UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) November 25, 1996
--------------------------
SECURE COMPUTING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-27074 52-1637226
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(State or other jurisdiction) (Commission File Number) (IRS Employer
of incorporation Identification No.)
2675 LONG LAKE ROAD
ROSEVILLE, MINNESOTA 55113
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 628-2700
--------------------------
Item 5. Other Events.
As a result of the mergers in August 1996 with Enigma Logic, Inc.
("Enigma") and Border Network Technologies, Inc. ("Border") which were accounted
for using the pooling of interests method, Secure Computing Corporation
("Secure" or the "Company") has issued supplemental financial statements to give
retroactive effect to these business combinations. These supplemental
consolidated financial statements have been audited by Ernst & Young LLP whose
report is included herein. The following "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" gives retroactive effect for the mergers.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
STATEMENT OF OPERATIONS DATA 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
Revenue:
<S> <C> <C> <C> <C> <C>
Government contracts $14,849,000 $13,744,000 $ 9,389,000 $ 5,265,000 $ 3,982,000
Products and services 13,081,000 4,051,000 1,598,000 1,454,000 1,985,000
----------------------------------------------------------------------------
Total revenue 27,930,000 17,795,000 10,987,000 6,719,000 5,967,000
Gross profit 13,079,000 7,120,000 4,244,000 2,933,000 3,281,000
Operating income (loss) (633,000) 1,220,000 215,000 (922,000) (954,000)
Net income (loss) (632,000) 1,541,000 731,000 (1,843,000) (1,570,000)
Net income (loss) per share (.05) .17 .14 (.49) (.66)
DECEMBER 31,
BALANCE SHEET DATA: 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
Working capital (deficit) $34,292,000 $ 1,991,000 $ (731,000) $ (150,000) $(1,925,000)
Total assets 44,261,000 7,727,000 4,495,000 3,200,000 3,974,000
Long-term debt, less current portion and redeemable
convertible preferred stock - 10,659,000 8,620,000 10,566,000 7,054,000
Stockholder's equity (deficit) 36,208,000 (5,996,000) (7,081,000) (9,574,000) (7,420,000)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The Company produces and markets products designed to enable electronic
commerce by protecting an organization's computer network from access by
unauthorized users. Secure was organized in July 1989 to acquire certain assets
of a division of Honeywell, Inc., then engaged in research and development of
computer network security technology under a U.S. government contract. The
Company was reorganized in September 1995 as a Delaware corporation. All
historical information presented has been restated to reflect the acquisitions
of Border and Enigma which were accounted for using the pooling of interests
method.
GOVERNMENT CONTRACTS. From the time of its organization, Secure has
been engaged in research and development of computer network security technology
under contracts with departments and agencies of the U.S. government. Billings
under these research and development contracts with U.S. government agencies
have accounted for substantially all of the Company's revenue since its
inception.
The Company's contract with the National Security Agency ("NSA") for
the development of the Company's Secure Network Server product accounted for
approximately 58 percent, 67 percent and 70 percent of the Company's government
contract revenue for the years ended December 31, 1995, 1994 and 1993,
respectively. The Company signed a contract modification to convert the contract
to a cost plus fixed fee type in July 1996 and to extend the contract to
September 1997. The Company estimates that the aggregate fee to be received over
the course of the contract will be approximately 6 percent and is currently
using a rate of 5.5 percent in recognizing revenue in 1996 based on its current
estimate of the remaining fee to be earned under the contract.
Most of the Company's government research and development contracts
provide for compensation to the Company in the form of reimbursement of costs
plus a fee. The Company typically bills government agencies, including the NSA,
monthly for a ratable portion of the fee expected to be received over the life
of the contract and current expenses. Under these government contracts, the
Company is entitled to recover direct labor costs, engineering overhead and
general and administrative expenses, including contract-related research and
development expenses. Selling, general and administrative expenses recoverable
under government contracts include salaries and benefits, sales commissions,
marketing, bid and proposal costs, product management, finance, legal and
contract administration, and certain other administrative expenses.
Under its government contracts, the Company bears the risk that
increased or unexpected costs required to perform specified services may reduce
the amount of the Company's fee. In addition, recoverable expenses billed by the
Company are subject to review and audit by the Defense Contract Audit Agency
("DCAA"). The DCAA has audited the Company's contracts through December 31,
1994, without any material disallowances. Pursuant to their terms, these
contracts are generally also subject to termination for the convenience of the
applicable government agency. If the contract is terminated, the Company
typically would be reimbursed for its costs to the date of its termination, plus
the costs of an orderly termination, and paid a portion of the fee.
PRODUCTS AND SERVICES. The Company sells its products and services to
commercial and government customers, and sells its Secure Network Server
products to government customers. The Company's SafeWord identification and
authentication server products were introduced prior to 1993. During 1994 and
1995 significant resources were invested in the development of the Sidewinder
and BorderWare firewall products. Both firewalls first had significant sales
beginning in 1995. The Company expects that the percentage of its revenues
derived from products and related services will increase in future years, as the
Company increasingly focuses on product sales.
The Company has committed significant research and development
resources to its products. During 1996, the Company plans to continue to
increase its research and development efforts and also significantly increase
its sales and marketing efforts. The Company's planned levels of research and
development, selling and marketing, and general and administrative expenses are
based in part on its expectations of higher revenue from increased product
sales, and as a result, net income for a given period could be
disproportionately affected by any reduction in revenue. In addition,
fluctuations in revenue from quarter to quarter will likely have an increasingly
significant impact on the Company's results of operations. The Company has
planned for increased costs associated with selling and marketing in connection
with the release of new products.
The Company plans to price its products to be competitive with certain
products offered by the Company's current and future competitors. The Company
believes that the cost of product revenues may increase as a percentage of the
related product revenues in future periods due to increased amounts paid for
licensed technology to be incorporated in future products and increased costs
associated with providing product support.
Results of Operations
The following table sets forth, for the periods indicated, certain
items from the statements of operations of the Company expressed as a percentage
of revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1995 1994 1993
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<S> <C> <C> <C>
Revenue:
Products and services 46.8% 22.8% 14.5%
Government contracts 53.2 77.2 85.5
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Total revenue 100.0 100.0 100.0
Cost of revenue 53.2 60.0 61.4
- --------------------------------------------------------------------------------------------------------------------
Gross profit 46.8 40.0 38.6
Operating expenses:
Selling and marketing 19.3 10.4 10.5
Research and development 17.4 10.5 8.0
General and administrative 12.4 12.3 18.1
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 49.1 33.2 36.6
- --------------------------------------------------------------------------------------------------------------------
Operating income (loss) (2.3) 6.8 2.0
Interest and other income 0.9 0.7 0.1
Interest expense (0.8) (1.7) (3.2)
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative change (2.2) 5.8 (1.1)
Income tax expense (benefit) 0.1 (2.8) (4.6)
Cumulative effect of accounting change - - 3.2
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) (2.3)% 8.6% 6.7%
====================================================================================================================
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994.
REVENUE. The Company's revenue increased by 57.0 percent to $27.9
million in 1995 up from $17.8 million in 1994. The increase resulted from higher
revenue in both products and services and government contracts revenue. Products
and services revenue was $13.1 million in 1995, an increase of 222.9 percent
over 1994, and was attributable mainly to increased sales of firewall products
and related services. The increase in government contracts revenue in 1995
reflects the Company's increased efforts on the Secure Network Server program
for the NSA.
GROSS PROFIT. Gross profit as a percentage of revenue increased to 46.8
percent in 1995 from 40.0 percent in 1994. The increase resulted mainly from
products and services revenue, which carry higher margins than contracts,
gaining as a percentage of the revenue mix.
SELLING AND MARKETING. Selling and marketing expenses increased by
189.7 percent to $5.4 million in 1995 from $1.9 million in 1994. The increase
reflects the Company's additional sales and marketing effort for products and
services.
RESEARCH AND DEVELOPMENT. Company-sponsored research and development
expenses increased substantially by 162.1 percent to $4.9 million in 1995
compared to $1.9 million in 1994. Research and development expenses as a
percentage of revenue also increased substantially to 17.4 percent, up from 10.5
percent. This increase is directly attributable to a significant commitment to
the development of the Company's firewall products. To date, the Company has
expensed all development costs as incurred.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by 58.6 percent to $3.5 million compared to $2.2 million in 1994. As a
percentage of revenue, these expenses remained consistent between 1995 and 1994.
INTEREST AND OTHER INCOME. Interest income increased to $261,000 in
1995, up from $18,000 in 1994, primarily due to higher cash balances resulting
from the proceeds of the Company's initial public offering. In 1994, other
income of $108,000 was recorded for costs recovered in connection with a 1992
financing transaction which was not consummated.
INTEREST EXPENSE. Interest expense decreased from $307,000 in 1994 to
$239,000 in 1995, due to reductions in the Company's outstanding debt.
INCOME TAX EXPENSE (BENEFIT). The Company recognized income tax expense
for 1995 of $21,000 compared to a $502,000 benefit for 1994. The income tax
benefit recognized in 1994 related to a reduction in the valuation allowance
against the Company's deferred tax assets, primarily the tax benefit associated
with net operating loss carryforwards. The allowance had been reduced based on
the Company's estimate of the amount of net operating loss carryforwards more
likely than not to be utilized to offset future taxable income. Management
believes it is more likely than not that deferred tax assets, which total
$1,373,000 December 31, 1995, will be realized. The computation of the Company's
deferred tax assets and valuation allowance are based in part on taxable income
expected to be earned on existing government contracts and projected interest
income. The amount of the deferred tax assets considered realizable could be
reduced in the near term if estimates of future taxable income are reduced. The
Company had total net operating loss carryforwards of approximately $15.8
million at December 31, 1995. Of these carryforwards, $4.1 million relate to
deductions for disqualifying dispositions of stock options. As these deductions
are realized, the benefit will not reduce income tax expense, rather it will be
recorded as additional paid-in-capital. Of the remaining benefit associated with
the carryforwards, approximately $8.7 million had yet to be recognized as a
benefit in the statement of operations. However, there can be no assurance that
these carryforwards will be available to offset future income tax expense when
taxable income is realized.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993.
REVENUE. The Company's revenue increased 62.1 percent to $15.2 million
in 1994, up from $11.0 million in 1993. The increase in revenue in 1994 was
primarily due to increased development efforts under the Company's contract with
the NSA as well as sales of the Secure Network Server and increased sales of the
Company's identification and authentication products.
GROSS PROFIT. Gross profit as a percentage of revenue increased to 40.0
percent in 1994 from 38.6 percent in 1993. The differences between periods were
the result of slight changes in the Company's rates used for billing allowable
costs under its government contracts and increased products and services revenue
which carries higher margins than contracts.
SELLING AND MARKETING. Selling and marketing expenses increased by 58.3
percent in 1994 to $1.9 million from $1.2 million in 1993. The increase was due
primarily to additions to the Company's sales and marketing staff and higher
expenditures for advertising, trade shows and product literature.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
significantly by 111.6 percent to $1.9 million in 1994 from $878,000 in 1993.
The 1994 increase resulted primarily from increased development efforts on the
Company's firewall products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased modestly by 6.1 percent to $2.2 million in 1994 from $2.0 million in
1993. Despite the rise in the dollar amount of general and administrative
expenses, such expenses decreased significantly as a percentage of revenue to
12.3 percent in 1994 from 18.1 percent in 1993. This decrease is attributable to
leveraging the revenue growth experienced over this period.
INTEREST AND OTHER INCOME. Interest income was insignificant in each
year. Other income of $108,000 was recorded in 1994 for recovered costs of a
1992 financing transaction which was not consummated.
INTEREST EXPENSE. Interest expense decreased from $353,000 in 1993 and
$307,000 in 1994, due primarily to an ongoing reduction in the Company's debt
levels.
INCOME TAX BENEFIT AND CHANGE IN ACCOUNTING METHOD. Prior to the fiscal
year ended December 31, 1993, the Company had incurred net operating losses. The
Company had cumulative net operating loss carryforwards of approximately $13.0
million at December 31, 1992. Effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109 and recorded a cumulative
effect benefit of $350,000 upon adoption. The Company recognized income tax
benefits of $502,000 in each of the fiscal years 1993 and 1994, respectively,
relating to the reduction in the valuation allowance for deferred tax assets.
The reduction in the valuation allowance was based on management's judgment that
a portion of the net operating loss carryforwards would more likely than not be
realized as an offset to future taxable income generated by the Company's
long-term government contracts.
Liquidity and Capital Resources
Since its organization, the Company has financed its operations through
the issuance of equity securities and notes to stockholders, long-term debt,
short-term borrowings and cash generated from operations. In 1995, the Company
raised $32.7 million through its initial public offering of its Common Stock,
$1.7 million in net proceeds from the exercise of warrants to purchase
convertible redeemable preferred stock and $470,000 from the issuance of its
Common Stock upon the exercise of options and warrants. In 1994, the Company
raised $967,000 in net proceeds from the sale of convertible redeemable
preferred stock.
The Company's cash and cash equivalents increased by approximately
$31.7 million from 1994 to 1995. The increase resulted primarily from the
proceeds of the initial public offering and preferred stock sale which were
partially offset by purchases of capital equipment and the repayment of a $1.2
million term loan. As of December 31, 1995, the Company had working capital of
$34.3 million. The Company has lines of credit totaling $850,000 for short-term
working capital needs. The Company anticipates using available cash to fund
growth in operations, invest in capital equipment and to acquire businesses or
license technology or products related to the Company's line of business. In
connection with the 1996 acquisitions of Border and Enigma, the Company will use
approximately $8 million of cash.
Capital expenditures for property and equipment were approximately $2.3
million, $933,000 and $1.3 million for the years ended December 31, 1995, 1994
and 1993, respectively. These expenditures have generally consisted of computer
workstations, office furniture and equipment, and leasehold additions and
improvements.
At its current level of operations, the Company believes that its
existing cash and cash equivalents are sufficient to meet the Company's current
working capital and capital expenditure requirements through at least the next
12 months.
Inflation
To date, the Company has not been significantly impacted by inflation.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Secure Computing Corporation Supplemental
Consolidation for the years ended December 31, 1995, 1994 and 1993
Report of Independent Auditors..........................................F-1
Supplemental Consolidated Financial Statements
Supplemental Consolidated Balance Sheets................................F-2
Supplemental Consolidated Statements of Operations......................F-4
Supplemental Consolidated Statement of Stockholders' Equity (Deficit)...F-5
Supplemental Consolidated Statements of Cash Flows......................F-6
Notes to Supplemental Consolidated Financial Statements.................F-7
(b) Exhibits
11.1 Statement of Computation of Earnings Per Share
(c) Financial Statement Schedule II
Valuation and Qualifying Accounts for the years ended
December 31, 1995, 1994 and 1993
Report of Independent Auditors
The Board of Directors
Secure Computing Corporation
We have audited the supplemental consolidated balance sheets of Secure Computing
Corporation (formed as a result of the consolidation of Secure Computing
Corporation, Border Network Technologies, Inc. and Enigma Logic, Inc.) as of
December 31, 1995 and 1994 and the related supplemental consolidated statements
of operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended December 31, 1995. The supplemental consolidated
financial statements give retroactive effect to the mergers of Secure Computing
Corporation with Enigma Logic, Inc. on August 28, 1996, and with Border Network
Technologies, Inc. on August 29, 1996 which have been accounted for using the
pooling of interests method as described in the notes to the supplemental
consolidated financial statements. Our audits also included the supplemental
consolidated financial statements schedule included in the Company's Current
Report on Form 8-K dated November 25, 1996. These supplemental consolidated
financial statements and schedule are the responsibility of the management of
Secure Computing Corporation. Our responsibility is to express an opinion on
these supplemental consolidated financial statements and schedule based on our
audits. We did not audit the financial statements of Enigma Logic, Inc. and
Border Network Technologies, Inc. which statements reflect total assets
constituting 7% for 1995 and 15% for 1994 of the related supplemental
consolidated financial statement totals, and which reflect net income
constituting approximately 2% of the related supplemental consolidated financial
statements totals for the three year period ended December 31, 1995. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to data included for Enigma logic,
Inc. and Border Network Technologies, Inc. is based solely on the report of the
other auditors.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
supplemental financial statements referred to above present fairly, in all
material respects, the supplemental consolidated financial position of Secure
Computing Corporation at December 31, 1995 and 1994, and the supplemental
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, after giving retroactive effect to
the mergers of Enigma Logic, Inc. and Border Network Technologies, Inc., as
described in the notes to the supplemental consolidated financial statements, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
supplemental consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in the notes to the financial statements, in 1993 the Company
changed its method of accounting for income taxes.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
November 25, 1996
<TABLE>
<CAPTION>
Secure Computing Corporation
Supplemental Consolidated Balance Sheets
DECEMBER 31
1995 1994
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $32,924,000 $ 1,264,000
Accounts receivable (net of allowance for doubtful accounts of
1995 - $131,000; 1994 - $165,000) 5,750,000 2,700,000
Deferred income taxes 936,000 700,000
Inventory 606,000 269,000
Other current assets 250,000 122,000
------------------------------------
Total current assets 40,466,000 5,055,000
Property and equipment:
Equipment 4,690,000 2,878,000
Furniture and fixtures 914,000 553,000
Leasehold improvements 292,000 160,000
------------------------------------
5,896,000 3,591,000
Accumulated depreciation (3,050,000) (2,022,000)
------------------------------------
2,846,000 1,569,000
Deferred income taxes 437,000 673,000
Intangible assets (net of accumulated amortization of
1995 - $238,000; 1994 - $199,000) 449,000 383,000
Other assets 63,000 47,000
------------------------------------
Total assets $44,261,000 $ 7,727,000
====================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,119,000 $ 651,000
Accrued payroll liability 1,653,000 957,000
Contract loss reserve 250,000 200,000
Other accrued liabilities 620,000 278,000
Deferred revenue 1,465,000 672,000
Current portion of stockholder debt - 59,000
Current portion of long-term debt 67,000 3,247,000
------------------------------------
Total current liabilities 6,174,000 3,064,000
Stockholder debt 1,845,000 1,700,000
Long-term debt 34,000 1,010,000
Redeemable Convertible Preferred Stock:
$2.24 Series A, par value $.01 per share:
Issued and outstanding shares--December 31, 1995 - none and
December 31, 1994 - 2,385,808
Redemption and liquidation value--December 31, 1994 - $6,968,000 - 6,957,000
$3.00 Series B, par value $.01 per share:
Issued and outstanding shares--December 31, 1995--none and
December 31, 1994 - 333,333
Redemption and liquidation value--December 31, 1994
--$1,023,000 - 992,000
Stockholders' equity (deficit):
Common Stock, par value $.01 per share:
Issued and outstanding shares--December 31, 1995 -
12,542,196 and December 31, 1994 - 6,431,851 125,000 64,000
Additional paid-in capital 50,116,000 7,234,000
Accumulated deficit (14,033,000) (13,294,000)
------------------------------------
Total stockholders' equity (deficit) 36,208,000 (5,996,000)
------------------------------------
Total liabilities and stockholders' equity (deficit) $44,261,000 $ 7,727,000
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
<TABLE>
<CAPTION>
Secure Computing Corporation
Supplemental Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1995 1994 1993
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Revenue:
<S> <C> <C> <C>
Products and services $13,081,000 $ 4,051,000 $ 1,598,000
Government contracts 14,849,000 13,744,000 9,389,000
-----------------------------------------------------
27,930,000 17,795,000 10,987,000
Cost of revenue 14,851,000 10,675,000 6,743,000
-----------------------------------------------------
Gross profit 13,079,000 7,120,000 4,244,000
Operating expenses:
Selling and marketing 5,376,000 1,856,000 1,157,000
Research and development 4,869,000 1,858,000 878,000
General and administrative 3,467,000 2,186,000 1,994,000
-----------------------------------------------------
13,712,000 5,900,000 4,029,000
-----------------------------------------------------
Operating income (loss) (633,000) 1,220,000 215,000
Interest expense (239,000) (307,000) (353,000)
Interest and other income 261,000 126,000 17,000
-----------------------------------------------------
Income (loss) before income taxes and
cumulative effect of accounting change
(611,000) 1,039,000 (121,000)
Income tax expense (benefit) 21,000 (502,000) (502,000)
-----------------------------------------------------
Income (loss) before cumulative effect of
accounting change (632,000) 1,541,000 381,000
Cumulative effect of change in method of
accounting for income taxes - - 350,000
-----------------------------------------------------
Net income (loss) $ (632,000) $ 1,541,000 $ 731,000
=====================================================
Net income (loss) per share: $(.08) $.14 $.09
Primary $(.06) $.16 $.14
Fully diluted $(.05) $.17
Supplementary
Weighted average shares outstanding:
Primary 7,665,000 7,342,000 3,081,000
Fully diluted 10,425,000 9,792,000 5,330,000
Supplementary 10,500,000 9,917,000
</TABLE>
SEE ACCOMPANYING NOTES.
<TABLE>
<CAPTION>
Secure Computing Corporation
Supplemental Consolidated Statement of Stockholders' Equity (Deficit)
COMMON
----------------------------------- ADDITIONAL
SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 482,258 $ 5,000 $ 480,000 $(14,628,000) $(14,143,000)
Exercise of incentive stock options 46,813 - 4,000 - 4,000
Preferred stock conversion 920,937 9,000 4,560,000 - 4,569,000
Preferred Stock accretion - - (4,000) (3,000) (7,000)
Common Stock issued for conversion of
stockholder debt 920,937 9,000 2,206,000 - 2,215,000
Dividends accrued on Preferred Stock - - - (450,000) (450,000)
Net income for the year - - - 731,000 731,000
----------------------------------------------------------------------------------------
Balance at December 31, 1993 2,370,945 23,000 7,246,000 (14,350,000) (7,081,000)
Exercise of incentive stock options 60,906 1,000 6,000 - 7,000
Common Stock issued 4,000,000 40,000 (12,000) - 28,000
Preferred Stock accretion - - (6,000) (3,000) (9,000)
Dividends accrued on Preferred Stock - - - (482,000) (482,000)
Net income for the year - - - 1,541,000 1,541,000
----------------------------------------------------------------------------------------
Balance at December 31, 1994 6,431,851 64,000 7,234,000 (13,294,000) (5,996,000)
Exercise of incentive stock options 223,820 2,000 99,000 - 101,000
Exercise of Common Stock Warrants 164,619 2,000 367,000 - 369,000
Common Stock issued for services 11,271 - 50,000 - 50,000
Initial Public Offering of Common Stock,
net of expenses 2,250,000 22,000 32,687,000 - 32,709,000
Preferred stock conversion 3,460,635 35,000 10,119,000 - 10,154,000
Preferred stock accretion - - (11,000) - (11,000)
Dividends accrued on Preferred Stock - - (429,000) (107,000) (536,000)
Net loss for the year - - - (632,000) (632,000)
----------------------------------------------------------------------------------------
Balance At December 31, 1995 12,542,196 $125,000 $50,116,000 $(14,033,000) $ 36,208,000
========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<TABLE>
<CAPTION>
Secure Computing Corporation
Supplemental Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (632,000) $ 1,541,000 $ 731,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of change in accounting for income
taxes - - (350,000)
Loss on disposal of property and equipment - - 41,000
Compensation expense on stock options 107,000 9,000 -
Depreciation 1,037,000 679,000 512,000
Amortization 39,000 39,000 155,000
Deferred income taxes - (522,000) (502,000)
Other (3,000) 56,000 46,000
Changes in operating assets and liabilities:
Accounts receivable (3,050,000) (1,253,000) 85,000
Inventory (337,000) (165,000) (42,000)
Other current assets (128,000) (75,000) 51,000
Accounts payable 1,468,000 (208,000) 197,000
Accrued liabilities and reserves 1,031,000 525,000 321,000
Deferred revenue 793,000 526,000 3,000
------------------------------------------------------
Net cash provided by operating activities 325,000 1,152,000 1,248,000
INVESTING ACTIVITIES
Purchase of property and equipment (2,314,000) (933,000) (1,268,000)
Increase in intangible and other assets (121,000) (74,000) (89,000)
------------------------------------------------------
Net cash used in investing activities (2,435,000) (1,007,000) (1,357,000)
FINANCING ACTIVITIES
Payments on notes payable and long-term debt (1,259,000) (1,750,000) (250,000)
Proceeds from notes and long-term debt 189,000 1,532,000 289,000
Proceeds from issuance of Common Stock 33,179,000 35,000 4,000
Proceeds from issuance of Series A Convertible Redeemable
Preferred Stock 1,661,000 - -
Proceeds from issuance of Series B Convertible Redeemable
Preferred Stock - 967,000 -
------------------------------------------------------
Net cash provided by financing activities 33,770,000 784,000 43,000
------------------------------------------------------
Increase (decrease) in cash and cash equivalents 31,660,000 929,000 (66,000)
Cash and cash equivalents at beginning
of year 1,264,000 335,000 401,000
------------------------------------------------------
Cash and cash equivalents at end of year $32,924,000 $ 1,264,000 $ 335,000
======================================================
</TABLE>
SEE ACCOMPANYING NOTES.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Secure Computing Corporation (the "Company") designs and assembles products to
enable electronic commerce by protecting an organization's computer network and
its computers from access by unauthorized users. The Company's principal markets
are the United States government under development contracts and commercial
companies for its network security products. Presently, government contracts and
product sales make up a majority of the Company's revenue.
BASIS OF PRESENTATION
These supplemental consolidated financial statements are presented giving
retroactive effect to the Company's mergers with Border Network Technologies,
Inc. (now known as Secure Computing Canada, Ltd.), and Enigma Logic, Inc. which
have been accounted for under the pooling of interests method. These
supplemental consolidated financial statements will become the historical
financial statements upon issuance of consolidated financial statements for
periods subsequent to the mergers (see Note 11).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION
Government Contracts
Government contract revenues for cost-plus-fixed-fee contracts are recognized on
the basis of costs incurred during the period plus the fee earned. Award fees
are recognized based upon the percentage of completion and forecasted profit. A
provision is made for the estimated loss, if any, on government contracts.
Under its government contracts, the Company bears the risk that increased or
unexpected costs required to perform specified services may reduce the amount of
the Company's fee. In addition, recoverable expenses billed by the Company are
subject to review and audit by the Defense Contract Audit Agency, which could
result in amounts previously billed being renegotiated. Pursuant to their terms,
these contracts are generally also subject to termination at the convenience of
the applicable government agency. If the contract is terminated, the Company
typically would be reimbursed for its costs to the date of its termination plus
the cost of an orderly termination, and paid a portion of the fee.
At December 31, 1995 and 1994, the Company had deferred revenue of $382,000 and
$253,000, respectively, related to government contracts.
Products and Services
The Company recognizes product revenues at the time of shipment. The Company has
entered into customer support and maintenance agreements with various customers.
The Company accounts for the obligations under these agreements by deferring a
pro rata portion of revenue and recognizing it either ratably as the obligations
are fulfilled or upon completion of performance.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORY
Inventory consists mainly of purchased components and is valued at the lower of
cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
accelerated methods over the estimated useful lives of the assets.
INTANGIBLE ASSETS
Intangible assets consist of patents and trademarks and are amortized using the
straight line method over the estimated useful lives of the assets, which range
up to ten years.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
Foreign assets and liabilities are translated using the year-end rates of
exchange. Results of operations are translated using the average exchange rates
throughout the period. The effect of the cumulative translation adjustment is
not material and has not been separately disclosed in the financial statements.
INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." As permitted under the new rules, prior years' financial statements were
not restated. The cumulative effect of adopting Statement No. 109 as of January
1, 1993 was to increase net income by $350,000.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
Based on the Company's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between completion of the working model and the point at which the product is
ready for general release have been insignificant. All research and development
costs have been expensed.
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.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
shares of common stock and common stock equivalents, if dilutive, outstanding
during the periods presented after giving effect to the application of
Securities and Exchange Commission Staff Accounting Bulletin No. 83 ("SAB No.
83"). Pursuant to SAB No. 83, all common shares issued and stock options and
warrants granted by the Company at a price less than the initial public offering
price during the twelve months preceding the offering date (using the treasury
stock method until shares are issued) have been included in the calculation of
common and common equivalent shares outstanding for all periods up to the
initial public offering date. The fully diluted income (loss) per share is
presented using the "if converted" method and reflects the impact of the
conversion of the preferred stock to common stock at the beginning of the
earliest period presented or at the date of issuance, if later.
In computing supplementary net income (loss) per share, interest expense related
to bank debt retired with the proceeds of Common Stock issued in the initial
public offering has been added back to net income (loss). The weighted average
number of shares used in the calculation consists of common and common
equivalent shares, if dilutive, outstanding during the period after giving
effect to the conversion of all preferred stock to Common Stock, additional SAB
No. 83 shares as determined above and the required shares of Common Stock issued
to repay bank debt.
STOCK OPTIONS
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) in accounting for its employee stock
options. In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company is required to adopt the provisions of the Statement
beginning in 1996. Upon adoption of Statement No. 123, the Company intends to
continue to measure compensation cost using the methods described in APB 25.
RECLASSIFICATIONS
Certain amounts presented in the 1994 and 1993 financial statements have been
reclassified to conform with the 1995 presentation.
2. ACCOUNTS RECEIVABLE
Approximately 46% and 77% of accounts receivable were due from the United States
government at December 31, 1995 and 1994, respectively. Unbilled accounts
receivable from all customers were $640,000 and $174,000 at December 31, 1995
and 1994, respectively.
3. STOCKHOLDER DEBT
A stockholder of the Company has made cash advances in exchange for notes
bearing interest at rates ranging from 9.5% to 12%. The notes are due on demand,
but the stockholder has agreed not to demand payment until January 1997. Accrued
interest of $562,000 and $433,000 is included within the balances at December
31, 1995 and 1994, respectively.
Another stockholder of the Company made cash advances to the Company in 1994
totaling $59,000. The advances were repaid in 1995.
In August 1994, the holder of a convertible debenture converted the $250,000 in
principal and all accrued and unpaid interest into 136,409 shares of the
Company's Series A Cumulative Redeemable Convertible Preferred Stock at a
conversion rate of $2.24 per share.
4. DEBT
Long-term debt consists of the following:
DECEMBER 31
1995 1994
------------------------------------
Bank term note $ - $1,200,000
Bank line of credit 50,000 50,000
Term note 8,000 7,000
Bank installment loan 43,000 -
Less current portion (67,000) (247,000)
------------------------------------
$ 34,000 $1,010,000
====================================
The Company received the bank term note on December 30, 1994 for the purpose of
paying off certain debt and the balance of another term loan. The bank term note
was paid in full following the Company's initial public offering.
The Company has a total of $850,000 in short-term lines of credit, on which
$50,000 has been drawn as of December 31, 1995 and 1994, respectively. The lines
bear interest on the outstanding balances at an annual rate equal to the prime
rate plus 1% to 2.5% and are secured by accounts receivable, inventory,
intangibles and all general business assets as well as a key man life insurance
policy.
5. LEASES
The Company leases office space for all of its locations. Future lease payments
for all operating leases, excluding executory costs such as management and
maintenance fees, are as follows:
1996 $ 1,233,000
1997 1,177,000
1998 1,055,000
1999 1,014,000
2000 985,000
Thereafter 4,819,000
-------------------
$10,283,000
===================
Rent expense was $916,000, $605,000 and $397,000 for the years ended December
31, 1995, 1994 and 1993, respectively.
6. CAPITAL STOCK
1995 REORGANIZATION AND STOCK SPLIT
On September 30, 1995, the Company effected a reorganization (the "1995
Reorganization") which included a 1.25-for-1 split of the Company's Common
Stock. Accordingly, all share, per share, weighted average share information and
redeemable convertible preferred stock have been restated to reflect the split.
Following the 1995 Reorganization, the Company had 30,460,635 shares of
authorized capital stock, consisting of 25,000,000 shares of Common Stock and
5,460,635 shares of Preferred Stock, of which 3,127,302 shares were designated
Series A Convertible Preferred Stock, 333,333 were designated Series B
Convertible Preferred Stock and 2,000,000 shares of Preferred Stock undesignated
as to its series. In December 1995, the Board of Directors elected to decrease
the amount of authorized Preferred Stock to 2,000,000 undesignated shares.
INITIAL PUBLIC OFFERING
In November 1995, the Company sold 2,250,000 shares of Common Stock in an
initial public offering from which the Company received $33,480,000 before
deducting expenses.
PREFERRED STOCK
Upon the conclusion of the Company's initial public offering, all outstanding
shares of preferred stock were converted on a one for one basis to Common Stock.
Prior to that date, the Company had issued 3,127,302 shares of $2.24 Series A
Cumulative Redeemable Convertible Preferred Stock and 333,333 shares of $3.00
Series B Cumulative Redeemable Convertible Preferred Stock.
Series A and B Preferred Stock accrued cumulative dividends at $.20 and $.24 per
share per annum, respectively. Dividends in arrears prior to conversion for
Series A Convertible Preferred Stock at November 17, 1995 and December 31, 1994
and 1993 were $2,093,000, $1,624,000 and $1,165,000, respectively, and for
Series B Cumulative Redeemable Convertible Preferred Stock at November 17, 1995
and December 31, 1994 were $90,000 and $23,000, respectively. Upon conversion,
all rights to receive the dividends in arrears ceased.
WARRANTS
Warrants for the purchase of 164,619 shares of Common Stock at $2.24 per share
and warrants for the purchase of 741,494 shares of Series A Convertible
Preferred Stock at $2.24 per share that were outstanding at December 31, 1994
were fully exercised during 1995.
1993 REORGANIZATION
In 1993, the Company effected a plan of Reorganization (the "1993
Reorganization") whereby certain Preferred Stock and $1,566,000 of notes,
exclusive of accrued interest, were converted to Common Stock. Accrued interest
of $649,000 on the notes was canceled under the Plan.
7. STOCK OPTIONS
The Board of Directors and the stockholders approved the revised 1989 Incentive
Stock Option Plan (the "ISO Plan"), effective September 19, 1990, and the
Non-Qualified Stock Option Plan (the "Non-ISO Plan"), effective May 25, 1994. In
September 1995, the Board of Directors and the stockholders approved the
Company's 1995 Omnibus Stock Plan (the "Stock Plan"). The Stock Plan supersedes
both the ISO Plan and the Non-ISO Plan and no new options will be granted under
either of the superseded plans. Under the terms of the Stock Plan, key employees
and non-employees may be granted options to purchase up to 1,881,551 shares of
the Company's Common Stock.
A summary of changes in outstanding options and common shares reserved under the
Plan are as follows:
<TABLE>
<CAPTION>
SHARES
AVAILABLE FOR OPTIONS PRICE
GRANT OUTSTANDING EXERCISABLE PER SHARE
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 83,100 394,773 66,586 $.08 to $1.33
Shares authorized 498,669 - - -
Granted or became exercisable (273,500) 273,500 117,688 .08 to .59
Exercised - (46,813) (46,813) .08 to .20
Canceled 13,875 (13,875) (875) .08 to .59
------------------------------------------------------------------
Balance at December 31, 1993 322,144 607,585 136,586 .08 to 1.33
Shares authorized 350,430 - - -
Granted or became exercisable (502,251) (502,251) 419,641 .01 to 1.60
Exercised - (60,906) (60,906) .08 to .59
Canceled 45,765 45,765 (13,340) .08 to 1.33
------------------------------------------------------------------
Balance at December 31, 1994 216,088 1,003,165 482,181 .01 to 1.60
Shares authorized 379,390 - - -
Granted or became exercisable (445,790) 445,790 326,617 .01 to 52.88
Exercised - (225,445) (225,445) .01 to 1.60
Canceled 90,957 (92,044) (17,857) .20 to 1.33
------------------------------------------------------------------
Balance at December 31, 1995 240,645 1,131,466 565,496 $.01 to $52.88
==================================================================
</TABLE>
The issuance of stock options to board members with an exercise price less than
the fair value on the date of grant was accounted for as compensation expense to
be recognized over the service period of one year. At December 31, 1995 and
1994, $66,000 and $9,000 had been accrued for the unexercised options as a
component of deferred compensation.
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
------------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities $ 383,000 $ 176,000
Contract loss reserve 100,000 80,000
Payroll liabilities 102,000 63,000
Book over tax amortization 49,000 45,000
Book over tax depreciation 64,000 36,000
Income tax credits 260,000 70,000
Net operating loss carryforward 5,963,000 4,219,000
------------------------------------
Total deferred tax assets before valuation allowance 6,921,000 4,689,000
Less valuation allowance (5,548,000) (3,316,000)
------------------------------------
Total deferred tax assets 1,373,000 1,373,000
------------------------------------
Net deferred tax assets $1,373,000 $1,373,000
====================================
</TABLE>
Management believes it is more likely than not that the net deferred tax assets
of $1,373,000 at December 31, 1995 will be realized. However, the amount of the
deferred tax assets considered realizable could be reduced in the near term if
estimates of future taxable income are reduced.
At December 31, 1995, the Company had a net operating loss carryforward (NOL) of
approximately $15,800,000 which are available to offset taxable income through
2010. For financial reporting purposes, a valuation allowance has been recorded
to offset deferred tax assets that may not be realized. Included in the NOL is
approximately $4,128,000 of deductions resulting from disqualifying dispositions
of stock options. These deductions currently have a full valuation allowance and
when realized for financial statement purposes they will not result in a
reduction in income tax expense. Rather, the benefit will be recorded as
additional paid-in-capital.
Section 382 of the Internal Revenue Code restricts the annual utilization of the
NOL's incurred prior to a change in ownership. Such a change in ownership may
have occurred in connection with a stock transaction in 1993, and the Company is
currently assessing possible restrictions on the use of its NOL carryforwards as
a result of such possible change in ownership. There can be no assurance that
certain of the Company's NOL carryforwards will be available for use in the
future.
Significant components of the income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------
1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ 17,000 $ -
State - 3,000 -
Foreign 21,000 - -
------------------------------------------------------
Total current 21,000 20,000 -
Deferred:
Federal - (443,000) (425,000)
State - (79,000) (77,000)
------------------------------------------------------
Total deferred - (522,000) (502,000)
------------------------------------------------------
$ 21,000 $(502,000) $(502,000)
======================================================
</TABLE>
In 1995, $25,000 of taxes were paid. No income taxes were paid in 1994 or 1993.
A reconciliation of statutory federal income taxes to the income tax expense
(benefit) recorded is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate $ (239,000) $ 367,000 $ (42,000)
State taxes, net of federal benefit (34,000) 52,000 (6,000)
Foreign taxes 21,000 - -
Change in valuation allowance 2,232,000 (894,000) (454,000)
Effect of disqualifying dispositions and income
tax credits (1,841,000) - -
Use of net operating loss carryforwards (102,000) (20,000) -
Other (16,000) (7,000) -
------------------------------------------------------
$ 21,000 $(502,000) $(502,000)
======================================================
</TABLE>
9. EMPLOYEE BENEFIT PLAN
The Company has a voluntary defined contribution plan under Section 401(k) of
the Internal Revenue Code which covers substantially all U.S. employees of the
Company. The Company also has a voluntary defined contribution plan ("the
Retirement Plan") under Section 401(a) of the Internal Revenue Code which covers
substantially all employees of the Company. Contributions to the Retirement Plan
are limited to the employer's discretionary annual contribution.
The Company recognized expense for contributions to the plans as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C>
Defined contribution plan - 401(k) $ 44,000 $ 31,000 $ 17,000
Voluntary contribution plan - 401(a) 451,000 287,000 132,000
------------------------------------------------------
$495,000 $318,000 $149,000
======================================================
</TABLE>
10. MANAGEMENT INCENTIVE PLAN
The Company has a management incentive plan designed to attract, retain and
provide performance incentives for key management personnel. The plan provides
for a cash bonus to be paid to certain employees upon attainment of certain
individual and Company performance objectives. For the years ended December 31,
1995, 1994 and 1993, the Company recognized expense of $272,000, $116,000,
$90,000, respectively, under the plan.
11. SUBSEQUENT EVENTS
ACQUISITIONS
In May 1996, the Company's Canadian subsidiary acquired Webster Network
Strategies, Inc. ("Webster"), a Florida based Internet software developer, for
102,000 shares of Common Stock valued at $2,601,000 and $500,000 cash in
exchange for all outstanding Common Stock of Webster. The acquisition will be
accounted for using the purchase method.
In August 1996, the Company acquired Border Network Technologies, Inc.
("Border") and Enigma Logic, Inc. ("Enigma"). Both Border and Enigma were merged
directly into the Company. As a result of the acquisitions, the Company
exchanged approximately 6,000,000 shares of Common Stock for all of the
outstanding Common Stock of Border and approximately 2,060,000 shares of common
Stock for all of the outstanding common Stock of Enigma. In addition,
outstanding Border and Enigma stock options were converted into options to
purchase approximately 1,160,000 shares of the Company's Common Stock. as
discussed in Note 1, both acquisitions were accounted for as poolings of
interests. Separate results of operations for the periods prior to the
acquisitions are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
<S> <C> <C> <C>
Revenue:
Secure $20,712,000 $15,230,000 $ 9,397,000
Enigma 3,901,000 2,426,000 1,590,000
Border 3,317,000 139,000 --
----------------------------- ---------------------------- ----------------------------
Combined $27,930,000 $17,795,000 $10,987,000
============================= ============================ ============================
Net income (loss):
Secure $(974,000) $1,493,000 $1,062,000
Enigma 292,000 57,000 (331,000)
Border 50,000 (9,000) --
----------------------------- ---------------------------- ----------------------------
Combined $(632,000) $1,541,000 $ 731,000
============================= ============================ ============================
</TABLE>
Also in May 1996, the Company acquired the remaining 68% interest it did not own
in Border Network Technologies Europe Limited for 40,909 shares Common Stock and
$1,000,000 in cash.
In conjunction with these acquisitions, the Company recognized acquisition costs
of $13,069,000 in the quarter ended June 30, 1996.
STOCK OPTION PLAN
The Stock Plan was amended in May and August 1996 to reserve an additional
2,500,000 shares to provide for converted options from the acquisitions and
future grants.
SALE OF COMMON STOCK
In a series of transactions from February 1996 through June 1996, the Company
sold approximately 1,950,000 shares of Common Stock resulting in net proceeds of
approximately $13,250,000.
SIGNATURE
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.
SECURE COMPUTING CORPORATION
Date: November 25, 1996 By: ______________________________
Timothy P. McGurran
Vice President Finance and Operations,
Treasurer & Chief Financial Officer
EXHIBIT INDEX
No. Exhibit No. Page
11.1 Statement of computation of Earnings Per Share
Exhibit 11.1
Secure Computing Corporation
Statement of Computations of Earnings Per Share
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C>
PRIMARY
Weighted average common shares outstanding 7,271,000 6,272,000 2,341,000
Common share equivalent - 545,000 215,000
Common shares outstanding pursuant to Staff Accounting
Bulletin No. 83 394,000 525,000 525,000
------------------------------------------------------
Weighted average common shares and share equivalents
outstanding 7,665,000 7,342,000 3,081,000
======================================================
Net income (loss) $ (632,000) $1,541,000 $ 731,000
Accrued preferred stock dividends and accretion - (491,000) (457,000)
------------------------------------------------------
Net income (los) as adjusted $ (632,000) $1,050,000 $ 274,000
======================================================
Net income (loss) per share $(.08) $.14 $.09
======================================================
FULLY DILUTED
Primary shares outstanding 7,665,000 7,342,000 3,081,000
Preferred stock on an as if converted basis 2,760,000 2,450,000 2,249,000
------------------------------------------------------
Weighted average common shares and share equivalents
outstanding 10,425,000 9,792,000 5,330,000
======================================================
Net income (loss) $ (632,000) $1,541,000 $ 731,000
======================================================
Net income (loss) per share $(.06) $.16 $.14
======================================================
SUPPLEMENTARY
Fully diluted shares outstanding 10,425,000 9,792,000
Common shares assumed issued for repayment of bank debt
75,000 125,000
------------------------------------
Weighted average common shares and share equivalents
outstanding 10,500,000 9,917,000
====================================
Net income (loss) $ (632,000) $1,541,000
Interest related to bank debt 101,000 164,000
------------------------------------
Net income (loss) as adjusted $ (521,000) $1,705,000
====================================
Net income (loss) per share $(.05) $.17
====================================
</TABLE>
<TABLE>
<CAPTION>
Secure Computing Corporation
Schedule II
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1994 and 1993
ADDITIONS CHARGED
BALANCE AT TO COSTS AND
BEGINNING OF YEAR EXPENSES LESS DEDUCTIONS BALANCE AT END
DESCRIPTION OF YEAR
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Contract loss reserve $200,000 $ 50,000 $ - $250,000
Warranty reserves 34,000 86,000 - 120,000
Sales return allowance - 70,000 - 70,000
Allowance for doubtful accounts 165,000 115,000 (149,000) 131,000
------------------------------------------------------------------------
Total $399,000 $321,000 $ (149,000) $571,000
========================================================================
Year ended December 31, 1994:
Contract loss reserve $154,000 $ 46,000 $ - $200,000
Allowance for doubtful accounts 150,000 65,000 (50,000) 165,000
Warranty reserves - 34,000 - 34,000
------------------------------------------------------------------------
Total $304,000 $ 145,000 $ (50,000) $399,000
========================================================================
Year ended December 31, 1994:
Contract loss reserve $148,000 $123,000 $(117,000) $154,000
Allowance for doubtful accounts - 150,000 - 150,000
------------------------------------------------------------------------
Total $148,000 $273,000 $(117,000) $304,000
========================================================================
</TABLE>
