<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 JUNE 30, 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 July 30, 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
June 30, 2000 and December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
JUNE 30, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,163 $ 21,571
Accounts receivable, net 5,774 12,675
Receivables - other 494 316
Cost in excess of billings on uncompleted contracts 2,272 2,298
Inventory 15,827 16,447
Prepaid expenses 564 500
Deferred tax assets 2,395 2,395
-------- --------
Total current assets 43,489 56,202
Property, plant and equipment, net 2,828 3,766
Deferred tax assets 9,981 9,981
Intangible assets, net 14,474 15,011
Other assets 558 561
-------- --------
$ 71,330 $ 85,521
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 7,659 $ 5,809
Current portion of long-term debt 42 116
Accounts payable 4,842 8,514
Billings in excess of cost on uncompleted contracts 3,853 5,116
Deferred revenue 664 4,090
Accrued expenses 3,773 5,764
-------- --------
Total current liabilities 20,833 29,409
Provision for litigation settlement 5,996 5,996
Long-term debt, net of current portion 40 197
Deferred revenue 949 633
-------- --------
27,818 36,235
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 130 130
Additional paid-in capital 90,402 90,331
Accumulated deficit (47,020) (41,175)
-------- --------
43,512 49,286
-------- --------
$ 71,330 $ 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 and six months ended June 30, 2000 and 1999
(Unaudited and in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 11,915 $ 12,727 $ 23,275 $ 22,436
Cost of sales 9,876 8,646 19,688 16,380
----------- ----------- ----------- -----------
Gross profit 2,039 4,081 3,587 6,056
----------- ----------- ----------- -----------
Operating expenses:
Research and development 1,495 1,510 2,960 3,224
Sales and marketing 1,743 2,396 3,533 4,122
General and administrative 2,045 2,460 4,171 5,094
Restructuring charge -- 523 -- 523
Provision for litigation settlement (387) (2,221) (387) (2,221)
----------- ----------- ----------- -----------
Total operating expenses 4,896 4,668 10,277 10,742
----------- ----------- ----------- -----------
Loss from operations (2,857) (587) (6,690) (4,686)
Other income 157 181 629 289
Interest income 236 202 478 404
Interest expense (130) (132) (262) (300)
----------- ----------- ----------- -----------
Loss before income taxes (2,594) (336) (5,845) (4,293)
Income tax benefit -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (2,594) $ (336) $ (5,845) $ (4,293)
=========== =========== =========== ===========
Net loss per share - Basic and Diluted $ (0.20) $ (0.03) $ (0.45) $ (0.33)
=========== =========== =========== ===========
Weighted average common shares - Basic and Diluted 13,004,124 12,946,624 12,980,498 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 six months ended June 30, 2000 and 1999
(Unaudited and in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
------- -------
<S> <C> <C>
Net cash flow used in operating activities $(6,170) $ (156)
------- -------
Cash flow (used in) provided by investing activities:
Proceeds from sale of fixed assets 426 5,261
Purchase of fixed assets (617) (303)
Increase in intangible assets (230) (144)
Decrease (increase) in other assets 3 (35)
Payments on restructuring reserve (705) (666)
------- -------
Net cash provided by investing activities (1,123) 4,113
------- -------
Cash flow from financing activities:
Borrowings (payments) on revolving lines of credit, net 1,850 (1,338)
Payments on term loans and capitalized leases (36) (2,737)
Proceeds from the issuance of stock 71 --
------- -------
Net cash provided by (used in) financing activities 1,885 (4,075)
Net decrease in cash and cash equivalents (5,408) (118)
Cash and cash equivalents, beginning of period 21,571 20,262
------- -------
Cash and cash equivalents, end of period $16,163 $20,144
======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 4
<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and 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 and condensed. The condensed
consolidated financial statements for the three and six months ended June 30,
2000 and for the three and six months ended June 30, 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 six months ended June 30, 2000 are not necessarily indicative
of the results for 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 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 and six months ended June 30, 2000 a net loss
was incurred and the impact of outstanding stock options on diluted EPS is
anti-dilutive.
4. INVENTORY
The following is a summary of inventory at June 30, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Raw materials and supplies $ 8,762 $ 9,027
Work in progress 1,939 1,816
Finished goods 5,126 5,604
------- -------
$15,827 $16,447
======= =======
</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. 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 June 30, 2000, the Company had $7,659 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 was 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 $1,083 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. It is anticipated that a
portion of 4,460,000 shares will be issued in the third quarter and the
remaining settlement shares issued 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 contained 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 reserves, which are
included in accrued expenses. The Company's operating expenses were reduced by
$0.4 million in the second quarter of 2000, as the settlements were for an
amount less than previously provided.
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
Page 6
<PAGE>
and issuance of removal and prohibition orders against Company-affiliated
persons, among other things.
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 $12,482 at June 30, 2000. As of that date, 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's reporting segments are strategic business units that offer
different products and services. Management considers its operations to comprise
two industry segments. One 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 second business
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 following table is a summary of unaudited quarterly results for the
three and six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------------------------
IN THOUSANDS 2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES
Wireless Communication $10,739 $11,121 $20,442 $18,874
Information Security 1,176 1,606 2,833 3,562
------- ------- ------- -------
TOTAL SALES 11,915 12,727 23,275 22,436
------- ------- ------- -------
COST OF GOODS SOLD
Wireless Communication 9,457 8,043 18,776 14,702
Information Security 419 603 912 1,678
------- ------- ------- -------
TOTAL COST OF GOODS SOLD 9,876 8,646 19,688 16,380
------- ------- ------- -------
GROSS MARGIN
Wireless Communication 1,282 3,078 1,666 4,172
Information Security 757 1,003 1,921 1,884
------- ------- ------- -------
TOTAL GROSS MARGIN $ 2,039 $ 4,081 $ 3,587 $ 6,056
================================================================================
--------------------------------------------------------------------------------
GROSS MARGIN PERCENTAGE
Wireless Communication 11.9% 27.7% 8.1% 22.1%
Information Security 64.4% 62.5% 67.7% 52.9%
TOTAL GM PERCENTAGE 17.1% 32.1% 15.4% 27.0%
--------------------------------------------------------------------------------
</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 information (in thousands) as a percentage of revenues during the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------
2000 1999
---------------------------------------------
<S> <C> <C> <C> <C>
Revenues $11,915 100.0% $12,727 100.0%
Cost of sales 9,876 82.9% 8,646 67.9%
------- ----- ------- -----
Gross profit 2,039 17.1% 4,081 32.1%
------- ----- ------- -----
Operating expenses:
Research and development 1,495 12.5% 1,510 11.9%
Sales and marketing 1,743 14.6% 2,396 18.8%
General and administrative 2,045 17.2% 2,460 19.3%
Restructuring charge -- 0.0% 523 4.1%
Provision for litigation settlement (387) (3.2)% (2,221) (17.5)%
------- ----- ------- -----
Total operating expenses 4,896 41.1% 4,668 36.7%
------- ----- ------- -----
Loss from operations (2,857) (24.0)% (587) (4.6)%
Other income 157 1.3% 181 1.4%
Interest income 236 2.0% 202 1.6%
Interest expense (130) (1.1)% (132) (1.0)%
------- ----- ------- -----
Loss before income taxes (2,594) (21.8)% (336) (2.6)%
Income tax benefit -- 0.0% -- 0.0%
------- ----- ------- -----
Net loss $(2,594) (21.8)% $ (336) (2.6)%
======= ===== ======= ====
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------
2000 1999
---------------------------------------------
<S> <C> <C> <C> <C>
Revenues $23,275 100.0% $22,436 100.0%
Cost of sales 19,688 84.6% 16,380 73.0%
------- ----- ------- -----
Gross profit 3,587 15.4% 6,056 27.0%
------- ----- ------- -----
Operating expenses:
Research and development 2,960 12.7% 3,224 14.4%
Sales and marketing 3,533 15.2% 4,122 18.4%
General and administrative 4,171 17.9% 5,094 22.7%
Restructuring charge -- 0.0% 523 2.3%
Provision for litigation settlement (387) (1.7)% (2,221) (9.9)%
------- ----- ------- -----
Total operating expenses 10,277 44.1% 10,742 47.9%
------- ----- ------- -----
Loss from operations (6,690) (28.7)% (4,686) (20.9)%
Other income 629 2.7% 289 1.3%
Interest income 478 2.0% 404 1.8%
Interest expense (262) (1.1)% (300) (1.3)%
------- ----- ------- -----
Loss before income taxes (5,845) (25.1)% (4,293) (19.1)%
------- ----- ------- -----
Income tax benefit -- 0.0% -- 0.0%
------- ----- ------- -----
Net loss $(5,845) (25.1)% $(4,293) (19.1)%
======= ===== ======= =====
</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 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 Development
On July 27, 2000 the Company announced that it's EF Johnson subsidiary
signed a Master Distribution Agreement with BearCom Group Inc. ("BearCom"). The
agreement gives BearCom the right and license to distribute EF Johnson's
SMARTNET-TM-/SmartZone-Registered Trademark- radio products under the EF Johnson
label. SMARTNET-TM-/SmartZone-Registered Trademark- are registered trademarks of
Motorola, and incorporate both analog and digital technology. EF Johnson is the
only company licensed to use this trunking protocol on its products.
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. At
June 30, 2000, the balance of the Motorola advance payment was $1.2 million, as
compared to $3.6 million at December 31, 1999.
Revenues decreased 6% to $11.9 million in the second quarter of 2000, as
compared to $12.7 million during the same period in 1999. Of total revenues in
the second quarter, the wireless communication segment comprised $10.7 million,
which represents a 3% decrease over segment revenues of $11.1 million during the
year-ago period. Information security segment revenues of $1.2 million represent
a 27% decline as compared to revenues of $1.6 million during 1999.
Revenues increased 4% to $23.3 million during the first half of 2000, as
compared to $22.4 million during the same period in 1999. Of total revenues in
the first half, the wireless communication segment comprised $20.4 million,
which represents an 8% increase over segment revenues of $18.9 million during
the year-ago period.
Page 9
<PAGE>
Information security segment revenues of $2.8 million represent a 20% decline as
compared to revenues of $3.6 million during 1999.
The decrease in revenues of the wireless communication segment during
the second quarter was primarily due to delays in the closing of orders from
the federal government. While these delays are expected to be resolved during
the third quarter, the Company has recently begun to focus certain sales and
marketing efforts on the federal government arena, and there can be no
assurances that such efforts will be successful. In addition, there were also
delays in the introduction of the new SMARTNET-TM-/SmartZone-Registered
Trademark- radio products. While these delays were substantially resolved by
the end of the second quarter, there can be no assurances that the
introduction of this new product line will be successful. For the half-year,
the increased revenues are primarily the result of increased sales of
equipment manufactured under contract at EF Johnson's Waseca, Minnesota
facility. Revenues associated with this effort increased approximately 155%
during the first half of 2000.
The decline in revenues of the information security segment during both the
second quarter and the half-year 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 decreased to $3.1 million for the
first half of 2000, compared to $3.6 million for the same period in 1999. The
decrease is primarily due to lower sales into Europe by the Company's
information security segment. The Company's revenue during the first half of
2000 for Central and Latin America is comparable to the first half of 1999.
Middle East and Asian revenues for the first half of 2000 increased
approximately 31%, as compared to the first half of 1999, due to sales to a
particular customer in Egypt. Overall, 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 during 2000 and beyond, the
Company plans to introduce new products, and to critically assess the price and
overall profitability of existing products. For example, during the quarter EF
Johnson introduced new portable and mobile radios that are compatible with
Motorola's Smartnet-TM- trunking technology. In addition, the Company announced
price increases on some of its products during July 2000. The timing, and
overall acceptance, of the Company's introduction of new products and price
increases will affect when and whether these new initiatives will favorably
impact our results of operations.
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 $2.0 million
(17.1% gross margin) for the second quarter of 2000, compared to $4.1 million
(32.1% gross margin) for the same period in 1999. Gross margin for the wireless
communications segment was 11.9% in the second quarter of 2000 and was 27.7% for
the same period in 1999. Gross margin for the information security segment was
64.4% in the second quarter of 2000, and was 62.5% for the same period in 1999.
Consolidated gross profit was $3.6 million (15.4% gross margin) for the
first half of 2000, compared to $6.1 million (27.0% gross margin) for the same
period in 1999. Gross margin for the wireless communications segment was 8.1%
during the first half of 2000 and was 22.1% for the same period in 1999. Gross
margin for the information security segment was 67.7% during the first half of
2000, and was 52.9% for the same period in 1999.
In the wireless communication segment, the overall decline in the 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; (3) adjustments to the estimated costs to
complete certain legacy systems projects; and (4) the level of sales not being
sufficient to fully absorb the Company's manufacturing overhead.
Gross margins were higher in the information security segment during the
second quarter and first half of 2000, as compared to the year-ago periods,
primarily because of product mix issues and the write-off of certain obsolete
inventory and other adjustments during the first quarter of 1999. Without the
inventory write-off and other adjustments, the gross margin would have been
66.2% during the first quarter of 1999 (as compared to 45.0%), and 62.3% for the
first half of 1999.
Page 10
<PAGE>
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 during the second quarter of 2000, at $1.5 million, were the same as in
the second quarter of 1999. The Company expects its research and development
costs to increase in the future, as the Company continues to fill staffing
vacancies and expand its product development efforts.
Research and development expenses decreased to $3.0 million during the
first half of 2000, from $3.2 million during the first half of 1999. This
decrease was primarily due to a reduced engineering staff during the first
quarter of 2000. As mentioned above, the Company expects its research and
development costs to increase in the future, as the Company continues to fill
staffing vacancies and expand its product development efforts.
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 second quarter of 2000, and
to $3.5 million for the first half of the year, from $2.4 million in the second
quarter of 1999 and $4.1 million in the first half of 1999. This reduction was
primarily due to permanently reduced staffing levels as the Company improves its
sales focus and marketing efforts, as well as from temporary vacancies in
certain continuing positions. In addition, the Company closed its Hong Kong
sales office during the third quarter of 1999, resulting in savings of
approximately $0.6 million per year. Sales and marketing expenses decreased as a
percentage of sales to 14.6% and 15.2% for the second quarter and first half of
2000, respectively, from 18.8% and 18.4% in the year-ago periods, respectively,
primarily due to cost savings. However, the Company anticipates that sales and
marketing expenses will increase as it continues to focus and enhance its
efforts in this area.
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 $2.0 million and $4.2 million in the second
quarter and first half of 2000, respectively, from $2.5 million and $5.1 million
in the second quarter and first half of 1999, respectively. As a percentage of
revenue, general and administrative expense declined to 17.2% and 17.9% of
revenues in the second quarter and first half of 2000, respectively, from 19.3%
and 22.7% of revenues in the second quarter and first half of 1999,
respectively. 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. For the remainder of the year, the Company anticipates
general and administrative expenses to be similar to or slightly higher than the
level experienced during the first half of 2000.
Page 11
<PAGE>
Restructuring Charge
The Company incurred a $523,000 restructuring charge during the second
quarter of 1999 as a result of the closure of its sales office in Hong Kong.
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 of 1999 as
the settlement was for an amount less than previously provided. The $387,000
adjustment recorded during the second quarter of 2000 is comprised of the
settlement of litigation between the Company and PricewaterhouseCoopers, and the
adjustment of a reserve associated with the settlement of the Physician's Mutual
litigation.
Interest Income and Expense
Interest income consists of interest earned on the Company's cash and
investable funds. Interest expense relates to amounts payable on the Company's
loans and bank lines of credit. Interest income was $236,000 in the second
quarter of 2000, as compared to $202,000 in the second quarter of 1999. For the
first half of 2000, interest income was $478,000, as compared to $404,000 during
the same period in 1999. Interest Expense was $130,000 in the second quarter of
2000 as compared to $132,000 in the year-ago period. For the first half of 2000,
interest expense was $262,000 as compared to $300,000 during the same period in
1999. Interest income and expense varies based on the relative interest rates
earned or paid, and the amount of cash available or loans outstanding. The
Company expects net interest income to continue to decline in 2000 as the cost
of the Company's net borrowings continues to increase.
Other Income, net
Other income for the second quarter of 2000 consists primarily of proceeds
from the sale of a surplus property in Garner, Iowa. Other income for the first
half of 2000 also includes funds received in settlement of arbitration
proceedings by Transcrypt against EFJ Partners, the previous owners of EF
Johnson, which the Company acquired in July 1997.
Benefit for Income Taxes
The Company did not record a tax benefit in the three and six months ended
June 30, 2000 and 1999. The Company did not recognize a tax benefit associated
with its loss during 2000 and 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 $6.2 million in the first
six months of 2000, as compared to $0.2 million in the first six months of 1999.
Cash used in operating activities in the first six months of 2000 consisted
primarily of a net loss plus a decrease in accounts payable and accrued
liabilities, and a net decrease in advance payments made by customers. These
uses of cash were offset in part by depreciation and amortization, a decrease in
inventory, and a decrease in accounts receivable.
Cash used by investing activities totaled $1.1 million for the first six
months of 2000 as compared to cash generated by investing activities of $4.1
million in the first six months of 1999. The 1999 activities included $5.3
Page 12
<PAGE>
million in proceeds from the sale of fixed assets. Capital expenditures of $0.6
million for the first six months of 2000, as compared to $0.3 million for the
first six months of 1999, consisted primarily of manufacturing equipment and
computer equipment.
Financing activities generated cash of $1.9 million in the first six months
of 2000, which primarily consisted of advances on the Company's line of credit
with U.S. Bank. During the first six months of 1999, the Company used $4.1
million in financing activities for the payment of lines of credit and term
loans.
As of March 31, 2000, the Company had $7.7 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. 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 the
previously mentioned certificates of deposit.
The Company does not anticipate paying cash dividends in the foreseeable
future.
As of June 30, 2000, the Company had $16.2 million in cash and cash equivalents.
This amount includes the $10.0 million in certificates of deposit pledged as
security on its bank line of credit, and $1.2 million in cash that is pledged as
collateral for a letter of credit associated with a guarantee on a certain
contract. There was approximately $2.3 million available under its bank line of
credit at June 30, 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 also carries foreign credit insurance to cover
receivables in a majority of the foreign countries where it does business.
Page 13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of pending litigation, see NOTE 6. COMMITMENTS AND
CONTINGENCIES above.
ITEMS 2 - 3.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on May 18, 2000.
(b) At the meeting, management's nominees as set forth in the proxy
statement for the meeting, Dr. Edward Bersoff and Mr. Winston Wade
were elected. The election of both Dr. Bersoff and Mr. Wade was
approved by a vote of 10,016,892 shares in favor and 112,341 shares
withheld.
(c) The proposal to amend the 1996 Incentive Stock Option Plan to increase
the number of authorized shares of common stock from 2.0 million to
2.6 million was approved by a vote of 9,593,181 shares in favor,
398,640 shares against and 137,412 shares abstaining. There were no
broker nonvotes.
(d) The proposal to ratify the appointment of KPMG LLP, as independent
public accountants for 2000 was approved by a vote of 9,993,118 shares
in favor, 97,224 shares against and 38,871 shares abstaining.
ITEM 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 (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 14
<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: August 10, 2000 By: /s/ Massoud Safavi
-------------------------------
Massoud Safavi
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Page 15
