-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EpCH0cxg2JVyyfG9TMaVknaWA8Uc+YI4RqD1cUzf6NaBMxxEX1byWrIGV/XnThxR 2oMEVmAgVnnw5E9DODD0rQ== /in/edgar/work/0000950005-00-001169/0000950005-00-001169.txt : 20001129 0000950005-00-001169.hdr.sgml : 20001129 ACCESSION NUMBER: 0000950005-00-001169 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000830 ITEM INFORMATION: FILED AS OF DATE: 20001128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYLINK CORP /CA/ CENTRAL INDEX KEY: 0001005230 STANDARD INDUSTRIAL CLASSIFICATION: [3577 ] IRS NUMBER: 953891600 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-27742 FILM NUMBER: 778162 BUSINESS ADDRESS: STREET 1: 910 HERMOSA COURT CITY: SUNNYVALE STATE: CA ZIP: 94086-4103 BUSINESS PHONE: 4087355822 MAIL ADDRESS: STREET 1: 910 HERMOSA CT CITY: SUNNYVALE STATE: CA ZIP: 94086-4103 8-K/A 1 0001.txt 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A Amendment No. 1 to Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 August 30, 2000 Date of Report (Date of earliest event reported) CYLINK CORPORATION California 0-27742 95-3891600 (State or other (Commission File Number) (I.R.S. Employer jurisdiction of Identification No.) incorporation) 3131 Jay Street Santa Clara, California 95054 (Address of principal executive offices) (408) 855-6000 (Registrant's telephone number, including area code) This Amendment No. 1 to Current Report on Form 8-K/A is filed for the purpose of filing the financial statements of Celotek Corporation ("Celotek") required by Item 7(a) and the pro forma financial information required by Item 7(b). Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Businesses Acquired The financial statements of Celotek required by this item are included as Exhibit 99.2 to the Amendment No. 1 to Current Report on Form 8-K/A and incorporated herein by reference. (b) Pro Forma Financial Information The pro forma financial information required by this item are included as Exhibit 99.3 to the Amendment No. 1 to Current Report on Form 8-K/A and incorporated herein by reference. (c) Exhibits See Exhibit Index attached hereto. Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: November 27, 2000 CYLINK CORPORATION /s/ R. Christopher Chillingworth -------------------------------- R. Christopher Chillingworth Acting Chief Financial Officer CYLINK CORPORATION Amendment No. 1 to Current Report on Form 8-K INDEX TO EXHIBITS Exhibit Number Description - ------ ----------- 23.1 Consent of Ernst & Young LLP 99.2 Financial Statements of Celotek Corporation 99.3 Pro Forma Financial Information EX-23.1 2 0002.txt INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements (Form S-8 Nos. 333-09797, 333-36845 and 333-41338) of Cylink Corporation of our report dated June 1, 2000, with respect to the financial statements of Celotek Corporation for the year ended December 31, 1999 and 1998, included in this Amendment No. 1 to Current Report on Form 8-K/A of Cylink Corporation dated August 30, 2000, as amended November 27, 2000. Raleigh, North Carolina /s/ Ernst & Young November 27, 2000 EX-99.2 3 0003.txt INDEPENDENT AUDITORS' REPORT EXHIBIT 99.2 CONSOLIDATED FINANCIAL STATEMENTS Celotek Corporation Years ended December 31, 1999 and 1998 with Report of Independent Auditors Celotek Corporation Consolidated Financial Statements Years ended December 31, 1999 and 1998 CONTENTS Report of Independent Auditors 1 Consolidated Financial Statements Consolidated Balance Sheets 2 Consolidated Statements of Operations 4 Consolidated Statements of Shareholders' Equity (Deficit) 5 Consolidated Statements of Cash Flows 6 Notes to Financial Statements 7 Report of Independent Auditors The Board of Directors Celotek Corporation We have audited the accompanying consolidated balance sheets of Celotek Corporation and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholder's equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Celotek Corporation at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP June 1, 2000 1 Celotek Corporation Consolidated Balance Sheets (amounts in thousands) December 31 1999 1998 -------- -------- Assets Current assets: Current assets: Cash and cash equivalents $ 2,264 $ 8,059 Accounts receivable 1,795 1,201 Inventories (Note 3) 905 448 Prepaid expenses and other 450 202 -------- -------- Total current assets 5,414 9,910 Furniture and equipment: Software, computers and office equipment 1,198 651 Furniture, fixtures and equipment 864 481 Demo and research equipment 541 270 -------- -------- 2,603 1,402 Accumulated depreciation (862) (317) -------- -------- Total furniture and equipment 1,741 1,085 -------- -------- -------- -------- Total Assets $ 7,155 $ 10,995 -------- -------- 2 December 31 1999 1998 -------- -------- Liabilities and shareholders' equity (deficit) Current liabilities: Accounts payable $ 758 $ 723 Accrued expenses 897 546 Current obligation under capital lease -- 51 Current portion of long-term debt (Note 5) 139 -- -------- -------- Total current liabilities 1,794 1,320 Long-term debt, less current portion (Note 5) 278 -- -------- -------- Total liabilities 2,072 1,320 Redeemable, Convertible Series A Preferred Stock, $0.001 par value; 7,035,723 shares designated, issued and outstanding (aggregate liquidation preference of $3,728,933) 3,706 3,706 Redeemable, Convertible Series B Preferred Stock, $0.001 par value; 6,393,290 shares designated, issued, and outstanding (aggregate liquidation preference of $7,752,503) 7,685 7,685 Shareholders' equity (deficit) (Notes 6, 7 and 8): Common stock, $0.00 1 par value; 30,000,000 shares authorized, 6,238,812 and 5,044,257 shares issued and outstanding in 1999 and 1998, respectively 6 5 Additional paid-in-capital 424 398 Accumulated deficit (6,734) (2,119) Accumulated other comprehensive income - foreign currency translation loss (4) -- -------- -------- Total shareholders' equity (6,308) (1,716) -------- -------- Total liabilities and shareholders' equity $ 7,155 $ 10,995 ======== ======== See accompanying notes.
3 Celotek Corporation Consolidated Statements of Operations (amounts in thousands) Year ended December 31 1999 1998 ------- ------- Product sales $ 3,648 $ 5,658 Service revenue 322 -- ------- ------- Total Sales 3,970 5,658 Cost of good sold 1,177 2,000 ------- ------- Gross profit 2,793 3,658 Selling, general and administrative expenses 5,784 3,142 Research and development expenses 1,825 804 ------- ------- Loss from operations (4,816) (288) Other income (expense): Interest income and other 229 144 Interest expense (28) (23) ------- ------- Net loss $(4,615) $ (167) ======= ======= 4 Celotek Corporation Consolidated Statements of Shareholder's Equity (Deficit) (amounts in thousands)
Redeemable Convertible Accumulated Preferred Stock Additional Other --------------- Common Paid-in Accumulated Comprehensive Series A Series B Stock Capital Deficit Income Total -------- -------- -------- -------- -------- ------- -------- Balance at December 31, 1997 $3,706 $ -- $ 5 $ 397 $ (1,952) $ -- $ (1,550) Issuance of preferred stock, net -- 7,685 -- -- -- Issuance of common stock -- -- -- 1 -- 1 Net Loss -- -- -- -- (167) -- (167) -------- -------- -------- -------- -------- ------- -------- Balance at December 31, 1998 3,706 7,685 5 398 (2,119) -- (1,716) Issuance of common stock -- -- 1 26 -- -- 27 Net unrealized foreign currency translation loss -- -- -- -- (4) (4) Net Loss -- -- -- (4,615) -- (4,615) Balance at December 31, 1999 $3,706 $7,685 $ 6 $ 424 $ (6,734) $ (4) $ (6,308) ======== ======== ======== ======== ======== ======= ======== See accompanying notes.
5 Celotek Corporation Consolidated Statements of Cash Flows (amounts in thousands) Year ended December 31 1999 1998 ------ ----- Operating activities Net loss $(4,615) $ (167) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 552 229 Changes in operating assets and liabilities: Accounts receivable (594) (1,201) Inventories (457) (187) Prepaid expenses and other (248) (96) Accounts payable 35 545 Accrued expenses 351 518 ------ ----- Net cash used in operating activities $(4,976) $ (359) Investing activities Purchases of furniture and equipment (1,212) (961) ------ ----- Net cash used in investing activities (1,212) (961) Financing activities Proceeds from issuance of common stock 27 1 Proceeds from issuance of preferred stock (net of issuance costs) -- 7,685 Proceeds from long-term debt 417 -- Repayment of note payable -- (200) Repayment of capital lease obligation (51) (47) ------ ----- Net cash provided by financing activities 393 7,439 Net (decrease) increase in cash and cash equivalents (5,795) 6,119 Cash and cash equivalents at beginning of year 8,059 1,940 ------ ----- Cash and cash equivalents at end of year $2,264 $8,059 ====== ====== Supplemental disclosure of cash flow information Cash paid for interest $ 33 $ 43 ====== ====== See accompanying notes 6 Celotek Corporation Notes to Consolidated Financial Statements December 31, 1999 1. History and Nature of the Business Celotek Corporation (the "Company") and subsidiary located in Research Triangle Park in North Carolina, designs, develops, markets and manufactures electronic information security systems for high-speed, high performance IP and ATM networks and also provides engineering, support service, and repair products to customers. In 1999, the Company established and incorporated Celotek Europe Ltd, a wholly owned foreign subsidiary, as a sales support office located in England. Effective January 1, 1999, the Company changed its name from Secant Network Technologies, Inc. to Celotek Corporation. 2. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Celotek Europe, Ltd. which is based in England. In 1999, Celotek Europe, Ltd. recognized no revenues and a loss of approximately $146,000. All material intercompany accounts and transactions, including management services and revenues, are eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Revenue Recognition Product revenue is generally recognized at the time of shipment to the customer. Services revenue is generally recognized when deliverables are shipped to the customer. Service contract revenue is recognized ratably over the term of the contract. 7 Celotek Corporation Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Sales and Accounts Receivable The Company operates in a single industry and is engaged in the design and sale of electronic information security and network analysis systems. Revenues and accounts receivable from significant customers, those representing 10% or more of total sales and accounts receivable for the years and periods ended December 31, are summarized as follows: Sales Accounts Receivable 1999 1998 1999 1998 ------------------------ ---------------------- Customer 1 75.0% 56.1% 80.2% 63.5% Customer 2 6.0% 27.2% 1.6% 23.9% Customer 3 11.8% -- 17.2% -- (a) Inventories Inventories are valued at the lower of cost or market using an average cost flow assumption. Furniture and Equipment Furniture and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets as follows: Software, computers and office equipment 3 years Furniture, fixtures and equipment 5 years Demonstration and research equipment 2 years Expenditures for repairs and maintenance are charged to expense as incurred. 8 Celotek Corporation Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Advertising Costs The Company expenses advertising costs as incurred. Amounts expensed in 1999 and 1998 were approximately $566,000 and $279,000, respectively. Income Taxes Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Translation of Foreign Currencies The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expenses accounts using an average exchange rate for the period. The gains and losses resulting from translation are included in other comprehensive income. Other Comprehensive Income As of January 1, 1999, the Company adopted SFAS 130, "Reporting Comprehensive Income", which sets standards for the reporting and display of comprehensive income and its components in financial statements. Adoption had no impact on the Company's net loss or shareholders' equity. Comprehensive income consists of net loss plus other comprehensive income. Under SFAS 130, the item included in other comprehensive income is unrealized losses in the translation of foreign currencies. Comprehensive income and its components are displayed by the Company in the statements of shareholders' equity. 9 Celotek Corporation Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Accounting for Stock Options In 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which gives companies the option to adopt the fair value method for expense recognition of employee stock options and other stock-based awards or to continue to account for such items using the intrinsic value method as outlined under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") with pro forma disclosures of net income (loss) as if the fair value method had been applied. The Company has elected to continue to apply APB 25 for stock options and other stock based awards and has disclosed pro forma net loss as if the fair value method had been applied. No compensation expense related to stock option grants was recorded in 1999 or 1998, as the option exercise prices were equal to fair market value on the date of grant. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist principally of cash investments with financial institutions and trade accounts receivable. Sales are made primarily to large domestic and international companies. Receivables are unsecured. The Company provides an allowance for doubtful accounts equal to the estimated losses expected to be incurred in the collection of accounts receivable. Research and Development Research and development costs are expensed to operations when incurred. 10 Celotek Corporation Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Reclassifications Certain 1998 financial statement amounts have been reclassified to conform with 1999 classifications. These reclassifications had no effect on net loss or shareholders' equity as previously reported. 3. Inventories The major components of inventories at December 31 were as follows (amounts in thousands): 1999 1998 ----- ----- Component parts $ 834 $ 465 Assembled finished product 114 15 ----- ----- 948 480 Reserve for obsolescence (43) (32) ----- ----- $ 905 $ 448 ----- ----- 4. Leases The Company leases certain office facilities and equipment under various non-cancelable operating leases. Some leases contain escalation clauses. Future minimum lease commitments under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 1999 are as follows (amounts in thousands): 2000 $ 258 2001 260 2002 263 2003 133 ----- Total $ 914 ===== Total rent expense for the years ended December 31, 1999 and 1998 was approximately $243,000 and $157,000, respectively. 11 Celotek Corporation Notes to Consolidated Financial Statements (continued) 5. Long-Term Debt In June 1999, the Company entered into a loan and security agreement with a bank providing the Company with up to $2,000,000 and $3,000,000 under revolving line and equipment line credit facilities, respectively. The revolving line outstanding balance is limited to 80% of eligible accounts receivable as determined by the bank. The revolving line bears interest at the bank's prime rate and is collateralized by certain assets as defined in the agreement. At December 31. 1999, there was no outstanding balance on the revolving line. The equipment line's purpose is for the acquisition of equipment and software development tools. Repayment of the line will be made in thirty-six equal installments starting in January 2000, including interest at the bank's prime rate plus 1% (9.5% at December 31, 1999). The equipment line is collateralized by certain assets as defined in the agreement. At December 31, 1999, $416,897 was outstanding under the equipment line. Principal maturities of long-term debt are as follows (amounts in thousands): 2000 $ 139 2001 139 2002 139 ------------- $ 417 ============= The agreement requires the Company to meet certain covenants regarding liquidity and profitability as defined in the agreement, and contains certain other restrictions. 6. Shareholders' Equity (Deficit) and Redeemable, Convertible Stock Capital Structure The Company authorized 30,000,000 shares of common stock and 15,000,000 shares of preferred stock of which 7,035,723 are designated for Series A preferred and 6,393,290 are designated for Series B preferred. 12 Celotek Corporation Notes to Consolidated Financial Statements (continued) 6. Shareholders' Equity (Deficit) and Redeemable, Convertible Stock (continued) Redeemable, Convertible Preferred Stock - Series A and B Redemption-- The holders of 75% or 60% of the outstanding shares of Series A or B Preferred Stock, respectively, voting together as a single group on an as-converted basis, can request on or after the 5th anniversary of the original issue date (July 16, 2002 and October 6, 2003, respectively), that their shares of Series A or B Preferred Stock be redeemed at a price for each share equal to the greater of a) the fair market value of Series A or B Preferred Stock plus all accrued but unpaid dividends or b) the Series A or B Preferred Stock liquidation preference. The Corporation shall redeem such shares plus accrued interest from the redemption date at the rate of 8% per annum in equal monthly installments over the 36 months following the redemption date. In the event the Company receives a Series B Preferred Stock redemption request subsequent to a Series A Preferred Stock redemption request but prior to redemption of Series A Preferred Stock, the Company shall redeem Series B Preferred Stock prior to redemption of Series A Preferred Stock. Conversion - Holders of Series A and B Preferred Stock have the right, at any time, to convert into such number of shares of Common Stock as is determined by dividing the Series A and B Preferred Stock original price ($0.53 and $ 1.2126 per share, respectively) by the conversion price in effect at the time of conversion. The preferred stock conversion price will be reduced in the event of the Company's issuing any shares of common stock (or instruments convertible into common stock) without consideration or for consideration per share less than the conversion price of any series of preferred stock in effect immediately prior to the time of such issue or sale. The Series A and B Preferred Stock conversion prices at December 31, 1999 were $0.53 and $1.2126 per share, respectively. Each share of Series A and B Preferred Stock shall automatically be converted into shares of Common Stock at the then effective applicable conversion price upon the closing of the sale of the Company's Common Stock in an underwritten public offering at a price per share of at least three times the then effective Series B Preferred Stock conversion price resulting in net proceeds to the Company of at least $15 million. 13 Celotek Corporation Notes to Consolidated Financial Statements (continued) 6. Shareholders' Equity (Deficit) and Redeemable, Convertible Stock (continued) Voting - Each holder of Series A and B Preferred Stock is entitled to the number of votes equal to the number of shares of Common Stock into which the Series A and Series B Preferred Stock is convertible. Dividends - The Company may not declare or pay any dividends on shares of Common Stock unless equivalent dividends are declared and paid on the Series A and Series B Preferred Stock. Liquidation - Upon liquidation, dissolution, or winding up of the Company, holders of the Series B Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any assets to holders of Series A Preferred Stock and Common Stock, an amount equal to $1.2126 per share (as adjusted for any combinations, consolidations, stock distributions, or stock dividends) plus all or any accrued but unpaid dividends. Subject to the payment in full of Series B Preferred Stock holders, holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any assets to holders of Common Stock, an amount equal to $0.53 per share (as adjusted for any combinations, consolidations, stock distributions, or stock dividends) plus all or any accrued but unpaid dividends. If the assets and funds of the Corporation are insufficient to pay the holders of Series B Preferred Stock the full amount, assets and funds shall be distributed ratably among the holders of the Series B Preferred Stock based upon number of shares held. If, after payment in full to the holders of Series B Preferred Stock, the assets and funds of the Corporation are insufficient to pay the holders of Series A Preferred Stock the full amount, assets and funds shall be distributed ratably among the holders of the Series A Preferred Stock based upon number of shares held. Right of First Participation - Each holder of Series A and B Preferred Stock is granted the right of participation to purchase up to its share of all new securities (excluding securities issued for conversion of Series A and B Preferred Stock, securities issued pursuant to the acquisition of another corporation, and shares issued pursuant to the Management Option Pool) which the Company may propose to sell or issue. This right expires upon the closing of a Qualified Public Offering. 14 Celotek Corporation Notes to Consolidated Financial Statements (continued) 7. Stock Option Plan In April 1997, the Board of Directors and shareholders of the Company adopted a Stock Option Plan ("the Plan"). The Plan is intended to provide employees, directors and consultants or advisors with an equity interest in the Company as an incentive to contribute to the success of the Company and to reward employees for outstanding performance. The Plan provides for the granting of either incentive or nonqualified options. The maximum number of shares of common stock which may be issued under the Plan is 5,432,386. Exercise and Vesting of Options -- The options vest on a monthly basis over forty eight (48) months. The options are exercisable and terminate six months and ten years from the date of grant, respectively. A summary of the Company's stock option activity and related information is as follows: Number Option of Price Range Options per Share ------------------------------- Balance at December 31, 1997 2,336,000 $.01 Granted 1,855,000 $0.35 - $0.12 Exercised (19,271) $0.035 Canceled (278,606) $0.035 ------------------------------- Balance at December 31, 1998 3,893,123 $0.01 - $0.12 Granted 1,461,000 $0.12 Exercised (1,194,555) $0.01 - $0.12 Canceled (1,209,287) $0.01 - $0.12 ------------------------------- Balance at December 31, 1999 2,950,281 $0.01 - $0.12 =============================== 15 Celotek Corporation Notes to Consolidated Financial Statements (continued) 7. Stock Option Plan (continued) Exercise prices for options outstanding as of December 31, 1999 ranged from $0.01 to $0.12. The weighted average remaining contractual life of outstanding options is 8.58 years. The weighted average exercise price of outstanding options at December 31, 1999 is $0.08. At December 31, 1999 and 1998, options to purchase 2,043,873 and 1,056,719 shares of common stock were exercisable, respectively. Pro forma information regarding net loss is required by SFAS 123 to be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a minimum value option pricing model with the following weighted-average assumptions: risk-free interest rate of 6.14%; a dividend yield of 0%; and a weighted-average expected life of the option of 10 years. The weighted-average grant-date fair value of the options granted in 1999 and 1998 was $.06 and $.04, respectively. Option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Had compensation cost for the Company's stock options been determined based on the fair value at the date of grant consistent with the provisions of SFAS 123, the Company's net loss would not have differed significantly from the amount reported in the statement of operations, therefore, supplemental pro forma information has not been separately disclosed, as permitted by SFAS 123. 16 Celotek Corporation Notes to Consolidated Financial Statements (continued) 8. Capital Stock Reserved for Future Issuance At December 31, 1999, the Company had reserved a total of 17,647,573 of its authorized 30,000,000 shares of common stock for future issuance as follows: For conversion of Series A Preferred 7,035,723 For conversion of Series B Preferred 6,393,290 Outstanding stock options (Note 7) 2,950,281 Possible future issuance under stock option plans (Note 7) 1,268,279 ---------- 17,647,573 ========== 9. Employee Savings Plan On February 13, 1998, the Company adopted a 401(k) Plan and Trust. The Plan covers substantially all full-time employees. The Company does not make contributions to the Plan. 10. Related Party Agreement The Company licenses certain technology under an exclusive license agreement from an entity which is a shareholder in the Company. The term of the exclusive license extends for twenty years assuming certain conditions are met as outlined in the license agreement. 11. Income Taxes At December 31, 1999, the Company has a cumulative federal and state net operating loss canyforward available to offset future taxable income of approximately $6,320,000 which begins to expire in the year 2011 for federal tax purposes and 2001 for state tax purposes. The Company also has approximately $373,000 of research credits to carry forward for use against future federal income taxes. U.S. tax rules impose limitations on the use of net operating losses and credits following certain changes in ownership. If such a change occurs, the limitation could reduce the amount of these benefits that would be available to offset future taxable income each year, starting with the year of ownership change. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 17 Celotek Corporation Notes to Consolidated Financial Statements (continued) 11. Income Taxes (continued) Components of deferred taxes at December 31, are as follows (amounts in thousands): 1999 1998 ------- ------- Deferred tax assets Net operating loss carryforwards $ 2,437 $ 700 Amortization 6 30 Depreciation -- 15 Reserves 24 -- Research and development credit 373 168 ------- ------- Total deferred tax asset 2,840 913 Valuation allowance for deferred tax asset (2,825) (913) ------- ------- Net deferred tax assct 15 -- Deferred tax liabilities: Depreciation (15) -- ------- ------- Total deferred tax liabilities (15) -- ------- ------- Total net deferred tax asset $ -- $ -- ------- ------- 18 UNAUDITED INTERIM FINANCIAL INFORMATION Celotek Corporation Consolidated Interim Financial Statements Six Months ended June 30, 2000 and 1999 CONTENTS Consolidated Interim Financial Statements (unaudited) Consolidated Balance Sheets (unaudited) 1 Consolidated Statements of Operations (unaudited) 3 Consolidated Statements of Cash Flows (unaudited) 4 Notes to Financial Statements (unaudited) 5 UNAUDITED INTERIM FINANCIAL INFORMATION Celotek Corporation Balance Sheet June 30, 2000 (unaudited, amounts in thousands) Assets Current assets: Cash and cash equivalents $ 1,182 Accounts receivable 1,026 Inventories (Note 3) 1,254 Prepaid expenses and other 215 ----------- Total current assets 3,677 Furniture and equipment: Software, computers and office equipment 1,004 Furniture, fixtures and equipment 755 Demo and research equipment 1,256 ----------- 3,015 Accumulated depreciation (1,283) ----------- Total furniture and equipment 1,732 Prepaid Engineering Costs 186 ----------- Total Assets $ 5,595 =========== Liabilities and shareholders' equity Current liabilities: Accounts payable $ 660 Accrued expenses 365 Deferred Revenue 167 Long-term debt (Note 5) 347 ------- Total current liabilities 1,539 Redeemable, Convertible Series A Preferred Stock, $0.00 1 par value; 7,035,723 shares designated, issued and outstanding (aggregate liquidation preference of $3,729) 3,706 Redeemable, Convertible Series B Preferred Stock, $0001 par value; 6,393,290 shares designated, issued, and outstanding (aggregate liquidation preference of $7,753) 7,685 Shareholders' equity: Common stock, $0.001 par value; 30,000,000 shares authorized, 6,238,812 and 5,044,257 shares issued and outstanding in 1999 and 1998, respectively 7 Additional paid-in-capital 732 Deferred Compensation (281) Accumulated deficit (7,788) Accumulated other comprehensive income - foreign currency translation loss (5) -------- Total shareholders' equity (deficit) (7,335) -------- Total liabilities and shareholders' equity (deficit) $ 5,595 ======== See accompanying notes Celotek Corporation Consolidated Statements of Operations (unaudited, amounts in thousands) 6 months ended June 30, 2000 1999 ---------------------------- Total Sales $ 4,081 $ 528 Cost of good sold 1,181 155 ---------------------------- Gross profit 2,900 373 Selling, general and administrative expenses 2,688 3,007 Research and development expenses 1,296 808 ---------------------------- Loss from operations (1,084) (3,442) Other income (expense): Interest income and other 55 148 Interest expense (25) (6) ---------------------------- Net loss $ (1,054) $ (3,300) ============================ See accompanying notes. Celotek Corporation Consolidated Statements of Cash Flows (unaudited, amounts in thousands)
Six months ended June 30, 2000 1999 ---------------------------- Operating activities Net loss $ (1,054) $ (3,300) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 448 242 Changes in operating assets and liabilities: Accounts receivable 769 925 Inventories (349) 5 Prepaid expenses and other 49 (90) Accounts payable (98) (378) Accrued expenses (365) (274) ---------------------------- Net cash used in operating activities $ (600) $ (2,870) Investing activities Purchases of furniture and equipment (426) (410) ---------------------------- Net cash used in investing activities (426) (410) Financing activities Proceeds from issuance of common stock 13 8 Proceeds from issuance of preferred stock (net of issuance costs) - - Proceeds from long-term debt - - Repayment of note payable (69) (25) Repayment of capital lease obligation - - ---------------------------- Net cash provided by financing activities (56) (17) Net (decrease) increase in cash and cash equivalents (1,082) (3,297) Cash and cash equivalents at beginning of year 2,264 8,059 ---------------------------- Cash and cash equivalents at end of year $ 1,182 $ 4,762 ============================ Supplemental disclosure of cash flow information Cash paid for interest $ 25 $ 6 ============================ See accompanying notes
Celotek Corporation Notes to Consolidated Financial Statements June 30, 2000 (unaudited) 1. Basis of Presentation The unaudited condensed consolidated financial statements included herein contain all adjustments, consisting only of normal recurring adjustments which, in the opinion of management, are necessary to state fairly the consolidated financial position, results of operations and cash flows of Celotek Corporation ("Celotek" or the "Company") for the periods presented. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1999. Interim results of operations are not necessarily indicative of the results to be expected for the full year. 2. Inventories June 30, 2000 (amounts in thousands) --------------------- Component parts $1,216 Assembled finished product 119 --------------------- 1,335 Reserve for obsolescence (81) --------------------- $1,254 ===================== 3. Subsequent Events Acquisitions. On August 30, 2000, Cylink Corporation, a developer of a comprehensive family of network security solutions, acquired all the outstanding shares of Celotek Corporation in exchange for the issuance of 1,664,000 shares valued at $23,431,000, the issuance of options to purchase 307,500 shares of Cylink common shares which vest over 4 years valued at $2,329,000, and net cash of approximately $1,316,000 at the date of closing. Transaction costs totaled approximately $1,558,000. The acquisition was treated for accounting purposes as a purchase. The purchase price has been allocated to the assets acquired and liabilities assumed based upon the fair market values at the date of acquisition, as summarized below (in thousands): Current assets (including cash and cash equivalents of $253) $ 2,657 Property and equipment 1,142 Current technology 12,077 In-process technology 3,681 Goodwill 7,521 Other intangibles 1,403 Current liabilities (1,220) Long-term debt assumed (185) --------- $ 27,076 ========= EX-99.3 4 0004.txt PRO FORMA FINANCIAL INFORMATION EXHIBIT 99.3 CYLINK CORPORATION PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) On August 30, 2000, Cylink Corporation (the "Company") completed the acquisition of all of the outstanding stock of Celotek Corporation. ("Celotek"), a company based in Raleigh, North Carolina that develops high-performance Asynchronous Transfer Mode network security appliances in exchange for the issuance of 1,664,000 shares of Cylink common stock valued at $23,431,000, the issuance of options to purchase 307,500 shares of Cylink common shares which vest over 4 years valued at $2,329,000, and net cash of approximately $1,316,000. The aggregate purchase price, including approximately $1,558,000 of transaction costs will be approximately $27,076,000. The accompanying unaudited pro forma combined condensed financial statements are presented for illustrative purposes only and are not necessarily indicative of the combined financial position or results of operations which may be reported in future periods or the financial position that actually would have been realized had the Company and Celotek been a combined company during the specified periods, or had the acquisition been consummated on the dates indicated. The unaudited pro forma combined condensed financial statements, including the related notes, are qualified in their entirety by reference to, and should be read in conjunction with, the historical financial statements and related notes of Celotek, included elsewhere in this filing, and the historical financial statements and related notes of the Company contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The accompanying unaudited pro forma combined condensed financial statements give effect to the acquisition between the Company and Celotek using the purchase method of accounting. The unaudited pro forma combined condensed financial statements are based on the respective historical consolidated financial statements and related notes of the Company and Celotek. The pro forma adjustments are preliminary and are based on management's estimates of the value of the tangible and intangible assets acquired. In addition, management is in the process of assessing and formulating its integration plans, which may include restructuring actions, the full cost of which has not yet been determined. The actual adjustments may differ materially from those presented in these pro forma financial statements. A change in the pro forma adjustments would result in a different allocation of the purchase price which would affect the value assigned to the tangible and intangible assets, or could result in a change to the statement of operations. The effect of these changes on the statement of operations will depend on the nature and amounts of the assets and liabilities adjusted. See the notes to the unaudited pro forma combined condensed financial statements. The unaudited pro forma combined condensed balance sheet assumes that the acquisition took place on July 2, 2000, and combines the Company's and Celotek's respective July 2, 2000 balance sheets. The unaudited pro forma combined condensed statements of operations assume the acquisition took place at the beginning of the periods presented and combines the Company's and Celotek's respective statements of operations. Certain reclassifications have been made to Celotek's financial statements to conform to the Company's presentation. CYLINK CORPORATION PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF JULY 2, 2000 (in thousands, unaudited)
Historical Pro Forma ---------------------- Pro Forma Adjustments Combined Cylink Celotek Reference Amount Cylink --------- --------- --------- --------- --------- Assets Current assets: Cash and cash equivalents $ 18,907 $ 1,182 (a) $ (1,176) $ 18,913 Accounts receivable, net 19,510 1,026 20,536 Inventories 12,998 1,254 (b) 232 14,484 Deferred income taxes 4,371 -- 4,371 Other current assets 1,911 214 2,125 --------- --------- --------- --------- Total current assets 57,697 3,676 60,429 Restricted Cash 1,400 -- 1,400 Property and equipment, net 10,558 1,733 (a)(b) (506) 11,785 Acquired technology, goodwill and other intangibles 1,746 -- (b) 20,791 22,537 Notes receivable from employees or former employees 3,284 -- 3,284 Other assets 1,312 186 -- 1,498 --------- --------- --------- --------- $ 75,997 $ 5,595 $ 19,341 $ 100,933 ========= ========= ========= ========= Liabilities and Shareholders' Equity Current liabilities: Current portion of lease obligations and long-term debt $ 39 $ 139 $ 178 Accounts payable 6,050 660 6,710 Accrued liabilities 9,858 366 (b) 801 11,025 Income taxes payable 1,030 -- 1,030 Deferred revenue 3,653 167 3,820 --------- --------- --------- Total current liabilities 20,630 1,332 22,763 Capital lease obligations and long-term debt 106 209 315 Preferred stock -- 13 (b) (13) -- Shareholders' equity: Common stock 308 7 (b) 10 325 Additional paid-in capital 132,117 12,110 (b) 10,467 154,694 Deferred compensation related to stock options (1,421) (281) (b) 281 (1,421) Accumulated other comprehensive loss (51) (6) (b) 6 (51) Accumulated deficit (75,692) (7,789) (b) 7,789 (75,692) --------- --------- --------- --------- Total shareholders' equity 55,261 4,041 18,540 77,855 --------- --------- --------- --------- $ 75,997 $ 5,595 $ 19,341 $ 100,933 ========= ========= ========= ========= See notes to unaudited pro forma combined condensed financial statements
CYLINK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 (in thousands, except per share data, unaudited)
Historical ---------------------- Pro Forma Adjustments Pro Forma Cylink Celotek Reference Amount Combined --------- --------- --------- --------- --------- Revenue $ 59,655 $ 3,970 (c) $ (2,978) $ 60,647 Cost of revenue 19,159 1,177 (c) (2,978) 17,358 --------- --------- --------- --------- Gross profit 40,496 2,793 - 43,289 --------- --------- --------- --------- Operating expenses: Research and development, net 16,176 1,825 - 18,001 Selling and marketing 26,316 1,751 - 28,067 General and administrative 13,998 4,033 - 18,031 Amortization of purchased intangibles 2,799 - (d) 3,105 5,904 --------- --------- --------- --------- Total operating expenses 59,289 7,609 3,105 70,003 --------- --------- --------- --------- Loss from operations (18,793) (4,816) (3,105) (26,714) Other income (expense): Interest income, net 1,858 199 (f) (79) 1,978 Royalty and other income (expense), net 232 2 - 234 --------- --------- --------- --------- 2,090 201 (79) 2,212 --------- --------- --------- --------- Loss from continuing operations before income taxes (16,703) (4,615) (3,184) (24,502) Provision for income taxes 174 - - 174 --------- --------- --------- --------- Loss from continuing operations (16,877) (4,615) (3,184) (24,676) Gain on disposal of discontinued operations, net of income tax expense of $0 2,304 - 2,304 --------- --------- --------- --------- Net loss $ (14,573) $ (4,615) $ (3,184) $ (22,372) ========= ========= ========= ========= Proforma Earnings (loss) per share - basic & diluted: Continuing operations $ (0.58) (e) $ (0.81) Discontinued operations 0.08 (e) 0.08 --------- --------- Net income (loss) $ (0.50) (e) $ (0.73) ========= ========= Shares used in computing proforma basic and diluted loss per share 29,217 (e) 30,612 ========= ========= See notes to unaudited proforma combined condensed financial statements.
CYLINK CORPORATION PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 2, 2000 (in thousands, except per share data, unaudited)
Historical ---------------------- Pro Forma Adjustments Pro Forma Cylink Celotek Reference Amount Combined --------- --------- --------- --------- --------- Revenue $ 35,383 $ 4,081 (c) $ (2,811) $ 36,653 Cost of revenue 12,679 1,181 (c) (2,811) 11,049 --------- --------- --------- --------- Gross profit 22,704 2,900 - 25,604 --------- --------- --------- --------- Operating expenses: Research and development, net 9,912 1,296 - 11,208 Selling and marketing 17,225 995 - 18,220 General and administrative 7,228 1,693 - 8,921 Amortization of purchased intangibles 1,440 - (d) 1,553 2,993 --------- --------- --------- --------- Total operating expenses 35,805 3,984 1,553 41,342 --------- --------- --------- --------- Loss from operations (13,101) (1,084) (1,553) (15,738) Other income (expense): Interest income, net 827 16 (f) (40) 803 Royalty and other income (expense), net (66) 14 (52) --------- --------- --------- --------- 761 30 (40) 751 --------- --------- --------- --------- Net loss $ (12,340) $ (1,054) $ (1,553) $ (14,987) ========= ========= ========= ========= 9999999 Proforma loss per share - basic & diluted: Net loss $ (0.41) (e) $ (0.48) ========= ========= Shares used in computing proforma basic and diluted loss per share 30,258 (e) 31,390 ========= ========= See notes to unaudited proforma combined condensed financial statements.
CYLINK CORPORATION NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS 1. Pro Forma Adjustments Certain pro forma adjustments have been made to the accompanying unaudited pro forma combined condensed financial statements, based on the acquisition of all of the outstanding capital stock of Celotek for 1,664,000 Cylink shares valued at $23,431,000 and the issuance of options to purchase 307,500 shares of Cylink common shares valued at $2,329,000, and net cash of approximately $1,316,000. The aggregate purchase price of approximately $27,076,000 includes transaction costs of approximately $1,558,000, some of which were satisfied through the issuance of Cylink shares. The unaudited pro forma combined condensed statement of operations for the year ended December 31, 1999 gives effect to the acquisition as if it had occurred at the beginning of the period presented. The unaudited pro forma consolidated statement of operations do not include the one time $3,681,000 charge for purchased in process technology from the acquisition, as it is a material non-recurring charge. The charge will be included in the actual consolidated statement of operations of Cylink in the post acquisition statement of operations. The following adjustments have been reflected in the unaudited pro forma combined condensed financial statements: (a) Reflects the spinoff of certain net assets belonging to Celotek to a newly formed company which were not acquired by Cylink. (b) Reflects the elimination of Celotek's shareholders equity, the issuance of Cylink stock to the shareholders of Celotek, adjustments to bring inventory to net realizable value, and the accrual of certain transaction costs. Accordingly, the total purchase price has been allocated to the tangible and intangible assets purchased and liabilities assumed of Celotek based on their relative fair values. The amounts and components of the purchase price, along with the allocation of the purchase price to the net assets acquired are presented below, and are subject to change as acquisition accruals are finalized. PURCHASE PRICE (in thousands) Current assets (including cash and cash equivalents of $253) $ 2,732 Property and equipment 1,277 Current technology 12,077 In-process technology 3,681 Goodwill 7,311 Other intangibles 1,403 Current liabilities (1,220) Long-term debt assumed (185) --------- $ 27,076 ========= (c) Reflects the elimination of intercompany transactions, between the Company and Celotek, that took place during the period presented in the unaudited pro forma combined condensed financial statements. (d) Reflects the adjustment to record the amortization of goodwill and other intangibles resulting from the allocation of the purchase price. The pro forma adjustment assumes goodwill and other intangibles will be amortized on a straight-line basis over an estimated useful life of four years for workforce in place, five years for customer base, and seven years for current technologies and goodwill. (e) Reflects the issuance of approximately 1,664,000 shares of Cylink to the shareholders of Celotek upon the acquisition, less approximately 270,000 shares held in escrow. (f) Reflects the investment income that would have been foregone in making the cash payments facilitating the acquisition. -----END PRIVACY-ENHANCED MESSAGE-----