 8-K, neither the Board, the
Audit Committee nor KPMG had ever advised C&L of any belief that C&L had a
conflict of interest in reviewing its prior work to date in order to try to
complete its audit. We would also note that KPMG was the second accounting firm
the Registrant had engaged in a period of a few weeks to try to obtain an
accounting opinion different from what C&L had advised. It is C&L's
understanding that both of the other accounting firms that the Registrant
consulted with during this period -- TenEyck and KPMG -- agreed with C&L's
opinions on the accounting principles at issue. In its tenth paragraph, the
Registrant further states that the Audit Committee retained independent counsel
to conduct an investigation and advise the Audit Committee in connection with
certain matters, concurring with C&L's advice that it must do so. We believe
this statement by the Registrant requires further elaboration to be fully
accurate. On April 2, 1998, the day preceding the April 3 Board meeting that the
Registrant also discusses in this paragraph, the C&L audit partner and two C&L
National Office partners held a meeting with the Registrant's Audit Committee
(which is made up of three outside Directors of the Registrant). C&L had
initiated this meeting with the Audit Committee and had specifically requested
that the Audit Committee not permit the Registrant's management and counsel to
attend the meeting. C&L advised the Audit Committee at this private April 2
meeting that C&L had identified possible fraud by the Registrant, and that the
fraud possibly had been committed by, or at the direction of, the Registrant's
most senior management. C&L explained to the Audit Committee during the meeting
details of the primary circumstances and events that had led C&L to reach this
conclusion of possible fraud, including the fact, among others, that in late
March 1998 C&L's investigations had led it to a non-anonymous and apparently
credible source who expressly told C&L that the Registrant's management had
intentionally manipulated sales revenues. During the April 2 meeting, C&L told
the Audit Committee that, because of the possibility of fraud and illegal acts,
(1) in C&L's opinion, the Audit Committee should retain special counsel who was
independent of the Registrant and its management to conduct an investigation to
determine whether fraud or other illegal acts in fact had occurred; and (2) if
the Audit Committee did not do this, C&L would resign. In response, the
Registrant's outside counsel made repeated attempts to convince C&L and the
Audit Committee that the Audit Committee did not need to retain special counsel.
On April 7, 1998, the same three C&L partners had a telephonic meeting with the
Audit
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Securities and Exchange Commission
May 18, 1998
Page 6
Committee in which C&L repeated its position that, if the Audit Committee did
not retain special counsel to investigate the possible fraud, C&L would resign.
With that, the Audit Committee then retained special counsel.
7. In its eleventh paragraph, the Registrant states that on the morning
of April 24, 1998, the Audit Committee's special counsel telephoned C&L's
outside counsel and informed C&L's outside counsel that "the Company would agree
with Coopers' proposed accounting treatment of the transactions in question" and
requested that C&L proceed with completion of the audit. We disagree with the
quoted portion of this statement. Until late in the day on April 24, 1998, no
one had suggested to C&L or its outside counsel that the Registrant (as opposed
to KPMG) had now decided to agree with C&L's proposed accounting treatment of
the transactions in question that KPMG was reviewing under SAS No. 50. Moreover,
based on what the Registrant itself states in later paragraphs of the Form 8-K,
specifically its fifteenth, sixteenth and nineteenth paragraphs, concerning
reportable "disagreements" with C&L, the Registrant still is continuing to
evaluate whether it agrees with C&L's proposed accounting treatment for some of
the transactions involved in KPMG's review under SAS No. 50. Furthermore, C&L
had made its decision to resign on the evening of the prior day, April 23. Early
the morning of April 24, at approximately 8:30 a.m. (or approximately one hour
before the Audit Committee's special counsel spoke with C&L's outside counsel),
C&L telephoned the Audit Committee Chairman and requested that a conference call
be set up as soon as possible that morning between C&L and the Audit Committee.
C&L's purpose in requesting this conference call was to inform the Audit
Committee of C&L's resignation decision. Because of C&L's resignation decision,
C&L also decided to postpone for the time being the appointment that happened to
be that day for the Audit Committee's special counsel to review the working
papers and to continue its debriefing of C&L's audit partner pursuant to C&L's
volunteered and ongoing efforts to assist the special counsel in the
investigation that C&L had requested into the Registrant's possible fraud.
Notably, due to a number of factors, C&L's decision to resign would not have
been altered even if C&L had been able to learn on the evening of April 23 or
the morning of April 24 that the Registrant now agreed with C&L's proposed
accounting treatment of the transactions in question. C&L had assumed for some
time that the Registrant's management would ultimately face the reality that it
had to agree with C&L's proposed accounting adjustments. C&L had already decided
a month earlier -- during the week of March 23, 1998 -- that, if the
Registrant's management refused to agree to the accounting adjustments C&L
believed were necessary, C&L would take exception to or render an adverse
opinion on the Registrant's financial statements for 1997. Accordingly, the
exercise the Registrant's management was going through to obtain yet a third
opinion on the proper accounting treatment was not important to C&L. C&L knew at
the time of its decision to resign that KPMG appeared to be in agreement with
C&L on the issues involved in the SAS No. 50 review. C&L also had understood for
approximately a month that the other accounting firm the Registrant's management
had engaged, TenEyck, appeared to be in agreement with C&L on the issues. The
factors, among others, that did lead to C&L's decision
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Securities and Exchange Commission
May 18, 1998
Page 7
to resign included the following: (a) the unresolved issues relating to C&L's
concerns about the integrity of the Registrant's management and possible fraud,
which concerns arose while C&L was attempting to do its audit for year-end 1997;
(b) the repeated attempts by the Registrant, Audit Committee and their counsel
to pressure C&L to complete its audit prior to May 7, 1998, when the Registrant
had been ordered to appear at a NASDAQ delisting hearing due to the Registrant's
late Form 10-K; (c) the concerns C&L had that, prior to the Registrant's desired
May 7, 1998 audit deadline, the Audit Committee's special counsel was not likely
to have sufficient time and opportunity to conduct the thorough and
comprehensive investigation that C&L had envisioned when it had requested the
Audit Committee to retain special counsel to investigate the possible fraud and
illegal acts, much less permit C&L sufficient time and opportunity before the
May 7, 1998 delisting hearing to review the special counsel's findings and
conclusions and to determine if C&L agreed with them; (d) the numerous examples
of the Registrant's management presenting information to C&L that C&L later
learned constituted distortions of the truth and half-truths, while the
Registrant's management continued to resist making the necessary corrections to
the financial results it had reported for 1997; and (e) the increasingly
apparent indications C&L would need to extend its audit procedures far beyond
normal audit procedures, and also beyond the audit for calendar year 1997 to
include calendar years 1995 and 1996, due to C&L's concerns about the integrity
of the Registrant's management at all levels and possible fraud.
8. In its twelfth paragraph, the Registrant states it is setting forth
the "disagreements" between C&L and the Registrant that are reportable under
Rule 304 (actually, Item 304 of SEC Regulation S-K) that C&L and members of the
Audit Committee discussed at various times in late March or in April 1998. We
disagree with any implication of this statement that, as the Registrant claimed
in its sixth paragraph, C&L had not given any indication to the Registrant
regarding any disagreements at an earlier time. We accordingly refer here to our
response above to the Registrant's sixth paragraph.
9. In its thirteenth paragraph, the Registrant discusses the reportable
disagreement it had with C&L concerning application of the
percentage-of-completion accounting method to the systems contracts of the
Registrant's E.J. Johnson subsidiary. We disagree with the implications of the
Registrant's discussion in this paragraph that E.F. Johnson's consistent
practice, prior to its July 31, 1997 acquisition by the Registrant, was to
include major purchased components in the percentage-of-completion calculation
when such components had not yet begun to be installed into the system. This was
not E.F. Johnson's prior practice before its acquisition by the Registrant.
Further, the costs the Registrant had included in its percentage-of-completion
calculation for this contract had not, in C&L's opinion, even been incurred
during 1997. In December 1997, the Registrant had ordered the components at
issue from several vendors, with the request that each vendor issue the
Registrant a "pro forma invoice" by December 31, 1997, in an apparent attempt by
the Registrant to demonstrate that it had incurred the costs in 1997. Each
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Securities and Exchange Commission
May 18, 1998
Page 8
of these pro forma invoices in fact was dated December 30 or 31, 1997. However,
the components were not delivered to the Registrant by December 31, 1997. In
fact, the components were not even scheduled for delivery until April 1998 at
the earliest. Moreover, C&L believes it unlikely that the vendors had even
manufactured the component parts by December 31, 1997. Even if such components
actually had been manufactured in only two or three weeks during late December,
then C&L believes that they should not be included in a cost-to-cost calculation
of the percentage of completion because they would not be special purpose
component parts. Rather, they would be "off-the-shelf" components that should
not be included in a percentage-of-completion calculation, which is intended to
measure the revenue earned by the Registrant's substantive efforts toward
completion. Further, we also disagree with the Registrant's implication in its
thirteenth paragraph that it was not until late March 1998 that C&L first
informed the Registrant of C&L's position in this regard. To the contrary, C&L
informed the Registrant in early January 1998 and again prior to the February 6,
1998 press release that inclusion of significant uninstalled materials in the
percentage-of-completion calculation for E.F. Johnson's system contracts was not
appropriate.
10. In its fourteenth paragraph, the Registrant discusses the reportable
disagreement it had with C&L concerning revenue the Registrant had recorded in
the fourth quarter of 1997 under a license contract containing a cancellation
right. The Registrant states that C&L's "current" position is that, because the
customer had a cancellation right and the payment terms extend beyond one year,
revenue should be recognized on an installment basis. The Registrant also states
that it amended the contract to eliminate the cancellation right before issuing
its 1997 financial results. We disagree with the implications of these
statements. C&L at no time agreed with the Registrant's position that the
revenue from this license agreement could be recorded in 1997 if the contract
subsequently was amended to eliminate the customer's cancellation right. The
Registrant had recorded the revenue for this contract on the last day of the
year, December 31, 1997. The terms of the original contract gave the customer
the right until February 15, 1998 to cancel the contract; the contract
additionally set forth a payment schedule over a three-year period for the
customer to pay the Registrant, with the customer's first payment not due until
February 15, 1998, when the cancellation right expired. The Registrant, in
January 1998, in an attempt to have the contract revenue apply to its 1997
revenues, contacted the customer and, on January 30, 1998 -- only two weeks
before the customer's cancellation right was to expire anyway under the original
terms of the contract -- the Registrant and the customer agreed to amend the
contract to delete the customer's cancellation right. C&L received a copy of the
amended contract in mid-March 1998 and concluded, based on all of these facts,
that the Registrant was not entitled to recognize any revenue from this contract
in 1997 and, further, that when the Registrant could properly recognize revenue
from this contract beginning in 1998, it must be recognized on an installment
basis.
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Securities and Exchange Commission
May 18, 1998
Page 9
11. In its sixteenth paragraph, the Registrant discusses the reportable
disagreement it had with C&L of whether the opening balance sheet after the
Registrant's acquisition of E.F. Johnson Company should have been adjusted to
reduce a $500,000 bad debt reserve established by E.F. Johnson and left on the
books, although the receivable was collected in the first quarter of 1998. The
Registrant does not mention that if goodwill and the bad debt reserve of E.F.
Johnson are reduced by $500,000, as C&L believes would be appropriate, it is
C&L's further opinion that the Registrant's consolidated bad debt reserve
potentially could be understated by an amount substantially in excess of
$500,000. Further, C&L disagrees with the Registrant's implication that C&L,
after reaching a final audit opinion on this issue, had later changed its
position. Retroactive adjustments to acquisition date balance sheets are not
ordinarily made as a result of changes in circumstances that occur subsequent to
the acquisition date. Occasionally, as was the case for the Registrant, however,
facts are discovered subsequent to the acquisition that indicate the
circumstances were different on the acquisition date than originally believed.
In the course of C&L's audit for 1997, C&L learned additional information that
indicated the retroactive adjustment in question was necessary as it was not due
to a change of circumstances after the acquisition.
12. In its seventeenth paragraph, the Registrant discusses its
reportable disagreement with C&L concerning recognition of revenue on certain
government agency sales. We disagree with implications of certain aspects of
this paragraph. The Registrant states that the government agency customer at
issue, in the usual course of business, would subsequently reduce the
transaction to a formal written agreement. However, the events described in the
Registrant's eighteenth paragraph demonstrate why the Registrant's assertions
that recording revenue on shipments prior to receipt of a contract is not an
appropriate accounting policy. The Registrant also states that C&L has now
advised the Registrant that these revenues should not have been recorded until a
formal written agreement was received. However, the Registrant fails to point
out that it had never informed C&L until late April 1998 that, in May 1997, the
government agency customer at issue had notified the Registrant by letter that
the agency's contact person with whom the Registrant was dealing was not
authorized to contractually commit the government agency. In late April 1998,
the Registrant received a letter from the government agency that enclosed a copy
of this May 1997 letter. The Registrant's management had informed and assured
C&L on numerous occasions prior to late April 1998 that the Registrant's
recording of revenue on shipments before receipt of a contract was appropriate
for transactions with this government agency due to the unique circumstances
involved, including the agency's need for quick shipments for national security
reasons. Had C&L known about the government's May 1997 letter to the Registrant,
C&L never would have initially accepted management's practice of recording
revenues before receipt of a formal written contract for these transactions.
13. In its eighteenth paragraph, the Registrant discusses its reportable
disagreement with C&L concerning the specific transactions with the government
agency customer referenced
<PAGE> 10
Securities and Exchange Commission
May 18, 1998
Page 10
in the preceding paragraph. We disagree with certain aspects of the Registrant's
statements in this paragraph and with implications of the Registrant's
statements. The Registrant states that on March 25, 1998 this government agency
customer advised the Registrant that the agency's employee with whom the
Registrant had been dealing was not authorized to contractually bind the
government, thereby implying that the Registrant first learned this on March 25,
1998. However, this is not true. As noted above, the government agency had sent
a letter in May 1997 to the Registrant advising that this agency employee was
not authorized to contractually commit the government agency. Further, the
Registrant also had been orally informed of this in a meeting with the
government agency in mid-March 1998. In its eighteenth paragraph, the Registrant
also fails to mention that, when it had recognized the revenue from these
transactions in the second and third quarters of 1997, it had shipped the
products at issue for this government agency to a public warehouse. C&L
subsequently learned in late February 1998 or in March 1998 that these products
remained in the public warehouse and, to the best of C&L's knowledge as of the
date it resigned, continue to remain there. The Registrant further fails to
mention that it had not manufactured many of the products in question, but
rather that another company had supplied a significant majority of the products
and was paid by the Registrant because the other company had refused to ship
products to the government agency without a binding contract.
14. In its nineteenth paragraph, the Registrant refers to its reportable
disagreement with C&L concerning the Registrant's recognition of revenue on
shipments to certain international dealers and distributors. We take issue with
several aspects of this paragraph. The Registrant states that in mid-March 1998
C&L "reevaluated" these sales that the Registrant made during 1997, implying
that C&L had previously audited these sales. As C&L's response above to the
Registrant's fifth paragraph points out, there is a significant difference under
AICPA standards between an accountant's quarterly review procedures and its
audit procedures at year-end. For example, the quarterly reviews would not
ordinarily include examination of the customer credit files. The Registrant does
not mention in this paragraph that it had failed to perform ordinary credit
review procedures prior to its agreement to advance substantial amounts of
credit to these dealers and distributors, as C&L learned in conducting its audit
procedures for year-end 1997. The Registrant also fails to note that C&L's
position, with which the Registrant disagreed, is that certain of these
shipments by the Registrant to public freight forwarders are in substance
consigned inventory, rather than sales, because the shipments are not in any
distribution channel and, in at least one instance, the product was shipped back
to the Registrant after year-end 1997.
15. In its twentieth paragraph, the Registrant discusses its reportable
disagreement with C&L regarding shipments to customers who had the explicit
right to exchange the products shipped for other products. The Registrant states
that it believes C&L did not disclose this issue to the Registrant until after
C&L resigned. We disagree with this statement. In early April 1998, some weeks
before C&L resigned on April 24, 1998, C&L specifically informed the
Registrant's
<PAGE> 11
Securities and Exchange Commission
May 18, 1998
Page 11
management and its Audit Committee about this issue after C&L had reviewed one
of the Registrant's customer files that disclosed the customer's express right
to exchange the products the Registrant was shipping for other products. In
mid-April 1998, C&L repeated this information to the Audit Committee's special
counsel and an Audit Committee member in conjunction with C&L's efforts to
assist the special counsel's investigation of the possible fraud.
16. In its twenty-second paragraph, the Registrant discloses the
reportable event that C&L had informed the Registrant that the Registrant's
internal controls for recording of sales revenue were deficient. C&L would add
that it discussed the Registrant's lack of internal controls for revenue
recognition with the Registrant's Audit Committee in March 1998.
17. In its twenty-third paragraph, the Registrant discusses the
reportable event relating to C&L's disclosure to the Audit Committee that C&L
had identified possible fraud and illegal acts at the Registrant, which possibly
involved the Registrant's management. C&L's discussion in more detail of this
issue is set forth above in response to the Registrant's tenth paragraph and
should be referenced. C&L would also clarify in response to the Registrant's
statements in its twenty-third paragraph that, as of April 2, 1998, when C&L
reported the possible fraud and illegal acts to the Audit Committee, C&L also
indicated to the Audit Committee on that date that C&L felt it could no longer
rely on representations of the Registrant's management under the circumstances
existing at that time.
18. In its twenty-fourth paragraph, the Registrant discusses C&L's need
to expand the scope of its audit, which the Registrant states C&L indicated only
at the time of its resignation on April 24, 1998. However, C&L had informed the
Audit Committee at meetings in late March and early April 1998 that C&L's audit
scope would have to be significantly expanded.
19. In its twenty-fifth paragraph, the Registrant discloses that C&L had
identified issues that may result in significant changes to the Registrant's
financial statements of one or more years and quarters that C&L "believes" were
unresolved as the result of its resignation prior to completion of the expanded
audit scope. However, for clarification, C&L would state that these issues in
fact existed and were unresolved at the time of C&L's resignation.
20. In its twenty-seventh paragraph, the Registrant describes one of the
specific unresolved issues C&L had identified as being issues regarding the
appropriateness of the Registrant's recording of revenues in 1996 and 1997 for
transactions where the Registrant "may" have shipped goods to itself, to public
warehouses, to family members and to employees. However, at the time of its
resignation, C&L did not believe it was merely "possible" that in 1997 the
Registrant had made shipments to itself, to public warehouses and to employees'
family members. C&L learned when conducting its audit procedures for 1997 that
the Registrant in fact had made some shipments of this nature during 1997. C&L
had not resolved at the time of its
<PAGE> 12
Securities and Exchange Commission
May 18, 1998
Page 12
resignation whether the Registrant had improperly recorded revenues in 1997 for
such transactions.
21. In its twenty-ninth paragraph, the Registrant describes one of the
specific unresolved issues C&L had identified as being 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.
C&L would more fully describe these issues as regarding the appropriateness of
the Registrant's recording of revenues in 1996 and 1997 for sales of newly
developed products for which, given the large volume of defects found and
merchandise returned by customers, engineering development may not have been
complete at the time the Registrant began marketing the products.
22. In its thirtieth paragraph, the Registrant describes one of the
specific unresolved issues C&L had identified as being issues regarding
reserving for sales returns and allowances. C&L would more fully describe these
issues as regarding the adequacy of the Registrant's reserves for inventory
returns and allowances given the large volume of merchandise returned by
customers due to product defects and other return arrangements.
23. In its thirty-first paragraph, the Registrant describes one of the
specific unresolved issues C&L had identified as being issues regarding the
possible need for a valuation allowance with respect to the Registrant's
consolidated deferred tax asset balance. C&L would more fully describe these
issues as regarding the possible need for a valuation allowance with respect to
the Registrant's consolidated deferred tax asset balance given the history of
losses experienced both by Transcrypt and by E.F. Johnson.
24. The Registrant's thirty-third paragraph discusses a reportable event
regarding reversal of $240,000 for engineering services revenue that the
Registrant recorded in November 1996 under a contract dated December 31, 1996.
These services were for the same government agency discussed in the Registrant's
eighteenth paragraph. In the Registrant's thirty-second paragraph, the
Registrant states that C&L had disclosed the need to make this adjustment in
conjunction with C&L's resignation on April 24, 1998. However, the Registrant
does not note that, at C&L's request, the Registrant had provided C&L in late
March 1998 with a list of all revenues the Registrant had recorded for this
government agency in 1996. This list reflected the November 1996 billing and the
December 31, 1996 contract date, but the list did not indicate when the
Registrant had provided the services in question to the government agency. Only
on April 22, 1998, after C&L had repeatedly requested the Registrant to supply
this information, did the Registrant finally provide C&L with the information
that allowed C&L to determine that the Registrant had performed all or most of
the services in 1997. Further, the Registrant states in this thirty-third
paragraph that these services "may not" have been completed until 1997. We
disagree with this statement. As noted, all or most of these services were
<PAGE> 13
Securities and Exchange Commission
May 18, 1998
Page 13
performed in 1997. Finally, the Registrant states in this paragraph that this
accounting change "could" negatively impact the Registrant's 1996 annual and
fourth quarter consolidated operating results. However, it is C&L's position
that this change is required and that it will negatively impact 1996 results.
Very truly yours,
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
COOPERS & LYBRAND L.L.P.
<PAGE> 14
[ATTACHMENT TO COOPERS LETTER]
[PARAGRAPH NUMBERS CORRESPOND TO HANDWRITTEN NUMBERING]
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
---------------------------------------------
TRANSCRYPT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-21681 47-0801192
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification Number)
4800 NW FIRST STREET, LINCOLN, NEBRASKA 68521
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (402) 474-4800
<PAGE> 15
Item 4. Changes in Registrant's Certifying Accountant.
1. (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.
2. 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.
3. (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.
4. (iii) Neither the Company's Board of Directors nor its Audit Committee
recommended the decision to change accountants.
5. (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.
6. 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.
1
<PAGE> 16
7. 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.
8. 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.
9. 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.
10. 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
2
<PAGE> 17
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.
11. 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.
12. 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
13. (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.
14. (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
3
<PAGE> 18
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.
15. (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.
16. 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.
17. (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.
4
<PAGE> 19
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.
18. 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.
19. (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.
20. (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.
5
<PAGE> 20
21. (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:
22. (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.
23. (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.
24. (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.
25. 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:
26. 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.
27. 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.
28. 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.
6
<PAGE> 21
29. 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.
30. 5. Issues regarding reserving for sales returns and
allowances.
31. 6. Issues regarding the possible need for a valuation
allowance with respect to the Company's consolidated deferred tax asset balance.
32. (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:
33. 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.
34. 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.
7
<PAGE> 22
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.
8
<PAGE> 23
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
-------------------------------------
Jeffery L. Fuller
Chief Executive Officer
(Principal executive officer and duly
authorized signatory)
<PAGE> 24
INDEX TO EXHIBITS
Exhibit No. Description
99.1 News Release issued on April 27, 1998 by the Registrant.
<PAGE> 25
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
