UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended June 30, 1997
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From _______________ to
________________.
Commission file number 0-27074
SECURE COMPUTING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-1637226
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2675 Long Lake Road
Roseville, Minnesota 55113
(Address of principal executive offices) (Zip code)
(612) 628-2700
Registrant's telephone number, including area code
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issueris classes
of common stock, as of the latest practical date: Common Stock, $.01 par value
- -- 15,575,616 issued and outstanding as of August 4, 1997, which number includes
(i) 3,071,817 Exchangeable Shares that have the same voting and other
rights as Common Stock and are immediately exercisable for shares of Common
Stock and (ii) securities that are immediately convertible into
7,273 Exchangeable Shares.
<PAGE>
SECURE COMPUTING CORPORATION
QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
(Unaudited) as of June 30, 1997 and
December 31, 1996 3
Condensed Consolidated Statements of
Operations (Unaudited) for the three
months ended June 30, 1997 and 1996 and
the six months ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the six
months ended June 30, 1997 and 1996 5
Notes to the Condensed Consolidated Financial
Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations. 8
PART II. OTHER INFORMATION 11
SIGNATURES 13
<PAGE>
PART 1. Financial Information
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
(Unaudited, in thousands except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,014 $ 12,130
Investments 982 5,935
Accounts receivable, net 8,850 7,098
Other current assets 2,819 4,266
-------- --------
Total current assets 23,665 29,429
PROPERTY AND EQUIPMENT, AT COST 12,062 10,839
Less accumulated depreciation and amortization (6,069) (4,993)
-------- --------
5,993 5,846
OTHER ASSETS 1,519 1,500
-------- --------
$ 31,177 $ 36,775
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other accrued liabilities $ 6,490 $ 8,788
Deferred revenue 1,699 1,755
-------- --------
Total current liabilities 8,189 10,543
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01; 2,000,000 shares authorized,
none issued and outstanding -- --
Common Stock, par value $.01; 25,000,000 shares authorized;
issued and outstanding -- June 30, 1997--15,496,409 and
December 31, 1996--15,101,152 155 151
Additional paid-in capital 66,132 65,208
Accumulated deficit (43,299) (39,127)
-------- --------
Total stockholders' equity 22,988 26,232
-------- --------
$ 31,177 $ 36,775
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 1997 and 1996 and
for the six months ended June 30, 1997 and 1996
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Products and services $ 7,207 $ 5,285 $ 13,618 $ 11,023
Government contracts 4,127 4,048 8,325 9,399
-------- -------- -------- --------
11,334 9,333 21,943 20,422
Cost of revenue 4,794 4,434 9,925 9,484
-------- -------- -------- --------
Gross profit 6,540 4,899 12,018 10,938
Operating expenses:
Selling and marketing 4,784 4,522 9,454 7,290
Research and development 2,171 2,773 4,878 4,720
General and administrative 944 1,831 2,159 3,207
Acquisition costs -- 13,069 -- 13,069
-------- -------- -------- --------
7,899 22,195 16,491 28,286
-------- -------- -------- --------
Operating loss (1,359) (17,296) (4,473) (17,348)
Net interest income 149 398 302 828
-------- -------- -------- --------
Loss before income taxes (1,210) (16,898) (4,171) (16,520)
Income taxes -- -- -- (21)
-------- -------- -------- --------
Net loss $ (1,210) $(16,898) $ (4,171) $(16,541)
======== ======== ======== ========
Net loss per share $ (.08) $ (1.21) $ (.27) $ (1.18)
======== ======== ======== ========
Weighted average shares outstanding 15,496 13,961 15,430 13,963
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1997 and 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1997 June 30, 1996
-------- --------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (5,641) $ 4,438
INVESTING ACTIVITIES
Cash paid in purchase of Webster Network Strategies, Inc. -- (759)
Proceeds from sales of investments 4,953 --
Purchase of property and equipment (1,223) (2,569)
Increase in intangibles and other assets (149) 68
-------- --------
Net cash provided by (used in) investing activities 3,581 (3,260)
FINANCING ACTIVITIES
Proceeds from long-term debt -- --
Proceeds from issuance of Common Stock 944 306
-------- --------
Net cash provided by financing activities 944 306
-------- --------
Increase (decrease) in cash and cash equivalents (1,116) 1,484
Cash and cash equivalents beginning of period 12,130 32,924
-------- --------
Cash and cash equivalents at end of period $ 11,014 $ 34,408
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by Secure Computing Corporation (the "Company") without audit
and reflect all adjustments (consisting only of normal and recurring
adjustments and accruals) which are, in the opinion of management,
necessary to present a fair statement of the results for the interim
periods presented. The statements have been prepared in accordance with
the regulations of the Securities and Exchange Commission, but omit
certain information and footnote disclosures necessary to present the
statements in accordance with generally accepted accounting principles.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full
fiscal year. These condensed financial statements should be read in
conjunction with the Consolidated Financial Statements and footnotes
thereto included in the Company's Annual 10-K Report for the year ended
December 31, 1996, as filed with the Securities and Exchange
Commission.
2. 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. The financial
statements for all periods presented have been restated to reflect the
pooling of interests of the Company and its acquired subsidiaries
Secure Computing Canada Ltd. (formerly Border Network Technologies
Inc.) and Enigma Logic, Inc.
3. NET INCOME (LOSS) PER SHARE
Net loss per share for the six months ended June 30, 1997 and 1996 are
computed using the weighted average number of common shares outstanding
during the periods including common stock equivalents if dilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share", which is required to be
adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock
options will be excluded. There is no impact expected to net income
(loss) per share for the three month and six month periods ended June
30, 1997 and June 30, 1996.
<PAGE>
4. STOCKHOLDERS' EQUITY
On July 24, 1997, the Company's Board of Directors declared a dividend
of one preferred share purchase right (the "Right") for each
outstanding share of Common Stock, $.01 par value (the "Common
Shares"), of the Company. The Board also authorized the issuance of one
Right for each Non-Voting Exchangeable Share (the "Exchangeable
Shares") of Secure Computing Canada Ltd. Under certain circumstances, a
Right may be exercised to purchase one one-hundredth of a share of
Series B Junior Participating Preferred Stock, $.01 par value (the
"Preferred Shares"), for $50, subject to adjustment. The Rights become
exercisable if a person or group acquires 15 percent or more of the
Company's outstanding Common Shares, including Exchangeable Shares,
subject to certain exceptions, or announces an offer which would result
in such person or group acquiring 15 percent or more of the Company's
outstanding Common Shares, including Exchangeable Shares. If a person
or group acquires 15 percent or more of the Company's outstanding
Common Shares, including Exchangeable Shares, subject to certain
exceptions, each Right will entitle its holder to buy Common Stock of
the Company having a market value of twice the exercise price of the
Right.
<PAGE>
SECURE COMPUTING CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
REVENUE. The Company's revenue increased by 21.4 percent to $11,334,000 for the
second quarter of 1997, up from $9,333,000 in the same period of 1996. For the
six months ended June 30, 1997, revenue increased 7.4 percent to $21,943,000
from $20,422,000 in 1996. The increase resulted from higher products and
services revenue. Products and services revenue was $7,207,000 and $13,618,000
for the quarter and six months ended June 30, 1997, respectively, an increase of
37.9 and 23.5 percent over the same periods in 1996, and reflects the Company's
increased marketing and sales efforts in the commercial arena. Government
contracts revenue was $4,127,000 and $8,325,000 for the quarter and six months
ended June 30, 1997, respectively, an increase of 2.0 percent and a decline of
11.4 percent over the same periods in 1996. The decline in 1997 is due to a one
time acceleration of a government contract in the first quarter of 1996.
GROSS PROFIT. Gross profit as a percentage of revenue increased from 52.5
percent in the second quarter of 1996 to 57.7 percent in the same period of
1997. Gross profit percentage also increased in the six month period ended June
30, 1997 to 54.8 percent from 53.6 percent in the same period of 1996. The
margin improvement is attributable to a higher proportion of revenue from
software sales and improved production efficiencies. The Company believes, with
the gains in products and services revenue, that margins for the remainder of
the year should trend higher.
SELLING AND MARKETING. Selling and marketing expenses increased by 5.8 percent
to $4,784,000 in the second quarter of 1997, up from $4,522,000 in the same
period of 1996. Selling and marketing expenses also increased in the six month
period ended June 30, 1997 to $9,454,000, up from $7,290,000 in the same period
of 1996. As a percentage of revenue, expenses were 42.2 and 43.1 percent for the
three month and six month periods ended June 30, 1997, compared to 48.5 and 35.7
percent in 1996. The increase resulted primarily from expenses associated with
the Company's increased order activity, a stronger marketing presence and
personnel additions made to position the Company for future growth. The Company
expects the quarterly amount of selling and marketing expenses to increase
during the remainder of 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by 21.7
percent to $2,171,000 in the second quarter of 1996, down from $2,773,000 in the
same period of 1996. Research and development expenses increased slightly in the
first half of 1997 to $4,878,000, up from $4,720,000 in the same period of 1996.
As a percentage of revenue, research and development expenses were 19.2 and 22.2
percent for the three month and six month periods ended June 30, 1997, compared
to 29.7 and 23.1 percent for the same periods in 1996. The increase resulted
primarily from the Company's continued development investments in new and
existing products. The Company expects research and development expenses to
remain at similar levels in the third quarter.
GENERAL AND ADMINISTRATIVE. General and administrative expenses as a percentage
of revenue were 8.3 percent for the second quarter of 1997, compared to 19.6
percent for the second quarter of 1996, and 9.8 percent for the first six months
of 1997, compared to 15.7 percent for the first six months of 1996. The Company
expects the quarterly amounts of general and administrative expenses as a
percentage of revenue will decrease during the remainder of 1997.
ACQUISITION COSTS. Certain acquisition costs were recognized in the second
quarter of 1996 relating to the Webster Network Strategies, Inc. ("Webster"),
Border Network Technologies Inc. ("Border") and Enigma Logic, Inc. ("Enigma")
acquisitions. Purchased technology of $4,110,000 was expensed in connection with
the Webster acquisition in accordance with purchase accounting rules. Also,
$8,959,000 of acquisition costs were recorded for investment banking and other
professional fees, and other accruals for the Border and Enigma acquisitions in
accordance with pooling rules.
<PAGE>
NET INTEREST INCOME (EXPENSE). The difference in net interest income (expense)
between the periods reflects interest earned on reduced levels of cash and cash
equivalents in 1997 by the Company.
INCOME TAXES. The Company recognized no income tax expense for either of the
periods in both 1997 and 1996. Management believes it is more likely than not
that deferred tax assets, which total $1,373,000 at June 30, 1997, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and investments decreased by $6.1
million from December 31, 1996 to June 30, 1997. The decrease resulted primarily
from the use of cash to fund operations and purchase capital equipment, which
was partially offset by proceeds from stock option exercises. As of June 30,
1997, the Company had working capital of $14.4 million. 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 lines of business.
Capital additions in the first six months of 1997 were $1,200,000 and were
primarily made up of computer equipment, office furniture and leasehold
improvements. The Company expects to invest another $1.6 million throughout the
remainder of 1997 mainly for computer equipment and facilities and business
systems upgrades.
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.
FORWARD LOOKING STATEMENTS
Certain statements made above, which are summarized below, are forward-looking
statements that involve risks and uncertainties, and actual results may be
materially different. Factors that could cause actual results to differ include
those identified below:
* THE COMPANY BELIEVES, WITH THE GAINS IN PRODUCTS AND SERVICES REVENUE,
THAT MARGINS FOR THE REMAINDER OF THE YEAR SHOULD TREND HIGHER -- This
expectation may be adversely impacted by presently unanticipated higher
expenses, price cutting pressures or lower products and services
revenue within the total revenue mix.
* THE COMPANY EXPECTS THE QUARTERLY AMOUNT OF SELLING AND MARKETING
EXPENSES TO INCREASE DURING THE REMAINDER OF 1997 -- This expectation
may be impacted by current plans for a full scale product marketing and
branding campaign being curtailed or delayed, or decreased products and
services revenue resulting in lower selling expense.
* THE COMPANY EXPECTS RESEARCH AND DEVELOPMENT EXPENSES TO REMAIN AT
SIMILAR LEVELS IN THE THIRD QUARTER -- This expectation depends on the
Company maintaining the currently anticipated level of product
development, which may not occur due to unexpected increases in such
costs or because of a need to accelerate or begin new product
development.
<PAGE>
* THE COMPANY EXPECTS THE QUARTERLY AMOUNTS OF GENERAL AND ADMINISTRATIVE
EXPENSES AS A PERCENTAGE OF REVENUE WILL DECREASE DURING THE REMAINDER
OF 1997 -- Meeting this expectation depends upon the Companyis ability
to control costs and achieve a higher level of revenue, which may not
occur for a variety of reasons, including general market conditions for
the Companyis products and services, development and acceptance of new
products offered by the Company and introductions of products by
competitors.
* MANAGEMENT BELIEVES IT IS MORE LIKELY THAN NOT THAT DEFERRED TAX
ASSETS, WHICH TOTAL $1,373,000 AT JUNE 30, 1997, WILL BE REALIZED --
Meeting this expectation depends mainly on the Company maintaining its
existing government contract business. If these contracts were lost or
adjusted downward, deferred tax assets would be expected to be written
down with a corresponding charge to income tax expense recorded.
* 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 - This expectation depends upon the ability of the Company to
generate revenue as expected and to avoid unexpected expenses so as to
be able to use available cash for the purposes described above.
* THE COMPANY EXPECTS TO INVEST ANOTHER $1.6 MILLION THROUGHOUT THE
REMAINDER OF 1997 MAINLY FOR COMPUTER EQUIPMENT AND FACILITIES AND
BUSINESS SYSTEMS UPGRADES - This expectation depends upon the ability
of the Company to generate revenue as expected and avoid unexpected
expenses so as to have funds available for this purpose. Additional
funds beyond the $1.6 million figure could be invested if the Company
determines that the desired equipment, facilities and upgrades are more
costly than expected.
* 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 -- This expectation may be adversely impacted
by the Company's inability to generate revenue as currently expected,
unexpected expenses and the need for additional funds to react to
changes in the marketplace, including unexpected increases in personnel
costs and selling and marketing expenses or currently unplanned
acquisitions.
<PAGE>
SECURE COMPUTING CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on
May 14, 1997. At such meeting, the stockholders approved (i)
the election of all four director nominees named in the
Company's proxy statement (Betsy S. Atkins, 11,471,482 votes;
Jeffrey H. Waxman, 11,480,832 votes; Dennis J. Shaughnessy,
11,061,984 votes; and Robert J. Frankenberg, 11,481,932
votes); (ii) the Amended and Restated 1995 Omnibus Stock Plan
of the Company, as amended (10,319,909 votes for, 881,392
votes against, 27,653 abstentions and 314,704 broker
non-votes); (iii) the Employee Stock Purchase Plan of the
Company, as amended (11,189,579 votes for, 132,489 votes
against, 14,592 abstentions and 206,999 broker non-votes); and
(iv) the appointment of Ernst & Young LLP as independent
auditors for the Company was ratified (11,513,427 votes for,
21,783 votes against, 8,449 abstentions and zero broker
non-votes). For further information respecting all such
matters, reference is made to the Company's proxy statement
dated April 11, 1997.
ITEM 5. OTHER INFORMATION
None
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997:
3.1 Restated Certificate of Incorporation of the Company(1)
3.2 By-Laws of the Company(2)
4 Form of Rights Agreement, dated as of July 24, 1997 among Secure
Computing Corporation, Norwest Bank Minnesota, National
Association, as Rights Agent, and the Bank of Nova Scotia Trust
Company of New York, as Trustee, which includes as Exhibit B the
Form of Right Certificate(3)
10 Secure Computing Corporation 1997 Non-Officer Stock Option Plan
27 Financial Data Schedule
Copies of Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Exhibits.
(b) REPORTS ON FORM 8-K
None
- --------
(1) Incorporated herein by reference to Exhibit 3.2 to the Company's Form
10-K filed on March 28, 1996 (File No. 0-27074).
(2) Incorporated herein by reference to Exhibit 3.3 to the Company's
Registration Statement on Form S-1 (Registration No. 33-97838).
(3) Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A filed on August 8, 1997 (File No.
0-27074).
<PAGE>
SECURE COMPUTING CORPORATION
SIGNATURES
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: August 12, 1997 By: \s\ Timothy P. McGurran
--------------------------
Timothy P. McGurran,
Vice President of Operations
and Chief Financial Officer
(Duly authorized officer and
Principal Financial Officer)
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company INCORPORATED BY REFERENCE
3.2 By-Laws of the Company INCORPORATED BY REFERENCE
4 Form of Rights Agreement INCORPORATED BY REFERENCE
10 Secure Computing Corporation 1997 Non-Officer Stock Option FILED ELECTRONICALLY
Plan
27 Financial Data Schedule FILED ELECTRONICALLY
</TABLE>
EXHIBIT 10
SECURE COMPUTING CORPORATION
1997 NON-OFFICER STOCK OPTION PLAN
DEFINED TERMS AND RULES OF CONSTRUCTION
1. DEFINITIONS.
Set forth below are the meanings of certain terms used in this Plan.
a. "Affiliate" means any corporation that is a "parent
corporation" or "subsidiary corporation" of the Company, as those terms
are defined in Section 424(e) and (f) of the Code, or any successor
provision.
b. "Agreement" means a written contract entered into between
the Company or an Affiliate and a Participant containing the terms and
conditions of an Award in such form and not inconsistent with this Plan
as the Committee shall approve from time to time, together with all
amendments thereto, which amendments may be unilaterally made by the
Company (with the approval of the Committee) unless such amendments are
deemed by the Committee to be materially adverse to the Participant and
are not required as a matter of law.
c. "Award" means a grant made under this Plan in the form of
Options.
d. "Board" means the Board of Directors of the Company.
e. "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
f. "Committee" means three or more Disinterested Persons
designated by the Board to administer the Plan under Section 3.
g. "Company" means Secure Computing Corporation, a Delaware
corporation, or any successor to substantially all of its businesses.
h. "Effective Date" means the date specified in Section 7.1
hereof.
i. "Employee" means (i) any full-time employee of the Company
who is not an officer or director of the Company or any parent
corporation of the Company and (ii) any contractor or advisor to or
representative of the Company or any Affiliate thereof, notwithstanding
that such person is an not an employee of the Company within the
meaning of the Code. References in this Plan to "employment" and
related terms shall include the providing of services in the capacity
as contractor or other advisor to or representative of the Company.
<PAGE>
j. "Event" means any of the following; provided, however, that
no Event shall be deemed to have occurred unless and until a majority
of the directors constituting the Incumbent Board (as defined below)
shall have declared that an Event has occurred:
(1) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Exchange Act) of beneficial ownership (within the meaning
of Exchange Act Rule 13d-3) of 20% (except for acquisitions by
any individual, entity or group that, prior to the
effectiveness of this Plan, owns 20 % or more of any class of
capital stock of the Company) or more of either (i) the then
outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined
voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of the
Board (the "Outstanding Company Voting Securities"); provided,
however, that the following acquisitions shall not constitute
an Event:
(A) any acquisition of voting securities of
the Company directly from the Company,
(B) any acquisition of voting securities of
the Company by the Company or any of its wholly owned
Subsidiaries,
(C) any acquisition of voting securities of
the Company by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any
of its Subsidiaries, or
(D) any acquisition by any corporation with
respect to which, immediately following such
acquisition, more than 60% of respectively, the then
outstanding shares of common stock of such
corporation and the combined voting power of the then
outstanding voting securities of such corporation
entitled to vote generally in the election of
directors is then beneficially owned, directly or
indirectly, by all or substantially all of the
individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting
Securities immediately prior to such acquisition in
substantially the same proportions as was their
ownership, immediately prior to such acquisition, of
the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be;
(2) Individuals who, as of the Effective Date,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director of
the
<PAGE>
Board subsequent to the Effective Date whose election, or
nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered a
member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election
contest which was (or, if threatened, would have been) subject
to Exchange Act Rule 14a-11;
(3) Approval by the stockholders of the Company of a
reorganization, merger, consolidation or statutory exchange of
Outstanding Company Voting Securities, unless immediately
following such reorganization, merger, consolidation or
exchange, all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company
Voting Securities immediately prior to such reorganization,
merger, consolidation or exchange beneficially own, directly
or indirectly, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting
power of the then outstanding voting securities entitled to
vote generally in the election of directors, as the case may
be, of the corporation resulting from such reorganization,
merger, consolidation or exchange in substantially the same
proportions as was their ownership, immediately prior to such
reorganization, merger, consolidation or exchange, of the
Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be; or
(4) Approval by the stockholders of the Company of
(i) a complete liquidation or dissolution of the Company or
(ii) the sale or other disposition of all or substantially all
of the assets of the Company, other than to a corporation with
respect to which, immediately following such sale or other
disposition, more than 60% of, respectively, the then
outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly
or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and Outstanding Company
Voting Securities immediately prior to such sale or other
disposition in substantially the same proportion as was their
ownership, immediately prior to such sale or other
disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be.
Notwithstanding the above, an Event shall not be deemed to occur with
respect to a recipient of an Award if the acquisition of the 20% or
greater interest referred to in paragraph (1) is by a group, acting in
concert, that includes that recipient or if at least 40% of the then
outstanding common stock or combined voting power of the then
outstanding voting securities (or voting equity interests) of the
surviving corporation or
<PAGE>
of any corporation (or other entity) acquiring all or substantially all
of the assets of the Company shall be beneficially owned, directly or
indirectly, immediately after a reorganization, merger, consolidation,
statutory share exchange or sale or other disposition of assets
referred to in paragraphs (3) or (4) by a group, acting in concert,
that includes that recipient.
k. "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time.
l. "Fair Market Value" as of any date means, unless otherwise
expressly provided in the Plan:
(i) the closing price of a Share on the date
immediately preceding that date or, if no sale of Shares shall
have occurred on that date, on the next preceding day on which
a sale of Shares occurred,
(A) on the composite tape for New York Stock
Exchange listed shares, or
(B) if the Shares are not quoted on the
composite tape for New York Stock Exchange listed
shares, on the principal United States Securities
Exchange registered under the Exchange Act on which
the Shares are listed, or
(C) if the Shares are not listed on any such
exchange, on the Nasdaq National Market, or
(ii) if clause (i) is inapplicable, the mean between
the closing "bid" and the closing "asked" quotation of a Share
on the date immediately preceding that date, or, if no closing
bid or asked quotation is made on that date, on the next
preceding day on which a quotation is made, on the NASDAQ
System or any system then in use, or
(iii) if clauses (i) and (ii) are inapplicable, what
the Committee determines in good faith to be 100% of the fair
market value of a Share on that date.
However, if the applicable securities exchange or system has closed for
the day at the time the event occurs that triggers a determination of
Fair Market Value, whether the grant of an Award, the exercise of an
Option or Stock Appreciation Right or otherwise, all references in this
paragraph to the "date immediately preceding that date" shall be deemed
to be references to "that date". In the case of an Incentive Stock
Option, if such determination of Fair Market Value is not consistent
with the then current regulations of the Secretary of the Treasury,
Fair Market Value shall be
<PAGE>
determined in accordance with said regulations. The determination of
Fair Market Value shall be subject to adjustment as provided in Section
16.
m. "Fundamental Change" shall mean a dissolution or
liquidation of the Company, a sale of substantially all of the assets
of the Company, a merger or consolidation of the Company with or into
any other corporation, regardless of whether the Company is the
surviving corporation, or a statutory share exchange involving capital
stock of the Company.
n. "Non-Employee Director" means a member of the Board who is
considered a non-employee director within the meaning of Exchange Act
Rule 16b-3(b)(3)(i) or any successor definition.
o. "Option" means a non-statutory right (which is not intended
to meet the requirements of Code Section 422 or any successor to said
section relating to "incentive stock options") to purchase Stock
pursuant to an Award under the Plan.
p. "Participant" means an Employee to whom an Award is made.
q. "Plan" means this Secure Computing Corporation 1997
Non-Officer Stock Option Plan, as amended from time to time.
r. "Retirement" as applied to a Participant, means (i) until
such time as the Company adopts an employee pension benefit plan (as
that term is defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974), termination of employment with the Company at
any time upon or after attaining age 65; (ii) after adoption by the
Company of an employee pension benefit plan, termination of employment
with the Company at a time when the Participant is eligible for normal
retirement under such a plan, as amended from time to time, or any
successor plan thereto.
s. "Share" means a share of Stock.
t. "Stock" means the common stock, $.01 par value per share
(as such par value may be adjusted from time to time), of the Company.
u. "Subsidiary" means a "subsidiary corporation", as that term
is defined in Code Section 424(f) or any successor provision.
v. "Successor" means the legal representative of the estate of
a deceased Participant or the person or persons who may, by bequest or
inheritance, or pursuant to the terms of an Award or of forms submitted
by the Participant to the Committee pursuant to Section 15, acquire the
right to exercise an Option in the event of a Participant's death.
<PAGE>
w. "Term" means the period during which an Option may be
exercised.
x. "Total and Permanent Disability" as applied to a
Participant, means disability within the meaning of Section 22(e)(3) of
the code or any successor provision.
2. GENDER AND NUMBER.
Except when otherwise indicated by context, reference to the masculine
gender shall include, when used, the feminine gender and any term used in the
singular shall also include the plural.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,014,000
<SECURITIES> 982,000
<RECEIVABLES> 9,109,000
<ALLOWANCES> 269,000
<INVENTORY> 995,000
<CURRENT-ASSETS> 23,664,000
<PP&E> 12,062,000
<DEPRECIATION> 6,069,000
<TOTAL-ASSETS> 31,176,000
<CURRENT-LIABILITIES> 8,189,000
<BONDS> 0
0
0
<COMMON> 155,000
<OTHER-SE> 66,131,000
<TOTAL-LIABILITY-AND-EQUITY> 31,176,000
<SALES> 11,334,000
<TOTAL-REVENUES> 11,334,000
<CGS> 4,794,000
<TOTAL-COSTS> 4,794,000
<OTHER-EXPENSES> 7,899,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,211,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,211,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,211,000)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
