<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549-1004
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 0-21681
TRANSCRYPT INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 47-0801192
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
4800 N.W. 1ST STREET
LINCOLN, NEBRASKA 68521
(402) 474-4800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
As of April 30, 1999, 12,946,624 shares of the Registrant's Common Stock
were outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
--------------------- ----------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,675 $ 20,262
Accounts receivable, net of allowance for returns and doubtful
accounts of $2,111 and $1,997 respectively 7,952 9,287
Receivables - other 236 605
Cost in excess of billings on uncompleted contracts 1,518 1,216
Inventory 12,377 13,907
Prepaid expenses 648 552
Deferred tax assets 5,157 5,157
--------------------- ----------------------
Total current assets 46,563 50,986
Property, plant and equipment, net 11,291 11,885
Deferred tax assets 7,219 7,219
Intangible assets, net of accumulated amortization 16,315 16,711
Other assets 418 411
--------------------- ----------------------
$ 81,806 $ 87,212
===================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 7,329 $ 7,426
Current portion of long-term debt 2,590 2,732
Accounts payable 2,552 2,620
Billings in excess of cost on uncompleted contracts 4,449 4,541
Deferred revenue 932 1,140
Accrued expenses 4,324 5,101
Provision for litigation settlement 10,000 10,000
--------------------- ----------------------
Total current liabilities 32,176 33,560
Long-term debt, net of current portion 2 6
Deferred revenue 489 550
--------------------- ----------------------
32,667 34,116
--------------------- ----------------------
Commitments and contingencies
Stockholders' equity:
Common stock 129 129
Additional paid-in capital 90,315 90,315
Accumulated deficit (41,305) (37,348)
--------------------- ----------------------
49,139 53,096
--------------------- ----------------------
$ 81,806 $ 87,212
===================== ======================
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 2
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ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TRANSCRYPT INTERNATIONAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1999 and 1998
(Unaudited) (in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
1999 1998
--------------- -----------------
<S> <C> <C>
Revenues $ 9,709 $ 21,988
Cost of sales 7,735 12,910
--------------- -----------------
Gross profit 1,974 9,078
--------------- -----------------
Operating expenses:
Research and development 1,714 2,038
Sales and marketing 1,726 3,210
General and administrative 2,634 2,113
--------------- -----------------
Total operating expenses 6,074 7,361
--------------- -----------------
Income (loss) from operations (4,100) 1,717
Other income 108 16
Interest income 203 394
Interest expense (168) (99)
--------------- -----------------
Income (loss) before income taxes (3,957) 2,028
Income tax provision - 712
--------------- -----------------
Net income (loss) $ (3,957) $ 1,316
=============== =================
Net income (loss) per share - Basic $ (0.31) $ 0.10
=============== =================
Net income (loss) per share - Diluted $ (0.31) $ 0.10
=============== =================
Weighted average common shares - Basic 12,946,624 12,946,624
=============== =================
Weighted average common shares - Diluted 12,946,624 13,621,149
=============== =================
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TRANSCRYPT INTERNATIONAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1999 and 1998
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------
1999 1998
------------------------ -----------------------
<S> <C> <C>
Net cash flow used in operating activities $ (588) $ (3,728)
------------------------ -----------------------
Cash flow from investing activities:
Proceeds from sale of fixed assets 72 -
Purchase of fixed assets (135) (747)
Increase in intangible assets (19) -
Decrease in other assets (8) -
Payments on restructuring reserve (666) (278)
Sale of investments - 1,750
------------------------ -----------------------
Net cash provided by (used in) investing activities (756) 725
------------------------ -----------------------
Cash flow from financing activities:
Borrowings (payments) on revolving lines of credit, net (98) 5,759
Payment of industrial development revenue bonds (140) -
Payment on term loans, lines of credit and capitalized leases (5) (2,546)
------------------------ -----------------------
Net cash provided by (used in) financing activities (243) 3,213
Net increase (decrease) in cash (1,587) 210
Cash and cash equivalents at beginning of period 20,262 15,384
------------------------ -----------------------
Cash and cash equivalents at end of period $ 18,675 $ 15,594
======================== =======================
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 4
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TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data)
1. GENERAL
The condensed consolidated balance sheet of Transcrypt
International, Inc. ("Transcrypt" or the "Company") at December 31, 1998 has
been taken from audited consolidated financial statements at that date and
condensed. The condensed consolidated financial statements for the three
months ended March 31, 1999 and for the three months ended March 31, 1998 are
unaudited and reflect all normal and recurring accruals and adjustments which
are, in the opinion of management, necessary for a fair presentation of the
financial position, operating results and cash flows for the interim periods
presented in this quarterly report. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and
analysis of financial condition and results of operations, contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
The results of operations and cash flows for the three months ended March 31,
1999 are not necessarily indicative of the results for the entire fiscal year
ending December 31, 1999. Where appropriate, items within the condensed
consolidated financial statements have been reclassified from the previous
periods' presentation.
2. ORGANIZATION AND CONSOLIDATION
The Company is a manufacturer of information security products and
wireless communications products and systems. The Company designs and
manufactures information security products, which prevent unauthorized access
to sensitive voice communications. These products are based on a wide range
of analog scrambling and digital encryption technologies and are sold mainly
to the land mobile radio ("LMR") and telephony security markets. Through its
E.F. Johnson subsidiary, the Company designs, develops, manufactures and
markets (1) trunked and conventional radio systems, (2) stationary land
mobile radio transmitters/receivers and (3) mobile and portable radios. The
Company sells its LMR products and systems mainly to two broad markets: (1)
business and industrial ("B&I") users and (2) public safety and other
governmental users.
The condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in the
consolidation.
3. LOSS PER SHARE
Basic earnings per share (EPS) is calculated based upon the
weighted average number of common shares outstanding during the period. The
diluted EPS calculation reflects the potential dilution from common stock
equivalents such as stock options. For the three months ended March 31, 1999
a net loss was incurred and the impact of outstanding stock options on
diluted EPS is anti-dilutive. For the three months ended March 31, 1998, net
income per share - diluted includes incremental shares for outstanding stock
options of 674,525 shares.
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4. INVENTORY
The following is a summary of inventory at March 31, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Raw materials and supplies $ 5,997 $ 6,267
Work in progress 1,263 1,337
Finished goods 5,117 6,303
------ ------
$ 12,377 $ 13,907
------ ------
------ ------
</TABLE>
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5. REVOLVING LINES OF CREDIT
The Company has a line of credit with a regional bank. It is a
secured line of credit not to exceed $10,000. The variable interest rate is
1.25% over the interest rate earned on the $10,000 cash collateral used as
security on the bank line of credit. This line of credit is due on August 31,
1999. The working capital line is collateralized by substantially all the
Company's assets including $10,000 in certificate of deposits with the bank.
At March 31, 1999, the Company had $7,329, outstanding on the
revolving line of credit. At December 31, 1998, the Company had $7,426,
outstanding on the line of credit. The Company had an additional fixed line
of credit with the same regional bank. It had a secured line of credit for
$196. This line of credit and applicable accrued interest was paid off on
February 10, 1999.
6. COMMITMENTS AND CONTINGENCIES
The Company has been named as a defendant in class action lawsuits
that were filed subsequent to the Company's announcement on March 27, 1998
that the filing of its Annual Report on Form 10-K for year ended December 31,
1997 would be delayed and that adjustments would be made to the Company's
previously announced financial results. Between March 31, 1998 and May 27,
1998, twelve purported class action lawsuits were filed against the Company
in the United States District Court for the District of Nebraska, and one
complaint was filed in the District Court of Scotts Bluff County, Nebraska.
Certain of the complaints, as amended, also name one or more officers of the
Company and PriceWaterhouseCoopers, LLP 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 federal class actions generally allege claims under Sections
11 and 15 of the Securities Act of 1933 and 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 class action
complaints seek unspecified compensatory damages, attorneys' fees and costs.
The federal class actions have been consolidated and lead plaintiff
appointed. The amended federal class action complaint was filed on March 4,
1999 and the Company is required to answer or otherwise respond to the
complaint by May 19, 1999.
Although the class action complaints 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
material. 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 is attempting to settle the class action lawsuits with
a combination of Company stock and cash up to the limits of its directors'
and officers' liability insurance. In the quarter ended December 31, 1998,
the Company booked a special provision of $10.0 million relating to the
federal and state class action lawsuits pending in Nebraska against the
Company and certain of its current and former officers. As previously
disclosed, the Company is in ongoing settlement discussions regarding these
lawsuits. While no settlement agreement has been reached, the $10.0 million
special provision is the Company's best estimate of the amount that would be
necessary for the Company to contribute to settle the class actions. The
Company would anticipate satisfying any settlement by issuing shares of
common stock to the class members rather than using its cash reserves.
Despite the taking of the special provision, the Company can give no
assurances whether any settlement can be reached, what the terms of any
settlement would be or whether the Company would be required to contribute
more than $10.0 million.
On November 4, 1998, Physician's Mutual Insurance Company filed an
action in the District Court of Douglas County, Nebraska against the Company,
PriceWaterhouseCoopers, LLP and two former officers of the Company. The
complaint contains common law causes of action for fraudulent
misrepresentation, fraudulent concealment and negligent misrepresentation
against the defendants arising from the same facts and circumstances
underlying the class actions. The complaint seeks damages in an amount to be
proved at trial, but which is currently alleged to be approximately $850,000.
The Company is unable to predict the likelihood of the outcome or range or
amount of potential liability that may arise therefrom.
Page 7
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Page 8
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6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Many factors will ultimately affect and determine the results of
the litigation however, and the Company can provide no assurances that the
outcomes will not have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.
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.
In April 1998, the Securities and Exchange Commission ("SEC")
issued a formal order of investigation to determine whether violations of
certain aspects of the Federal securities laws had occurred in connection
with the Company. At the present time, the Company is unable to predict
whether the SEC is likely to initiate enforcement action against the Company
or its affiliated parties relating to these events.
The Company is involved in certain other legal proceedings
incidental to the normal conduct of its business. The Company does not
believe that any liabilities relating to such other legal proceedings are
likely to be, individually or in the aggregate, material to the Company's
business, financial condition, results of operations or cash flows.
7. SEGMENT AND RELATED INFORMATION
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, in 1998.
The Company's reporting segments are strategic business units that
offer different products and services. Management considers its operations to
comprise two industry segments. One segment consists of business conducted in
the information security industry, which comprises the design, manufacture
and sale of devices that prevent the unauthorized interception on sensitive
voice and data communication. The second business segment competes in the
wireless communication industry where the Company designs, develops,
manufactures and markets stationary land mobile radio transmitters/receivers,
mobile and portable radios and trunked and conventional radio communication
systems.
The following table is a summary of unaudited quarterly results for the
three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
MARCH 31, MARCH 31,
----------------------------------------------------------------------
IN THOUSANDS 1999 1998
----------------------------------------------------------------------
<S> <C> <C>
SALES
Information Security $ 1,956 $ 3,790
Wireless Communication 7,753 18,198
------------- -------------
TOTAL SALES 9,709 21,988
------------- -------------
COST OF GOODS SOLD
Information Security 1,075 877
Wireless Communication 6,659 12,033
------------- -------------
TOTAL COST OF GOODS SOLD 7,735 12,910
------------- -------------
GROSS MARGIN
Information Security 881 2,913
Wireless Communication 1,094 6,164
------------- -------------
TOTAL GROSS MARGIN $ 1,974 $ 9,078
======================================================================
----------------------------------------------------------------------
GROSS MARGIN PERCENTAGE
Information Security 45.0% 76.9%
Page 9
<PAGE>
Wireless Communication 14.1% 33.9%
TOTAL GM PERCENTAGE 20.3% 41.3%
----------------------------------------------------------------------
</TABLE>
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth certain Consolidated Statements of
Operations (in thousands) information as a percentage of revenues during the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------
1999 1998
------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 9,709 100.0% $21,988 100.0%
Cost of sales 7,735 79.7% 12,910 58.7%
------------- ----------- ------------ -----------
Gross profit 1,974 20.3% 9,078 41.3%
Operating expenses:
Research and development 1,714 17.7% 2,038 9.3%
Sales and marketing 1,726 17.8% 3,210 14.6%
General and administrative 2,634 27.1% 2,113 9.6%
------------- ----------- ------------ -----------
Total operating expenses 6,074 62.6% 7,361 33.5%
------------- ----------- ------------ -----------
Income (loss) from operations (4,100) (42.3)% 1,717 7.8%
Other income 108 1.1% 16 0.1%
Interest income 203 2.1% 394 1.8%
Interest expense (168) (1.7)% (99) (0.5)%
------------- ----------- ------------ -----------
Income (loss) before income taxes (3,957) (40.8)% 2,028 9.2%
Provision for income taxes - 0.0% 712 3.2%
------------- ----------- ------------ -----------
Net income (loss) $ (3,957) (40.8)% $ 1,316 6.0%
============= =========== ============ ===========
</TABLE>
Discussions of certain matters contained in this Quarterly Report
on Form 10-Q may constitute forward-looking statements under Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act").
These statements may involve risks and uncertainties. These forward-looking
statements relate to, among other things, the outcome of pending class action
litigation involving the Company, the outcome of the pending investigation by
the SEC, the effects of the Company's restatement of its financial statements
on the Company's product development efforts, future sales levels and
customer confidence, the Company's future financial condition, liquidity and
business prospects generally, perceived opportunities in the marketplace for
the Company's products and its products under development, expectations
regarding the Company's efforts to resolve Year 2000 issues and the effects
of a failure to resolve such issues and the Company's other business plans
for the future. The actual outcomes of these matters may differ significantly
from the outcomes expressed or implied in these forward-looking statements
and other risks detailed in "ITEM 1. BUSINESS -- Summary of Business
Considerations and Certain Factors That May Affect Future Results of
Operations and/or Stock Price" contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
The following discussion is intended to provide a better
understanding of the significant changes in trends relating to the Company's
financial condition and results of operations. Management's Discussion and
Analysis should be read in conjunction with the accompanying Consolidated
Financial Statements and Notes thereto.
Restatement and Recent Developments
In 1998, the Company restated its previously released results for
the year ended December 31, 1997, the Company's financial statements 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
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<PAGE>
restatement of the Company's financial statements and other events relating
to the restatement, including the class action lawsuits and the SEC
investigation which occurred subsequent to March 31, 1998, have had an adverse
Page 12
<PAGE>
Restatement and Recent Events (Continued)
impact on the Company's business, financial condition, results of operations,
liquidity and cash flows. These events have had, to varying degrees, an
adverse impact on the Company's relationships with its customers and vendors.
Because of these events, the Company is also evaluating all of its product
lines, and has implemented and is continuing to look at various initiatives
to reduce operating expenses in order to keep them in line with revenues.
Implementation of any plan resulting from these initiatives in the future may
result in substantial up front costs and cash expenditures. The Company can
provide no assurance that the restatement of the financial statements and the
ongoing class action and securities lawsuits and SEC investigation,
regardless of their outcomes, will not continue to have a material adverse
effect on the Company's business, financial condition, results of operations,
liquidity and cash flows.
In connection with the bidding requirements on domestic systems
contracts with governmental agencies, the bidding procedures often require
suppliers of systems to supply a bond from an approved surety company at the
time the contract is awarded. A number of factors can limit the availability
of such bonds. These include the applicant's financial condition and
operating results, the applicant's record for completing similar systems
contracts and the extent to which the applicant has bonds in place for other
projects.
As a result of its review of the Company's recent operating
results, the current issuer of the Company's bonds recently advised the
Company that it will only issue additional bonds up to a maximum of $2.0 to
$3.0 million through June 15, 1999 on behalf of the Company and these bonds
would have to be collateralized up to 50% of the amount of the bond.
The Company has identified another surety company to issue bonds
for the Company on a case by case basis subject to terms and conditions
negotiated for each such bond. The new surety company has advised the Company
that it will require some amount of collateral on any bonds it may issue.
To the extent that the Company is a successful bidder on any
domestic systems contracts and depending on the Company's overall need for
bonds, the requirement that any additional bonds be collateralized could
adversely affect the Company's ability to bid on or be awarded new domestic
systems contracts. This, in turn, could have a material adverse affect on the
Company's business, financial condition, results of operations and liquidity.
Revenues
Revenues are recognized when product is shipped, less an estimate
for an allowance for returns, if applicable, if collection is reasonably
assured. For shipments where collection is not reasonably assured, the
Company recognizes revenue as cash is received. If collection is contingent
on a future event, such as a reseller of product selling the product to the
end user, the Company recognizes revenue when the contingency lapses,
generally upon cash collection.
System sales under long-term contracts are accounted for under the
percentage-of-completion method. Under this method, revenues are recognized
as work on a contract progresses. The recognized revenue is that percentage
of estimated total revenue that incurred costs to date bear to estimated
total costs to complete the contract. Revisions in cost and profit estimates
are made when conditions requiring such revisions become known. Anticipated
losses on contracts are recognized in operations as soon as such losses are
determined to be probable and reasonably estimable.
Deferred revenue includes unearned warranty fees on extended
product warranty contracts sold to customers. The Company recognizes the fees
based on the expected warranty repairs to be incurred over the life of the
contract. Deferred revenue also includes an advanced payment received for
products to be sold to a former division of EFJ. The advance payment was
negotiated as part of the sale agreement of the division by EFJ. The advanced
payment is recognized as revenue is earned.
Revenues decreased 55.8% to $9.7 million in the first quarter of
1999, compared to $22.0 million during the same period of 1998. Of total
revenues in the first quarter, the information security segment comprised
20.1% and the wireless communication segment comprised 79.9%. The decline was
primarily attributable to declines in sales of LMR systems to government
agencies, lower revenues from business and industrial users and international
sales in the wireless communication segment.
The decrease in revenues was partially attributable to the
uncertainty raised by the restatement discussed above, which has adversely
impacted sales of LMR systems to governmental agencies. The Company was not
awarded any domestic system contracts in 1998. During the first quarter of
1999, the Company was awarded two contracts in the domestic public safety
market for approximately $6.0 million, any revenue on these contracts will be
recognized as revenue over the next 12 months. The recent action taken by the
Company's surety company described above under "Restatement and Recent
Developments" could adversely effect, among other things, the Company's
ability to bid on LMR systems to government agencies in the future.
The Company also experienced reduced demand and downward pricing
pressure for its wireless communication analog products sold to business and
industrial users. Management believes that this is due to several factors.
These include the fact that (1) no new 800 MHz SMR frequencies are being made
available and existing channels are filling up; (2) SMR operator's with
licenses for 900 MHz channels have been slow to develop their build outs; (3)
there has been consolidation in both of these SMR marketplaces; and (4) a
number of SMR systems have been converting from analog to digital which has
resulted in the increasing availability of used analog radios and repeaters
in the marketplace. In an effort to reverse the downward trend of its B&I
sales, the Company has reduced prices on certain B&I products. While the
price reduction may improve overall sales, it will have a negative impact on
gross margins.
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<PAGE>
Revenues from international sales declined to $2.4 million for the
three months ended March 31, 1999, compared to $8.0 million for the same
period in 1998. The decrease is primarily due to a decline in sales in
Central and Latin America. The Company's revenue in the first quarter of 1999
for Central and Latin America decreased approximately 75% compared to the
first quarter of 1998. The decline in revenues to Central and Latin America
is attributable to economic uncertainty, which resulted in recent currency
fluctuations in the region. Middle East and Asian revenues for the first
three months of 1999 were down approximately 68% compared to the first three
months of 1998 and this decrease was due to continued economic weakness in
that region of the world. Revenues in Europe, while a small percentage of
overall sales, decreased approximately 17.3% for the first three months of
1999 compared to the same period in 1998. The Company's international sales
may continue to be depressed for the rest of 1999 as compared to 1998 due to
world economic conditions.
In an effort to improve sales, the Company plans to introduce new
products in 1999. Land mobile radio secure products to be introduced include
new encryption modules for deployment in a wide range of mobile radios,
including the latest Motorola models. In telephony, voice security modules
are under development for Nokia and Qualcomm cellular phones. The Company's
EFJohnson Division will introduce new models of our hand-held land mobile
radios and a new line of digital mobile radios, which are APCO-25 compliant.
The EFJohnson Division released on March 31, 1999 the Company's LTR-Net-TM-
trunked radio system. With LTR-Net-TM-, EFJohnson is the only company that is
currently delivering a complete system solution for enhanced LTR-Registered
Trademark- networking. The timing of the Company's introduction of proposed
new products and the acceptance of any new products introduced by the Company
are subject to certain risks and uncertainties that could cause the actual
results, performance or achievements to differ materially from those
expressed, suggested or implied.
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 was $2.0 million
(20.3% gross margin) for the first quarter of 1999, compared to $9.1 million
(41.3% gross margin) for the same period in 1998. Gross margin for the
information security segment was 45.0% in the first quarter of 1999, and was
76.9% for the same period in 1998. Gross margin for the wireless
communications segment was 14.1% in the first quarter of 1999 and was 33.9%
for the same period in 1998.
The overall decline in gross margin percentage from 1999 to 1998
was due to a number of factors. These include (1) the decline in sales of
domestic system contracts to the public safety market which provides a higher
margin than the business and industrial portion of E.F. Johnson's wireless
segment; (2) product mix and the level of sales not being sufficient to fully
absorb the Company's manufacturing overhead; and (3) a shift in the Company's
information security product segment from primarily add-on products to more
radios and cellular phones incorporating the Company's encryption products,
which tends to have a lower gross margin. Gross margins are likely to vary in
the future based primarily upon the mix of products and the amount of
revenues for that period.
Research and Development
Research and development expenses consist primarily of the costs
associated with research and development personnel, materials and the
depreciation of research and development equipment and facilities. Research
and development expenses decreased to $1.7 million in the first quarter of
1999 from $2.0 million in the first quarter of 1998. This decrease was
primarily due to a reduced engineering staff. The Company's implementation of
a new product development process in the third quarter of 1998 is intended to
speed up the Company's ability to deliver products to market which should
also aid in reducing research and development expenses and requires a reduced
amount of resources. The Company is focusing its research and development
processes in such a way as to not require the staffing levels employed in
1998. The Company anticipates research and development expenses to remain at
a level similar to the first quarter of 1999.
The information security and wireless communications product
markets in which the Company competes are rapidly evolving and can be
expected to further evolve in the future as a result of changing technology,
industry standards and customer requirements. The Company's ability to
compete effectively will depend upon its ability to
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<PAGE>
anticipate and react to these changes in a timely manner. The Company may not
have, either currently or in the future, adequate capital resources or funds
to respond to these changes.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and
related costs of sales personnel, including sales commissions and travel
expenses, and costs of advertising, public relations and trade show
participation. Sales and marketing expenses decreased to $1.7 million in the
first quarter of 1999 from $3.2 million in the first quarter of 1998. This
was primarily due to a decrease in sales commissions and fewer sales
personnel. Sales and marketing expenses increased as a percentage of sales to
17.8% for the first three months of 1999 from 14.6% in the first three months
of 1998 primarily due to a decrease in revenues. The Company anticipates that
sales and marketing expenses will continue to decline in 1999 as compared to
1998 due to the Company's efforts to reduce its overall operating expenses.
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 increased to $2.6 million in the first
quarter of 1999 from $2.1 million in the first quarter of 1998. The increase
is due primarily to the addition of the Company's management team, which
began in late first quarter of 1998, and the cost associated with recruiting
and hiring the Company's current Chairman and CEO in the first quarter of
1999. The Company anticipates general and administrative expenses to decline
for the remainder of 1999 on a quarterly basis when compared to 1998.
Net Interest Income (Expense)
Net interest income consists of interest income earned on cash and
investable funds, net of interest expense related to amounts payable on the
Company's term and installment loans and bank lines of credit. Net interest
income was $35,000 in the first quarter of 1999, as compared to $295,000 in
the first quarter of 1998. With the increase of bank debt during 1998 and a
declining balance of investable cash and cash equivalents, interest income is
expected to continue to decline while interest expense will increase on a
quarterly basis, as it did in the first quarter of 1999, until the Company is
able to become cash flow positive.
Other Income, net
Other income, net for the first quarter of 1999 was primarily
related to the sale of property.
Benefit for Income Taxes
The Company did not record a tax benefit in the first quarter of
1999, compared to a tax provision of $712,000 in the first quarter of 1998.
The Company's decision not to record a benefit for income taxes in 1999 is
based on its analysis of the need for a valuation allowance under Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes".
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment.
Liquidity and Capital Resources
Since January 1, 1997, the Company has financed its operations and
met its capital requirements primarily through short-term borrowings,
long-term debt and stock offerings completed on January 22, 1997 and October
15, 1997.
The Company's operating activities used cash of $588,000 in the
first three months of 1999 compared to $3.7 million in the first three months
of 1998. Cash used in operating activities in the first three months of 1999
consisted primarily of a net loss plus a decrease in accounts payable and a
decrease in accrued expenses, offset in part by depreciation and
amortization, a decrease in inventory, and a decrease in accounts receivable.
Page 15
<PAGE>
The deferred tax assets totaling $12.4 million were 15.1% and
25.2% of total assets and stockholders' equity, respectively, at March 31,
1999. As mentioned above, the Company did not book a provision for income
taxes in 1999. Management believes that it is more likely than not that
future taxable income will be sufficient to fully utilize all deferred tax
assets recorded, net of existing valuation allowances.
Cash used by investing activities was $756,000 for the first three
months of 1999 as compared to cash provided by investing activities of
$725,000 in the first three months of 1998. Capital expenditures of $135, 000
for the first three months of 1999 consisted primarily of manufacturing
equipment, computer equipment and software. Capital expenditures of $747,000
for the first three months of 1998 consisted primarily of computer and
networking equipment, office furniture and manufacturing equipment and phase
III construction at the Company's Lincoln facility.
Financing activities used cash of $243,000 in the first three
months of 1999. Financing activities consisted of a decrease in borrowings on
the Company's line of credit and a payment of $140,000 due on the Company's
industrial development revenue bonds. Cash provided by investing activities
for the first three months of 1998 consisted of $5.8 million in borrowings on
the Company's revolving line of credit less a $2.6 million payment on
long-term debt.
As of March 31, 1999, the Company had $7.3 million in outstanding
indebtedness under its line of credit with its bank. It is a secured line of
credit not to exceed $10.0 million. Interest is at a variable rate of 1.25%
over the interest rate earned on the $10.0 million on certificates of
deposits pledged as security on the bank line of credit. This line of credit
is due on August 31, 1999. The working capital line is collateralized by
substantially all the Company's assets including $10.0 million in certificate
of deposits with the bank. The Company also had an additional secured fixed
line of credit of $196,000 with the same regional bank. This line of credit
and applicable accrued interest was paid off on February 10, 1999.
The Company had outstanding IDR Bonds totaling $2.6 million at
March 31, 1999, which is classified as a current liability. The IDR is due in
annual principal payments of $140,000 plus interest at a variable rate
beginning March 1, 1998 through March 1, 2007, increasing to annual principal
payments of $145,000 plus interest at a variable rate due March 1, 2008
through March 1, 2016, with the remaining principal and accrued interest due
on March 1, 2017. The Company has pledged cash collateral of $2.8 million as
additional security on this indebtedness.
The Company does not anticipate paying cash dividends in the
foreseeable future.
As of March 31, 1999, the Company had approximately $18.7 million
in cash and cash equivalents, which includes $10.0 million of certificates of
deposit pledged as security on its bank line of credit and $2.8 million
pledged as security on its IDR Bond. There was approximately $2.7 million
available under its bank line of credit at March 31, 1999. The Company's bank
line of credit expires on August 31, 1999 and the Company is currently
seeking to refinance its bank line of credit. However, it has been difficult
to refinance the debt or obtain new lines of credit primarily due to
uncertainties resulting from the pending class action lawsuits and declining
revenues and losses incurred since March 31, 1998. The Company can provide no
assurance that it will be able to secure new financing or a renewal of its
line of credit, and if successful, what would be the terms of such financing.
The recent decision of the Company's surety company to require collateral on
bonds issued in the future could put a further strain on the Company's
liquidity and working capital. To improve its cash position, the Company is
currently negotiating for the sale and leaseback of its facilities in Waseca
and Lincoln. The Company believes that its cash, cash equivalents, and lines
of credit will be sufficient to meet anticipated cash needs for working
capital and for the Year 2000 capital expenditures through 1999. However, if
sales do not increase and operating losses do not decline, or the Company is
not able to furnish collateral for bonds on new domestic systems, or the
Company incurs unanticipated substantial costs, the Company may be required
to seek additional financing or funding sources, including possible sale of
securities. No assurance can be given that the Company will be able to obtain
such additional funding or financing, or a renewal of its line of credit or be
able to obtain financing on satisfactory terms. Additionally, see "Note 6.
COMMITMENTS AND CONTINGENCIES" above for a discussion regarding certain
pending litigation, the resolution of which could materially adversely affect
the Company's liquidity, operating results and financial condition.
Page 16
<PAGE>
Recently Issued Accounting Standards
In June 1997, FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 requires publicly-held enterprises to
report certain information about their operating segments, to report certain
enterprise-wide information about their products and services, their
activities in different geographic areas, and their reliance on major
customers, and to also disclose certain segment information in their interim
financial statements. The basis for determining an enterprise's operating
segments is the manner in which management operates the business. The Company
has adopted SFAS 131 effective December 31, 1998, and segment reporting can
be found in "Note 7. SEGMENT AND RELATED INFORMATION."
Impact of the Year 2000 Issue
State of Readiness
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
of the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
All products currently being shipped by the Company are Year 2000
compliant. Should a customer use the Company's software with a personal
computer that is not compliant with the year 2000, at that time, the customer
may experience erroneous dates on usage reports, but should not experience
any operational issues. Customers inquiring about previously shipped products
are forwarded to the Year 2000 Compliance Manager in Engineering Product
Development. The Year 2000 Compliance Manager researches the customer's
product and responds in writing as to whether the product is compliant. One
obsolete software product has been identified which will incorrectly report
the date after December 31, 1999. A solution for this issue has been
developed to correct this problem and has been offered to customers
identified as having purchased systems, which include this application
software. Written test instructions are also published for the customer to
check their equipment.
In February 1999, Transcrypt completed the first phase of
identifying and thoroughly researching non-compliant hardware and software.
In addition, the Company has completed the process of seeking quotes and
delivery estimates for the equipment and software that must be replaced or
upgraded to be Year 2000 compliant.
Transcrypt has identified and prioritized the following non-compliant items:
- The current version of our Enterprise Resource Planning ("ERP")
software is non-compliant. Our ERP system consists of our
manufacturing and accounting software systems. A software upgrade
has been scheduled with the vendor. The manufacturing and
accounting system software will be converted as is, with very few
customizations. In addition to vendor support, three contractors
have been engaged to support the conversion process. The Company
has been advised that the software upgrade is Year 2000 compliant
and is scheduled for completion in the third quarter 1999.
- Four wide area network file servers, which run our software
applications and interconnects the Company's various locations,
must be replaced with compliant servers. The servers are to be
installed by the end of June 1999. The remaining servers have
already been upgraded with Year 2000 compliant operating
software.
- The payroll system also must be upgraded to be Year 2000
compliant. The contract for this upgrade has been signed with the
vendor, the equipment has been ordered. The upgrade should be
completed by end of May 1999.
- Approximately 98 workstations used by various Company personnel
must be replaced due to compliance issues. The ordering of these
replacements have begun and is scheduled for completion by
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<PAGE>
the end of August 1999. Additional resources have been hired to
assist with this compliance step.
- The voicemail systems in Waseca and Lincoln are not Year 2000
compliant and must be upgraded. The necessary software has been
ordered to upgrade the Waseca system. The Lincoln voicemail
system will be replaced in connection with the installation of a
new telephone switch. Both location installations are to be
completed by the end of the third quarter 1999.
Management believes that all projects relating to Year 2000 compliance
will be completed by the end of the third quarter of 1999.
The upgrade to the Company's ERP software discussed above only
addresses the information technology part of the Company's state of readiness
with Year 2000 issues. There are other computerized systems involved in
manufacturing and engineering systems of the Company that may contain
embedded technology such as microcontrollers. A preliminary assessment was
made as to what effect, if any, the Year 2000 issue will have on these
systems and whether or not there will be a material effect on future
financial results. As of April 30, 1999, no definitive conclusions have been
drawn. Furthermore, the Company has not yet initiated formal communications
with all of its significant suppliers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The Company intends to perform steps to obtain reasonable
verification and written assurances from these suppliers as to their Year
2000 readiness by June 30, 1999.
Certifications have been received from the security system,
elevators, fire alarm systems, air conditioning and heating systems at the
Lincoln facility. The same checks are being performed in Waseca, and remote
offices.
Costs to Address the Year 2000 Issue.
The Company has budgeted expenditures of approximately $550,000 to
$750,000 to ensure that its systems are ready for processing information in
the Year 2000. The majority of these expenditures relate to the cost of
purchasing hardware and hardware installation. The Company estimates that it
has incurred approximately $75,000 in Year 2000 expenditures through March
31, 1999 with the balance of the budgeted expenditures to be incurred by the
end of 1999. In addition, the Company has incurred, and will continue to
incur, certain costs relating to the temporary reallocation of its internal
resources to address Year 2000 issues. The Company does not separately
account for the internal costs incurred for the Year 2000 issue. The Company
anticipates funding year 2000 expenditures from current cash reserves and
capital leases for certain portions of the project. All costs specifically
allotted to Year 2000 remediation are expensed as incurred.
Risks Presented by the Year 2000 Issue
If the other internal computerized systems are found not to be
Year 2000 compliant and significant suppliers were to become unable to
process shipments to the Company as a result of Year 2000 issues, the issues
may have a material adverse effect on the Company's business, results of
operations, and financial condition. There can be no guarantee that the
systems of other companies on which the Company relies upon will be timely
converted. Any adverse impact may include the requirement to pay significant
overtime to manually process certain transactions as a result of a systems
failure resulting in the inability to process transactions or engage in
normal business activities. At this time, the Company is unable to predict
with any certainty the estimated lost revenue it may experience as a result
of such failure or disruption.
Contingency Plans
The Company does not currently have any contingency plans to
address the event of the Company or a major supplier not becoming Year 2000
compliant. The contingency plan is in the process of being completed while at
the same time we continue to research all available information on products
and vendors. The project schedules will be closely monitored and additional
resources will be added early in the project. All systems are scheduled for
completion by the end of the third quarter. This allows the three months for
final testing and adjustments if necessary. During the last week of December
1999, all users will be instructed to backup critical information, or to
print paper copies of critical data. Paper copy reports of production
schedules, shipments, and
Page 18
<PAGE>
forms will be printed in advance. A team of information systems staff,
department representatives, and contractors will be scheduled for the weekend
of January 1, 2000 to monitor the date change.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does a significant amount of business in foreign
countries. The Company sales in these foreign countries are denominated in
United States dollars. Certain sales in foreign countries may be secured with
irrevocable letters of credit. The Company also carries foreign credit
insurance to cover receivables in a majority of the foreign countries where
it does business.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of pending litigation, see NOTE 6. COMMITMENTS
AND CONTINGENCIES above.
ITEMS 2 - 5.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are being filed herewith:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11 Computation of net income per share.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on March 5, 1999, under Item
5. "Other Events" to report a press release announcing the release of
its audited consolidated financial statements for 1998 and to report
a press release announcing Michael E. Jalbert as President and CEO of
the Company effective March 1, 1999.
Page 19
<PAGE>
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 17, 1999 By: /s/ Craig J. Huffaker
---------------------------------------
Craig J. Huffaker
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Page 20
<PAGE>
EXHIBIT 11
TRANSCRYPT INTERNATIONAL, INC AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31, 1999 MARCH 31, 1998
------------------------- -----------------------
<S> <C> <C>
Net income (loss) $ (3,957) $ 1,316
========================= =======================
NET INCOME (LOSS) PER SHARE - BASIC
Weighted average common shares - Basic 12,946,624 12,946,624
========================= =======================
Net income (loss) per share - Basic $ (0.31) $ 0.10
========================= =======================
NET INCOME (LOSS) PER SHARE - DILUTED
Shares used in this computation:
Weighted average common shares - Basic 12,946,624 12,946,624
Dilutive effect of shares under employee stock plans - 674,525
------------------------- -----------------------
Weighted average common shares - Diluted 12,946,624 13,621,149
========================= =======================
Net income (loss) per share - Diluted $ (0.31) $ 0.10
========================= =======================
</TABLE>
Page 21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TRANSCRYPT
INTERNATIONAL, INC.'S CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
CONSOLIDATED CONDENSED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 18,675
<SECURITIES> 0
<RECEIVABLES> 10,063
<ALLOWANCES> 2,111
<INVENTORY> 12,377
<CURRENT-ASSETS> 46,563
<PP&E> 11,291
<DEPRECIATION> 0
<TOTAL-ASSETS> 81,806
<CURRENT-LIABILITIES> 32,176
<BONDS> 0
0
0
<COMMON> 129
<OTHER-SE> 49,010
<TOTAL-LIABILITY-AND-EQUITY> 81,806
<SALES> 9,709
<TOTAL-REVENUES> 9,709
<CGS> 7,735
<TOTAL-COSTS> 7,735
<OTHER-EXPENSES> 6,074
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (143)<F1>
<INCOME-PRETAX> (3,957)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,957)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
<FN>
<F1>Interest expense is net of $311 of interest and other income less $168 of
interest expense.
</FN>
</TABLE>
