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 March 31, 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 issuer's
classes of common stock, as of the latest practical date: Common Stock, $.01 par
value -- 15,427,620 issued and outstanding as of April 23, 1997, which number
includes (i) 3,367,120 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 10,908
Exchangeable Shares.
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 March 31, 1997 and
December 31, 1996 3
Condensed Consolidated Statements of
Operations (Unaudited) for the three
months ended March 31, 1997
and 1996 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the three
months ended March 31, 1997
and 1996 5
Notes to the Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 7-9
PART II. OTHER INFORMATION 10-11
SIGNATURES 12
PART 1. Financial Information
<TABLE>
<CAPTION>
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1996
(Unaudited, in thousands except share amounts)
3/31/97 12/31/96
-------- --------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 10,879 $ 12,130
Investments 2,987 5,935
Accounts receivable, net 8,595 7,098
Other current assets 3,230 4,266
-------- --------
Total current assets 25,691 29,429
PROPERTY AND EQUIPMENT, AT COST 11,670 10,839
Less accumulated depreciation and amortization (5,529) (4,993)
-------- --------
6,141 5,846
OTHER ASSETS 1,554 1,500
-------- --------
$ 33,386 $ 36,775
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other accrued liabilities $ 7,363 $ 8,788
Deferred revenue 1,808 1,755
-------- --------
Total current liabilities 9,171 10,543
STOCKHOLDERS' EQUITY
Common Stock, par value $.01; 25,000,000 shares
authorized; issued and outstanding - March 31,
1997--15,407,233 and December 31, 1996--15,101,152 154 151
Additional paid-in capital 66,149 65,208
Accumulated deficit (42,088) (39,127)
-------- --------
Total stockholders' equity 24,215 26,232
-------- --------
$ 33,386 $ 36,775
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1997 and 1996
(Unaudited, in thousands except per share amounts)
Three months Three months
ended ended
3/31/97 3/31/96
-------- --------
Revenue:
Products and services $ 6,411 $ 5,738
Government contracts 4,198 5,351
-------- --------
10,609 11,089
Cost of revenue 5,131 5,050
-------- --------
Gross profit 5,478 6,039
Operating expenses:
Selling and marketing 4,670 2,768
Research and development 2,707 1,947
General and administrative 1,215 1,376
-------- --------
8,592 6,091
-------- --------
Operating loss (3,114) (52)
Net interest income 153 392
-------- --------
Income (loss) before income taxes (2,961) 340
Income taxes -- 169
-------- --------
Net income (loss) $ (2,961) $ 171
======== ========
Net income (loss) per share $ (.19) $ .01
======== ========
Weighted average shares outstanding 15,314 13,965
======== ========
See accompanying notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1997 and 1996
(Unaudited, in thousands)
Three months Three months
ended ended
3/31/97 3/31/96
-------- --------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (4,149) $ (1,469)
INVESTING ACTIVITIES
Proceeds from sales of investments 3,000 --
Purchase of property and equipment (831) (1,438)
Increase in intangibles and other assets (215) (34)
-------- --------
Net cash provided by (used in) investing activities 1,954 (1,472)
FINANCING ACTIVITIES
Proceeds from long-term debt -- 159
Proceeds from issuance of Common Stock 944 10,409
-------- --------
Net cash provided by financing activities 944 10,568
-------- --------
Increase (decrease) in cash and cash equivalents (1,251) 7,627
Cash and cash equivalents beginning of period 12,130 32,924
-------- --------
Cash and cash equivalents at end of period $ 10,879 $ 40,551
======== ========
</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 income (loss) per share for the three months ended March 31, 1997
and 1996 are computed using the weighted average number of common stock
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 months periods ended March 31, 1997 and
March 31, 1996.
SECURE COMPUTING CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
REVENUE. The Company's revenue decreased by 4.3 percent to $10,609,000 for the
first quarter of 1997, down from $11,089,000 in the same period of 1996. The
decrease resulted from lower government contracts revenue. Products and services
revenue was $6,411,000 for the quarter, an increase of 11.7 percent over 1996.
Government contracts revenue was $4,198,000 for the quarter, a decrease of 21.5
percent from 1996. Government contracts revenue in the first quarter of 1996
reflected a one-time acceleration of the Company's effort on the Secure Network
Server program. The Company expects quarterly revenue from government contracts
for the rest of 1997 to remain comparable to the first quarter of 1997.
GROSS PROFIT. Gross profit as a percentage of revenue decreased from 54.5
percent in the first quarter of 1996 to 51.6 percent in the same period of 1997.
The decrease resulted mainly from certain bundled hardware and software sales
within products and services revenue in 1997, which carry lower margins than
software only sales, increasing as a percentage of the revenue mix. The Company
believes that margins for the remainder of the year should trend higher.
SELLING AND MARKETING. Selling and marketing expenses increased by 68.7 percent
to $4,670,000 in the first quarter of 1997, up from $2,768,000 in the same
period of 1996. As a percentage of revenue, selling and marketing expenses were
44.0 percent for the quarter compared to 25.0 percent in 1996. The increase
resulted primarily from expenses associated with a stronger sales and marketing
presence needed due to competitive pressures and personnel additions made to
position the Company for future growth. The Company expects selling and
marketing expenses will increase during the remainder of the year.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by 39.0
percent to $2,707,000 in the first quarter of 1997, up from $1,947,000 in the
same period of 1996. As a percentage of revenue, research and development
expenses were 25.5 percent for the quarter compared to 17.6 percent in 1996. The
increase resulted primarily from the Company's continued development investments
in new and existing products, including Secure Computing Firewall for NT and
enhanced versions of the Company's other firewall and authentication products.
GENERAL AND ADMINISTRATIVE. As a percentage of revenue, general and
administrative expenses were 11.4 percent for the first quarter of 1997,
compared to 12.4 percent for the first quarter of 1996. The Company expects the
quarterly amount of general and administrative expenses for the rest of 1997 to
remain at levels comparable to those of the first quarter of 1997.
NET INTEREST INCOME. The difference in net interest income between the periods
reflects lower cash and investment balances in 1997 as compared to 1996.
INCOME TAXES. The Company recognized no income tax expense in the first quarter
of 1997, compared to $169,000 in 1996. Management believes it is more likely
than not that deferred tax assets, which total $1,373,000 at March 31, 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 decreased by $1.3 million from December
31, 1996 to March 31, 1997. The decrease resulted primarily from the use of cash
to fund operations and purchase capital equipment, which was partially offset by
the sale of investments and proceeds from stock option exercises. As of March
31, 1997, the Company had working capital of $16.5 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 line of business.
Capital additions in the first three months of 1997 were $800,000 and were
primarily made up of computer equipment, office furniture and leasehold
improvements. The Company expects to invest another $2 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 EXPECTS QUARTERLY REVENUE FROM GOVERNMENT CONTRACTS FOR THE
REMAINDER OF 1997 TO REMAIN STEADY IN COMPARISON TO THE FIRST QUARTER OF
1997 -- Meeting this expectation depends upon the Company's ability to
maintain its government contracting business at its current level which,
because the Company's current backlog of contracts is not sufficient to
last through the end of 1997, entails making proposals on and winning
contracts, which may not occur. Also, this expectation may be adversely
affected by currently unforeseen cancellation of existing contracts.
* THE COMPANY BELIEVES 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 SELLING AND MARKETING EXPENSES WILL INCREASE DURING THE
REMAINDER OF THE YEAR -- 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 THE QUARTERLY AMOUNT OF GENERAL AND ADMINISTRATIVE
EXPENSES FOR THE REST OF 1997 TO REMAIN AT LEVELS COMPARABLE TO THOSE OF
THE FIRST QUARTER OF 1997 -- Meeting this expectation depends upon the
Company's ability to control costs, which may not occur for a variety of
reasons, including general market conditions for the Company's products and
services, development and acceptance of new products offered by the
Company, and introduction of products by competitors.
* MANAGEMENT BELIEVES IT IS MORE LIKELY THAN NOT THAT DEFERRED TAX ASSETS,
WHICH TOTAL $1,373,000 AT MARCH 31, 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 $2 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 $2 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.
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
None
ITEM 5. OTHER INFORMATION
None
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 March 31, 1997:
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 By-Laws of the Company (2)
4 Specimen of Common Stock certificate (3)
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 Number 33-97838).
3 Incorporated herein by reference to the same numbered Exhibit to Amendment
No. 2 to the Company's Registration Statement on Form S-1 (Registration
Number 33-97838).
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: April 28, 1997 By: \s\ Timothy P. McGurran
------------------------------
Timothy P. McGurran,
Vice President of Operations
and Chief Financial Officer
(Duly authorized officer and
Principal Financial Officer)
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 Specimen of Common Stock certificate INCORPORATED BY
REFERENCE
27 Financial Data Schedule FILED ELECTRONICALLY
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 10,879,000
<SECURITIES> 2,987,000
<RECEIVABLES> 8,885,000
<ALLOWANCES> 290,000
<INVENTORY> 892,000
<CURRENT-ASSETS> 25,691,000
<PP&E> 11,670,000
<DEPRECIATION> 5,529,000
<TOTAL-ASSETS> 33,386,000
<CURRENT-LIABILITIES> 9,171,000
<BONDS> 0
0
0
<COMMON> 154,000
<OTHER-SE> 66,149,000
<TOTAL-LIABILITY-AND-EQUITY> 33,386,000
<SALES> 10,609,000
<TOTAL-REVENUES> 10,609,000
<CGS> 5,131,000
<TOTAL-COSTS> 5,131,000
<OTHER-EXPENSES> 8,592,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,961,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,961,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,961,000)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
