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, 1998
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
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
One Almaden Blvd., Suite 400
San Jose, CA 95113
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(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 - 16,028,440 issued and outstanding as of May 8, 1998, which number
includes 892,061 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 3
(Unaudited) as of March 31, 1998 and
December 31, 1997
Condensed Consolidated Statements of 4
Operations (Unaudited) for the three
months ended March 31, 1998
and 1997
Condensed Consolidated Statements of 5
Cash Flows (Unaudited) for the three
months ended March 31, 1998
and 1997
Notes to the Condensed Consolidated Financial 6
Statements (Unaudited)
Item 2. Management's Discussion and Analysis 7
of Financial Condition and Results of
Operations.
PART II. OTHER INFORMATION 10
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 12
<PAGE>
PART 1. Financial Information
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
(Unaudited, in thousands except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,181 $ 4,880
Accounts receivable, net 14,610 13,553
Other current assets 5,312 4,996
-------- --------
Total current assets 24,103 23,429
PROPERTY AND EQUIPMENT, NET 3,217 5,618
OTHER ASSETS 2,334 2,007
-------- --------
$ 29,654 $ 31,054
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other accrued liabilities $ 9,337 $ 4,439
Deferred revenue 1,896 1,815
-------- --------
Total current liabilities 11,233 6,254
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 - March 31, 1998--15,994,985 and
December 31, 1997--15,762,820 160 158
Additional paid-in capital 69,018 68,131
Accumulated deficit (50,743) (43,378)
Foreign currency translation (14) (111)
-------- --------
Total stockholders' equity 18,421 24,800
-------- --------
$ 29,654 $ 31,054
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1998 and 1997
(Unaudited, in thousands except per share amounts)
Three months ended March 31,
1998 1997
----------------------------
Revenue:
Products and services $ 10,265 $ 6,411
Government contracts 2,510 4,198
-------- --------
12,775 10,609
Cost of revenue 4,251 5,131
-------- --------
Gross profit 8,524 5,478
Operating expenses:
Selling and marketing 5,811 4,670
Research and development 1,902 2,707
General and administrative 775 1,215
Restructure costs 7,800 --
-------- --------
16,288 8,592
-------- --------
Operating loss (7,764) (3,114)
Net interest income 42 153
-------- --------
Loss before income taxes (7,722) (2,961)
Income taxe benefit 357 --
-------- --------
Net loss $ (7,365) $ (2,961)
======== ========
Net loss per share - basic and diluted $ (.46) $ (.19)
======== ========
Weighted average shares outstanding 15,883 15,314
======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1998 and 1997
(Unaudited, in thousands)
Three months ended March 31,
1998 1997
----------------------------
NET CASH USED IN OPERATING ACTIVITIES $ (1,368) $ (4,149)
INVESTING ACTIVITIES
Proceeds from sales of investments -- 3,000
Purchase of property and equipment (575) (831)
Increase in intangibles and other assets (472) (215)
-------- --------
Net cash provided by (used in) investing activities (1,047) 1,954
FINANCING ACTIVITIES
Proceeds from sales lease back transaction 730 --
Proceeds from issuance of Common Stock 889 944
-------- --------
Net cash provided by financing activities 1,619 944
EFFECT OF FOREIGN CURRENCY TRANSLATION 97 --
-------- --------
Decrease in cash and cash equivalents (699) (1,251)
Cash and cash equivalents beginning of period 4,880 12,130
-------- --------
Cash and cash equivalents at end of period $ 4,181 $ 10,879
======== ========
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, 1997,
as filed with the Securities and Exchange Commission.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its sudsidiaries. 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 LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share", which was adopted on December 31,
1997. All earnings (loss) per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements. Basic earnings per share is computed on the basis of the
average number of common shares outstanding. Diluted earnings per share
does not include the effect of outstanding stock options and warrants in a
loss period as they are anti-dilutive.
4. RESTRUCTURING
In the first quarter of 1998, the Company announced plans to implement a
restructuring plan designed to facilitate further integration of acquired
businesses, and recorded a pre-tax expense of $7.8 million to account for
these actions, which include costs of lease terminations, streamlining its
product offerings and reducing the Company's cost structure to increase
operational efficiency. The plan will result in the separation of some
employees worldwide and the exiting of certain facilities.
5. SIGNIFICANT ACCOUNTING POLICIES
In November 1997, the Financial Accounting Standards Board issued SOP 97-2
"Software Revenue Recognition" to replace SOP-91-1. The Company adopted
97-2 in the first quarter of 1998 and it did not materially impact revenue
recognition for this time period.
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income". Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net income
ore shareholders equity. Statement 130 requires foreign currency
translation adjustments, which prior to adoption were reported separately
in shareholders' equity to be included in other comprehensive income.
Prior year financial statements have been reclassified to conform to the
requirements of Statement 130. During the first quarter of 1998 and 1997,
total comprehensive income amounted to ($7,268) and ($2,961).
<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 20.4 percent to $12,775,000 for the
first quarter of 1998 up from $10,609,000 in the same period of 1997. The
increase resulted from higher products and services revenue. Products and
services revenue was $10,265,000 for the quarter, an increase of 60.1 percent
over 1997, and reflects the Company's increased marketing and sales effort in
the commercial arena. Government contracts revenue was $2,510,000 for the
quarter, a decrease of 40.2 percent from 1997, which reflects reduced focus on
government contract business. The Company expects quarterly revenue from
government contracts for the rest of 1998 to remain comparable to the first
quarter of 1998.
GROSS PROFIT. Gross profit as a percentage of revenue increased from 51.6
percent in the first quarter of 1997 to 66.7 percent in 1998. The increase
resulted mainly from software only sales within products and services revenue,
which carry higher margins than sales of systems bundled with hardware and a
decrease in lower margin government contract revenue. The Company believes, with
the leveling in government contracts revenue, that margins for the remainder of
the year should trend higher.
SELLING AND MARKETING. Selling and marketing expense increased 24.4 percent to
$5,811,000 in the first quarter of 1998 up from $4,670,000 in the same period of
1997. As a percentage of revenue, selling and marketing expense was 45.5 percent
for the quarter compared to 44.0 percent in the same period of 1997. The
increase resulted primarily from expenses for a stronger sales and marketing
presence needed due to competitive pressures, increased international activities
and personnel additions made to position the Company for future growth. The
Company expects selling and marketing expenses for the rest of 1998 will remain
at levels comparable to the first quarter of 1998.
RESEARCH AND DEVELOPMENT. Research and development expense decreased by 29.7
percent to $1,902,000 in the first quarter of 1998 down from $2,707,000 in the
same period of 1997. As a percentage of revenue, research and development
expense was 14.9 for the quarter compared to 25.5 percent in 1997. The decrease
resulted primarily from savings achieved from integrating duplicative tasks.
GENERAL AND ADMINISTRATIVE. As a percentage of revenue, general and
administrative expenses were 6.1 percent for the first quarter of 1998 compared
to 11.4 percent for the first quarter of 1997. The Company expects the quarterly
rate of general and administrative expenses for the rest of 1998 to remain at
levels comparable to those of the first quarter of 1998.
RESTRUCTURE COSTS. In the first quarter of 1998, the Company announced and began
to implement a restructuring plan designed to facilitate further integration of
acquired businesses, and recorded a pre-tax expense of $7.8 million to account
for these actions, which include streamlining its product offerings and reducing
the unit's cost structure and the exiting of certain facilities. The Company
expects that approximately $4.2 million of the non-recurring charges require
expenditures of cash. A significant portion of the restructuring activities will
be implemented and completed by the end of the third quarter of 1998. The
largest components of the charge will be lease termination costs of
approximately $2.5 million and the write off of related assets of $2.1 million.
NET INTEREST INCOME. The difference in net interest income between the periods
reflects lower cash and investment balances in 1998 as compared to 1997.
INCOME TAXES. The Company recognized an income tax benefit in the first quarter
of 1998 of $357,000 compared to no income tax in 1997. Management believes it is
more likely than not that deferred tax assets, which total $2,761,000 at March
31, 1998, 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 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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by $699,000 from December 31,
1997 to March 31, 1998. The decrease resulted primarily from the use of cash to
fund operations and purchase capital equipment, which was partially offset by
the sale of capital assets and proceeds from stock option exercises. As of March
31, 1998, the Company had working capital of $12.9 million. The Company
anticipates using available cash to fund growth in operations, invest in capital
equipment, acquire businesses or license technology or products related to the
Company's line of business, and provide for restructuring activities.
Capital additions in the first three months of 1998 were $575,000 and were
primarily made up of computer equipment, office furniture and leasehold
improvements. The Company expects to invest another $750,000 throughout the
remainder of 1998 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 THAT THE PERCENTAGE OF ITS REVENUES DERIVED FROM
PRODUCTS AND RELATED SERVICES WILL INCREASE IN FUTURE YEARS, AS THE
COMPANY INCREASINGLY FOCUSES ON PRODUCT SALES. Meeting this expectation
depends upon the Company's ability to achieve a higher level of products
and services revenue, which may not occur for a variety of reasons,
including general market conditions for the Company's products and
services, delays or difficulties in the development, and inability to
obtain market acceptances of new products offered by the Company, and
introduction of products by competitors.
* DURING 1998, THE COMPANY PLANS TO CONTINUE ITS RESEARCH AND DEVELOPMENT,
GENERAL AND ADMINISTRATIVE, AND SALES AND MARKETING EXPENDITURES AT
CURRENT LEVELS. THE COMPANY EXPECTS THAT OPERATING EXPENSES AS A
PERCENTAGE OF REVENUES WILL DECLINE IN 1998. This expectation depends on
the Company maintaining the current 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 and
also may be affected 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. Fluctuations in
revenue from quarter to quarter will likely have an increasingly
significant impact on the Company's results of operations. Additionally,
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 introduction of products by competitors.
* MANAGEMENT BELIEVES IT IS MORE LIKELY THAN NOT THAT DEFERRED TAX ASSETS,
WHICH TOTAL $2.8 MILLION AT MARCH 31, 1998, WILL BE REALIZED. This
expectation depends mainly on the Company maintaining, at current levels,
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.
* 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. The Company's ability 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 may impact whether the Company has sufficient cash resources
to fund its product development and marketing and sales plans for the
remainder of 1998 and early 1999.
<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
See proxy
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 March 31, 1998:
27.1 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
<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: May 13, 1998 By: \s\ Timothy P. McGurran
--------------------------------------
Timothy P. McGurran,
Senior Vice President of Operations
and Chief Financial Officer
(Duly authorized officer and
Principal Financial Officer)
<PAGE>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
27.1 Financial Data Schedule FILED ELECTRONICALLY
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,181,000
<SECURITIES> 0
<RECEIVABLES> 15,372,000
<ALLOWANCES> 762,000
<INVENTORY> 873,000
<CURRENT-ASSETS> 24,103,000
<PP&E> 8,751,000
<DEPRECIATION> 5,534,000
<TOTAL-ASSETS> 29,654,000
<CURRENT-LIABILITIES> 11,233,000
<BONDS> 0
0
0
<COMMON> 159,000
<OTHER-SE> 69,019,000
<TOTAL-LIABILITY-AND-EQUITY> 29,654,000
<SALES> 12,775,000
<TOTAL-REVENUES> 12,775,000
<CGS> 4,251,000
<TOTAL-COSTS> 4,251,000
<OTHER-EXPENSES> 16,288,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,722,000)
<INCOME-TAX> 357,000
<INCOME-CONTINUING> (7,365,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,365,000)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
