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
======== ========
<FN>
See accompanying notes.
</FN>
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)
======== ======== ======== ======== ======== ======= ========
<FN>
See accompanying notes.
</FN>
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
============================
<FN>
See accompanying notes
</FN>
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
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