UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 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
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(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 -
21,737,532 issued and outstanding as of November 1, 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.
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SECURE COMPUTING CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1999
(Unaudited) and December 31, 1998............................ 3
Condensed Consolidated Statements of Operations (Unaudited) for
the three months ended September 30, 1999 and 1998........... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the three months ended September 30, 1999 and 1998........... 5
Notes to the Condensed Consolidated Financial Statements
(Unaudited).................................................. 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 9-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................... 14
Item 2. Changes in Securities........................................... 14
Item 3. Defaults upon Senior Securities................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............. 14
Item 5. Other Information............................................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 15
Signatures...................................................... 16
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PART 1. FINANCIAL INFORMATION
SECURE COMPUTING CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 221 $ 9,992
Investments 5,424 10,886
Accounts receivable, net 8,138 19,712
Deferred income taxes 187 1,323
Inventories 647 2,361
Other current assets 1,450 1,038
------------ ------------
Total current assets 16,067 45,312
PROPERTY AND EQUIPMENT, NET 3,846 3,794
DEFERRED INCOME TAXES 2,515 2,277
OTHER ASSETS 2,033 2,965
------------ ------------
TOTAL ASSETS $ 24,461 $ 54,348
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 2,845 3,820
Accrued payroll liability 2,820 3,004
Other accrued liability 2,090 1,918
Deferred revenue 2,744 2,553
------------ ------------
TOTAL CURRENT LIABILITIES $ 10,499 $ 11,295
STOCKHOLDERS' EQUITY
Preferred Stock, par value $.01; 2,000,000 shares
Authorized; issued and outstanding - September 30,
1999 - 3,600 and December 31, 1998 - 16,000 -- --
Common Stock, par value $.01; 50,000,000 shares
Authorized; issued and outstanding -- September 30, 1999 --
21,184,940 and December 31, 1998 -- 16,545,987 212 165
Additional paid-in capital 97,922 89,730
Accumulated deficit (83,952) (46,640)
Foreign currency translation (220) (202)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 13,962 43,053
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,461 $ 54,348
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Products and services revenue $ 5,318 $ 13,808 $ 16,647 $ 35,828
Advanced Technology contracts revenue 1,157 2,549 3,567 7,829
------------ ------------ ------------ ------------
6,475 16,357 20,214 43,657
Cost of revenue 4,416 5,783 17,298 15,209
------------ ------------ ------------ ------------
Gross profit 2,059 10,574 2,916 28,448
Operating expenses:
Selling and marketing 5,674 5,604 20,946 17,131
Research and development 2,842 1,885 8,015 5,625
General and administrative 1,510 1,418 5,989 3,295
Restructure costs -- -- -- 7,800
Stock option expense -- -- 4,740 --
------------ ------------ ------------ ------------
10,026 8,907 39,690 33,851
------------ ------------ ------------ ------------
Operating income/(loss) (7,967) 1,667 (36,774) (5,403)
Net interest income 61 228 362 285
------------ ------------ ------------ ------------
Income/(loss) before income taxes (7,906) 1,895 (36,412) (5,118)
Income tax (expense)/benefit -- 208 (900) 825
------------ ------------ ------------ ------------
Net income/(loss) $ (7,906) $ 2,103 $ (37,312) $ (4,293)
============ ============ ============ ============
Basic earnings(loss) per share $ (0.38) $ 0.13 $ (2.03) $ (0.27)
============ ============ ============ ============
Weighted average shares outstanding 20,628 16,233 18,359 16,029
============ ============ ============ ============
Diluted earnings(loss) per share $ (0.38) $ 0.11 $ (2.03) $ (0.27)
============ ============ ============ ============
Weighted average common shares
and equivalents outstanding 20,628 19,137 18,359 16,029
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SECURE COMPUTING CORPORATION
CONDENSED CONSOLDIATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
-----------------------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (17,312) $ (2,381)
INVESTING ACTIVITIES
Proceeds from sales of investments 5,462 --
Purchase of property and equipment (1,502) (1,623)
Increase in intangibles and other assets 100 (1,665)
------------ ------------
Net cash provided by (used in) investing activities 4,060 (3,288)
FINANCING ACTIVITIES
Proceeds from issuance of Preferred Stock (125) 15,432
Proceeds from issuance of Common Stock 3,624 2,326
Proceeds from sales-lease-back transaction -- 729
------------ ------------
Net cash provided by financing activities 3,499 18,487
EFFECT OF EXCHANGE RATE CHANGES (18) (26)
------------ ------------
Increase (decrease) in cash and cash equivalents (9,771) 12,792
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 9,992 4,880
------------ ------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 221 $ 17,672
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SECURE COMPUTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
1. ORGANIZATION
We develop and sell computer network "security" products and services
designed to provide secure access control for organizations engaged in
electronic commerce/business. Our products provide solutions to assure the
integrity and security of transactions and communications over public networks
such as the Internet. Our products can also be used to prevent unauthorized
access to private organizations and government networks. Our products generally
fall into two broad categories: 1) those intended to prevent unauthorized access
to computer and network based data and information, and 2) those intended to
authenticate/identify network users and control access to network resources or
applications. In addition, to our products, we provide security centered
professional services for vulnerability assessment and analysis; penetration
testing; and security architecture design and implementation.
2. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by us without audit and reflect all adjustments (consisting only of
normal and recurring adjustments and accruals) which are, in our opinion,
necessary to present a fair statement of the results for the interim periods
presented. The consolidated financial statements include our accounts and those
of our 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 our 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, we 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 our 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 third quarter of 1999 and 1998, total comprehensive
income amounted to ($7,904,000) and $2,080,000 respectively.
4. CONVERSION OF PREFERRED STOCK
In June 1998, we sold 16,000 shares of Series C Convertible Preferred
Stock (the "Preferred Stock"), resulting in net proceeds to us of approximately
$15,220,000, net of $780,000 in transaction costs. In connection with the sale
of the Preferred Stock, we also issued warrants to purchase 174,464 shares of
our common stock. The warrants may be exercised until the earlier of June 29,
2001 or a merger involving us where we are 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. As of
September 30, 1999, 12,400 shares of the Preferred Stock were converted into
3,937,324 shares of our common stock at an average price of $3.15 per share,
leaving 3,600 outstanding preferred shares. As of November 3, 1999, all 16,000
shares of the Series C Preferred were converted into 5,174,493 shares of common
stock at an average price of $3.09 per share, leaving no outstanding preferred
shares.
6
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SECURE COMPUTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
5. COMMON STOCK
On October 4, 1999, we entered into a common stock investment agreement
(the "Agreement") which provides for the sale from time to time over the next
two years of up to $25 million in common stock to Manchester Securities Corp.
("Manchester"). We must file and have declared effective a registration
statement covering the resale of the shares by Manchester, and we must satisfy a
number of other conditions, before selling any shares under the Agreement.
We also issued a warrant to Manchester to acquire shares of Common Stock
(the "Warrant"). The number of shares issuable upon exercise of the Warrant is
equal to $1,875,000 divided by 120% of the average of the trading price of the
common stock calculated during either of two time periods as further set forth
in the Warrant.
6. SEGMENT INFORMATION
We have two reportable segments consisting of Products and Services and
Advanced Technology. Our products and services segment markets a range of
interoperable, standards-based network security products and services to the
global marketplace including customers from Fortune 500 companies, small branch
offices, and government agencies. Our Advanced Technology segment engages in
research and development of information security technology by acquiring and
executing contracts with departments and agencies of the United States
government. Cash, investments, deferred tax assets, general and administrative
expenses, and stock option compensation costs cannot be readily identified to
the two business segments, therefore, they are presented separately in a
Corporate segment.
We evaluate segment performance based on gross profit. Resources are
allocated based on contractual requirements as the Advanced technology segment
is reimbursed on a cost plus basis from the various agencies of the United
States government. The accounting policies of the reportable segments are the
same as those described in Note 1, "Summary of Significant Accounting Policies."
Revenue is recognized at time of shipment and/or when performance of services
are complete for the Products and Services segment. For Advanced Technology,
contract revenue is recognized on the basis of costs incurred for the government
contracts serviced by Advanced Technology and intersegment transfers are
recorded at cost; there are no intercompany profits or losses recorded on
intersegment transfers.
Our reportable segments are business units that offer distinct product
and services to very different customer groups. The reportable segments are each
managed separately because they require different managerial skill sets and are
focused toward different markets.
Significant components of our segments are as follows:
<TABLE>
<CAPTION>
PRODUCTS AND ADVANCED
SERVICES TECHNOLOGY
NINE MONTHS ENDED SEPTEMBER 30, 1999 SEGMENT SEGMENT CORPORATE TOTAL
- ------------------------------------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from external customers ..... $ 16,647 $ 3,567 $ -- $ 20,214
Depreciation expense ................. 998 101 15 1,114
Segment gross profit ................. 2,619 297 -- 2,916
Segment operating income/(loss) ...... (22,454) (3,591) (10,729) (36,774)
Interest income ...................... -- -- 362 362
Segment assets ....................... 14,622 1,445 8,394 24,461
Expenditures for long lived assets ... 1,440 42 20 1,502
----------- ----------- ----------- -----------
</TABLE>
7
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SECURE COMPUTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
6. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
PRODUCTS AND ADVANCED
SERVICES TECHNOLOGY
NINE MONTHS ENDED SEPTEMBER 30, 1998 SEGMENT SEGMENT CORPORATE TOTAL
- ------------------------------------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from external customers ..... $ 35,828 $ 7,829 $ -- $ 43,657
Restructuring charge ................. -- -- 7,800 7,800
Depreciation expense ................. 732 195 15 942
Segment gross profit ................. 26,351 2,097 -- 28,448
Segment operating income/(loss) ...... 6,766 (1,074) (11,095) (5,403)
Interest income ...................... -- -- 285 285
Segment assets ....................... 26,691 1,960 20,922 49,573
Expenditures for long lived assets ... 1,028 574 21 1,623
----------- ----------- ----------- -----------
</TABLE>
International sales accounted for 12% and 26% of total revenue for the
nine months ended September 30, 1999 and 1998 respectively. Major foreign
markets for the our products include Europe and the Pacific Rim, with the United
Kingdom, Germany, Scandinavia and Japan being particularly strong. In each
country, the we have independent channel partners who are responsible for
marketing, selling and supporting our products to resellers and end-users within
their defined territories.
The following table summarizes information about our international and domestic
sales and operations:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
United States sales .................... $ 17,713 $ 32,237
International sales .................... 2,501 11,420
----------- -----------
$ 20,214 $ 43,657
=========== ===========
Identifiable Assets:
United States operations ............... $ 23,408 $ 48,405
International operations ............... 1,053 1,168
----------- -----------
$ 24,461 $ 49,573
=========== ===========
</TABLE>
8
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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 our
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.
We base all forward-looking statements in this document on information
available to us as of the date hereof, and we assume 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 our Annual Report on Form 10-K
for the year ended December 31, 1998, filed with the SEC, the risk factors
detailed in our Form S-1 filed with the SEC on October 15, 1999, as well as the
risk factors identified in Forward Looking Statements below.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998.
REVENUE. Our revenue decreased 60.4% to $6,475,000 for the third quarter of 1999
down from $16,357,000 in the same period of 1998. Products and services revenue
was $5,318,000 for the quarter, a decrease of 61.5 % over 1998, and reflects
delays in purchasing decisions based on "Year 2000" concerns and lengthening of
sales cycles. We expect revenue from products and services for the remainder of
1999 to increase from the third quarter of 1999, however, these levels will be
less than that from the third quarter of 1998. Advanced Technology contract
revenue was $1,157,000 for the quarter, a decrease of 54.6% from the third
quarter of 1998, which reflects a reduced focus on government contract business
that does not complement our products and services offerings. Due to the
holidays and vacation usage, we expect quarterly revenue from Advanced
Technology contracts for the remainder of 1999 to decrease from the third
quarter of 1999.
GROSS PROFIT. Gross profit as a percentage of revenue decreased from 64.6% in
the third quarter of 1998 to 31.8% in 1999. The decrease resulted primarily from
reduced volumes and relatively fixed manufacturing and amortization costs. We
believe that gross profit will trend higher for the remainder of the year as
products and services revenues increase.
SELLING AND MARKETING. Selling and marketing expense increased 1.2% to
$5,674,000 in the third quarter of 1999 up from $5,604,000 in the same period of
1998. As a percentage of revenue, selling and marketing expense was 87.6% for
the quarter compared to 34.3% in the same period of 1998. The increased spending
as a percent of revenue resulted primarily from decreased revenues. We expect
selling and marketing expense levels for the rest of 1999 will remain at levels
comparable to those of the third quarter.
RESEARCH AND DEVELOPMENT. Research and development expense increased 50.8% to
$2,842,000 in the third quarter of 1999 up from $1,885,000 in the same period of
1998. As a percentage of revenue, research and development expense was 43.9% for
the quarter compared to 11.5 percent in the same period of 1998. The increased
spending levels resulted primarily from accelerated development efforts for next
generation of flagship products, Sidewinder and SafeWord, including the Virtual
Smart Card Server. We expect that research and development expense levels for
the rest of 1999 will remain at levels comparable to those of the third quarter
of 1999.
GENERAL AND ADMINISTRATIVE. General and Administrative expense increased 6.5% to
$1,510,000 in the third quarter of 1999 up from $1,418,000 in the same period of
1998. As a percentage of revenue, general and administrative expense was 23.3%
for the quarter compared to 8.7% in the same period of 1998. We expect general
and administrative expenses for the rest of 1999 will remain at levels
comparable to those of the third quarter of 1999.
9
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NET INTEREST INCOME. Net interest income was $61,000 in the third quarter of
1999, an decrease from $228,000 in the same period of 1998. The decrease
reflects declining cash and investment balances in 1999.
INCOME TAXES. The Company recognized no income tax expense in the third quarter
of 1999 compared to an income tax benefit of $208,000 in the same period of
1998. We believe it is more likely than not, that deferred tax assets, which
total $2.7 million at September 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.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998.
Significant additional expense charges of $11.7 million in aggregate are
included in the 1999 statement of operations. These expenses relate to
rationalizing our product line, refocusing on e-commerce products and
streamlining our executive management structure. The following table compares
the nine months ended September 30, 1999 income statement items including and
excluding the significant additional expense charges:
Nine Months Ended September 30, 1999
(Unaudited, in thousands, except per share amounts)
Including Excluding
Significant Significant Significant
Charges Charges Charges
-----------------------------------------
Gross profit $ 2,916 $ (4,700) $ 7,616
Operating expenses:
Selling and marketing 20,946 4,047 16,899
Research and development 8,015 281 7,734
General and administrative 5,898 1,801 4,188
Stock option expense 4,740 -- 4,740
-----------------------------------------
39,690 6,129 33,561
-----------------------------------------
Operating Loss (36,774) (10,829) (25,945)
Net interest income 362 -- 362
-----------------------------------------
Loss before income taxes (36,412) (10,829) (25,583)
Income tax expense (900) (900) --
-----------------------------------------
Net loss $ (37,312) $ (11,729) $ (25,583)
=========================================
Net loss per share - basic and
diluted $ (2.03) $ (.64) $ (1.39)
=========================================
REVENUE. Our revenue decreased 53.7% to $20,214,000 for the first nine months of
1999 down from $43,657,000 in the same period of 1998. Products and services
revenue was $16,647,000 for the nine months, a decrease of 53.5% over 1998, and
reflects delays in purchasing decisions based on "Year 2000" concerns and
lengthening of sales cycles. We expect revenue from products and services for
the remainder of 1999 to trend higher from the first nine months of 1999.
However, these levels will be less than that from same period of 1998. Advanced
Technology contract revenue was $3,567,000 for the first nine months, a decrease
of 54.4% from the same period of 1998, which reflects a reduced focus on
government contract business that does not complement our products and services
offerings. Due to the holidays and vacation usage, we expect revenue from
advanced technology contracts for the remainder of 1999 to trend lower from the
first nine months of 1999.
GROSS PROFIT. Gross profit as a percentage of revenue decreased from 65.2% in
the first nine months of 1998 to 14.4% in 1999. Excluding significant charges
related to discontinued products, total gross profit as a percentage of revenue
decreased from 65.2% in the first nine months of 1998 to 37.7% of revenue in
1999. The decrease resulted primarily from reduced volumes and relatively fixed
manufacturing and amortization costs. We believe that gross profit will trend
higher for the remainder of the year as products and services revenues increase.
10
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SELLING AND MARKETING. Selling and marketing expense increased 22.3% to
$20,946,000 in the first nine months of 1999 up from $17,131,000 in the same
period of 1998. As a percentage of revenue, selling and marketing expense was
103.6% for the nine months compared to 39.2% in the same period of 1998.
Excluding significant charges resulting from discontinued product activities and
severance pay associated with the streamlining of our management structure,
selling and marketing expense decreased 1.4% to $16,899,000 in the first nine
months of 1999 down from $17,131,000 in the same period of 1998. As a percentage
of revenue, selling and marketing expense was 83.6% for the first nine months
compared to 39.2% in the same period of 1998. The increased spending as a
percent of revenue resulted primarily from decreased revenues. We expect that
selling and marketing expense levels for the rest of 1999 will trend at levels
comparable to those of the first nine months of 1999.
RESEARCH AND DEVELOPMENT. Research and development expense increased 42.5% to
$8,015,000 in the first nine months of 1999 up from $5,625,000 in the same
period of 1998. As a percentage of revenue, research and development expense was
39.7% for the first nine months compared to 12.9% in the same period of 1998.
Excluding significant charges mainly for employee relocation expense, research
and development expense increased 37.5% to $7,734,000 in the first nine months
of 1999 up from $5,625,000 in the same period of 1998. As a percentage of
revenue, research and development expense was 38.3% for the first nine months
compared to 12.9% in the same period of 1998. The increased spending levels
resulted primarily from accelerated development efforts for next generation of
flagship products, Sidewinder and SafeWord, including the Virtual Smart Card
Server. We expect that research and development expense levels for the rest of
1999 will trend at levels comparable to those of the first nine months of 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased 81.1%
to $5,989,000 in the first nine months of 1999 up from $3,295,000 in the same
period of 1998. As a percentage of revenue, general and administrative expense
was 29.6% for the first nine months compared to 7.5% in the same period of 1998.
Excluding significant charges mainly for severance pay associated with the
streamlining of our management structure and litigation settlements, general and
administrative expense increased 27.1% to $4,188,000 in the first nine months of
1999 up from $3,295,000 in the same period of 1998. As a percentage of revenue,
general and administrative expense was 20.7% for the first nine months compared
to 7.5% in the same period of 1998. The increased spending levels resulted
primarily from duplicative executive compensation during our chief executive
officer transition period. We expect that general and administrative expense
levels for the rest of 1999 will trend at levels comparable to those of the
first nine months of 1999.
NET INTEREST INCOME. Net interest income was $362,000 in the first nine months
of 1999, an increase from $285,000 in the same period of 1998. The increase
reflects higher average cash and investment balances in the first nine months of
1999 as compared to 1998.
INCOME TAXES. We recognized an income tax expense in the first nine months of
1999 of $900,000 compared to an income tax benefit of $825,000 in the same
period of 1998. The expense is a result of anticipated reduced government
contract revenue. We believe it is more likely than not that deferred tax
assets, which total $2.7 million at September 30, 1999, will be realized. The
computation of our deferred tax assets and valuation allowance are based in part
on taxable income we expect to earn 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
Since our organization, we have financed our operations through the
issuance of equity securities and notes to stockholders, long-term debt,
short-term borrowings and cash generated from operations. Our cash and cash
equivalents and short term investments decreased by $15.2 million from December
31, 1998 to September 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 December 31, 1998 and September
30, 1999, we had working capital of $34.0 million and $5.6 million respectively,
as well as an unused $5 million line of credit. We anticipate using available
cash to fund operations, invest in capital equipment, and to license technology
or products related to our line of business.
11
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Capital additions in the third quarter of 1999 were $694,000 and were
primarily made up leasehold improvements. We expect to invest approximately
$400,000 throughout the remainder of 1999 mainly for computer equipment,
facilities and business systems upgrades.
On October 4, 1999, we entered into an investment agreement that
provides financing to us of up to $25 million that expires October 2001.
We believe that we have sufficient financial resources available to fund
our current working capital and capital expenditure requirements through the
next 12 months. These financial resources include our current cash and
investments on hand, our unutilized $5M line of credit and our $25 million
investment agreement.
YEAR 2000 COMPLIANCE
We have completed testing of our products and systems and believe that
our 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. We have also verified that third party computer software and hardware
used by us are Year 2000 compliant. We has not verified Year 2000 compliance of
certain semiconductors embedded in other third party equipment used by us, nor
have we established the costs and risks associated with such third party
equipment.
Since our Year 2000 compliance verification efforts are virtually
complete, the estimated future expenditures for compliance activities are
insignificant.
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:
* WE EXPECT REVENUE FROM PRODUCTS AND SERVICES FOR THE REMAINDER OF
1999 TO INCREASE/TREND HIGHER FROM THE THIRD QUARTER/ FIRST NINE
MONTHS OF 1999. HOWEVER, THESE LEVELS WILL BE LESS THAN THAT FROM
THE THIRD QUARTER/SAME PERIOD OF 1998. Meeting this expectation
depends upon our ability to achieve a higher level of products and
services revenue. We may be unable to meet this expectation for a
variety of reasons, including general market conditions for our
products and services, delays or difficulties in the development,
inability to obtain market acceptance of our new products, and
introduction of products by competitors.
* WE BELIEVE THAT GROSS PROFIT WILL TREND HIGHER FOR THE REMAINDER OF
THE YEAR AS PRODUCTS AND SERVICES REVENUES INCREASE. Meeting this
expectation depends upon our ability to achieve a higher level of
products and services revenue. We may be unable to meet this
expectation for a variety of reasons, including general market
conditions for our products and services, delays or difficulties in
the development, inability to obtain market acceptance of our new
products, and introduction of products by competitors.
* WE EXPECT THAT SELLING AND MARKETING EXPENSE LEVELS FOR THE REST OF
1999 WILL REMAIN/TREND AT LEVELS COMPARABLE TO THOSE OF THE THIRD
QUARTER/FIRST NINE MONTHS OF 1999. This expectation depends on us
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 our results of operations. Additionally, meeting this
expectation depends upon our ability to control costs and achieve a
higher level of revenue. This expectation may not occur for a
variety of reasons, including general market conditions for our
products and services, development and acceptance of our new
products, and introduction of products by competitors.
* WE EXPECT THAT RESEARCH AND DEVELOPMENT EXPENSE LEVELS FOR THE REST
OF 1999 WILL REMAIN/TREND AT LEVELS COMPARABLE TO THOSE OF THE THIRD
QUARTER/FIRST NINE MONTHS OF 1999. This expectation depends on us
maintaining the current anticipated level of product development,
which may not occur due to
12
<PAGE>
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 our results of operations. Additionally, meeting this
expectation depends upon our ability to control costs and achieve a
higher level of revenue. This expectation may not occur for a
variety of reasons, including general market conditions for our
products and services, development and acceptance of our new
products, and introduction of products by competitors.
* WE EXPECT THAT GENERAL AND ADMINISTRATIVE EXPENSE LEVELS FOR THE
REST OF 1999 WILL REMAIN/TREND AT LEVELS COMPARABLE TO THOSE OF
THIRD QUARTER/FIRST NINE MONTHS OF 1999. This expectation depends on
us to maintain the current anticipated level of spending which may
not occur due to unexpected increases in such costs.
* WE BELIEVE IT IS MORE LIKELY THAN NOT, THAT DEFERRED TAX ASSETS,
WHICH TOTAL $2.7 MILLION AT SEPTEMBER 30, 1999, WILL BE REALIZED.
This expectation depends primarily on us maintaining, at current
levels, our 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.
* WE EXPECT TO INVEST APPROXIMATELY $400,000 THROUGHOUT THE REMAINDER
OF 1999 MAINLY FOR COMPUTER EQUIPMENT, FACILITIES AND BUSINESS
SYSTEMS UPGRADES. This expectation depends primarily on us to
maintain our current level of investment in property and equipment.
Unexpected changes in our structure could change the level of
expenditures.
* AT OUR CURRENT LEVEL OF OPERATIONS, WE BELIEVE THAT WE HAVE
SUFFICIENT FINANCIAL RESOURCES AVAILABLE TO FUND OUR CURRENT WORKING
CAPITAL AND CAPITAL EXPENDITURE REQUIREMENTS THROUGH THE NEXT 12
MONTHS. Several factors may affect the availability of sufficient
cash resources to fund our product development and marketing and
sales plans for the remainder of 1999, including:
- our ability to generate revenue as currently expected;
- unexpected expenses;
- the need for additional funds to react to changes in the
marketplace;
- unexpected increases in personnel costs;
- unexpected increases in selling and marketing expenses; or
- currently unplanned acquisitions;
- the conditions to our selling stock to Manchester Securities
Corporation under the October 4, 1999 agreement may not be
satisfied;
- our ability to collect our accounts receivable.
* SINCE OUR 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 us to
incur unanticipated expenses to remedy any problems, which could
have a material adverse effect on our business, operating results
and financial condition. We have verified Year 2000 compliance with
third party suppliers of the components we use in our products.
However, we have 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 our business. To the extent our customers use third
party software and other products that are not Year 2000 compliant,
it could adversely affect their business, operating results and
financial condition. We do 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
We do not have material exposure to quantitative and qualitative market
risks because it does not own any risk sensitive financial instruments.
13
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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 certain of its officers and directors. 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.
By stipulated Order dated August 19, 1999, the Court consolidated
these actions, appointed lead plaintiffs, and approved the retention
of lead counsel.
There has been no discovery to date and no trial is
scheduled in any of these consolidated actions. We believe that we
have meritorious defenses to the actions and intend to defend the
vigorously. However, if we do 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,
which cannot be reasonably estimated.
ITEM 2. CHANGES IN SECURITIES
On June 30, 1998, we 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 November 3, 1999, all 16,000 shares of the Series C
Preferred had been converted into 5,174,493 shares of Common Stock
leaving no outstanding shares of Series C Preferred. The average
conversion price for shares of Series C Preferred previously converted
was $3.09 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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
14
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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:
10.1 Employment Agreement between Secure Computing Corporation
and Carr Biggerstaff dated July 2, 1999.
10.2 Employment Agreement between Secure Computing Corporation
and Craig Caudill dated October 1, 1999.
27.1 Financial Data Schedule
Copies of Exhibits will be furnished upon request and payment of our
reasonable expenses in furnishing the Exhibits.
(b) REPORTS ON FORM 8-K
We filed a report on Form 8-K dated October 8, 1999, reporting an
agreement to sell Common Stock under item 5 thereof. The agreement provides for
the sale from time to time over the next two years of up to $25 million in
Common Stock to Manchester Securities Corporation.
15
<PAGE>
SECURE COMPUTING CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SECURE COMPUTING CORPORATION
DATE: November 9, 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)
16
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INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
10.1 Employment Agreement between Secure Computing
Corporation and Carr Biggerstaff dated July 2,
1999. FILED ELECTRONICALLY
10.2 Employment Agreement between Secure Computing
Corporation and Craig Caudill dated October 1,
1999. FILED ELECTRONICALLY
27.1 Financial Data Schedule FILED ELECTRONICALLY
17
EXHIBIT 10.1
SECURE COMPUTING CORPORATION
EMPLOYMENT AGREEMENT
SECURE COMPUTING CORPORATION, its subsidiaries, affiliates, successors or
assigns (together the "Company"), and Carr Biggerstaff agree as follows:
1. Positions and Responsibilities.
1.1 You shall serve as Senior Vice President of Marketing, Strategic and
Product Planning, and Business Development, reporting to the Chief Executive
Officer (CEO) and perform the duties customarily associated with such capacity
from time to time and at such place or places as the Company shall designate.
You will work primarily out of your home office in Oregon, traveling for face to
face team meetings and to fulfill your job responsibilities, when necessary and
appropriate.
1.2 You will duly, punctually and faithfully perform and observe any and
all rules and regulations which the Company may now or shall hereafter establish
governing the conduct of its business.
2. Term of Employment.
2.1 The term of your employment agreement shall commence on July 6, 1999
and terminate in one year, subject to automatic renewal for successive one year
terms unless either party shall have notified the other in writing not less than
thirty (30) days prior to the then current expiration date of this Agreement of
such party's determination not to renew this Agreement.
2.2 The Company shall have the right, on written notice to you,
(a) to terminate your employment immediately at any time for
cause, or
(b) to terminate your employment at any time after July 6,
1999, or to not renew this Agreement at any time,
without cause provided the Company shall be obligated in
either case to pay to you as severance an amount equal
to six month's base salary less applicable taxes and
other required withholdings and any amount you may owe
to the Company, payable in full immediately upon such
termination. Such severance payment shall be contingent
upon you signing a Separation and Release Agreement in a
form satisfactory to the Company which assures, among
other things, that you will not commence any type of
litigation or other claims as a result of the
termination.
2.3 For purposes of this Section 2.2, you may be terminated for cause
if, in the reasonable determination of the Company's CEO, you are convicted of
any felony or of any crime involving moral turpitude, or participate in fraud
against the Company, or intentionally damage any property of the Company, or
wrongfully disclose any trade secrets or other confidential information of the
Company to any of its competitors, or materially breach Sections 4 (Confidential
Information) or 5 (Other Activities During Employment) of this Agreement.
3. Compensation.
3.1 The Company shall pay to you for the services to be rendered
hereunder a base salary at an annual rate of two hundred ten thousand dollars
($210,000), subject to increase in accordance with the policies of the Company,
payable in installments in accordance with Company policy.
(a) The CEO will review the base salary from time to time, no
less frequently than annually, and may in his sole discretion adjust the
base salary upward, but not downward, to reflect performance,
appropriate industry guideline data and other factors.
(b) If certain personal and corporate performance goals
established from time to time by the CEO are met, you will be entitled
to a cash performance bonus of up to sixty-five thousand dollars
($65,000) annually, and guaranteed during Q3 and Q4, 1999.
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3.2 You shall also be entitled to all rights and benefits for which you
shall be eligible under deferred bonus, pension, group insurance, profit-sharing
or other Company benefits which may be in force from time to time and provided
for the Company's executives generally.
3.3 You will be reimbursed for reasonable expenses incurred on behalf of
the Company upon presentation of appropriate receipts.
3.4 Subject to Board of Directors approval, you will be granted a stock
option to purchase 210,000 shares of Secure Computing Common Stock, one-third
(1/3) of which will vest each year for three (3) years, vesting immediately upon
change of control as will be defined in your Stock Option Agreement. In
addition, you will have the opportunity during your first three years of your
employment to vest an additional seventy thousand shares, five year incentive
stock option, early, based on the following Secure Computing stock price
appreciation. Twenty thousand option shares at a option exercise price of the
closing price of Secure stock on your first day of employment (the "Strike
Price") will vest immediately upon the share price of Secure increasing by at
least ten dollars per share over the Strike Price during the first twelve months
of your employment and holding that price level for a period of at least ten
consecutive business days (based on the closing price of the stock.) An
additional twenty thousand shares will vest immediately upon the share price of
Secure increasing by at least twenty dollars per share over the Strike Price
during the first twenty four months of your employment and holding that price
level for a period of at least ten consecutive business days (based on the
closing price of the stock.) Finally, an additional thirty thousand shares will
vest immediately upon the share price of Secure increasing by at least thirty
dollars per share over the strike price during the first thirty six months of
your employment and holding that price level for a period of at least ten
consecutive business days (based on the closing price of the stock).
Notwithstanding the foregoing vesting schedule, in the event the above
accelerated vesting stock price criteria are not met for whatever reason, the
shares will vest and become exercisable on July 6, 2004.
4. Confidential Information.
4.1 You represent and warrant that at all times during the term of your
employment and thereafter, to hold in strictest confidence, and not to use or
disclose, except for the benefit of the Company, to any person, firm or
corporation without written authorization of the Chief Executive Officer of the
Company, any Confidential Information of the Company. You understand that
"Confidential Information" means any Company proprietary information, technical
data, trade secrets or know-how, including, but not limited to, research,
product plans, products, services, customer lists and customers (including, but
not limited to, customers of the Company on whom you called or with whom you
became acquainted during the term of your employment), markets, software,
developments, inventions, processes, formulas, technology, designs, drawings,
engineering data, hardware configuration information, marketing, financial or
other business information disclosed to you by the Company either directly or
indirectly in writing, orally or by drawings or observation of parts or
equipment. You further understand that Confidential Information does not include
any of the foregoing items which has become publicly known and made generally
available through no wrongful act of yours or of others who were under
confidentiality obligations as to the item or items involved or improvements or
new versions thereof.
4.2 You recognize that the Company has received and in the future will
receive from third parties their confidential or proprietary information subject
to a duty on the Company's part to maintain the confidentiality of such
information and to use it only for certain limited purposes. You agree to hold
all such confidential or proprietary information in the strictest confidence and
not to disclose it to any person, firm or corporation or to use it except as
necessary in carrying out your work for the Company consistent with the
Company's agreement with such third party.
5. Other Activities During Employment.
5.1 Except as stated herein or with the prior written consent of the
CEO, you will not during the term of this Agreement undertake or engage in any
other employment, occupation or business enterprise other than ones in which you
are a passive investor.
5.2 Except as permitted by Section 5.3, you will not acquire, assume or
participate in, directly or indirectly, any position, investment or interest
adverse or antagonistic to the Company, its business or prospects, financial or
otherwise, or take any action toward or looking toward any of the foregoing.
19
<PAGE>
5.3 During the term of your employment by the Company except on behalf
of the Company or its subsidiaries, you will not directly or indirectly, whether
as an officer, director, stockholder, partner, proprietor, associate,
representative, consultant, or otherwise, become or be interested in any other
person, corporation, firm, partnership or other entity whatsoever which
manufacturers, markets, sells, distributes or provides consulting services
concerning products or services which compete with those of the Company or any
of its subsidiaries. However, nothing in this Section 5.3 shall preclude you
from holding less than one percent of the outstanding capital stock of any
corporation required to file periodic reports with the Securities Exchange
Commission under Sections 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the securities of which are listed on any securities exchange, quoted
on the National Association of Securities Dealers Automated Quotation System or
traded in the over-the-counter market, notwithstanding current and any future
investment in Digital Integrity Incorporated. During the term of your employment
with the Company you will also not directly or indirectly intentionally solicit,
endeavor to entice away from the Company, or any of its subsidiaries, or
otherwise interfere with the relationship of the Company, or any of its
subsidiaries with, any person who is employed by or otherwise engaged to perform
services for the Company, or any of its subsidiaries (including, but not limited
to, any independent sales representatives or organizations), or any other person
or entity who is, or was within the then most recent 12-month period, a customer
or client of the Company, or any of its subsidiaries, whether for your own
account or for the account of any other person, corporation, firm, partnership
or other entity whatsoever.
6. Former Employment.
6.1 You represent and warrant that your employment by the Company will
not conflict with and will not be constrained by any prior employment or
consulting agreement or relationship. You represent and warrant that you do not
possess confidential information arising out of prior employment which, in your
best judgment, would be utilized in connection with your employment by the
Company in the absence of Section 6.2.
6.2 If, in spite of the second sentence of Section 6.1, you should find
that confidential information belonging to any former employer might be usable
in connection with the Company's business, you will not intentionally disclose
to the Company or use on behalf of the Company any confidential information
belonging to any of your former employers; but during your employment by the
Company you will use in the performance of your duties all information which is
generally known and used by persons with training and experience comparable to
your own and all information which is common knowledge in the industry or
otherwise legally in the public domain.
7. Survival. Your duties under Section 4 (Confidential Information) shall
survive termination of your employment with the Company to the extent provided
above.
8. Assignment. This Agreement and the rights and obligations of the parties
hereto shall bind and inure to the benefit of any successor or successors of the
Company by way of reorganization, or merger and any assignee of all or
substantially all or its business and properties, but, except as to any such
successor or assignee of the Company, neither this Agreement nor any rights or
benefits hereunder may be assigned by the Company or by you.
9. Interpretation. In case any one or more of the provisions contained in the
agreement shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
the other provisions of this Agreement, and this Agreement shall be construed as
if such invalid, illegal or unenforceable provision had never been contained
herein. If, moreover, any one or more of the provisions contained in this
Agreement shall for any reason be held to be excessively broad as to duration,
geographical scope, activity or subject, it shall be construed by limiting and
reducing it so as to be enforceable to the extent compatible with the applicable
law as it shall then appear.
10. Notices. Any notice which the Company is required or may desire to give to
you shall be given by personal delivery or registered or certified mail, return
receipt requested, addressed to you at the address of record with the Company,
or at such other place as you may from time or time designate in writing. Any
notice which you are required or may desire to give to the Company hereunder
shall be given by personal delivery or by registered or certified mail, return
receipt requested, addressed to the Company at its principal office, or at such
other office as the Company may from time to time designate in writing, to the
attention of the CEO. The date of personal delivery or the date of mailing such
notice shall be deemed to be the date of delivery thereof.
11. Waiver. If either party should waive any breach of any provisions of this
Agreement, he or it shall not thereby be deemed to have waived any preceding or
succeeding breach of the same or any other provisions of this Agreement.
20
<PAGE>
12. Complete Agreement; Amendments. The foregoing is the entire agreement of the
parties with respect to the subject matter hereof. This Agreement may not be
amended, supplemented, canceled or discharged except by written instrument
executed by both parties hereto.
13. Applicable Law. This agreement has been negotiated in, and shall be governed
by the laws of, the State of California, without giving effect to conflict of
law principles.
14. Heading. The heading of the sections hereof are inserted for convenience
only and shall not be deemed to constitute a part hereof nor to affect the
meaning thereof.
SECURE COMPUTING CORPORATION
By: \s\ John E. McNulty
--------------------
John E. McNulty
Chairman and Chief Executive Officer
Accepted and agreed as of the 2nd
day of July, 1999.
\s\ Carr Biggerstaff
- --------------------
Carr Biggerstaff
21
EXHIBIT 10.2
SECURE COMPUTING CORPORATION
EMPLOYMENT AGREEMENT
SECURE COMPUTING CORPORATION, its subsidiaries, affiliates, successors or
assigns (together the "Company"), and Craig Caudill agree as follows:
1. Positions and Responsibilities.
1.1 You shall serve as Senior Vice President of World Wide Sales,
reporting to the Chief Executive Officer (CEO) and perform the duties
customarily associated with such capacity from time to time and at such place or
places as the Company shall designate. You will work out of the San Jose, CA
office.
1.2 You will duly, punctually and faithfully perform and observe any and
all rules and regulations which the Company may now or shall hereafter establish
governing the conduct of its business.
2. Term of Employment.
2.1 The term of your employment agreement shall commence on October 1,
1999 and terminate in one year, subject to automatic renewal for successive one
year terms unless either party shall have notified the other in writing not less
than thirty (30) days prior to the then current expiration date of this
Agreement of such party's determination not to renew this Agreement.
2.2 The Company shall have the right, on written notice to you,
(a) to terminate your employment immediately at any time for
cause, or
(b) to terminate your employment at any time after October
1, 1999, or to not renew this Agreement at any time,
without cause provided the Company shall be obligated in
either case to pay to you as severance an amount equal
to six month's base salary less applicable taxes and
other required withholdings and any amount you may owe
to the Company, payable in full immediately upon such
termination. Such severance payment shall be contingent
upon you signing a Separation and Release Agreement in a
form satisfactory to the Company which assures, among
other things, that you will not commence any type of
litigation or other claims as a result of the
termination.
2.3 For purposes of this Section 2.2, you may be terminated for cause
if, in the reasonable determination of the Company's CEO, you are convicted of
any felony or of any crime involving moral turpitude, or participate in fraud
against the Company, or intentionally damage any property of the Company, or
wrongfully disclose any trade secrets or other confidential information of the
Company to any of its competitors, or materially breach Sections 4 (Confidential
Information) or 5 (Other Activities During Employment) of this Agreement.
3. Compensation.
3.1 The Company shall pay to you for the services to be rendered
hereunder a base salary at an annual rate of one hundred seventy-five thousand
dollars ($175,000), subject to increase in accordance with the policies of the
Company, payable in installments in accordance with Company policy.
(a) The CEO will review the base salary from time to time, no
less frequently than annually, and may in his sole discretion adjust the
base salary upward, but not downward, to reflect performance,
appropriate industry guideline data and other factors.
(b) If certain revenue goals established from time to time by
the CEO are met, you will be entitled to a cash performance bonus of one
hundred fifty thousand ($150,000) annually at plan, and guaranteed
during Q4, 1999.
22
<PAGE>
3.2 You shall also be entitled to all rights and benefits for which you
shall be eligible under deferred bonus, pension, group insurance, profit-sharing
or other Company benefits which may be in force from time to time and provided
for the Company's executives generally.
3.3 You will be reimbursed for reasonable expenses incurred on behalf of
the Company upon presentation of appropriate receipts.
3.4 Subject to Board of Directors approval, you will be granted a stock
option to purchase 210,000 shares of Secure Computing Common Stock, one-third
(1/3) of which will vest each year for three (3) years, vesting immediately upon
change of control as will be defined in your Stock Option Agreement. In
addition, you will have the opportunity during your first three years of your
employment to vest an additional seventy thousand (70,000) shares, five year
incentive stock option, early, based on the following Secure Computing stock
price appreciation. Twenty thousand (20,000) option shares at a option exercise
price of the closing price of Secure stock on your first day of employment (the
"Strike Price") will vest immediately upon the share price of Secure increasing
by at least ten dollars per share over the Strike Price during the first twelve
months of your employment and holding that price level for a period of at least
ten consecutive business days (based on the closing price of the stock). An
additional twenty thousand (20,000) shares will vest immediately upon the share
price of Secure increasing by at least twenty dollars per share over the Strike
Price during the first twenty four months of your employment and holding that
price level for a period of at least ten consecutive business days (based on the
closing price of the stock). Finally, an additional thirty thousand (30,000)
shares will vest immediately upon the share price of Secure increasing by at
least thirty dollars per share over the strike price during the first thirty six
months of your employment and holding that price level for a period of at least
ten consecutive business days (based on the closing price of the stock).
Notwithstanding the foregoing vesting schedule, in the event the above
accelerated vesting stock price criteria are not met for whatever reason, the
shares will vest and become exercisable on September 30, 2004.
4. Confidential Information.
4.1 You represent and warrant that at all times during the term of your
employment and thereafter, to hold in strictest confidence, and not to use or
disclose, except for the benefit of the Company, to any person, firm or
corporation without written authorization of the Chief Executive Officer of the
Company, any Confidential Information of the Company. You understand that
"Confidential Information" means any Company proprietary information, technical
data, trade secrets or know-how, including, but not limited to, research,
product plans, products, services, customer lists and customers (including, but
not limited to, customers of the Company on whom you called or with whom you
became acquainted during the term of your employment), markets, software,
developments, inventions, processes, formulas, technology, designs, drawings,
engineering data, hardware configuration information, marketing, financial or
other business information disclosed to you by the Company either directly or
indirectly in writing, orally or by drawings or observation of parts or
equipment. You further understand that Confidential Information does not include
any of the foregoing items which has become publicly known and made generally
available through no wrongful act of yours or of others who were under
confidentiality obligations as to the item or items involved or improvements or
new versions thereof.
4.2 You recognize that the Company has received and in the future will
receive from third parties their confidential or proprietary information subject
to a duty on the Company's part to maintain the confidentiality of such
information and to use it only for certain limited purposes. You agree to hold
all such confidential or proprietary information in the strictest confidence and
not to disclose it to any person, firm or corporation or to use it except as
necessary in carrying out your work for the Company consistent with the
Company's agreement with such third party.
5. Other Activities During Employment.
5.1 Except as stated herein or with the prior written consent of the
CEO, you will not during the term of this Agreement undertake or engage in any
other employment, occupation or business enterprise other than ones in which you
are a passive investor.
5.2 Except as permitted by Section 5.3, you will not acquire, assume or
participate in, directly or indirectly, any position, investment or interest
adverse or antagonistic to the Company, its business or prospects, financial or
otherwise, or take any action toward or looking toward any of the foregoing.
23
<PAGE>
5.3 During the term of your employment by the Company except on behalf
of the Company or its subsidiaries, you will not directly or indirectly, whether
as an officer, director, stockholder, partner, proprietor, associate,
representative, consultant, or otherwise, become or be interested in any other
person, corporation, firm, partnership or other entity whatsoever which
manufacturers, markets, sells, distributes or provides consulting services
concerning products or services which compete with those of the Company or any
of its subsidiaries. However, nothing in this Section 5.3 shall preclude you
from holding less than one percent of the outstanding capital stock of any
corporation required to file periodic reports with the Securities Exchange
Commission under Sections 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the securities of which are listed on any securities exchange, quoted
on the National Association of Securities Dealers Automated Quotation System or
traded in the over-the-counter market, notwithstanding current and any future
investment in Digital Integrity Incorporated. During the term of your employment
with the Company you will also not directly or indirectly intentionally solicit,
endeavor to entice away from the Company, or any of its subsidiaries, or
otherwise interfere with the relationship of the Company, or any of its
subsidiaries with, any person who is employed by or otherwise engaged to perform
services for the Company, or any of its subsidiaries (including, but not limited
to, any independent sales representatives or organizations), or any other person
or entity who is, or was within the then most recent 12-month period, a customer
or client of the Company, or any of its subsidiaries, whether for your own
account or for the account of any other person, corporation, firm, partnership
or other entity whatsoever.
6. Former Employment.
6.1 You represent and warrant that your employment by the Company will
not conflict with and will not be constrained by any prior employment or
consulting agreement or relationship. You represent and warrant that you do not
possess confidential information arising out of prior employment which, in your
best judgment, would be utilized in connection with your employment by the
Company in the absence of Section 6.2.
6.2 If, in spite of the second sentence of Section 6.1, you should find
that confidential information belonging to any former employer might be usable
in connection with the Company's business, you will not intentionally disclose
to the Company or use on behalf of the Company any confidential information
belonging to any of your former employers; but during your employment by the
Company you will use in the performance of your duties all information which is
generally known and used by persons with training and experience comparable to
your own and all information which is common knowledge in the industry or
otherwise legally in the public domain.
7. Survival. Your duties under Section 4 (Confidential Information) shall
survive termination of your employment with the Company to the extent provided
above.
8. Assignment. This Agreement and the rights and obligations of the parties
hereto shall bind and inure to the benefit of any successor or successors of the
Company by way of reorganization, or merger and any assignee of all or
substantially all or its business and properties, but, except as to any such
successor or assignee of the Company, neither this Agreement nor any rights or
benefits hereunder may be assigned by the Company or by you.
9. Interpretation. In case any one or more of the provisions contained in the
agreement shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
the other provisions of this Agreement, and this Agreement shall be construed as
if such invalid, illegal or unenforceable provision had never been contained
herein. If, moreover, any one or more of the provisions contained in this
Agreement shall for any reason be held to be excessively broad as to duration,
geographical scope, activity or subject, it shall be construed by limiting and
reducing it so as to be enforceable to the extent compatible with the applicable
law as it shall then appear.
10. Notices. Any notice which the Company is required or may desire to give to
you shall be given by personal delivery or registered or certified mail, return
receipt requested, addressed to you at the address of record with the Company,
or at such other place as you may from time or time designate in writing. Any
notice which you are required or may desire to give to the Company hereunder
shall be given by personal delivery or by registered or certified mail, return
receipt requested, addressed to the Company at its principal office, or at such
other office as the Company may from time to time designate in writing, to the
attention of the CEO. The date of personal delivery or the date of mailing such
notice shall be deemed to be the date of delivery thereof.
24
<PAGE>
11. Waiver. If either party should waive any breach of any provisions of this
Agreement, he or it shall not thereby be deemed to have waived any preceding or
succeeding breach of the same or any other provisions of this Agreement.
12. Complete Agreement; Amendments. The foregoing is the entire agreement of the
parties with respect to the subject matter hereof. This Agreement may not be
amended, supplemented, canceled or discharged except by written instrument
executed by both parties hereto.
13. Applicable Law. This agreement has been negotiated in, and shall be governed
by the laws of, the State of California, without giving effect to conflict of
law principles.
14. Heading. The heading of the sections hereof are inserted for convenience
only and shall not be deemed to constitute a part hereof nor to affect the
meaning thereof.
SECURE COMPUTING CORPORTION
By: \s\ John E. McNulty
--------------------
John E. McNulty
Chairman and Chief Executive Officer
Accepted and agreed as of the 1st
day of October, 1999.
\s\ Craig Caudill
- -----------------
Craig Caudill
25
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