UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended March 31, 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
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(Exact name of registrant as specified in its charter)
Delaware 52-1637226
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
One Almaden Blvd., Suite 400
San Jose, CA 95113
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(Address of principal executive offices) (Zip code)
(408) 918-6100
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Registrant's telephone number, including area code
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date: Common Stock, $.01 par value -
17,435,571 issued and outstanding as of May 6, 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
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and
December 31, 1998........................................................... 3
Condensed Consolidated Statements of Operations (Unaudited) for the three
months ended March 31, 1999 and 1998........................................ 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three
months ended March 31, 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 - 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 11
Item 2. Changes in Securities.......................................................... 11
Item 3. Defaults upon Senior Securities................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders............................ 11
Item 5. Other Information.............................................................. 12
Item 6. Exhibits and Reports on Form 8-K............................................... 12
Signatures..................................................................... 13
</TABLE>
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PART 1. Financial Information
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998
(In thousands except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,596 $ 9,992
Investments 8,894 10,886
Accounts receivable, net 16,867 19,712
Inventories 3,521 2,361
Other current assets 2,376 2,361
-------- --------
Total current assets 40,254 45,312
PROPERTY AND EQUIPMENT, NET 3,793 3,794
OTHER ASSETS 5,483 5,242
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$ 49,531 $ 54,348
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other accrued liabilities $ 6,144 $ 8,742
Deferred revenue 2,399 2,553
-------- --------
Total current liabilities 8,543 11,295
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01; 2,000,000 shares
authorized, none issued and outstanding -- --
Common Stock, par value $.01; 25,000,000 shares
authorized; issued and outstanding - March 31, 1999--
16,975,353 and December 31, 1998--16,545,987 170 165
Additional paid-in capital 97,362 89,730
Accumulated deficit (56,374) (46,640)
Foreign currency translation (170) (202)
-------- --------
Total stockholders' equity 40,988 43,053
-------- --------
$ 49,531 $ 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 MARCH 31, 1998 AND 1997
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three months ended March 31,
1999 1998
--------------------------
Revenue:
Products and Services $ 6,567 $ 10,265
Advanced Technology contracts 1,663 2,510
-------- --------
8,230 12,775
Cost of revenue 4,656 4,251
-------- --------
Gross profit 3,574 8,524
Operating expenses:
Selling and marketing 5,360 5,811
Research and development 2,219 1,902
General and administrative 1,162 775
Restructure costs -- 7,800
Stock option expense 4,740 --
-------- --------
13,481 16,288
-------- --------
Operating loss (9,734) (7,764)
Net interest income 173 42
-------- --------
Loss before income taxes (9,734) (7,722)
Income tax benefit -- 357
-------- --------
Net loss $ (9,734) $ (7,365)
======== ========
Net loss per share - basic and diluted $ (.58) $ (.46)
======== ========
Weighted average shares outstanding 16,680 15,883
======== ========
See accompanying notes to condensed consolidated financial statements.
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SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
-------------------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $(5,572) $(1,368)
INVESTING ACTIVITIES
Proceeds from sales of investments 1,992 --
Purchase of property and equipment (365) (575)
Increase in intangibles and other assets (380) (472)
------- -------
Net cash provided by (used in) investing activities 1,247 (1,047)
FINANCING ACTIVITIES
Proceeds from sales lease back transaction -- 730
Proceeds from issuance of Common Stock 2,897 889
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Net cash provided by financing activities 2,897 1,619
EFFECT OF FOREIGN CURRENCY TRANSLATION 32 97
------- -------
Decrease in cash and cash equivalents (1,396) (699)
Cash and cash equivalents beginning of period 9,992 4,880
------- -------
Cash and cash equivalents at end of period $ 8,596 $ 4,181
======= =======
</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
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 first quarter of 1999 and 1998, total
comprehensive income amounted to ($9,702) and ($7,268) respectively.
4. STOCK OPTION EXPENSE
The Company has an Executive Stock Option program under which
1,110,000 options are subject to accelerated vesting based on the performance of
the Company's stock price over a period ranging from one to three years. As of
March 31, 1999, the number of options exercisable under this program was 860,000
of which 380,000 have an exercise price of $6.125 and 480,000 have an exercise
price of $10.25. For the quarter ended March 31, 1999 the Company recognized
$4,740 of compensation expense related to the accelerated vesting of options
under this program.
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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 the Company's
expectations, beliefs, intentions or strategies regarding the future.
Forward-looking statements include, without limitation, statements regarding the
extend 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
REVENUE. The Company's revenue decreased 35.6 percent to $8,230,000
for the first quarter of 1999 down from $12,775,000 in the same period of 1998.
Products and services revenue was $6,567,000 for the quarter, a decrease of 36.0
percent over 1998, and reflects the slippage in timing of several large
transactions. The Company expects quarterly revenue from products and services
for the remainder of 1999 to increase from the first quarter of 1999. Advanced
Technology contract revenue was $1,663,000 for the quarter, a decrease of 33.7
percent from 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 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.
GROSS PROFIT. Gross profit as a percentage of revenue decreased from
66.7 percent in the first quarter of 1998 to 43.4 percent in 1999. The decrease
resulted mainly 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 decreased 7.8
percent to $5,360,000 in the first quarter of 1999, a decrease from $5,811,000
in the same period of 1998. As a percentage of revenue, selling and marketing
expense was 65.1 percent for the quarter compared to 45.5 percent in the same
period of 1998. The decreased spending levels resulted primarily from reduced
commissions from reduced sales. The Company expects selling and marketing
expense levels to increase in proportion to the increase in revenues for the
rest of 1999.
RESEARCH AND DEVELOPMENT. Research and development expense increased
by 16.7 percent to $2,219,000 in the first quarter of 1999 from $1,902,000 in
the same period of 1998. As a percentage of revenue, research and development
expense was 27.0 percent for the quarter compared to 14.9 percent in 1998. The
increase resulted primarily from increased investment in quality assurance
activities. The Company expects that research and development expenses for the
rest of 1999 will remain at levels comparable to those of the first quarter of
1999.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased 49.9 percent to $1,162,000 in the first quarter of 1999, from $775,000
in the same period of 1998. As a percentage of revenue, general and
administrative expenses were 14.1 percent for the first quarter of 1999 compared
to 6.1 percent for the first quarter of 1998. The Company expects the quarterly
general and administrative expenses for the rest of 1999 to remain at levels
comparable to those of the first quarter of 1999.
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RESTRUCTURE COSTS. In the first quarter of 1998, the Company
recorded a pre-tax expense of $7.8 million to account for restructuring
activities which included streamlining its product offerings and reducing the
unit's cost structure and the closing of certain facilities. The Company
completed these efforts in early 1999.
NET INTEREST INCOME. Net interest income was $173,000 in the first
quarter of 1999, an increase from $42,000 in the same period of 1998. The
increase reflects higher cash and investment balances in 1999 as compared to
1998.
INCOME TAXES. The Company did not recognize an income tax benefit in
the first quarter of 1999 compared to an income tax benefit of $357,000 in 1998.
Management believes it is more likely than not that deferred tax assets, which
total $3,600,000 at March 31, 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, cash equivalents and short term investments
decreased by $3,388,000 from December 31, 1998 to March 31, 1999. The decrease
resulted primarily from the use of cash to fund operations and purchase capital
equipment, which was partially offset by proceeds from stock option exercises.
As of March 31, 1999, the Company had working capital of $31.7 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 or license technology or products related to the Company's line of
business, and provide for restructuring activities.
Capital additions in the first three months of 1999 were $365,000
and were primarily made up of computer equipment, office furniture and leasehold
improvements. The Company expects to invest another $1,200,000 throughout the
remainder of 1999 mainly for computer equipment and facilities upgrades.
At its current level of operations, the Company believes that its
existing cash and cash equivalents are sufficient to meet the Company's current
working capital and capital expenditure requirements through at least the next
12 months.
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:
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o THE COMPANY EXPECTS QUARTERLY REVENUE FROM PRODUCTS AND SERVICES FOR THE
REMAINDER OF 1999 TO INCREASE FROM THE FIRST QUARTER OF 1999. 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.
o 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.
o 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.
o THE COMPANY EXPECTS SELLING AND MARKETING EXPENSE LEVELS TO INCREASE IN
PROPORTION TO THE INCREASE IN 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.
o THE COMPANY EXPECTS THAT RESEARCH AND DEVELOPMENT EXPENSES FOR THE REST OF
1999 WILL REMAIN AT LEVELS COMPARABLE TO THOSE OF THE FIRST 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 and also may be affected by current plans
for a full scale product marketing and branding campaign being curtailed
or delayed or decreased products and services revenue resulting in lower
selling expense. Fluctuations in revenue from quarter to quarter will
likely have an increasingly significant impact on the Company's results of
operations. Additionally, meeting this expectation depends upon the
Company's ability to control costs and achieve a higher level of revenue,
which may not occur for a variety of reasons, including general market
conditions for the company's products and services, development and
acceptance of new products offered by the Company, and introduction of
products by competitors.
o THE COMPANY EXPECTS THE QUARTERLY GENERAL AND ADMINISTRATIVE EXPENSES FOR
THE REST OF 1999 TO REMAIN AT LEVELS COMPARABLE TO THOSE OF THE FIRST
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.
o MANAGEMENT BELIEVES IT IS MORE LIKELY THAN NOT THAT DEFERRED TAX ASSETS,
WHICH TOTAL $3,600,000 AT MARCH 31, 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.
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o AT ITS CURRENT LEVEL OF OPERATIONS, THE COMPANY BELIEVES THAT ITS EXISTING
CASH AND CASH EQUIVALENTS ARE SUFFICIENT TO MEET THE COMPANY'S CURRENT
WORKING CAPITAL AND CAPITAL EXPENDITURE REQUIREMENTS THROUGH AT LEAST THE
NEXT 12 MONTHS. The Company's ability to generate revenue as currently
expected, unexpected expenses and the need for additional funds to react
to changes in the marketplace, including unexpected increases in personnel
costs and selling and marketing expenses or currently unplanned
acquisitions may impact whether the Company has sufficient cash resources
to fund its product development and marketing and sales plans for the
remainder of 1999.
o 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.
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.
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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 the Company, and certain of its officers and directors. Each complaint
alleges that defendants made false and misleading statements about the Company's
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. Failure by the Company to obtain
a favorable resolution of the claims set forth in the actions could have a
material adverse effect on the Company's business, results of operations and
financial condition. Currently, the amount of such material adverse effect
cannot be reasonably estimated.
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. Failure by the Company to obtain
a favorable resolution of the claims set forth in the actions could have a
material adverse effect on the Company's business, results of operations and
financial condition. Currently, the amount of such material adverse effect
cannot be reasonably estimated.
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 the Company, certain of its present officers, present directors, and
former directors (the "Golaine Action"), alleging that the provisions of the
July 24, 1997 shareholder rights plan (the "Plan") permitting only those
directors who voted for the Plan (or their designated successors) to redeem the
Rights granted therein, violated Delaware law. The complaint in the Golaine
Action seeks injunctive relief and damages of an unspecified amount.
The Company has amended the Plan which will render moot the
injunctive relief requested. In November, 1998, the defendants moved to dismiss
the Golaine Action. On March 22, 1999, the parties submitted a proposed
settlement of the Golaine Action for court approval. The proposed settlement
would require the Company to pay up to $100,000 in attorney fees and the costs
of notifying the class of the proposed settlement. A hearing on the proposed
settlement has been scheduled for June 8, 1999.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
See proxy statement of the Company dated April 14, 1999, as filed
with the Commission on April 15, 1999.
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ITEM 5. OTHER INFORMATION
On May 3, 1999, the Company announced that John McNulty has joined the
company as President and Chief Operating Officer and has been appointed to serve
on the Board of Directors. Mr. McNulty, 52, has over thirty years experience in
the hi-tech industry, most recently serving as Senior Vice President Sales,
Services, and Business Development at Genesys Telecommunications Labs, a leading
independent software company in the computer telephony integration environment.
Previously, Mr. McNulty was with Intel Corporation, where in his latest position
he was Director of Marketing and Business Development for the Enterprise Server
Group, which he launched. He also served as General Manager of Intel's
Commercial Memory and Micro Systems division. Mr. McNulty has also been
President and CEO of Integrated Solutions, Inc. and Rose Communications.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1999:
10.1 Employment Agreement between Secure Computing
Corporation and John E. McNulty dated May 3, 1999.
27 Financial Data Schedule
Copies of Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Exhibits.
(b) REPORTS ON FORM 8-K
None
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SECURE COMPUTING CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SECURE COMPUTING CORPORATION
DATE: May 12, 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)
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INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
10.1 Employment Agreement between Secure Computing
Corporation and John E. McNulty dated
May 3, 1999. FILED ELECTRONICALLY
27 Financial Data Schedule FILED ELECTRONICALLY
EXHIBIT 10.1
SECURE COMPUTING CORPORATION
EMPLOYMENT AGREEMENT
SECURE COMPUTING CORPORATION, its subsidiaries, affiliates, successors or
assigns (together the "Company"), and John E. McNulty agree as follows:
1. Positions and Responsibilities.
1.1 You shall serve as President and Chief Operating Officer, 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 or as shall be appropriate and necessary in
connection with such employment. You will also serve as a member of the Board of
Directors, subject to Board approval. You will be expected to be named Chief
Executive Officer within twelve (12) months, subject to satisfactory performance
by you and by the Company. This will require Board of Directors' approval. The
current Chairman and CEO will stay on as active Chairman for at least twelve
(12) months thereafter, and longer, if possible.
1.2 You will, to the best of your ability, devote your full time and
best efforts to the performance of your duties hereunder and the business and
affairs of the Company, with the exception of serving on boards approved by the
Chairman of Secure Computing Corporation.
1.3 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 May 3, 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 May 3,
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 one year'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 three hundred thousand dollars
($300,000), subject to increase in accordance with the policies of the Company,
payable in installments in accordance with Company policy.
(a) The Board of Directors will review the base salary from
time to time, no less frequently than annually, and may in their 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 Chairman are met, you will be
entitled to a cash performance bonus of up to 100% of annual base
salary, with respect to each fiscal year, prorated for the remainder of
fiscal 1999, subject to Compensation Committee approval.
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.
<PAGE>
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 350,000 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, beginning on May 3, 1999, you will be eligible to participate in the
Executive Incentive Option Program, wherein you may earn an additional 250,000
shares of stock (100,000 each year for the first two years and 50,000 for the
third year) based on the following performance criteria: to grow the stock price
by $10 per share over the May 3, 1999 closing price. Each delta will last for
one year and the increased stock price must hold for ten (10) consecutive
business days. 100,000 shares to vest only in the event SCUR stock price is at
or above $14.250 by May 3, 2000; 100,000 shares to vest only in the event SCUR
stock price is at or above $24.250 by May 3, 2001; and 50,000 shares to vest
only in the event SCUR stock price is at or above $34.250 by May 3, 2002.
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
Board of Directors, 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, with exception of approved Board of
Directors seats.
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.
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
<PAGE>
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 Chairman of the Compensation Committee. 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.
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/ Jeffrey H. Waxman
------------------------------------
Jeffrey H. Waxman
Chairman and Chief Executive Officer
Accepted and agreed as of the Third
day of May, 1999.
/s/ John E. McNulty
- ---------------------------------
John E. McNulty
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