<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 SEPTEMBER 30, 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, SUITE 100
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 October 31, 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
September 30, 1999 and December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,119 $ 20,262
Accounts receivable, net 7,553 9,287
Receivables - other 155 605
Cost in excess of billings on uncompleted contracts 5,177 1,216
Inventory 11,704 13,907
Prepaid expenses 726 552
Deferred tax assets 2,870 5,157
------------------- ------------------
Total current assets 45,304 50,986
Property, plant and equipment, net 5,577 11,885
Deferred tax assets 9,506 7,219
Intangible assets, net 15,599 16,711
Other assets 357 411
------------------- ------------------
$ 76,343 $ 87,212
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 7,090 $ 7,426
Current portion of long-term debt 79 2,732
Accounts payable 3,733 2,620
Billings in excess of cost on uncompleted contracts 3,743 4,541
Deferred revenue 409 1,140
Accrued expenses 5,883 5,101
Provision for litigation settlement - 10,000
------------------- ------------------
Total current liabilities 20,937 33,560
Provision for litigation settlement 5,996 -
Long-term debt, net of current portion 62 6
Deferred revenue 396 550
------------------- ------------------
27,391 34,116
------------------- ------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - -
Common stock 129 129
Additional paid-in capital 90,315 90,315
Accumulated deficit (41,492) (37,348)
------------------- ------------------
48,952 53,096
------------------- ------------------
$ 76,343 $ 87,212
=================== ==================
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TRANSCRYPT INTERNATIONAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 1999 and 1998
(in thousands, except share and per share data) (unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ------------------------------
1999 1998 1999 1998
-------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 15,323 $ 14,325 $ 37,760 $ 50,190
Cost of sales
9,917 11,220 26,298 34,983
-------------- --------------- ------------- -------------
Gross profit
5,406 3,105 11,462 15,207
-------------- --------------- ------------- -------------
Operating expenses:
Research and development 1,220 2,174 4,445 6,915
Sales and marketing 1,885 2,626 6,006 9,191
General and administrative 2,287 3,030 7,381 9,858
Restructuring charge - 1,230 523 1,230
Provision for litigation settlement - - (2,221) -
-------------- --------------- ------------- -------------
Total operating expenses 5,392 9,060 16,134 27,194
-------------- --------------- ------------- -------------
Income (loss) from operations 14 (5,955) (4,672) (11,987)
Other income (expense) (33) (119) 256 (119)
Interest income 263 369 667 1,050
Interest expense (95) (221) (395) (483)
-------------- --------------- ------------- -------------
Net income (loss) before income taxes 149 (5,926) (4,144) (11,539)
Income tax benefit - (2,030) - (3,916)
-------------- --------------- ------------- -------------
Net income (loss) $ 149 $ (3,896) $ (4,144) $ (7,623)
============== =============== ============= =============
Net income (loss) per share - Basic and Diluted $ 0.01 $ (0.30) $ (0.32) $ (0.59)
============== =============== ============= =============
Weighted average common shares - Basic 12,946,624 12,946,624 12,946,624 12,946,624
============== =============== ============= =============
Weighted average common shares - Diluted 13,203,130 12,946,624 12,946,624 12,946,624
============== =============== ============= =============
</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 nine months ended September 30, 1999 and 1998
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
1999 1998
------------------------- -------------------------
<S> <C> <C>
Net cash flow used in operating activities $ (4,220) $ (14,505)
------------------------- -------------------------
Cash flow from investing activities:
Proceeds from sale of fixed assets 5,272 5
Purchase of fixed assets (504) (2,997)
Increase in intangible assets (146) -
Increase in other assets 54 -
Payments on restructuring reserve (666) -
Sale of investments - 15,900
------------------------- -------------------------
Net cash provided by investing activities 4,010 12,908
------------------------- -------------------------
Cash flow from financing activities:
Borrowings (payments) on revolving lines of credit, net (336) 9,242
Borrowings on term loans and capitalized leases 146 -
Payment on term loans and capitalized leases (2,743) (2,557)
------------------------- -------------------------
Net cash provided by (used in) financing activities (2,933) 6,685
Net increase (decrease) in cash and cash equivalents (3,143) 5,088
Cash and cash equivalents, beginning of period
20,262 15,384
------------------------- -------------------------
Cash and cash equivalents, end of period $ 17,119 $ 20,472
========================= =========================
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 4
<PAGE>
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. The
condensed consolidated financial statements for the three and nine months
ended September 30, 1999 and for the three and nine months ended September
30, 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 nine months ended September 30, 1999 are not necessarily indicative of
the results for the entire fiscal year ending December 31, 1999.
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.
3. NET EARNINGS (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 nine months ended September 30, 1999 a net
loss was incurred and the impact of outstanding stock options on diluted EPS
is anti-dilutive. For the three months ended September 30, 1999, net income
per share -- diluted includes incremental shares for outstanding stock options
of 256,506 shares.
4. INVENTORY
The following is a summary of inventory at September 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Raw materials and supplies $ 4,953 $ 6,267
Work in progress 1,737 1,337
Finished goods 5,014 6,303
----- ------
$ 11,704 $ 13,907
====== ======
</TABLE>
Page 5
<PAGE>
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 June 30,
2000. The working capital line is collateralized by substantially all the
Company's assets including $10,000 in certificate of deposits with the bank.
At September 30, 1999, the Company had $7,090 outstanding on the
revolving line of credit. At December 31, 1998, the Company had $7,230
outstanding on this line of credit and $196 outstanding on an additional line
of credit.
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 current and
former 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.
In July 1999, the Company announced that a memorandum of
understanding has been signed with lead plaintiffs' counsel to settle the
pending stockholder class action suits against the Company and certain of its
current or former officers in the United States District Court of Nebraska
and the District Court for Scotts Bluff County, Nebraska. The principal terms
of the memorandum of understanding require the establishment of a settlement
fund consisting of (a) 4,460,000 shares of Transcrypt common stock and (b) at
least $3,850 and up to $8,850 to be paid by Transcrypt's insurance carriers
(depending on the outcome of an arbitration between plaintiffs and one of the
insurance carriers). Transcrypt would also pay $2,000 to the class if there
were a purchase of Transcrypt by acquisition or merger that occurs within 18
months of the signing of the memorandum of understanding. The proposed
settlement is subject to a number of contingencies, including the court
approval of a definitive agreement.
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.
In the quarter ended December 31, 1998, the Company recorded a
special provision of $10 million related to actions pending against the
Company. Upon entering the memorandum of understanding, the Company revised
its estimated costs related to the settlement of actions against the Company.
This lowered the Company's operating expenses by $2.2 million in the second
quarter of 1999 as the settlement was for an amount less than previously
provided. The remaining reserves for litigation settlement and related costs
include $1,783 included in accrued expenses and $5,996 included in the
provision for litigation settlement. The remaining reserves for litigation
settlement have been classified as long term to the extent that they will be
extinguished through the issuance of common stock of the Company.
Page 6
<PAGE>
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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'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 of 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 and nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------- ------------------------------
IN THOUSANDS 1999 1998 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES
Information Security $ 1,344 $ 1,915 $ 4,906 $ 8,650
Wireless Communication 13,979 12,410 32,854 41,540
----------- ------------- ------------- -------------
TOTAL SALES 15,323 14,325 37,760 50,190
----------- ------------- ------------- -------------
COST OF GOODS SOLD
Information Security 431 1,401 2,109 3,139
Wireless Communication 9,486 9,819 24,188 31,844
----------- ------------- ------------- -------------
TOTAL COST OF GOODS SOLD 9,917 11,220 26,297 34,983
----------- ------------- ------------- -------------
GROSS MARGIN
Information Security 913 514 2,797 5,511
Wireless Communication 4,493 2,111 8,665 9,696
----------- ------------- ------------- -------------
TOTAL GROSS MARGIN $ 5,406 $ 3,105 $ 11,462 $ 15,207
=========================================================================================
-----------------------------------------------------------------------------------------
GROSS MARGIN PERCENTAGE
Information Security 67.9% 26.8% 57.0% 63.7%
Wireless Communication 32.1% 17.0% 26.4% 23.3%
TOTAL GM PERCENTAGE 35.3% 21.7% 30.4% 30.3%
-----------------------------------------------------------------------------------------
</TABLE>
Page 7
<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 SEPTEMBER 30,
------------------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 15,323 100.0% $ 14,325 100.0%
Cost of sales 9,917 64.7% 11,220 78.3%
------------------- -------------- ----------------- -----------------
Gross profit 5,406 35.3% 3,105 21.7%
------------------- -------------- ----------------- -----------------
Operating expenses:
Research and development 1,220 8.0% 2,174 15.2%
Sales and marketing 1,885 12.3% 2,626 18.3%
General and administrative 2,287 14.9% 3,030 21.2%
Restructuring charge - 0.0% 1,230 8.6%
Provision for litigation settlement - 0.0% - 0.0%
------------------- -------------- ----------------- -----------------
Total operating expenses 5,392 35.2% 9,060 63.2%
------------------- -------------- ----------------- -----------------
Income (loss) from operations 14 0.0% (5,955) (41.6)%
Other income (expense) (33) (0.2)% (119) (0.8)%
Interest income 263 1.7% 369 2.6%
Interest expense (95) (0.6)% (221) (1.5)%
------------------- -------------- ----------------- -----------------
Income (loss) before income taxes 149 0.9% (5,926) (41.4)%
Income tax benefit - 0.0% (2,030) (14.2)%
------------------- -------------- ----------------- -----------------
Net income (loss) $ 149 0.9% $ (3,896) (27.2)%
=================== ============== ================= =================
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 37,760 100.0% $ 50,190 100.0%
Cost of sales 26,298 69.6% 34,983 69.7%
------------------- -------------- ----------------- -----------------
Gross profit 11,462 30.4% 15,207 30.3%
------------------- -------------- ----------------- -----------------
Operating expenses:
Research and development 4,445 11.8% 6,915 13.8%
Sales and marketing 6,006 15.9% 9,191 18.3%
General and administrative 7,381 19.6% 9,858 19.6%
Restructuring charge 523 1.4% 1,230 2.5%
Provision for litigation settlement (2,221) (5.9)% - 0.0%
------------------- -------------- ----------------- -----------------
Total operating expenses 16,134 42.7% 27,194 54.2%
------------------- -------------- ----------------- -----------------
Loss from operations (4,672) (12.4)% (11,987) (23.9)%
Other income (expense) 256 0.7% (119) (0.2)%
Interest income 667 1.8% 1,050 2.1%
Interest expense (395) (1.1)% (483) (1.0)%
------------------- -------------- ----------------- -----------------
Loss before income taxes (4,144) (11.0)% (11,539) (23.0)%
Income tax benefit - 0.0% (3,916) (7.8)%
------------------- -------------- ----------------- -----------------
Net loss $ (4,144) (11.0)% $ (7,623) (15.2)%
=================== ============== ================= =================
</TABLE>
Page 8
<PAGE>
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 court approval and finalization
of the proposed settlement of the pending class action litigation involving
the Company, the outcome of the pending investigation by the SEC, the results
of the Company's product development efforts, future sales levels, 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
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 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 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.
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 increased 7.0% to $15.3 million in the third quarter of
1999 and decreased 24.8% to $37.8 million during the first nine months of
1999, compared to $14.3 million and $50.2 million, respectively, during the
same periods of 1998. Of total revenues in the third quarter, the information
security segment comprised 8.8% and the wireless communication segment
comprised 91.2%. For the first nine months of 1999, the information security
segment comprised 13.0% and the wireless communication segment comprised
87.0% of total revenues.
Page 9
<PAGE>
The increase in revenues in the third quarter of 1999 when compared
to the third quarter of 1998 was primarily attributable to a significant
increase in LMR systems sales to government agencies, which increased 125%
compared to the same period in 1998. The Company was not awarded any domestic
system contracts in 1998, largely attributable to the uncertainty raised by
the restatement discussed above. This adverse impact was most acute in the
third quarter of 1998. In comparison, for the first nine months of 1999, the
Company has been awarded multiple contracts in the domestic public safety
market for approximately $14.0 million, and revenue recognized has increased
accordingly.
The decrease in revenues for the first nine months of 1999 was
primarily due to reduced domestic wireless sales to business and industrial
customers and to a general decline in sales in international markets. The
decrease in domestic wireless sales was primarily the result of discontinuing
product sales that were not sufficiently profitable.
Revenues from international sales decreased to $2.5 million for the
three months ended September 30, 1999, compared to $6.2 million for the same
period in 1998. For the first nine months of 1999, international sales
decreased to $7.9 million compared to $18.9 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 for the first nine months of 1999 for
Central and Latin America decreased approximately 51.2% compared to the first
nine months 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.
In an effort to improve sales, the Company has introduced and plans
to introduce new products in 1999. Land mobile radio secure products
introduced in the first nine months of 1999 include new encryption modules
for deployment in a wide range of mobile radios, including the latest
Motorola models. The Company also introduced new voice security modules for
Nokia and Qualcomm cellular phones. The EFJohnson subsidiary released on
March 31, 1999 the Company's LTR-Net-TM- trunked radio system. The Company's
EFJohnson subsidiary also introduced new models of our hand-held land mobile
radios and a new line of digital mobile radios, which are APCO-25 compliant.
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 $5.4 million
(35.3% gross margin) for the third quarter of 1999, compared to $3.1 million
(21.7% gross margin) for the same period in 1998. For the first nine months
of 1999, gross profit was $11.5 million (30.4% gross margin) compared to
$15.2 million (30.3% gross margin) for the same period in 1998. Gross margin
for the information security segment for the three and nine months ended
September 30, was 67.97% and 57.0%, respectively, compared to 26.8% and 63.7%
for the same periods in 1998. Gross margin for the wireless communications
segment for the three and nine months ended September 30, 1999 was 32.1% and
26.4%, respectively, compared to 17.0% and 23.3% for the same periods in 1998.
On a quarterly comparison basis, the increase in gross margin
percentage in the third quarter of 1999 compared to the same period in 1998
is due to several factors. These factors include: (1) the Company selling new
products with better margins in the third quarter of 1999; (2) higher
proportion of sales in higher margin domestic public safety systems; and (3)
1998 third quarter margins were adversely effected by the occurrence of
higher costs than anticipated to complete certain public safety systems. For
the first nine months of 1999 compared to the same period in 1998, the
overall gross margin percentage was flat.
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 $1.2 million and $4.4 million for the
three and nine months ended September 30, 1999, respectively, from $2.2
million and $6.9 million for the same periods in 1998. This decrease was
primarily due to a reduced engineering staff.
Page 10
<PAGE>
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.
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 $1.9 million and
$6.0 million for the three and nine month periods ended September 30, 1999,
respectively, from $2.6 million and $9.2 million for the same periods in
1998. This was primarily due to a decrease in sales commissions and fewer
sales personnel. Sales and marketing expenses decreased as a percentage of
sales to 12.3% and 15.9% for the three and nine months ended September 30,
1999, respectively, from 18.3% for both comparable periods in 1998.
General and Administrative
General and administrative expenses consist primarily of salaries
and other expenses associated with the Company's management, accounting,
finance and administrative functions and amortization of intangible assets.
General and administrative expenses decreased to $2.3 million in the third
quarter of 1999 from $3.0 million in the third quarter of 1998. For the nine
months ended September 30, 1999, general and administrative expenses
decreased to $7.4 million from $9.9 million for the first nine months of
1998. The decrease is due primarily to legal, accounting and severance costs,
which were incurred, in the first nine months of 1998 associated with the
Company's financial restatement in 1998.
Restructuring Charge
Restructuring charges for the nine month period ending September 30,
1999 was $523,000 compared to $1.2 million for the same period in 1998. The
Company incurred a restructuring charge in the second quarter of 1999 of
approximately $523,000 in connection primarily with the closure of
EFJohnson's sales office in Hong Kong. In the third quarter of 1998, the
Company recorded a restructuring charge of approximately $1.2 million in
connection with a 25% work force reduction.
Provision for Litigation Settlement
In the quarter ended December 31, 1998, the Company recorded a
special provision of $10 million related to actions pending against the
Company. Upon entering the memorandum of understanding, the Company revised
its estimated costs related to the settlement of actions against the Company.
This lowered the Company's operating expenses by $2.2 million in the second
quarter as the settlement was for an amount less than previously provided.
Other Income, Net
Other income, net for the third quarter of 1999 increased primarily
as a result of the sale of Company's corporate headquarters in Lincoln,
Nebraska.
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 $168,000 in the third quarter of 1999, as compared to $148,000 in
the third quarter of 1998. The increase was due to the Company carrying a
lower average balance on its revolving line of credit in the third quarter of
1999. For the first nine months of 1999, net interest income was $272,000
compared to $567,000 for the same period in 1998. This decrease was due to
the Company having a higher cash balance and lower average balance on its
bank line of credit in the first quarter of 1998.
Page 11
<PAGE>
Benefit for Income Taxes
The Company did not record a tax benefit in the third quarter of
1999, compared to a tax benefit of $2.0 million in the third quarter of 1998.
For the first nine months of 1999 the Company did not record a tax benefit
compared to a tax benefit of $3.9 million for the same period in 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
The Company has historically 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 $4.2 million in the
first nine months of 1999 compared to $14.5 million in the first nine months
of 1998. Cash used in operating activities in the first nine months of 1999
consisted primarily of a net loss plus: a gain on a sale of assets, offset in
part by depreciation and amortization: a decrease in inventory; an increase
in accounts payable; an increase in accrued expenses; and a decrease in
accounts receivable.
The deferred tax assets totaling $12.4 million were 16.2% and 25.3%
of total assets and stockholders' equity, respectively, at September 30,
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 provided by investing activities was $4.0 million for the first
nine months of 1999. The Company sold its Lincoln facility in the second
quarter of 1999 generating $5.3 million in cash. Capital expenditures of
$504,000 for the first nine months of 1999 consisted primarily of
manufacturing equipment, computer equipment and software. In the first nine
months of 1998, cash provided by investing activities of $12.9 million was
generated from the sale of investments less $3.0 million of capital
expenditures. Capital expenditures of $3.0 million for the first nine months
of 1998 consisted primarily of computer and networking equipment, office
furniture and manufacturing equipment and phase III construction cost at the
Company's Lincoln facility.
Financing activities used cash of $2.9 million in the first nine
months of 1999. Financing activities consisted of a $336,500 decrease in
borrowings on the Company's lines of credit and the elimination of its
outstanding IDR Bonds totaling $2.7 million during the second quarter of 1999
as a result of the sale of its Lincoln facility. Cash provided by financing
activities for the first nine months of 1998 consisted of $9.2 million in
borrowings on the Company's revolving line of credit less a $2.6 million
payment on long-term debt.
As of September 30, 1999, the Company had $7.1 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 June 30, 2000. 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 does not anticipate paying cash dividends in the
foreseeable future.
As of September 30, 1999, the Company had approximately $17.1
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
$1.2 million pledged as security for bonding on domestic system contracts
with the Company's surety company. $750,000 of the bank line of credit
secures a letter of credit issued to the Company's surety company for bonding
on system contracts. There was approximately $1.7 million available under the
Company's bank line of credit at September 30, 1999. The Company's bank line
of credit was renewed during the third quarter, with expiration on June 30,
2000.
Page 12
<PAGE>
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 Year 2000 capital expenditures for the next 12 months. In addition,
the Company has retained ING Barings as its financial advisor to assist the
Company in its review of strategic and financial alternatives. Also, to
strengthen its cash position, the Company is actively marketing its
manufacturing facility in Waseca. However, no assurance can be given that the
Company will be able to obtain additional funding or financing, if determined
to be necessary, or to be able to obtain financing on terms satisfactory to
its stockholders. 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.
Business Risk
The Company is faced with several business risk factors that may
have a material effect upon its future business operations, financial
condition, results of operations, liquidity and cash flows. Business risks
specifically known to the Company include: 1.) Potential to 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. 2.) Potential SEC
enforcement action for violations of certain aspects of the Federal
securities laws. 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. Nor can the Company project any possible penalties
that may result from any such enforcement action. 3.) The Company has
identified a 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
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 collateral requirement for any
additional bonds could adversely affect the Company's ability to bid on or be
awarded new domestic systems contracts. 4.) 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. 5.) The Company's
ability to compete effectively will depend upon its ability to anticipate and
react timely to technological changes.
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, included in certain communication systems, has
been identified. This product issue has no effect on communication
operability, but will incorrectly report system usage dates after December
31, 1999. All customers identified as having purchased a system with this
application software have been notified and have been offered a solution to
correct this Year 2000 issue. The Company estimates approximately 10
customers have elected not to pursue the offered solution.
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.
Page 13
<PAGE>
Transcrypt previously identified non-compliant items requiring corrective
actions. Statuses for those items follow:
- The previous version of our Enterprise Resource Planning ("ERP")
software was non-compliant. Our ERP system consists of our
manufacturing and accounting software systems. A software upgrade
has been completed as of this filing. The ERP system is now Year
2000 compliant.
- All essential workstations and file servers are now Year 2000
compliant. One server in our Miami sales office will require an
upgrade, scheduled for the fourth quarter of 1999.
- The payroll system and HRIS are now Year 2000 compliant.
- The voicemail systems in Waseca and Lincoln are now Year 2000
compliant.
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. An 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 this filing, the Company believes these other internal systems will not
be adversely effected by Year 2000 problems. Furthermore, the Company has
received reasonable verification and written assurances from its major
suppliers as to their Year 2000 readiness. However, the Company cannot
warrant that all internal and external systems will perform as expected.
All major facility systems, including the security system,
elevators, fire alarm systems, air conditioning and heating systems at the
Lincoln and Waseca facilities have been tested and are believed to be Year
2000 compliant.
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 $450,000 in Year 2000 expenditures through
September 30, 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
A material adverse effect on the Company's business, results of
operations, and financial condition could occur if other internal
computerized systems are found not to be Year 2000 compliant, significant
suppliers were to become unable to process shipments to the Company, or
utility service was disrupted as a result of Year 2000 issues. There can be
no guarantee that the systems of other companies on which the Company relies
upon will be timely converted or whether utility service will continue
without interruption. 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 internal systems
Page 14
<PAGE>
are completed, which allows for the remaining time to be used 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 forms will be printed in advance. A team of information
systems staff, department representatives, and contractors are 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 - 4.
Inapplicable.
ITEM 5. OTHER INFORMATION
Inapplicable.
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 July 13, 1999, under Item 5.
"Other Events" to report a press release announcing that a memorandum
of understanding has been signed with lead plaintiffs' counsel to
settle the pending stockholder class action suits against the Company
and certain of its current and former officers in the United States
District Court of Nebraska and the District Court for Scotts Bluff
County, Nebraska.
Page 15
<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: November 11, 1999 By: /S/ Michael E. Jalbert
-----------------------------------
Michael E. Jalbert
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: November 11, 1999 By: /S/ Massoud Safavi
-----------------------------------
Massoud Safavi
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Page 16
<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 NINE MONTHS ENDED
----------------------------------------- ----------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 149 $ (3,896) $ (4,114) $ (7,623)
=================== =================== =================== ==================
NET INCOME (LOSS) PER SHARE - BASIC
Weighted average common shares - Basic 12,946,624 12,946,624 12,946,624 12,946,624
=================== =================== =================== ==================
Net income (loss) per share - Basic $ 0.01 $ (0.30) $ (0.32) $ (0.59)
=================== =================== =================== ==================
NET INCOME (LOSS) PER SHARE - DILUTED
Shares used in this computation:
Weighted average common shares - Basic 12,946,624 12,946,624 12,946,624 12,946,624
Dilutive effect of shares under
employee stock plans 256,506 - - -
------------------- ------------------- ------------------- ------------------
Weighted average common shares - Diluted 13,203,130 12,946,624 12,946,624 12,946,624
=================== =================== =================== ==================
Net income (loss) per share - Diluted $ 0.01 $ (0.30) $ (0.32) $ (0.59)
=================== =================== =================== ==================
</TABLE>
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,119
<SECURITIES> 0
<RECEIVABLES> 7,708
<ALLOWANCES> 0
<INVENTORY> 11,704
<CURRENT-ASSETS> 45,304
<PP&E> 5,577
<DEPRECIATION> 0
<TOTAL-ASSETS> 76,343
<CURRENT-LIABILITIES> 20,937
<BONDS> 0
0
0
<COMMON> 129
<OTHER-SE> 48,823
<TOTAL-LIABILITY-AND-EQUITY> 76,343
<SALES> 37,760
<TOTAL-REVENUES> 37,760
<CGS> 26,298
<TOTAL-COSTS> 26,298
<OTHER-EXPENSES> 16,134<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (528)<F2>
<INCOME-PRETAX> (4,144)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,144)
<EPS-BASIC> (0.32)
<EPS-DILUTED> (0.32)
<FN>
<F1>Includes a reversal of 2,221 for a reduction of the provision for litigation
settlement.
<F2>Interest expense is net of $693 of interest and other income less $300 of
interest expense.
</FN>
</TABLE>
