<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, 2000
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 27, 2000, 13,004,124 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, 2000 and December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
(unaudited)
Current assets:
Cash and cash equivalents $17,876 $ 21,571
Accounts receivable, net of allowance for
returns and doubtful accounts of $1,273
and $1,570 respectively 8,253 12,675
Receivables - other 563 316
Cost in excess of billings on uncompleted contracts 3,170 2,298
Inventory 16,766 16,447
Prepaid expenses 795 500
Deferred tax assets 2,395 2,395
------- --------
Total current assets 49,818 56,202
Property, plant and equipment, net 3,280 3,766
Deferred tax assets 9,981 9,981
Intangible assets, net of accumulated amortization 14,831 15,011
Other assets 565 561
------- --------
$78,475 $ 85,521
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 7,722 $ 5,809
Current portion of long-term debt 52 116
Accounts payable 3,658 8,514
Billings in excess of cost on uncompleted contracts 5,390 5,116
Deferred revenue 3,935 4,090
Accrued expenses 5,029 5,764
------- --------
Total current liabilities 25,786 29,409
Provision for litigation settlement 5,996 5,996
Long-term debt, net of current portion 50 197
Deferred revenue 538 633
------- --------
32,370 36,235
------- --------
Stockholders' equity:
Common stock 130 130
Additional paid-in capital 90,401 90,331
Accumulated deficit (44,426) (41,175)
------- --------
46,105 49,286
------- --------
$78,475 $ 85,521
------- --------
------- --------
</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 months ended March 31, 2000 and 1999
(Unaudited) (in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
------------ -----------
<S> <C> <C>
Revenues $ 11,360 $ 9,709
Cost of sales 9,812 7,735
----------- -----------
Gross profit 1,548 1,974
----------- -----------
Operating expenses:
Research and development 1,465 1,714
Sales and marketing 1,790 1,726
General and administrative 2,126 2,634
----------- -----------
Total operating expenses 5,381 6,074
----------- -----------
Income (loss) from operations (3,833) (4,100)
Other income 472 108
Interest income 242 203
Interest expense (132) (168)
----------- -----------
Income (loss) before income taxes (3,251) (3,957)
Income tax provision - -
----------- -----------
Net income (loss) $ (3,251) $ (3,957)
=========== ===========
Net income (loss) per share - Basic and Diluted $ (0.25) $ (0.31)
=========== ===========
Weighted average common shares - Basic and Diluted 12,956,871 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 three months ended March 31, 2000 and 1999
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ -----------
<S> <C> <C>
Net cash flow used in operating activities $ (4,590) $ (588)
------------ ----------
Cash flow from investing activities:
Proceeds from sale of fixed assets 63 72
Purchase of fixed assets (223) (135)
Increase in intangible assets (203) (19)
Increase in other assets (4) (8)
Payments on restructuring reserve (705) (666)
------------ ----------
Net cash used in investing activities (1,072) (756)
------------ ----------
Cash flow from financing activities:
Borrowings (payments) on revolving lines of credit, net 1,913 (98)
Payment of industrial development revenue bonds - (140)
Payment on term loans and capitalized leases (17) (5)
Proceeds from the exercise of employee stock options 71 -
------------ ----------
Net cash provided by (used in) financing activities 1,967 (243)
Net decrease in cash (3,695) (1,587)
Cash and cash equivalents at beginning of period 21,571 20,262
------------ ----------
Cash and cash equivalents at end of period $ 17,876 $18,675
============ ==========
</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, 1999 has
been taken from audited consolidated financial statements at that date. The
condensed consolidated financial statements for the three months ended March
31, 2000 and 1999 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, 1999. The results of operations and cash flows for
the three months ended March 31, 2000 are not necessarily indicative of the
results for any other period or the entire fiscal year ending December 31,
2000. 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 wireless communications products
and systems, and information security products. 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 land mobile radio products and systems mainly to two broad markets: (1)
commercial users and (2) public safety and other governmental users. In
addition, 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 and
telephony security markets.
The condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in the
consolidation.
3. 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, 2000 and 1999 net
losses were incurred, and the impact of outstanding stock options on diluted
EPS were anti-dilutive.
4. INVENTORY
The following is a summary of inventory at March 31, 2000 and December
31, 1999:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Raw materials and supplies $ 9,527 $ 9,027
Work in progress 2,208 1,816
Finished goods 5,031 5,604
------ ------
$16,766 $ 16,447
======= ========
</TABLE>
Page 5
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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. Originally due on June 1, 2000, the bank
has extended the line of credit until September 1, 2000. The Company is
currently in the process of either renewing the current line of credit or
securing a replacement facility. The working capital line is collateralized
by substantially all the Company's assets, including $10,000 in certificates
of deposit with the bank.
At March 31, 2000, the Company had $7,722 outstanding on the
revolving line of credit. At December 31, 1999, the Company had $5,809
outstanding on the line of credit.
6. COMMITMENTS AND CONTINGENCIES
As previously disclosed, 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. The
Company has settled the stockholder class action suits against the Company
and certain of its current or former officers. The Honorable Warren K. Urbom
of the United States District Court for the District of Nebraska approved the
settlement, which also resulted in a dismissal of the stockholder class
action suit pending in the District Court for Scotts Bluff County, Nebraska.
In the quarter ended December 31, 1998, the Company recorded a
special provision of $10 million related to the class actions suits against
the Company. Upon entering the memorandum of understanding that contained the
principal terms of the class action settlement, 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 $1,535 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 4,460,000 shares of common stock of the
Company, which is anticipated to be completed by December 31, 2000.
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. On May 9, 2000, the Company entered into a
mutual release and settlement agreement with Physician's Mutual Insurance
Company, PricewaterhouseCoopers, LLP and two former officers of the Company
whereby the parties agreed to settlement of all the outstanding claims
included in the complaint. The Company's portion of consideration for
settling the compliant was previously accrued in the Company's litigation
settlement reserve, which is included in accrued expenses.
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. As part of this investigation, the SEC is also examining the conduct
of certain former officers of the Company. The Company has an obligation to
defend and/or indemnify certain former employees. The Company has discussed
possible settlement of the investigation or any pending enforcement action
against the Company or its affiliated parties relating to these events. At
this time, it is unknown whether the Company will settle the SEC formal order
of investigation. While the Company has a reasonable expectation of the
outcome of the SEC investigation regarding the Company and certain former
officers, it is still unknown what actions will ultimately be taken against
former officers and, therefore, the Company cannot determine the total
exposure of any future obligations to defend and/or indemnify these former
officers. It is the company's current expectation that the SEC investigation
will not result in a monetary sanction against the Company. This expectation
could change upon discretionary action taken by the SEC. Furthermore, the SEC
has the authority to impose a variety of sanctions against the Company and
Company-affiliated parties. Such sanctions could include monetary penalties,
imposition of a cease and desist order and issuance of removal and
prohibition orders against Company-affiliated persons, among other things.
Page 6
<PAGE>
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In the normal course of its business activities, the Company is
required under a contract with various governmental authorities to provide
letters of credit and bonds that may be drawn upon if the Company fails to
perform under its contracts. The letters of credit, which expire on various
dates in 2000, have a total undrawn balance of $1,981. Of this total, $1,172
for one specific contract is collateralized by a cash reserve. Bonds, which
expire on various dates through 2000, totaled $12,696 at March 31, 2000. As
of March 31, 2000 no bonds have been drawn upon.
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, 2000 and 1999.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------
MARCH 31, MARCH 31,
------------------------------------------------------------
<S> <C> <C>
IN THOUSANDS 2000 1999
------------------------------------------------------------
<S> <C> <C>
SALES
Wireless Communication $9,703 $7,753
Information Security 1,657 1,956
-------- -------
TOTAL SALES 11,360 9,709
-------- -------
COST OF GOODS SOLD
Wireless Communication 9,320 6,660
Information Security 492 1,075
-------- -------
TOTAL COST OF GOODS SOLD 9,812 7,735
-------- -------
GROSS MARGIN
Wireless Communication 383 1,093
Information Security 1,165 881
-------- -------
TOTAL GROSS MARGIN $1,548 $1,974
============================================================
------------------------------------------------------------
GROSS MARGIN PERCENTAGE
Wireless Communication 3.9% 14.1%
Information Security 70.3% 45.0%
TOTAL GM PERCENTAGE 13.6% 20.3%
------------------------------------------------------------
</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 MARCH 31,
-------------------------------------------------
2000 1999
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $11,360 100.0 % $9,709 100.0 %
Cost of sales 9,812 86.4 % 7,735 79.7 %
--------- -------- ------- -------
Gross profit 1,548 13.6 % 1,974 20.3 %
Operating expenses:
Research and development 1,465 12.9 % 1,714 17.7 %
Sales and marketing 1,790 15.7 % 1,726 17.8 %
General and administrative 2,126 18.7 % 2,634 27.1 %
--------- -------- ------- -------
Total operating expenses 5,381 47.3 % 6,074 62.6 %
--------- -------- ------- -------
Income (loss) from operations (3,833) (33.7)% (4,100) (42.3)%
Other income 472 4.2 % 108 1.1 %
Interest income 242 2.1 % 203 2.1 %
Interest expense (132) (1.2)% (168) (1.7)%
--------- -------- ------- -------
Income (loss) before income taxes (3,251) (28.6)% (3,957) (40.8)%
Provision for income taxes - 0.0 % - 0.0 %
--------- -------- ------- -------
Net income (loss) $(3,251) (28.6)% $(3,957) (40.8)%
========= ======== ======= =======
</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 litigation
involving the Company, the outcome of the pending investigation by the SEC,
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, 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, 1999.
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.
Recent Developments
On April 17, 2000 Transcrypt signed a five-year agreement with Motorola
whereby Motorola has the right to develop and sell mobile and portable radio
products incorporating the EF Johnson developed LTR-Net-TM protocol. The
agreement provides for an initial payment for the technology, and a royalty
based on the net revenues derived from the sale of products using the
technology. A companion agreement stipulates that the initial payment and a
certain amount of royalties will be considered fulfilled in return for the
waiver of an equal amount in deferred license fees due to Motorola by EF Johnson
upon the sale of certain products that use Smartnet-TM- technology.
Page 8
<PAGE>
On May 9, 2000, the Company entered into a mutual release and
settlement agreement with Physician's Mutual Insurance Company,
PricewaterhouseCoopers, LLP and two former officer of the Company whereby the
parties agreed to settlement all of the complaint's outstanding claims. The
Company's consideration for settling the compliant was previously accrued in
the Company's litigation settlement reserve, which is included in accrued
expenses.
On May 10, 2000, the Company entered into an agreement with
PricewaterhouseCoopers, LLP that settled all claims between the Company and
PricewaterhouseCoopers, including the claims pertaining to the Company's
action filed against PricewaterhouseCoopers LLP, Randy Vitray, Roy Thylin and
other affiliated individuals which was filed with the District Court of
Lancaster County, Nebraska. The Company's action against
PricewaterhoueCoopers, LLP and its affiliated parties contained common law
causes of action for accountant malpractice, breach of contract and
contribution for damages and arising from the same facts and circumstances
underlying the class actions.
On May 11, 2000 the Company released an open letter to shareholders
signed by Michael E. Jalbert, Transcrypt's Chairman and Chief Executive
Officer. The letter discussed the Company's strengths and weaknesses,
potential market opportunities, and this year's outlook. This document was
filed with the SEC as an attachment to a Report on Form 8K filed on May 12,
2000.
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 advance payment received for
products to be sold to Motorola. The advance payment was negotiated as part
of an agreement to produce certain products during 2000, and is recognized as
revenue is earned.
Revenues increased 17% to $11.4 million in the first quarter of
2000, as compared to $9.7 million during the same period in 1999. Of total
revenues in the first quarter, the wireless communication segment comprised
$9.7 million, which represents a 25% increase over segment revenues of $7.8
million during the year-ago period. Information security segment revenues of
$1.7 million represent a 15% decline as compared to revenues of $2.0 million
during 1999.
The increase in revenues of the wireless communication segment was
primarily due to increased sales of equipment manufactured under contract at
EF Johnson's Waseca, Minnesota facility. Revenues associated with this effort
increased approximately 100% during the first quarter of 2000. A portion of
this increase is the result of fulfilling during the first quarter certain
deliveries originally scheduled for the second quarter of 2000. Management
believes that this rate of increase in contract manufacturing revenues is
unusual, and cannot be expected to continue. In addition, sales to federal
customers contributed $0.9 million in revenues during the first quarter of
2000. While the Company has recently begun to focus certain sales and
marketing efforts on that area, there can be no assurances that these efforts
will be successful, and that sales into this customer base will continue to
increase.
Page 9
<PAGE>
The decline in revenues of the information security segment was
primarily the result of product mix changes and not finalizing certain sales
agreements during the period. The Company believes that the majority of the
delayed agreements will be finalized later in the fiscal year.
Total revenues from international sales increased to $3.0 million
for the three months ended March 31, 2000, compared to $2.4 million for the
same period in 1999. The increase is primarily due to an increase in sales in
Central and Latin America. The Company's revenue during the first quarter of
2000 for Central and Latin America increased approximately 72% as compared to
the first quarter of 1999. In addition, Middle East and Asian revenues for
the first three months of 2000 were down approximately 56% compared to the
first three months of 1999. The Company expects continued decreases in Middle
East and Asian revenues as a result of its decision to close its Hong Kong
office during the second quarter of 1999.
In an effort to further improve overall sales, the Company plans to
introduce new products in 2000. For example, during the fiscal year EFJohnson
will introduce new portable and mobile radios that are compatible with
Motorola's Smartnet-TM- trunking technology.
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. Consolidated gross profit was
$1.5 million (13.6% gross margin) for the first quarter of 2000, compared to
$2.0 million (20.3% gross margin) for the same period in 1999. Gross margin
for the wireless communications segment was 3.9% in the first quarter of 2000
and was 14.1% for the same period in 1999. Gross margin for the information
security segment was 70.3% in the first quarter of 2000, and was 45.0% for
the same period in 1999.
In the wireless communication segment, the overall decline in gross
margin percentage from 1999 to 2000 was due to a number of factors. These
include (1) product mix; (2) a higher relative percentage of revenues from
lower margin contract manufacturing; and (3) the level of sales not being
sufficient to fully absorb the Company's manufacturing overhead. Gross
margins were significantly higher in the information security segment during
the first quarter of 2000, as compared to the year-ago period, primarily
because of product mix issues and the write-off of certain obsolete inventory
and other adjustments during 1999. Without the inventory write-off and other
adjustments, the gross margin percentage during the 1999 quarter would have
been 66.2%. Gross margins for both industry segments are likely to vary in
the future, based primarily upon the mix of products and the amount of
revenues for the respective 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 $1.5 million in the first quarter of
2000 from $1.7 million in the first quarter of 1999. This decrease was
primarily due to a reduced engineering staff. The Company expects its
research and development costs to increase slightly in the future, such that
quarterly expenditures are in line with amounts expensed during the year-ago
quarter.
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 increased to $1.8 million in the
first quarter of 2000 from $1.7 million in the first quarter of 1999. This
was primarily due to increased staffing levels as the Company improves its
sales focus and marketing efforts. Sales and marketing expenses decreased as
a percentage of sales to 15.8% for the first three months of 2000 from 17.8%
in the first three months of 1999 primarily due to the increase in revenues.
The Company anticipates that sales and marketing expenses will increase as it
continues to focus and enhance its efforts in this area.
Page 10
<PAGE>
General and Administrative
General and administrative expenses consist primarily of salaries
and other expenses associated with the Company's management, accounting,
finance, administration, and the amortization of intangible assets. General
and administrative expenses decreased to $2.1 million in the first quarter of
2000 from $2.6 million in the first quarter of 1999. As a percentage of
revenue, general and administrative expense declined to 18.7% of revenues in
the first quarter of 2000 from 27.1% of revenues in the first quarter of
1999. The lower expenses are primarily the result of the restructuring begun
in 1998, which brought the administrative organization more in line with the
needs of the Company. The Company anticipates general and administrative
expenses to be similar to or slightly higher than the level experienced
during the first quarter of 2000.
Net Interest Income
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 loans and bank lines of credit. Net interest income was $110,000 in
the first quarter of 2000, as compared to $35,000 in the first quarter of
1999. Interest income and expense varies based on the relative interest rates
earned or paid. The Company expects net interest income to continue to
decline in 2000 as the cost of the Company's borrowings continues to increase.
Other Income, net
Other income for the first quarter of 2000 was primarily related to
funds received in settlement of arbitration proceedings by Transcrypt against
EFJ Partners, the previous owners of EFJohnson, which the Company acquired in
July 1997.
Benefit for Income Taxes
The Company did not record a tax benefit in either the first quarter
of 2000 or in the first quarter of 1999. The Company did not recognize a tax
benefit associated with its loss during 1999 because the amount of the
Deferred Tax Assets shown on the Consolidated Balance Sheet is management's
estimate of the amount that is more likely than not to be realized.
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 $4.6 million in the
first three months of 2000 compared to $0.6 million in the first three months
of 1999. Cash used in operating activities in the first three months of 2000
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.
Cash used by investing activities was $1.1 million for the first
three months of 2000 as compared to cash used in investing activities of $0.8
million in the first three months of 1999. Capital expenditures of $0.2
million for the first quarter of 2000, as compared to $0.1 million for the
first quarter of 1999, consisted primarily of manufacturing equipment and
computer equipment.
Financing activities generated cash of $2.0 million in the first
quarter of 2000, which primarily consisted of advances on the Company's line
of credit with U.S. Bank.
As of March 31, 2000, the Company had $7.1 million in outstanding
indebtedness under its line of credit with the 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 deposit
pledged as security on the bank line of credit.
Page 11
<PAGE>
This line of credit, which was originally due on June 1, 2000, has been
extended to September 1, 2000 and is collateralized by substantially all the
Company's assets, including $10.0 million in certificates of deposit with the
bank. The Company also has $1.2 million in cash that is pledged as collateral
for a letter of credit associated with a guarantee on a certain contract.
The Company does not anticipate paying cash dividends in the
foreseeable future.
As of March 31, 2000, the Company had $17.9 million in cash and cash
equivalents, which includes $10.0 million of certificates of deposit pledged as
security on its bank line of credit. There was approximately $2.3 million
available under its bank line of credit at March 31, 2000. The Company's bank
line of credit expires on September 1, 2000 and the Company is currently in the
process of either renewing the current line of credit or securing a replacement
facility. 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 capital expenditures through 2000. However, if sales do not increase and
operating losses do not decline, 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.
Recently Issued Accounting Standards
As of the date of this filing, there were no recently issued accounting
standards that impact the Company.
Impact of the Year 2000 Issue
The Company did not experience any material Year 2000 system failure
or miscalculations causing disruptions of operations resulting for computer
programs being written using two digits rather than four to define the
applicable year. In addition, we have not received a significant amount of
customer notification regarding experiencing erroneous dates on usage reports
or Year 2000 operational issues. It is still possible for customers to have
issues with previously shipped products. The Year 2000 compliance manager
will continue to respond in writing to any possible solutions to any Year
2000 product issues.
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 has a line of credit with a regional bank, which carries
a variable interest rate that changes based on changes in certain time
certificates of deposits issued by the lender.
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:
Page 12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
11 Computation of net income (loss) per share.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed a report on Form 8K on May 12, 2000 under
Item 5. "Other Events" to report a press release announcing the
Company's first quarter 2000 financial results.
The Company filed a report on Form 8K on May 12, 2000 under
Item 5. "Other Events" to report a press release announcing an open
letter to shareholders signed by Michael E. Jalbert, Transcrypt's
Chairman and Chief Executive Officer.
Page 13
<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 12, 2000 By: /S/ Massoud Safavi
------------------------------------
Massoud Safavi
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Page 14
<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, 2000 MARCH 31, 1999
--------------- ---------------
<S> <C> <C>
Net income (loss) $(3,251) $(3,957)
=============== ===============
NET INCOME (LOSS) PER SHARE - BASIC
Weighted average common shares - Basic 12,956,871 12,946,624
=============== ===============
Net income (loss) per share - Basic $(0.25) $(0.31)
=============== ===============
NET INCOME (LOSS) PER SHARE - DILUTED
Shares used in this computation:
Weighted average common shares - Basic 12,956,871 12,946,624
Dilutive effect of shares under employee
stock plans - -
--------------- ---------------
Weighted average common shares - Diluted 12,956,871 12,946,624
=============== ===============
Net income (loss) per share - Diluted $(0.25) $(0.31)
=============== ===============
</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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 17,876
<SECURITIES> 0
<RECEIVABLES> 9,526
<ALLOWANCES> 1,273
<INVENTORY> 3,170
<CURRENT-ASSETS> 49,818
<PP&E> 3,280
<DEPRECIATION> 0
<TOTAL-ASSETS> 78,475
<CURRENT-LIABILITIES> 25,786
<BONDS> 0
0
0
<COMMON> 130
<OTHER-SE> 90,401
<TOTAL-LIABILITY-AND-EQUITY> 78,475
<SALES> 11,360
<TOTAL-REVENUES> 11,360
<CGS> 9,812
<TOTAL-COSTS> 9,812
<OTHER-EXPENSES> 5,381
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (582)<F1>
<INCOME-PRETAX> (3,251)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,251)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
<FN>
<F1>Interest expense is net of $714 of interest and other income less $132 of
interest expense.
</FN>
</TABLE>
