UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended June 30, 1999
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ___________ to __________.
Commission file number 0-27074
SECURE COMPUTING CORPORATION
-----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1637226
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
One Almaden Blvd., Suite 400
San Jose, CA 95113
------------------------------- -------------
(Address of principal executive offices) (Zip code)
(408) 918-6100
--------------------------------------------------
Registrant's telephone number, including area code
Not Applicable
-----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date: Common Stock, $.01 par value -
20,807,414 issued and outstanding as of August 10, 1999, which number includes
743,636 Exchangeable Shares that have the same voting and other rights as Common
Stock and are immediately exercisable for shares of Common Stock.
1
<PAGE>
SECURE COMPUTING CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998............................. 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended June 30, 1999 and 1998............. 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended June 30, 1999 and 1998............. 5
Notes to the Condensed Consolidated Financial Statements
(Unaudited)................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 7-11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................ 12
Item 2. Changes in Securities............................................ 12
Item 3. Defaults upon Senior Securities.................................. 12
Item 4. Submission of Matters to a Vote of Security Holders.............. 13
Item 5. Other Information................................................ 13
Item 6. Exhibits and Reports on Form 8-K................................. 13
Signatures ...................................................... 14
2
<PAGE>
PART 1. FINANCIAL INFORMATION
SECURE COMPUTING CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,329 $ 9,992
Investments 8,905 10,886
Accounts receivable, net 9,792 19,712
Deferred income taxes 187 1,323
Inventories 658 2,361
Other current assets 1,550 1,038
------------ ------------
Total current assets 23,421 45,312
PROPERTY AND EQUIPMENT, NET 3,527 3,794
OTHER ASSETS 4,848 5,242
------------ ------------
TOTAL ASSETS $ 31,796 $ 54,348
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,401 $ 3,802
Accrued payroll liability 1,851 3,004
Other accrued liability 2,707 1,918
Deferred revenue 2,328 2,553
------------ ------------
TOTAL CURRENT LIABILITIES 10,287 11,295
STOCKHOLDERS' EQUITY
Preferred Stock, par value $.01; 2,000,000 shares
authorized, 11,950 issued and outstanding -- --
Common Stock, par value $.01; 50,000,000 shares
authorized; issued and outstanding -- June 30, 1999 --
18,079,594 and December 31, 1998 -- 16,545,987 181 165
Additional paid-in capital 97,596 89,730
Accumulated deficit (76,046) (46,640)
Foreign currency translation (222) (202)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 21,509 43,053
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,796 $ 54,348
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------------- -------------------------
<S> <C> <C> <C> <C>
Products and services revenue $ 4,763 $ 11,755 $ 11,329 $ 22,020
Advanced Technology contracts 747 2,770 2,410 5,280
---------- ---------- ---------- ----------
5,510 14,525 13,739 27,300
Cost of revenue 8,226 5,175 12,882 9,426
---------- ---------- ---------- ----------
Gross profit (2,716) 9,350 857 17,874
Operating expenses:
Selling and marketing 9,912 5,716 15,272 11,527
Research and development 2,955 1,838 5,173 3,740
General and administrative 3,317 1,102 4,479 1,877
Restructure costs -- -- -- 7,800
Stock option expense -- -- 4,740 --
---------- ---------- ---------- ----------
16,184 8,656 29,664 24,944
---------- ---------- ---------- ----------
Operating income/(loss) (18,900) 694 (28,807) (7,070)
Net interest income 128 15 301 57
---------- ---------- ---------- ----------
Income/(loss) before income taxes (18,772) 709 (28,506) (7,013)
Income tax (expense)/benefit (900) 260 (900) 617
---------- ---------- ---------- ----------
Net income/(loss) $ (19,672) $ 969 $ (29,406) $ (6,396)
========== ========== ========== ==========
Basic earnings(loss) per share $ (1.11) $ 0.06 $ (1.71) $ (0.40)
========== ========== ========== ==========
Weighted average shares outstanding 17,744 16,038 17,203 15,945
========== ========== ========== ==========
Diluted earnings(loss) per share $ (1.11) $ 0.06 $ (1.71) $ (0.40)
========== ========== ========== ==========
Weighted average common shares
and equivalents outstanding 17,744 17,471 17,203 15,945
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SECURE COMPUTING CORPORATION
CONDENSED CONSOLDIATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
---------- ----------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (11,887) $ (732)
INVESTING ACTIVITIES
Proceeds from sales of investments 1,981 --
Purchase of property and equipment (808) (1,197)
Increase in intangibles and other assets (73) (1,082)
---------- ----------
Net cash provided by (used in) investing activities (1,100) (2,279)
FINANCING ACTIVITIES
Proceeds from issuance of Preferred Stock -- 15,432
Proceeds from issuance of Common Stock 3,143 1,784
Proceeds from sales-lease-back transaction -- 729
---------- ----------
Net cash provided by financing activities 3,143 17,945
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES (19) (4)
---------- ----------
Increase (decrease) in cash and cash equivalents (7,663) 14,930
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 9,992 4,880
---------- ----------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 2,329 $ 19,810
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
Secure Computing Corporation ("Secure Computing" or the "Company")
designs, develops, markets and sells a comprehensive offering of interoperable,
standards-based products for end-to-end network solutions, including firewalls,
Web filters, authentication, extranet access control and security related
professional services. Today, the Company enables business security solutions
through its advanced technologies, professional services and partner programs.
The Company's goal is to provide a complete portfolio of integrated enterprise
security solutions for corporate networks. The Company's principal markets are
the United States government and commercial companies for its network security
products and the United States government under development contracts.
2. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by Secure Computing without audit and reflect all adjustments
(consisting only of normal and recurring adjustments and accruals) which are, in
the opinion of management, necessary to present a fair statement of the results
for the interim periods presented. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation. The statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission, but omit certain information and footnote disclosures necessary to
present the statements in accordance with generally accepted accounting
principles. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full fiscal year.
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and footnotes thereto included in the
Company's Annual 10-K Report for the year ended December 31, 1998, as filed with
the Securities and Exchange Commission.
3. SIGNIFICANT ACCOUNTING POLICIES
As of January 1, 1998, the Company adopted Financial Accounting
Standards No. 130 ("Statement 130"), "Reporting Comprehensive Income." Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders equity. Statement 130 requires foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130. During the second quarter of 1999 and 1998, total
comprehensive income amounted to ($19,724,000) and $867,000 respectively.
4. CONVERSION OF PREFERRED STOCK
In June 1998, the Company sold 16,000 shares of Series C Convertible
Preferred Stock (the "Preferred Stock"), resulting in net proceeds to the
Company of approximately $15,432,000, net of $568,000 in transaction costs. In
connection with the sale of the Preferred Stock, the Company also issued
warrants to purchase 174,464 shares of the Company's Common Stock. The warrants
may be exercised until the earlier of June 29, 2001 and a merger involving the
Company in which the Company is not the surviving entity. The exercise price of
the warrants is $11.92. The Preferred Stock is convertible into the number of
shares of Common Stock which may be purchased for the stated value of $1,000 per
share of Preferred Stock at a per share price equal to the lower of a) the
average closing bid price of the Common Stock for the five trading days
immediately prior to the date of conversion, b) the average closing bid price of
the Common Stock for the 15 trading days immediately prior to the date of
conversion, and c) a fixed conversion price of $19.0035 per share. In the second
quarter of 1999, 4050 shares of the Preferred Stock were converted into
1,004,545 shares of the Company's Common Stock leaving 11,950 outstanding
preferred shares. As of July 12, 1999, 4,150 shares of Series C Preferred remain
outstanding and an additional 7,800 shares of the Series C Preferred were
converted to 2,726,820 shares of the Company's Common Stock in July.
6
<PAGE>
SECURE COMPUTING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations 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 statements. Actual
results could differ materially from those projected in the forward-looking
statements as a result of a number of factors, including the risk factors
detailed in the Company's Annual Report on Form 10-K for the year ended December
31, 1998, filed with the Securities and Exchange Commission, as well as the
factors identified in Forward Looking Statements below.
RESULTS OF OPERATIONS
Significant additional expense charges of $11.7 million in aggregate
are included in the second quarter 1999 income statement. These expenses relate
to product line rationalization, refocusing of the company on e-commerce
products and streamlining the Company's executive management structure. The
following table compares the three months ended June 30, 1999 income statement
items including and excluding the significant additional expense charges:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
- --------------------------------------------------------------------------------------
Including Excluding
Significant Significant Significant
Charges Charges Charges
---------------------------------------------
<S> <C> <C> <C>
Gross profit $ (2,716) $ (4,700) $ 1,984
Operating expenses:
Selling and marketing 9,912 4,047 5,865
Research and development 2,955 281 2,674
General and administrative 3,317 1,801 1,516
---------------------------------------------
16,184 6,129 10,055
---------------------------------------------
Operating loss (18,900) (10,829) (8,071)
Net interest income 128 -- 128
---------------------------------------------
Loss before income taxes (18,772) (10,829) (7,943)
Income tax expense (900) (900) --
---------------------------------------------
Net loss $ (19,672) $ (11,729) $ (7,943)
=============================================
Net loss per share - basic and diluted $ (1.11) $ (.66) $ (0.45)
=============================================
</TABLE>
7
<PAGE>
REVENUE. The Company's revenue decreased 62.1 percent to $5,510,000 for the
second quarter of 1999 down from $14,525,000 in the same period of 1998.
Products and services revenue was $4,763,000 for the quarter, a decrease of 59.5
percent over 1998, and reflects delays in purchasing decisions based on "Year
2000" concerns and lengthening of sales cycles. The Company expects quarterly
revenue from products and services for the remainder of 1999 to increase from
the second quarter of 1999, however, these levels will be less than that from
the second quarter of 1998. Advanced Technology contract revenue was $747,000
for the quarter, a decrease of 73.0 percent from the second quarter of 1998,
which reflects a reduced focus on government contract business that does not
complement the Company's products and services offerings. The Company expects
quarterly revenue from Advanced Technology contracts for the remainder of 1999
to increase slightly from the second quarter of 1999. This increase is primarily
the result of expected contract awards.
GROSS PROFIT. Gross profit as a percentage of revenue decreased from 64.4
percent in the second quarter of 1998 to a negative 49.3 percent in 1999.
Excluding significant charges related to discontinued products, total gross
profit as a percentage of revenue decreased from 64.4 percent in the second
quarter of 1998 to 33.6 percent of revenue in 1999. The decrease resulted
primarily from reduced volumes and relatively fixed manufacturing and
amortization costs. The Company believes that gross profit will trend higher for
the remainder of the year as revenues increase.
SELLING AND MARKETING. Selling and marketing expense increased 73.4 percent to
$9,912,000 in the second quarter of 1999 up from $5,716,000 in the same period
of 1998. As a percentage of revenue, selling and marketing expense was 179.9
percent for the quarter compared to 39.4 percent in the same period of 1998.
Excluding significant charges resulting from discontinued product activities and
severance pay associated with the streamlining of the Company's management
structure, selling and marketing expense increased 2.6 percent to $5,865,000 in
the second quarter of 1999 up from $5,716,000 in the same period of 1998. As a
percentage of revenue, selling and marketing expense was 99.2 percent for the
quarter compared to 39.4 percent in the same period of 1998. The increased
spending levels resulted primarily from increased discretionary marketing
efforts. The Company expects selling and marketing expense to decrease from the
second quarter as a percentage of revenues for the rest of 1999.
RESEARCH AND DEVELOPMENT. Research and development expense increased 60.8
percent to $2,955,000 in the second quarter of 1999 up from $1,838,000 in the
same period of 1998. As a percentage of revenue, research and development
expense was 53.6 percent for the quarter compared to 12.7 percent in the same
period of 1998.
Excluding significant charges mainly for employee relocation expense, research
and development expense increased 45.5 percent to $2,674,000 in the second
quarter of 1999 up from $1,838,000 in the same period of 1998. As a percentage
of revenue, research and development expense was 45.2 percent for the quarter
compared to 12.7 percent in the same period of 1998. The increased spending
levels resulted primarily from increased investment in quality assurance
activities. The Company expects that research and development expense levels for
the rest of 1999 will remain at levels comparable to those of the second quarter
of 1999.
GENERAL AND ADMINISTRATIVE. General and Administrative expense increased 201.0
percent to $3,317,000 in the second quarter of 1999 up from $1,102,000 in the
same period of 1998. As a percentage of revenue, general and administrative
expense was 60.2 percent for the quarter compared to 7.6 percent in the same
period of 1998.
Excluding significant charges mainly for severance pay associated with the
streamlining of the Company's management structure and litigation settlements,
general and administrative expense increased 37.6 percent to $1,516,000 in the
second quarter of 1999 up from $1,102,000 in the same period of 1998. As a
percentage of revenue, general and administrative expense was 25.7 percent for
the quarter compared to 7.6 percent in the same period of 1998. The increased
spending levels resulted primarily from duplicative executive compensation
during the Company's Chief Executive Officer transition period, additional
investment in the Company's accounting department and increased legal fees
related to current legal proceedings. The Company expects the quarterly general
and administrative expenses for the rest of 1999 to decrease as a percentage of
revenue from the second quarter of 1999.
NET INTEREST INCOME. Net interest income was $128,000 in the second quarter of
1999, an increase from $15,000 in the same period of 1998. The increase reflects
higher average cash and investment balances in 1999 as compared to 1998.
8
<PAGE>
INCOME TAXES. The Company recognized an income tax expense in the second quarter
of 1999 of $900,000 compared to an income tax benefit of $260,000 in the same
period of 1998. The expense is a result of anticipated reduced government
contract revenue. The Company's management believes it is more likely than not
that deferred tax assets, which total $2.7 million at June 30, 1999, will be
realized. The computation of the Company's deferred tax assets and valuation
allowance are based in part on taxable income expected to be earned on
government contracts and projected interest income. The amount of the deferred
tax assets considered realizable could be reduced in the near term if estimates
of future taxable income are reduced.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and short term investments decreased by
$9,644,000 from December 31, 1998 to June 30, 1999. The decrease resulted
primarily from the use of cash to fund operations and purchase capital equipment
that was partially offset by proceeds from stock option exercises. As of June
30, 1999, the Company had working capital of $13.1 million as well as an unused
$5 million line of credit. The Company anticipates using available cash to fund
growth in operations, invest in capital equipment, acquire businesses, and to
license technology or products related to the Company's line of business.
Capital additions in the second quarter of 1999 were $443,000 and were primarily
made up of computer equipment, office furniture and leasehold improvements. The
Company expects to invest approximately $750,000 additional throughout the
remainder of 1999 mainly for computer equipment, facilities and business systems
upgrades.
At its current level of operations, the Company believes that it has sufficient
financial resources available to fund the Company's current working capital and
capital expenditure requirements through the end of the fiscal year.
YEAR 2000 COMPLIANCE
The Company has completed testing of its products and systems and
believes that its products and systems sold after December 31, 1998 are and will
be Year 2000 compliant. For non-compliant products introduced prior to this
date, we have provided customers with a migration path in the form of an
update/upgrade option. The Company has also verified compliance of third party
computer software and hardware utilized by the Company. The Company has not
verified Year 2000 compliance of certain semiconductors embedded in other
third-party equipment used by the Company, nor has the Company established the
costs and risks associated with such third party equipment.
Since the Company's Year 2000 compliance verification efforts are
virtually complete, the estimated future expenditures for compliance activities
are insignificant. The Company does not have any contingency plans nor does it
plan on developing one at this time.
FORWARD LOOKING STATEMENTS
Certain statements made above, which are summarized below, are
forward-looking statements that involve risks and uncertainties, and actual
results may be materially different. Factors that could cause actual results to
differ include those identified below:
* THE COMPANY EXPECTS QUARTERLY REVENUE FROM PRODUCTS AND SERVICES FOR THE
REMAINDER OF 1999 TO INCREASE FROM THE SECOND QUARTER OF 1999, HOWEVER,
THESE LEVELS WILL BE LESS THAN THAT FROM THE SECOND QUARTER OF 1998. 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 acceptance of new products offered by the Company, and introduction
of products by competitors.
* THE COMPANY EXPECTS QUARTERLY REVENUE FROM GOVERNMENT CONTRACTS FOR THE
REMAINDER OF 1999 TO INCREASE SLIGHTLY FROM THE FIRST QUARTER OF 1999. This
increase is primarily the result of expected contract awards. Meeting this
expectation depends upon the Company's ability to achieve a higher level of
government contract revenue, which may not occur for a variety of reasons,
including an inability to staff engineers to its current contract
requirements or customer delays or cancellations of contract awards.
9
<PAGE>
* THE COMPANY BELIEVES THAT GROSS PROFIT WILL TREND HIGHER FOR THE REMAINDER
OF THE YEAR AS REVENUES INCREASE. 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 acceptance of
new products offered by the Company, and introduction of products by
competitors.
* THE COMPANY EXPECTS SELLING AND MARKETING EXPENSE TO DECREASE FROM THE
SECOND QUARTER 1999 AS A PERCENTAGE OF REVENUES FOR THE REST OF 1999. This
expectation depends on the Company maintaining the current anticipated level
of selling and marketing expenses, which may not occur due to unexpected
increases in such costs or because of a need to accelerate a full scale
product marketing and branding campaign, 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.
* THE COMPANY EXPECTS THAT RESEARCH AND DEVELOPMENT EXPENSES FOR THE REST OF
1999 WILL REMAIN AT LEVELS COMPARABLE TO THOSE OF THE SECOND QUARTER OF
1999. 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. 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.
* THE COMPANY EXPECTS THE QUARTERLY GENERAL AND ADMINISTRATIVE EXPENSES FOR
THE REST OF 1999 TO DECREASE AS A PERCENTAGE OF REVENUE FROM THE SECOND
QUARTER OF 1999. This expectation depends on the Company maintaining the
current anticipated level of spending which may not occur due to unexpected
increases in such costs.
* MANAGEMENT BELIEVES IT IS MORE LIKELY THAN NOT THAT DEFERRED TAX ASSETS,
WHICH TOTAL $2,700,000 AT JUNE 30, 1999, WILL BE REALIZED. This expectation
depends primarily on the Company maintaining, at current levels, its
existing government contract business. If these contracts are lost or
adjusted downward, deferred tax assets would be expected to be written down
with a corresponding charge to income tax expense recorded.
* THE COMPANY EXPECTS TO INVEST APPROXIMATELY $750,000 ADDITIONAL THROUGHOUT
THE REMAINDER OF 1999 MAINLY FOR COMPUTER EQUIPMENT, FACILITIES AND BUSINESS
SYSTEMS upgrades. This expectation depends primarily on the Company
maintaining its current level of investment in property and equipment.
Unexpected changes in the Company's structure could change the level of
expenditures.
* AT ITS CURRENT LEVEL OF OPERATIONS, THE COMPANY BELIEVES THAT IT HAS
SUFFICIENT FINANCIAL RESOURCES AVAILABLE TO FUND THE COMPANY'S CURRENT
WORKING CAPITAL AND CAPITAL EXPENDITURE REQUIREMENTS THROUGH THE END OF THE
FISCAL YEAR. The Company's ability to generate revenue as currently
expected, unexpected expenses and the need for additional funds to react to
changes in the marketplace, including unexpected increases in personnel
costs and selling and marketing expenses or currently unplanned
acquisitions, may impact whether the Company has sufficient cash resources
to fund its product development and marketing and sales plans for the
remainder of 1999.
* SINCE THE COMPANY'S YEAR 2000 COMPLIANCE VERIFICATION EFFORTS ARE VIRTUALLY
COMPLETE, THE ESTIMATED FUTURE EXPENDITURES FOR COMPLIANCE ACTIVITIES ARE
INSIGNIFICANT. Failure of third-party equipment to operate properly in the
Year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect
on the Company's business, operating results and financial condition. The
company has verified Year 2000 compliance with third party suppliers of the
components used in its products, however, the company has limited or no
control over the actions of these third-party suppliers. The failure of
these suppliers to properly address their internal systems and components
could cause a material disruption to the Company's business.
10
<PAGE>
The business, operating results and financial condition of the Company's
customers could be adversely affected to the extent they utilize third-party
software and other products that are not Year 2000 compliant. The Company
does not have nor is it possible to obtain any insurance policy providing
material coverage for potential injuries or damages related to or caused by
the Year 2000 issue.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have material exposure to quantitative and
qualitative market risks because it does not own any risk sensitive financial
instruments.
11
<PAGE>
SECURE COMPUTING CORPORATION
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 2, 9, 12, 14 and 20, 1999, purported class action
complaints were filed in the United States District Court for the
Northern District of California by Myron Goldstein, Herbert Silverberg,
William Preiner, Charles McInnis, and George H. Rosenquist and Melvin
Freedenberg, respectively, against Secure Computing Corporation, and
its present or former officers Jeffrey Waxman, Timothy McGurran,
Patrick Regester, Gary Taggart, Howard Smith and Christine Hughes. Each
complaint alleges that defendants made false and misleading statements
about our business condition and prospects during a purported class
period of November 10, 1998 - March 31, 1999, and asserts claims for
violations of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 and SEC Rule 10b-5. Each complaint seeks damages of an
unspecified amount.
There has been no discovery to date and no trial is scheduled
in any of these actions. The Company believes that it has meritorious
defenses to these actions and intends to defend them vigorously.
However, if the Company does not obtain a favorable resolution of the
claims set forth in the actions it could have a material adverse effect
on our business, results of operations and financial condition. The
Company is currently unable to reasonably estimate the size or impact
of such material adverse effect.
On August 26, 1998, a purported class action complaint was
filed in the Delaware Chancery Court in and for New Castle County by
Rosalyn Golaine against Secure Computing Corporation, the Company's
former Chairman and Chief Executive Officer Jeffrey Waxman, its Chief
Financial Officer Timothy McGurran, and present or former directors
Betsy Atkins,Robert Frankenberg, Stephen Puricelli, Eric Rundquist and
Dennis Shaughnessy. The complaint alleged that the provisions of the
July 24, 1997 Shareholder Rights Plan permitting only those directors
who voted for the Rights Plan (or their designated successors) to
redeem the rights granted therein, violates Delaware law. The complaint
sought injunctive relief and damages of an unspecified amount. After
the Golaine action was filed, the Company amended the Shareholder
Rights Plan, thereby rendering moot the injunctive relief requested. On
June 8, 1999, the court approved a settlement of the Golaine action
requiring the Company to pay $100,000 in attorney fees and the costs of
notifying the class of the proposed settlement. The $100,000 payment
was entirely covered by insurance.
ITEM 2. CHANGES IN SECURITIES
On June 30, 1998, the Company sold 16,000 shares of newly issued Series
C Convertible Preferred Stock (the "Series C Preferred") and warrants
to acquire 174,464 shares of Common Stock to two investors affiliated
with Credit Suisse First Boston and Castle Creek Partners. The offer
and sale of these securities were completed pursuant to the exemption
provided by Regulation D under the Securities Act of 1933.
The Series C Preferred is convertible at the election of the holder
into shares of Common Stock beginning six months after issuance. As of
July 12, 1999, 11,850 shares of the Series C Preferred had been
converted into 3,731,365 shares of Common Stock leaving 4,150
outstanding shares of Series C Preferred. The average conversion price
for shares of Series C Preferred previously converted was $3.18 per
share of Common Stock. A more comprehensive description of the rights
and preferences of the Series C Preferred is contained in the Company's
Report on Form S-3 dated August 14, 1998 and August 6, 1999 as well as
Form 8-K filed with the Commission on July 15, 1998. A copy of the
Certificate of Designation of Series C Preferred Stock is filed as an
exhibit to the Report on Form 8-K.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were approved at the Company's Annual Meeting of
Stockholders held on May 13, 1999:
a) The following directors were elected:
Common Shares Voted
Directors For Against
-----------------------------------------------------------
Eric P. Rundquist 12,276,422 177,828
Alexander Zakupowsky, Jr. 12,276,422 177,828
Such directors were elected to three year terms commencing
upon their election. Directors Robert J.Frankenberg, Stephen M.
Puricelli, and John E. McNulty continued in office until expiration of
their respective roles.
b) Amendment of the Employee Stock Purchase Plan
Number of Common Shares Voted
Employee Stock Purchase Plan For Against Abstain
-----------------------------------------------------------------------
Amendment of the Employee 11,054,348 1,413,567 31,203
Stock Purchase Plan
c) The stockholders also approved the following proposal:
Number of Common Shares Voted
Independent Accountants For Against Abstain
-----------------------------------------------------------------------
Ratification of Ernst & Young LLP 12,267,290 219,195 12,631
As independent accountants
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1999:
27.1 Financial Data Schedule
Copies of Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Exhibits.
13
<PAGE>
SECURE COMPUTING CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SECURE COMPUTING CORPORATION
DATE: August 13, 1999 By: \s\ Timothy P. McGurran
--------------------------------------
Timothy P. McGurran,
Senior Vice President of Operations
and Chief Financial Officer
(Duly authorized officer and
Principal Financial Officer)
14
<PAGE>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
27.1 Financial Data Schedule FILED ELECTRONICALLY
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 11,234,000
<SECURITIES> 0
<RECEIVABLES> 11,501,000
<ALLOWANCES> 1,709,000
<INVENTORY> 658,000
<CURRENT-ASSETS> 23,421,000
<PP&E> 10,364,000
<DEPRECIATION> 6,836,000
<TOTAL-ASSETS> 31,796,000
<CURRENT-LIABILITIES> 10,287,000
<BONDS> 00
00
120
<COMMON> 181,000
<OTHER-SE> 97,596,000
<TOTAL-LIABILITY-AND-EQUITY> 31,796,000
<SALES> 13,739,000
<TOTAL-REVENUES> 13,739,000
<CGS> 12,882,000
<TOTAL-COSTS> 12,882,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (301,000)
<INCOME-PRETAX> (28,506)
<INCOME-TAX> 900,000
<INCOME-CONTINUING> (29,406,000)
<DISCONTINUED> 00
<EXTRAORDINARY> 00
<CHANGES> 00
<NET-INCOME> (29,406,000)
<EPS-BASIC> (1.71)
<EPS-DILUTED> (1.71)
</TABLE>