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, 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
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
47-0801192
(I.R.S. EMPLOYER IDENTIFICATION NO.)
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 October 30, 2000, 14,342,123 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, 2000 and December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
ASSETS (unaudited)
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------------- ----------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $13,270 $21,571
Accounts receivable, net 6,701 12,675
Receivables - other 561 316
Cost in excess of billings on uncompleted contracts 1,818 2,298
Inventory 15,783 16,447
Prepaid expenses 537 500
Deferred tax assets 2,395 2,395
--------------------- ----------------------
Total current assets 41,065 56,202
Property, plant and equipment, net 2,513 3,766
Deferred tax assets 9,981 9,981
Intangible assets, net 14,031 15,011
Other assets 546 561
--------------------- ----------------------
$68,136 $85,521
===================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $7,950 $5,809
Current portion of long-term debt 43 116
Accounts payable 6,595 8,514
Billings in excess of cost on uncompleted contracts 1,178 5,116
Deferred revenue 589 4,090
Accrued expenses 3,273 5,764
--------------------- ----------------------
Total current 19,628 29,409
liabilities
Provision for litigation settlement 4,197 5,996
Long-term debt, net of current portion 29 197
Deferred revenue 450 633
--------------------- ----------------------
24,304 36,235
--------------------- ----------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - -
Common stock 143 130
Additional paid-in capital 92,188 90,331
Accumulated deficit (48,499) (41,175)
--------------------- ----------------------
43,832 49,286
--------------------- ----------------------
$68,136 $85,521
===================== ======================
</TABLE>
See accompanying notes to the consolidated financial
statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
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<PAGE>
TRANSCRYPT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2000 and 1999
(Unaudited and in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $11,664 $15,323 $34,939 $37,760
Cost of sales 8,098 9,917 27,786 26,298
------------ ----------- ----------- ------------
Gross profit 3,566 5,406 7,153 11,462
------------ ----------- ----------- ------------
Operating expenses:
Research and development 1,417 1,220 4,377 4,445
Sales and marketing 1,708 1,885 5,241 6,006
General and administrative 2,009 2,287 6,180 7,381
Restructuring charge - - - 523
Provision for litigation settlement - - (387) (2,221)
------------ ----------- ----------- ------------
Total operating expenses 5,134 5,392 15,411 16,134
------------ ----------- ----------- ------------
Income (loss) from operations (1,568) 14 (8,258) (4,672)
Other income (expense) 33 (33) 662 256
Interest income 210 263 688 667
Interest expense (155) (95) (417) (395)
------------ ----------- ----------- ------------
Income (loss) before income taxes (1,480) 149 (7,325) (4,144)
Income tax benefit - - - -
------------ ----------- ----------- ------------
Net income (loss) $(1,480) $149 $(7,325) $(4,144)
============ =========== =========== ============
Net income (loss) per share - Basic and $ (0.11) $0.01 $ (0.56) $(0.32)
Diluted
============ =========== =========== ============
Weighted average common shares - Basic 13,731,297 12,946,624 12,997,555 12,946,624
============ =========== =========== ============
Weighted average common shares - Diluted 13,731,297 13,203,130 12,997,555 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, 2000 and 1999
(Unaudited and in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
2000 1999
------------------------- -------------------------
<S> <C> <C>
Net cash flow used in operating activities $(9,091) $(4,220)
------------------------- -------------------------
Cash flow (used in) provided by investing activities:
Proceeds from sale of fixed assets 426 5,272
Purchase of fixed assets (687) (504)
Increase in intangible assets (230) (146)
Decrease in other assets 15 54
Payments on restructuring reserve (705) (666)
------------------------- -------------------------
Net cash (used in) provided by investing activities (1,181) 4,010
------------------------- -------------------------
Cash flow from financing activities:
Borrowings (payments) on revolving lines of credit, net 2,141 (336)
Payments on term loans and capitalized leases (241) (2,597)
Proceeds from the issuance of stock 71 -
------------------------- -------------------------
Net cash provided by (used in) financing activities 1,971 (2,933)
------------------------- -------------------------
Net decrease in cash and cash equivalents (8,301) (3,143)
Cash and cash equivalents, beginning of period 21,571 20,262
------------------------- -------------------------
Cash and cash equivalents, end of period $13,270 $17,119
========================= =========================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
For the nine months ended September 30, 2000, $1,799 in stock was
issued for a liability associated with the settlement of a class action as a
non-cash activity.
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 nine months ended
September 30, 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 nine months
ended September 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 nine months ended September 30, 2000 and 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.
4. INVENTORY
The following is a summary of inventory at September 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Raw materials and supplies $ 8,221 $ 9,027
Work in progress 1,993 1,816
Finished goods 5,569 5,604
------ -----
$ 15,783 $ 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. The working capital line expires on June 1, 2001, and is
collateralized by substantially all the Company's assets, including $10,000 in
certificates of deposit with the bank.
At September 30, 2000, the Company had $7,950 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 $1,062 included in
accrued expenses and $4,197 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 shares
of common stock of the Company. In accordance with the litigation settlement,
the Company issued 1,337,999 shares of common stock of the Company in the third
quarter of 2000. The remaining 3,122,001 shares, which the Company is obligated
to issue under the settlement, are anticipated to be 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, 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. However, based on the information currently
available, the Company has accrued its best estimate of the expected outcome. It
is the Company's current expectation that the SEC investigation will not result
in a monetary sanction against the Company. In addition, the Company has
submitted an offer for settlement in anticipation of cease-and-desist
proceedings to be instituted pursuant to Section 8A of the Securities Act of
1993 and Section 21C of the Securities Exchange Act of 1934. The Company's offer
of settlement does not contain a monetary
Page 6
<PAGE>
sanction against the Company. However, the SEC has not approved any settlement
with the Company. 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.
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.
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 $2,883. Bonds, which expire on
various dates through 2000, totaled $16,602 at September 30, 2000. As of that
date, no bonds have been drawn upon.
The Company is evaluating all of its product lines and business
segments, and has implemented and is continuing to look at various initiatives
to reduce operating expenses in order to keep them in line with revenues,
including workforce reductions, elimination of certain products and product
lines, and exit from certain markets. As a result of these initiatives, the
Company reduced its workforce by approximately 22% on November 6, 2000.
Accordingly, a $0.3 million reserve will be established during the fourth
quarter of 2000 to cover the severance costs and other expenses associated with
this workforce reduction. Implementation of any additional plan resulting from
these initiatives in the future may result in substantial up front costs and
cash expenditures. The Company can provide no assurance that its liquidity and
cash flows will be adequate to implement the necessary initiatives. In addition,
the Company cannot guarantee that any executed initiative to reduce operating
expenses will not have a material adverse effect on the Company's long-term
business and financial condition.
Page 7
<PAGE>
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 nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------------------------------------------
IN THOUSANDS 2000 1999 2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES
Wireless Communication $9,583 $13,979 $30,025 $32,854
Information Security 2,081 1,344 4,914 4,906
----------- ------------ ------------- -------------
TOTAL SALES 11,664 15,323 34,939 37,760
----------- ------------ ------------- -------------
COST OF GOODS SOLD
Wireless Communication 7,518 9,486 26,294 24,189
Information Security 580 431 1,492 2,109
----------- ------------ ------------- -------------
TOTAL COST OF GOODS SOLD 8,098 9,917 27,786 26,298
----------- ------------ ------------- -------------
GROSS MARGIN
Wireless Communication 2,065 4,493 3,731 8,665
Information Security 1,501 913 3,422 2,797
----------- ------------ ------------- -------------
TOTAL GROSS MARGIN $3,566 $5,406 $7,153 $11,462
=========================================================================================
-----------------------------------------------------------------------------------------
GROSS MARGIN PERCENTAGE
Wireless Communication 21.5% 32.1% 12.4% 26.4%
Information Security 72.1% 67.9% 69.6% 57.0%
TOTAL GM PERCENTAGE 30.6% 35.3% 20.5% 30.4%
-----------------------------------------------------------------------------------------
</TABLE>
Page 8
<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 SEPTEMBER 30,
------------------------------------------------------
2000 1999
------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $11,664 100.0% $15,323 100.0%
Cost of sales 8,098 69.4% 9,917 64.7%
----------- ----------- ----------- -----------
Gross profit 3,566 30.6% 5,406 35.3%
----------- ----------- ----------- -----------
Operating expenses:
Research and development 1,417 12.1% 1,220 8.0%
Sales and marketing 1,708 14.6% 1,885 12.3%
General and administrative 2,009 17.2% 2,287 14.9%
----------- ----------- ----------- -----------
Total operating expenses 5,134 44.0% 5,392 35.2%
----------- ----------- ----------- -----------
Income (loss) from operations (1,568) (13.4)% 14 0.0%
Other income 33 0.3% (33) (0.2)%
Interest income 210 1.8% 263 1.7%
Interest expense (155) (1.3)% (95) (0.6)%
----------- ----------- ----------- -----------
Income (loss) before income taxes (1,480) (12.7)% 149 0.9%
Income tax benefit - 0.0% - 0.0%
----------- ----------- ----------- -----------
Net income (loss) $(1,480) (12.7)% $149 0.9%
=========== =========== =========== ===========
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------
2000 1999
------------------------------------------------------
Revenues $34,939 100.0% $37,760 100.0%
Cost of sales 27,786 79.5% 26,298 69.6%
----------- ----------- ----------- -----------
Gross profit 7,153 20.5% 11,462 30.4%
----------- ----------- ----------- -----------
Operating expenses:
Research and development 4,377 12.5% 4,445 11.8%
Sales and marketing 5,241 15.0% 6,006 15.9%
General and administrative 6,180 17.7% 7,381 19.6%
Restructuring charge - 0.0% 523 1.4%
Provision for litigation
settlement (387) (1.1)% (2,221) (5.9)%
----------- ----------- ----------- -----------
Total operating expenses 15,411 44.1% 16,134 42.7%
----------- ----------- ----------- -----------
Loss from operations (8,258) (23.6)% (4,672) (12.4)%
Other income 662 1.9% 256 0.7%
Interest income 688 2.0% 667 1.8%
Interest expense (417) (1.2)% (395) (1.1)%
----------- ----------- ----------- -----------
Loss before income taxes (7,325) (21.0)% (4,144) (11.0)%
Income tax benefit - 0.0% - 0.0%
----------- ----------- ----------- -----------
Net loss $(7,325) (21.0)% $(4,144) (11.0)%
=========== =========== =========== ===========
</TABLE>
Page 9
<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 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, the Company's other business plans for the future, and the outcome
of pending litigation involving the Company. 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 Company is evaluating all of its product lines and business
segments, and has implemented and is continuing to look at various initiatives
to reduce operating expenses in order to keep them in line with revenues,
including workforce reductions, elimination of certain products and product
lines, and exit from certain markets. As a result of these initiatives, the
Company reduced its workforce by approximately 22% on November 6, 2000.
Accordingly, a $0.3 million reserve will be established during the fourth
quarter of 2000 to cover the severance costs and other expenses associated with
this workforce reduction. Implementation of any additional plan resulting from
these initiatives in the future may result in substantial up front costs and
cash expenditures. The Company can provide no assurance that its liquidity and
cash flows will be adequate to implement the necessary initiatives. In addition,
the Company cannot guarantee that any executed initiative to reduce operating
expenses will not have a material adverse effect on the Company's long-term
business and financial condition.
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
In September 2000, the Company re-engaged the services of ING Barings
LLC to act as its financial advisor. ING Barings was originally retained during
July of 1999 to assist the Company in its review of strategic and financial
alternatives, and will perform a similar function during this engagement.
On October 2, 2000, the Company announced that it's EF Johnson
subsidiary won a significant acceptance milestone with its primary contractor to
supply a conventional Mutual Aid System for Minnesota Metro. The contractor
recently accepted EF Johnson's system after extensive factory acceptance testing
at the Company's Operations center located in Waseca, Minnesota.
On October 20, 2000, the Company announced that it's EF Johnson subsidiary
received a contract number issued by the U.S. General Services Administration
(GSA) that allows federal agencies to purchase EF Johnson wireless
communications solutions without the need to undergo a formal bid process. The
GSA reviewed and accepted the proposal submitted by EF Johnson after a year-long
evaluation period. The contract number is valid through September 26, 2005, and
covers a selection of Project 25, SMARTNET(TM)II/SmartZone-Registered
Trademark-, and conventional radio products.
On November 6, 2000, the Company announced a reduction in force of 69
people at its EF Johnson subsidiary, or approximately 22% of the total Company
workforce. Accordingly, a $0.3 million reserve will be established during the
fourth quarter of 2000 to cover the severance costs and other expenses
associated with this workforce reduction.
On November 6, 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 outlook for the rest of the fiscal year,
recent initiatives and changes implemented by management, and next year's
outlook. This document was furnished to the SEC under item 9 of a Report on Form
8K dated November 6, 2000.
Page 10
<PAGE>
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 on December 31, 1999 also includes an advance payment received
for products sold to Motorola. The advance payment was negotiated as part of an
agreement to produce certain products during 2000, and was recognized as revenue
was earned. At September 30, 2000, the revenue associated with the Motorola
advance payment was fully recognized, as compared to an unrecognized balance of
$3.6 million at December 31, 1999.
Revenues decreased 24% to $11.7 million in the third quarter of 2000,
as compared to $15.3 million during the same period in 1999. Of total revenues
in the third quarter, the wireless communication segment comprised $9.6 million,
which represents a 31% decrease over segment revenues of $14.0 million during
the year-ago period. Information security segment revenues of $2.1 million
represent a 55% increase as compared to revenues of $1.3 million during 1999.
Revenues decreased 8% to $34.9 million during the first nine months of
2000, as compared to $37.8 million during the same period in 1999. Of total
revenues in the nine months ended September 30, 2000, the wireless communication
segment comprised $30.0 million, which represents a 9% decrease over segment
revenues of $32.9 million during the year-ago period. Information security
segment revenues of $4.9 million represent the same level as generated during
1999.
The decrease in revenues during third quarter, as compared to the
year-ago period, is primarily the result of lower revenues generated by systems
installation projects at the Company's EF Johnson subsidiary. Systems
installation revenues were $2.4 million during the third quarter of 2000, as
compared to $5.8 million during the third quarter of 1999. Since EF Johnson uses
the percentage of completion method of revenue recognition on its systems
installation projects, revenue is dependent upon the amount of work completed
compared to the total work to be done. EF Johnson completed a significant amount
of work on several systems installation projects during the third quarter of
1999. The result was significant revenues from system installation projects
during that quarter. The Company completed a lower volume of work on systems
installation projects during the third quarter of 2000, resulting in lower
revenues as compared to the year-ago period. In addition, there was $0.6 million
in revenues derived from the execution of "Year 2000" upgrades during the third
quarter of 1999 that were not duplicated in the current fiscal year. Finally,
while there was an incremental increase in federal sales over the second
quarter, there were delays in the closing of orders with the federal government,
on which the Company has recently begun to focus certain sales and marketing
efforts. These issues also resulted in revenues during the first nine months of
2000, at $34.9 million, that were $2.8 million lower than the $37.8 million
generated during the year-ago period.
The increase in revenues of the information security segment during the
third quarter was primarily the result of timing issues associated with
finalizing certain sales agreements during the current period, rather than in
previous periods during the fiscal year. For the nine months, revenues were the
same as the year-ago period.
Total revenues from international sales decreased to $5.1 million for
the first nine months of 2000, compared to $5.5 million for the same period in
1999. The decrease is primarily due to lower sales into Europe by the Company's
information security segment and lower sales into Central and South America by
its wireless
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communications segment. The Company's revenue during the first nine months of
2000 for Central and Latin America is 45% lower than the first nine months of
1999. However, Middle East and Asian revenues for the first nine months of 2000
increased approximately 135%, as compared to the first nine months of 1999, due
to sales to a particular customer in Egypt. Overall, the Company anticipates
continued decreases in international revenues as a result of management's
continuing evaluation of the overall profitability of that market segment.
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 second
quarter EF Johnson introduced new portable and mobile radios that are compatible
with Motorola's Smartnet-TM- trunking technology. During the third quarter, the
Company announced price increases on some of its products. During the fourth
quarter and beyond, the Company may continue to make changes to its product
offerings and prices. The timing, and overall acceptance, of the Company's price
changes, introduction of new products, and potential de-emphasis of certain
existing products and markets 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 $3.6
million (30.6% gross margin) for the third quarter of 2000, compared to $5.4
million (35.3% gross margin) for the same period in 1999. Gross margin for the
wireless communications segment was 21.5% in the third quarter of 2000 and was
32.1% for the same period in 1999. Gross margin for the information security
segment was 72.1% in the third quarter of 2000, and was 67.9% for the same
period in 1999.
Consolidated gross profit was $7.2 million (20.5% gross margin) for the
first nine months of 2000, compared to $11.5 million (30.4% gross margin) for
the same period in 1999. Gross margin for the wireless communications segment
was 12.4% during the first nine months of 2000 and was 26.4% for the same period
in 1999. Gross margin for the information security segment was 69.6% during the
first nine months of 2000, and was 57.0% 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) lower overall margins on sales into the
Company's commercial markets; (4) adjustments to the estimated costs to complete
certain legacy systems projects; and (5) the level of sales not being sufficient
to fully absorb the Company's manufacturing overhead. In an effort to improve
overall gross margins at EF Johnson, the Company is continuing a thorough review
of the profitability of certain product lines and market segments. The Company
is evaluating various actions intended to maximize gross margins, including the
elimination of some product lines, exit from some markets, and workforce
reductions. There can be no assurances that any of these actions, if
implemented, will result in improved overall gross margins.
Gross margins were higher in the information security segment during
the third quarter and first nine months 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
65.5% for the first nine months of 1999.
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.
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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 third quarter of 2000, at $1.4 million, were
$0.2 million higher than the third quarter of 1999 primarily due to increased
staffing levels. Consistent with its initiatives to bring operating expenses in
line with revenues, management anticipates that its research and development
costs will decrease in the future, as the Company assesses its product lines,
business segments, and product development efforts.
Research and development expenses, at $4.4 million during the first
nine months of 2000, were the same as during the first nine months of 1999.
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 third quarter of 2000, and
to $5.2 million for the first nine months of the year, from $1.9 million in the
third quarter of 1999 and $6.0 million in the first nine months 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
increased as a percentage of sales to 14.6% for the third quarter of 2000,
compared to 12.3% during the year-ago period, primarily due to lower revenues
during the current period. For the first nine months of 2000, sales and
marketing expenses decreased as a percentage of sales, from 15.9% to 15.0%,
primarily due to the previously mentioned permanent and temporary reductions in
staffing levels. Consistent with its initiatives to bring operating expenses in
line with revenues, management anticipates that its sales and marketing costs
will decrease in the future.
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 $6.2 million in the third
quarter and first nine months of 2000, respectively, from $2.3 million and $7.4
million in the third quarter and first nine months of 1999, respectively. As a
percentage of revenue, general and administrative expense increased to 17.2% of
revenues in the third quarter of 2000 from 14.9% of revenues in the third
quarter of 1999, and declined to 17.7% during the first nine months of 2000 from
19.6% during the same period in 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 will decline, which is consistent with
management's initiatives to bring operating expenses in line with revenues.
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. A $387,000
adjustment was recorded during the second quarter of 2000, and 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.
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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 $210,000 in the third
quarter of 2000, as compared to $263,000 in the third quarter of 1999. For the
first nine months of 2000, interest income was $688,000, as compared to $667,000
during the same period in 1999. Interest Expense was $155,000 in the third
quarter of 2000 as compared to $95,000 in the year-ago period. For the first
nine months of 2000, interest expense was $417,000 as compared to $395,000
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 third quarter of 2000 consists primarily of
proceeds from the sale of a surplus property in Garner, Iowa, and royalty income
from the licensing of certain intellectual property. Other income for the first
nine months 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 nine months
ended September 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 $9.1 million in the
first nine months of 2000, as compared to $4.2 million in the first nine months
of 1999. Cash used in operating activities in the first nine 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 in investing activities totaled $1.2 million for the first
nine months of 2000 as compared to cash generated by investing activities of
$4.0 million in the first nine months of 1999. The 1999 activities included $5.3
million in proceeds from the sale of fixed assets. Capital expenditures of $0.7
million for the first nine months of 2000, as compared to $0.5 million for the
first nine months of 1999, consisted primarily of manufacturing equipment and
computer equipment.
Financing activities generated cash of $2.0 million in the first nine
months of 2000, which primarily consisted of advances on the Company's line of
credit with U.S. Bank. During the first nine months of 1999, the Company used
$0.3 million in financing activities for the payment of the line of credit.
As of September 30, 2000, the Company had $7.9 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 is due on June 1,
2001 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.
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As of September 30, 2000, the Company had $13.3 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. There was approximately
$1.1 million available under its bank line of credit at September 30, 2000. The
Company's bank line of credit expires on June 1, 2001 and the Company is
currently in the process of analyzing alternatives to its current facility that
may provide for more favorable terms. 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, expenses 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
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101) which summarizes certain of the staff's
view in applying generally accepted accounting principles to revenue recognition
in financial statements. The effective date of SAB 101 for the Company is the
quarter ended December 31, 2000. While the Company continues to evaluate the
impact that SAB 101 will have on the timing of revenue recognition in future
periods, it does not anticipate significant changes to its current revenue
recognition methods.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 requires that all derivatives be
recognized as either assets or liabilities in the balance sheet and measured at
their fair value. If certain conditions are met, a derivative may be
specifically designated as (i) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(ii) a hedge of the exposure to variable cash flows of a forecasted transaction
or (iii) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale
security or a foreign currency denominated forecasted transaction. SFAS 133, as
amended by Statement of Financial Accounting Standards No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
does not expect the effect of SFAS 133 to be significant to its financial
reporting.
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of pending litigation, see NOTE 6. COMMITMENTS AND
CONTINGENCIES above.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 11, 2000, the Company issued 1,337,999 shares of common stock
in conjunction with the previously court approved settlement of a class action
lawsuit. The shares were issued pursuant to section 3(a)(10) of the Securities
Act of 1933. As a result of the issuance of the shares, the Company reduced the
reserve established for the settlement of the class action by $1.8 million
during the third quarter.
ITEMS 3 - 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 November 7, 2000 under
Item 5. "Other Events" to report a press release announcing the
Company's third quarter 2000 financial results. Also included on that
Form 8K, the Company furnished information under Item 9. "Regulation
FD Disclosure" to report a press release announcing an open letter to
shareholders signed by Michael E. Jalbert, Transcrypt's Chairman and
Chief Executive Officer.
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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 6, 2000 By: /s/ Massoud Safavi
------------------
Massoud Safavi
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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