UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended December 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
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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.)
One Almaden Blvd, Suite 400
San Jose, CA 95113
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408) 918-6100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant as of March 17, 1998 was $221,589,386, based on the closing
sale price for the Company's Common Stock on that date. For purposes of
determining this number, all officers and directors of the Registrant are
considered to be affiliates of the Registrant, as well as individual
stockholders holding more than 10% of the Registrant's outstanding Common Stock.
This number is provided only for the purpose of this report on Form 10-K and
does not represent an admission by either the Registrant or any such person as
to the status of such person.
As of March 17, 1998 the Registrant had 15,907,350 shares of Common
Stock issued and outstanding, which number includes 1,820,293 Exchangeable
Shares that have the same voting and other rights as Common Stock and are
immediately exercisable for shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held May 14, 1998 for the year ended December 31, 1997 are
incorporated by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including statements regarding the
Company's expectations, beliefs, intentions or strategies regarding the future.
Forward-looking statements include, without limitation, statements regarding the
extent and timing of future revenues and expenses and customer demand. All
forward-looking statements included in this document are based on information
available to the Company as of the date hereof, and the Company assumes no
obligation to update any such forward-looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward-looking statements.
The Company designs, develops, markets and sells complete network
security solutions, including firewalls, filters, authentication and network
services. Today, the Company enables business security solutions through its
advanced technologies, professional services and partner programs. The Company's
goal is to create complete network security products and services that can be
used at the same time across the enterprise.
Originating as a small branch of Honeywell that pioneered the
principles of modern data security in the 1970s, the Company spun off in 1989 to
develop and market core security for the National Security Agency (NSA) and
other departments and agencies of the U.S. government.
Recognizing the market need for an integrated suite of product
solutions to address the growing productivity and security concerns of today's
enterprise information systems, the Company acquired authentication and URL
filtering companies in 1996, along with a robust international distribution
network with Border Network Technologies Inc.
The Company markets a range of interoperable, standards-based network
security products to the global marketplace. The Company's customers include
Fortune 500 companies, small branch offices, and government agencies all of whom
rely on the Company's suite of network security solutions to maximize their
productivity on the Internet without compromising information security.
INDUSTRY BACKGROUND
PRIVATE NETWORKS. Enterprise computing has evolved over the past
twenty-five years from mainframe computers supporting a number of terminals to
networks of inter-connected personal computers. As the cost of personal
computers has decreased, businesses and other organizations increasingly have
begun to connect personal computers into local-area networks ("LANs") in order
to share data and applications within work groups. As network technology has
advanced, organizations have connected together geographically dispersed LANs
into wide-area networks ("WANs"). Originally each vendor provided network
support using its own proprietary suite of network, transport, and application
protocols, Novell IPX/SPX, IBM SNA, etc. Today, most vendors support the
standard TCP/IP protocol suite either by providing an implementation with their
products and/or by providing gateways that translate between their proprietary
protocol suite and the TCP/IP suite. As a result, an increasing number of
businesses are using the standard TCP/IP protocol suite for at least some of
their internal network communications.
Private networks present several advantages to an organization. They
can combine mainframes, UNIX servers and personal computers running on different
operating systems such as DOS, Windows 95 or NT, and the Macintosh operating
system into a single network. They can
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support remote access from other private networks to provide customer support
bulletin board services, ordering and acknowledgment using electronic data
interchange ("EDI"), and database sharing. Because TCP/IP is an open standard
maintained by the Internet Engineering Task Force ("IETF"), there is a large
number of researchers and vendors developing new protocols to support
applications ranging from electronic commerce and digital cash to video
conferencing. Thus, the utility of corporate networks and the opportunities to
use them in support of enterprise critical operations are rapidly increasing.
More importantly, the adoption of the TCP/IP protocol suite enables an
organization to use the Internet to implement a WAN, thereby extending its
internal information systems and enterprise applications to geographically
dispersed facilities, remote offices and mobile employees. The Internet provides
a lower cost, though insecure, alternative to private company networks.
THE INTERNET. The Internet allows any computer connected to it to
communicate with any other computer. Much of the recent rapid growth of the
Internet and the related World Wide Web is attributed to an increase in
commercial access providers and to organizations seeking to exploit the Internet
for commercial gain. Uses include intra- and inter-organizational communication
and data sharing, product marketing and advertising, interactive customer
feedback, and remote customer.
However, there are limits to how some organizations have chosen to use
the Internet. Many commercial organizations have established a "home page"
giving them a presence on the Internet but have not connected mission critical
internal networks to the Internet. As a result, these organizations' personnel
do not have full access to the resources of the Internet, and the organizations'
customers, suppliers, and other business partners do not have timely access to
the organizations' personnel and data. The Company believes that, due to the
sensitive nature of the information involved, the growth of the number of
commercial organizations fully connected to the Internet and the broad
introduction of significant additional commercial uses of the Internet have been
slowed by security concerns, and will continue to be slowed by such concerns
until use of the Internet can be made significantly more secure.
NETWORK SECURITY. Networks and network transmissions are vulnerable to
a variety of attacks that can compromise the secrecy and/or the integrity of
mission critical data or that can cause the loss of services critical to the
organization. The National Institute of Standards and Technology (the "NIST")
has identified the TCP/IP protocol suite and the Internet as particularly
vulnerable to attack. Individuals have been able to exploit weaknesses in the
protocol suite and network configurations to gain unauthorized access to network
transmissions and individual computers, and have used such access to alter or
steal data or, in some cases, to launch destructive attacks on data and
computers within a compromised network. Moreover, the Internet itself serves as
a threat multiplier. Knowledge of attacks and the software required to mount
these attacks spreads quickly through the hacker community. Thus, an attacker
does not need to be especially sophisticated. Moreover, the attacker can launch
the attack from anywhere on the Internet, often hopping from site to site to
hide his identify and true location.
Security conscious industries such as financial services, insurance,
healthcare, telecommunications and defense have typically addressed network
security concerns by using private networks. This is not an alternative for some
organizations that want to take advantage of the business opportunities provided
by networked computing in general and the Internet in particular. Even within
private networks, the increasing number of authorized users having direct access
to expanding networks and the data contained on such networks has increased the
need to provide protection for financial results, personnel files, research and
development projects and other sensitive data. Moreover, these private networks
do not lend themselves to the rapid reconfiguration necessary to support the
dynamic needs of companies as they form new alliances and terminate old ones in
a constantly shifting sea of virtual enterprises. The solution is an integrated
set of security products that enables a corporation to connect safely to the
Internet and to rapidly reconfigure its information security policy as the
business climate and alliances change.
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The Company believes that the combination of security concerns and the
relatively small number of businesses offering comprehensive, flexible,
enterprise-wide security solutions presents a significant commercial opportunity
for providers of network security products and services.
ELEMENTS OF NETWORK SECURITY. The Company has identified what it
believes are the key elements of an effective network security solution that
should be addressed by an organization in order for it to secure its information
networks from unauthorized access. These features are security policy,
identification and authentication, access control, encryption, administration,
audit, and network services.
* SECURITY POLICY -- the means by which an organization determines
which users and other network principals have access to its
network, which actions each principal is permitted to take, and
how the network will be managed. Security products must be
flexible enough to support a variety of policies and easy to
reconfigure when an organization's policies change.
* IDENTIFICATION AND AUTHENTICATION -- the means by which the
organization identifies principals attempting to gain access to a
network and confirms the source of transmissions over the network.
* ACCESS CONTROL -- the means by which a principal is prevented from
taking unauthorized actions, such as importing (exporting)
information from (to) the Internet.
* ENCRYPTION -- the means by which information, whether in storage
or in transmission, is kept private and its integrity is
maintained in the event that a transmission is intercepted or the
storage medium is stolen or tampered with.
* ADMINISTRATION -- the ability of a network administrator to
configure the network's security features to implement the
organization's security policy.
* AUDIT AND ACCOUNTING -- the ability to monitor activity in the
network, to detect and respond to abuse of information assets, and
to hold principals accountable for their actions.
* NETWORK SERVICES -- professional network security expertise,
support and education services, to enable ongoing management and
evolution of security policies and enforcement measures.
SECURE COMPUTING'S SOLUTION
Based on its understanding of competitive products, product features
and service capabilities, the Company believes that its current portfolio of
products and services enables comprehensive network security while offering
innovations in architecture, interfaces and features. These innovations can
translate into strategic business benefits -- such as ease of management,
reduced human error and lower total cost of ownership -- in addition to flexible
and comprehensive network security.
All elements of network security are addressed by each Secure Computing
product, either by direct integration of key features or through
inter-operability with other Secure Computing products. Education and support
services are tailored to each product, and professional services address the
life span of a security policy.
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TECHNOLOGY
FIREWALLS
Secure Computing offers two categories of firewall: (I) High end and (ii)
Mid-range. High end firewalls deliver robust security for security-conscious
organizations, and use a firewall-specific operating system integrated with the
firewall application. Mid-range firewalls run on a commercial operating system.
High end and mid-range firewalls are multi-homed application-level gateways that
understand and interpret network protocols, increase access control in any
direction, support a comprehensive suite of network services and enable Network
Address Translation and Multiple Address Translation to hide addresses from
untrusted networks.
ACCESS CONTROL. Access control rules determine how the firewall reacts to user
connection requests from internal and external networks. Versatile, configurable
access control features enable organizations to define unique and
simple-to-complex rules for enforcing security policy on internal and external
network connection attempts. The Company's access control features ensure
consistent and automatic enforcement of security policy, regardless of policy
complexity.
VIRTUAL PRIVATE NETWORKS The Company has regularly introduced IPSec-compliant
VPN innovations, adding new value to this proven approach to using lower-cost
Internet connections for secured business network connections. VPNs are
encrypted connections between firewalls, or between a firewall and an end user
computer, which can reduce the costs of creating a private network for
connecting geographically dispersed resources. The Company introduced dynamic
VPN support with integrated third party software for local access to the
Internet from any major business center in the world, an important option for
organizations with remote and roaming employees. The Company also engineered
firewall support for embedded VPNs with granular access control options,
automated key management, X.509 digital certificate handling and
inter-operability with standard Certificate Authorities.
SECUREOS(TM). SecureOS, the Company's operating system designed for running
high-end firewalls, removes the inherent risks of layering a firewall on top of
a discrete commercial operating system. These risks escalate over time, usually
through normal operating system upgrades, exposing the firewall integrity to
threat agents from inside and outside the organization. With SecureOS, the
Company enables security-sensitive organizations in every industry to avoid the
risks and costs associated with maintaining separate operating systems.
REGIONS. The Company introduced the Regions in its new family of firewalls in
March 1998 to address the need for applying security policies and access
requirements to complex organizations requiring alternative ways of managing
firewalls. Regions are groupings of physical interfaces (network cards) and VPNs
into entities of similar trust.
Regions allow administrators to define both physically and virtually connected
global networks into grouped items for easy management. Regions can be named as
desired, and network access policies can be applied for any Region to Region
communication. Furthermore, administrators can define Network Address
Translation to hide addresses between any Regions, rather than specifying one as
the trusted network and exposing untrusted network addresses.
TYPE ENFORCEMENT(TM). Initially developed for classified government agencies and
now incorporated into Secure Computing high-end firewall architectures, Secure
Computing's patented Type Enforcement secures the underlying firewall operating
system and protects network services by segmenting them into individual domains.
Each domain is granted permission to access specific file types and domains. As
a result, each domain provides a self-contained, discrete layer of protection
which cannot be altered. Type Enforced firewalls protect against known network
penetration and denial of service attacks, including the most common,
destructive and malicious attacks.
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INTRUSION DETECTION AND STRIKEBACK(TM) RESPONSE. Secure Computing's Strikeback
feature responds to intrusion attempts with selectable alarms and captures as
much information as possible about the intruder, including their source and the
route used to reach the system. Strikeback has proven its value in permitting
organizations to take direct corrective action against individual attackers and
organizations employing them.
CENTRALIZED AND REMOTE MANAGEMENT. Centralized control features include an
easy-to-use management interface, encrypted and authenticated remote management,
remote systems configuration, and real-time monitoring of suspicious activities
on the network. Administrators can use SNMP agents to send alarms to
SNMP-compliant network management stations located on an internal or external
network. Comprehensive audit, reporting and diagnostics support proactive and
productive management, as well as user access billing.
COMPREHENSIVE AUDIT AND LOGGING. Comprehensive audit and logging technology
allows the Company's firewalls to provide comprehensive audit, logging and
report generation tools to enable effective management reporting of all access
attempts. Special security alarms and alert notifications bring unauthorized
access attempts to the immediate attention of the administrator. For example, an
organization may configure its firewall with traps which trigger an alarm,
alerting a network administrator (by paging the administrator if desired) to the
attack in progress. Moreover, the firewall can be configured to lure the
unauthorized user to continue the attack by making it appear that the attack is
succeeding, while implementing software countermeasures which log the attack and
trace the attack to its source. The triggers can also be configured to
immediately terminate access.
TRANSPARENCY. Transparency technology enables the Company's firewalls to provide
unobtrusive security by seamlessly integrating a firewall into a new or existing
network without interfering with legitimate corporate network services and
business requirements. As a result, the Company's firewalls do not alter the
work behavior of internal users nor do they require modification to existing or
new software in use on the protected network.
IDENTIFICATION AND AUTHENTICATION
The Company's identification and authentication technology results from more
than a decade of efforts in network authenticating technology. The Company has
three patents for this technology. Described below are the salient features of
this technology.
DYNAMIC PASSWORDS. Dynamic password technology is compatible with existing
computing and networking equipment utilized by most organizations. Since each
password can only be used one time, methods of electronically trying many
passwords have an extremely low mathematical probability of being successful.
Physical observation or electronic interception of the entered password will not
enable the eavesdropper to gain access, without calculating a subsequent
authorized dynamic password, a process made extremely unlikely by the use of the
Data Encryption Standard ("DES") algorithm. The DES algorithm is widely
recognized as a government certified and industry-tested standard. Databases of
user authentication codes and authorizations are themselves encrypted utilizing
the DES algorithm for further protection from unauthorized access.
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AUTHENTICATION PROTOCOLS AND INTERFACE MODULES. This technology supports
existing and emerging authentication protocols, including four TCP/IP based
protocols, XTACACS, TACACS+, RADIUS and EASSP. Certain of these authentication
protocols have been adopted by many manufacturers of access equipment, and
permit transmission of a user's name and password from numerous connection
points and through various network connectors, gateways, routers, servers and
ports to the authentication server. In addition, a linkable library of files
allows customers to create support for other levels of authentication at either
the application or the transaction level. The application interface can be
linked by a customer with virtually any application or new or customized
authentication products. After such linkage, execution of the application will
permit the application or product to pass a user-entered name and dynamic
password to the application interface, which, after communicating through the
software, returns the result of the authentication query to the application or
product.
OPEN ARCHITECTURE AND INTER-OPERABILITY. The Company's identification and
authentication technology has been designed to allow its operation on a wide
variety of platforms and to be compatible with a wide range of
telecommunications products and protocols, which is important to organizations
operating a heterogeneous computing environment. Moreover, it supports multiple
token types manufactured by the Company and others with a single network.
SCALABILITY. One database can support greater than one million users, and each
authentication server can contain several databases. Further, SafeWord allows
the support of a high volume of user authentication requests through the use of
multiple servers which are automatically synchronized.
FULLY DOWN-LOADABLE, ALL SOFTWARE SOLUTION. The technology permits a
down-loadable, all software solution. Thus, through the use of a combination of
the Company's network authentication software and software password generators,
or "tokens," an organization can achieve an all-software authentication solution
for its network. Such an all software solution reduces the aggregate cost of the
authentication systems and, since the basic software may be down-loaded from the
Company's World Wide Web site, enables rapid installation of an authentication
system on an organization's network.
FAULT TOLERANCE. With this feature, databases are automatically mirrored on up
to four servers on a network to achieve fault tolerance. As a result, a hardware
failure of one server does not prevent the authentication of users.
INTERNET MONITORING AND FILTERING
The Company's Internet monitoring and filtering technology includes three main
elements: control list, multiple platform functionality and programming toolkit.
CONTROL LIST--is a database of URLs for major Internet protocols (HTTP, FTP,
NNTP, and Gopher) representing sites, portions of sites, or discrete documents
available on the Internet that meet the criteria of one or more of the 27
categories that the control list currently supports. The distributed form of the
control list is binary, using a secure hash algorithm to both protect the actual
contents of the database, and to form the basis of efficient runtime access for
URL filtering. Proprietary tools are used to perform updates to the control list
efficiently and effectively, including Human-Computer Interface and automated
web robots (variations on the spiders used by most Internet search engines),
which provide candidate URLs from a variety of sources for review by list
technicians.
MULTIPLE PLATFORM FUNCTIONALITY--includes Web proxies for Unix and Windows NT,
plug-ins for leading general-purpose proxies such as Netscape Proxy Server and
Microsoft Proxy Server, and proxy-based enhancements to Secure's line of
firewall products. In all cases the monitoring and filtering applications
leverage the widely accepted concept of proxies for fundamental Internet
protocols.
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PROGRAMMING TOOLKIT--is an application programming interface to the core
functionality of the control list which is used as a high-level development tool
for developing customized monitoring and filtering applications. The Programming
Toolkit is used internally and externally by third-party vendors.
PRODUCTS AND SERVICES
The Company's security products are designed to enable secure and productive
electronic commerce.
SECUREZONE(TM). The first of the Company's new family of network security
solutions, SecureZone delivers comprehensive, robust security with revolutionary
ease of use and lower cost of ownership to organizations requiring the highest
level of network security. The intuitive, visual interface simplifies and speeds
all aspects of security administration, including access control, entities of
trust and VPNs. The first network security solution to deliver application
gateway strengths with embedded VPNs and Commercially available integrated X.509
digital certificate management, SecureZone delivers advanced security
technologies developed for government and military agencies, such as the
Company's patented Type Enforcement, SecureOS, and Strikeback intrusion
detection/response.
SIDEWINDER(TM) SECURITY SERVER. Sidewinder employs SecureOS, Type Enforcement
and Strikeback intrusion detection/response. Sidewinder delivers robust power
and versatility for enforcing complex security policies and stringent security
thresholds for government, commercial and public organizations. Sidewinder
permits highly granular control over network access rules, message filtering and
intrusion detection. It provides all the features of a high-end application
gateway firewall plus additional technologies and filters, allowing safe
connections to and through untrusted networks.
BORDERWARE(TM) FIREWALL SERVER. One of the world's best-selling application
gateway firewalls, BorderWare combines turnkey plug-and-play installation,
simplified management interfaces, hardened network perimeter defenses and
secured, cost-effective remote connectivity options, including dynamic VPN and
iPass software for cost-effective, secured remote and roaming users. Its
combined ease of use with hardened perimeter security bring robust security
within the reach of any organization sensitive to Internet security risk.
SECURE COMPUTING FIREWALL(TM) FOR NT. The only commercially available
application gateway firewall designed for Microsoft BackOffice, Secure Computing
Firewall for NT is a native Windows NT server application, built to take full
advantage of the NT server architecture. It delivers a cost effective, highly
secure solution without the complexity of firewalls ported to Windows NT
environments from UNIX platforms. Fitting naturally into Windows NT
environments, it addresses business, technology and skills requirements with a
native Windows NT graphical user interface, native facilities and an advanced
network security scanner.
SAFEWORD(TM). The SafeWord family of strong authentication products provides
server software, hard tokens and soft tokens for secured access to networks.
SafeWord features built-in replication to enable load balancing, real-time
mirroring and recovery. It combines one-time encrypted password protection with
standards-based inter-operability, resulting in a wide choice of servers and
tokens. SafeWord runs on a wide range of platforms through the Company's
partners program.
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SMARTFILTER(TM). SmartFilter helps organizations manage productivity, preserve
network bandwidth and reduce legal liability through industry-leading web
monitoring and filtering. Organizations can manage and monitor Internet access
through the SmartFilter Control List. For ease of administration, the Control
List is organized into 27 selectable content categories and can be customized to
organizational needs, interests and policies. SmartFilter capabilities combine
in unique ways with each of the Company's network security solutions and
complement a selection of recognized firewalls participating in the Company's
partner's program.
SECUREWIRE(TM). SecureWire is the first commercially available business solution
combining the capabilities of intranet and extranet technologies for sharing
internal Web data with external users, such as partners, customers, suppliers
and agencies. SecureWire enables organizations to grant authorized access to
specific pages or URLs on the internal network, while denying access to all
other data. As a result, each external user can be granted a portal to internal
Web data in keeping with security policy.
LOCKOUT(TM). LOCKout's strong authentication allows remote access security login
over networks by employing dynamic password techniques using DES and/or
FORTEZZA-based encryption standards.
PROFESSIONAL SERVICES. The Company provides a rich portfolio of packaged and
custom security professional services, ranging from internal and external
network penetration testing to complex security installation and integration.
Services are provided by the Company's team of accredited, certified security
experts.
The standard consulting product of the Company is the investigation and analysis
of a client's operational and information security issues. The investigation
includes a variety of interviews, observations, and technical tools. The
Company's security experience is applied to the analysis of a client's critical
information assets and systems, business objectives and operational environment,
and the subsequent identification of potential threats and risks. The process is
documented in written reports and oral presentations which clearly describe what
action the client should take to improve their security posture. Recommended
actions may include network redesign, policies, procedures, and training, as
well as specific technology such as cryptography, authentication tools and
firewalls. Additional consulting services include customized security policies,
security architecture, and a variety of either standard or customized security
related training, as well as fully customized consulting, based on specific
customer needs.
SECURESUPPORT(TM). SecureSupport provides expert customer support resources
through diverse access options, including telephone, email and Web-based
support. Service options are tailored for each of the Company's network security
products.
Customers may purchase software support and upgrade service for an annual fee.
Product feature upgrades are released when new features or capabilities are made
available to software support subscribers. Basic hardware support is provided
pursuant to the Company's basic warranty terms. Extended warranties are
available for an annual fee. Enhanced hardware support may be purchased at
varying rates either to provide service during normal business hours or at all
times (24 hours a day, 7 days a week) for up to three years. The Company
currently provides hardware support through contracts with third party support
vendors and by using Company employees. Software updates and technical support
are provided through program fix releases to customers when necessary to fix
bugs or to provide enhancements to existing software features.
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The Company provides limited hardware and software warranties to users for one
year from acceptance of a product, and will provide contractual maintenance,
service of the hardware and upgrades of software for a fee after warranty
expiration. In many instances, the Company's warranties are in turn supported by
warranties received by the Company from its manufacturers and suppliers.
EDUCATION AND TRAINING SERVICES. The Company hosts extensive product training
and security education opportunities through classes, workshops and seminars
around the world for customers and Channel Partners. These services assist in
maintaining security integrity, from updating security policy to configuring
products to integrating products into cohesive solutions.
GOVERNMENT CONTRACTS
From its inception, the Company has been engaged in research and
development of security technology under contracts with departments and agencies
of the United States government, including the NSA. Government contracts have
provided substantial revenue in each year of its existence, providing the
Company with the financial resources to assemble a substantial group of
scientists and engineers dedicated to computer system security. Government
agencies under directives to comply with the NSA's standards represent a base of
potential customers.
Most of the Company's contracts require the Company to perform
specified services, for which the Company is reimbursed for actual cost plus a
fee. The Company's NSA Secure Network Server research and development contract
accounts for a majority of the Company's government development contract
business. A contract modification was executed in early July 1996 that changed
the contract to a fixed-fee basis and increased the contract to $54 million from
$35 million, of which $52.6 million has been recognized through February 28,
1998. The revised scheduled completion date is August 30, 1998. The Company
estimates that the aggregate fee to be received over the course of the contract
will be approximately 6%. The Company used a rate of 5.5% in recognizing revenue
in 1997, based on its estimate of the remaining award fee to be earned under the
contract.
Under its cost-reimbursement contracts, the Company bears the risk that
increased or unexpected costs required to perform the specified services may
reduce the Company's fee. Pursuant to their terms, these contracts are generally
also subject to termination at the convenience of the applicable government
agency. If a contract is terminated, the Company typically is reimbursed for its
costs to the date of its termination plus the cost of an orderly termination and
paid a portion of the fee.
The Company's United States government contracts are subject to audit
by a designated government audit agency, currently the Defense Contract Audit
Agency (DCAA). The DCAA has periodically audited the Company's contracts without
any material cost disallowances.
CUSTOMERS
The Company's current commercial customers and prospects are likely to
consider network security solutions a high priority, because they routinely deal
with proprietary or highly sensitive information.
Customers within the United States government for the Company's
products and services include the Department of Defense (both directly and
through the NSA), which is the single largest government user of classified
processing systems, and the Department of Energy. The Company also targets other
agencies within the United States government.
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The Company's customers also include foreign governments and businesses. The
Company sells its products in western Europe, the Middle East, Australia and the
Pacific Rim, mainly through reseller channels.
SALES AND MARKETING
SALES. The Company sells products and services in domestic and foreign
markets. At February 28, 1998, the Company had a sales force of 60 individuals
who sell security products to Fortune 1000 companies and the United States
government. To the extent that sales of the Company's commercial products and
services increase, the Company will hire additional sales staff. From time to
time, the Company may enter into teaming relationships with third-party
government contractors.
The Company has initiated a transition from selling through a direct
sales force and indirect multi-channel network of resellers and distributors to
a predominantly indirect sales model, based on migrating existing customers to
new products and enabling indirect channel distributors to sell all of the
Company's products. In addition, the Company has introduced focused methods of
sales and channel expansion, including Microsoft-oriented reseller and
distributor recruitment, an OEM sales focus, and high technology alliances for
sales, marketing and point-of-sale leverage. To support this transition and
expansion, the Company is implementing a new multi-level distributor program.
The Company currently sells its products outside of the United States
and through an international distribution network. Overseas sales in 1997 were
approximately 35% of revenue. The Company believes that international markets
present a potentially large market for network and security products. Export
controls on cryptographic products may place limits on the export of the
Company's products to certain countries identified from time to time by the
United States Department of State. In addition, certain of the Company's
government products are subject to United States government contracting
regulations and to the International Trade in Arms Regulation ("ITAR"), which
restricts the exports of certain products affecting national security. These
regulations could restrict the Company's ability to sell its products to foreign
governments and businesses identified from time to time by the United States
Department of State, creating delays in the introduction of the Company's
products in international markets.
The Company attempts to limit its liability to customers, including
liability arising from a failure of the security features contained in the
Company's products, through contractual limitations of warranties and remedies.
However, some courts have held similar contractual limitations of liability, or
the "shrinkwrap licenses" in which they are often embodied, to be unenforceable.
Accordingly, there can be no assurance that such limitations will be enforced.
<PAGE>
The following table summarizes information about the Company's foreign
and domestic sales and operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
United States products and services sales $18,171 $14,711 $ 9,179
International products and services sales 15,032 8,579 3,902
Government contracts 13,773 16,972 14,849
-----------------------------------------------------
$46,976 $40,262 $27,930
=====================================================
Net Income (Loss):
United States operations $4,363 $(17,709) $ (682)
International operations (8,614) (7,385) 50
-----------------------------------------------------
$(4,251) $(25,094) $ (632)
=====================================================
Identifiable Assets:
United States operations $28,905 $32,259 $42,963
International operations 2,149 4,516 1,298
-----------------------------------------------------
$31,054 $36,775 $44,261
=====================================================
</TABLE>
MARKETING. At February 28, 1998, the Company had 21 marketing
employees. The Company deploys comprehensive targeted marketing programs to
generate sales leads and brand awareness. Programs include direct marketing, Web
marketing, advertising, seminars and trade shows and ongoing customer, channel
and partner communications programs. The Company has entered into strategic
marketing relationships with various vendors of communications, security, and
network management products. Certain of these vendors recommend Secure Computing
products along with their solutions to meet customers' security needs. The
potential increased revenues from such relationships may be reduced by
requirements to provide volume price discounts and other allowances, and
significant costs incurred in customizing the Company's products. Although the
Company does not intend that such relationships be exclusive, the Company may be
required to enter into an exclusive relationship or forego a significant sales
opportunity. To the extent the Company becomes dependent on actions by such
parties, the Company could be adversely affected if the parties fail to perform
as expected.
The Company also seeks to stimulate interest in network security
through its public relations program, speaking engagements, white papers,
technical notes and other publications.
COMPETITION
The market for network security products is intensely competitive and
characterized by rapid technological change. The Company believes that
competition in this market is likely to persist and to intensify as a result of
increasing demand for network security products. Each of the Company's
individual products competes with a different group of competitors and products.
The principal competitors for the Company's existing products include ActivCard,
Axent, CheckPoint Software Technologies Ltd., Cisco Systems, Network Associates,
Security Dynamics, Inc. and Sun Microsystems.
<PAGE>
The Company may also face competition from these and other parties in
the future that develop, or acquire computer and network security products based
upon approaches similar to or different from those employed by the Company.
There can be no assurance that the market for network security products will not
ultimately be dominated by approaches other than the approach marketed by the
Company. While the Company believes that it does not compete against
manufacturers of other classes of security products (such as encryption) due to
the complementary functions performed by such other classes, there can be no
assurance that the Company's customers will not perceive such other companies as
competitors of the Company.
The Company believes that the principal competitive factors affecting
the market for computer and network security products include level of security,
technical features, ease of use, capabilities, reliability, customer service and
support, distribution channels, price and total cost of ownership.
Current and potential competitors have established or may in the future
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address the security needs of the
Company's prospective customers. Accordingly, it is possible that new
competitors or alliances may emerge and rapidly acquire significant market
share. If this were to occur, the financial condition or results of operations
of the Company could be materially adversely affected.
BACKLOG
The Company's backlog for commercial products as of February 28, 1998
was approximately $1.2 million, compared to $0.5 million as of February 28,
1997. The Company does not believe that its commercial backlog at any particular
point in time is indicative of future sales levels. The Company's backlog
relating to its government contracts as of February 28, 1998 was approximately
$6.1 million, compared to $13.7 million as of February 28, 1997. Backlog
historically has represented firm government orders for research and development
services. Funded backlog represents that portion of backlog for which the
Company's government customers have actually obligated payment. At February 28,
1998, approximately $3.6 million of the Company's government contract backlog
was funded, compared to $2.0 million as of February 28, 1997. The timing and
volume of customer orders are difficult to forecast because the Company's
customers typically require prompt delivery of products and a substantial
majority of the Company's sales are booked, and shipped in the same quarter. In
addition, sales are generally made pursuant to standard purchase orders that can
be rescheduled, reduced or canceled with little or no penalty.
MANUFACTURING
The Company's manufacturing operations consist primarily of light
assembly and packaging associated with its software products. The Company uses
subcontractors to duplicate its software media and print its user documentation
and product packaging. The Company then assembles the final software products in
its facilities in Roseville, Minnesota. The Company also performs some limited
hardware manufacturing operations, which consist primarily of purchasing
hardware components, final assembly and testing. Hardware components include
commercially available computers, memory, monitors and third party peripherals.
The Company's manufacturing processes utilize the principles of ISO 9001
standards for which the Company received certification in 1996.
The majority of the materials utilized in the Company's manufacturing
operations are industry standard parts and services and are widely available.
Typical materials required are media and media duplication services, user
documentation and other printed materials, product packaging and computer
systems PCs and computer peripherals such as (memory disk drives and storage
devices. Interruptions or delays in shipments of software supplies, certain
computer systems or peripherals could materially adversely affect the Company's
business and results of operations.
<PAGE>
The Company's SafeWord product line includes a small calculator-style
token which provides user authentication. The Company subcontracts for these
tokens from ReachOut, LTD., an electronics assembly manufacturer located in the
Peoples Republic of China. The Company is currently establishing a second source
relationship for these tokens with Lan Plus, Inc., a California company with
manufacturing facilities located in Taiwan. The Company anticipates having this
second source supplier in production by the second quarter of 1998. However,
there can be no assurance that the Company will successfully establish this or
any other second source arrangement. The Company's source for its tokens is
currently limited to ReachOut, LTD. While the Company has generally been able to
obtain adequate supplies of these products in a timely manner, delays,
interruptions in supply, a failure of the second source supplier to perform, or
a significant increase in manufacturing costs could materially adversely affect
the results of operations.
RESEARCH AND DEVELOPMENT
Internal development of new products and features is performed by the
Company's internal engineering staff. The Company's government contracts efforts
support a far larger research and development program than the Company's own
independent research and development efforts. Of the Company's total of 196
engineering employees at February 28, 1998, 51 hold post-graduate degrees.
The Company intends to keep its products broadly compatible with a
variety of host computer configurations and other network security products and
other network applications, and will introduce new products as market demand
develops for such products. The Company researches and attempts to design its
products to be able to support emerging security standards, such as the secure
socket layer and secure http protocols.
The Company will continue to seek government research and development
contracts to maintain its high technology base. The Company currently has
research and development contracts with government agencies, including the NSA.
These contracts address information security for operating systems, secure
applications for database management systems and security policy research. The
Company continuously pursues additional contracts with these organizations.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company relies on patent, trademark, copyright and trade secret
laws, employee and third-party non-disclosure agreements and other methods to
protect its proprietary rights. The Company currently holds eight patents and
has fifteen patent applications pending in the United States relating to
computer security software and hardware products. The Company has also filed
patent applications in Western Europe, Japan, Israel and Australia. The Company
believes that its patents are broad and fundamental to network security computer
products. While the Company believes that the pending applications relate to
patentable devices or concepts, there can be no assurance that any pending or
future patent applications will be granted or that any current or future patent,
regardless of whether the Company is an owner or a licensee of such patent, will
not be challenged, invalidated or circumvented or that the rights granted
thereunder or under licensing agreements will provide competitive advantages to
the Company.
<PAGE>
The Company's success is dependent, in part, upon its proprietary
software and security technology. The Company also relies on trade secrets and
proprietary know-how which it seeks to protect, in part, through confidentiality
agreements with employees, consultants and other parties. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known to or independently developed by competitors. In
addition, under its contracts with the Company, U.S. government agencies have
the right to disclose certain technology developed with government funding to
competitors of the Company as part of the establishment by the government of
second-source manufacturing arrangements or competitive bidding.
The Company is not aware of any patent infringement charge or any
violation of other proprietary rights claimed by any third party relating to the
Company or the Company's products. However, the computer technology market is
characterized by frequent and substantial intellectual property litigation.
Intellectual property litigation is complex and expensive, and the outcome of
such litigation is difficult to predict. In the event that a third party were to
make a claim of infringement against the Company, the Company could be required
to devote substantial resources and management time to the defense of such
claim, which could have a material adverse effect on the Company's business and
results of operations.
The Company has received or applied for trademark protection in the
United States for its BorderWare, SafeWord, Secure Computing Firewall,
SecureWire, SecureOS, SecureSupport, SecureZone, Sidewinder, SmartFilter,
Strikeback, Type Enforcement and Nobody Comes Close marks.
REGULATION AND GOVERNMENT CONTRACTS
Other than government contracting regulations described above under
"Government Contracts," the Company is not currently subject to direct
regulation by any government agency, other than regulations generally applicable
to businesses. Currently, there are few laws or regulations directly applicable
to access to or commerce on the Internet. However, due to the increasing
popularity and use of the Internet, it is possible that a number of laws and
regulations may be adopted with respect to the Internet, covering issues such as
user privacy, pricing and characteristics and quality of products and services.
In addition, the adoption of laws or regulations may decrease the growth of the
Internet, which could in turn decrease the demand for the Company's products and
increase the Company's cost of doing business or otherwise have an adverse
effect on the Company's business, operating results or financial condition.
EMPLOYEES
At February 28, 1998, the Company had 360 employees. No employee of the
Company is represented by a labor union or is subject to a collective bargaining
agreement. All employees are covered by agreements containing confidentiality
and non-compete provisions. The Company believes that it maintains good
relations with its employees.
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are:
NAME AGE POSITION
-------------------------------------------------------------------
Jeffrey H. Waxman 51 Chairman of the Board, Chief
Executive Officer
Timothy P. McGurran 35 Senior Vice President of Operations,
Chief Financial Officer
Christine Hughes 51 Senior Vice President of Marketing
Gary D. Taggart 44 Vice President of Sales
Patrick Regester 49 Vice President of International
Operations
JEFFREY H. WAXMAN has been Chairman of the Board since January 1997 and
Chief Executive Officer of the Company since November 1996. From June 1995
through August 1996, Mr. Waxman was the Executive Vice President and General
Manager of the Application Group of Novell Inc., a network software provider.
From November 1992 through June 1995, Mr. Waxman was the President and Chief
Executive Officer of ServiceSoft Corporation, a diagnostics software company.
From June 1988 through January 1992, Mr. Waxman was the Chief Executive Officer
of Uniplex, Inc. Mr. Waxman currently serves on the Board of Directors of
ComTel.
TIMOTHY P. MCGURRAN has been the Senior Vice President of Operations
and Chief Financial Officer of the Company since May 1996. Mr. McGurran was at
Ernst & Young LLP from December 1984 to May 1996, where his last position was
Senior Manager.
CHRISTINE HUGHES has been the Senior Vice President of Marketing since
November 1996. Ms. Hughes was the Senior Vice President, Corporate Marketing at
Novell, Inc., a network software provider from December 1994 to August 1996.
From June 1991 to November 1994 Ms. Hughes was a Vice President at Xerox
Corporation. Ms. Hughes currently serves on the Board of Directors of Sulcus
Hospitality Technologies Corporation.
GARY D. TAGGART has been Vice President of Sales since January 1997.
Prior to joining Secure, Mr. Taggart was Vice President of Americas Sales for
Eicon Technology Inc., a Canadian manufacturer of communications products, from
December 1994 through September 1996. From 1989 to 1994, Mr. Taggart was Vice
President of Worldwide Sales for Storage Dimensions, Inc., a San Jose-based
manufacturer of network storage subsystems.
PATRICK REGESTER has been the Vice President of International
Operations since February 1997. From November 1995 to January 1997 Mr. Regester
was Vice President of Sales and International Operations for Process Software
Corporation, a TCPIP applications developer. From March 1989 to October 1995,
Mr. Regester held various positions most recently as the Group Managing Director
for Uniplex Inc., a UNIX office automation software provider.
Executive officers are elected annually by the Board of Directors and
serve a term of one year or until their successors are elected. None of the
above executive officers is related to each other or to any director of the
Company.
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual
results to differ materially from those indicated by forward-looking statements
made in this Annual Report on Form 10-K and presented elsewhere by management
from time to time.
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, general economic conditions,
the Company's continued ability to develop and introduce products, the
introduction of new products by competitors, pricing practices of competitors,
expansion of the Company's sales distribution capability, the cost and
availability of components and the Company's ability to control costs.
The Company success is highly dependent on its ability to enhance its
existing products and to develop and introduce new products in a timely manner.
If the Company were to fail to introduce new products on a timely basis, the
Company's operating results could be adversely affected. To date, substantially
all of the Company's revenues have been attributable to sales of its enterprise
network and data security products and the provision of related services, and
existing and new versions of such products are expected to continue to represent
a high percentage of the Company's revenue for the foreseeable future. As a
result, any factor adversely affecting sales of these products and services
could have a material adverse effect on the Company's financial condition and
results of operations.
Certain components of the Company's products are currently purchased
from a single or limited sources and any interruption in the supply of such
components could adversely affect the Company's operating results.
The Company's quarterly operating results may vary significantly
depending on a number of factors, including the timing of the introduction or
enhancement of products by the Company or its competitors, the sizes, timing and
shipment of individual orders, market acceptance of new products, changes in the
Company's operating expenses, personnel changes, mix of products sold, changes
in product pricing, development of the Company's direct and indirect
distribution channels and general economic conditions.
Dependence on Principal Products. The Company currently derives substantially
all of its revenue from sales of its enterprise network and data security
products, the provision of related services, and existing and new versions of
such products are expected to continue to represent a high percentage of the
Company's revenue for the foreseeable future. As a result, any factor adversely
affecting sales of these products and services, or any factor impeding or
delaying the Company's ability to diversify its products offerings to lessen its
dependency on those products, would have a material adverse effect on the
Company's financial condition and results of operations.
Risks Associated with Enterprise Network and Data Security Market. The rapid
development of enterprise-wide and remote computing as well as increased use of
the Internet, intranets and extranets has enhanced the ability of users to
access proprietary information and resources and has in recent years increased
demand for enterprise network and data security products. Declines in demand for
the Company's products, whether as a result of competition, technological
change, the public's perception of the need for security products, developments
in the hardware and software environments in which these products operate,
general economic conditions or other factors, could have a material adverse
effect on the Company's financial condition and results of operations.
<PAGE>
A well-publicized actual or perceived breach of enterprise network or
data security could trigger a heightened awareness of computer abuse, resulting
in an increased demand for security products such as those offered by the
Company. Similarly, an actual or perceived breach of enterprise network or data
security at one of the Company's customers, regardless of whether such breach is
attributable to the Company's products, could adversely affect the market's
perception of the Company and the Company's financial condition or results of
operations. In addition, although the effectiveness of the Company's
identification and authentication products is not dependent upon the secrecy of
its proprietary algorithm, the public disclosure or "breaking" of this algorithm
could result in a perception of breached security which could have an adverse
effect on the Company's financial condition and results of operations.
Technological Change and New Products. The market for security products,
especially in the Internet, intranet and extranet markets, is characterized by
rapidly changing technology, emerging and evolving industry standards, new
product introductions, relatively short product life cycles and rapid and
constant changes in customer requirements and preferences. To the extent that
specific methods other than those employed by the Company are adopted as
standards for implementing enterprise network data security, sales of the
Company's existing and planned products in those market segments may be
adversely impacted, which could have a material adverse effect on the Company's
financial condition and results of operations.
Software products may also contain undetected errors or bugs when first
introduced or as new versions are released, and software products or media may
contain undetected viruses. Errors or bugs may also be present in software
licensed by the Company from third parties and incorporated into the Company's
products. Errors, bugs or viruses may result in loss of or delay in market
acceptance, recalls of hardware products incorporating the software or loss of
data. Delays or difficulties associated with new product introductions or
product enhancements could have a material adverse effect on the Company's
financial condition and results of operations.
Competition. The market for enterprise network and data security products is
highly competitive and subject to rapid change. The Company believes that the
principal competitive factors affecting the market for enterprise network and
data security products include technical features, ease of use,
quality/reliability, level of security, customer service and support,
distribution channels and price. The Company's competitors and potential
competitors include organizations that provide or may seek to provide enterprise
network and data security products based upon approaches similar to and
different from those employed by the Company, and could in the future include
operating systems or network suppliers not currently offering competitive
enterprise-wide security products. There can be no assurance that the market for
enterprise network and data security products will not ultimately be dominated
by approaches other than the approach marketed by the Company.
Certain of the Company's potential competitors have significantly
greater financial, marketing, technical and other competitive resources than the
Company. As a result, they may be able to leverage an installed customer base
and/or other existing or future enterprise-wide products, adapt more quickly to
new or emerging technologies and changes in customer requirements, or devote
greater resources to the promotion and sale of their products than can the
Company. Competition could increase if new companies enter the market or if
existing competitors expand their product lines. Any reduction in gross margins
resulting from competitive factors could have a material adverse effect on the
Company's financial condition and results of operations.
<PAGE>
Potential Volatility of Stock Price. The trading of the Company's Common Stock
has been and may continue to be subject to wide fluctuations in response to
quarter to quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
developments with respect to patents or proprietary rights, general conditions
in the information security systems and wireless communications industries,
changes in earnings estimates by analysts, or other events or factors. In
addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
technology companies and which have often been unrelated to the operating
performance of such companies. The Company's sales or operating results in
future quarters may be below the expectations of public market securities
analysts and investors. In such event, the price of the Company's Common Stock
would likely decline, perhaps substantially. These Company-specific factors or
broad market fluctuations may have a material adverse effect on the market price
of the Company's Common Stock.
Lengthy Sales Cycle. Sales of the Company's products generally involve a
significant commitment of capital by customers, with the attendant delays
frequently associated with large capital expenditures. For these and other
reasons, the sales cycle associated with the Company's product is typically
lengthy and subject to a number of significant risks over which the Company has
little or no control. The Company is often required to ship products shortly
after it receives orders and consequently, order backlog at the beginning of any
period has in the past represented only a small portion of that period's
expected revenue. As a result, product revenue in any period is substantially
dependent on orders booked and shipped in that period. The Company typically
plans its production and inventory levels based on internal forecasts of
customer demand, which are highly unpredictable and can fluctuate substantially.
If revenue falls significantly below anticipated levels, the Company's financial
condition and results of operations would be materially and adversely affected.
In addition, the Company's operating expenses are based on anticipated revenue
levels and a high percentage of the Company's expenses are generally fixed in
the short term. Based on these factors, a small fluctuation in the timing of
sales can cause operating results to vary significantly from period to period.
Product Liability Risks. Customers rely on the Company's information security
products to prevent unauthorized access to their networks and data
transmissions. A malfunction or the inadequate design of the Company's products
could result in tort or warranty claims. Although the Company seeks to reduce
the risk of such losses by attempting to negotiate warranty disclaimers and
liability limitation clauses in its sales agreements and by maintaining product
liability insurance, there can be no assurance that such measures will be
effective in limiting the Company's liability for such damages. Any liability
for damages resulting from security breaches could be substantial and could have
a material adverse effect on the Company's financial condition and results of
operations.
Evolving Information Security Market. The market for the Company's information
security products is only beginning to emerge. This market is characterized by
rapidly changing technology, emerging industry standards, new product
introductions and changes in customer requirements and preferences. The
Company's future success will depend in part upon end users' demand for
information security products in general and upon the Company's ability to
enhance its existing products and to develop and introduce new products and
technologies that meet customer requirements. To the extent that a specific
method other than the Company's is adopted as the standard for implementing
information security in any segment of the information security market, sales of
the Company's existing and planned products in that market segment may be
adversely impacted, which could have a material adverse effect on the Company's
financial condition and results of operations. There can be no assurance that
information security-related products or technologies developed by others will
not adversely affect the Company's competitive position or render its products
or technologies noncompetitive or obsolete.
<PAGE>
In addition, a portion of the sales of the Company's information
security products will depend upon a robust industry and infrastructure for
providing access to public switched networks, such as the Internet. There can be
no assurance that the infrastructure or complementary products necessary to make
these networks into viable commercial marketplaces will be developed, or, if
developed, that these networks will become viable commercial marketplaces.
ITEM 2. PROPERTIES
The Company is headquartered in approximately 65,000 square feet of
office and production space in Roseville, Minnesota. The Company occupies these
premises under leases expiring at various times through the year 2006. The
annual base rent for this facility is approximately $875,000. The Company's
subsidiaries located in Toronto, Ontario, Concord, California and Naples,
Florida also lease office space totaling 55,000 square feet and with annual rent
totaling approximately $1,115,000. Of the aforementioned space, approximately
13,000 square feet of the Toronto facility has been sublet for $143,000 annual
rental income. The Company recently added 6,000 square feet in San Jose,
California totaling 13,000 square feet and annual rent of $257,000. The
additional San Jose space will allow Secure to move its' headquarters to San
Jose in the spring of 1998. In support of its eastern U.S. field sales and
support organization, the Company also leases approximately 6,000 square feet of
office space in Vienna, Virginia. The annual rent for this facility is
approximately $140,000. The Company also has foreign offices in London, England;
Paris, France; Sydney, Australia and Munich, Germany.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders by the
Registrant during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol SCUR. The following table sets forth, for the periods
indicated, the high and low bid prices per share of the Common Stock on the
Nasdaq National Market.
<PAGE>
High Low
1996
First Quarter....................... $52.00 $21.00
Second Quarter...................... $35.25 $20.50
Third Quarter....................... $25.25 $9.50
Fourth Quarter...................... $12.50 $8.13
1997
First Quarter....................... $8.88 $5.00
Second Quarter...................... $8.75 $5.00
Third Quarter....................... $8.94 $5.56
Fourth Quarter...................... $14.69 $9.06
As of March 17, 1998, the Company had 510 stockholders of record which
includes 6 holders of Exchangeable Shares and approximately 4,780 beneficial
holders of its Common Stock.
The Company has never declared or paid any dividends on its Common
Stock. The Company currently intends to retain any earnings for use in its
business and therefore does not anticipate paying any dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The consolidated statement of operations data set forth below for the
fiscal years ended December 31, 1997, 1996 and 1995 and the consolidated balance
sheet data at December 31, 1997 and 1996 are derived from the audited
consolidated financial statements included elsewhere in this Form 10-K. The
consolidated statement of operations data set forth below for the fiscal years
ended December 31, 1994 and 1993 and the consolidated balance sheet data at
December 31, 1995, 1994 and 1993 are derived from audited consolidated financial
statements which are not included in this Form 10-K. The consolidated statement
of operations for the fiscal years ended December 31, 1995 and 1994 and the
consolidated balance sheet data at December 31, 1995 and 1994 have been restated
to give effect to the acquisition of Border Network Technologies, Inc. and
Enigma Logic, Inc. in August 1996. The data set forth below should be read in
conjunction with the Financial Statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Products and services....... $33,203,000 $23,290,000 $ 13,081,000 $ 4,051,000 $ 1,598,000
Government contracts...... 13,773,000 16,972,000 14,849,000 13,744,000 9,389,000
----------- ---------- ---------- ---------- ---------
Total revenue......... 46,976,000 40,262,000 27,930,000 17,795,000 10,987,000
Gross profit 28,210,000 21,465,000 13,079,000 7,120,000 4,244,000
Acquisition costs........... --- 13,069,000 --- --- ---
Operating Income (loss)..... (5,734,000) (26,473,000) (633,000) 1,220,000 215,000
Net Income (loss)........... (4,251,000) (25,094,000) (632,000) 1,541,000 731,000
Net income (loss) per share:
Basic................. (.27) (1.76) (.08) .17 .14
Diluted............... (.27) (1.76) (.08) .17 .10
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)... $17,175,000 $18,886,000 $ 34,292,000 $1,991,000 $ (731,000)
Total assets................ 31,054,000 36,775,000 44,261,000 7,727,000 4,495,000
Long-term debt, less
current portion and
redeemable convertible
preferred stock............. --- --- 1,879,000 10,659,000 8,630,000
Stockholder's equity
(deficit)................... 24,800,000 26,232,000 36,208,000 (5,996,000) (7,081,000)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company produces and markets products designed to enable electronic
commerce by protecting an organization's computer network from access by
unauthorized users. Secure was organized in July 1989 to acquire certain assets
of a division of Honeywell, Inc., then engaged in research and development of
computer network security technology under a U.S. government contract. In August
1996, the Company acquired Border Network Technologies Inc. ("Border") and
Enigma Logic, Inc. ("Enigma") in a transaction accounted for as a pooling of
interests. All historical information presented in this Item 7 has been restated
to reflect this combination. Also in 1996, the Company purchased Webster Network
Strategies, Inc. ("Webster").
PRODUCTS AND SERVICES. The Company sells its products and services to
commercial and government customers. The Company's SafeWord identification and
authentication server products were introduced prior to 1994. During 1994 and
1995, the Company invested significant resources in the development of the
Sidewinder and BorderWare firewall products. Both firewalls first had
significant sales in 1995. In 1996, the Company's SmartFilter internet filtering
product (formerly known as WebTrack) was introduced. 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.
During 1998, the Company plans to continue its research and development
investment and general and administrative spending at current levels and to
increase its sales and marketing expenditures over 1997 levels. The Company
expects that operating expenses as a percentage of revenues will decline in
1998. The Company has planned for increased costs associated with selling and
marketing in connection with the release of new products.
GOVERNMENT CONTRACTS. From the time of its organization, Secure has
been engaged in research and development of computer network security technology
under contracts with departments and agencies of the U.S.
government.
<PAGE>
The Company's Secure Network Server development contract with the
National Security Agency ("NSA") accounted for approximately 18 percent, 33
percent and 43 percent of the Company's total revenue for the years ended
December 31, 1997, 1996 and 1995, respectively. The Company estimates that the
aggregate fee to be received over the course of the contract will be
approximately 6 percent and is currently using a rate of 5.5 percent in
recognizing revenue in 1997 based on its current estimate of the remaining fee
to be earned under the contract. The NSA contract now extends to August 1998.
Most of the Company's government research and development contracts
provide for compensation to the Company in the form of reimbursement of costs
plus a fee. The Company typically bills government agencies, including the NSA,
monthly for a ratable portion of the fee expected to be received over the life
of the contract and current expenses. Under these government contracts, the
Company is entitled to recover direct labor costs, engineering overhead and
certain general and administrative expenses.
Under its government contracts, the Company bears the risk that
increased or unexpected costs required to perform specified services may reduce
the amount of the Company's fee and are subject to audit. Pursuant to their
terms, these contracts are generally also subject to termination for the
convenience of the applicable government agency. If the contract is terminated,
the Company typically would be reimbursed for its costs to the date of its
termination, plus the costs of an orderly termination, and paid a portion of the
fee.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items from the statements of operations of the Company expressed as a percentage
of revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Products and services 70.7% 57.8% 46.8%
Government contracts 29.3 42.2 53.2
- --------------------------------------------------------------------------------------
Total revenue 100.0 100.0 100.0
Cost of revenue 39.9 46.7 53.2
Gross profit 60.1 53.3 46.8
Operating expenses:
Selling and marketing 43.6 45.8 19.3
Research and development 18.6 23.8 17.4
General and administrative 8.2 17.1 12.4
Acquisition costs --- 32.4 ---
Stock option compensation expense 1.9 --- ---
- --------------------------------------------------------------------------------------
Total operating expenses 72.3 119.1 49.1
- --------------------------------------------------------------------------------------
Operating loss (12.2) (65.8) (2.3)
Interest and other income 1.1 3.8 0.9
Interest expense --- (0.3) (0.8)
Loss before income taxes (11.1) (62.3) (2.2)
Income tax (benefit) expense (2.1) --- 0.1
- --------------------------------------------------------------------------------------
Net loss (9.0)% (62.3)% (2.3)%
======================================================================================
</TABLE>
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996.
REVENUE. The Company's revenue increased 16.7 percent to $47.0 million
in 1997, up from $40.3 million in 1996. Products and services revenue was $33.2
million in 1997, an increase of 42.6 percent over 1996, and was attributable
mainly to increased sales of authentication products and related services. The
decrease in government contracts revenue in 1997 reflects the continuation of
efforts to reduce reliance on government contracts.
GROSS PROFIT. Gross profit as a percentage of revenue increased to 60.1
percent in 1997 from 53.3 percent in 1996. The increase in 1997 was primarily
the result of increased products and services revenue which carries a higher
gross margin than government contracts.
SELLING AND MARKETING. Selling and marketing expenses increased 11.1
percent to $20.5 million in 1997, from $18.4 million in 1996. The increase was
due primarily to additions to the Company's sales and marketing staff and higher
expenditures for advertising, trade shows and product literature.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
by 8.8 percent to $8.7 million in 1997 from $9.6 million in 1996. The decrease
resulted primarily from improved efficiencies due to consolidation of the
Company's operations.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased by 44.1 percent to $3.8 million in 1997 from $6.9 million in 1996. The
decrease was primarily the result of improved efficiencies from the
consolidation of the Company's operations.
ACQUISITION COSTS. Certain acquisition costs were recognized in the
second quarter of 1996 relating to the Webster, Border and Enigma acquisitions.
Purchased research and development in process of $3.9 million was expensed in
connection with the Webster acquisition. Also, $9.2 million of acquisition costs
were recorded for investment banking, professional fees and other expenses for
the Border and Enigma acquisitions.
INTEREST AND OTHER INCOME. The difference in interest and other income
between the periods reflects interest earned in 1997 by the Company on declining
cash and investment balances.
STOCK OPTION COMPENSATION EXPENSE. The stock option compensation
expense in 1997 reflects vesting by a certain portion of options triggered by
stock price performance.
INCOME TAX BENEFIT. The Company recognized an income tax benefit in
1997 compared to no income tax expense or benefit in 1996. The income tax
benefit recognized in 1997 related to a reduction in the valuation allowance
against the Company's deferred tax assets. The allowance was reduced based on
the Company's estimate of the amount of net operating loss carryforwards more
likely than not to be utilized to offset future taxable income. Management
believes it is more likely than not that net deferred tax assets, which total
$2.4 million at December 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. The Company had total net operating loss carryforwards of
approximately $38.9 million at December 31, 1997. Of these carryforwards, $9.9
million relates to stock option exercises. As these deductions are realized, the
benefit will not reduce income tax expense, rather it will be recorded as
additional paid-in-capital. Of the remaining benefit associated with the
carryforwards, approximately $23.0 million had yet to be recognized as a benefit
in the statement of operations. However, there can be no assurance that these
carryforwards will be available to offset future income tax expense when taxable
income is realized.
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995.
REVENUE. The Company's revenue increased 44.2 percent to $40.3 million
in 1996, up from $27.9 million in 1995. Products and services revenue was $23.3
million in 1996, an increase of 78.0 percent over 1995, and was attributable
mainly to increased sales of firewall products and related services. The
increase in government contracts revenue in 1996 reflects the continuation of
increased efforts on the Secure Network Server program for the NSA.
GROSS PROFIT. Gross profit as a percentage of revenue increased to 53.3
percent in 1996 from 46.8 percent in 1995. The difference between periods was
the result of increased products and services revenue which carries higher
margins than government contracts.
SELLING AND MARKETING. Selling and marketing expenses increased by
242.7 percent to $18.4 million in 1996 from $5.4 million in 1995. The increase
was due primarily to additions to the Company's sales and marketing staff and
higher expenditures for advertising, trade shows and product literature.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
by 96.7 percent to $9.6 million in 1996 from $4.9 million in 1995. The increase
resulted primarily from increased development efforts on the Company's firewall
and identification and authentication products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by 98.1 percent to $6.9 million in 1996 from $3.5 million in 1995. The
increase was due primarily to additions to administration staff and increased
professional and other outside fees.
ACQUISITION COSTS. Certain acquisition costs were recognized in the
second quarter of 1996 relating to the Webster, Border and Enigma acquisitions.
Purchased research and development in process of $3.9 million was expensed in
connection with the Webster acquisition as well as $9.2 million of acquisition
costs recorded for investment banking, professional fees and other expenses for
the Border and Enigma acquisitions.
INTEREST AND OTHER INCOME. The difference in interest and other income
between the periods reflects interest earned in 1996 by the Company on cash and
investments generated from its initial public offering in November, 1995 and
sales of common stock in early 1996.
INTEREST EXPENSE. Interest expense decreased to $129,000 in 1996 from
$239,000 in 1995, due to the repayment of all outstanding debt in 1996.
INCOME TAX EXPENSE. The Company recognized no income tax expense for
1996 compared to $21,000 in 1995. Management's evaluation of the realizability
of the deferred tax assets remained constant in 1996 and 1995, resulting in a
net deferred tax asset of $1.4 million in both years.
LIQUIDITY AND CAPITAL RESOURCES
Since its organization, the Company has financed its operations through
the issuance of equity securities and notes to stockholders, long-term debt,
short-term borrowings and cash generated from operations. The Company's cash and
cash equivalents decreased by approximately $7.3 million from 1996 to 1997. The
decrease resulted primarily from recurring operating losses and $2.3 million of
purchases of capital equipment. The decrease was partially offset by
approximately $2.0 million of proceeds from sales of common stock, primarily
from employees upon exercise of stock options. As of December 31, 1997, the
Company had working
<PAGE>
capital of $17.2 million. In 1998, the Company has received a commitment from a
bank to enter into a $5 million line of credit. The Company expects the terms of
the line to be finalized in April 1998. 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 expenditures for property and equipment were $2.3 million, $5.0
million and $2.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively. These expenditures have generally consisted of computer
workstations, office furniture and equipment, and leasehold improvements.
At its current level of operations, the Company believes that its
existing cash and cash equivalents are sufficient to meet the Company's current
working capital and capital expenditure requirements through at least the next
12 months.
INFLATION
To date, the Company has not been significantly affected by inflation.
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
INVESTMENT AND GENERAL AND ADMINISTRATIVE SPENDING AT CURRENT LEVELS AND TO
INCREASE ITS SALES AND MARKETING EXPENDITURES OVER 1997 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.
* YEAR 2000 COMPLIANCE. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date
code field. These date code fields will need to accept four digit entries
to distinguish 21st century dates. As a result, in less than two years,
computer systems and software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Although the Company
believes that its products and internal systems are Year 2000 compliant,
the Company believes that the purchasing patterns of
<PAGE>
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to upgrade their current software
systems for Year 2000 compliance. These expenditures may result in reduced
funds available to purchase products such as those offered by the Company,
which could have a material adverse effect on the Company's business and
results of operations.
* MANAGEMENT BELIEVES IT IS MORE LIKELY THAN NOT THAT DEFERRED TAX ASSETS,
WHICH TOTAL $2.4 MILLION AT DECEMBER 31, 1997, 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 1998 and early 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information under the heading
"Election of Directors" and "Section 16(a) Reporting", in the Registrant's Proxy
Statement to be filed on or about April 15, 1998. See also Part I, Item 1
"Executive Officers" of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing in the
Registrant's Proxy Statement which the Registrant anticipates filing on April
15, 1998 under the headings "Election of Directors -- Committees of the Board of
Directors and Meeting Attendance", "Executive Compensation", "Summary
Compensation Table", "Option Grants in Last Fiscal Year", "Aggregated Option
Exercises in Last Fiscal Year and Fiscal Year-End Option Values", "Employment
Contracts; Severance, Termination of Employment and Change-in-Control
Arrangements", and "Performance Evaluation".
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information appearing under the
heading "Security Ownership of Principal Stockholders and Management", in the
Registrant's Proxy Statement which the Registrant anticipates filing on April
15, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information appearing under the
heading "Certain Transactions", in the Registrant's Proxy Statement which the
Registrant anticipates filing on April 15, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
1. Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Auditors (Ernst & Young LLP)
Report of Independent Accountants
(Price Waterhouse LLP - San Jose California)
Auditors Report (Price Waterhouse - Ontario, Canada)
2. Consolidated Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts. Such schedule
should be read in conjunction with the Consolidated Financial
Statements. All other supplemental schedules are omitted
because of the absence of conditions under which they are
required.
(b) REPORTS ON FORM 8-K
A Form 8-K was not filed during the quarter ended December 31, 1997
(c) EXHIBITS
The following exhibits are filed as part of this Annual Report on Form
10-K for the fiscal year ended December 31, 1997:
<PAGE>
2.1 Agreement and Plan of Merger among Secure Computing
Corporation, Owl Acquisition, Inc. and Enigma Logic, Inc.
dated as of June 24, 1996, as amended as of July 31, 1996.(1)
2.2 Acquisition and Pre-Amalgamation Agreement among Secure
Computing Corporation, Edge Acquisition Inc. and Border
Network Technologies, Inc. dated as of May 28, 1996, as
amended as of July 31, 1996.(1)
2.3 Amalgamation Agreement dated as of August 29, 1996.(2)
3.1 Restated Certificate of Incorporation of Registrant.(3)
3.2 By-Laws of the Registrant.(4)
4.1 Specimen of Common Stock certificate.(5)
4.2 Certificate of Designation.(6)
10.1 Registration Rights Agreement among ITI, Incorporated, Grotech
Partners II, L.P., Ideas, Inc. and Bernard Farkas dated July
14, 1989.(7)
10.2 Purchase Agreement among ITI Incorporated, Grotech Partners
II, L.P., Ideas Inc. and Bernard Farkas dated July 14,
1989.(8)
10.3 Purchase Agreement among ITI Incorporated and Corporate
Venture Partners dated December 13, 1989.(9)
10.4 First Amendment dated December 13, 1989 among ITI,
Incorporated, Grotech Partners II, L.P., Ideas, Inc., and
Bernard Farkas and Corporate Venture Partners to Registration
Rights Agreement among ITI, Incorporated, Grotech Partners II,
L.P., Ideas, Inc. and Bernard Farkas dated July 14, 1989.(10)
10.5 Software Agreement between AT&T Information Systems Inc. and
ITI, Incorporated, Agreement No. SOFT-01701, dated April 2,
1990, including Supplement No. 1, UNIX System V Release 3.0,
Supplement No. 2 dated August 10, 1990; Sublicensing Agreement
between AT&T Information Systems, Inc.; Letter Agreement
between UNIX System Laboratories, Inc. and ITI, Inc. dated
April 15, 1991; Letter Agreement modifying Software Agreement
No. SOFT-01701 dated October 22, 1992; and Software Agreement
between AT&T Information Systems Inc. and ITI, Incorporated,
Agreement No. SOFT-02036, dated July 26, 1991.(11)
10.6 Agreement and Plan of Merger and Reorganization among ITI
Incorporated and Secure Computing Technology Company dated May
29, 1992.(12)
- --------------------
(1) Incorporated by reference to Appendix A to the Company's Definitive
Proxy Statement dated August 5, 1996 and filed August 7, 1996 with the
Securities and Exchange Commission (File No. 0-27074).
(2) Incorporated herein by reference to Exhibit 2.3 to the Company's
Current Report on Form 8-K filed September 12, 1996 (File No. 0-27074).
(3) Incorporated herein by reference to Exhibit 3.2 to the Company's Form
10-K filed on March 28, 1996 (File No. 0-27074).
(4) Incorporated herein by reference to Exhibit 3.3 to the Company's
Registration Statement on Form S-1 (Registration Number 33-97838).
(5) 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).
(6) Incorporated herein by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K filed on September 12, 1996 (File No.
0-27074).
(7) Incorporated herein by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1 (Registration Number 33-97838).
(8) Incorporated herein by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (Registration Number 33-97838).
(9) Incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Registration Number 33-97838).
(10) Incorporated herein by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (Registration Number 33-97838).
(11) Incorporated herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (Registration Number 33-97838).
(12) Incorporated herein by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (Registration Number 33-97838).
<PAGE>
10.7 Contract between the United States of America and Secure
Computing Corporation, Contract No. MDA904-93-C-C034, dated
December 16, 1992, including Amendment P00001 dated January
25, 1993; Amendment P00002 dated March 10, 1993; Amendment
P00003 dated February 18, 1993; Amendment P00004 dated March
15, 1993; Amendment P00005 dated October 27, 1993; Amendment
P00006 dated December 13, 1993; Amendment P00007 dated
December 30, 1993; Amendment P00008 dated April 29, 1994;
Amendment P00009 dated October 14, 1994; Amendment P00010
dated November 30, 1994; Amendment P00011 dated December 21,
1994; Amendment P00012 dated January 25, 1995; Amendment
P00013 dated May 3, 1995; Amendment P00014 dated May 26, 1995;
Amendment P00015 dated June 28, 1995; Amendment P00016 dated
July 24, 1995; Amendment P00017 dated October 4, 1995;
Amendment A00001 dated January 11, 1993; Amendment A00002
dated March 24, 1993; Amendment A00003 dated March 30, 1993;
Amendment A00004 dated May 1, 1993; Amendment A00005 dated
July 8, 1993.(13)
10.8 The following amendments to Contract between the United States
of America and Secure Computing Corporation, Contract No.
MDA904-93-C-C034: Amendment No. P00018 effective October 13,
1995, Amendment No. P00019 effective November 13, 1995,
Amendment No. P00020 effective December 15, 1995, Amendment
No. P00021 effective December 11, 1995, Amendment No. P00023,
effective January 22, 1996, Amendment No. P00024 effective
January 29, 1996, Amendment No. P00025 effective February 12,
1996, Amendment No. P00026 effective March 11, 1996, Amendment
No. P00027 effective April 10, 1996, Amendment No. P00028
effective April 11, 1996, Amendment No. P00029 effective April
24, 1996, Amendment No. P00030 effective June 6, 1996,
Amendment No. P00031 effective June 6, 1996, Amendment No
P00032 effective July 2, 1996, Amendment No. P00033 effective
September 12, 1996, and Amendment No. P00034 effective October
31, 1996.
10.9 Secure Computing Corporation Profit Sharing and Retirement
Plan--Summary Plan Description dated February 1, 1994.(14)
10.10 Software License Agreement between Berkeley Software Design,
Inc. and Secure Computing Corporation, dated February 7,
1994.(15)
10.11 Second Amendment to Purchase Agreement among Secure Computing
Corporation, Grotech Partners II, L.P., Corporate Venture
Partners, L.P., Ideas, Inc. and Bernard Farkas dated September
19, 1994, to Purchase Agreement dated July 14, 1989 among ITI,
Incorporated, Grotech Partners II, L.P., Ideas, Inc. and
Bernard Farkas.(16)
10.12 Purchase Agreement between Secure Computing Corporation and
FBL Ventures of South Dakota, Inc. dated September 20,
1994.(17)
10.13 Employment Agreement between Secure Computing Corporation and
Jeffrey H. Waxman dated November 4, 1997.(18)+
- ---------------
(13) Incorporated herein by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-1 (Registration Number 33-97838).
(14) Incorporated herein by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (Registration Number 33-97838).
(15) Incorporated herein by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (Registration Number 33-97838).
(16) Incorporated herein by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (Registration Number 33-97838).
(17) Incorporated herein by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (Registration Number 33-97838).
(18) Incorporated herein by reference to Exhibit 10.4 to the Company's Form
10-Q filed on November 14, 1996 (File No. 0-27074).
<PAGE>
10.15 Employment Agreement between Secure Computing Corporation and
James Boyle dated October 7, 1996.(19)+
10.16 Employment Agreement between Secure Computing Corporation and
Christine Hughes dated November 8, 1997, including the letter
agreement dated November 7, 1996.(20)+
10.18 Employment Agreement between Secure Computing Corporation and
Timothy P. McGurran dated August 27, 1996.(21)+
10.19 Employment Agreement between Secure Computing Corporation and
Gary D. Taggart dated October 2, 1996. +
10.24 Description of Secure Computing Corporation Management
Incentive Plan.(22)+
10.25 Secure Computing Corporation Amended and Restated 1995 Omnibus
Stock Plan. +
10.27 Secure Computing Corporation Employee Stock Purchase Plan (23)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Price Waterhouse, Chartered Accountants, Toronto,
Canada.
23.3 Consent of Price Waterhouse LLP, San Jose, California.
24.1 Powers of Attorney
27.1 Financial Data Schedule - 1997.
27.2 Financial Data Schedule - 1995.
- --------
(19) Incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q
filed on November 14, 1996 (File No. 0-27074).
(20) Incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q
filed on November 14, 1996 (File No. 0-27074).
(21) Incorporated by reference to Exhibit 10.8 to the Company's Form 10-Q
filed on November 14, 1996 (File No. 0-27074).
(22) Incorporated herein by reference to Exhibit 10.28 to the Company's
Registration Statement on Form S-1 (Registration Number 33-97838).
(23) Incorporated herein by reference to Exhibit 4.03 to the Company's
Registration Statement on Form S-8 (Registration Number 333-114151)
+ Management Contract or compensatory plan or arrangement required to be
filed as an exhibit hereto pursuant to Item 14(c) of Form 10-K and Item
601 of Regulation S-K.
<PAGE>
SECURE COMPUTING CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1996
--------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ............................................. $4,880 $12,130
Investments............................................................ --- 5,935
Accounts receivable (net of allowance for doubtful accounts
of 1997 - $417; 1996 - $290)............................................ 13,553 7,098
Deferred income taxes................................................... 2,113 1,083
Inventory............................................................... 1,123 1,908
Other current assets.................................................... 1,760 1,275
--------------------------------------
Total current assets................................................ 23,429 29,429
PROPERTY AND EQUIPMENT
Equipment............................................................... 8,008 7,843
Furniture and fixtures.................................................. 2,595 2,067
Leasehold improvements.................................................. 1,301 929
--------------------------------------
11,904 10,839
Accumulated depreciation................................................ (6,286) (4,993)
--------------------------------------
5,618 5,846
INTANGIBLE ASSETS (net of accumulated amortization of
1997 - $561; 1996 - $425)............................................. 1,221 1,082
OTHER ASSETS................................................................. 786 418
--------------------------------------
Total assets........................................................ $31,054 $36,775
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................................ $ 2,175 $ 3,727
Accrued payroll liability............................................... 1,170 2,031
Accrued acquisition liabilities......................................... --- 1,083
Other accrued liabilities............................................... 1,094 1,947
Deferred revenue........................................................ 1,815 1,755
--------------------------------------
Total current liabilities........................................... 6,254 10,543
STOCKHOLDERS' EQUITY
Common Stock, par value $.01 per share:
Issued and outstanding shares-- December 31, 1997 -
15,762,820 and December 31, 1996 - 15,101,152.......................... 158 151
Additional paid-in capital.............................................. 68,131 65,208
Accumulated deficit..................................................... (43,378) (39,127)
Foreign currency translation............................................ (111) ---
--------------------------------------
Total stockholders' equity ......................................... 24,800 26,232
--------------------------------------
Total liabilities and stockholders' equity.......................... $31,054 $36,775
======================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
SECURE COMPUTING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
REVENUE
Products and services.................. $33,203 $ 23,290 $13,081
Government contracts................... 13,773 16,972 14,849
-----------------------------------------------------
46,976 40,262 27,930
COST OF REVENUE............................. 18,766 18,797 14,851
-----------------------------------------------------
GROSS PROFIT................................ 28,210 21,465 13,079
OPERATING EXPENSES
Selling and marketing.................. 20,469 18,425 5,376
Research and development............... 8,736 9,575 4,869
General and administrative............. 3,839 6,869 3,467
Acquisition costs...................... --- 13,069 ---
Stock option compensation expense..... 900 --- ---
-----------------------------------------------------
33,944 47,938 13,712
-----------------------------------------------------
OPERATING LOSS.............................. (5,734) (26,473) (633)
Interest expense....................... --- (129) (239)
Interest and other income.............. 506 1,508 261
-----------------------------------------------------
Loss before income taxes............... (5,228) (25,094) (611)
Income tax (benefit) expense......... (977) --- 21
-----------------------------------------------------
Net loss.......................... $(4,251) $(25,094) $ (632)
=====================================================
NET LOSS PER SHARE--BASIC AND DILUTED $ (.27) $ (1.76) $ (.08)
WEIGHTED AVERAGE SHARES OUTSTANDING 15,480 14,222 7,665
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
SECURE COMPUTING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL FOREIGN
-------------------------- PAID-IN ACCUMULATED CURRENCY
SHARES AMOUNT CAPITAL DEFICIT TRANSLATION TOTAL
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 6,431,851 $ 64 $ 7,234 $ (13,294) --- $(5,996)
Exercise of incentive stock options. 223,820 2 99 --- --- 101
Exercise of Common Stock warrants... 164,619 2 367 --- --- 369
Common Stock issued for services.... 11,271 --- 50 --- --- 50
Initial public offering of Common
Stock, net of expenses............ 2,250,000 22 32,687 --- --- 32,709
Preferred Stock conversion.......... 3,460,635 35 10,119 --- --- 10,154
Preferred Stock accretion .......... --- --- (11) --- --- (11)
Dividends accrued on Preferred
Stock............................. --- --- (429) (107) --- (536)
Net loss for the year............... --- --- --- (632) --- (632)
-------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 12,542,196 125 50,116 (14,033) --- 36,208
Exercise of incentive stock options. 426,394 4 991 --- --- 995
Common Stock issued under
Employee Stock Purchase Plan...... 34,155 --- 277 --- --- 277
Compensation expense on options..... --- --- 197 --- --- 197
Common Stock issued................. 1,142,908 12 6,350 --- --- 6,362
Exercise of Common Stock warrants... 955,499 10 7,277 --- --- 7,287
Net loss for the year............... --- --- --- (25,094) --- (25,094)
-------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 15,101,152 151 65,208 (39,127) --- 26,232
Exercise of incentive stock options. 552,111 6 1,447 --- --- 1,453
Common Stock issued under
Employee Stock Purchase Plan..... 109,557 1 576 --- --- 577
Compensation expense on options..... --- --- 900 --- --- 900
Foreign currency translation........ --- --- --- --- $ (111) (111)
Net loss for the year............... --- --- --- (4,251) --- (4,251)
-------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 15,762,820 $ 158 $68,131 $(43,378) $ (111) $24,800
===========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
SECURE COMPUTING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,251) $(25,094) $ (632)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Purchased research and development in process and goodwill
write-off --- 4,994 ---
Depreciation 2,373 2,030 1,037
Loss on disposals of property and equipment 159 --- ---
Amortization 731 187 39
Deferred income taxes (1,030) 409 104
Stock option expense 900 --- ---
Changes in operating assets and liabilities:
Accounts receivable (6,455) (1,348) (3,050)
Inventory 785 (1,302) (337)
Other current assets (485) (1,315) (128)
Accounts payable (1,552) 1,608 1,468
Accrued liabilities and reserves (2,797) 2,009 1,031
Deferred revenue 60 290 793
-------------------------------------------------------
Net cash (used in) provided by operating activities (11,562) (17,532) 325
INVESTING ACTIVITIES
Purchases of investments --- (8,645) ---
Proceeds from sales of investments 5,935 3,000 ---
Cash paid in purchase of Webster Network Strategies, Inc. --- (759) ---
Cash paid in purchase of remaining interest in Border
Network Technologies Europe Ltd. --- (989) ---
Purchase of property and equipment (2,304) (5,030) (2,314)
Increase in intangible and other assets (1,238) (885) (121)
-------------------------------------------------------
Net cash provided by (used in) investing activities 2,393 (13,308) (2,435)
FINANCING ACTIVITIES
Payments on notes payable and long-term debt --- (1,943) (1,259)
Proceeds from notes and long-term debt --- --- 189
Proceeds from issuance of Common Stock 2,030 11,989 33,179
Proceeds from issuance of Preferred Stock --- --- 1,661
-------------------------------------------------------
Net cash provided by financing activities 2,030 10,046 33,770
EFFECT OF FOREIGN CURRENCY TRANSLATION (111) --- ---
-------------------------------------------------------
(Decrease) increase in cash and cash equivalents (7,250) (20,794) 31,660
Cash and cash equivalents at beginning of year 12,130 32,924 1,264
-------------------------------------------------------
Cash and cash equivalents at end of year $4,880 $12,130 $32,924
=======================================================
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Secure Computing Corporation (the "Company") designs and assembles products to
enable electronic commerce by protecting an organization's computer network and
its computers from access by unauthorized users. The Company's principal markets
are commercial companies and the United States government for its network
security products and the United States government under development contracts.
BASIS OF PRESENTATION
The consolidated financial statements are presented giving retroactive effect to
the Company's mergers with Border Network Technologies Inc. (now known as Secure
Computing Canada Ltd.) and Enigma Logic, Inc. which have been accounted for
under the pooling of interests method (see Note 2.).
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION
Products and Services
The Company recognizes product revenues at the time of shipment. The Company has
entered into customer support and maintenance agreements with various customers.
The Company recognizes the obligations either ratably as the obligations are
fulfilled or upon completion of performance.
Government Contracts
Government contract revenues for cost-plus-fixed-fee contracts are recognized on
the basis of costs incurred during the period plus the fee earned. Award fees
are recognized based upon the percentage of completion and forecasted profit. A
provision is made for the estimated loss, if any, on government contracts.
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Under its government contracts, the Company bears the risk that increased or
unexpected costs required to perform specified services may reduce the amount of
the Company's fee. In addition, recoverable expenses billed by the Company are
subject to review and audit by the Defense Contract Audit Agency, which could
result in amounts previously billed being renegotiated. Pursuant to their terms,
these contracts are generally also subject to termination at the convenience of
the applicable government agency. If the contract is terminated, the Company
typically would be reimbursed for its costs to the date of its termination plus
the cost of an orderly termination, and paid a portion of the fee.
At December 31, 1997 and 1996, the Company had deferred revenue of $144 and
$178, respectively, related to government contracts.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORY
Inventory consists mainly of purchased components and is valued at the lower of
cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
accelerated methods over the estimated useful lives of the assets ranging from 3
to 10 years.
INTANGIBLE ASSETS
Intangible assets consist of patents and trademarks and are amortized using the
straight-line method over the estimated useful lives of the assets, which range
up to ten years.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
Foreign assets and liabilities are translated using the year-end exchange rate.
Results of operations are translated using the average exchange rates throughout
the period. Translation gains or losses, net of applicable deferred taxes, are
accumulated as a separate component of stockholders' equity. In 1996 the effect
of foreign currency translation was immaterial, and accordingly, has not been
separately disclosed.
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed", requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
Based on the Company's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between completion of the working model and the point at which the product is
generally available for sale are capitalized and amortized over their estimated
useful life of one year. The Company capitalized software development costs net
of accumulated amortization of $547 and $450 at December 31, 1997 and 1996,
respectively. Amortization expense was $682, $187, and $--- for the years ended
December 31, 1997, 1996, and 1995, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share, (Statement 128). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share under the
previous rules. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements. Diluted earnings per share is not presented as the effect of
outstanding options, warrants and preferred stock are antidilutive.
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
regarding disclosure of pro-forma information for stock compensation. As is
allowed by Statement No. 123, the Company will continue to measure compensation
cost using the methods described in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees".
RECLASSIFICATIONS
Certain amounts presented in the 1996 and 1995 financial statements have been
reclassified to conform with the 1997 presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued No. 130, "Reporting Comprehensive Income."
Statement No. 130 is effective for fiscal years beginning after December 15,
1997. This standard defines comprehensive income as the changes in equity of an
enterprise income are required to be reported in a new financial statement.
Management believes the adoption of Statement No. 130 will not have a material
effect on the Company's financial statements.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Statement No. 131 is
effective for years beginning after December 15, 1997. Statement No. 131
establishes standards for disclosures about operating segments, products and
services, geographic areas and major customers. Management has not completed its
review of Statement No. 131, but does not anticipates that the adoption will
have a significant effect on the Company's reported segments.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2 ("SOP 97-2"). "Software Revenue Recognition." This
Statement establishes revenue recognition requirements for companies that sell
software for fiscal years beginning after December 15, 1997. Management is
currently evaluating the impact of SOP 97-2 and has not determined the result,
if any, on the Company's financial position, results of operations or cash
flows.
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. ACQUISITIONS
In May 1996, the Company acquired Webster Network Strategies, Inc. ("Webster"),
a Florida based Internet software developer, for 102,000 shares of Common Stock
and $749 cash, which included expenses of $249, in exchange for all outstanding
common stock of Webster. The acquisition was been accounted for using the
purchase method. Subsequent to the acquisition, the Company expensed all
purchased research and development in process of $3,894 based upon an
independent appraisal.
In August 1996, the Company acquired network security software developers Border
Network Technologies, Inc. ("Border") and Enigma Logic, Inc. ("Enigma"). Both
Border and Enigma were merged directly into the Company in a pooling of
interests. As a result of the mergers, the Company exchanged approximately
6,000,000 shares of Common Stock for all of the outstanding common stock of
Border and approximately 2,060,000 shares of Common Stock for all of the
outstanding common stock of Enigma. In addition, outstanding Border and Enigma
stock options were converted into options to purchase approximately 1,160,000
shares of the Company's Common Stock. Separate results of operations for the
periods prior to the mergers are as follows:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1996 1995
-------------------------------------------------
Revenue: (UNAUDITED)
Secure $13,438 $20,712
Border 4,506 3,317
Enigma 2,478 3,901
-------------------------------------------------
Combined $20,422 $27,930
=================================================
Net income (loss):
Secure $(9,189) $(974)
Border (4,474) 50
Enigma (2,857) 292
-------------------------------------------------
Combined $ (16,520) $(632)
=================================================
Also in May 1996, the Company acquired the remaining 68% interest it did not own
in Border Network Technologies Europe Limited for 40,908 shares Common Stock and
$989 in cash. Goodwill of $1,100 that was recorded in this transaction was
subsequently expensed as acquisition costs.
3. INVESTMENTS
At December 31, 1996, investments consisted of United States treasury bills with
original maturities of less than one year. The investments are considered
available for sale and are stated at cost plus accrued interest which
approximates fair market value.
<PAGE>
4. ACCOUNTS RECEIVABLE
Approximately 9% and 26% of accounts receivable were due from the United States
government at December 31, 1997 and 1996, respectively. Unbilled accounts
receivable from all customers were $644 and $202 at December 31, 1997 and 1996,
respectively.
5. STOCKHOLDER DEBT
In 1995, a stockholder of the Company made cash advances in exchange for notes
bearing interest at rates ranging from 9.5% to 12%. The notes were fully repaid
in 1996. Accrued interest of $562 is included in the balance at December 31,
1995.
6. LEASES
The Company leases office space for all of its locations. Future lease payments
for all operating leases, excluding executory costs such as management and
maintenance fees, are as follows:
1998 $2,244
1999 2,395
2000 2,305
2001 1,799
2002 1,727
Thereafter 5,508
-------------------
$15,978
===================
Rent expense was $2,191, $2,488 and $916 for the years ended December 31, 1997,
1996 and 1995, respectively.
7. CAPITAL STOCK
1995 REORGANIZATION AND STOCK SPLIT
On September 30, 1995, the Company effected a reorganization (the "1995
Reorganization") which included a 1.25-for-1 split of the Company's Common
Stock. Accordingly, all share, per share, weighted average share information and
redeemable convertible preferred stock have been restated to reflect the split.
Following the 1995 Reorganization, the Company had 30,460,635 shares of
authorized capital stock, consisting of 25,000,000 shares of Common Stock and
5,460,635 shares of Preferred Stock, of which 3,127,302 shares were designated
Series A Convertible Preferred Stock, 333,333 were designated Series B
Convertible Preferred Stock and 2,000,000 shares of Preferred Stock.
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. CAPITAL STOCK (CONTINUED)
undesignated as to its series. In December 1995, the Board of Directors elected
to decrease the amount of authorized Preferred Stock to 2,000,000 undesignated
shares.
INITIAL PUBLIC OFFERING
In November 1995, the Company sold 2,250,000 shares of Common Stock in an
initial public offering from which the Company received $33,480 before deducting
expenses.
PREFERRED STOCK
Upon the conclusion of the Company's initial public offering, all outstanding
shares of preferred stock were converted on a one for one basis to Common Stock.
Prior to that date, the Company had issued 3,127,302 shares of $2.24 Series A
Cumulative Redeemable Convertible Preferred Stock and 333,333 shares of $3.00
Series B Cumulative Redeemable Convertible Preferred Stock.
Series A and B Preferred Stock accrued cumulative dividends at $.20 and $.24 per
share per annum, respectively. Dividends in arrears prior to conversion for
Series A Convertible Preferred Stock at November 17, 1995 and December 31, 1994
were $2,093 and $1,624, respectively, and for Series B Cumulative Redeemable
Convertible Preferred Stock at November 17, 1995 and December 31, 1994 were $90
and $23, respectively. Upon conversion, all rights to receive the dividends in
arrears ceased.
8. STOCK OPTIONS
In September 1995, the Board of Directors and the stockholders approved the
Company's 1995 Omnibus Stock Plan (the "Stock Plan"). Under the terms of the
Stock Plan, key employees and non-employees may be granted options to purchase
up to 5,244,131 shares of the Company's Common Stock. Options granted typically
have ten year terms and vest annually over three years.
A summary of changes in outstanding options and common shares reserved under the
Plan are as follows:
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES AVAILABLE OPTIONS EXERCISE PRICE PER
FOR GRANT OUTSTANDING SHARE
-----------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 216,088 1,003,165 $ .73
Shares authorized 379,390 --- ---
Granted (445,790) 445,790 4.10
Exercised --- (225,445) .39
Canceled 90,957 (92,044) .73
-----------------------------------------------------------
Balance at December 31, 1995 240,645 1,131,466 2.14
Shares authorized 2,084,570 --- ---
Granted (2,397,152) 2,397,152 10.29
Exercised --- (426,394) 2.33
Canceled 188,188 (188,188) 6.88
-----------------------------------------------------------
Balance at December 31, 1996 116,251 2,914,036 $ 9.01
Shares authorized 1,300,000 --- ---
Granted (3,282,073) 3,282,073 6.44
Exercised --- (552,111) 2.71
Canceled 1,866,233 (1,866,233) 11.96
===========================================================
Balance at December 31, 1997 411 3,777,765 $ 6.24
===========================================================
</TABLE>
The following table summarizes information about the stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ----------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING CONTACTUAL LIFE PRICE EXERCISABLE PRICE
- ------------------------- ----------------- ---------------------- --------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
$.01 - $1.60 224,562 6.5 years $ .79 41,225 $ .88
$2.22 - $3.66 202,612 7.5 years 2.61 37,196 2.59
$5.06 - $6.63 2,849,626 9.5 years 6.12 522,952 6.35
$6.66 - $8.50 286,573 8 years 7.07 52,609 7.07
$10.50 - $30.00 214,392 8.5 years 15.59 39,538 13.78
========================= ================= ====================== =============== ================== ==================
$.01 - $30.00 3,777,765 8 years $6.24 693,520 $ 6.31
========================= ================= ====================== =============== ================== ==================
</TABLE>
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. STOCK OPTIONS (CONTINUED)
Options outstanding under the Stock Plan expire at various dates from 2002 to
2007. The number of options exercisable as of December 31, 1997, 1996 and 1995
were 693,520, 1,062,920 and 565,496 respectively. The weighted average fair
value of options granted and the weighted average remaining contractual life of
options granted during 1997, 1996 and 1995 are $5.05, $10.29 and $4.26 and 8,
9.5 and 8.5 years, respectively.
The Company also has an Executive Stock Option Plan under which 780,000 shares
are subject to accelerated vesting based on the performance of the Company's
stock price over the next three years. The number of shares exercisable under
this Plan, as of December 31, 1997 was 180,000 and are valued at $6.125. For the
year ended December 31, 1997, the Company recognized $900,000 of compensation
expense related to the accelerated vesting of options under this Plan.
The Company also has an Employee Stock Purchase Plan under which 400,000 shares
have been reserved for purchase by employees. The purchase price of the shares
under the Plan is the lesser of 85% of the fair market value on the first or
last day of the offering period. Offering periods are each three months.
Employees may designate up to 10% of their compensation for the purchase of
stock under the Plan.
Pro forma information regarding net loss and loss per share is required by
Statement No. 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
6.0%; volatility factors of the expected market price of the Company's Common
Stock of .80, .80 and 3.51; and a weighted average expected life of the option
of 5 years.
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net loss $(9,105) $(30,217) $(956)
============================================================
Pro forma basic and diluted loss per share $(.59) $(2.12) $(.12)
============================================================
</TABLE>
The pro forma effect on the net loss for all years shown is not representative
of the pro forma effect on net income (loss) in future years because it does not
take into consideration pro forma compensation expense related to grants made
prior to 1995.
9. INCOME TAXES
The Company's income tax benefit of $977 for the year ended December 31, 1997
consists of current foreign income taxes of $53 and a deferred federal benefit
of $1,030. The entire tax expense for the year ended December 31, 1995
represents current foreign income taxes.
The effective tax rate differs from the statutory tax rate primarily as a result
of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
Income taxes at statutory rate $(1,778) $(8,785) $ (239)
State taxes, net of federal benefit (223) (1,255) (34)
Foreign taxes (180) --- 21
Change in valuation allowance 1,110 5,539 391
Use of net operating loss carryforwards --- --- (102)
Non-deductible acquisition costs --- 4,470 ---
Other 94 31 (16)
----------------------------------------------------------
Income tax (benefit) expense $ (977) $ --- $ 21
==========================================================
</TABLE>
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. INCOME TAXES (CONTINUED)
Deferred income tax assets and liabilities result from temporary differences
between the carrying values of assets and liabilities for financial statement
and the income tax purposes. Significant components of the Company's net
deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1997 1996
------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities $ 492 $ 823
Stock option compensation expense 360 ---
Contract loss reserve 70 100
Payroll liabilities 187 187
Book over tax amortization (124) 55
Book over tax depreciation 114 112
Income tax credits 478 312
Net operating loss carryforward 15,675 12,117
------------------------------------------
Total deferred tax assets before valuation allowance 17,252 13,706
Less valuation allowance (14,849) (12,333)
------------------------------------------
Total deferred tax assets 2,403 1,373
------------------------------------------
Net deferred tax assets $ 2,403 $ 1,373
==========================================
</TABLE>
SFAS 109 "Accounting for Income Taxes" requires the consideration of a valuation
allowance for deferred tax assets if it is "more likely than not" that benefits
of deferred tax assets will not be realized. Management believes it is more
likely than not that the net deferred tax assets of $2,403 at December 31, 1997
will be realized. However, the amount of the deferred tax assets considered
realizable could be reduced in the near term if estimates of future taxable
income are reduced.
At December 31, 1997, the Company had net operating loss carryforwards (NOL) of
$38,878 which are available to offset taxable income through 2012. These
carryforwards are subject to the limitations of Internal Revenue Code Section
382. This section provides limitations on the availability of net operating
losses to offset current taxable income if significant ownership changes have
occurred for federal tax purposes. Included in the NOL is approximately $9,900
related to stock option exercises. These deductions currently have a full
valuation allowance and, when realized for financial statement purposes, they
will not result in a reduction in income tax expense. Rather, the benefit will
be recorded as an increase to additional paid-in-capital.
Income taxes were paid only in 1995 and amounted to $25.
10. EMPLOYEE BENEFIT PLAN
The Company has a voluntary defined contribution plan under Section 401(k) of
the Internal Revenue Code which covers substantially all U.S. employees of the
Company. The Company also has voluntary defined contribution plans which cover
substantially all employees of the Company. Contributions to the latter are
limited to the employer's discretionary annual contribution.
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
10. EMPLOYEE BENEFIT PLAN (CONTINUED)
The Company recognized expense for contributions to the plans as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C> <C>
Defined contribution plan (401K) $ 50 $ 61 $ 44
Voluntary contribution plans --- 367 451
------------------------------------------------------
$ 50 $428 $495
======================================================
</TABLE>
11. FOREIGN SALES
Sales to foreign customers accounted for 35%, 21% and 14% of total revenue in
the years ended December 31, 1997, 1996 and 1995, respectively.
12. CONTINGENCIES
The Company is engaged in certain legal proceedings and claims arising in the
ordinary course of its business. The ultimate liabilities, if any, which may
result from these or other pending or threatened legal actions against the
Company cannot be determined at this time. However, in the opinion of
management, the facts known at the present time do not indicate that there is a
probability that such litigation will have a material effect on the financial
position of the Company.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Secure Computing Corporation
We have audited the accompanying consolidated balance sheets of Secure Computing
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We did not audit the
financial statements of Enigma Logic, Inc. and Border Network Technologies Inc.,
which statements reflect total revenues constituting 26% in 1995 of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to data
included for Enigma Logic, Inc. and Border Network Technologies, Inc., is based
solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Secure Computing
Corporation at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 26, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Enigma Logic, Inc.
In our opinion, the balance sheets and the related statements of operations,
shareholder' deficit and cash flows present fairly, in all material respects,
the financial position of Enigma Logic, Inc. at December 31, 1995 and 1994 and
the results of its operations and its cash flows for the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles not presented separately herein. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform theaudit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for the opinion express above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
San Jose California
March 1, 1996
<PAGE>
PRICE WATERHOUSE
March 29, 1996
AUDITORS' REPORT
To the Shareholders of
Border Network Technologies Inc.
We have audited the consolidated balance sheet of Border Network Technologies
Inc. as at December 31, 1995 and the consolidated statements of operations and
retained earnings (deficit) and changes in financial position for the year then
ended not presented separately herein. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 1995
and the results of its operations and the changes in its financial position for
the year then ended in accordance with generally accepted accounting principles.
The financial statements as at December 31, 1994 and for the period then ended
were audited by other auditors who expressed an opinion without reservation on
those statements in their report dated October 2, 1995.
/s/ Price Waterhouse
Chartered Accountants
Toronto, Ontario
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SECURE COMPUTING CORPORATION
Date: March __, 1998 By /s/ Jeffrey H. Waxman
Jeffrey H. Waxman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant, and in the capacities indicated on March __, 1998.
Signature Title
/s/ Jeffrey H. Waxman President and Chief Executive
Jeffrey H. Waxman Officer and Director
(Principal Executive Officer)
/s/ Timothy P. McGurran Chief Financial Officer
Timothy P. McGurran (Principal Financial and
Accounting Officer)
* Director
Betsy Atkins
* Director
Robert J. Frankenberg
* Director
Stephen M. Puricelli
* Director
Eric P. Rundquist
* Director
Dennis J. Shaughnessy
* Director
Robert Smith
* Jeffrey H. Waxman by signing his name hereto, does hereby sign this document
on behalf of each of the above named directors of the Registrant pursuant to
power of attorney duly executed by such persons.
/s/ Jeffrey H. Waxman
Jeffrey H. Waxman, Attorney in fact
<PAGE>
Secure Computing Corporation
Schedule II
Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Less Balance at
Description of Year Expenses Deductions End of Year
----------- ------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Year Ended 12/31/97:
Contract loss reserves $250,000 $ --- $ (74,000) $176,000
Warranty reserves 65,000 --- (35,000) 30,000
Sales return allowance 120,000 --- (120,000) ---
Allowance for doubtful accounts 290,000 179,000 (52,000) 417,000
Inventory reserve 150,000 60,000 (160,000) 50,000
------------------- ------------------- ------------------- -----------------
Total $875,000 $239,000 $ (441,000) $673,000
=================== =================== =================== =================
Year Ended 12/31/96:
Contract loss reserves $250,000 $ --- $ --- $250,000
Warranty reserves 120,000 35,000 (90,000) 65,000
Sales return allowance 70,000 50,000 --- 120,000
Allowance for doubtful accounts 131,000 462,000 (303,000) 290,000
Inventory reserve --- 150,000 --- 150,000
------------------- ------------------- ------------------- -----------------
Total $571,000 $697,000 $(393,000) $875,000
=================== =================== =================== =================
Year Ended 12/31/95:
Contract loss reserves $200,000 $50,000 $ --- $250,000
Warranty reserve 34,000 86,000 --- 120,000
Sales return allowance --- 70,000 --- 70,000
Allowance for doubtful accounts 165,000 115,000 (149,000) 131,000
------------------- ------------------- ------------------- -----------------
Total $399,000 $321,000 $(149,000) $571,000
=================== =================== =================== =================
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 33-80065, 333-06563, 333-114151, 333-35651, 333-28929 and
333-28927) and the Registration Statements on Form S-3 (Nos. 333-16767 and
333-26293), respectively, of our report dated January 26, 1998, with respect to
the consolidated financial statements and schedule of Secure Computing
Corporation included in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 24, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 33-80065, 333-06563, 333-114151, 333-35651, 333-28929 and
333-28927) and the Registration Statements on Form S-3 (Nos. 333-16767 and
333-26293), respectively, of our report dated March 29, 1996, with respect to
the consolidated financial statements of Border Network Technologies Inc.,
included in the Annual Report (Form 10-K) of Secure Computing Corporation for
the year ended December 31, 1997.
/s/ Price Waterhouse
Chartered Accountants
Toronto, Canada
March 24, 1998
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 and the Registration Statement on Form S-3, respectively,
of our report dated March 1, 1996, relating to the financial statements of
Enigma Logic, Inc. for the year ended December 31, 1995, included in the Annual
Report of Form 10-K of Secure Computing Corporation for the fiscal year ended
December 31, 1997.
Price Waterhouse LLP
San Jose, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE>5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,880,000
<SECURITIES> 0
<RECEIVABLES> 13,970,000
<ALLOWANCES> 417,000
<INVENTORY> 1,123,000
<CURRENT-ASSETS> 5,880,000
<PP&E> 11,904,000
<DEPRECIATION> 6,286,000
<TOTAL-ASSETS> 31,054,000
<CURRENT-LIABILITIES> 6,254,000
<BONDS> 0
0
0
<COMMON> 158,000
<OTHER-SE> 68,131,000
<TOTAL-LIABILITY-AND-EQUITY> 31,054,000
<SALES> 46,976,000
<TOTAL-REVENUES> 46,976,000
<CGS> 18,766,000
<TOTAL-COSTS> 18,766,000
<OTHER-EXPENSES> 33,438,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,228,000)
<INCOME-TAX> (977,000)
<INCOME-CONTINUING> (4,251,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,251,000)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 32,924,000
<SECURITIES> 0
<RECEIVABLES> 5,750,000
<ALLOWANCES> 131,000
<INVENTORY> 606,000
<CURRENT-ASSETS> 40,466,000
<PP&E> 5,896,000
<DEPRECIATION> 3,050,000
<TOTAL-ASSETS> 44,261,000
<CURRENT-LIABILITIES> 6,174,000
<BONDS> 0
0
0
<COMMON> 125,000
<OTHER-SE> 50,116,000
<TOTAL-LIABILITY-AND-EQUITY> 44,261,000
<SALES> 27,930,000
<TOTAL-REVENUES> 27,930,000
<CGS> 14,851,000
<TOTAL-COSTS> 14,851,000
<OTHER-EXPENSES> 13,690,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (611,000)
<INCOME-TAX> 21,000
<INCOME-CONTINUING> (632,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (632,000)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
