<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
October 16, 1997
TRUSTED INFORMATION SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1281786
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3060 Washington Road (Rt. 97)
Glenwood, Maryland 21738
(Address of principal executive offices) (Zip code)
(301) 854-6889
(Registrant's telephone number including area code)
<PAGE> 2
<TABLE>
<CAPTION>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
<S> <C>
(a) Financial Statements of Business Acquired
Haystack Laboratories, Inc.
Report of Ernst & Young LLP, Independent Auditors 3
Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited) 4
Statements of Operations for the year ended December 31, 1996 and the nine month
periods ended September 30, 1996 and 1997 (unaudited) 5
Statements of Stockholders' Equity (Deficit) for the year ended December 31, 1996 and
for the nine month period ended September 30, 1997 (unaudited) 6
Statements of Cash Flows for the year ended December 31, 1996 and the nine month
periods ended September 30, 1996 and 1997 (unaudited) 7
Notes to Financial Statements 8
(b) Unaudited Pro Forma Financial Information
Introduction to Unaudited Pro Forma Combined Condensed Financial Information of
Trusted Information Systems, Inc. and Haystack Laboratories, Inc. 16
Unaudited Pro Forma Combined Condensed Balance Sheet as of September 26, 1997 17
Unaudited Pro Forma Combined Condensed Balance Sheet as of December 27, 1996 19
Unaudited Pro Forma Combined Condensed Statement of Operations for the nine month
period ended September 26, 1997 21
Unaudited Pro Forma Combined Condensed Statement of Operations for the nine month
period ended September 27, 1996 22
Unaudited Pro Forma Combined Condensed Statement of Operations for the year ended
December 27, 1996 23
Unaudited Pro Forma Combined Condensed Statement of Operations for the year ended
December 29, 1995 24
Unaudited Pro Forma Combined Condensed Statement of Operations for the year ended
December 30, 1994 25
Notes to Unaudited Pro Forma Combined Condensed Financial Information 26
(c) Exhibits
Exhibit No. Description
23.1 Consent of Ernst & Young LLP, Independent Auditors
</TABLE>
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired
Report of Independent Auditors
Board of Directors
Haystack Laboratories, Inc.
We have audited the accompanying balance sheet of Haystack Laboratories, Inc.
(the "Company") as of December 31, 1996, and the related statements of
operations, stockholders' equity and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Haystack Laboratories, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Austin, Texas
March 11, 1997
PAGE 3
<PAGE> 4
Haystack Laboratories, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $1,396,284 $ 225,613
Money market accounts - -
Accounts receivable 405,006 917,640
Inventory 30,409 38,568
---------- ----------
Total current assets 1,831,699 1,181,821
Property and equipment, net of accumulated
depreciation 232,982 231,547
Other assets 23,054 122,927
---------- ----------
Total assets $2,087,735 $1,536,295
---------- ----------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 138,208 $ 203,205
Accrued liabilities 170,259 255,756
Deferred revenue 207,860 729,227
Short-term borrowings - 350,000
Current portion of capital lease obligations 22,684 21,547
---------- ----------
Total current liabilities 539,011 1,559,735
Line of credit 60,500 701,500
Capital lease obligations (less current portion) 57,809 48,448
---------- ----------
Total liabilities 657,320 2,309,683
Stockholders' equity (deficit):
Series A Preferred stock, $.001 par value;
6,200,000 shares authorized; 5,809,075 shares
and 5,809,575 shares issued and outstanding
at December 31, 1996 and September 30, 1997,
respectively 5,810 5,815
Series B Preferred stock, $.001 par value;
1,900,000 shares authorized; 1,551,111 shares
issued and outstanding at December 31, 1996 and
September 30, 1997 1,551 1,551
Common stock, $.001 par value; 11,900,000
shares authorized; no shares and 4,400 shares
issued and outstanding at December 31, 1996
and September 30, 1997 - 44
Common stock, no par value; 5,000,000
shares authorized; no shares outstanding
at December 31, 1996 or September 30, 1997 - -
Additional paid-in capital 2,902,875 2,914,006
Accumulated deficit (1,479,821) (3,694,804)
---------- ----------
Total stockholders' equity (deficit) 1,430,415 ( 773,388)
---------- ----------
Total liabilities and stockholders'
equity (deficit) $2,087,735 $1,536,295
---------- ----------
</TABLE>
See accompanying notes.
PAGE 4
<PAGE> 5
Haystack Laboratories, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30, September 30,
1996 1996 1997
---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
License fees $ 862,669 $ 455,939 $ 1,123,433
Services and other 142,518 75,324 185,598
----------- --------- -----------
Total revenues 1,005,187 531,263 1,309,031
Cost of revenues: 109,857 64,032 136,576
----------- --------- -----------
Gross margin 895,330 467,231 1,172,455
Operating expenses:
Selling and marketing 1,049,896 478,043 1,968,128
Research and development 373,066 239,488 550,531
General and administrative 581,345 375,013 871,273
----------- --------- -----------
Total operating expenses: 2,004,307 1,092,544 3,389,932
Loss from operations (1,108,977) (625,313) (2,217,477)
Other income (expense):
Investment and other income 62,059 42,049 18,515
Interest expense (2,076) (516) (16,242)
Other income (expense), net - -- 221
----------- --------- -----------
59,983 41,533 2,494
----------- --------- -----------
Net loss $(1,048,994) $(583,780) $(2,214,983)
----------- --------- -----------
</TABLE>
See accompanying notes.
PAGE 5
<PAGE> 6
Haystack Laboratories, Inc.
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Series B Series A Additional Total
Preferred Preferred Common Paid-In Accumulated Stockholders'
Stock Stock Stock Capital Deficit Equity (Deficit)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ - $ - $658,496 $ - $(430,827) $227,669
Conversion of common stock to Series A
preferred stock (Note 1) - 5,806 (658,496) 652,690 - -
Issuances of Series B preferred stock 1,551 - - 2,249,019 - 2,250,570
Series A preferred stock options exercised - 4 - 1,166 - 1,170
Net loss - - - - (1,048,994) (1,048,994)
---------------------------------------------------------------------------------
Balance at December 31, 1996 $1,551 $5,810 $ - $2,902,875 $(1,479,821) $1,430,415
Issuance of common stock (unaudited) - - 44 - - 44
Series A preferred stock options
exercised (unaudited) - 5 - 11,131 - 11,136
Net loss (unaudited) - - - - (2,214,983) (2,214,983)
---------------------------------------------------------------------------------
Balance at September 30, 1997 (unaudited) $1,551 $5,815 $ 44 $2,914,006 $(3,694,804) $(773,388)
=================================================================================
</TABLE>
See accompanying notes.
PAGE 6
<PAGE> 7
Haystack Laboratories, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30, September 30,
1996 1996 1997
---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,048,994) $(583,780) $(2,214,983)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation expense 39,303 19,263 72,846
Changes in operating assets and liabilities
Accounts receivable (343,978) (230,688) (512,634)
Inventory (30,409) (145) (8,159)
Other assets (21,679) (32,726) (99,873)
Accounts payable 120,678 62,343 64,997
Accrued liabilities 137,271 82,973 85,497
Deferred revenue 179,393 179,679 521,367
----------- ---------- -----------
Net cash used in operating activities (968,415) (503,081) (2,090,942)
Cash flows from investing activities:
Purchases of property and equipment (159,522) (114,176) (71,411)
Proceeds from the sale of investments 11,323 11,323 -
----------- ---------- -----------
Net cash used in investing activities (148,199) (102,853) (71,411)
Cash flows from financing activities:
Proceeds from issuance of Series B Preferred stock 2,250,570 2,136,965 -
Proceeds from exercise of stock options/warrants 1,170 1,170 11,180
Proceeds from borrowings under line of credit 60,500 - 989,660
Repayment of capital lease obligations (5,522) (2,109) (9,158)
----------- ---------- -----------
Net cash provided by financing activities 2,306,718 2,136,026 991,682
Increase (decrease) in cash and cash equivalents 1,190,104 1,530,092 (1,170,671)
Cash and cash equivalents at beginning of period 206,180 206,180 1,396,284
----------- ---------- -----------
Cash and cash equivalents at end of period $ 1,396,284 $1,736,272 $ 225,613
----------- ---------- -----------
</TABLE>
See accompanying notes.
PAGE 7
<PAGE> 8
Haystack Laboratories, Inc.
Notes to Financial Statements
December 31, 1996 and
September 30, 1996 and 1997 (unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Haystack Laboratories, Inc. (the "Company") is the successor to a Texas
corporation that was originally incorporated in 1989 and then merged and
recapitalized into a newly formed Delaware corporation in 1996. The Company is
principally in the business of developing and marketing computer network and
server intrusion and misuse detection software.
MERGER AND RECAPITALIZATION
On April 12, 1996, the Company's predecessor ("Haystack-Texas") incorporated a
wholly-owned subsidiary, Haystack Laboratories, Inc. (the Company) in the State
of Delaware. Effective May 9, 1996, (the "Effective Date"), Haystack-Texas
merged with and into the Company. Upon the Effective Date: each share of common
stock of Haystack-Texas was converted to five shares of common stock, par value
of $.001, of the Company; each option to purchase common stock of Haystack-Texas
was converted to an option to purchase five shares of common stock of the
Company at an exercise price equal to the exercise price of the options for
Haystack-Texas divided by five; Haystack-Texas ceased separate corporate
existence; and each existing share of the Company prior to the Effective Date
was retired.
Also effective May 9, 1996, the Company adopted an Amended and Restated
Certificate of Incorporation under which it is authorized to issue two classes
of stock: Common Stock, par value $.001 per share, and Preferred Stock, par
value $.001 per share. Immediately following the filing of the Amended and
Restated Certificate of Incorporation with the State of Delaware, each
outstanding share of Common Stock was exchanged for one share of Series A
Preferred Stock and each option to purchase shares of Common Stock was converted
to an option to purchase shares of Series A Preferred Stock.
Series A Preferred Stock is convertible to Common Stock on a 1:1 basis, subject
to certain adjustments for dilution. Each share of Series A Preferred Stock will
automatically be converted to shares of Common Stock at the conversion ratio in
effect at the time immediately upon the earlier of (i) the closing of a firm
underwritten public offering, of at least $10,000,000 at a price of not less
than $10 per share or (ii) the date upon which the Company obtains the consent
of the holders of at least 66 2/3% of the then outstanding shares of Series A
Preferred Stock to convert such shares into Common Stock.
In the event of liquidation, Series A preferred shareholders shall be entitled
to receive, subject to amounts to be distributed to the Series B preferred
shareholders which have preference over Series A preferred shareholders with
respect to distributions, an amount per share equal to the sum of (i) $.80 (as
adjusted for any stock dividends, recapitalizations, combinations or splits) for
each outstanding share, (ii) any declared but unpaid dividends, (iii) subject to
distributions to the Common Stock holders, an additional amount until the
distributions aggregate $1.483 per outstanding share, and (iv) a pro-rata
distribution of any remaining assets among the Series A Preferred Stock, Series
B Preferred Stock and Common Stock holders based on the number of shares of
Common Stock held by each (assuming conversion of all such Series A Preferred
Stock and Series B Preferred Stock).
PAGE 8
<PAGE> 9
Haystack Laboratories, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Series A preferred shareholders are entitled to one vote for each share of
Common Stock into which the Series A Preferred Stock may be converted. In
addition, Series A preferred shareholders voting separately as a series are
entitled to elect one member of the Board of Directors. Series A preferred
shareholders are entitled to receive dividends at the rate of $.048 per share
per year (as adjusted for any stock dividends, recapitalizations, combinations
or splits) subject to dividends to Series B preferred shareholders, which have
preference over Series A preferred shareholders with respect to dividends, when,
as, and if declared by the Board of Directors. Such dividends are noncumulative.
PRIVATE PLACEMENT
On May 9, 1996, the Company issued 1,483,680 shares of Series B Preferred Stock
for net proceeds of approximately $2,150,000 after issuance costs. Also in 1996,
the Company issued an additional 67,431 shares of Series B Preferred Stock for
net proceeds of approximately $98,000 after issuance costs.
Series B Preferred Stock is convertible to Common Stock on a 1:1 basis, subject
to certain adjustments for dilution. Each share of Series B Preferred Stock will
automatically be converted to shares of Common Stock at the conversion ratio in
effect at the time immediately upon the earlier of (i) a Qualified IPO or (ii)
the date upon which the Company obtains the consent of the holders to convert
such shares into Common Stock.
In the event of liquidation, Series B preferred shareholders, which have
preference over Series A preferred shareholders with respect to distributions,
shall be entitled to receive an amount per share equal to the sum of (i) $1.483
(as adjusted for any stock dividends, recapitalizations, combinations or splits)
for each outstanding share, (ii) any declared but unpaid dividends, and (iii) a
pro-rata distribution of any remaining assets among the Series A Preferred
Stock, Series B Preferred Stock and Common Stock holders based on the number of
shares of Common Stock held by each (assuming conversion of all such Series A
Preferred Stock and Series B Preferred Stock).
Series B preferred shareholders are entitled to one vote for each share of
Common Stock into which the Series B Preferred Stock may be converted. In
addition, Series B preferred shareholders voting separately as a series are
entitled to elect one member of the Board of Directors. Series B preferred
shareholders, which have preference over Series A preferred shareholders with
respect to dividends, are entitled to receive dividends at the rate of $.148 per
share per year (as adjusted for any stock dividends, recapitalizations,
combinations or splits) when, as, and if declared by the Board of Directors.
Such dividends are noncumulative.
Until January 24, 2001, the Series B Preferred Stock is subject to mandatory
redemption at the request of the holders of at least 66 2/3% of the then
outstanding shares. The Series B Preferred Stock is redeemable at $1.483 per
share (as adjusted for any stock dividends, recapitalizations, combinations or
splits), plus $1.483 times .07 times the number of years the Series B Preferred
Stock has been outstanding.
PAGE 9
<PAGE> 10
Haystack Laboratories, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the Company has made all adjustments, consisting
primarily of normal recurring accruals, necessary for a fair presentation of the
financial condition of the Company as of September 30, 1997 and the results of
operations and cash flows for the nine month periods ended September 30, 1996
and 1997, as presented in the accompanying unaudited interim financial
statements.
CASH AND EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less when purchased and investments in money market mutual funds
to be cash equivalents.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"). SFAS
No. 109 prescribes the use of the liability method whereby deferred tax asset
and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws in effect when the differences are expected to
reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity 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.
INVESTMENTS
Investments consist of shares in publicly-traded mutual funds. The Company
adopted Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities ("SFAS 115"), effective
January 1, 1994. The cumulative effect of adoption was not material. The Company
classifies all investments as available-for-sale under SFAS 115. At December 31,
1996, the Company did not hold any investments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets, which are generally three to five years.
PAGE 10
<PAGE> 11
Haystack Laboratories, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, the Company capitalizes costs of software development beginning when
the resulting products become technologically feasible and ending when the
product is available for general release, subject to net realizable value
considerations. The Company has defined technological feasibility as completion
of a working model. As of December 31, 1996, such capitalizable costs were
insignificant; accordingly, the Company has charged all such costs to research
and development expense.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company sells its products to customers in diversified industries. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral. There have been no significant
losses on the collection of outstanding receivables. At December 31, 1996, six
customers accounted for approximately 79% of accounts receivable.
Sales to individual customers constituting 10% or more of revenue were as
follows:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Customer No. 1 $172,978
Customer No. 2 254,877
</TABLE>
INVENTORIES
Inventories consist primarily of software packaging and documentation materials
and are valued at the lower of cost or market.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25"). In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"). SFAS No. 123 encourages expensing the fair value
of employee stock options, but allows an entity to continue to account for
stock-based compensation to employees under APB 25 with disclosure of the pro
forma effect on net income had the fair value accounting provisions of SFAS No.
123 been adopted.
ADVERTISING AND PROMOTION
All costs associated with advertising and promotion products are expensed in the
year incurred. Advertising and promotion expense was $235,081 in 1996.
PAGE 11
<PAGE> 12
Haystack Laboratories, Inc.
Notes to Financial Statements (continued)
2. REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' Statement of Position 91-1, Software Revenue
Recognition. License fee revenue is generally recognized on shipment of the
product provided that no significant vendor or post-contract customer support
obligations remain and that collection of the resulting receivable is deemed
probable by management. Insignificant vendor and post-contract customer support
obligations are accrued upon shipment. Service revenue includes training,
consulting and customer support. Revenues from training and consulting are
recognized at the time the service is performed. Revenue from software support
contracts sold under separate arrangements with customers is deferred and
recognized pro-rata over the life of the contract.
3. LEASE COMMITMENTS
During 1996, the Company leased various equipment under capital lease
obligations. At December 31, 1996, the Company held equipment with a net book
value of $77,444 financed under capital leases. Future minimum lease payments
under capital lease obligations as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $28,872
1998 28,872
1999 23,814
2000 7,533
2001 5,024
-----------------------
Total minimum lease payments 94,115
Less amount representing imputed interest (13,622)
-----------------------
Net present value of capital lease obligations 80,493
Less current portion (22,684)
-----------------------
Long-term portion of capital lease obligations $57,809
=======================
</TABLE>
The Company leases office space in Austin, Texas and Santa Clara, California
under short-term operating leases. Rent expense was approximately $36,421 for
the year ended December 31, 1996.
4. CREDIT FACILITY
In 1996, the Company obtained a $250,000 line of credit with a bank for
financing the acquisition of fixed assets. The line of credit is collateralized
by a pledge of accounts receivable, inventory and all tangible assets. There are
no financial covenants. Interest is at the bank's prime rate plus three quarters
of one percent per year. Under the line of credit agreement, the Company may
make four additional draws and will pay interest only until December 21, 1997,
at which time any outstanding principal and interest will be converted to an
amortizing loan, payable in 30 equal monthly installments. At December 31, 1996,
$60,500 had been borrowed under this line of credit.
PAGE 12
<PAGE> 13
Haystack Laboratories, Inc.
Notes to Financial Statements (continued)
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
(UNAUDITED)
-----------------------------------------------
<S> <C> <C>
Computer equipment $244,236 $307,552
Software 46,377 54,472
-----------------------------------------------
Total property and equipment 290,613 362,024
Less accumulated depreciation (57,631) (130,477)
-----------------------------------------------
Net property and equipment $232,982 $231,547
===============================================
</TABLE>
6. STOCK OPTION PLANS
In January 1993, the Company adopted stock option plans ("the 1993 Plans") under
which officers, employees and consultants may be granted incentive and
non-qualified options to purchase shares of the Company's Series A Preferred
stock. The 1993 Plans permit incentive stock options to be granted to employees
at an exercise price not less than the fair market value on the date of grant
and non-qualified options to be granted at an exercise price not less than 50%
of the fair market value on the date of grant. The 1993 Plans permit options
with expiration terms up to 10 years. Options under the 1993 Plans generally
vest over four years.
In May 1996, the Company adopted a stock option plan ("the 1996 Plan") under
which employees, members of the Board and consultants may be granted options to
purchase shares of the Company's Common Stock. The 1996 Plan permits stock
options to be granted at an exercise price not less than fair market value on
the date of grant for incentive options and not less than 85% of the fair market
value on the date of grant for all other options. The 1996 Plan permits options
with expiration terms up to 10 years. Options under the 1996 Plan generally vest
over four years.
PAGE 13
<PAGE> 14
Haystack Laboratories, Inc.
Notes to Financial Statements (continued)
6. STOCK OPTION PLANS (CONTINUED)
A summary of option activity under the 1993 Plans is as follows (restated to
reflect conversion discussed in Note 1):
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE PRICE PER EXERCISE PRICE PER
NUMBER OF SHARES SHARE SHARE
-----------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1993 167,500 $.200 $.200
Options granted 200,000 .312 .312
-----------------------------------------------------------------------
Balance at December 31, 1994 367,500 .200 - .312 .261
Options granted 210,000 .312 - .476 .423
Options expired (208,750) .200 - .312 .297
-----------------------------------------------------------------------
Balance at December 31, 1995 368,750 .200 - .476 .333
Options canceled (66,665) .476 .476
Options exercised (3,750) .312 .312
-----------------------------------------------------------------------
Balance at December 31, 1996 298,335 $.200 - $.476 $.310
=======================================================================
</TABLE>
A summary of option activity under the 1996 Plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE PRICE PER EXERCISE PRICE PER
NUMBER OF SHARES SHARE SHARE
-----------------------------------------------------------------------
<S> <C> <C> <C>
Options granted 547,525 $.200 $.200
-----------------------------------------------------------------------
Balance at December 31, 1996 547,525 $.200 $.200
=======================================================================
</TABLE>
At December 31, 1996, no option shares were available for grant under the 1993
Plans and 1,434,390 option shares were available for grant under the 1996 Plan.
Also at December 31, 1996, 193,126 options were exercisable under the 1993 Plans
at prices ranging from $.200 to $.476 (aggregating approximately $51,000), and
236,525 options were exercisable under the 1996 Plan at $.200 (aggregating
approximately $47,000). The remainder of the outstanding options become
exercisable on various dates through 2000.
Pro forma information regarding net loss is required for 1996 by SFAS No. 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value of these
options was estimated at the date of grant using a minimum value pricing model
with the following weighted-average assumptions for 1996: risk-free interest
rate of 6.2%; dividend yield of 0%; and a weighted-average expected life of the
option of four years.
PAGE 14
<PAGE> 15
Haystack Laboratories, Inc.
Notes to Financial Statements (continued)
6. STOCK OPTION PLANS (CONTINUED)
Option valuation models require the input of highly subjective assumptions.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. Based on the minimum value pricing
model and assumptions used, the pro forma net loss would not differ materially
from net loss as reported. The effects of applying Statement No. 123 for pro
forma disclosures are not necessarily indicative of future amounts due to the
prospective adoption of Statement No. 123, combined with the option vesting
characteristics.
7. INCOME TAXES
Effective May 9, 1996, the Company's election to be treated as an S Corporation
was terminated. As a result, the Company is subject to federal income taxes on
income recognized subsequent to that date. In accordance with SFAS No. 109,
Accounting for Income Taxes, deferred tax assets and liabilities were recognized
for temporary differences existing at the date the Company became a taxable
enterprise.
Deferred income taxes reflect the tax effects of temporary differences between
the carrying value of assets and liabilities for financial reporting purposes
and the amounts reported for income tax purposes. Significant components of the
Company's deferred tax assets are as follows as of December 31, 1996:
<TABLE>
<S> <C>
Deferred tax assets:
Change from accrual to cash method for tax $ 37,000
Net operating loss carryforwards 329,000
-----------------
Subtotal 366,000
Valuation allowance (366,000)
-----------------
Net deferred tax asset $ -
=================
</TABLE>
The Company has provided a valuation allowance on deferred tax assets due to
uncertainties regarding the realization of such assets.
As of December 31, 1996, the Company had net operating loss carryforwards of
approximately $890,000 which will expire in 2011, if not utilized. Utilization
of the net operating loss carryforwards may be subject to annual limitations in
the event of a significant change in ownership of the Company.
The following is a reconciliation of income taxes calculated at the U.S. federal
statutory rate to the provision for income taxes for 1996:
<TABLE>
<S> <C>
Tax benefit at U.S. statutory rate $(357,000)
State taxes, net of federal benefit (37,000)
S Corporation income not taxed at corporate level (66,000)
Effect of valuation allowance 366,000
Effect of change in tax status 92,000
Other 2,000
-----------------
Income tax expense $ -
=================
</TABLE>
PAGE 15
<PAGE> 16
(b) Unaudited Pro forma financial information
Introduction to Unaudited Pro Forma Combined Condensed Financial Information of
Trusted Information Systems, Inc. and Haystack Laboratories, Inc.
The following unaudited pro forma combined condensed financial information is
presented assuming the combination of Trusted Information Systems, Inc. ("TIS")
and Haystack Laboratories, Inc. ("Haystack") had occurred at the beginning of
each period presented on a pooling of interests basis.
The unaudited pro forma combined condensed balance sheets reflect the combined
historical balance sheets of TIS at December 27, 1996 and September 26, 1997 and
Haystack at December 31, 1996 and September 30, 1997. The unaudited pro forma
combined condensed statements of operations for the nine month periods ended
September 27, 1996 and September 26, 1997 reflect historical operating results
of TIS for such periods combined with historical operating results of Haystack
for the nine months ended September 30, 1996 and 1997, respectively.
For all applicable periods presented in the pro forma combined condensed
statements of operations, shares used in the computation of earnings per common
and common equivalent shares give effect to the appropriate exchange ratio.
The pro forma financial information is not necessarily indicative of the results
that would have been obtained had the combination occurred on the dates
indicated. The pro forma financial information should be read in conjunction
with the related historical financial statements and notes thereto of TIS and
Haystack previously reported or included herein.
On October 16, 1997, the Company acquired Haystack Laboratories, Inc., a
privately held Austin, Texas based software company. The following tables
illustrates pro forma data for the indicated period.
PAGE 16
<PAGE> 17
Unaudited Pro Forma Condensed Consolidated Balance Sheet
September 26, 1997
<TABLE>
<CAPTION>
Historical Historical
Trusted Haystack
Information Laboratories, Pro Forma
Systems, Inc. Inc. Adjustments Pro Forma
------------ --------------- ----------- ----------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 864,185 $ 225,613 $ 16,242 (2) $ 1,106,040
Money market accounts 32,997,374 -- (1,099,948) (1) 31,897,426
Accounts receivable 8,854,161 917,640 - 9,771,801
Unbilled Receivables 2,085,473 -- - 2,085,473
Inventory -- 38,568 - 38,568
Prepaid expenses and other current assets 1,624,998 -- - 1,624,998
Refundable income taxes 2,204,926 -- - 2,204,926
Deferred income taxes 528,634 -- - 528,634
----------- ----------- ----------- ---------------
Total current assets 49,159,751 1,181,821 (1,083,706) 49,257,866
Property and equipment, net of accumulated depreciation 7,691,785 231,547 - 7,923,332
Other assets 373,818 122,927 - 496,745
----------- ----------- ----------- ---------------
Total assets $ 57,225,354 $ 1,536,295 $(1,083,706 $ 57,677,943
=========== =========== =========== ===============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 537,025 $ 203,205 $ - $ 740,230
Accrued liabilities 6,595,544 255,756 - 6,851,300
Deferred revenue 3,118,529 729,227 - 3,847,756
Short-term borrowings - 350,000 (350,000) (1) -
Current portion of capital lease obligations 150,857 21,547 - 172,404
----------- ------------ ----------- ---------------
Total current liabilities 10,401,955 1,559,735 (350,000) 11,611,690
Notes payable, net of current portion 2,316,602 - - 2,316,602
Capital lease obligations (less current portion) - 749,948 (749,948) (1) -
Other non-current liabilities 43,894 - - 43,894
----------- ----------- ----------- ---------------
Total liabilities 12,762,451 2,309,683 (1,099,948) 13,972,186
</TABLE>
See accompanying notes.
PAGE 17
<PAGE> 18
Unaudited Pro Forma Condensed Consolidated Balance Sheet (continued)
September 26, 1997
<TABLE>
<CAPTION>
Historical Historical
Trusted Haystack
Information Laboratories, Pro Forma
Systems, Inc. Inc. Adjustments Pro Forma
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Commitments
Stockholders' equity (deficit):
7,366 (3)
Common stock 116,532 44 13,645 (5) 137,587
Series A Preferred stock -- 5,815 (5,815) (3) -
Series B Preferred stock -- 1,551 (1,551) (3) -
(13,645) (5)
Additional paid-in capital 47,036,156 2,914,006 690,043 (4) 50,626,560
Foreign currency translation adjustment (62,799) -- - (62,799)
16,242 (2)
Retained earnings (1,889,983) (3,694,804) (690,043) (4) (6,258,588)
Deferred stock compensation (737,003) - - (737,003)
------------ ----------- ----------- ------------
Total stockholders' equity (deficit) 44,462,903 (773,388) 16,242 43,705,757
------------ ----------- ----------- ------------
Total liabilities and stockholders'
equity (deficit) $ 57,225,354 $ 1,536,295 ($1,083,706 $ 57,677,943
------------ ----------- ----------- ------------
</TABLE>
(1) Pro forma payoff of Haystack debt paid at closing
(2) Pro forma interest expense reduction related to pro forma payoff of
Haystack debt paid at closing
(3) Pro forma conversion of Haystack preferred stock to common stock
(4) Pro forma recognition of additional compensation expense related to
Haystack cheap stock issued within three months prior to closing
(5) Pro forma conversion of Haystack options converted to TIS common
stock at closing
See accompanying notes.
PAGE 18
<PAGE> 19
Unaudited Pro Forma Condensed Consolidated Balance Sheet
December 27, 1996
<TABLE>
<CAPTION>
Historical Historical
Trusted Information Haystack Pro Forma
Systems, Inc. Laboratories, Inc. Adjustments Pro Forma
--------------------- -------------------- ------------------- ------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,838,787 $ 1,396,284 $ 2,076 (2) $ 3,237,147
Money market accounts 39,127,069 - (118,309) (1) 39,008,760
Accounts receivable 5,803,361 405,006 - 6,208,367
Unbilled Receivables 1,746,370 - - 1,746,370
Inventory - 30,409 - 30,409
Prepaid expenses and other current assets 952,822 - - 952,822
Refundable income taxes 1,507,121 - - 1,507,121
------------ ----------- ---------- -----------
Total current assets 50,975,530 1,831,699 (116,233) 52,690,996
Property and equipment, net of
accumulated depreciation 6,695,524 232,982 - 6,928,506
Other assets 332,539 23,054 - 355,593
------------ ----------- ---------- -----------
Total assets $ 58,003,593 $ 2,087,735 $ (116,233) $59,975,095
============ =========== ========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 906,706 $ 138,208 $ - $ 1,044,914
Accrued payroll and related expenses 2,470,429 170,259 - 2,640,688
Accrued expenses 1,861,648 - - 1,861,648
Deferred income taxes 403,324 - - 403,324
Deferred revenue 2,072,266 207,860 - 2,280,126
Short-term borrowings - - - --
Current portion of capital lease obligations 150,857 22,684 - 173,541
------------ ----------- ---------- -----------
Total current liabilities 7,865,230 539,011 - 8,404,241
Notes payable, net of current portion 2,424,355 - 2,424,355
Line of credit - 60,500 (60,500) (1) -
Capital lease obligations (less current portion) - 57,809 (57,809) (1) -
Other non-current liabilities 47,365 - - 47,365
------------ ----------- ---------- -----------
Total liabilities 10,336,950 657,320 (118,309) 10,875,961
</TABLE>
See accompanying notes.
PAGE 19
<PAGE> 20
Unaudited Pro Forma Condensed Consolidated Balance Sheet (continued)
December 27, 1996
<TABLE>
<CAPTION>
Historical Historical
Trusted Information Haystack Pro Forma
Systems, Inc. Laboratories, Inc. Adjustments Pro Forma
--------------------- -------------------- ------------------ --------------
<S> <C> <C> <C> <C>
Commitments
Stockholders' equity:
7,361 (3)
Common stock 114,897 - 13,694 (4) 135,952
Series A Preferred stock - 5,810 (5,810) (3) -
Series B Preferred stock - 1,551 (1,551) (3) -
Additional paid-in capital 46,809,343 2,902,875 (13,694) (4) 49,698,524
Unrealized gains, net of income taxes of
$932,828 1,495,162 - - 1,495,162
Foreign currency translation adjustment 12,663 - - 12,663
Retained earnings 178,861 (1,479,821) 2,076 (1) (1,298,884)
Deferred stock compensation (944,283) - - (944,283)
------------ - - -----------
Total stockholders' equity 47,666,643 1,430,415 2,076 49,099,134
------------ ----------- ---------- -----------
Total liabilities and stockholders' equity $ 58,003.593 $ 2,087,735 $ (116,233) $59,975,095
============ =========== ========== ===========
</TABLE>
(1) Pro forma payoff of Haystack debt paid at closing
(2) Pro forma interest expense reduction related to pro forma payoff of
Haystack debt paid at closing
(3) Pro forma conversion of Haystack preferred stock to common stock
(4) Pro forma conversion of Haystack options converted to TIS common
stock at closing
See accompanying notes.
PAGE 20
<PAGE> 21
Pro Forma Unaudited Condensed Consolidated Statements of Operations
Nine months ended September 26, 1997
<TABLE>
<CAPTION>
Historical Historical
Trusted Information Haystack Pro Forma
Systems, Inc. Laboratories, Inc. Adjustments Pro Forma
-------------------- ------------------ ------------- -----------
<S> <C> <C> <C> <C>
Total Revenues 28,481,270 1,309,031 - 29,790,301
Cost of revenues: 9,344,422 136,576 - 9,480,998
------------ ------------ -------- ------------
Gross margin 19,136,848 1,172,455 - 20,309,,303
Operating expenses:
Selling, general and administrative 19,115,685 2,839,401 690,043 (2) 22,645,126
Research and development 5,873,295 550,531 - 6,423,826
------------ ------------ -------- ------------
Total operating expenses 24,988,980 3,389,932 690,043 29,068,955
------------ ------------ -------- ------------
Loss from operations (5,852,132) (2,217,477) 690,043 (8,759,652)
Other income (expense):
Interest and other income 1,452,856 18,515 - 1,471,371
Interest expense (162,188) (16,242) 16,242 (1) (162,188)
Other income (expense) net - 221 - 221
Non-recurring gain on sale of marketable
securities 1,670,377 - - 1,670,377
------------ ------------ --------- ------------
2,961,045 2,494 16,242 2,979,781
------------ ------------ --------- ------------
Loss before income taxes (2,891,087) (2,214,983) (673,801) (5,779,871)
Income tax provision (benefit) (822,243) - - (822,243)
------------ ------------ --------- ------------
Net loss $ (2,068,844) $ (2,214,983) (673,801) $ (4,957,628)
============ ============ ========= ============
Net (loss) per share $ (0.18) $ ( 1.27) $ (0.41)
Weighted average shares
outstanding 11,569,109 1,743,646 11,981,185
</TABLE>
(1) Pro forma interest expense reduction related to pro forma payoff of
Haystack debt paid at closing
(2) Pro forma recognition of additional compensation expense related to
Haystack cheap stock issued within three months prior to closing
See accompanying notes.
PAGE 21
<PAGE> 22
Pro Forma Unaudited Condensed Consolidated Statements of Operations
Nine months ended September 27, 1996
<TABLE>
<CAPTION>
Historical Historical
Trusted Information Haystack Pro Forma
Systems, Inc. Laboratories, Inc. Adjustments Pro Forma
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Revenues 16,962,600 531,263 - 17,493,863
Cost of revenues: 8,567,225 64,032 - 8,631,257
Gross margin 8,396,375 467,231 - 8,862,606
Operating expenses:
Selling, general and administrative 8,345,411 853,056 - 9,198,467
Research and development 2,184,696 239,488 - 2,424,184
----------- ---------- ------ -----------
Total operating expenses 10,530,107 1,092,544 - 11,622,651
----------- ---------- ------ -----------
Loss from operations (2,134,732) (625,313) - (2,760,045)
Other income (expense):
Interest and other income 21,867 42,049 - 63,916
Interest expense (334,880) (516) 516(1) (334,880)
----------- ---------- ------ -----------
(313,013) 41,533 516 (270,964)
----------- ---------- ------ -----------
Loss before income taxes (2,447,745) (583,780) 516 (3,031,009)
Income tax provision (benefit) (1,041,077) - - (1,041,077)
----------- ---------- ------ -----------
Net loss $(1,406,668) $(583,780) 516 $(1,989,932)
=========== ========== ====== ===========
Net (loss) per share $(0.18) $(0.38) $(0.24)
====== ====== ======
Weighted average shares
outstanding 7,915,561 1,539,960 8,279,500
</TABLE>
(1) Pro forma interest expense reduction related to pro forma payoff of
Haystack debt paid at closing
See accompanying notes.
PAGE 22
<PAGE> 23
Pro Forma Unaudited Condensed Consolidated Statements of Operations
For the year ended December 27, 1996
<TABLE>
<CAPTION>
Historical Historical
Trusted Information Haystack Pro Forma
Systems, Inc. Laboratories, Inc. Adjustments Pro Forma
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Revenues 26,370,081 1,005,187 - 27,375,268
Cost of revenues: 12,193,453 109,857 - 12,303,310
------------ ------------ ----- ------------
Gross margin 14,176,628 895,330 - 15,071,958
Operating expenses:
Selling, general and administrative 13,841,618 1,631,241 - 15,472,859
Research and development 3,936,825 373,066 - 4,309,891
------------ ------------ ----- ------------
Total operating expenses 17,778,443 2,004,307 - 19,782,750
------------ ------------ ----- ------------
Loss from operations (3,601,815) (1,108,977) - (4,710,792)
Other income (expense):
Interest and other income 456,345 62,059 - 518,404
Interest expense (415,243) (2,076) 2,076 (1) (415,243)
------------ ------------ ----- ------------
41,102 59,983 2,076 103,161
------------ ------------ ----- ------------
Loss before income taxes (3,560,713) (1,048,994) 2,076 (4,607,631)
Income tax provision (benefit) (1,396,510) -- - (1,396,510)
------------ ------------ ----- ------------
Net loss $ (2,164,203) $ (1,048,994) 2,076 $ (3,211,121)
============ ============ ===== ============
Net (loss) per share $ (0.25) $ ( 0.66) $ (0.36)
Weighted average shares
outstanding 8,645,862 1,595,896 9,023,020
</TABLE>
(1) Pro forma interest expense reduction related to pro forma payoff of
Haystack debt paid at closing
See accompanying notes.
PAGE 23
<PAGE> 24
Pro Forma Unaudited Condensed Consolidated Statements of Operations
For the year ended December 29, 1995
<TABLE>
<CAPTION>
Historical Historical
Trusted Information Haystack Pro Forma
Systems, Inc. Laboratories, Inc. Adjustments Pro Forma
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Revenues 18,090,087 414,233 - 18,504,320
Cost of revenues: 10,864,947 57,429 - 10,922,376
----------- ---------- - -----------
Gross margin 7,225,140 356,804 - 7,581,944
Operating expenses:
Selling, general and administrative 3,727,701 291,677 - 4,019,378
Research and development 1,144,737 117,417 - 1,262,154
----------- ---------- - -----------
Total operating expenses 4,872,438 409,094 - 5,281,532
----------- ---------- - -----------
Income (loss) from operations 2,352,702 (52,290) - 2,300,412
Other income (expense):
Interest and other income 50,276 12,908 - 63,184
Interest expense (158,778) - - (158,778)
----------- ---------- - -----------
108,502) 12,908 - (95,594)
----------- ---------- - -----------
Income (loss) before income taxes 2,244,200 (39,382) - 2,204,818
Income tax provision (benefit) 900,137 - - 900,137
----------- ---------- - -----------
Net income (loss) $ 1,344,063 $ (39,382) - $ 1,304,681
=========== ========== = ===========
Net income (loss) per share $ 0.15 $ ( 0.03) $ 0.14
Weighted average shares
outstanding 8,884,755 1,372,150 9,209,035
</TABLE>
See accompanying notes.
PAGE 24
<PAGE> 25
Pro Forma Unaudited Condensed Consolidated Statements of Operations
For the year ended December 30, 1994
<TABLE>
<CAPTION>
Historical Historical
Trusted Information Haystack Pro Forma
Systems, Inc. Laboratories, Inc. Adjustments Pro Forma
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Revenues 13,117,152 210,510 - 13,327,662
Cost of revenues: 8,202,657 51,729 - 8,254,386
----------- -------------- - -----------
Gross margin 4,914,495 158,781 - 5,073,276
Operating expenses:
Selling, general and administrative 2,997,806 218,229 - 3,216,035
Research and development 646,001 113,227 - 759,228
----------- -------------- - -----------
Total operating expenses 3,643,807 331,456 - 3,975,263
----------- -------------- - -----------
Income (loss) from operations 1,270,688 (172,675) 1,098,013
Other income (expense):
Interest and other income 44,635 2,529 - 47,164
Interest expense (134,236) - - (134,236)
----------- -------------- - -----------
(89,601) 2,529 - (87,072)
----------- -------------- - -----------
Income (loss) before income taxes 1,181,087 (170,146) - 1,010,941
Income tax provision (benefit) 505,646 - - 505,646
----------- -------------- - -----------
Net income (loss) $ 675,441 $ (170,146) - $ 505,295
=========== ============== = ===========
Net income (loss) per share $ 0.08 ($0.12) $ 0.06
Weighted average shares
outstanding 8,525,910 1,372,150 8,850,190
</TABLE>
See accompanying notes.
PAGE 25
<PAGE> 26
Notes to Unaudited Pro Forma Combined Condensed Balance Sheets At September 26,
1997 And December 27, 1996, and Statements of Operations For the Nine Months
September 26, 1997 and September 27, 1996 and The Years December 27, 1996,
December 29, 1995, and December 30, 1994
(1) Pro forma payoff of Haystack debt paid at closing
(2) Pro forma interest expense reduction related to pro forma payoff of
Haystack debt paid at closing
(3) Pro forma conversion of Haystack preferred stock to common stock
(4) Pro forma recognition of additional compensation expense related to
Haystack cheap stock issued within three months prior to closing
(5) Pro forma conversion of Haystack options converted to TIS common
stock at closing
(6) There are no intercompany or related party transactions between TIS
and Haystack which need to be eliminated
PAGE 26
<PAGE> 27
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Trusted Information Systems, Inc.
December 23, 1997 By: /s/ Stephen T. Walker
- ------------------- ------------------------------------------------
Date Stephen T. Walker, President and Chief Executive
Officer
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated March 11, 1997, with respect to the
financial statements of Haystack Laboratories, Inc. for the year ended December
31, 1996 included in the Form 8-K/A filing of Trusted Information Systems, Inc.
(amendment to Form 8-K No. 000-21-67 dated October 16, 1997), and incorporated
by reference in the Registration Statements (Form S-8) of Trusted Information
Systems, Inc. listed below, filed with the Securities and Exchange Commission.
<TABLE>
<S> <C>
1) No. 333-20311 1994 Stock Option Plan
2) No. 333-20313 Amended and Restated 1996 Stock Option Plan
3) No. 333-24849 Amended and Restated 1996 Director's Stock Option Plan
4) No. 333-30971 1997 Employees Stock Purchase Plan
</TABLE>
/s/ Ernst & Young LLP
Austin, Texas
December 19, 1997
