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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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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, CALIFORNIA 95113
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408)918-6100
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant as of March 22, 2000 was $553,131,545 based on the closing sale
price for the Company's Common Stock on that date. For purposes of determining
this number, all officers and directors of the Registrant are considered to be
affiliates of the Registrant, as well as individual stockholders holding more
than 10% of the Registrant's outstanding Common Stock. This number is provided
only for the purpose of this report on Form 10-K and does not represent an
admission by either the Registrant or any such person as to the status of such
person.
As of March 22, 2000, the Registrant had 24,180,614 shares of Common Stock
issued and outstanding 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.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held May 11, 2000 for the year ended December 31, 1999 are
incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS..............................................................1
ITEM 2. PROPERTIES............................................................14
ITEM 3. LEGAL PROCEEDINGS.....................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS...............................................15
ITEM 6. SELECTED FINANCIAL DATA...............................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..........................................................22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................23
ITEM 11. EXECUTIVE COMPENSATION...............................................23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.....24
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PART I
Forward looking statements made in this Annual Report on Form 10-K or
in the documents incorporated by reference herein that are not statements of
historical fact are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. A number of risks and uncertainties, including
those discussed under the caption "Certain Factors that May Affect Future
Results" in this Form 10-K and the documents incorporated by reference herein
could affect such forward-looking statements and could cause actual results to
differ materially from the statements made.
In this Annual Report on Form 10-K, "Secure Computing", "we", "us" and
"our" refer to Secure Computing Corporation.
ITEM 1. BUSINESS
We develop and sell computer software products and services designed to
provide secure extranets for organizations engaged in electronic business.
Our mission is to be the leading provider of safe, secure extranets for
e-business. The challenge for organizations doing electronic business
(e-business) is to provide application and network solutions that let growing
numbers of users access business systems, safely and privately - in short, to
provide a secure extranet. This is a change from the traditional information
system security goal of keeping external users out of internal business systems.
Our secure extranet solutions combine impenetrable perimeter defense for
business networks with scalable, authenticated Web and application access
control so that an organization may conduct business safely with growing numbers
of customers, employees, partners and suppliers.
We are the first security company to recognize the global need for
integrated e-business security solutions capable of addressing broad network
security and productivity concerns. With the development of new technology and
the acquisition of leading identification/authentication and URL filtering
companies, we quickly moved from being a provider of access control devices
only, to being a provider of a complete integrated security solution across the
enterprise.
Our clients operate some of the largest and most sensitive networks in
the world. We have always worked closely with these clients, which include major
corporations and agencies of the US government, to deliver the utmost in
security and innovative new features. When our customers buy a Secure Computing
solution, they are getting the benefit of these relationships and experience
that no other commercial security vendor can match.
We are one of the foremost information security companies in the world
with almost 20 years in the industry. Over the years, we invented many of the
technologies and standards that now underlie information security. In 1995, we
introduced the world's first truly secure proxy-based firewall, Sidewinder(TM).
In 1996, we acquired the two market leading access control products -
SafeWord(TM) authentication and authorization, and SmartFilter(TM) URL
filtering. These three products are converging to become a complete, secure
extranet solution for e-business.
INDUSTRY BACKGROUND
Enterprise computing has evolved over the past 25 years from mainframe
computers supporting a number of terminals to networks of interconnected servers
and personal computers. As the cost of computing has decreased, organizations
have increasingly begun to connect personal computers into networks allowing
them to share data, resources and applications within work groups. As network
technology has advanced, these geographically dispersed local-area networks have
been connected into wide-area networks. The advance of networking standards such
as Transmission Communication Protocol/Internet Protocol (TCP/IP) has enabled a
broad range of computer applications. These applications include:
* remote/branch office access to home office computer
systems/applications;
* e-mail;
* electronic commerce, payment processing, order transmission, etc.;
* video conference and data application sharing;
* electronic software distribution; and
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* mobile computing/Internet access.
ELECTRONIC BUSINESS
Electronic business (e-business) can be broadly defined as activities
over a shared network that facilitate and expose the internal business systems
and applications of an organization to an external network, such as the
Internet. This definition encompasses activities such as electronic trading of
goods and services, online delivery of digital content, electronic fund
transfers and share trading, electronic bills of lading, commercial auctions,
collaborative design and engineering, online sourcing, public procurement,
direct consumer marketing, and after-sales service.
One key reason organizations are moving rapidly to e-business is the
direct interaction between the e-business and suppliers, customers and partners.
This direct interaction lowers costs and eliminates many process delays. Market
expansion for e-business solutions is driven by the realization of lower
purchasing costs, reductions in inventories, lower cycle times, more efficient
and effective customer service, lower sales and marketing costs, and new sales
opportunities. A well-designed e-business gives any organization a competitive
advantage.
ELECTRONIC BUSINESS SECURITY ISSUES
The move to Internet-based business processes brings speed and
efficiency but it also exposes organizations and their partners to increased
security risks of theft, downtime, espionage and embarrassment. In a 1999 survey
published in INFORMATION SECURITY magazine, organizations deploying e-business
systems were 57 percent more likely to have data leaks and 24 percent more
likely to have unauthorized outsiders (hackers) in the systems. The average
annual loss was more than two hundred fifty thousand dollars. To mitigate these
risks, organizations moving to e-business must have solid and scalable security
architecture, appropriate security policy and exceptional security products.
MARKET NEED AND STRATEGY
There is tremendous market demand for fast, secure e-business systems.
The pressure is on to deploy electronic business solutions now. Yet,
organizations are finding that firewalls--traditionally configured--do not scale
to meet e-business needs. The firewall provided first-generation Internet
security, but was also a choke point in the network. Firewalls force everybody
through a single point, where the firewall determines what network resources
they can access. This approach falls apart when network access involves millions
of users--and it is therefore not suitable for securing e-commerce and
e-business. Secure Computing moves forward with a technology based on a new
paradigm--one that understands the principles of e-business and is capable of
establishing trusted relationships with vast numbers of users.
Our strategy is to authenticate inbound users as they connect at secure
gateways and direct them to applications that they are authorized to use, while
applying any required firewall filtering services at the same time. We provide
gateway/firewall clusters so millions of sessions can be managed seamlessly. Our
authentication/authorization solution also scales to millions of users.
Together, organizations can establish role-based security policies that define
access control in real-time as users connect to the extranet for e-business. In
addition, we include outbound (employee) Internet access control by filtering
and blocking Web sites that are not authorized for employee use.
Our goal is to help organizations maximize Internet productivity with
the strongest network protection available, comprehensive manageability, and
greater scalability and interoperability than any other access control gateway
on the market along with the flexibility necessary to implement and enforce even
the most complex security policies.
SECURE COMPUTING SOLUTIONS
SafeWord(TM)
In an e-business site, the goal is to make it easy to allow an
unlimited number of users safely into the organization's extranet. To scale to
this kind of environment, it is necessary to authenticate users at the first
point of contact with the network. Secure's authentication solution, SafeWord,
authenticates and authorizes access to networks, hosts and applications while
accounting for all actions. SafeWord works with a wide variety of authentication
methods including hardware tokens, software tokens on personal computers, mobile
phones and personal digital assistants (PDAs), and passwords. Additionally, a
version of SafeWord is PKI-ready (Public Key Infrastructure) and will integrate
with market-leading certificate authority solutions. The PKI-based version of
SafeWord includes a virtual smart card server for organizations that have not
deployed smart card readers, but need to support smart card enabled applications
with all of the safety and benefits of smart cards.
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E-business solutions are frequently based on Web access to business
information systems. For this reason, SafeWord includes a variety of Web Access
Control agents for the market-leading Web servers such as Microsoft, Netscape
and Apache. In addition, SafeWord includes access control agents for
environments such as Citrix, as well as for all major host platforms. The
SafeWord agent SDK can be used to construct access control agents for custom and
proprietary applications. SafeWord agents enable authentication, authorization,
and access activity logging for accountability.
SafeWord integrates to network access control gateways such as
Sidewinder firewall using the RADIUS standard. RADIUS is an industry standard
that is in every Cisco router and virtually every router shipped by major
corporations since 1992. SafeWord can communicate with any RADIUS-compliant
device on the extranet to authenticate the connecting user at the first moment
of contact. This lets customers continue to scale their authentication and
authorization capabilities, regardless of how big the extranet grows.
Sidewinder(TM)
Sidewinder firewall and virtual private networking gateway is the
industry's most secure and scalable solution. It differs from other high-end
gateways and traditional firewalls because the technology is built on the highly
secure and optimized SecureOS(TM) operating system, based on Secure Computing's
patented Type Enforcement(TM) technology. Type Enforcement implements the twin
strategies of least-privilege access and isolation, protecting the trusted
network from untrusted public networks, intranets and extranets--while still
enabling access on the broad scale required by e-business. Using this
technology, Sidewinder provides unrivaled security and perimeter defense, and
the management tools and access controls necessary to give organizations the
flexibility they need to implement and enforce the most complex network security
policies.
Sidewinder is designed for maximum performance and scalability.
Multiple Sidewinder firewalls can be clustered together providing load balancing
and high availability. Also, Sidewinder is the first enterprise firewall to
commercially integrate and dynamically configure the Intel(R) Internet
Exchange(TM) (IX) architecture using the Intel Policy Accelerator 100 card,
increasing throughput and performance by offloading traffic filtering from the
main processors to the specialized PA-100 hardware.
SmartFilter(TM)
SmartFilter is a network-based URL filtering solution that is designed
to work in conjunction with a proxy server or firewall to manage Web access for
an organization. We've designed SmartFilter as a business tool to enable
organizations to establish and enforce Web access policies for liability control
and preservation of network bandwidth.
SmartFilter uses the access enforcement mechanism built in to popular
proxy servers such as Microsoft Proxy Server, Netscape Proxy Server and SQUID
proxy server popular at many Internet Service Providers (ISPs). It can also be
configured to run with our Sidewinder firewall, and is included as a standard
feature with Sidewinder.
Services
Our services are designed to assist our customers during all states of
network implementation. Our types of services are summarized below:
SecureSupport(TM)
SecureSupport provides expert customer support through e-mail, the Web
or telephonically. Service options are tailored for each of our network security
products. Support is provided on a constant basis worldwide (24 hours a day, 7
days a week), reflecting the mission-critical nature of our solutions.
Customers may purchase software support and upgrade service for an
annual fee. When necessary, we provide software updates and technical support
through program fix releases to customers to fix bugs or to provide enhancements
to existing software features.
We provide limited hardware and software warranties to users for one
year from acceptance of a product. In many instances, our warranties are in turn
supported by warranties we receive from our manufacturers and suppliers.
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Training Services
We provide extensive product and network training around the world for
customers and partners. These services help our customers and partners
configure, integrate and maintain our products as part of a comprehensive
e-business solution.
ADVANCED TECHNOLOGY CONTRACTS
From the early days of Secure Computing, we have engaged in research
and development of information security technology and products by acquiring and
executing contracts with departments and agencies of the United States
government, including Defense Advanced Research Projects Agency (DARPA), the
National Security Agency (NSA) and the Department of Energy (DOE). Our Advanced
Technology Division is a self-funded organization whose mission is to develop
new technologies and products that meet the emerging needs of the commercial
sector. As a result, we continue to innovate, providing state-of-the-market
products for organizations of all types and sizes.
The majority of our contracts require that we perform specified
services, for which we are reimbursed for actual cost plus a fee. Under these
cost-reimbursement contracts, we have the ability to recoup all legitimate costs
associated with the performance of the contract. In some instances, we accept
firm fixed price contracts. Under the terms of this type of contract, we bear
the risk of increased or unexpected costs beyond the scope of the contract.
These increased costs may reduce our profitability. The cost-reimbursement
contracts generally are also subject to termination at the convenience of the
applicable government agency. If a contract is terminated, we typically are
reimbursed for our costs to the date of its termination plus the cost of an
orderly termination and are paid a portion of the fee. Our United States
government contracts are subject to audit by the Defense Contract Audit Agency
(DCAA). The DCAA has periodically audited our contracts without any material
cost disallowances.
CUSTOMERS
Our commercial and government customers are typically larger organizations who
must deal with numerous employees, partners, customers and suppliers. Commercial
accounts include more than half of the Fortune 100 and major U.S. government
agencies such as the Department of Defense and Department of Energy.
Our customer list also includes numerous international organizations
and foreign governments. Overseas, our customers are concentrated primarily in
Western Europe, Japan, and the Pacific Rim.
SALES
We sell our products and services through both indirect and direct
channels, using a worldwide sales organization of approximately 55 individuals
as of March 22, 2000. For 1999, sales to major end-users comprised 62% of total
product sales, while indirect channel sales comprised the remaining 38%.
Indirect channels include sales made to domestic and international distributors,
value-added resellers, major integrators and original equipment manufacturers
(OEMs).
Our sales strategy is a hybrid high-touch model designed to reduce
possible channel conflicts and allow the end-user to decide how best to acquire
our products. Our direct sales teams work closely with our channel partners to
ensure that the customer wins.
We have a high-profile United States federal government sales team and
maintain a General Services Administration (GSA) schedule for our products to
facilitate government orders. The United States government continues to be the
world's largest buyer of security products and this continues to be a strong
market for us.
International sales accounted for 11% of total revenue during 1999.
Major foreign markets for our products include Europe and the Pacific Rim, with
the United Kingdom, Germany, Scandinavia and Japan being particularly strong. In
each country, we have independent channel partners who are responsible for
marketing, selling and supporting our products to resellers and end-users within
their defined territories. Independent market analyst reports indicate that
international markets will continue to provide increased opportunities for
e-business security products in the years ahead. The following table summarizes
information about our international and domestic sales and operations:
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<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS) 1999* 1998* 1997
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<S> <C> <C> <C>
REVENUES:
United States products and services sales ...... $ 19,631 $ 36,522 $ 18,171
International products and services sales ...... 2,915 14,978 15,032
Government contracts ........................... 4,567 9,942 13,773
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$ 27,113 $ 61,442 $ 46,976
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IDENTIFIABLE ASSETS:
United States operations ....................... $ 24,897 $ 53,463 $ 28,905
International operations ....................... 932 885 2,149
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$ 25,829 $ 54,348 $ 31,054
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*Includes significant charges of $11.7 million in 1999 and restructure charges
of $7.8 million in 1998. See Item 7 for a full description of these charges.
MARKETING
We market our products to prospects worldwide using a variety of
programs. Dedicated marketing personnel are based primarily in our corporate
headquarters in San Jose, California. They create and implement marketing
programs in each of our major functional market areas -- corporate marketing for
company and brand awareness, product marketing and partner marketing. As of
March 22, 2000, we had approximately 22 marketing employees.
We use comprehensive targeted marketing programs to generate sales
leads and brand awareness. Programs include:
* direct marketing;
* Web marketing;
* advertising;
* seminars and trade shows; and
* ongoing customer, channel and partner communications programs.
An active public relations program ensures that we receive appropriate
press coverage for our various programs and announcements as well as obtaining
product reviews and speaking engagements. In addition to the marketing programs,
we stimulate interest and demand about our e-business solutions through our Web
site, providing white papers, newsletters and technical notes. Several of our
senior technical staff contributes articles to industry periodicals, further
extending our ability to educate the industry about e-business and extranet
security.
Through our partnering programs we enter strategic marketing and
selling relationships with various notable vendors of communications, security,
and network management products or managed services. These partners recommend
our products along with their products in helping customers build a security
solution. The potential increase in revenues from such relationships may be
reduced by requirements to provide volume price discounts and other allowances,
and significant costs incurred in customizing our products. Although we do not
intend that such relationships be exclusive, we may be required to enter into an
exclusive relationship or forego a significant sales opportunity. To the extent
we become dependent on actions by such parties, we could be adversely affected
if the parties fail to perform as expected. To minimize our risk, we often set
minimum quotas with our customers as a condition of exclusivity.
COMPETITION AND MARKET CONSOLIDATION
The market for e-business security products is intensely competitive
and characterized by rapid technological change. While we are early to market,
we believe that competition in this market is likely to persist and to intensify
as a result of increasing
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demand for e-business products. Each of our individual products competes with a
different group of competitors and products. The principal competitors for our
existing solutions are:
* Active Card S.A.;
* Axent Technologies Ltd.;
* CheckPoint Software Technologies Ltd.;
* JSB Software;
* Network Associates; and
* RSA Security Inc.
In the future, we may also face competition from these and other
parties who develop or acquire e-commerce and network security products based
upon approaches similar to or different from those we employ. There are no
guarantees that our approach will dominate the market for e-commerce security
products. While we believe that we do not compete against manufacturers of other
classes of security products (such as encryption) due to the complementary
functions performed by such other classes, our customers may perceive such other
companies as our competitors.
Current and potential competitors have established or may in the future
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address the needs of our prospective
customers. Accordingly, it is possible that new competitors or alliances may
emerge and rapidly acquire significant market share. If this were to occur, it
could materially and adversely affect the financial condition or results of our
operations.
The trend toward large-scale e-commerce and e-business security
solutions may result in a consolidation of the market around a smaller number of
vendors who are able to provide the necessary breadth of products and services.
In the event that we are unable to internally develop all of the products needed
for a complete secure e-business solution, we may need to acquire such
technology, or be acquired by a larger entity. However, there is no assurance
that, in the event that we are not able to internally develop all of the
products needed for an enterprise-wide security solution, we will be able to
acquire or merge with other entities on terms favorable to us and our
stockholders.
BACKLOG
Our backlog for commercial products at any point in time is not
significant since products are shipped on receipt of order. We do not believe
that our commercial backlog at any particular point in time is indicative of
future sales levels. The timing and volume of customer orders are difficult to
forecast because our customers typically require prompt delivery of products and
a substantial majority of our sales are booked and shipped in the same quarter.
In addition, sales are generally made pursuant to standard purchase orders that
can be rescheduled, reduced or canceled with little or no penalty.
Our backlog relating to Advanced Technology contracts as of February
29, 2000, was approximately $3.4 million, compared to $2.7 million as of
February 28, 1999. Backlog historically has represented firm government orders
for research and development services. Funded backlog represents that portion of
backlog for which our government customers have actually committed to compensate
us. As of February 29, 2000, approximately $3.0 million of our government
contract backlog was funded, compared to $2.2 million as of February 28, 1999.
MANUFACTURING
Our manufacturing operations consist primarily of light assembly and
packaging associated with our software products. We use subcontractors to
duplicate our software media and print our user documentation and product
packaging. We then assemble the final software products at our facilities in St.
Paul, Minnesota. We also perform some limited hardware manufacturing operations
which consist of purchasing hardware components, final assembly and testing.
Hardware components include commercially available computers, memory, monitors
and third-party peripherals.
The majority of the materials used in our manufacturing operations are
industry standard parts that are widely available. Typical materials required
are media and media duplication services, user documentation and other printed
materials, product packaging, and computer systems (PCs, computer peripherals,
memory disk drives, and storage devices). Interruptions or delays in
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shipments of software supplies, certain computer systems or peripherals could
materially and adversely affect the results of operations.
Our SafeWord product line includes a small token, that is available in
various designs, which is used for user authentication. We have two
subcontractors for these tokens: ReachOut Ltd., an electronics assembly
manufacturer located in the People's Republic of China, and Lan Plus, Inc., a
California company with manufacturing facilities located in Taiwan. While we
have generally been able to obtain adequate supplies of these products in a
timely manner, delays, interruptions in supply, or a significant increase in
manufacturing costs could materially and adversely affect the results of
operations.
RESEARCH AND DEVELOPMENT
Our internal engineering staff performs internal development of new
products and features. Of Secure Computing's approximate total of 106
engineering employees at March 22, 2000, 23 held postgraduate degrees.
We intend to keep our products broadly compatible with a variety of
host computer configurations, other information security products and other
applications. In addition, we will introduce new products as market demand
develops for such products. We design our products so that they support emerging
security standards, such as the PKIX and PKCS Public Key Infrastructure
standards, the IP Security Option (IPSec), and the Lightweight Directory Access
Protocol (LDAP).
We will continue to seek government research and development contracts
to maintain our high technology base. We currently have research and development
contracts with government agencies, including the DARPA, the DOE, and the NSA.
These contracts address information security for operating systems, new firewall
architectures, authentication technologies, security for middleware, and
security policy definition and management. We will continue to pursue additional
contracts with these and other government organizations.
PATENTS AND PROPRIETARY TECHNOLOGY
We rely on patent, trademark, copyright and trade secret laws, employee
and third-party nondisclosure agreements and other methods to protect our
proprietary rights. We currently hold 19 patents and have 18 patent applications
pending in the United States relating to computer security software and hardware
products. We have also filed patent applications in the European Union, Canada,
Israel, Australia, Japan, Germany, and the United Kingdom. We believe that our
patents are broad and fundamental to information security computer products.
While we believe that the pending applications relate to patentable devices or
concepts, there are no guarantees that any pending or future patent applications
will be granted. There is also the risk that a current or future patent,
regardless of whether we are an owner or a licensee of such patent, may be
challenged, invalidated or circumvented. In addition, there are no guarantees
that the rights granted under a patent or under licensing agreements will
provide competitive advantages to Secure Computing.
Our success depends, in part, upon our proprietary software and
security technology. We also rely on trade secrets and proprietary expertise
that we seek to protect, in part, through confidentiality agreements with
employees, consultants and other parties. There are no guarantees that these
agreements will not be breached, that we will have adequate remedies for any
breach, or that our trade secrets will not otherwise become known to or
independently developed by competitors. In addition, under their contracts with
Secure Computing, United States government agencies have the right to disclose
certain technology developed with government funding to our competitors as part
of the establishment by the government of second-source manufacturing
arrangements or competitive bidding.
We are not aware of any third-party claims that Secure Computing or our
products have infringed a patent or other proprietary rights. However, the
computer technology market is characterized by frequent and substantial
intellectual property litigation. Intellectual property litigation is complex
and expensive, and the outcome of such litigation is difficult to predict. In
the event that a third party were to make a claim of infringement against us, we
could be required to devote substantial resources and management time to the
defense of such claim, which could have a material adverse effect on our
business and results of operations.
We have received or applied for trademark protection in the United
States for our SafeWord, SecureOS, SecureSupport, SecureZone, Sidewinder,
SmartFilter, SofToken, Strikeback, Type Enforcement, "The 'I' in PKI", and "Safe
secure extranets for e-business" trademarks.
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REGULATION AND GOVERNMENT CONTRACTS
Other than regulations generally applicable to businesses and
regulations applicable to our government contracts described above under
"Advanced Technology Contracts," we are not currently subject to direct
regulation by any government agency. Currently, there are few laws or
regulations directly applicable to access or commerce on the Internet. However,
due to the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations may be adopted with respect to the Internet,
covering issues such as user privacy, pricing and characteristics and quality of
products and services. In addition, the adoption of laws or regulations may slow
the growth of the Internet, which could in turn decrease the demand for our
products and increase our cost of doing business or otherwise have an adverse
effect on our business, operating results or financial condition.
EMPLOYEES
At March 22, 2000, Secure Computing had approximately 310 employees. No
employee of Secure Computing is represented by a labor union or is subject to a
collective bargaining agreement. We believe that we maintain good relations with
our employees.
EXECUTIVE OFFICERS
Our executive officers, and their ages as of February 29, 2000, are as
follows:
DIRECTORS AGE POSITION WITH SECURE COMPUTING CORPORATION
- ----------------- --- ------------------------------------------
John McNulty 53 Chief Executive Officer and Chairman of the Board
Timothy McGurran 37 Senior Vice President of Operations and Chief
Financial Officer Senior Vice President of
Marketing, Business Development and
Carr Biggerstaff 44 Strategic Planning
JOHN McNULTY is our Chairman and Chief Executive Officer. Mr. McNulty
first joined us as President and Chief Operating Officer on May 3, 1999, and
assumed the positions of Chairman of the Board and Chief Executive Officer on
July 1, 1999. From 1997 until joining us, he served as Senior Vice President
Sales, Services, and Business Development at Genesys Telecommunications
Laboratories, a leading independent software company in the computer telephony
integration environment. Mr. McNulty was also previously with Intel Corporation,
the world's leading semiconductor manufacturer, where he held a number of
positions, including Director of Marketing and Business Development for the
Enterprise Server Group, which he launched.
TIMOTHY P. MCGURRAN has been the Senior Vice President of Operations
and Chief Financial Officer of Secure Computing since May 1996. Mr. McGurran was
at Ernst & Young LLP from December 1984 to May 1996, where his last position was
Senior Manager.
CARR BIGGERSTAFF has been the Senior Vice President of Marketing,
Business Development and Strategic Planning since July 6, 1999. From 1997 to
1995, Mr. Biggerstaff was CIO and Vice President of Strategic Programs at
Genesys Telecommunications Laboratories. He has been the senior IT executive for
both services and manufacturing companies, a consulting manager with Arthur
Andersen, the manager for emerging technologies in the Enterprise Server Group
at Intel and the vice president of a sales and marketing agency.
None of the executive officers is related to each other or to any other
director of Secure Computing.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among other could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by us from time to time.
WE ARE EXPERIENCING OPERATING LOSSES AND MAY NOT ACHIEVE PROFITABILITY.
We have incurred losses in the past. For example, for the year ended December
31, 1999 we had a net operating loss of $44.4 million and for the year ended
December 31, 1998 we had a net operating loss of $4.9 million. We expect to
continue to incur losses for at least the next four quarters. We may continue to
incur losses thereafter. If these losses continue, our stock price may decline,
which could cause you to lose part or all of your investment.
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IF OUR EXISTING FINANCING SOURCES AND OTHER SOURCES ARE NOT AVAILABLE
WE MAY NOT HAVE SUFFICIENT CASH TO SATISFY WORKING CAPITAL REQUIREMENTS. On
January 26, 2000, we entered into an agreement with Westgate that gives us the
right, and under certain circumstances the obligation, to sell a total of
$17,500,000 of Series E preferred stock to Westgate in two tranches on or before
November 1, 2000. This arrangement with Westgate and our previous sale of Series
D preferred stock are intended to replace the October 4, 1999 common stock
investment agreement with Manchester Securities Corp. which has been terminated.
As of the date of this annual report on Form 10-K, we have sold 8,750 shares of
Series E preferred stock to Westgate under this agreement with gross proceeds to
us of $8,750,000. As of March 17, 2000, 7,323 shares of the Series E preferred
stock had been converted into 606,416 shares of common stock. We believe our
current cash balances and the additional financing resources in the put/call
agreement with Westgate are sufficient to satisfy our working capital
requirements for at least the next 12 months. At the time we need cash, however,
our arrangement with Westgate, may not be available. Our right and obligation to
sell to Westgate is subject to a number of conditions and limitations. The
conditions include, for example, a requirement that our representations and
warranties contained in the put/call agreement must be accurate and our stock
must be listed for trading. The limitations include, for example, a requirement
that we cannot require Westgate to purchase any amount of stock in excess of 6%
of our market capitalization in any tranche and we cannot sell stock to Westgate
if the market price of our common stock is less than $5.00. If any of the
conditions are not satisfied or if any of the limitations are exceeded, we may
not be able to raise working capital by selling additional shares of Series E
preferred stock to Westgate.
The risk to us is that at the time we will need cash, the arrangement
with Westgate may be unavailable or insufficient to meet our cash needs.
Moreover, financing from other sources may not be available on satisfactory
terms or at all. For example, we currently do not have a line of credit, and one
might not be available. Our failure to obtain financing could result in our
insolvency and the loss to investors of their entire investment in our common
stock.
DELAYS IN PURCHASES MATERIALLY REDUCED OUR REVENUES DURING 1999 AND
WILL LIKELY CONTINUE TO REDUCE OUR REVENUES INTO EARLY 2000. In recent months we
have experienced delays in customer purchasing decisions. In the private sector
the delays result from year 2000 compliance concerns and lengthening of the
sales cycle resulting from increases in enterprise-wide transactions.
Enterprise-wide transactions typically involve complex sales of bundled security
products. Our customers take longer to reach purchasing decisions for these
enterprise-wide transactions, thus slowing our sales cycle. In the government
sector delays have related to the conflict in Kosovo. We believe the conflict in
Kosovo has caused government agencies to focus government spending on matters
related to the Kosovo conflict rather than our products and services. We believe
that these delays, particularly year 2000 related delays, will continue to
adversely affect our revenues through the first half of 2000. However, we have
not been able to determine the extent of this reduction in revenues.
THE CONVERSION OF THE SERIES E PREFERRED STOCK SOLD PURSUANT TO THE
PUT/CALL AGREEMENT WITH WESTGATE WILL HAVE A DILUTIVE IMPACT ON OUR SECURITY
HOLDERS. The number of shares of common stock that may ultimately be issued upon
conversion of shares of Series E preferred stock is presently undeterminable
because the conversion price of the Series E preferred stock is based, in part,
on the price of the common stock around the time of the conversion. Assuming a
conversion price of $20.00 per share, conversion of all of the 10,177 shares of
Series E preferred stock currently outstanding and authorized for issuance would
result in the issuance of approximately 508,850 shares of common stock. This
represents about 2% of our outstanding common stock based on the number of
shares outstanding as of the date of the put/call agreement.
The number of shares issuable upon conversion of the Series E preferred
stock will increase as the price of our common stock drops. For example, if the
price of our common stock drops to $5.00 per share, assuming the remaining
10,177 shares of Series E preferred stock are converted (as of March 1, 2000,
7,323 shares of the Series E preferred had been converted into 606,416 shares of
common) we would issue 2,035,400 shares of common stock. This would represent
approximately 9% of our outstanding common stock based on the number of shares
outstanding as of January 31, 2000. This may in turn place additional downward
pressure on the price of our common stock.
COMPETITION FROM COMPANIES PRODUCING ENTERPRISE NETWORK AND DATA
SECURITY PRODUCTS COULD REDUCE OUR SALES AND MARKET SHARE. Our principal
products are network and data security products which enable organizations to
conduct electronic business safely and confidentially. Because the market for
these products is highly competitive it may be difficult to significantly
increase our market share and our share may actually decline.
Our customers' purchase decisions are based heavily upon the quality of
the security our products provide, the ease of installation and management, the
ability to increase the number of individuals using our software simultaneously
and the flexibility of our software. If a competitor can offer our customers a
better solution in these areas and we are unable to rapidly offer a competitive
product we may lose customers. Additionally, barriers to entry into our market
are relatively low, and competitors could offer new solutions rapidly and at
relatively low costs. This could lead to increased price pressure, reduced
margins and a loss of market share.
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MANY OF OUR COMPETITORS AND POTENTIAL COMPETITORS HAVE SIGNIFICANTLY
GREATER FINANCIAL, MARKETING, TECHNICAL AND OTHER COMPETITIVE RESOURCES THAN WE
HAVE. Our most significant competitors currently include:
* ACTIVCARD S.A.;
* AXENT TECHNOLOGIES LTD.;
* CHECKPOINT SOFTWARE TECHNOLOGIES LTD.;
* JSB SOFTWARE;
* NETWORK ASSOCIATES, INC.; AND
* RSA SECURITY, INC.
Our larger actual and potential competitors may be able to leverage an
installed customer base and/or other existing or future enterprise-wide
products, adapt more quickly to new or emerging technologies and changes in
customer requirements, or devote greater resources to the promotion and sale of
their products than we can. Additionally, we may lose product sales to these
competitors because of their greater name recognition and reputation among
potential customers.
Our future potential competitors could include developers of operating
systems or hardware suppliers not currently offering competitive enterprise-wide
security products including Microsoft Corporation, Sun Microsystems, Inc.,
Lucent Technologies, Inc., Nortel Networks, 3Com Corporation, Cisco Systems,
Inc., and Novell, Inc. If any of those potential customers begin to offer
enterprise-wide security systems as a component of their hardware, demand for
our software could decrease. Ultimately, approaches other than ours may dominate
the market for enterprise network and data security products.
OTHER VENDORS MAY INCLUDE PRODUCTS SIMILAR TO OURS IN THEIR HARDWARE OR
SOFTWARE AND RENDER OUR PRODUCTS OBSOLETE. In the future, vendors of hardware
and of operating system or other software may continue to enhance their products
or bundle separate products to include functions that are currently provided
primarily by network security software. For example, a group of companies,
including Microsoft, IBM, Compaq, and Hewlett-Packard, recently formed an
alliance for the purpose of developing standard security specifications. We may
be at a competitive disadvantage if any such standards gain market acceptance
and are adopted by competitors and if we are unable to take advantage of such
standards. If network security functions become standard features of computer
hardware or of operating system software or other software, our products may
become obsolete and unmarketable, particularly if the quality of these network
security features was comparable to that of our products. Furthermore, even if
the network security and/or management functions provided as standard features
by hardware providers or operating systems or other software is more limited
than that of our products, our customers might accept this limited functionality
in lieu of purchasing additional software. Sales of our products would suffer
materially if we were then unable to develop new network security and management
products to further enhance operating systems or other software and to replace
any obsolete products.
TECHNOLOGY IN THE ENTERPRISE NETWORK AND DATA SECURITY MARKETS IS
CHANGING RAPIDLY, AND IF WE FAIL TO DEVELOP NEW PRODUCTS WHICH ARE WELL
ACCEPTED, OUR MARKET SHARE WILL ERODE. To compete successfully we must enhance
our existing products and develop and introduce new products in a timely manner.
Our net sales and operating results could be materially affected if we fail to
introduce new products on a timely basis. The rate of new network and data
security product introductions is substantial, and security products have
relatively short product life cycles. Our customer requirements and preferences
change rapidly. Our net sales and operating results will be materially affected
if the market adopts as industry standards solutions other than those we employ.
In addition, a portion of our basic research efforts are funded by government
contracts. If those contracts are terminated for any reason, it could reduce our
new product stream, which could materially reduce our net sales and operating
results.
IF THE USE OF PUBLIC SWITCHED NETWORKS SUCH AS THE INTERNET DOES NOT
CONTINUE TO GROW, OUR MARKET AND ABILITY TO SELL OUR PRODUCTS AND SERVICES WILL
BE LIMITED. Our sales also depend upon a robust industry and infrastructure for
providing access to public switched networks, such as the Internet. If the
infrastructure or complementary products necessary to make these networks into
viable commercial marketplaces are not developed, or, if developed, these
networks do not become and continue to be viable commercial marketplaces, our
net sales and operating results could suffer.
OUR PRODUCT LINE IS NOT DIVERSIFIED, AND ANY DROP IN THE DEMAND FOR
NETWORK AND DATA SECURITY PRODUCTS WOULD MATERIALLY HARM OUR BUSINESS.
Substantially all of our revenue comes from sales of enterprise network and data
security products, and related services. We expect this will continue for the
foreseeable future. As a result, if for any reason our sales of these
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products and services are impeded, our net sales and operating results will be
significantly reduced. The same would occur if we face difficulties or delay in
diversifying our product offerings to lessen our dependency on those products.
OUR STOCK PRICE AND OUR QUARTERLY OPERATING RESULTS ARE HIGHLY
VOLATILE, WHICH MAY IMPAIR OUR ABILITY TO RAISE MONEY AND CAUSE OUR INVESTORS TO
LOSE MONEY. The price of our common stock, like that of many technology
companies, has fluctuated widely. In addition, our revenues and operating
results have fluctuated significantly from period to period, which tends to
increase the volatility of our common stock price. We expect that our quarterly
results will continue to fluctuate significantly. Fluctuation in our results and
stock price may cause our investors to lose money and impair our ability to
raise additional capital. Factors that may affect stock price volatility
include:
* UNEXPECTED FLUCTUATIONS IN OPERATING RESULTS;
* SECURE COMPUTING OR ITS COMPETITORS ANNOUNCE TECHNOLOGICAL INNOVATIONS OR
NEW PRODUCTS;
* DEVELOPMENTS WITH RESPECT TO OUR PATENTS OR OTHER PROPRIETARY RIGHTS OR
THOSE OF OUR COMPETITORS;
* OUR ABILITY TO SUCCESSFULLY EXECUTE OUR BUSINESS PLAN AND COMPETE IN THE
NETWORK SECURITY INDUSTRY; AND
* ANALYST REPORTS AND MEDIA STORIES.
QUARTERLY REVENUES AND OPERATING RESULTS DEPEND ON THE VOLUME AND
TIMING OF ORDERS RECEIVED, WHICH MAY BE AFFECTED BY LARGE INDIVIDUAL
TRANSACTIONS AND WHICH SOMETIMES ARE DIFFICULT TO PREDICT. Historically we have
recognized a substantial portion of our license revenues in the last week of
each quarter. This increases our uncertainty about the results of any given
quarter. Our quarterly operating results may vary significantly depending on a
number of other factors, including:
* THE TIMING OF THE INTRODUCTION OR ENHANCEMENT OF PRODUCTS BY US OR OUR
COMPETITORS;
* THE SIZE, TIMING AND SHIPMENT OF INDIVIDUAL ORDERS;
* MARKET ACCEPTANCE OF NEW PRODUCTS;
* CHANGES IN OUR OPERATING EXPENSES;
* PERSONNEL CHANGES, MIX OF PRODUCTS SOLD; AND
* CHANGES IN PRODUCT PRICING, AND DEVELOPMENT OF OUR DIRECT AND INDIRECT
DISTRIBUTION CHANNELS.
THE SALES CYCLE FOR OUR PRODUCTS IS LONG AND WE MAY INCUR SUBSTANTIAL
EXPENSES AND INVENTORY FOR SALES THAT DO NOT OCCUR WHEN ANTICIPATED. Sales of
our products generally involve a significant commitment of capital by customers,
with the attendant delays frequently associated with large capital expenditures.
For these and other reasons, the sales cycle for our products is typically
lengthy and subject to a number of significant risks over which we have little
or no control. We are often required to ship products shortly after we receive
orders and, consequently, order backlog at the beginning of any period has in
the past represented only a small portion of that period's expected revenue. As
a result, our product revenue in any period substantially depends on orders
booked and shipped in that period. We typically plan our production and
inventory levels based on internal forecasts of customer demand, which are
highly unpredictable and can fluctuate substantially.
If customer demand falls below anticipated levels, it could seriously
harm our operating results. In addition, our operating expenses are based on
anticipated revenue levels and a high percentage of our expenses are generally
fixed in the short term. Based on these factors, a small fluctuation in the
timing of sales can cause operating results to vary significantly from period to
period. Recently, we have experienced a lengthening of our sales cycle as a
consequence of increases in enterprise-wide transactions. We believe that an
increase in enterprise-wide purchasing involving extensive bundling of security
products causes this extension of the sales cycle.
IF OUR PRODUCTS FAIL TO FUNCTION PROPERLY OR ARE NOT PROPERLY DESIGNED,
OUR REPUTATION MAY BE HARMED AND CONSUMERS MAY MAKE PRODUCT LIABILITY AND
WARRANTY CLAIMS AGAINST US. Our customers rely on our information security
products to prevent unauthorized access to their networks and data
transmissions. These customers include major financial institutions, defense
related government agencies protecting national security information, and other
large organizations. These customers use our products to protect confidential
business information with commercial value far in excess of our net worth.
Therefore, if our products
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malfunction or are not properly designed we could face warranty and other legal
claims, which may exceed our ability to pay. We seek to reduce the risk of these
losses by attempting to negotiate warranty disclaimers and liability limitation
clauses in our sales agreements and by maintaining product liability insurance.
However, these measures may ultimately prove ineffective in limiting our
liability for damages.
In addition to any monetary liability for the failure of our products,
an actual or perceived breach of network or data security at one of our
customers could harm the market's perception of our products and our business.
The harm could occur regardless of whether that breach is attributable to our
products.
We also face the more general risk of bugs and other errors in our
software. Software products often contain undetected errors or bugs when first
introduced or as new versions are released, and software products or media may
contain undetected viruses. Errors or bugs may also be present in software that
we license from third parties and incorporate into our products. Errors, bugs or
viruses in our products may result in loss of or delay in market acceptance,
recalls of hardware products incorporating the software or loss of data. Our net
sales and operating results could be materially reduced if we experience delays
or difficulties with new product introductions or product enhancements.
UNDER THE TERMS OF OUR FINANCINGS WE MAY BE REQUIRED TO MAKE
COMPENSATORY PAYMENTS WHICH WOULD MATERIALLY AFFECT OUR CASH POSITION AND
BUSINESS. Under the terms of the agreement with the holders of common stock
issued upon conversion of our Series C preferred stock, we are subject to a
number of ongoing obligations. For example, our stock must be quoted on the
Nasdaq Stock Market, or listed on the New York Stock Exchange or the American
Stock Exchange. Additionally, we must maintain the effectiveness of the
registration statement covering the resale of the common stock issued upon
conversion of the Series C preferred stock. If we fail to satisfy our ongoing
obligations we are subject to compensatory payments. The potential compensatory
payment generally consist of a cash payment equal to 1.5% per month of the
stated value of the Series C preferred stock and/or a downward adjustment to the
conversion price of the Series C preferred stock. For example, in September
1999, one of our holders of Series C preferred stock claimed that we were not in
compliance with our obligations. We issued 42,100 shares of common stock in full
satisfaction of this claim. The risk to us is that if the holders of any of the
common stock issued upon conversion of the Series C preferred stock are
successful in imposing such compensatory payments, our cash could be depleted
and/or our stockholders could be diluted by the issuance of additional stock.
In addition, we may also be required to make compensatory payments
which would materially affect our cash position and business under the terms of
the Series D preferred stock financing and our Series E preferred stock
financing. Under the terms of the agreements with Westgate, we are subject to a
number of ongoing obligations. For example, our stock must be quoted on the
Nasdaq Stock Market and the registration statements covering the resale of the
common stock issued or issuable upon conversion of the Series D and Series E
preferred stock must be effective. If we fail to satisfy our ongoing obligations
we are subject to compensatory payments. The potential compensatory payments
generally consist of a cash payment equal to approximately 1% of the purchase
price of the preferred stock for the first 30 days that we fail to satisfy our
obligations and 2% for each 30-day period thereafterThe risk to us is that our
cash could be depleted if a stockholder is successful in imposing such
compensatory payments.
WE MAY BE REQUIRED TO REDEEM THE SERIES E PREFERRED STOCK AND WE
CURRENTLY DO NOT HAVE SUFFICIENT FUNDS TO PAY FOR A REDEMPTION. We may be forced
to redeem all of the Series E preferred stock, 1,427 shares of which are
outstanding March 10, 2000, and 8,750 shares which are reserved for future
issuance, upon the occurrence of certain events. Events that could trigger our
obligation to redeem the Series E preferred stock include, for example,
delisting of our common stock from the Nasdaq National Market, our failure to
maintain the effectiveness of the registration statement covering the resale of
the common stock issuable upon conversion of the Series E preferred stock or if
there is a change in control of Secure Computing. Our operations could be
materially and adversely affected by the cost of a redemption.
IF WE LOSE A SIGNIFICANT CUSTOMER, WE WILL INCUR GREATER LOSSES. We
derive a significant portion of our revenues from a limited number of customers.
For example, our top five customers in products and services made up 20% of our
products and services revenue in 1999. If we lose any of these customers and
fail to replace the customer or fail to increase revenues from other customers,
we will incur greater losses. Additionally, if our revenues from any of these
customers are reduced, without an increase in revenues from other customers, we
will incur greater losses.
IF WE FAIL TO COLLECT AMOUNTS DUE FROM OUR CUSTOMERS ON A TIMELY BASIS,
OUR CASH FLOW AND OPERATING RESULTS MAY SUFFER. Because the timing of our
revenues is difficult to predict, and our expenses are often difficult to reduce
in the short run, management of our cash flow is very important to us. Like most
companies, we anticipate that a portion of the amounts owed to us will never be
paid. However, if our actual collection of amounts owed to us is less than we
have estimated, we will have less cash to fund our operations than we
anticipated and our financial condition and operating results could be adversely
affected.
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In addition, collection of amounts due us from sales to resellers and
distributors generally takes longer than for other sales. Therefore, if our
sales to resellers and distributors increase as a percentage of our total
revenue, the average number of days it takes for us to collect amounts due from
our customers may increase. If there is an increase in the time required for us
to collect amounts due us, we will have less cash to fund our operations than we
anticipated. This in turn could adversely affect our financial condition and
operating results.
We have taken and may from time to time take various forms of action to
manage the amounts due us from customers, including selling the debt owed us to
lenders at a discount and granting customer discounts in exchange for earlier
payment.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS, DELAWARE LAW, COULD
DISCOURAGE A TAKEOVER OR FUTURE FINANCING. The terms of our certificate of
incorporation and share right agreement permit our Board of Directors to issue
up to 2,000,000 shares of preferred stock and determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by our stockholders.
The Board may authorize the issuance of preferred stock with voting or
conversion rights that could materially weaken the voting power or other rights
of the holders of our common stock. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could make it more difficult for a third party to
acquire a majority of our outstanding voting stock. Further, provisions of
Delaware law, our certificate of incorporation and bylaws, such as a classified
board and limitations on the ability of stockholders to call special meetings,
and provisions of our share rights agreement could delay or make more difficult
a merger, tender offer, proxy contest or other takeover attempts.
UNANTICIPATED COSTS AND DISALLOWANCE OF COSTS UNDER OUR GOVERNMENT
CONTRACTS MAY HARM OUR BUSINESS. Under our government contracts, we bear the
risk that increased or unexpected costs of providing our services may reduce our
profit margin. Any material unanticipated costs could therefore harm our
business. In addition, recoverable expenses previously billed by us are subject
to review and audit by the Defense Contract Audit Agency (DCAA). If the DCAA
disallows any of the costs we claim under our contracts, it could adversely
affect our operating results. We have not previously experienced any material
disallowance of costs respecting our government contracts.
THE ABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL TO DEVELOP
OUR PRODUCTS AND MANAGE OUR BUSINESS IS EXTREMELY IMPORTANT AND OUR FAILURE TO
DO SO COULD HARM OUR BUSINESS. We believe our success depends significantly upon
a number of key technical and management employees. We may be unable to achieve
our revenue and operating performance objectives unless we can attract and
retain technically qualified and highly skilled engineers, sales, consulting,
technical, financial, operations, marketing and management personnel. These
personnel are particularly important to our research and development efforts,
and to our growing professional service business, where we employ a large number
of technical personnel holding advanced degrees and special professional
certification. Competition for qualified personnel is intense and we expect it
to remain so for the foreseeable future. We may not be successful in retaining
our existing key personnel and in attracting and retaining the personnel we
require. Our operating results and our ability to successfully execute our
business plan will be adversely affected if we fail to retain and increase our
key employee population.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS RELATED TO DOING
BUSINESS IN FOREIGN COUNTRIES. International sales are a substantial portion of
our business. Although almost all of our sales are payable in U.S. dollars,
several factors could make it difficult for customers from foreign countries to
purchase our products and services, or pay us for obligations already incurred.
Such factors include:
* SEVERE ECONOMIC DECLINE IN ONE OF OUR MAJOR FOREIGN MARKETS; AND
* SUBSTANTIAL DECLINE IN THE EXCHANGE RATE FOR FOREIGN CURRENCIES WITH
RESPECT TO THE U.S. DOLLAR.
A decline in our international sales or collections of amounts due us
from customers could materially effect our operations and financial conditions.
In 1998, 24% of our total sales came from international sales. Of this 24%,
Japan and Sweden accounted for the largest sources of foreign sales. In 1999,
11% of our total sales came from international sales. Of this 11%, the United
Kingdom, Germany, Scandinavia and Japan accounted for the largest sources of
foreign sales. A very large drop in our sales or collections of amounts due us
in these specific countries as a result of recession or other economic or
political disturbances would likely harm our net sales and operating results.
In addition, we face a number of general risks inherent in doing
business in international markets, including, among others:
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* UNEXPECTED CHANGES IN REGULATORY REQUIREMENTS;
* TARIFFS AND OTHER TRADE BARRIERS;
* POTENTIALLY GREATER DIFFICULTY IN COLLECTING AMOUNTS DUE US;
* LONGER PERIODS OF TIME TO COLLECT AMOUNTS DUE US; AND
* A HIGHER RATE OF PIRACY OF OUR PRODUCTS IN COUNTRIES WITH A HIGH INCIDENCE
OF SOFTWARE PIRACY.
ITEM 2. PROPERTIES
We are headquartered in approximately 13,000 square feet of office
space in San Jose, California. The annual rent for this facility is
approximately $300,000. We have three separate facilities with a combined square
footage of approximately 73,000 in St. Paul, Minnesota that are occupied by
production, research and development, and administration with an annual base
rent of $1,100,000. We have a research facility located in Concord, California
that occupies 8,000 square feet at an approximate annual cost of $100,000. We
occupy these premises under leases expiring at various times through the year
2006. Not included in the aforementioned space is 29,500 square feet that has
been sublet. In support of our United States field sales and professional
services organizations we also lease 12,000 sq. ft. of office space in Vienna,
Virginia and Atlanta, Georgia with an approximate annual cost of $200,000. We
also have foreign offices in London, England; Sydney, Australia; and Munich,
Germany, with an annual cost of approximately $300,000.
ITEM 3. LEGAL PROCEEDINGS
On April 2, 9, 12, 14 and 20, 1999, purported class action complaints
were filed in the United States District Court for the Northern District of
California by Myron Goldstein, Herbert Silverberg, William Preiner, Charles
McInnis, and George H. Rosenquist and Melvin Freedenberg, respectively, against
Secure Computing Corporation, and its present or former officers Jeffrey Waxman,
Timothy McGurran, Patrick Regester, Gary Taggart, Howard Smith and Christine
Hughes. Each complaint alleges that defendants made false and misleading
statements about our business condition and prospects during a purported class
period of November 10, 1998 to 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. On January 7, 2000,
plaintiffs served a consolidated corrected complaint. On February 14, 2000,
defendants filed a motion to dismiss the complaint. Defendants' motion is
scheduled to be heard on May 26, 2000.
There has been no discovery to date and no trial is scheduled in any of
these actions. We believe that we have meritorious defenses to these actions and
intend to defend them 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.
We are currently unable to reasonably estimate the size or impact of such
material adverse effect.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the
three months ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock is listed on the Nasdaq National Market. As of March
22, 2000, there were approximately 283 registered holders, which includes one
holder of exchangeable shares, of our common stock. We believe, however, that
many beneficial holders of our common stock have registered their shares in
nominee or street name, and that there are approximately 13,420 beneficial
owners. The low price and high price of our common stock during the last eight
quarters, are as follows:
------------------------------------------------------------------
Low Price High Price
--------- ----------
------------------------------------------------------------------
1998
Quarter ended March 31, 1998.............. $8.00 $15.25
Quarter ended June 30, 1998............... $7.75 $13.75
Quarter ended September 30, 1998.......... $6.38 $13.63
Quarter ended December 31, 1998........... $8.88 $22.50
------------------------------------------------------------------
1999
Quarter ended March 31, 1999.............. $9.94 $29.00
Quarter ended June 30, 1999............... $2.25 $6.75
Quarter ended September 30, 1999.......... $2.31 $4.75
Quarter ended December 31, 1999........... $2.56 $14.38
------------------------------------------------------------------
We have not paid any dividends on our common stock during the periods
set forth above. It is presently the policy of the Board of Directors to retain
earnings for use in expanding and developing our business. Accordingly, we do
not anticipate paying dividends on the common stock in the foreseeable future.
SALE OF UNREGISTERED SECURITIES
On December 17, 1999, we sold 5,000 shares of Series D preferred stock
to Westgate International L.P. for aggregate consideration of $5 million. On
December 31, 1999, we sold 2,500 shares of Series D preferred stock to Westgate
International L.P. for aggregate consideration of $2.5 million. On February 24.
2000, we sold 8,750 shares of Series E preferred stock to Westgate International
L.P. for aggregate consideration of $8.8 million. Each share of the Series D
preferred stock and the Series E preferred stock is convertible at the option of
the holder into the number of shares of common stock equal to the liquidation
preference of the preferred stock divided by the conversion price, as more
specifically set forth in the Certificate of Designations related to the
preferred stock.
On November 10, 1999, we issued 42,100 shares of common stock in
satisfaction of all obligations to one of the holders of our Series C preferred
stock.
The issuance of securities described in Item 5 were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and Regulation D promulgated thereunder as transactions by an
issuer not involving a public offering. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about us or had access, through employment
or other relationships, to such information.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The consolidated statement of operations data set forth below for the
fiscal years ended December 31, 1999, 1998 and 1997 and the consolidated balance
sheet data at December 31, 1999 and 1998 are derived from the audited
consolidated financial statements included elsewhere in this Form 10-K. The
consolidated statement of operations data set forth below for the fiscal years
ended December 31, 1996 and 1995 and the consolidated balance sheet data at
December 31, 1997, 1996 and 1995 are derived from audited consolidated financial
statements which are not included in this Form 10-K. The consolidated statement
of operations and the consolidated balance sheet data for the fiscal year ended
December 31, 1995 have been restated to give effect to the acquisition of Border
Network Technologies, Inc. and Enigma Logic, Inc. in August 1996. You should
read the data set forth below in conjunction with the Financial Statements and
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
(In thousands, except per share amounts)
1999* 1998 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Products and services ................ $ 22,546 $ 51,500 $ 33,203 $ 23,290 $ 13,081
Advanced technology contracts ........ 4,567 9,942 13,773 16,972 14,849
--------------------------------------------------------------------
Total revenue .................... 27,113 61,442 46,976 40,262 27,930
Gross profit ............................ 8,332 41,290 28,210 21,465 13,079
Acquisition costs ....................... -- -- -- 13,069 --
Operating income (loss) ................. (44,370) (4,933) (5,734) (26,473) (633)
Net income (loss) ....................... (44,907) (3,262) (4,251) (25,094) (632)
Net income (loss) per share:
Basic and diluted ....... (2.32) (.20) (.27) (1.76) (.05)
BALANCE SHEET DATA:
Working capital ........................ $ 7,297 $ 34,017 $ 17,175 $ 18,886 $ 34,292
Total assets ........................... 25,829 54,348 31,054 37,775 44,261
Long-term debt, less current
portion and redeemable
convertible preferred stock ........ -- -- -- -- 1,879
Stockholders' equity ................... 15,277 43,053 24,800 26,232 36,208
</TABLE>
* 1999 STATEMENT OF OPERATIONS DATA INCLUDES $11,729 IN SIGNIFICANT
CHARGES. PLEASE REFER TO ITEM 7 FOR A DESCRIPTION OF THESE CHARGES.
ITEM 7. 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 item 1 of this Form 10-K as well
as the factors identified in Forward-Looking Statements below.
16
<PAGE>
OVERVIEW
We develop and sell computer network security products and services
designed to provide secure extranets 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 corporate and government networks. Our products generally fall into two
broad categories: (i) those intended to prevent unauthorized access to computer
and network based data and information; and (ii) those intended to authenticate
or identify network users and control access to resources or applications.
PRODUCTS AND SERVICES. We market a range of interoperable,
standards-based commerce security products and services to the global
marketplace. Our customers include Fortune 500 companies, small branch offices,
and government agencies, all of whom rely on our suite of network security
solutions to maximize their productivity on the Internet without compromising
information security. ADVANCED TECHNOLOGY CONTRACTS. From the time of our
organization, we have been engaged in research and development of information
security technology by acquiring and executing contracts with departments and
agencies of the United States government.
The following table sets forth, for the periods indicated, certain
items from the statements of operations of our company expressed as a percentage
of revenue:
YEAR ENDED DECEMBER 31,
---------------------------------
1999* 1998 1997
---------------------------------
Revenue:
Products and Services 83.2% 83.8% 70.7%
Advanced technology contracts 16.8 16.2 29.3
------------------------------------------------------------------------
Total revenue 100.0 100.0 100.0
Cost of revenue 69.3 32.8 39.9
------------------------------------------------------------------------
Gross profit 30.7 67.2 60.1
Operating expenses:
Selling and marketing 109.6 38.8 43.6
Research and development 40.5 12.2 18.6
General and administrative 26.8 8.1 8.2
Stock option expense 17.5 3.5 1.9
Restructure expense -- 12.7 --
------------------------------------------------------------------------
Total operating expenses 194.4 75.3 72.3
------------------------------------------------------------------------
Operating loss (163.7) (8.1) (12.2)
Interest and other income 1.3 0.8 1.1
------------------------------------------------------------------------
Loss before income taxes (162.4) (7.3) (11.1)
Income tax benefit (expense) (3.3) 2.0 2.1
------------------------------------------------------------------------
Net loss (165.7)% (5.3)% (9.0)%
========================================================================
* Includes $11.7 million in significant charges.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 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 year ended December 31, 1999 statement of operations items including and
excluding the significant additional expense charges:
17
<PAGE>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------
INCLUDING EXCLUDING
SIGNIFICANT SIGNIFICANT SIGNIFICANT
CHARGES CHARGES CHARGES
---------------------------------------
Gross profit $ 8,332 $ (4,700) $ 13,032
Operating expenses:
Selling and marketing 29,705 4,047 25,658
Research and development 10,983 281 10,702
General and administrative 7,274 1,801 5,473
Stock option expense 4,740 -- 4,740
- -------------------------------------------------------------------------------
Total operating expense 52,702 6,129 46,573
- -------------------------------------------------------------------------------
Operating loss (44,370) (10,829) (33,541)
Net interest income 363 -- 363
- -------------------------------------------------------------------------------
Loss before income taxes (44,007) (10,829) (33,178)
Income tax expense 900 900 --
- -------------------------------------------------------------------------------
Net loss $(44,907) $(11,729) $(33,178)
===============================================================================
Net loss per share -- basic and diluted $ (2.32) $ (.60) $ (1.72)
===============================================================================
REVENUE. Our revenue decreased 55.9% to $27,113,000 in 1999, down from
$61,442,000 in 1998. Products and services revenue was $22,546,000, a decrease
of 56.2% over 1998, and reflects delays in purchasing decisions based on "Year
2000" concerns and lengthening of sales cycles. We expect 2000 revenue from
products and services to increase from 1999. Advanced Technology contract
revenue was $4,567,000, a decrease of 54.1% from 1998, which reflects a reduced
focus on government contract business that does not complement our products and
services offerings. We expect revenue from Advanced Technology contracts to
remain at levels comparable to 1999.
GROSS PROFIT. Gross profit as a percentage of revenue decreased from
67.2% in 1998 to 30.7% in 1999. Excluding significant charges related to
discontinued products, total gross profit as a percentage of revenue decreased
from 67.2% in 1998 to 48.1% 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 in 2000 as revenues increase.
SELLING AND MARKETING. Selling and marketing expense increased 24.7% to
$29,705,000 in 1999, up from $23,821,000 in 1998. As a percentage of revenue,
selling and marketing expense was 109.6% for the year compared to 38.8% in 1998.
Excluding significant charges resulting from discontinued product
activities and severance pay associated with the streamlining of our management
structure, selling and marketing expense increased 7.7% to $25,658,000 in 1999,
up from $23,821,000 in 1998. As a percentage of revenue, selling and marketing
expense was 94.6% for the year compared to 38.8% in 1998. The increased spending
levels resulted primarily from increased discretionary marketing efforts. We
expect that selling and marketing expense as a percent of revenue will decline
in 2000 while the dollar levels increase from 1999.
RESEARCH AND DEVELOPMENT. Research and development expense increased
46.9% to $10,983,000 in 1999, up from $7,477,000 in 1998. As a percentage of
revenue, research and development expense was 40.5% for the year compared to
12.2% in 1998.
Excluding significant charges mainly for employee relocation expense,
research and development expense increased 43.1% to $10,702,000 in 1999, up from
$7,477,000 in 1998. As a percentage of revenue, research and development expense
was 39.5% for the year compared to 12.2% in 1998. The increased spending levels
resulted primarily from increased investment in our next generation flagship
products. We expect that research and development expense levels as a percent of
revenue will decline in 2000 while the dollar levels increase from 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased 46.5% to $7,274,000 in 1999, up from $4,965,000 in 1998. As a
percentage of revenue, general and administrative expense was 26.8% for the year
compared to 8.1% in 1998.
18
<PAGE>
Excluding significant charges mainly for severance pay associated with
the streamlining of our management structure and litigation settlements, general
and administrative expense increased 10.2% to $5,473,000 in 1999, up from
$4,965,000 in 1998. As a percentage of revenue, general and administrative
expense was 20.2% for the year compared to 8.1% in 1998. The increased spending
levels resulted primarily from duplicative executive compensation during our
chief executive officer transition period, and increased legal fees related to
legal proceedings. We expect that general and administrative expense levels as a
percent of revenue will decline in 2000 while the dollar levels remain at levels
comparable to 1999.
NET INTEREST INCOME. Net interest income was $363,000 in 1999, a
decrease from $474,000 in 1998. The decrease reflects lower average cash and
investment balances in 1999 as compared to 1998.
INCOME TAXES. We recognized income tax expense in 1999 of $900,000
compared to an income tax benefit of $1,197,000 in 1998. The expense is a result
of decreasing the amount of our deferred tax asset based on reduced projected
taxable income. We believe it is more likely than not that deferred tax assets,
which total $2.7 million at December 31, 1999, will be realized. The
computations of our deferred tax assets and valuation allowance are based in
part on taxable income we expect to earn on government contracts, commercial
products 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. We had total net operating loss carryforwards of
approximately $85.5 million at December 31, 1999. Of these carryforwards, $15.4
million relates to stock option exercises. As these deductions are realized, the
benefit will not reduce income tax expense, rather it will be recorded as
additional paid-in-capital. Of the remaining benefit associated with the
carryforwards, approximately $63.1 million had yet to be recognized as a benefit
in the statement of operations. However, there are no assurances that these
carryforwards will be available to offset future income tax expense when taxable
income is realized.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997.
REVENUE. Our revenue increased 30.8% to $61.4 million in 1998, up from
$47.0 million in 1997. Products and services revenue was $51.5 million in 1998,
an increase of 55.1% over 1997, and was attributable to increased sales of
firewall and authentication products and related services as well as increased
professional services. The decrease in Advanced Technology contracts revenue in
1998 reflects the continuation of efforts to reduce reliance on government
contracts.
GROSS PROFIT. Gross profit as a percentage of revenue increased to
67.2% in 1998 from 60.1% in 1997. The increase in 1998 was primarily the result
of increased products and services revenue which carries a higher gross margin
than government contracts.
SELLING AND MARKETING. Selling and marketing expenses as a percent of
revenue decreased to 38.8% in 1998 from 43.6% in 1997. The decrease was due
primarily to sustained revenue growth resulting from prior year selling and
marketing efforts.
RESEARCH AND DEVELOPMENT. Research and development expenses as a
percent of revenue decreased to 12.2% in 1998 from 18.6% in 1997. The decrease
resulted primarily from improved efficiencies due to consolidation of our
operations.
GENERAL AND ADMINISTRATIVE. General and administrative expenses as a
percent of revenue decreased to 8.1% in 1998 from 8.2% in 1997.
STOCK OPTION COMPENSATION EXPENSE. The stock option compensation
expense in 1998 and 1997 reflects vesting by a certain portion of
performance-based options triggered by stock price targets being met.
RESTRUCTURE COSTS. In the first quarter of 1998, we announced plans to
implement a restructuring plan designed to facilitate further integration of
acquired businesses, and recorded a pre-tax expense of $7.8 million to account
for these actions, which include costs of lease terminations, streamlining our
product offerings and reducing our cost structure to increase operational
efficiency. The plan resulted in the separation of some employees worldwide and
the closing of certain facilities.
INTEREST AND OTHER INCOME. The difference in interest and other income
between the periods reflects interest we earned in 1998 on declining cash and
investment balances for the first half of the year.
INCOME TAX BENEFIT. We recognized income tax benefits in 1998 and 1997
related to reductions in the valuation allowance against our deferred tax
assets. The allowance was reduced based on the estimate of the amount of net
operating loss carryforwards more likely than not to be utilized to offset
future taxable income. We believe it is more likely than not that net deferred
tax assets, which total $3.6 million at December 31, 1998, will be realized. The
computations of our deferred tax assets and valuation allowance are based in
part on taxable income we expect to earn on existing government contracts and
projected interest income. The amount of the deferred tax assets considered
realizable could be reduced in the near term if estimates of future taxable
income
19
<PAGE>
are reduced. We had total net operating loss carryforwards of approximately
$44.4 million at December 31, 1998. Of these carryforwards, $11.4 million
relates to stock option exercises. As these deductions are realized, the benefit
will not reduce income tax expense, rather it will be recorded as additional
paid-in-capital. Of the remaining benefit associated with the carryforwards,
approximately $24.0 million had yet to be recognized as a benefit in the
statement of operations. However, there is no assurance that these carryforwards
will be available to offset future income tax expense when taxable income is
realized.
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 approximately $12 million
from 1998 to 1999. The decrease resulted primarily from the use of cash to fund
operations and purchase capital equipment that was partially offset by $7.1
million in net proceeds from the sale of preferred stock and $5.3 million in
proceeds from stock option exercises and employee stock purchases. As of
December 31, 1999, we had working capital of $7.3 million, as well as a January
2000 Series E put/call agreement which subject to certain conditions and
limitations provides for the sale of up to $17.5 million in Series E preferred
stock of which we received an additional $8.8 million in gross proceeds in
February, 2000. We anticipate using available cash to fund growth in operations,
invest in capital equipment, acquire businesses, and to license technology or
products related to our line of business.
Capital additions were $2.3 million, $2.0 million, and $2.3 million for
the years ended December 31, 1999, 1998 and 1997, respectively. These additions
were primarily made up of computer equipment, office furniture and leasehold
improvements.
We believe that we have sufficient financial resources available to
fund our current working capital and capital expenditure requirements for at
least the next twelve months.
INFLATION
To date, we have not been significantly affected by inflation.
YEAR 2000 COMPLIANCE
We completed all Year 2000 readiness work and experienced no
significant problems. Costs incurred to address the Year 2000 issue were not
significant nor do we anticipate any future costs to be incurred related to the
Year 2000 issue.
THE EURO CONVERSION
We do not anticipate nor have we experienced any material problems
related to the euro conversion.
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 2000 REVENUE FROM PRODUCTS AND SERVICES TO INCREASE FROM 1999.
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 REVENUE FROM ADVANCED TECHNOLOGY CONTRACTS TO REMAIN AT LEVELS
COMPARABLE TO 1999. Meeting this expectation depends on our ability to
maintain the current government contract revenues, which could 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.
* WE BELIEVE THAT GROSS PROFIT WILL TREND HIGHER IN 2000 AS 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.
20
<PAGE>
* WE EXPECT THAT SELLING AND MARKETING EXPENSES AS A PERCENT OF REVENUE WILL
DECLINE IN 2000 WHILE THE DOLLAR LEVELS INCREASE FROM 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 AS A PERCENT OF
REVENUE WILL DECLINE IN 2000 WHILE THE DOLLAR LEVELS INCREASE FROM 1999.
This expectation depends on us maintaining the current anticipated level of
product development, which may not occur due to unexpected increases in
such costs or because of a need to accelerate or begin new product
development. Fluctuations in revenue from quarter to quarter will likely
have an increasingly significant impact on 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 AS A PERCENT OF
REVENUE WILL DECLINE IN 2000 WHILE THE DOLLAR LEVELS REMAIN AT LEVELS
COMPARABLE TO 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 DECEMBER 31, 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 BELIEVE THAT WE HAVE SUFFICIENT FINANCIAL RESOURCES AVAILABLE TO FUND
OUR CURRENT WORKING CAPITAL AND CAPITAL EXPENDITURE REQUIREMENTS FOR AT
LEAST THE NEXT TWELVE MONTHS. Several factors may affect the availability
of sufficient cash resources to fund our product development and marketing
and sales plans for the next twelve months, 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;
* CURRENTLY UNPLANNED ACQUISITIONS; OR
* OUR ABILITY TO SATISFY THE CONDITIONS AND OBLIGATIONS IN OUR
AGREEMENT WITH WESTGATE.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any material exposure to quantitative and qualitative
market risks because we don't own any risk-sensitive financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14 of this Form 10-K.
21
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information under the heading
"Election of Directors" and "Section 16(a) Reporting," in the Registrant's Proxy
Statement to be filed on or about April 12, 2000. See also Part I, Item 1
"Executive Officers" of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing in the
Registrant's Proxy Statement which the Registrant anticipates filing on or about
April 12, 2000, under the headings "Election of Directors - Committees of the
Board of Directors and Meeting Attendance," "Executive Compensation," "Summary
Compensation Table," "Option Grants in Last Fiscal Year," "Aggregated Option
Exercises in Last Fiscal Year and Fiscal Year-End Option Values," "Employment
Contracts; Severance, Termination of Employment and Change-in-Control
Arrangements," and "Performance Evaluation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information appearing under the
heading "Security Ownership of Principal Stockholders and Management," in the
Registrant's Proxy Statement which the Registrant anticipates filing on or about
April 12, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information appearing under the
heading "Certain Transactions," in the Registrant's Proxy Statement which the
Registrant anticipates filing on or about April 12, 2000.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
1. Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Consolidated Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts. Such schedule
should be read in conjunction with the Consolidated Financial
Statements. All other supplemental schedules are omitted because
of the absence of conditions under which they are required.
(b) REPORTS ON FORM 8-K
A Form 8-K was filed on October 8, 1999. Pursuant to Item 5 of Form
8-K, the report contains information about a proposed financing with Manchester
Securities Corp. That financing has been replaced with a preferred stock
financing.
(c) EXHIBITS
The following exhibits are filed as part of this Annual Report on Form
10-K for the fiscal year ended December 31, 1999:
Exhibit Description
- ------- -----------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of Registrant. (1)
3.2 By-Laws of the Registrant. (2)
3.3 Certificate of Designations of Series D Preferred Stock. (11)
3.4 Certificate of Designations of Series E Preferred Stock. (11)
4.1 Specimen of common stock certificate. (3)
4.2 Securities Purchase Agreement dated June 30, 1998. (4)
4.3 Registration Rights Agreement dated June 30, 1998. (5)
4.4 Warrant to purchase shares of common stock dated June 30, 1998. (6)
4.5 Amended and Restated Rights Agreement dated October 22, 1998. (7)
4.6 Amended and Restated 1995 Omnibus Stock Plan. (8)
4.7 Common Stock Investment Agreement between Manchester Securities Corp.
and Secure Computing Corporation dated as of October 4, 1999. (9)
4.8 Warrant to purchase common stock dated October 5, 1999. (9)
4.9 Preferred Stock Investment Agreement between Westgate International,
L.P. and Secure Computing Corporation dated December 17, 1999. (11)
4.10 Put and call agreement between Westgate International, L.P. and Secure
Computing Corporation dated January 26, 2000. (11)
10.1 Employment Agreement between Secure Computing Corporation and John E.
McNulty dated May 3, 1999. (10)
10.2 Employment Agreement between Secure Computing Corporation and Carr
Biggerstaff dated July 2, 1999. (12)
24
<PAGE>
10.3 Registration Rights Agreement between Manchester Securities Corp. and
Secure Computing Corporation dated as of October 4, 1999. (9)
10.4 Registration Rights Agreement between Westgate International, L.P. and
Secure Computing Corporation dated December 17, 1999. (11)
10.5 Registration Rights Agreement between Westgate International, L.P. and
Secure Computing Corporation dated January 26, 2000. (11)
10.6 Separation Agreement and Release between Secure Computing Corporation
and Jeffrey H. Waxman effective June 30, 1999.
10.7 Separation Agreement and Release between Secure Computing Corporation
and Christine Hughes effective June 30, 1999.
23.1 Consent of Ernst & Young LLP.
27.0 Financial Data Schedule - 1999.
- -------------------------
(1) Incorporated herein by reference to Exhibit 3.1 to Secure Computing's
Form 10-K filed on March 28, 1996 (File No. 0-27074), as amended
pursuant to (i) the Certificate of Designation of Series A Preferred
Stock, incorporated herein by reference to Exhibit 4.1 to Secure
Computing's Form 8-K filed on September 12, 1996, (ii) the Certificate
of Designation of Series C Preferred Stock, incorporated herein by
reference to Exhibit 3.1 to Secure Computing's Form 8-K filed on July
15, 1998, (iii) the Amended and restated Certificate of Designation of
Series B Preferred Stock, incorporated herein by reference to Exhibit 1
to Secure Computing's Form 8-A filed on November 9, 1998, and (iv) the
Certificate of Amendment filed with the Delaware Secretary of State on
December 11, 1998, incorporated herein by reference to Exhibit 4.1 to
Secure Computing's Registration Statement on Form S-8 filed on February
5, 1999.
(2) Incorporated herein by reference to Exhibit 3.3 to Secure Computing's
Registration Statement on Form S-1 (Registration Number 33-97838).
(3) Incorporated herein by reference to the same numbered Exhibit to
Amendment No. 2 to Secure Computing's Registration Statement on Form
S-1 (Registration Number 33-97838).
(4) Incorporated herein by reference to Exhibit 10.1 to Secure Computing's
Form 8-K filed on July 15, 1998.
(5) Incorporated herein by reference to Exhibit 10.1 to Secure Computing's
Form 8-K filed on July 15, 1998.
(6) Incorporated herein by reference to Exhibit 10.1 to Secure Computing's
Form 8-K filed on July 15, 1998.
(7) Incorporated herein by reference to Exhibit 10.1 to Secure Computing's
Form 8-K filed on November 9, 1998.
(8) Incorporated herein by reference to Exhibit 4.7 to Secure Computing's
Registration Statement on Form S-8 dated February 5, 1999. (Management
contract or compensatory plan or arrangement).
(9) Incorporated herein by reference to the Exhibits to Secure Computing's
Current Report on Form 8-K filed on October 8, 1999.
(10) Incorporated by reference to Exhibit 10.1 to Secure Computing's Form
10-Q filed on May 12, 1999.
(11) Incorporated herein by reference to Secure Computing's Form 8-K filed
on February 9, 2000.
(12) Incorporated herein by reference to Exhibit 10.1 to Secure Computing's
Form 10-Q filed on November 9, 1999.
25
<PAGE>
SECURE COMPUTING CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ............................................. $ 3,678 $ 9,992
Investments ........................................................... 5,212 10,886
Accounts receivable, (net of allowance for doubtful accounts
of 1999 -- $710; 1998 -- $900) ........................................ 5,417 19,712
Deferred income taxes ................................................. 720 1,323
Inventories ........................................................... 828 2,361
Other current assets .................................................. 1,994 1,038
------------ ------------
Total current assets ................................................ 17,849 45,312
PROPERTY AND EQUIPMENT
Equipment ............................................................. 8,698 7,261
Furniture & fixtures .................................................. 2,102 2,059
Leasehold improvements ................................................ 1,061 1,037
------------ ------------
11,861 10,357
Accumulated depreciation .............................................. (7,646) (6,563)
------------ ------------
4,215 3,794
INTANGIBLE ASSETS (net of accumulated amortization of 1999 -- $706;
1998 -- $522) ..................................................................... 1,611 1,971
DEFERRED INCOME TAXES ............................................................. 1,980 2,277
EMPLOYEE NOTES RECEIVABLE ......................................................... -- 481
OTHER ASSETS ...................................................................... 174 513
------------ ------------
TOTAL ASSETS .......................................................... $ 25,829 $ 54,348
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ...................................................... $ 3,198 $ 3,820
Accrued payroll ....................................................... 2,208 3,004
Other accrued expenses ................................................ 1,364 1,918
Deferred revenue ...................................................... 3,782 2,553
------------ ------------
Total current liabilities ........................................... 10,552 11,295
STOCKHOLDERS' EQUITY
Convertible preferred stock, par value $.01 per share:
Authorized -- 2,000,000 shares; issued and outstanding shares -
December 31, 1999 - 5,706 and December 31, 1998 - 16,000 ............ -- --
Common stock, par value $.01 per share:
Authorized - 50,000,000 shares; issued and outstanding shares --
December 31, 1999 - 23,022,884 and
December 31, 1998 - 16,545,987 ...................................... 230 165
Additional paid-in capital ............................................ 106,832 89,730
Accumulated deficit ................................................... (91,547) (46,640)
Accumulated other comprehensive loss .................................. (238) (202)
------------ ------------
Total stockholders' equity .......................................... 15,277 43,053
------------ ------------
Total liabilities and stockholders' equity .......................... $ 25,829 $ 54,348
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE>
SECURE COMPUTING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
REVENUE
Products and Services ...................... $ 22,546 $ 51,500 $ 33,203
Advanced Technology contracts .............. 4,567 9,942 13,773
---------------------------------------
27,113 61,442 46,976
COST OF REVENUE ................................ 18,781 20,152 18,766
---------------------------------------
GROSS PROFIT ................................... 8,332 41,290 28,210
OPERATING EXPENSES
Selling and marketing ...................... 29,705 23,821 20,469
Research and development ................... 10,983 7,477 8,736
General and administrative ................. 7,274 4,965 3,839
Stock option expense ....................... 4,740 2,160 900
Restructure costs .......................... -- 7,800 --
---------------------------------------
52,702 46,223 33,944
---------------------------------------
OPERATING LOSS ................................. (44,370) (4,933) (5,734)
Interest and other income .................. 363 474 506
---------------------------------------
Loss before income tax expense (benefit) ... (44,007) (4,459) (5,228)
Income tax expense (benefit) ............... 900 (1,197) (977)
---------------------------------------
NET LOSS ....................................... $ (44,907) $ (3,262) $ (4,251)
=======================================
NET LOSS PER SHARE -- BASIC AND DILUTED ........ $ (2.32) $ (0.20) $ (0.27)
WEIGHTED AVERAGE SHARES OUTSTANDING--
BASIC AND DILUTED ......................... 19,323 16,106 15,480
</TABLE>
SEE ACCOMPANYING NOTES.
27
<PAGE>
SECURE COMPUTING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Additional Other Total
------------------- --------------------- Paid-in Comprehensive Accumulated Stockholders'
Shares Amount Shares Amount Capital Loss Deficit Equity
-------- -------- ----------- -------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 ....... -- $ -- 15,101,152 $ 151 $ 65,208 $ -- $ (39,127) $ 26,232
Comprehensive loss
Net loss for the year ........ -- -- -- -- -- -- (4,251) (4,251)
Foreign currency
translation adjustment ...... -- -- -- -- -- (111) -- (111)
-----------
Total comprehensive loss ....... (4,362)
Exercise of incentive stock
options ....................... -- -- 552,111 6 1,447 -- -- 1,453
Common stock issued under:
Employee stock purchase plan . -- -- 109,557 1 576 -- -- 577
Compensation expense on
options ....................... -- -- -- -- 900 -- -- 900
-------- -------- ----------- -------- ---------- ----------- ----------- -----------
BALANCE, December 31, 1997 ....... -- -- 15,762,820 158 68,131 (111) (43,378) 24,800
Comprehensive loss
Net loss for the year ........ -- -- -- -- -- -- (3,262) (3,262)
Foreign currency
translation adjustment ...... -- -- -- -- -- (91) -- (91)
-----------
Total comprehensive loss ....... (3,353)
Exercise of incentive stock
options ....................... -- -- 687,995 6 3,295 -- -- 3,301
Common stock issued under:
Employee stock purchase
plan ........................ -- -- 95,172 1 799 -- -- 800
Compensation expense on
options ....................... -- -- -- -- 2,160 -- -- 2,160
Preferred stock issued ......... 16,000 -- -- -- 15,345 15,345
-------- -------- ----------- -------- ---------- ----------- ----------- -----------
BALANCE, December 31, 1998 ....... 16,000 -- 16,545,987 165 89,730 (202) (46,640) 43,053
Comprehensive loss
Net loss for the year ........ -- -- -- -- -- -- (44,907) (44,907)
Foreign currency
translation adjustment ...... -- -- -- -- -- (36) -- (36)
-----------
Total comprehensive loss ....... (44,943)
Exercise of incentive stock
options ....................... -- -- 643,205 7 4,103 -- -- 4,110
Common stock issued under:
Preferred stock conversions .. (17,794) -- 5,416,526 54 (54) -- -- --
Employee stock purchase plan . -- -- 417,166 4 1,171 -- -- 1,175
Compensation expense on
options ....................... -- -- -- -- 4,740 -- -- 4,740
Preferred stock issued ......... 7,500 -- -- -- 7,142 -- -- 7,142
-------- -------- ----------- -------- ---------- ----------- ----------- -----------
BALANCE, December 31, 1999 ....... 5,706 $ -- $23,022,884 $ 230 $ 106,832 $ (238) $ (91,547) $ 15,277
======== ======== =========== ======== ========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
28
<PAGE>
SECURE COMPUTING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss .......................................................... $ (44,907) $ (3,262) $ (4,251)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation ................................................... 1,472 1,533 2,373
Loss on disposals of property and equipment .................... 362 1,724 159
Loss on disposals of intangible assets ......................... 402 268 731
Amortization ................................................... 557 325 --
Deferred income tax ............................................ 900 (1,197) (1,030)
Stock option expense ........................................... 4,740 2,160 900
Changes in operating assets and liabilities:
Accounts receivable ............................................ 14,295 (6,159) (6,455)
Inventories .................................................... 1,533 (1,238) 785
Other current assets ........................................... (956) 722 (485)
Accounts payable ............................................... (622) 1,645 (1,552)
Accrued liabilities and reserves ............................... (1,350) 2,491 (2,797)
Deferred revenue ............................................... 1,229 738 60
-------------------------------------------
Net cash used in operating activities ......................... (22,345) (250) (11,562)
INVESTING ACTIVITIES
Purchases of investments ....................................... -- (10,886) --
Proceeds from sales of investments ............................. 5,674 -- 5,935
Purchase of property and equipment ............................. (2,255) (1,994) (2,304)
Decrease (Increase) in intangibles and other assets ............ 221 (1,842) (1,238)
-------------------------------------------
Net cash provided by (used in) investing activities ........... 3,640 (14,722) 2,393
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock ...................... 7,142 15,345 --
Proceeds from issuance of common stock ......................... 5,285 4,101 2,030
Proceeds from sales-lease-back transaction ..................... -- 729 --
-------------------------------------------
Net cash provided by financing activities ..................... 12,427 20,175 2,030
EFFECT OF FOREIGN CURRENCY TRANSLATION ........................................ (36) (91) (111)
-------------------------------------------
Net increase (decrease) in cash and cash equivalents ........... (6,314) 5,112 (7,250)
Cash and cash equivalents, beginning of year ................... 9,992 4,880 12,130
-------------------------------------------
Cash and cash equivalents, end of year ......................... $ 3,678 $ 9,992 $ 4,880
===========================================
</TABLE>
SEE ACCOMPANYING NOTES.
29
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
We develop and sell computer software products and services designed to
provide secure extranets for organizations engaged in electronic business
("e-business").
Our secure extranet solutions combine impenetrable perimeter defense
for business networks with scalable, authenticated web and application access
control so that an organization may conduct business safely with growing numbers
of customers, employees, partners and suppliers.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Secure
Computing and our subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation. Certain prior year amounts have been
reclassified to conform to the current year presentation.
REVENUE RECOGNITION
PRODUCTS AND SERVICES
We recognize product revenues at the time of shipment in instances
where we have evidence of a contract, the fee charged is fixed and determinable
and collection is probable. We have entered into customer support and
maintenance agreements with various customers. We recognize the related revenues
either ratably as the obligations are fulfilled or upon completion of
performance.
Revenue generated through traditional channels with a right of return
for stock balancing and rotations is reduced by a reserve for estimated returns.
These reserves are based on estimates made by our management and are subject to
change.
ADVANCED TECHNOLOGY CONTRACTS
Advanced technology contract revenues for cost-plus-fixed-fee contracts
are recognized on the basis of costs incurred during the period plus the fee
earned. Award fees are recognized based upon the percentage of completion and
forecasted profit. A provision is made for the estimated loss, if any, on the
contracts in the period the loss becomes probable.
Under our Advanced Technology contracts, we bear the risk that
increased or unexpected costs required to perform specified services may reduce
our profitability. In addition, recoverable expenses we bill for government
contracts are subject to review and audit by the Defense Contract Audit Agency,
which could result in amounts previously billed being renegotiated. Pursuant to
their terms, these contracts are also generally also subject to termination at
the convenience of the applicable government agency. If a contract is
terminated, we would typically be reimbursed for our costs to the date of our
termination plus the cost of an orderly termination, and paid a portion of the
fee.
30
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 1999 and 1998, we had deferred revenue of $37 and $102,
respectively, related to Advanced Technology contracts.
CASH EQUIVALENTS
We consider all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents are
carried at cost which approximates market.
INVENTORIES
Inventories consist mainly of purchased components and prepaid licenses
and are valued at the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is calculated
using straight-line and accelerated depreciation methods with estimated useful
lives ranging from three to ten years.
INTANGIBLE ASSETS
Intangible assets consist of patents and trademarks and are amortized
using the straight-line method over the estimated useful lives of the assets,
which range up to 17 years.
IMPAIRMENT OF LONG-LIVED ASSETS
We review our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
Foreign assets and liabilities are translated using the year-end
exchange rate. Results of operations are translated using the average exchange
rates throughout the year. Translation gains or losses, net of applicable
deferred taxes, are accumulated as a separate component of stockholders' equity.
31
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
Based on our product development process, technological feasibility is
established upon completion of a working model. Costs that we incur between
completion of the working model and the point at which the product is generally
available for sale are capitalized and amortized over their estimated useful
life of three years. We have capitalized software development costs net of
accumulated amortization of $894 and $1,304 at December 31, 1999 and 1998,
respectively. Amortization expense was $918, $366 and $682 for the years ended
December 31, 1999, 1998, and 1997, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET LOSS PER SHARE
Basic earnings per share is computed using the weighted average number
of common shares outstanding. Diluted earnings per share is computed using the
combination of dilutive common share equivalents and the weighted average number
of common shares outstanding. Diluted earnings per share is not presented as the
effect of outstanding options, warrants and preferred stock is antidilutive.
COMPREHENSIVE LOSS
Our comprehensive loss for the years ended December 31, 1999, 1998 and
1997 was $(44,934), $(3,353), and $(4,362) respectively. The components of our
comprehensive loss are net loss and foreign currency translation adjustments.
STOCK OPTIONS
We follow the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
regarding disclosure of pro forma information for stock compensation. As
permitted by Statement No. 123, we measure compensation cost using the methods
described in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees."
32
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. INVESTMENTS
At December 31, 1999, and 1998, investments consisted of commercial
paper with maturities of less than one year. The investments are considered
available for sale and are stated at cost plus accrued interest which
approximates fair market value.
3. ACCOUNTS RECEIVABLE
Approximately 13% and 9% of accounts receivable were due from the United States
government at December 31, 1999 and 1998. Unbilled accounts receivable from all
customers were $408 and $2,254 at December 31, 1999 and 1998, respectively. We
may take various actions to manage our receivables such as selling our
receivables at a discount to third parties.
4. LEASES
We lease office space for all of our locations. Future lease payments
for all operating leases, excluding executory costs such as management and
maintenance fees, are as follows:
FUTURE LEASE NET FUTURE LEASE
OBLIGATIONS SUBLEASES OBLIGATIONS
------------------------------------ ------------------
2000 $ 2,374 $ (210) $ 2,164
2001 1,972 (156) 1,816
2002 1,900 (168) 1,732
2003 1,802 (168) 1,634
2004 1,637 (168) 1,469
Thereafter 2,238 (308) 1,930
---------------- ------------------ ------------------
$ 11,923 $ (1,178) $ 10,745
================ ================== ==================
Rent expense was $2,459, $1,865 and $2,191 for the years ended December
31, 1999, 1998 and 1997, respectively.
In addition, in February 1998, we entered into a sales-lease-back
agreement pertaining to certain previously acquired computer equipment and
software. Proceeds from the sale were $729, which approximated the assets'
carrying value. In February 2000, we renewed this lease for an additional 12
months with monthly rental payments of $32, resulting in a remaining future
minimum lease obligation of $384.
33
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
5. CAPITAL STOCK
PREFERRED STOCK
In June 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. The exercise price of the
warrants is $11.92 per share. The warrants expire on the earlier of June 29,
2001 or the date on which the closing of a consolidations, merger or other
business combination of ours with or into another entity that is not currently
our affiliate.
In 1999, all of the Series C Preferred was converted by the holders
into 5,174,493 shares of Common Stock. In addition, 42,100 shares of Common
Stock were issued to one of the investors in full satisfaction of a claim
against us for failing to maintain the effectiveness of a registration statement
covering the resale of the common stock issued upon the conversion of the Series
C preferred stock.
In December 1999, we sold in two separate transactions, a total of
7,500 shares of Series D 4% Cumulative Convertible Preferred Stock (the "Series
D Stock") to Westgate International, L.P. ("Westgate") resulting in total gross
proceeds of $7,500.
In January 2000, all outstanding Series D preferred stock were
converted into 793,205 shares of common stock.
In January 2000, we entered into a Put and Call Agreement with Westgate
which provides for the sale of up to 17,500 shares of Series E 4% Cumulative
Convertible Preferred Stock (the "Series E Stock") to Westgate at $1 per share.
The Series E preferred stock may be sold in two tranches of approximately 8,750
shares each. All sales of securities to Westgate will be pursuant to the
exemption provided by Regulation D under the Securities Act of 1933.
Under the terms of the agreement with the holders of common stock
issued upon conversion of our Series C preferred stock, we are subject to a
number of ongoing obligations. These ongoing obligations include (i), our stock
must be quoted on the Nasdaq Stock Market, or listed on the New York Stock
Exchange or the American Stock Exchange: and (ii) we must maintain the
effectiveness of the registration statement covering the resale of the common
stock issued upon conversion of the Series C preferred stock. If we fail to
satisfy our ongoing obligations we are subject to compensatory payments
associated with the conversion of the outstanding warrants. The potential
compensatory payments generally consist of a cash payment equal to 1.5% per
month of the stated value of the warrants assoicated with the Series C preferred
stock issuance and/or a downward adjustment to the conversion price of the
warrants.
In addition, we may also be required to make compensatory payments
which would materially affect our cash position and business under the terms of
the Series D preferred stock financing and our Series E preferred stock
financing. Under the terms of the agreements with Westgate, we are subject to a
number of ongoing obligations. These ongoing obligations include (i) our stock
must be quoted on the Nasdaq Stock Market; and (ii) the registration statements
covering the resale of the common stock issued or issuable upon conversion of
the Series D and Series E preferred stock must be effective. If we fail to
satisfy our ongoing obligations we are subject to compensatory payments. The
potential compensatory payments generally consist of a cash payment equal to
approximately 1% of the purchase price of the preferred stock for the first 30
days that we fail to satisfy our obligations and 2% for each 30-day period
thereafter.
34
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. STOCK OPTIONS
In September 1995, our Board of Directors and stockholders approved our
1995 Omnibus Stock Plan (the "Stock Plan"). Under the terms of the Stock Plan,
key employees and non-employees may be granted options to purchase up to
7,744,131 shares of our common stock. The majority of options granted typically
have ten-year terms and vest annually over three years. In addition, we have
programs where options are subject to accelerated vesting based on the
performance of our stock price over a specified period of time ranging from one
to three years.
A summary of changes in outstanding options and common shares reserved
under the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES AVAILABLE OPTIONS EXERCISE PRICE PER
FOR GRANT OUTSTANDING SHARE
--------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 .................... 247,755 3,034,531 $ 9.01
Shares authorized ............................. 1,300,000 -- --
Granted ....................................... (3,282,073) 3,282,073 6.44
Exercised ..................................... -- (552,111) 2.71
Canceled ...................................... 1,866,233 (1,866,233) 11.96
-----------------------------------
Balance at December 31, 1997 .................... 131,915 3,898,260 6.24
Shares authorized ............................. 2,500,000 -- --
Granted ....................................... (1,896,307) 1,896,307 10.41
Exercised ..................................... -- (687,995) 4.86
Canceled ...................................... 859,380 (859,380) 7.91
-----------------------------------
Balance at December 31, 1998 .................... 1,594,988 4,247,192 $ 7.75
Shares authorized ............................. -- -- --
Granted ....................................... (3,646,294) 3,646,294 4.99
Exercised ..................................... -- (643,205) 6.39
Canceled ...................................... 2,520,708 (2,520,708) 7.95
-----------------------------------
Balance at December 31, 1999 .................... 469,402 4,729,573 $ 5.70
===================================
</TABLE>
35
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. STOCK OPTIONS (CONTINUED)
The following table summarizes information about the stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- -----------------------------
Weighted- Weighted- Weighted-
Number Average Remaining Average Number Average
Range of Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .01 - $ 3.03 622,682 4.4 years $ 2.41 107,782 $ 1.13
$ 3.04 - $ 6.05 2,386,563 9.3 years 3.71 133,573 5.40
$ 6.06 - $ 9.08 852,938 7.2 years 6.72 469,731 6.54
$ 9.09 - $12.10 599,432 8.4 years 10.19 315,575 9.82
$12.11 - $15.13 28,883 7.7 years 12.74 14,447 12.79
$15.14 - $18.15 191,575 8.0 years 17.64 10,580 17.00
$18.16 - $21.18 31,500 8.9 years 18.76 10,665 18.79
$21.19 - $27.23 16,000 9.0 years 25.94 -- --
- -----------------------------------------------------------------------------------------------------------------
$ .01 - $27.23 4,729,573 8.1 years $ 5.70 1,062,353 $ 7.13
=================================================================================================================
</TABLE>
Options outstanding under the Stock Plan expire at various dates from
2000 to 2009. The number of options exercisable as of December 31, 1999, 1998,
and, 1997 was 1,062,353, 1,483,950, and 693,520, at weighted average exercise
prices of $7.13, $6.47, $6.31, respectively. The weighted average fair value of
options granted and the weighted average remaining contractual life of options
granted during 1999, 1998, and, 1997 are $5.70, $8.09, and $5.05, and 8.1, 8.4,
and 8 years, respectively.
We had an executive stock option program under which options would only
vest if certain price performance targets were met. Upon meeting those targets,
compensation expense would be recorded. During the life of this program,
1,390,000 options were granted while 90,000 options remain exercisable as of
December 31, 1999. For the years ended December 31, 1999, 1998, and 1997, we
recognized $4,740, $2,160 and $900, respectively, of compensation expense
related to the vesting of options under this program.
We also have an executive stock option program under which 420,000
performance-based options were granted and are subject to accelerated vesting
based on our stock price reaching certain price performance targets prior to
specified dates. These options will vest in a lump sum five years after the date
of grant regardless of company stock price performance. There will not be
expense related to the granting of these options.
36
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. STOCK OPTIONS (CONTINUED)
Pro forma information regarding net loss and loss per share is required
by Statement No. 123, and has been determined as if we had accounted for our
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998 and 1997, respectively: risk-free interest rates of 6.0%; volatility
factors of the expected market price of our common stock of 1.27, 1.00, .80; and
a weighted-average expected life of the option of five years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Our pro forma
information is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
---------------------------------
Pro forma net loss $(53,278) $(10,739) $(9,105)
=================================
Pro forma basic and diluted loss per share $ (2.76) $ (.67) $ (.59)
=================================
7. INCOME TAXES
Income tax expense for the year ended December 31, 1999 was $900. Net
tax benefits of $1,197 and $977 were reported for the years ended December 31,
1998 and 1997, respectively.
The effective tax rate differs from the statutory tax rate primarily as
a result of the following:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
--------------------------------------
Income taxes at statutory rate ......... $(14,959) $ (1,516) $ (1,778)
State taxes, net of federal benefit..... (1,705) (150) (223)
Foreign taxes .......................... -- -- (180)
Change in valuation allowance .......... 17,494 440 1,110
Other .................................. 70 29 94
--------------------------------------
Income tax expense (benefit)............ $ 900 $ (1,197) $ (977)
======================================
37
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. INCOME TAXES (CONTINUED):
Deferred income tax assets and liabilities result from temporary
differences between the carrying values of assets and liabilities for financial
statement and income tax purposes. Significant components of our net deferred
tax assets are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
------------------------------------
Deferred tax assets:
Accrued liabilities ...................... $ 1,591 $ 465 $ 492
Stock option compensation expense ........ 3,120 1,224 360
Contract loss reserve .................... -- 23 70
Payroll liabilities ...................... 113 149 187
Tax over book amortization ............... (295) (463) (124)
Book over tax depreciation ............... 171 171 114
Income tax credits ....................... 478 478 478
Net operating loss carryforward .......... 34,211 17,754 15,675
------------------------------------
Total deferred tax assets before valuation
allowance ................................ 39,389 19,801 17,252
Less valuation allowance ................... (36,689) (16,201) (14,849)
------------------------------------
Net deferred tax assets..................... $ 2,700 $ 3,600 $ 2,403
====================================
SFAS No. 109 "Accounting for Income Taxes," requires the consideration
of a valuation allowance for deferred tax assets if it is "more likely than not"
that benefits of deferred tax assets will not be realized. We believe it is more
likely than not that the net deferred tax assets of $2,700 at December 31, 1999
will be realized. However, the amount of the deferred tax assets considered
realizable could be reduced in the near term if estimates of future taxable
income are reduced.
At December 31, 1999, we had net operating loss carryforwards "NOL" of
$85,500 that are available to offset taxable income through 2014. These
carryforwards are subject to the limitations of Internal Revenue Code Section
382. This section provides limitations on the availability of net operating
losses to offset current taxable income if significant ownership changes have
occurred for federal tax purposes. Included in the NOL is approximately $15,400
related to stock option exercises. These deductions currently have a full
valuation allowance and, when realized for financial statement purposes, they
will not result in a reduction in income tax expense. Rather, the benefit will
be recorded as an increase to additional paid-in-capital.
Federal income taxes were not paid in 1999, 1998 or 1997.
38
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. EMPLOYEE BENEFIT PLAN
We have a voluntary defined contribution plan under Section 401(k) of
the Internal Revenue Code which covers substantially all U.S. employees. We also
have voluntary defined contribution plans which cover substantially all
employees. Contributions to the latter are limited to the employer's
discretionary annual contribution.
We recognized expense for contributions to the plans as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
-----------------------------------
Defined contribution plan (401(k)) ......... $ -- $ 275 $ 50
Voluntary contribution plans ............... -- -- --
-----------------------------------
$ -- $ 275 $ 50
===================================
9. CONTINGENCIES
We are engaged in certain legal proceedings and claims arising in the
ordinary course of our business. The ultimate liabilities, if any, which may
result from these or other pending or threatened legal actions against us cannot
be determined at this time. However, in the opinion of management, the facts
known at the present time do not indicate that such litigation will have a
material effect on our financial position.
10. RESTRUCTURING
Early in 1998, we announced plans to implement a restructuring plan
designed to facilitate further integration of acquired businesses, and recorded
a pre-tax expense of $7,800 to account for these actions, which include costs of
lease terminations, streamlining our product offerings and reducing our cost
structure to increase operational efficiency. The plan resulted in the
separation of some employees worldwide and the closing of three North American
facilities. As of December 31, 1998, approximately 45 employee terminations were
related to restructuring actions.
39
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
10. RESTRUCTURING (CONTINUED)
Early in 1999, the restructure reserve was fully utilized. Asset
impairment and restructuring costs are as follows:
TOTAL CASH WRITE-
COSTS RELATED TO CHARGES PAYMENTS DOWNS
- ------------------------------------------------------------------------------
Compensation costs for severance and
other termination benefits ....... $ 1,333 $ 1,333 $ --
Consulting and legal costs............... 739 739 --
Write-off of property, plant and
equipment ........................ 1,764 -- 1,764
Write-off of other assets ............... 761 -- 761
Lease termination costs ................. 853 853 --
Facility reconfigurations ............... 328 328 --
Employee relocations .................... 474 474 --
Canceled contracts ...................... 536 300 236
Additional travel ....................... 196 196 --
Other charges ........................... 816 816 --
-------------------------------------
Total costs ........................ $ 7,800 $ 5,039 $ 2,761
=====================================
11. 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 that are
aimed at providing safe, secure extranets for e-business to the global
marketplace. Our Advanced Technology Division is a self-funded organization
whose mission is to develop new technologies and products that meet the emerging
needs of the commercial sector. As a result, we continue to innovate, providing
state-of-the-market products for organizations of all types and sizes. Cash,
investments, deferred tax assets, general and administrative expenses,
acquisition costs 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 products
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.
40
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. SEGMENT INFORMATION (CONTINUED)
Significant components of our segments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------------------------------------------
Products and Advanced
Services Technology
Segment Segment Corporate Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers .............. $ 22,546 $ 4,567 $ -- $ 27,113
Restructuring charge .......................... -- -- -- --
Depreciation expense .......................... 1,357 152 20 1,529
Segment gross profit .......................... 7,719 613 -- 8,332
Segment operating income (loss) ............... (27,769) (4,587) (12,014) (44,370)
Interest income ............................... -- -- 363 363
Segment assets ................................ 13,170 1,014 11,645 25,829
Expenditures for long-lived assets ............ 2,184 42 29 2,255
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------------------------------
Products and Advanced
Services Technology
Segment Segment Corporate Total
- --------------------------------------------------------------------------------------------------------------------
Revenues from external customers .............. $ 51,500 $ 9,942 $ -- $ 61,442
Restructuring charge .......................... -- -- 7,800 7,800
Depreciation expense .......................... 1,241 273 19 1,533
Segment gross profit .......................... 37,174 3,130 -- 40,304
Segment operating income (loss) ............... 10,689 (697) (14,925) (4,933)
Interest income ............................... -- -- 474 474
Segment assets ................................ 27,594 2,227 24,527 54,348
Expenditures for long-lived assets ............ 3,674 137 25 3,836
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------
Products and Advanced
Services Technology
Segment Segment Corporate Total
- --------------------------------------------------------------------------------------------------------------------
Revenues from external customers .............. $ 33,202 $ 13,773 $ -- $ 46,976
Depreciation expense .......................... 1,533 809 31 2,373
Segment gross profit .......................... 24,033 4,177 -- 28,210
Segment operating income (loss) ............... 1,267 (2,262) (4,739) (5,734)
Interest income ............................... -- -- 506 506
Segment assets ................................ 20,906 2,720 7,428 31,054
Expenditures for long-lived assets ............ 3,166 346 30 3,542
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. SEGMENT INFORMATION (CONTINUED)
International sales accounted for 11%, 24% and 32% of total revenue for
the years 1999, 1998 and 1997, respectively. Major foreign markets for our
products include Europe and the Pacific Rim, with the United Kingdom, Germany,
Scandinavia and Japan being particularly strong. In each country, 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:
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
----------------------------------------------------------------------
Revenues:
United States sales .......... $24,198 $46,464 $31,944
International sales .......... 2,915 14,978 15,032
------------------------------------
$27,113 $61,442 $46,976
====================================
Identifiable Assets:
United States operations ..... $24,897 $53,463 $28,905
International operations ..... 932 885 2,149
------------------------------------
$25,829 $54,348 $31,054
====================================
12. RELATED PARTY TRANSACTIONS
In 1998, we relocated several key employees to California. To mitigate
cost of living differences, we provided interest-free loans totaling $481 to
these employees. In 1999, these loans were forgiven. In addition, we reimbursied
the employees for the tax liabilities incurred as a result of the loan
forgiveness.
42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Secure Computing Corporation
We have audited the accompanying consolidated balance sheets of Secure Computing
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Secure
Computing Corporation at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 28, 2000
43
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SECURE COMPUTING CORPORATION
Date: March 29, 2000 By /s/ John McNulty
-------------------
John McNulty
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant, and in the capacities indicated on March 29, 2000.
Signature Title
- --------- -----
/s/ John McNulty Chairman and Chief Executive Officer
- --------------------------------- (Principal Executive Officer)
John McNulty
/s/ Timothy P. McGurran Senior Vice President of Operations, Chief
- --------------------------------- Financial Officer (Principal Financial
Timothy P. McGurran and Accounting Officer)
/s/ Robert J. Frankenberg Director
- ---------------------------------
Robert J. Frankenberg
/s/ Stephen M. Puricelli Director
- ---------------------------------
Stephen M. Puricelli
/s/ Eric P. Rundquist Director
- ---------------------------------
Eric P. Rundquist
/s/ Alexander Zakupowsky, Jr. Director
- ---------------------------------
Alexander Zakupowsky, Jr.
44
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Less Balance at
Description of Year Expenses Deductions End of Year
- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Contract loss reserves ............. $ 58,000 $ 300,000 $ (358,000) $ --
Warranty reserves .................. 30,000 42,000 -- 72,000
Sales return allowance ............. 527,000 513,000 (330,000) 710,000
Allowance for doubtful accounts .... 900,000 634,000 (824,000) 710,000
Inventory reserve .................. 117,000 60,000 (57,000) 120,000
Restructure reserve ................ 618,000 -- (618,000) --
---------------------------------------------------------------
Total .......................... $ 2,250,000 $ 1,549,000 $(2,187,000) $ 1,612,000
===============================================================
YEAR ENDED DECEMBER 31, 1998:
Contract loss reserves ............. $ 176,000 $ -- $ (118,000) $ 58,000
Warranty reserves .................. 30,000 -- -- 30,000
Sales return allowance ............. -- 527,000 -- 527,000
Allowance for doubtful accounts .... 417,000 1,152,000 (669,000) 900,000
Inventory reserve .................. 50,000 67,000 -- 117,000
Restructure reserve ................ -- 7,800,000 (7,182,000) 618,000
---------------------------------------------------------------
Total .......................... $ 673,000 $ 9,546,000 $(7,969,000) $ 2,250,000
===============================================================
YEAR ENDED DECEMBER 31, 1997:
Contract loss reserves ............. $ 250,000 $ -- $ (74,000) $ 176,000
Warranty reserves .................. 65,000 -- (35,000) 30,000
Sales return allowance ............. 120,000 -- (120,000) --
Allowance for doubtful accounts .... 290,000 179,000 (52,000) 417,000
Inventory reserve .................. 150,000 60,000 (160,000) 50,000
---------------------------------------------------------------
Total .......................... $ 875,000 $ 239,000 $ (441,000) $ 673,000
===============================================================
</TABLE>
EXHIBIT 10.6
SEPARATION AGREEMENT AND RELEASE
This Separation Agreement and Release ("Agreement") is made by and
between Secure Computing Corporation (the "Company") and Jeffrey H. Waxman
("Employee").
WHEREAS, Employee and the Company mutually agree that Employee's
employment as Chief Executive Officer of the Company shall be terminated
effective on June 30, 1999; and hereby resigns as a member of the Board of
Directors of the Company, effective the same date; and
WHEREAS, Employee does not have pending against the Company any claim,
charge, or action in or with any federal, state, or local court or
administrative agency; and
WHEREAS, Employee and the Company desire to settle fully and finally
all differences between them.
NOW THEREFORE, in consideration of the mutual promises made herein, the
Company and Employee (collectively referred to as "the Parties") hereby agree as
follows:
1. Resignation. Employee agrees to resign from employment as Chief
Executive Officer of the Company and to resign as a Director of the Company,
effective June 30, 1999. The Company shall issue a press release stating that
Employee is resigning for personal reasons.
2. Consideration. The Company agrees to pay Employee nine (9) months of
base salary, less applicable withholdings. This amount will be paid as a lump
sum payment no later than July 9, 1999. The Company shall also reimburse
Employee for any outstanding expense reports. In addition, for a period of
twelve (12) months commencing July 1, 1999, the Company shall pay for office
space for Employee in an amount not to exceed $2,000 per month.
3. Continued Benefits. Employee's medical benefits will be paid through
the end of June. Employee will be notified of his rights to continue benefits
for up to eighteen (18) months under COBRA.
4. Stock Options. The exercise of any stock options shall continue to
be subject to the terms and conditions of the Company's Stock Option Plan and
the applicable Stock Option Agreement between Employee and the Company.
5. Payment of Salary. Employee acknowledges and represents that the
Company has paid all salary, wages, bonuses, accrued vacation, commissions and
any and all other benefits due to Employee.
6. Indemnification of Employee. To the extent permitted by law, the
Company will provide Employee indemnity, in accordance with the applicable
provisions of the Company's Articles of Incorporation and its By-Laws, and will
cover Employee under any directors and officers liability insurance policy
maintained by the Company for directors and officers, against all expense,
liability and loss (including attorneys' fees and settlement payments) that
Employee may incur by reason of any action, suit or proceeding arising from or
relating to his position as an employee, officer or director of the Company.
Employee will cooperate with the Company in the defense of any such matters.
7. Mutual Release. (a) Employee, on behalf of himself, and his heirs,
family members, executors and assigns, hereby releases and forever discharges
Company, and its executors, officers,
<PAGE>
directors, employees, investors, shareholders, administrators, affiliates,
divisions, subsidiaries, predecessor and successor corporations, from any and
all existing claims, liens, demands, causes of action, obligations, damages and
liabilities, known or unknown, that Employee ever had, now has or may hereafter
claim to have against them, arising directly or indirectly out of, or in any way
connected with or based upon, or related in any way to his employment with the
Company or his termination therefrom including any and all claims for violation
of any federal, state or municipal statute, including, but not limited to, Title
VII of the Civil Rights Act of 1964; the Civil Rights Act of 1991; the Age
Discrimination in Employment Act of 1967; the Americans with Disabilities Act of
1990; the Fair Labor Standards Act; the Employee Retirement Income Security Act
of 1974; The Worker Adjustment and Retraining Notification Act; the Older
Workers Benefit Protection Act; the California Civil Code; the California Fair
Employment and Housing Act and Labor Code section 201, ET SEQ. and section 970,
ET SEQ.; and
(b) Company, on behalf of itself and its executors, officers,
directors, employees, investors, shareholders, administrators, affiliates,
divisions, subsidiaries, predecessor and successor corporations, and assigns,
hereby releases and forever discharges Employee, and his heirs, family members,
executors and assigns, from any and all claims, liens, demands, causes of
action, obligations, damages and liabilities, known or unknown, that Company
ever had, now has or may hereafter claim to have against his or them arising
directly or indirectly out of, or in any way connected with or based upon, or
related in any way to his employment with the Company or his termination
therefrom;
(c) except that neither Employee nor the Company releases each other
from any claims, liens, demands, causes of action, obligations, damages and
liabilities, known or unknown, arising from, related or connected to, directly
or indirectly, present or future claims of securities fraud, breach of fiduciary
duty or similar claims against the Company and its officers and directors,
including, by way of illustration and not limitation, the causes of action as
stated in Myron Goldstein vs. Secure Computing Corporation, et al (U. S. Dist.
Court, ND Calf., C.99-20279), including any derivative actions.
Employee and Company agree that the release set forth in this section
shall be and remain in effect in all respects as a complete general release as
to the matters released. This release does not extend to any obligations
incurred under this Agreement.
8. Acknowledgment of Waiver of Claims under ADEA. Employee acknowledges
that he is waiving and releasing any rights he may have under the Age
Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary. Employee and the Company agree that this
waiver and release does not apply to any rights or claims that may arise under
ADEA after the Effective Date of this Agreement. Employee acknowledges that the
consideration given for this waiver and release Agreement is in addition to
anything of value to which Employee was already entitled. Employee further
acknowledges that he has been advised by this writing that (a) he should consult
with an attorney prior to executing this Agreement; (b) he has at least
twenty-one (21) days within which to consider this Agreement; (c) he has at
least seven (7) days following the execution of this Agreement by the parties to
revoke the Agreement; and (d) this Agreement shall not be effective until the
revocation period has expired.
9. California Civil Code Section 1542. Employee represents that he is
not aware of any claim other than the claims that are released by this
Agreement. Employee acknowledge that he has been advised by legal counsel and is
familiar with the provisions of California Civil Code Section 1542, which
provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH
THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN
HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF
2
<PAGE>
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Employee, being aware of said Code section, agrees to expressly waive
any rights he may have thereunder, as well as under any other statute or common
law principles of similar effect.
10. No Future Lawsuits. Employee represents that he has no lawsuits,
claims, or actions pending in his name, or on behalf of any other person or
entity, against the Company or any other person or entity referred to herein.
Employee also represents that he does not intend to bring any claims on his own
behalf or on behalf of any other person or entity against the Company or any
other person or entity referred to herein.
11. Confidentiality. The Parties hereto agree to use their best efforts
to maintain in confidence the existence of this Agreement, the contents and
terms of this Agreement, and the consideration for this Agreement (hereinafter
collectively referred to as "Settlement Information"). The Parties hereto agree
to take every reasonable precaution to prevent disclosure of any Settlement
Information to third parties except as required by law, and agree that there
will be no publicity, directly or indirectly, concerning any Settlement
Information. The Parties hereto agree to take every precaution to disclose
Settlement Information only to those attorneys, accountants, governmental
entities, and family members who have a reasonable need to know of such
Settlement Information.
12. No Cooperation. Employee agrees that he will not counsel or assist
any attorneys or their clients in the presentation or prosecution of any
disputes, differences, grievances, claims, charges, or complaints by any third
party against the Company and/or any officer, director, employee, agent,
representative, shareholder or attorney of the Company, unless under a subpoena
or other court order to do so.
13. Non-Disparagement. Each Party agrees to refrain from any
defamation, libel or slander of the other, or tortious interference with each
other's contracts and relationships. The Company will make all reasonable
efforts to insure that its officers, directors and employees comply with this
provision of this Agreement. All inquiries by potential future employers of
Employee will be directed to the Company's Director of Human Resources. Upon
inquiry, the Company shall only state the following: Employee 's last position
and dates of employment.
14. No Admission of Liability. Employee understands and acknowledges
that this Agreement constitutes a compromise and settlement of disputed claims.
No action taken by the Company hereto, either previously or in connection with
this Agreement, shall be deemed or construed to be (a) an admission of the truth
or falsity of any claims heretofore made or (b) an acknowledgment or admission
by the Company of any fault or liability whatsoever to Employee or to any third
party.
15. Costs. The Parties shall each bear their own costs, expert fees,
attorneys' fees and other fees incurred in connection with this Agreement,
except as provided in paragraph 2 herein.
16. Tax Consequences. The Company makes no representations or
warranties with respect to the tax consequences of the payment of any sums to
Employee under the terms of this Agreement. Employee agrees and understands that
he is responsible for payment, if any, of local, state and/or federal taxes on
the sums paid hereunder by the Company and any penalties or assessments thereon.
17. Arbitration. The Parties agree that any and all disputes arising
out of the terms of this Agreement, their interpretation, and any of the matters
herein released, shall be subject to binding arbitration in Santa Clara County,
California before the American Arbitration Association under its California
3
<PAGE>
Commercial Dispute Resolution Rules, or by a judge to be mutually agreed upon.
The Parties agree that the prevailing party in any arbitration shall be entitled
to injunctive relief in any court of competent jurisdiction to enforce the
arbitration award. The Parties agree that the prevailing party in any
arbitration shall be awarded its reasonable attorney's fees and costs. Employee
expressly acknowledges that he is waiving any right to a jury trial for any and
all claims covered by this Agreement.
18. Solicitation of Employees. Employee agrees that he will not, for a
period of six (6) months immediately following the Effective Date of this
Agreement, by himself or in collaboration with others, either directly or
indirectly initiate contact to solicit or recruit any of the Company's employees
to leave their employment, or take away such employees, or attempt to solicit,
recruit, or take away employees of the Company, either for himself or any other
person or entity.
19. Returning Company Documents. Employee agrees on the Effective Date
of this Agreement, he shall deliver to the Company (and will not keep in his
possession, recreate or deliver to anyone else) any and all devices, records,
data, notes, reports, proposals, lists, correspondence, specifications, drawings
blueprints, sketches, materials, equipment, other documents or property, or
reproductions of any aforementioned items developed by Employee during the
course of his employment with the Company or otherwise belonging to the Company,
its successors or assigns.
20. Company Confidential Information. Employee acknowledges that the
confidentiality provisions stated in the November 4, 1996 Secure Computing
Corporation Employment Agreement continue to be in full force and effect.
21. Authority. The Company represents and warrants that the undersigned
has the authority to act on behalf of the Company and to bind the Company and
all who may claim through it to the terms and conditions of this Agreement.
Employee represents and warrants that he has the capacity to act on his own
behalf and on behalf of all who might claim through him to bind them to the
terms and conditions of this Agreement. Each Party warrants and represents that
there are no liens or claims of lien or assignments in law or equity or
otherwise of or against any of the claims or causes of action released herein.
22. No Representations. Employee represents that he has had the
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Agreement. Employee has not
relied upon any representations or statements made by the Company which are not
specifically set forth in this Agreement.
23. Severability. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
24. Entire Agreement. This Agreement represents the entire agreement
and understanding between the Company and Employee concerning Employee's
separation from the Company and the events leading thereto and associated
therewith, and supersedes and replaces any and all prior agreements and
understandings concerning Employee's relationship with the Company and his
compensation by the Company.
25. No Oral Modification. This Agreement may only be amended in writing
signed by Employee and the Compensation Committee of the Board of Directors.
26. Governing Law. This Agreement shall be governed by the laws of the
State of California.
4
<PAGE>
27. Effective Date. This Agreement is effective seven days after it has
been signed by both parties, provided Employee has not revoked the Agreement
prior to that date, and provided Employee has returned an executed Agreement to
the Company.
28. Counterparts. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
29. Voluntary Execution of Agreement. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation, negotiation,
and execution of this Agreement by legal counsel of their own
choice or that they have voluntarily declined to seek such
counsel;
(c) They understand the terms and consequences of this Agreement
and of the releases it contains;
(d) They are fully aware of the legal and binding effect of this
Agreement.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the
respective dates set forth below.
SECURE COMPUTING CORPORATION
Dated: June 30, 1999 By: /s/ John McNulty
---------------------
JEFFREY H. WAXMAN
Dated: June 26, 1999 By: /s/ Jeffrey H. Waxman
---------------------
5
EXHIBIT 10.7
SEPARATION AGREEMENT AND RELEASE
This Separation Agreement and Release ("Agreement") is made by and
between Secure Computing Corporation (the "Company") and Christine Hughes
("Employee").
WHEREAS, Employee and the Company mutually agree that Employee's
employment with the Company shall be terminated effective on June 30, 1999; and
WHEREAS, Employee and the Company mutually agree that the Separation
and Release document dated May 20, 1999, is no longer in effect; and
WHEREAS, Employee does not have pending against the Company any claim,
charge, or action in or with any federal, state, or local court or
administrative agency; and
WHEREAS, Employee and the Company desire to settle fully and finally
all differences between them.
NOW THEREFORE, in consideration of the mutual promises made herein, the
Company and Employee (collectively referred to as "the Parties") hereby agree as
follows:
1. Resignation. Employee agrees to resign from her employment with the
Company as Senior Vice President of Worldwide Marketing and Business Development
effective June 30, 1999. Upon execution of this Agreement, the Company shall
issue a press release regarding termination of Employee. Such press release
shall be mutually agreed upon by the Parties.
2. Consideration. The Company agrees to pay Employee nine (9) months of
base salary, less applicable withholdings. This amount will be paid as a lump
sum payment no later than July 6, 1999. The Company shall also reimburse
Employee for any outstanding expense reports. In addition, the Company shall pay
reasonable moving expenses (through a reputable mover, mutually agreed upon by
the parties) for moving Employee's personal belongings, including Employee's art
work, to Employee's home in Virginia.
3. Continued Benefits. Employee's medical benefits will be paid through
the end of June. Employee will be notified of her rights to continue benefits
for up to eighteen (18) months under COBRA.
4. Stock Options. The exercise of any stock options shall continue to
be subject to the terms and conditions of the Company's Stock Option Plan and
the applicable Stock Option Agreement between Employee and the Company.
5. Payment of Salary. Employee acknowledges and represents that the
Company has paid all salary, wages, bonuses, accrued vacation, commissions and
any and all other benefits due to Employee.
6. Indemnification of Employee. To the extent permitted by law, the
Company will provide Employee indemnity, in accordance with the applicable
provisions of the Company's Articles of Incorporation and its By-Laws, and will
cover Employee under any directors and officers liability insurance policy
maintained by the Company for directors and officers, against all expense,
liability and loss (including attorneys' fees and settlement payments) that
Employee may incur by reason of any action, suit or proceeding arising from or
relating to her position as an employee, officer or director of the Company.
Employee will cooperate with the Company in the defense of any such matters.
7. Mutual Release. (a) Employee, on behalf of herself, and her heirs,
family members, executors and assigns, hereby releases and forever discharges
Company, and its executors, officers, directors, employees, investors,
shareholders, administrators, affiliates, divisions, subsidiaries, predecessor
and successor corporations, from any and all existing claims, liens, demands,
causes of action, obligations, damages and liabilities, known or
<PAGE>
unknown, that Employee ever had, now has or may hereafter claim to have against
them, arising directly or indirectly out of, or in any way connected with or
based upon, or related in any way to her employment with the Company or her
termination therefrom including any and all claims for violation of any federal,
state or municipal statute, including, but not limited to, Title VII of the
Civil Rights Act of 1964; the Civil Rights Act of 1991; the Age Discrimination
in Employment Act of 1967; the Americans with Disabilities Act of 1990; the Fair
Labor Standards Act; the Employee Retirement Income Security Act of 1974; The
Worker Adjustment and Retraining Notification Act; the Older Workers Benefit
Protection Act; the California Civil Code; the California Fair Employment and
Housing Act and Labor Code section 201, ET SEQ. and section 970, ET SEQ.; and
(b) Company, on behalf of itself and its executors, officers,
directors, employees, investors, shareholders, administrators, affiliates,
divisions, subsidiaries, predecessor and successor corporations, and assigns,
hereby releases and forever discharges Employee, and her heirs, family members,
executors and assigns, from any and all claims, liens, demands, causes of
action, obligations, damages and liabilities, known or unknown, that Company
ever had, now has or may hereafter claim to have against her or them arising
directly or indirectly out of, or in any way connected with or based upon, or
related in any way to her employment with the Company or her termination
therefrom;
(c) except that neither Employee nor the Company releases each other
from any claims, liens, demands, causes of action, obligations, damages and
liabilities, known or unknown, arising from, related or connected to, directly
or indirectly, present or future claims of securities fraud, breach of fiduciary
duty or similar claims against the Company and its officers and directors,
including, by way of illustration and not limitation, the causes of action as
stated in Myron Goldstein vs. Secure Computing Corporation, et al (U. S. Dist.
Court, ND Calf., C.99-20279), including any derivative actions.
Employee agrees that the release set forth in this section shall be and
remain in effect in all respects as a complete general release as to the matters
released. This release does not extend to any obligations incurred under this
Agreement.
8. Acknowledgment of Waiver of Claims under ADEA. Employee acknowledges
that she is waiving and releasing any rights she may have under the Age
Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary. Employee and the Company agree that this
waiver and release does not apply to any rights or claims that may arise under
ADEA after the Effective Date of this Agreement. Employee acknowledges that the
consideration given for this waiver and release Agreement is in addition to
anything of value to which Employee was already entitled. Employee further
acknowledges that she has been advised by this writing that (a) she should
consult with an attorney prior to executing this Agreement; (b) she has at least
twenty-one (21) days within which to consider this Agreement; (c) she has at
least seven (7) days following the execution of this Agreement by the parties to
revoke the Agreement; and (d) this Agreement shall not be effective until the
revocation period has expired.
9. California Civil Code Section 1542. Employee represents that she is
not aware of any claim other than the claims that are released by this
Agreement. Employee acknowledge that she has been advised by legal counsel and
is familiar with the provisions of California Civil Code Section 1542, which
provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH
THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN
her FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED
her SETTLEMENT WITH THE DEBTOR.
Employee, being aware of said Code section, agrees to expressly waive
any rights she may have thereunder, as well as under any other statute or common
law principles of similar effect.
2
<PAGE>
10. No Future Lawsuits. Employee represents that she has no lawsuits,
claims, or actions pending in her name, or on behalf of any other person or
entity, against the Company or any other person or entity referred to herein.
Employee also represents that she does not intend to bring any claims on her own
behalf or on behalf of any other person or entity against the Company or any
other person or entity referred to herein.
11. Confidentiality. The Parties hereto agree to use their best efforts
to maintain in confidence the existence of this Agreement, the contents and
terms of this Agreement, and the consideration for this Agreement (hereinafter
collectively referred to as "Settlement Information"). The Parties hereto agree
to take every reasonable precaution to prevent disclosure of any Settlement
Information to third parties except as required by law, and agree that there
will be no publicity, directly or indirectly, concerning any Settlement
Information. The Parties hereto agree to take every precaution to disclose
Settlement Information only to those attorneys, accountants, governmental
entities, and family members who have a reasonable need to know of such
Settlement Information.
12. No Cooperation. Employee agrees that she will not counsel or assist
any attorneys or their clients in the presentation or prosecution of any
disputes, differences, grievances, claims, charges, or complaints by any third
party against the Company and/or any officer, director, employee, agent,
representative, shareholder or attorney of the Company, unless under a subpoena
or other court order to do so.
13. Non-Disparagement. Each Party agrees to refrain from any
defamation, libel or slander of the other, or tortious interference with each
other's contracts and relationships. All inquiries by potential future employers
of Employee will be directed to the Company's Director of Human Resources. Upon
inquiry, the Company shall only state the following: The information stated in
the mutually agreed to press release; Employee 's last position and dates of
employment.
14. No Admission of Liability. Employee understands and acknowledges
that this Agreement constitutes a compromise and settlement of disputed claims.
No action taken by the Company hereto, either previously or in connection with
this Agreement, shall be deemed or construed to be (a) an admission of the truth
or falsity of any claims heretofore made or (b) an acknowledgment or admission
by the Company of any fault or liability whatsoever to Employee or to any third
party.
15. Costs. The Parties shall each bear their own costs, expert fees,
attorneys' fees and other fees incurred in connection with this Agreement,
except as provided in paragraph 2 herein.
16. Tax Consequences. The Company makes no representations or
warranties with respect to the tax consequences of the payment of any sums to
Employee under the terms of this Agreement. Employee agrees and understands that
she is responsible for payment, if any, of local, state and/or federal taxes on
the sums paid hereunder by the Company and any penalties or assessments thereon.
17. Arbitration. The Parties agree that any and all disputes arising
out of the terms of this Agreement, their interpretation, and any of the matters
herein released, shall be subject to binding arbitration in Santa Clara County,
California before the American Arbitration Association under its California
Commercial Dispute Resolution Rules, or by a judge to be mutually agreed upon.
The Parties agree that the prevailing party in any arbitration shall be entitled
to injunctive relief in any court of competent jurisdiction to enforce the
arbitration award. The Parties agree that the prevailing party in any
arbitration shall be awarded its reasonable attorney's fees and costs. Employee
expressly acknowledges that she is waiving any right to a jury trial for any and
all claims covered by this Agreement.
18. Solicitation of Employees. Employee agrees that she will not, for a
period of six (6) months immediately following the Effective Date of this
Agreement, by herself or in collaboration with others, either
3
<PAGE>
directly or indirectly initiate contact to solicit or recruit any of the
Company's employees to leave their employment, or take away such employees, or
attempt to solicit, recruit, or take away employees of the Company, either for
herself or any other person or entity.
19. Returning Company Documents. Employee agrees on the Effective Date
of this Agreement, she shall deliver to the Company (and will not keep in her
possession, recreate or deliver to anyone else) any and all devices, records,
data, notes, reports, proposals, lists, correspondence, specifications, drawings
blueprints, sketches, materials, equipment, other documents or property, or
reproductions of any aforementioned items developed by Employee during the
course of her employment with the Company or otherwise belonging to the Company,
its successors or assigns.
20. Company Confidential Information. Employee acknowledges that the
confidentiality provisions stated in the November 8, 1996 Secure Computing
Corporation Employment Agreement continue to be in full force and effect.
21. Authority. The Company represents and warrants that the undersigned
has the authority to act on behalf of the Company and to bind the Company and
all who may claim through it to the terms and conditions of this Agreement.
Employee represents and warrants that she has the capacity to act on her own
behalf and on behalf of all who might claim through him to bind them to the
terms and conditions of this Agreement. Each Party warrants and represents that
there are no liens or claims of lien or assignments in law or equity or
otherwise of or against any of the claims or causes of action released herein.
22. No Representations. Employee represents that she has had the
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Agreement. Employee has not
relied upon any representations or statements made by the Company which are not
specifically set forth in this Agreement.
23. Severability. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
24. Entire Agreement. This Agreement represents the entire agreement
and understanding between the Company and Employee concerning Employee's
separation from the Company and the events leading thereto and associated
therewith, and supersedes and replaces any and all prior agreements and
understandings concerning Employee's relationship with the Company and her
compensation by the Company.
25. No Oral Modification. This Agreement may only be amended in writing
signed by Employee and the Compensation Committee of the Board of Directors.
26. Governing Law. This Agreement shall be governed by the laws of the
State of California.
27. Effective Date. This Agreement is effective seven days after it has
been signed by both parties, provided Employee has not revoked the Agreement
prior to that date, and provided Employee has returned an executed Agreement to
the Company.
28. Counterparts. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
4
<PAGE>
29. Voluntary Execution of Agreement. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation, negotiation,
and execution of this Agreement by legal counsel of their own
choice or that they have voluntarily declined to seek such
counsel;
(c) They understand the terms and consequences of this Agreement
and of the releases it contains;
(d) They are fully aware of the legal and binding effect of this
Agreement.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the
respective dates set forth below.
SECURE COMPUTING CORPORATION
Dated: June 30, 1999 By /s/ John McNulty
--------------- -----------------------------------------
CHRISTINE HUGHES
Dated: June 24, 1999 /s/ Christine Hughes
--------------- -----------------------------------------
5
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-80065, 333-06563, 333-11451, 333-35651, 333-28929, 333-28927,
333-71913 and 333-80963) and the Registration Statements on Form S-3 (Nos.
333-16767, 333-26293, 333-61585, 333-30766 and 333-77715), respectively, of our
report dated January 28, 2000, with respect to the consolidated financial
statements and schedule of Secure Computing Corporation included in the Annual
Report (Form 10-K) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,890,000
<SECURITIES> 0
<RECEIVABLES> 6,127,000
<ALLOWANCES> 710,000
<INVENTORY> 828,000
<CURRENT-ASSETS> 17,849,000
<PP&E> 11,861,000
<DEPRECIATION> 7,646,000
<TOTAL-ASSETS> 25,829,000
<CURRENT-LIABILITIES> 10,552,000
<BONDS> 0
0
0
<COMMON> 230,000
<OTHER-SE> 106,831,000
<TOTAL-LIABILITY-AND-EQUITY> 25,829,000
<SALES> 27,113,000
<TOTAL-REVENUES> 27,113,000
<CGS> 18,781,000
<TOTAL-COSTS> 18,781,000
<OTHER-EXPENSES> 52,339,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (44,007,000)
<INCOME-TAX> (900,000)
<INCOME-CONTINUING> (44,907,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,907,000)
<EPS-BASIC> (2.32)
<EPS-DILUTED> (2.32)
</TABLE>
