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 September 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
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(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
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Registrant's telephone number, including area code
Not Applicable
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(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
- -- 15,719,841 issued and outstanding as of November 3, 1997, which number
includes $3,061,817 Exchangeable Shares that have the same voting and other
rights as Common Stock and are immediately exercisable for shares of Common
Stock.
<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 September 30, 1997 and
December 31, 1996 3
Condensed Consolidated Statements of
Operations (Unaudited) for the three months
ended September 30, 1997 and 1996 and the
nine months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the nine months
ended September 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
September 30, 1997 and December 31, 1996
(Unaudited, in thousands except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,689 $ 12,130
Investments 0 5,935
Accounts receivable, net 12,127 7,098
Other current assets 3,460 4,266
---------- ----------
Total current assets 24,276 29,429
PROPERTY AND EQUIPMENT, AT COST 12,552 10,839
Less accumulated depreciation and amortization (6,643) (4,993)
---------- ----------
5,909 5,846
OTHER ASSETS 1,507 1,500
---------- ----------
$ 31,692 $ 36,775
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other accrued liabilities $ 7,200 $ 8,788
Deferred revenue 1,500 1,755
---------- ----------
Total current liabilities 8,700 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 -- September 30, 1997--15,620,600
and December 31, 1996--15,101,152 156 151
Additional paid-in capital 66,519 65,208
Accumulated deficit (43,683) (39,127)
---------- ----------
Total stockholders' equity 22,992 26,232
---------- ----------
$ 31,692 $ 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 September 30, 1997 and 1996 and
for the nine months ended September 30, 1997 and 1996
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1997 1996 1997 1996
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenue:
Products and services $ 9,188 $ 6,904 $ 22,805 $ 17,927
Government contracts 3,049 3,923 11,375 13,322
---------- ---------- ---------- ----------
12,237 10,827 34,180 31,249
Cost of revenue 4,502 4,894 14,423 14,378
---------- ---------- ---------- ----------
Gross profit 7,735 5,933 19,757 16,871
Operating expenses:
Selling and marketing 5,308 4,952 14,762 12,242
Research and development 2,052 2,540 6,930 7,260
General and administrative 890 1,603 3,049 4,810
Acquisition costs -- -- -- 13,069
---------- ---------- ---------- ----------
8,250 9,095 24,741 37,381
---------- ---------- ---------- ----------
Operating loss (515) (3,162) (4,984) (20,510)
Net interest income 127 302 429 1,130
---------- ---------- ---------- ----------
Loss before income taxes (388) (2,860) (4,555) (19,380)
Income taxes -- -- -- --
---------- ---------- ---------- ----------
Net loss $ (388) $ (2,860) $ (4,555) $ (19,380)
========== ========== ========== ==========
Net loss per share $ (.02) $ (.19) $ (.29) $ (1.39)
========== ========== ========== ==========
Weighted average shares outstanding 15,619 14,838 15,494 13,961
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1997 and 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1996
-------------------------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (8,349) $ (15,315)
INVESTING ACTIVITIES
Cash paid in purchase of Webster Network Strategies, Inc. -- (759)
Proceeds from sales of investments 5,935 (989)
Purchase of property and equipment (1,714) (3,451)
Increase in intangibles and other assets (629) (338)
---------- ----------
Net cash provided by (used in) investing activities 3,592 (5,537)
FINANCING ACTIVITIES
Proceeds from long-term debt -- (1,896)
Proceeds from issuance of Common Stock 1,316 11,112
---------- ----------
Net cash provided by financing activities 1,316 9,216
---------- ----------
Increase (decrease) in cash and cash equivalents (3,441) (11,636)
Cash and cash equivalents beginning of period 12,130 32,924
---------- ----------
Cash and cash equivalents at end of period $ 8,689 $ 21,288
========== ==========
NONCASH TRANSACTIONS
Common Stock issued in purchase of Webster Network
Strategies, Inc. -- $ 2,601
========== ==========
Common Stock issued to purchase remaining interest
in Border Network Technologies Europe Ltd. -- $ 331
========== ==========
</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 nine months ended September 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 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 nine month periods ended September 30,
1997 and September 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 13.0 percent to $12,237,000 for the
third quarter of 1997, up from $10,827,000 in the same period of 1996. For the
nine months ended September 30, 1997, revenue increased 9.4 percent to
$34,180,000 from $31,249,000 in 1997. The increase resulted from higher products
and services revenue. Products and services revenue was $9,188,000 and
$22,805,000 for the quarter and nine months ended September 30, 1997,
respectively, an increase of 33.1 and 27.2 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 $3,049,000 and $11,375,000
for the quarter and nine months ended September 30, 1997, respectively, a
decrease of 22.3 percent and 14.6 percent over the same periods in 1996. The
decrease 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 54.8
percent in the third quarter of 1996 to 63.2 percent in the same period of 1997.
Gross profit percentage also increased in the nine month period ended September
30, 1997 to 57.8 percent from 54.0 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 7.2 percent
to $5,308,000 in the third quarter of 1997, up from $4,952,000 in the same
period of 1996. Selling and marketing expenses also increased in the nine month
period ended September 30, 1997 to $14,762,000, up from $12,242,000 in the same
period of 1996. As a percentage of revenue, selling and marketing expenses were
43.4 and 43.2 percent for the three month and nine month periods ended September
30, 1997, compared to 45.7 and 39.2 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 19.2
percent to $2,052,000 in the third quarter of 1997, down from $2,540,000 in the
same period of 1996. Research and development expenses decreased slightly in the
first nine months of 1997 to $6,930,000, from $7,260,000 in the same period of
1996. As a percentage of revenue, research and development expenses were 16.8
and 20.3 percent for the three month and nine month periods ended September 30,
1997, compared to 23.5 and 23.2 percent for the same periods in 1996. The
decrease resulted primarily from synergies achieved from integrating duplicative
efforts. The Company expects research and development expenses to remain at
similar levels in the fourth quarter.
GENERAL AND ADMINISTRATIVE. General and administrative expenses as a percentage
of revenue were 7.3 percent for the third quarter of 1997, compared to 14.8
percent for the third quarter of 1996, and 8.9 percent for the first nine months
of 1997, compared to 15.4 percent for the first nine months of 1996. The
decrease resulted primarily from the Company's centralization of global finance
and operations functions. The Company expects the quarterly amounts of general
and administrative expenses as a percentage of revenue will stay flat during the
fourth quarter of 1997 and into 1998.
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 September 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 $9.4
million from December 31, 1996 to September 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 September 30, 1997, the Company had working capital of $13.6 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 nine months of 1997 were $1.7 million and were
primarily made up of computer equipment, office furniture and leasehold
improvements. The Company expects to invest another $200,000 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 FOURTH 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 STAY FLAT DURING THE REMAINDER OF
1997 -- Meeting this expectation depends upon the Company's 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
Company's 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 SEPTEMBER 30, 1997, WILL BE REALIZED -- Meeting
this expectation depends mainly on the Company's estimates of future
taxible income and if these estimates change the company will adjust the
asset accordingly.
* 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 $200,000 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 $200,000
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
None
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 September 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: November 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
1. PURPOSE. The purpose of this Secure Computing Corporation 1997
Non-Officer Stock Option Plan (the "Plan") is to motivate personnel (other than
officers and directors) to produce a superior return to the stockholders of the
Company by offering such personnel an opportunity to realize Stock appreciation,
by facilitating Stock ownership and by rewarding them for achieving a high level
of corporate financial performance. The Plan is also intended to facilitate
recruiting and retaining personnel of outstanding ability by providing an
attractive capital accumulation opportunity.
2. DEFINITIONS AND RULES OF CONSTRUCTION. The capitalized terms used in
this Plan have the meanings, and certain rules of construction are, set forth in
the list of defined terms attached to this Plan as Exhibit A.
3. ADMINISTRATION.
3.1 AUTHORITY OF COMMITTEE. The Committee shall administer the
Plan. Solely for purposes of determining and administering Awards to
Employees who are not then subject to the reporting requirements of
Section 16 of the Exchange Act, the Committee may delegate all or any
portion of its authority under the Plan to persons who are not
Non-Employee Directors. The Committee shall have exclusive power to
make Awards, to determine when and to whom Awards will be granted, the
amount of each Award, and any other terms or conditions of each Award.
Each Award shall be subject to an Agreement authorized by the
Committee. The Committee's interpretation of the Plan and of any Awards
made under the Plan shall be final and binding on all persons with an
interest therein. The Committee shall have the power to establish
regulations to administer the Plan and to change such regulations.
3.2 INDEMNIFICATION. To the full extent permitted by law, (i)
no member of the Committee or any person to whom the Committee
delegates authority under the Plan shall be liable for any action or
determination taken or made in good faith with respect to the Plan or
any Award made under the Plan, and (ii) the members of the Committee
and each person to whom the Committee delegates authority under the
Plan shall be entitled to indemnification by the Company with regard to
such actions and determinations.
4. SHARES AVAILABLE UNDER THE PLAN. The number of Shares that may be
made subject to Awards granted under this Plan available for distribution shall
not exceed 250,000 (subject to adjustment pursuant to Section 11 hereof). Any
Shares subject to the terms and conditions of an Award under this Plan which are
not issued because the Award is not exercised may again be used for an Award
under the Plan.
5. ELIGIBILITY. The granting of Awards to Employees is solely at the
discretion of the Committee.
<PAGE>
6. TERMS OF AWARDS.
6.1 AGREEMENT; PURCHASE PRICE. An Option shall be granted
pursuant to an Agreement in such form as the Committee may approve. The
purchase price of each Share subject to an Option shall be determined
by the Committee and set forth in the Agreement, but shall not be less
than 50% of the Fair Market Value of a Share as of the date the Option
is granted. The purchase price of the Shares with respect to which an
Option is exercised shall be payable in full at the time of exercise,
provided that to the extent permitted by law, the Agreement may permit
some or all Participants to simultaneously exercise Options and sell
the Shares thereby acquired pursuant to a brokerage or similar
relationship and use the proceeds from such sale as payment of the
purchase price of such Shares. The purchase price may be payable in
cash, in Stock having a Fair Market Value as of the date the Option is
exercised equal to the purchase price of the Stock being purchased
pursuant to the Option, or a combination thereof, as determined by the
Committee and provided in the Agreement. Provided, however, that a
person exercising an Option shall not be permitted to pay any portion
of the purchase price with Stock if, in the opinion of the Committee,
payment in such manner could have adverse financial accounting
consequences for the Company. Each Option shall be exercisable in whole
or in part on the terms provided in the Agreement. In no event shall
any Option be exercisable at any time after its expiration date. When
an Option is no longer exercisable, it shall be deemed to have lapsed
or terminated.
6.2 AMOUNT. Each Agreement shall set forth the number of
Shares to which the Option subject to such Agreement applies.
6.3 TERM. Each Agreement shall set forth the Term of the
Option. An Agreement may permit acceleration of the commencement of the
applicable Term upon such terms and conditions as shall be set forth in
the Agreement, which may, but need not, include without limitation
acceleration resulting from the occurrence of an Event, Fundamental
Change, or in the event of the Participant's death or Retirement.
6.4 TRANSFERABILITY. During the lifetime of a Participant to
whom an Award is granted, only such Participant (or such Participant's
legal representative) may exercise the Option. No Award may be sold,
assigned, transferred, exchanged or otherwise encumbered other than
pursuant to a qualified domestic relations order as defined in the Code
or Title 1 of the Employee Retirement Income Security Act ("ERISA") or
the rules thereunder, and any attempt to do so shall be of no effect;
provided, however, that any Participant may transfer an Option granted
under this Plan to a member or members of his or her immediate family
(i.e., his or her children, grandchildren and spouse) or to one or more
trusts for the benefit of such family members or partnerships in which
such family members are the only partners, if (i) the Agreement with
respect to such Option expressly so provides either at the time of
initial grant or by amendment to an outstanding Agreement and (ii) the
Participant does not receive any consideration for the transfer. Any
Option held by any such transferee shall continue to be subject to the
same terms and conditions that were applicable to such Option
immediately prior to its transfer and may be exercised by such
transferee as and to the extent that such Option has become exercisable
<PAGE>
and has not terminated in accordance with the provisions of the Plan
and the applicable Agreement. For purposes of any provision of this
Plan relating to notice to a Participant or to vesting or termination
of an Option upon the death, Total and Permanent Disability or
termination of employment of a Participant, the references to
"Participant" shall mean the original grantee of an Option and not any
transferee. Notwithstanding the immediately preceding sentence, an
Agreement may provide that the Award subject to the Agreement shall be
transferable to a Successor in the event of a Participant's death.
6.5 TERMINATION OF EMPLOYMENT. No Option may be exercised by
any Participant, after (i) the expiration of the three-month period (or
such other time period as the Committee may, in its sole discretion,
determine) following the date the Participant's employment by the
Company ceases, including cessation of employment because of death,
Retirement, or Total and Permanent Disability, or (ii) if applicable,
the date of breach by a Participant of any provision of any employment
agreement between the Company and Participant. An Award may be
exercised by, or paid to, the Successor of a Participant following the
death of such Participant to the extent, and during the period of time,
if any, provided in the applicable Agreement.
7. EFFECTIVE DATE OF THE PLAN.
7.1 EFFECTIVE DATE. The Plan shall become effective as of
August 5, 1997.
7.2 DURATION OF THE PLAN. The Plan shall remain in effect
until all Stock subject to it shall be distributed or until all Awards
have expired or lapsed, or the Plan is terminated pursuant to Section
10.
8. RIGHT TO TERMINATE EMPLOYMENT. Nothing in the Plan shall confer upon
any Participant the right to continue in the employment of the Company or any
Affiliate or affect any right which the Company or any Affiliate may have to
terminate the employment of the Participant with or without cause.
9. TAX WITHHOLDING. The Company shall have the right to require a
Participant or other person receiving Stock under the Plan to pay the Company a
cash amount sufficient to cover any required withholding taxes. In lieu of all
or any part of such a cash payment from a person receiving Stock under the Plan,
the Committee may permit the individual to elect to cover all or any part of the
required withholdings, and to cover any additional withholdings up to the amount
needed to cover the individual's full FICA and Medicare, and federal, state and
local income tax with respect to income arising from payment of the Award,
through a reduction of the number of Shares delivered to him or a subsequent
return to the Company of Shares held by the Participant or other person, in each
case valued in the same manner as used in computing the withholding taxes under
the applicable laws.
10. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN. The Board may
at any time terminate, suspend or modify the Plan. No termination, suspension,
or modification of the Plan will materially and adversely affect any right
acquired by any Participant (or his legal representative) or any Successor under
an Award granted before the date of termination,
<PAGE>
suspension, or modification, unless otherwise agreed to by the Participant in
the Agreement or otherwise or required as a matter of law; but it will be
conclusively presumed that any adjustment for changes in capitalization provided
for in Section 11 does not adversely affect any right.
11. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Appropriate adjustments
in the aggregate number and type of Shares available for Awards under the Plan,
in the number and type of Shares subject to Awards then outstanding and in the
Option price as to any outstanding Options may be made by the Committee in its
sole discretion to give effect to adjustments made in the number or type of
Shares of the Company through a Fundamental Change (subject to Section 12),
recapitalization, reclassification, stock dividend, stock split, stock
combination or other relevant change, provided that fractional Shares shall be
rounded to the nearest whole share.
12. FUNDAMENTAL CHANGE. In the event of a proposed Fundamental Change,
the Committee may, but shall not be obligated to:
a. if the Fundamental Change is a merger or consolidation or
statutory share exchange, make appropriate provision for the protection
of the outstanding Options by the substitution of options and
appropriate voting common stock of the corporation surviving any merger
or consolidation or, if appropriate, the parent corporation of the
Company or such surviving corporation to be issuable upon the exercise
of Options, in lieu of options and capital stock of the Company; or
b. at least 30 days prior to the occurrence of the Fundamental
Change, declare, and provide written notice to each holder of an Option
of the declaration, that each outstanding Option, whether or not then
exercisable, shall be canceled at the time of, or immediately prior to
the occurrence of the Fundamental Change in exchange for payment to
each holder of an Option, within ten days after the Fundamental Change,
of cash equal to, for each Share covered by the canceled Option, the
amount, if any, by which the Fair Market Value (as hereinafter defined
in this Section) per Share exceeds the exercise price per Share covered
by such Option. At the time of the declaration provided for in the
immediately preceding sentence, each Option shall immediately become
exercisable in full and each person holding an Option shall have the
right, during the period preceding the time of cancellation of the
Option, to exercise such Option as to all or any part of the Shares
covered thereby. In the event of a declaration pursuant to this Section
12(b), each outstanding Option granted pursuant to the Plan that shall
not have been exercised prior to the Fundamental Change shall be
canceled at the time of, or immediately prior to, the Fundamental
Change, as provided in the declaration. Notwithstanding the foregoing,
no person holding an Option shall be entitled to the payment provided
for in this Section 12(b) if such Option shall have expired pursuant to
the Agreement. For purposes of this Section only, "Fair Market Value"
per Share shall mean the cash plus the fair market value, as determined
in good faith by the Committee, of the non-cash consideration to be
received per Share by the stockholders of the Company upon the
occurrence of the Fundamental Change, notwithstanding anything to the
contrary provided in the Plan.
<PAGE>
13. UNFUNDED PLAN. The Plan shall be unfunded and the Company shall not
be required to segregate any assets that may at any time be represented by
Awards under the Plan.
14. OTHER BENEFIT AND COMPENSATION PROGRAMS. Payments and other
benefits received by a Participant under an Award made pursuant to the Plan
shall not be deemed a part of a Participant's regular, recurring compensation
for purposes of the termination, indemnity or severance pay law of any country
and shall not be included in, nor have any effect on, the determination of
benefits under any other employee benefit plan, contract or similar arrangement
provided by the Company or an Affiliate unless expressly so provided by such
other plan, contract or arrangement, or unless the Committee expressly
determines that an Award or portion of an Award should be included to accurately
reflect competitive compensation practices or to recognize that an Award has
been made in lieu of a portion of competitive cash compensation.
15. BENEFICIARY UPON PARTICIPANT'S DEATH. To the extent that the
transfer of a Participant's Award at his death is permitted under an Agreement,
(i) a Participant's Award shall be transferable at his death to the beneficiary,
if any, designated on forms prescribed by and filed with the Committee and (ii)
upon the death of the Participant, such beneficiary shall succeed to the rights
of the Participant to the extent permitted by law. If no such designation of a
beneficiary has been made, the Participant's legal representative shall succeed
to the Awards which shall be transferable by will or pursuant to laws of descent
and distribution to the extent permitted under an Agreement.
16. GOVERNING LAW. To the extent that Federal laws do not otherwise
control, the Plan and all determinations made and actions taken pursuant to the
Plan shall be governed by the laws of Delaware and construed accordingly.
<PAGE>
EXHIBIT A
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 Non-Employee Directors
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 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
<PAGE>
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 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.
<PAGE>
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 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.
<PAGE>
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.
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,689,000
<SECURITIES> 0
<RECEIVABLES> 12,294,000
<ALLOWANCES> 167,000
<INVENTORY> 1,123,000
<CURRENT-ASSETS> 3,844,000
<PP&E> 12,552,000
<DEPRECIATION> 6,643,000
<TOTAL-ASSETS> 31,692,000
<CURRENT-LIABILITIES> 8,700,000
<BONDS> 0
0
0
<COMMON> 156,000
<OTHER-SE> 66,519,000
<TOTAL-LIABILITY-AND-EQUITY> 31,692,000
<SALES> 34,180,000
<TOTAL-REVENUES> 34,180,000
<CGS> 14,423,000
<TOTAL-COSTS> 14,423,000
<OTHER-EXPENSES> 24,312,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,555,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,555,000)
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<EXTRAORDINARY> 0
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<NET-INCOME> (4,555,000)
<EPS-PRIMARY> (.29)
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