<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 22, 1999
CYBERGUARD CORPORATION
(Exact name of registrant as specified in its charter)
COMMISSION FILE NUMBER: 0-24544
FLORIDA 65-0510339
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
2000 WEST COMMERCIAL BOULEVARD, SUITE 200, FORT LAUDERDALE, FLORIDA 33309
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (954) 958-3900
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
The following exhibits are included in this report.
(c) Exhibits
(i) Forward Looking Statements
(ii) Audited Financial Statements for the fiscal years ended June
30, 1998 and 1997.
(iii) Quarterly Restatements for fiscal years 1998 and 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on behalf
of the undersigned, thereunto duly authorized.
CYBERGUARD CORPORATION
By: /s/ DAVID R. PROCTOR
David R. Proctor
Chairman of the Board of Directors and
Chief Executive Officer
Dated: July 24, 1999
<PAGE> 3
Exhibit 7 (c) (i) FORWARD-LOOKING STATEMENTS
Statements regarding future products, future prospects, business plans
and strategies, future revenues and revenue sources, future liquidity and
capital resources, computer network security market directions, future
acceptance of the Company's products, possible growth in markets, possible
resolution of loss contingencies, as well as other statements contained in this
Report on Form 8-K that address activities, events or developments that the
Company expects, believes or anticipates will or may occur in the future, and
similar statements are forward looking statements.
These statements are based upon assumptions and analyses made by the Company in
light of current conditions, future developments and other factors the Company
believes are appropriate in the circumstances, or information obtained from
third parties and are subject to a number of assumptions, risks and
uncertainties. Readers are cautioned that forward looking statements are not
guarantees of future performance and that the actual results might differ
materially from those suggested or projected in the forward looking statements.
Some of the factors that might cause future actual events to differ from those
predicted or assumed include: future advances in technologies and computer
security; risks related to the early stage of the Company's existence and its
products' development; the Company's ability to execute on its business plans;
the Company's dependence on outside parties such as its key customers and
alliance partners; competition from major computer hardware, software, and
networking companies; risk and expense of Government regulation and effects on
changes in regulation; the limited experience of the Company in marketing its
products; uncertainties associated with product performance liability; risks
associated with growth and expansion; risks associated with obtaining patent and
intellectual property right protection; uncertainties in availability of
expansion capital in the future and other risks associated with capital markets.
In addition, certain recent events that have occurred also are factors that
might cause future actual events to differ from those predicted or assumed,
including: the Company's announcement in August 1998, regarding the resignation
of KPMG Peat Marwick as its independent accountants and the subsequent
engagement of PricewaterhouseCoopers LLP as the Company's independent
accountants; the restatement of financial results for the Company's 1997 fiscal
year and the three fiscal quarters ended September 30, 1997, December 31, 1997,
and March 31, 1998; the suspension or retirement of three of the Company's
executive officers during August, 1998 (with the suspended officers subsequently
resigning their positions); the filing of twenty-five purported class action
lawsuits against the Company and certain current and former officers and
directors relating to the restatement of financial results noted above; the sale
of assets of the Company's ARCA Systems, Inc. subsidiary; the delinquency in
filing the Company's Form 10-K Annual Report for its fiscal year ended June 30,
1998 and other reports that are required to be filed under the Securities
Exchange Act of 1934 (which, among other things, caused the Company to be
delisted from the NASDAQ National Market, and restricts the Company from being
able to use Form S-3, a simplified method of registering securities for sale
with the Securities and Exchange Commission). The forward looking statements
herein involve assumptions, risks and uncertainties, including, but not limited
to economic, competitive, operational, management, governmental, litigation and
technological factors affecting the Company's operations, liquidity, capital
resources, markets, strategies, products, prices and other factors discussed
elsewhere herein and in the other documents filed by the Company with the
Securities and Exchange Commission. Many of the foregoing factors are beyond the
Company's control.
<PAGE> 4
EXHIBIT 7 (c) (ii) AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED JUNE
30, 1998 AND 1997
TABLE OF CONTENTS
Report of Independent Accountants
Consolidated Balance Sheets as of June 30, 1998 and June 30, 1997
Consolidated Statements of Operations for year ended June 30, 1998, and the year
ended June 30, 1997
Consolidated Statements of Cash Flows for the year ended June 30, 1998, and the
year ended June 30,1997
Consolidated Statements of Changes in Shareholders' Equity for the year ended
June 30,1998 and the year ended June 30, 1997
Notes to Consolidated Financial Statements
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of
CyberGuard Corporation and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows and changes in
shareholders' equity, after the restatement described in Note 2, present fairly,
in all material respects, the financial position of CyberGuard Corporation and
its Subsidiaries at June 30, 1998 and 1997, and the results of their operations
and cash flows for the years then ended, in conformity with generally accepted
accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with generally accepted auditing standards,
which 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 consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As further described in Note 2, the Company restated its 1997 and 1996
financial statements previously audited by other independent accountants.
PricewaterhouseCoopers LLP
Atlanta, Georgia
July 22, 1999
<PAGE> 6
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,773 $ 2,975
Restricted cash 650
Accounts receivable, less allowance for
uncollectible accounts of $450 and $148
at June 30, 1998 and June 30, 1997, respectively 3,334 5,275
Inventories, net 916 1,568
Capitalized software development, net 548
Other current assets 166 265
Securities available for sale 1,307
Receivable from sale of Arca Systems, Inc. 3,261
-------- --------
Total current assets 10,100 11,938
-------- --------
Property and equipment, net 1,761 1,630
Non-compete agreements, net 840 1,120
Goodwill, net 96 122
Other assets 279 395
-------- --------
Total assets $ 13,076 $ 15,205
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Line of credit and note payable $ 2,198
Accounts payable 2,383 $ 2,109
Deferred revenue 1,288 1,418
Accrued expenses and other liabilities 2,619 2,353
-------- --------
Total current liabilities 8,488 5,880
-------- --------
Commitments and contingencies - Note 14
Shareholders' equity:
Common stock par value $0.01 authorized 20,000,000
shares; issued and outstanding 8,902,699 shares
and 7,452,314 shares at June 30, 1998 and
June 30, 1997, respectively 89 75
Additional paid in capital 72,999 59,507
Accumulated deficit (68,360) (50,096)
Unrealized loss on securities available for sale (35)
Cumulative foreign currency translation adjustment (140) (126)
-------- --------
Total shareholders' equity 4,588 9,325
-------- --------
Total liabilities and shareholders' equity $ 13,076 $ 15,205
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 7
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Products $ 13,563 $ 13,135
Services 1,989 1,089
----------- -----------
15,552 14,224
----------- -----------
Cost of Revenues:
Products 5,044 6,672
Services 685 572
----------- -----------
5,729 7,244
----------- -----------
Gross Profit 9,823 6,980
Operating Expenses:
Research and development 5,767 4,723
Selling, general and administrative 20,216 15,133
----------- -----------
Total operating expenses 25,983 19,856
Operating loss (16,160) (12,876)
Interest income, net 399 646
Other income (expense), net 11 (200)
Loss on sale of Arca Systems, Inc. (2,386)
Loss on sale of securities available for sale (128) (5,012)
----------- -----------
(2,104) (4,566)
Net loss $ (18,264) $ (17,442)
=========== ===========
Basic and fully-diluted loss per common share $ (2.17) $ (2.46)
=========== ===========
Weighted average number of shares outstanding 8,423,011 7,100,014
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 8
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, June 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss $(18,264) $(17,442)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation 856 546
Amortization 888 2,861
Provision for inventory reserve 274 131
Provision for uncollectible accounts 500 327
Compensation and benefits 256 125
Loss on sale of securities available for sale 128 5,012
Loss on sale of Arca Systems, Inc. 2,386
Changes in assets and liabilities net of effect of 1997 acquisition:
Accounts receivable 1,440 (1,905)
Inventories 379 (1,550)
Accounts payable 274 2,109
Accrued expenses and other liabilities 266 (1,647)
Deferred revenue (130) 1,214
Other, net 91 (494)
-------- --------
Net cash used by operating activities (10,656) (10,713)
Cash flows used by investing activities:
Additions to property and equipment (911) (530)
Purchase of business, net of cash acquired (450) (400)
Advances to Arca Systems, Inc. (417)
-------- --------
Net cash used by investing activities (1,778) (930)
Cash flows from financing activities:
Proceeds (repayments) from line of credit 1,548 (3,200)
Proceeds from sale of securities 1,214 12,363
Proceeds from sale of common stock 8,470 1,838
-------- --------
Net cash provided by financing activities 11,232 11,001
-------- --------
Net decrease in cash and cash equivalents (1,202) (642)
Cash and cash equivalents at beginning of the period 2,975 3,617
-------- --------
Cash and cash equivalents at end of the period $ 1,773 $ 2,975
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 9
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Unrealized Cumulative
Loss on Foreign
Additional Securities Currency
Common Stock Paid in Accumulated Available Translation
Shares Amount Capital Deficit for Sale Adjustment Total
---------- ------ ---------- ----------- ---------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1996, as previously
reported 6,709,371 $ 67 $56,152 $(37,210) $(764) $18,245
Restatement 4,556 522 5,078
---------- ------ ------- -------- ------ ----- -------
Balance June 30, 1996, as restated 6,709,371 67 56,152 (32,654) (242) 23,323
Net loss (17,442) (17,442)
Change in market value of
securities available for sale (35) (35)
Translation adjustment 116 116
Issuance of common stock, for
the non compete agreement 91,800 1 1,399 1,400
Issuance of common stock 651,143 7 1,956 1,963
---------- ------ ------- -------- ------ ----- -------
Balance June 30, 1997, as restated 7,452,314 75 59,507 (50,096) (35) (126) 9,325
Net loss (18,264) (18,264)
Translation adjustment (14) (14)
Change in market value of securities
available for sale 35 35
Issuance of common stock 1,450,385 14 8,711 8,725
Issuance of common stock for the
Arca investment 590,429 6 5,513 5,519
Receipt and retirement of common
stock for the Arca investment (590,429) (6) (732) (738)
---------- ------ ------- -------- ------ ----- -------
Balance June 30, 1998 8,902,699 $ 89 $72,999 $(68,360) $(140) $4,588
========== ====== ======= ======== ====== ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE> 10
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The consolidated financial statements are prepared on the basis of
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements as well as the reported amounts of revenues
and expenses during the reported periods. Significant estimates include those
made for software development costs, reserve for inventories, the allowance for
uncollectable accounts, and contingencies. Actual results could differ from
those estimates.
The consolidated financial statements of CyberGuard Corporation and
Subsidiaries (the "Company") include the accounts of the Company and its
subsidiaries over which it maintains control. Majority owned subsidiaries where
control is temporary are carried on the cost basis. All significant intercompany
balances and transactions have been eliminated.
The Company's operating results and financial condition may be impacted
by a number of factors including, but not limited to the following, any of which
could cause actual results to vary materially from current and historical
results or the Company's anticipated future results. A portion of the Company's
revenue is derived from its international operations and sources. As a result,
the Company's operations and financial results have been affected by
international factors such as changes in foreign currency exchange rates or weak
economic conditions in the international markets in which the Company
distributes its products. The network security industry is highly competitive
and competition is expected to intensify. There are numerous companies competing
in segments of the market in which the Company does business. Competitors
include organizations significantly larger and with more development, marketing
and financial resources than the Company.
In addition, the Company is subject to risks and uncertainties which
include, but are not limited to the timely development of and acceptance of new
products, impact of competitive products, regulation, inventory obsolescence,
the ultimate outcome of certain litigation matters, and cash balances in excess
of federally insured limits.
The Company provides a full suite of products and services for the
network security industry. The products offered by the Company include the
CyberGuard(R) Firewall, proprietary and third-party technology (such as Virtual
Private Network, authentication, virus scanning, encryption, advanced reporting,
high availability and centralized management), and consulting, support, and
installation services.
<PAGE> 11
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) RESTATEMENT
The Company restated its 1997 and 1996 financial statements previously
audited by other independent accountants.
The following table depicts the components of the restatement:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accumulated deficit as previously reported $(49,700) $(37,210)
Prior year adjustments 4,556
Adjustments
Restore capitalized software development costs written off
during fiscal 1996 and subsequent amortization during fiscal 1997 (2,539) 3,087
Reduction (recognition) of expenses due to changes in timing of
expense accrual (892) 1,196
Change in value of securities available for sale (598) 846
Write off of foreign currency translation adjustment related to
subsidiaries sold during fiscal 1996 522 (522)
Increase in receivable allowance for uncollectible accounts (51)
Deferral of revenue due to changes in timing of revenue recognition (1,374)
Change in components of TradeWave acquisition 255
Write off of inventory and other current assets (159)
Recognition of amounts related to prepaid licenses and post
contract customer support (167)
-------- --------
Net Adjustments (396) 4,556
-------- --------
Accumulated deficit, as adjusted $(50,096) $(32,654)
======== ========
1997
--------
Net loss, as previously reported $(12,490)
========
Net loss, restated $(17,442)
========
Net loss per share, as previously reported $ (1.76)
========
Net loss per share, restated $ (2.46)
========
</TABLE>
<PAGE> 12
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) SIGNIFICANT ACCOUNTING POLICIES
Inventories--Inventories consist primarily of purchase component parts
and are carried at the lower of cost, determined by the First-In-First-Out
(FIFO) method or market. The Company maintains a reserve for its estimate of
excess, obsolete and damaged goods based on historical and forecasted usage.
Long-Lived Assets--Property and equipment is carried at cost.
Depreciation is computed by the straight-line method using the estimated useful
lives of the assets which range from 3 to 10 years. Maintenance and repairs are
charged to expense as incurred. Upon sale, retirement or other disposition of
these assets, the cost and the related accumulated depreciation are removed from
the respective accounts and any gain or loss on the disposition is included in
the consolidated statement of operations. The Company evaluates the
recoverability of all its long-lived assets including intangibles and goodwill.
If the sum of the undiscounted future cash flows is less than the carrying
amount of the asset, an impairment loss is recognized as the amount by which the
carrying amount of the asset exceeds its fair value.
Software Development Costs--The Company capitalizes costs related to
the development of certain software products in accordance with Statement of
Financial Accounting Standards No. 86 "Accounting For the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed" which requires
capitalization to begin when technological feasibility has been established and
ends when the product is available for general release to customers. Software
development costs incurred prior to technological feasibility defined by
completion of a working model are considered research and development costs and
are expensed as incurred. Capitalized costs are amortized as the greater of the
amount computed using the ratio that current revenues for a product bear to the
total current and anticipated future revenues for that product or the
straight-line method over five years.
During 1998 and 1997, the period between established technological
feasibility and the general release has been less than three months and software
development costs qualifying for capitalization have been minimal. Accordingly,
the Company has not capitalized any software development costs for those years.
Revenue Recognition--The Company accounts for software revenues in
accordance with the American Institute of Certified Public Accountants Statement
of Position 91-1, "Software Revenue Recognition". Revenues earned under software
license agreements are generally recognized when the software has been shipped,
payment is due within one year, collectibility is probable, and there are no
significant vendor obligations. When factors indicate that fees in a reseller or
distributor arrangement are not fixed or that a reasonable basis for estimating
the degree of collectibility of the receivable does not exist, revenue is
recognized as cash is received. Certain arrangements with distributors and
resellers are under terms which allow for those distributors to receive price
protection based on future price reductions and allow limited rights of return.
The Company provides an allowance for uncollectible accounts which includes
returns and price protection. Revenue on post contract customer support is
deferred and amortized by the straight-line method over the term of the
contracts.
Income Taxes--The provision for income taxes and corresponding balance
sheet accounts are determined in accordance with SFAS No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax liabilities and assets
are determined based on the temporary differences between the bases of certain
assets and liabilities for income tax and financial reporting purposes. The
deferred tax assets and liabilities are classified according to the financial
statement classification of the assets and liabilities generating the
differences. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount which more likely than not is expected to be
realized.
<PAGE> 13
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Foreign Currency Translation--All balance sheet accounts denominated in
foreign currency are translated into U.S. dollars at the current exchange rate
as of the end of the accounting period. Income statement items are translated at
weighted-average currency exchange rates. The Company will continue to be
exposed to the effects of foreign currency translation adjustments. Gains and
losses resulting from foreign currency transactions denominated in a currency
other than the functional currency are included in net loss. Gains and losses
relative to intercompany foreign currency transactions, for which settlement is
not planned or anticipated are excluded from net loss and reflected as
cumulative translation adjustments.
Cash Equivalents and Restricted Cash--The Company considers all
investments purchased with an original maturity of three months or less at the
time of purchase to be cash equivalents. Restricted cash is unavailable to the
Company until certain contractual terms and conditions are met.
Marketable Securities--The Company accounts for marketable securities
in accordance with the SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS No. 115"). In accordance with the provisions of
SFAS No. 115, marketable securities, which have been classified by the Company
as available for sale, are carried at market value, with the unrealized gains or
losses, net of tax, reported as a separate component of shareholders' equity.
Net Loss Per Common Share--In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement No. 128 ("SFAS 128"). This statement
establishes standards for computing and presenting earnings per share ("EPS").
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. SFAS 128 requires restatement of all prior period
EPS data presented. Potential common stock is in the form of stock options which
do not have an effect on diluted net loss per share calculations due to its
anti-dilutive effect.
(4) LIQUIDITY AND CAPITAL RESOURCES
The consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities in normal course of business. The Company has suffered recurring
losses from operations resulting in net cash used in operating activities. In
addition, violations of covenants in debt agreements have resulted in
classification of all of its debt as current as of June 30, 1998. Management's
financing plans include the sale of certain assets and the issuance of debt as
well as the potential issuance of equity securities. Accordingly, management
believes that the Company's consolidated financial statements are appropriately
prepared on a going concern basis.
The Company and certain former officers and directors were named in
twenty-five shareholder lawsuits. The plaintiffs sued for unspecified
compensatory damages, legal fees, and litigation costs. The Company is unable to
predict the ultimate outcome or potential financial impact of this litigation.
The consolidated financial statements do not include any adjustments
relating to the realization of assets and the recognition and satisfaction of
liabilities that might be necessary as a result of these matters.
<PAGE> 14
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) REAL TIME BUSINESS
In May 1995, the Company separated its business operation into two
units: the Real Time Division, responsible for equipment development, and the
Trusted Systems Division, responsible for network security product development.
On February 8, 1996, the Company and Concurrent Computer Corporation
("Concurrent") announced the sale of the Real Time Division to Concurrent which
became effective under the Purchase and Sale Agreement effective March 26, 1996
and amended and restated as of May 23, 1996 (hereinafter referred to as the
"Agreement").
The Agreement was approved by the shareholders of both companies on
June 27, 1996 and the transaction was closed effective June 30, 1996. In
connection with this sale, the Company changed its fiscal year end from
September 30 to June 30 becoming effective in the year beginning October 1,
1995.
Under the Agreement, the Company sold the net assets of its Real Time
Division with a book value of $21,561 and issued 683,178 shares of its common
stock valued at $1,804 to Concurrent in exchange for (a) 10,000,000 newly issued
shares of Concurrent common stock, par value $0.01 per share valued at $10,700,
and (b) convertible preferred stock of Concurrent paying a 9% cumulative annual
dividend quarterly in arrears valued at $4,699. The preferred stock was
redeemable by Concurrent when the current market price of Concurrent's common
stock exceeded $3.75 per share and was mandatory redeemable on June 27, 2006 at
the liquidation preference of $6,264 plus any unpaid dividends at that date. The
conversion ratio for the preferred stock was based on the liquidation preference
divided by the conversion price per the Agreement, set at $2.50 per share.
At June 30, 1996, the Company sold its interest in 2,000,000 shares of
Concurrent common stock recognizing no gain or loss on the sale. During 1997,
all of the convertible preferred stock was converted to Concurrent common stock
and accounted for as securities available for sale. During 1997, the Company
sold a total of 9,950,000 shares recognizing a total loss on sale of those
shares of $5,012. At June 30, 1997, the securities available for sale were
valued at their market value of $1,007 with a net unrealized holding loss
recorded to shareholder's equity of $35. At June 30, 1997, the securities
available for sale also included $300 of cumulative dividends receivable on
preferred stock. During 1998, the remaining shares of Concurrent common stock
were sold at a loss of $128.
(6) TRADEWAVE
On April 9, 1997, the Company purchased substantially all the assets of
TradeWave Corporation ("TradeWave"). The transaction was accounted for as a
purchase and, accordingly, TradeWave's results are included in the consolidated
financial statements since the date of acquisition. The aggregate purchase price
was approximately $356. The fair value of identifiable net assets acquired was
approximately $211. Approximately $129 has been accounted for as goodwill and is
being amortized over its useful life of five years. Additionally, at the time of
acquisition, a deferred charge of $133 was recorded representing restricted
stock grants to TradeWave employees. The charge was expensed in 1998 over the
course of the vesting period of the restricted stock grants none of which
exceeded twelve months.
During September 1998, the Company's Board of Directors authorized a
plan to dispose of certain net assets of its TradeWave division, and on
September 14, 1998 the Company announced the sale of TradeWave's Galaxy Internet
search engine ("Galaxy") for approximately $2,000. In addition, on April 30,
1999, the Company sold substantially all the remaining assets of its TradeWave
division to Digital Signature Trust Co. ("DST") for $810 and the assumption of
certain liabilities. A definitive Asset Purchase Agreement was entered into that
has certain development deadlines. An escrow account has been established to set
aside fifty percent (50%) of the purchase price until the terms of the asset
purchase agreement are met. The Company will record these transactions during
fiscal year 1999.
<PAGE> 15
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In June 1999, CyberGuard filed a lawsuit against DST in state court in
Austin, Texas. The Company alleged breach of contract, tortious interference and
fraud. Also in June 1999, DST filed a lawsuit against the Company in federal
court in Salt Lake City, Utah, alleging fraud, negligent misrepresentation,
unjust enrichment, with unspecified damages, and rescission and reformation of
contract. Both actions are currently tolled due to ongoing negotiations towards
settlement between the Company and DST.
(7) ARCA SYSTEMS, INC.
On June 17, 1998 the Company completed the acquisition of Arca Systems, Inc.
("Arca"), a privately held information professional security service firm, for
590,429 shares of its common stock. However, on October 5, 1998, the Company
sold all the assets of Arca. As a result, the transaction is presented as a
receivable from the sale of Arca and accounted for on the cost basis, at its net
realizable value at June 30, 1998 because of the temporary control the Company
had over this majority owned subsidiary. The investment amount was based on the
fair value of the common stock issued, using an average of its quoted market
value a few days before and after the acquisition announcement date, and other
direct costs.
In response to the Company's announcement on August 24, 1998, that
revenues for certain 1998 quarters would be restated, the previous shareholders
of Arca threatened legal action under the purchase agreement. On October 5, 1998
the Company completed the sale of the net assets of Arca to Exodus
Communications. In exchange for the net assets of Arca, the Company received
approximately $3,261, the return of the previously issued 590,429 shares of the
Company's common stock and the release of any potential legal claims the Arca
shareholders might have had against the Company. The disposition resulted in a
settlement loss that was recorded in the fourth quarter of fiscal 1998 of $2,386
which was determined based on the Company's investment in and advances to Arca
less the $3,261 cash received and the 590,429 shares of common stock at its fair
value using its quoted market value on the return date. The shares were assumed
to be retired effective June 30, 1998.
(8) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
-------- --------
<S> <C> <C>
Property and equipment $ 3,286 $ 2,877
Purchased software for internal use 415 198
Leasehold improvement 37 27
-------- --------
Subtotal 3,738 3,102
-------- --------
Less: accumulated depreciation (1,977) (1,472)
-------- --------
Property and equipment, net $ 1,761 $ 1,630
======== ========
</TABLE>
<PAGE> 16
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) NON-COMPETE AGREEMENTS
In connection with the sale of the Real Time Business, the Company
entered into non-compete agreements for a period of five years with two former
officers of the Company. In consideration for these non-compete agreements,
these officers received 91,800 shares of the Company's common stock. These
shares were valued at market price as of the date of the agreement, June 28,
1996. These amounts will be amortized over the life of the agreement. The
amortization expense was $280, for the years ended June 30, 1998 and 1997,
respectively.
(10) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Salaries, wages and other compensation $ 794 $1,052
Accrued interest and sundry taxes 243 96
Accrued professional service fee 958 238
Other payables 624 967
-------------- -------------
$2,619 $2,353
============== =============
</TABLE>
(11) LINE OF CREDIT AND NOTE PAYABLE
On April 1, 1996, the Company entered into a loan agreement with
Foothill Capital Corporation ("Foothill") pursuant to which Foothill agreed to
make revolving advances to the Company on an amount of up to $5,000 subject to
certain borrowing base requirements and at an interest rate equal to prime, plus
two percent. As collateral for the loan, the Company granted Foothill a security
interest in its assets (including the Concurrent common and preferred stock). In
addition, the Company granted Foothill warrants to purchase 100,000 shares of
common stock at a price equal to the lower of the price of a share of common
stock issued to the public pursuant to a registration statement or $17.00 per
share. In August 1996, the Foothill loan of $3,200 was repaid.
On December 30, 1997, the Company entered into a $3,350 asset-based
revolving line of credit and a $650 Term Note Agreement with Coast Business
Credit ("Coast"). Interest is charged at the prime rate plus 2.0% (at June 30,
1998). The credit facility is collateralized by all of the tangible assets and
intellectual property of the Company. Availability under the revolving credit
facility is limited to 80% of eligible accounts receivable and 30% of qualified
inventory up to a maximum availability of $300 on eligible inventory. The term
note is for a period of three years and payable in thirty-nine monthly
installments. The Company has presented the $650 cash compensating balance equal
to the amount of the term loan as restricted cash. As of June 30, 1998, there
was $2,198 outstanding under the agreement, all of which was classified as a
current liability. The Company estimates that the fair value of the line of
credit and note payable approximates carrying value based upon its effective
current borrowing rate.
<PAGE> 17
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(12) INCOME TAXES
The components of deferred income tax assets (liabilities) are as
follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS AND LIABILITIES June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Accrued expenses $ 537 $ 946
Depreciation and amortization (444) (1,078)
Net operating loss carryforwards 18,991 14,618
Capital loss carryforwards 2,697 2,494
Other Deferred tax assets(liabilities) 859 (67)
Valuation allowance (22,640) (16,913)
------------- -------------
Net deferred income tax liability -- --
============= =============
</TABLE>
A reconciliation of the effective income tax rate and the statutory
United States income tax rate follows:
<TABLE>
<CAPTION>
Year ended Year ended
June 30, June 30,
1998 1997
------ ------
<S> <C> <C>
Statutory U.S. income tax rate (34.0%) (34.0%)
Loss on sale of Arca 5.1% 0.0%
State taxes (3.0%) (3.0%)
Other 0.8% 1.0%
Valuation Allowance 31.1% 36.0%
------ ------
Effective income tax rate 0.0% 0.0%
====== ======
</TABLE>
As of June 30, 1998, the Company had U.S. net operating loss
carryforwards for federal income tax purposes of approximately $51,000. The
Company's net operating loss carryforwards begin to expire in 2010. Under the
Tax Reform Act of 1986, the amounts of, and the benefits from, net operating
loss carryforwards may be impaired or limited due to a change of ownership
control as defined by the Internal Revenue Code. In addition, the Company has a
U.S. net capital loss carryforwards of approximately $7,289. The Company may
utilize the capital loss carryforwards only to the extent it generates future
capital gains. As of June 30, 1998, a valuation allowance has been established
against the deferred tax asset since the Company believes it is more likely than
not that some or all of the amounts will not be realized.
(13) SHAREHOLDERS' EQUITY
Common Stock--Each share of the Company's common stock has attached to
it one right. Each right entitles its registered holder to purchase from the
Company after the "Separation Time", as hereinafter defined, one-hundredth of a
share of Participating Preferred Stock, par value $.01 per share, for an amount
calculated in accordance with the Preferred Stock Agreement. The rights will not
trade separately from the common stock unless and until the Separation Time. The
Separation Time is defined as the earlier of the tenth business day after the
date on which any person commences a tender or exchange offer which, if
consummated, would result in an acquisition, and the first date of public
announcement by the Company of such offering. In the event of any voluntary or
involuntary liquidation of the Company, the holders of the Preferred Stock shall
be paid an amount as calculated in accordance with the Preferred Stock
Agreement.
<PAGE> 18
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock Option Plans--Effective October 8, 1994, the Company adopted a
Stock Incentive Plan which permits the issuance of stock options, stock
appreciation rights, performance awards, restricted stock and/or other stock
based awards to directors and salaried employees. On February 4, 1996, the Board
of Directors approved an amendment to the plan to reserve 2,025,000 shares of
common stock for grant. The option price shall be determined by the Board
Committee effective on the Grant Date. The option price shall not be less than
fifty percent of the Fair Market Value of a share of common stock on the Grant
Date. If Incentive Stock Options are granted to a participant who on the Grant
Date is a ten-percent holder, such price shall not be less than one hundred and
ten percent of the Fair Market Value of a share of common stock on the Grant
Date. All options become immediately exercisable upon the occurrence of a Change
in Control of the Company. Vesting of these options occurs based on years of
service. Generally it begins at 33% after one year, 66% after two years, and
100% after the third year of service.
The Company also elected to have non-qualified stock options for key
executives as part of their compensation plan. The Board of Directors has the
authority to determine to whom options may be granted, period of exercise, the
option price at the date of grant, and what other restrictions, if any, should
apply.
The Company applies APB 25 and related interpretations in accounting
for its plans. During 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
changing the methods for recognition of costs on plans similar to those of the
Company. Adoption of the accounting provisions of SFAS 123 is optional; however,
pro-forma disclosures as if the Company adopted the cost recognition
requirements under SFAS 123 are required.
The fair value method for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for 1998 and 1997, respectively: risk-free interest rates
were 5.69% and 6.05%, expected dividend yield of 0%, volatility factors of the
expected market price of the Company's common stock were 79.1% and 88.5% and a
weighted average expected life of the option of 4 and 3 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
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.
The adoption of SFAS 123 under the fair value based method would have
increased compensation expense by $2,524 and $1,728 for the years ended June 30,
1998 and 1997. The effect of SFAS 123 under the fair value based method would
have effected net loss and loss per share as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1998 June 30, 1997
--------------- -------------
<S> <C> <C>
Net loss $(18,264) $ (17,442)
======== =========
Pro-Forma $(20,789) $ (19,170)
======== =========
Loss per common share as reported $ (2.17) $ (2.46)
======== =========
Pro- Forma $ (2.47) $ (2.70)
======== =========
</TABLE>
<PAGE> 19
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Information relating to the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
---------- --------------
<S> <C> <C>
Shares under option at June 30, 1996 1,589,664 $ 3.50
Granted 947,850 $ 9.37
Exercised (636,559) $ 3.00
Forfeited (75,033) $ 8.75
---------- --------
Shares under option at June 30, 1997 1,825,922 $ 7.77
========== ========
Shares exercisable at June 30, 1997 594,442 $ 6.43
========== ========
Shares under option at June 30, 1997 1,825,922 $ 7.77
Granted 889,668 $ 7.48
Exercised (254,071) $ 4.37
Forfeited (363,774) $ 9.21
---------- --------
Shares under option at June 30, 1998 2,097,745 $ 7.81
========== ========
Shares exercisable at June 30, 1998 759,291 $ 7.95
========== ========
</TABLE>
At June 30, 1998, 656,950 stock options outstanding had exercise prices
ranging from $2.50 to $5.88. The weighted average exercise price of these
options is $5.27 and weighted remaining contractual life of these options is
3.30 years. Of these options, 323,002 are exercisable at a weighted average
price of $5.10.
At June 30, 1998, 1,043,520 stock options outstanding had exercise
prices ranging from $7.37 to $9.63. The weighted average exercise price of these
options is $8.40 and weighted remaining contractual life of these options is
4.56 years. Of these options, 172,135 are exercisable at a weighted average
price of $9.13.
At June 30, 1998, 397,275 stock options outstanding had exercise prices
ranging from $9.75 to $11.75. The weighted average exercise price of these
options is $10.64. The remaining contractual life of these options is 7.55
years. Of these options, 264,154 are exercisable at a weighted average price of
$10.67.
As of June 30, 1998 there were 100,000 warrants to purchase common
stock outstanding to Nissin Electric Company, granted as a part of a joint sales
and marketing agreement to address the Japanese firewall market. These warrants
are exercisable based upon Nissin fulfilling certain minimum purchase
obligations at predetermined dates through December 31, 1998. The options are
exercisable at $15.00 per common share.
During September 1998, the Company re-priced all of the outstanding
options to its then current fair market value per share of $1.125. In addition,
during fiscal year 1999 the Company issued officers and employees approximately
1,110,936 new options at an exercise price of $1.31 per share.
<PAGE> 20
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) COMMITMENTS AND CONTINGENCIES
Lease Commitments--Rent expense was $501 for the year ended June 30,
1998 and $231 for the year ended June 30, 1997.
On June 10, 1997, the Company entered into a ten-year term office lease
for its corporate office located in a commercial building in Fort Lauderdale,
Florida. The lease provides for a 5-year renewal option.
Total future minimum rental commitments under non-cancelable operating
leases, primarily for buildings and equipment, for the years following June 30,
1998 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1999 $ 672
2000 667
2001 478
2002 454
Thereafter 464
------
Total $2,735
======
</TABLE>
Effective May 1, 1999, the Company sold substantially all the assets of
its TradeWave division and the assumption of several capital and operating
leases. In the transaction, the operating lease amount assumed for the fiscal
year ended 1999 are $25, fiscal year end 2000 are $165, fiscal year end 2001 are
$3, and fiscal year end 2002 are $2.
Litigation--In August 1998, the Company and certain current and former
officers and directors were named as defendants in 25 shareholder lawsuits filed
in the United States District Court for the Southern District of Florida. All of
the lawsuits purport to be brought on behalf of a class of all persons who
purchased or otherwise acquired the Company's common stock during various
periods from October 7, 1997 through August 24, 1998. The lawsuits allege, among
other things, that as a result of accounting issues relating to the Company's
revenue recognition practices, defendants knowingly or recklessly caused the
Company to publish false and misleading financial statements which caused the
Company's common stock prices to rise artificially. One lawsuit also alleges
violations of common law. The plaintiffs are seeking an unspecified amount of
damages, interest, costs and attorney fees. These cases have been transferred
and consolidated into a single case for purposes of all pre-trial matters and
trial.
The Company's obligation to indemnify its officers and directors under
the aforementioned lawsuits is insured, to the extent of the limits of the
applicable insurance policies. The Company has notified its insurance carrier of
the existence of the lawsuits, and the carrier has sent the Company a
reservation of rights letter. The Company intends to vigorously defend these
actions, and believes that in the event that it is unsuccessful, that insurance
coverage will be available to defray a portion, or substantially all, the
expense of defending and settling the lawsuits or paying a judgment. However,
the Company is unable to predict the ultimate outcome of the litigation. There
can be no assurance that the Company will be successful in defending the
lawsuits or that if unsuccessful, that insurance will be available to pay all or
any portion of the expense of the lawsuits. If the Company is unsuccessful in
defending the lawsuits and the insurance coverage is unavailable or
insufficient, the resolution of the lawsuits could have a material adverse
effect on the Company's consolidated financial position, results of operations,
and cash flows. The Company's consolidated financial statements do not include
any adjustments related to these matters.
<PAGE> 21
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company is involved from time to time in other litigation on
various matters relating to the conduct of its business. The Company believes
that these other litigation, single or collective, will not have a material
adverse effect on its consolidated financial position, results of operations or
cash flows.
Regulatory Investigations--In August of 1998, the Securities and
Exchange Commission ("SEC") began an informal investigation into certain
accounting and financial reporting practices of the Company. The Company is
cooperating with the SEC. The Company is unable to predict the ultimate outcome
of the investigation. The resolution of such matters could have a material
adverse effect on the Company's consolidated financial position, results of
operations, and cash flows. The Company's consolidated financial statements do
not include any adjustments related to these matters.
(15) CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to a
concentration of credit risk principally, consist of cash, cash equivalents and
trade receivables. The Company holds any excess cash in short-term investments
consisting of commercial paper. Concentrations of credit risk with respect to
receivables are limited due to the Company's customer base.
(16) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Savings Plan ("the Plan") which covers the
eligible employees of the Company. An employee is eligible to participate in the
Plan on the date of hire. The amount of profit-sharing contributions made by the
Company into the Plan is discretionary. Each participant may contribute up to
12% of compensation into the Plan. The Company makes a matching contribution on
behalf of each participant for the first 6% of their individual contribution.
These contributions are made in the form of cash and common stock of the
Company. Participants' profit sharing and matching contribution vests over a
seven-year period. The Company's contributions to the Plan were $388 for the
year ended June 30, 1998 and $221 for the year ended June 30, 1997.
(17) GEOGRAPHIC AND CUSTOMER INFORMATION
The Company operates primarily in one segment: trusted systems
consisting of network security and electronic commerce products and services.
During 1998, one customer, a major financial institution, represented 17% of
consolidated sales. During 1997, sales to a distributor represented 11% of
consolidated sales.
A summary of the Company's operations by geographic area is summarized
below:
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1998 June 30, 1997
-------------- --------------
<S> <C> <C>
United States Operations
Net sales $ 11,423 $ 10,057
Net loss (17,292) (17,176)
Identifiable assets 11,100 15,043
European Operations
Net sales 4,129 4,167
Net loss (972) (266)
Identifiable assets 1,976 162
</TABLE>
U.S. Export Sales were $4,530 for the year ended June 30, 1998, and $5,209 for
the year ended June 30, 1997.
<PAGE> 22
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(18) CONCURRENT CORPORATION AGREEMENTS
The Company entered into an agreement with Concurrent Corporation on
June 30, 1996 to provide certain administrative and personnel-related services
for the Company. The Company was billed monthly for these services which totaled
$461 for the year ended June 30, 1997. Effective June 30, 1997 the only service
provided was for rental of facilities. The facility costs paid to Concurrent
were $40 for the fiscal year ended June 30, 1998.
CyberGuard Reseller Agreement:
The Company and Concurrent entered into a reseller agreement effective
June 27, 1996 to act as a reseller of CyberGuard products. For each CyberGuard
product sold by Concurrent, Concurrent shall pay to CyberGuard a predetermined
fee. The initial term of the agreement was for a period of twelve months
beginning with the effective date of this agreement and may be renewed for two
additional terms of twelve months each with the written consent of both the
Company and Concurrent. During the current fiscal year, the Company elected to
extend the reseller agreement to Concurrent for an additional twelve-month
period.
Sales to Concurrent Computer Corporation and its subsidiaries were $60
for the year ended June 30, 1997 and $174 for the year ended June 30, 1998.
Nighthawk Supplier Agreement:
Effective June 27, 1996, the Company and Concurrent entered into a
supplier agreement. During the initial term of the agreement, the Company shall
pay Concurrent a fee of $5 per month. The initial term of this agreement shall
be for a period of twelve months beginning with the effective date of this
agreement and may be renewed for two additional terms of twelve months each with
the written consent of both the Company and Concurrent. The NightHawk Supplier
Agreement with Concurrent was renegotiated at the end of the initial term with
new pricing established and an extension of the agreement until December 31,
1997.
(19) SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
During 1998, the Company issued 590,429 shares of common stock for all
of the outstanding common stock of Arca. In addition, during 1998 and 1997, the
Company paid cash for interest of $84 and $2, respectively.
(20) NEW ACCOUNTING PRONOUNCEMENTS
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2 "Software Revenue Recognition" ("SOP 97-2"). This statement provides
guidance on applying generally accepted accounting principles in recognizing
revenues on software transactions. SOP 97-2 supercedes Statement of Position
91-1 "Software Revenue Recognition". SOP 97-2 is effective for transactions
entered into in fiscal years beginning after December 15, 1997. Earlier
application is encouraged as of the beginning of the fiscal year or interim
period for which financial statements or information have not been issued.
Retroactive application of the provisions of this statement is prohibited. The
Company believes that the adoption of SOP 97-2 will not have a significant
impact on its revenue recognition policy.
<PAGE> 23
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In June 1997, the Financial Accounting Standards Board ("FASB") Issued
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS No. 130 requires all
items to be reported in a separate financial statement. The Company believes
that adoption of SFAS No. 130 will not have a significant impact on its
financial reporting.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS No 131). SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. SFAS 131
establishes standards for the way public business enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. The Company believes that adoption of SFAS No. 131 will not have a
significant impact on its financial reporting.
(21) SUBSEQUENT EVENTS
On December 17, 1998, the Company executed an agreement to issue
$1,125,000 of Convertible Debt ("Debt"). The Debt bears interest at prime plus
200 basis points and is payable quarterly. The Debt is convertible into 750,000
shares of common stock at a conversion price equal to $1.50 per share. The Debt
is convertible, at the debt holders option, after February 1, 2000. In addition,
the Company issued the debt holders 500,000 warrants to purchase the Company's
common stock at $2.00. The warrants are exercisable at any time before June,
2001. The terms of the Debt and warrant agreement, which permit the conversion
of the Debt and warrants to common stock at a discount to market, is considered
a beneficial conversion feature. The beneficial conversion feature at the date
of issuance of the Debt will be recognized as interest expense over the shortest
possible conversion period. The convertible debt is subordinated to the
Company's senior debt.
During December 1998, the Company's senior creditor, Coast, notified
the Company of the following events of default under the loan agreement: decline
in revenues, significant decline in the market value of the Company's stock, and
the shareholder lawsuits. Coast agreed to continue to make advances to the
Company but did not waive any of their rights under the default provision. The
Company reclassified the three-year note to current due to the technical
default. Coast may elect to cease funding and demand payment. In addition,
pursuant to the loan agreement, the interest rate was adjusted to prime plus 5%.
On January 11, 1999, the Company was delisted from the NASDAQ.
<PAGE> 24
EXHIBIT 7 (c) (iii) QUARTERLY RESTATEMENT
Previously, CyberGuard Corporation had announced that due to a review of its
revenue recognition policy relating to distributors and resellers, it would
restate results for the first three-quarters of the fiscal year ended June 30,
1998. Subsequently, the Company determined that it would also restate its
results from fiscal year 1997. These restatements are presented below.
Previously, the Company had reported revenues for fiscal year 1997 of $15,621
and a net loss of $12,490 or a loss per share of $1.76. For the first
three-quarters of fiscal 1998, the Company had previously reported revenue of
$15,069 and a net loss of $5,951 or $0.75 per share.
The restatements arise from errors in applying the Company's revenue recognition
policy and resulted in the following adjustments to correct revenues previously
reported in fiscal year 1998 and 1997. In addition, the restatement of expenses
were primarily due to the restatement of the write-off of capitalized software
in fiscal year end 1996 and its amortization in fiscal years 1997 and 1998, and
the timing of recognition of expense amounts.
<TABLE>
<CAPTION>
qtr1 qtr2 qtr3 qtr4 qtr1 qtr2 qtr3
---- ---- ---- ---- ---- ---- ----
9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98
------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues, as previously
reported $ 3,067 $ 3,047 $ 4,105 $ 5,402 $ 5,063 $ 4,854 $ 5,152
Restatements (457) (389) (52) (499) (890) (669) (636)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues, restated 2,610 2,658 4,053 4,903 4,173 4,185 4,516
=========== =========== =========== =========== =========== =========== ===========
Cost of revenues, as
previously reported 1,874 1,508 1,870 1,988 1,796 1,828 1,778
Restatements 4 (25) (5) (30)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Costs of revenues, restated 1,874 1,508 1,870 1,992 1,771 1,823 1,748
=========== =========== =========== =========== =========== =========== ===========
Gross profit, as
previously reported 1,193 1,539 2,235 3,414 3,267 3,026 3,374
Restatements (457) (389) (52) (503) (865) (664) (606)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit, restated 736 1,150 2,183 2,911 2,402 2,362 2,768
=========== =========== =========== =========== =========== =========== ===========
Development, Selling,
General and
Administrative,
as reported 3,400 3,563 3,875 5,557 5,421 5,817 5,047
Restatements 817 942 816 898 389 560 500
----------- ----------- ----------- ----------- ----------- ----------- -----------
Development, Selling,
General and
Administrative,
restated 4,217 4,505 4,691 6,455 5,810 6,377 5,547
=========== =========== =========== =========== =========== =========== ===========
Other income (expense),
as reported (6,055) 1,207 748 (376) 452 187 29
Restatements -- (238) (18) 178 (188) (59) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Other income (expense),
restated (6,055) 969 730 (198) 264 128 29
=========== =========== =========== =========== =========== =========== ===========
Net loss, as previously
reported $ (8,262) $ (817) $ (892) $ (2,519) $ (1,702) $ (2,604) $ (1,644)
Restatements (1,274) (1,569) (886) (1,223) (1,442) (1,283) (1,106)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss, restated (9,536) (2,386) (1,778) (3,742) (3,144) (3,887) (2,750)
=========== =========== =========== =========== =========== =========== ===========
Loss per share, as previously
reported $ (1.20) $ (0.12) $ (0.12) $ (0.32) $ (0.22) $ (0.32) $ (0.19)
Restatements (0.19) (0.22) (0.12) (0.17) (0.19) (0.16) (0.13)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss per share, restated $ (1.39) $ (0.34) $ (0.24) $ (0.49) $ (0.41) $ (0.48) $ (0.32)
=========== =========== =========== =========== =========== =========== ===========
Weighted Average Shares
Outstanding 6,859,146 7,086,692 7,375,293 7,100,014 7,688,529 8,111,851 8,504,575
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
