UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended June 30, 2000
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
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(Exact name of registrant as specified in its charter)
Delaware 52-1637226
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
One Almaden Blvd., Suite 400
San Jose, CA 95113
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(Address of principal executive offices) (Zip code)
(408) 918-6100
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Registrant's telephone number, including area code
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date: Common Stock, $.01 par
value - 25,151,801 issued and outstanding as of August 3, 2000.
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SECURE COMPUTING CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2000
(Unaudited) and December 31, 1999............................. 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three and six months ended June 30, 2000 and 1999..... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 2000 and 1999............... 5
Notes to the Condensed Consolidated Financial Statements
(Unaudited)................................................... 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 14
Item 2. Changes in Securities.......................................... 14-15
Item 3. Defaults upon Senior Securities................................ 15
Item 4. Submission of Matters to a Vote of Security Holders............ 15
Item 5. Other Information.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 16
Signatures .................................................... 17
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PART 1. FINANCIAL INFORMATION
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 15,068 $ 3,678
Investments 4,956 5,212
Accounts receivable, net 4,634 5,417
Inventories 517 828
Other current assets 2,224 2,714
------------ ------------
Total current assets 27,399 17,849
PROPERTY AND EQUIPMENT, NET 5,220 4,215
OTHER ASSETS 3,740 3,765
------------ ------------
$ 36,359 $ 25,829
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,148 $ 3,198
Accrued payroll 3,500 2,208
Other accrued expenses 2,210 1,364
Deferred revenue 5,012 3,782
------------ ------------
Total current liabilities 14,870 10,552
STOCKHOLDERS' EQUITY
Convertible preferred stock, par value $.01 per share:
Authorized -2,000,000 shares; issued and outstanding shares -
June 30, 2000 - 8,760 and December 31, 1999 - 5,706 -- --
Common stock, par value $.01; 50,000,000 shares authorized;
issued and outstanding - June 30, 2000- 24,726,539 and December
31, 1999 - 23,022,884 247 230
Additional paid-in capital 125,305 106,832
Accumulated deficit (103,774) (91,547)
Foreign currency translation (289) (238)
------------ ------------
Total stockholders' equity 21,489 15,277
------------ ------------
$ 36,359 $ 25,829
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------------------- ----------------------
<S> <C> <C> <C> <C>
Products and services revenue $ 7,563 $ 4,763 $ 14,083 $ 11,330
Advanced Technology contracts revenue 1,259 747 2,251 2,410
-------- -------- -------- --------
8,822 5,510 16,334 13,740
Cost of revenue 2,683 7,627 5,527 11,835
-------- -------- -------- --------
Gross profit 6,139 (2,117) 10,807 1,905
Operating expenses:
Selling and marketing 7,899 10,511 14,567 16,319
Research and development 3,035 2,955 6,342 5,174
General and administrative 1,139 3,317 2,342 4,479
Stock option expense -- -- -- 4,740
-------- -------- -------- --------
12,073 16,783 23,251 30,712
-------- -------- -------- --------
Operating loss (5,934) (18,900) (12,444) (28,807)
Interest and other income 189 128 216 301
-------- -------- -------- --------
Loss before income taxes (5,745) (18,772) (12,228) (28,506)
Income tax expense -- (900) -- (900)
-------- -------- -------- --------
Net loss $ (5,745) $(19,672) $(12,228) $(29,406)
======== ======== ======== ========
Net loss per share - basic and diluted $ (0.23) $ (1.11) $ (0.50) $ (1.71)
======== ======== ======== ========
Weighted average shares outstanding 24,603 17,744 24,267 17,203
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SECURE COMPUTING CORPORATION
CONDENSED CONSOLDIATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
-------------------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (4,433) $(11,887)
INVESTING ACTIVITIES
Proceeds from sales of investments 7,925 1,981
Purchase of investments (7,669) --
Purchase of property and equipment (2,093) (808)
Increase in intangibles and other assets (231) (73)
-------- --------
Net cash provided by (used in) investing activities (2,068) 1,100
FINANCING ACTIVITIES
Proceeds from issuance of Preferred Stock 16,581 --
Proceeds from issuance of Common Stock 1,361 3,143
-------- --------
Net cash provided by financing activities 17,942 3,143
-------- --------
EFFECT OF EXCHANGE RATE CHANGES (51) (19)
-------- --------
Increase (decrease) in cash and cash equivalents 11,390 (7,663)
Cash and cash equivalents beginning of period 3,678 9,992
-------- --------
Cash and cash equivalents ending of period $ 15,068 $ 2,329
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SECURE COMPUTING CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1. 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.
2. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by us without audit and reflect all adjustments (consisting only of
normal and recurring adjustments and accruals) which are, in our opinion,
necessary to present a fair statement of the results for the interim periods
presented. The consolidated financial statements include our accounts and those
of our subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation. The statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission, but omit certain
information and footnote disclosures necessary to present the statements in
accordance with generally accepted accounting principles. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the full fiscal year. These condensed financial
statements should be read in conjunction with the Consolidated Financial
Statements and footnotes thereto included in our Annual 10-K Report for the year
ended December 31, 1999, as filed with the Securities and Exchange Commission.
3. SIGNIFICANT ACCOUNTING POLICIES
Results of operations are translated using the average exchange rates
throughout the quarter. Translation gains or losses, net of applicable deferred
taxes, are accumulated as a separate component of stockholders' equity and
included in comprehensive income. During the second quarter of 2000 and 1999,
total comprehensive loss amounted to ($5,762) and ($19,724) respectively. During
the first six months of 2000 and 1999, total comprehensive loss amounted to
($12,278) and ($29,426) respectively.
4. STOCK OPTION EXPENSE
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. As of June 30, 2000, 81,000 options
remain exercisable. For the six months ended June 30, 1999 we recognized $4,740
of compensation expense related to the accelerated vesting of options under this
program.
5. PREFERRED STOCK FINANCING
In January 2000, we entered into a Put and Call Agreement with Westgate
International, L.P. ("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 $1,000 per share. In February 2000 we sold 8,750 shares
of the Series E Stock to Westgate resulting in gross proceeds of $8,750. In June
2000 we sold the remaining 8,750 shares of the Series E Stock to Westgate
resulting in gross proceeds of $8,750.
As of June 30, 2000 8,740 shares of the Series E preferred stock were
converted into 820,258 shares of our common stock at an average price of $10.69
per share, leaving 8,760 outstanding preferred shares.
As of July 6, 2000 an additional 4,857 shares of the Series E preferred
stock were converted into 399,825 shares of our common stock at an average price
of $12.16 per share, leaving 3,903 outstanding preferred shares.
In June 2000, we entered into a Put and Call Agreement with Westgate
which provides for the sale of up to 15,250 shares of Series F 4% cumulative
Convertible Preferred Stock (the "Series F Stock") to Westgate at $1,000 per
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SECURE COMPUTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
share. As of June 30, 2000 15,250 shares remain available. All sales of
securities to Westgate will be pursuant to the exemption provided by Regulation
D under the Securities Act of 1933.
6. PROFESSIONAL SERVICES
In March 2000, we sold our Professional Services group to Guardent,
Inc. We have included the gain on this transaction, which was not material, in
other income.
7. SEGMENT INFORMATION
We have two reportable segments consisting of Products and Services and
Advanced Technology. Our products and services segment markets a range of
interoperable, standards-based network security products and services to the
global marketplace including customers from Fortune 500 companies, small branch
offices, and government agencies. Our Advanced Technology segment engages in
research and development of information security technology by acquiring and
executing contracts with departments and agencies of the United States
government. Cash, investments, deferred tax assets, general and administrative
expenses, and stock option compensation costs cannot be readily identified to
the two business segments, therefore, they are presented separately in a
Corporate segment.
We evaluate segment performance based on gross profit. Resources are
allocated based on contractual requirements as the Advanced Technology segment
is reimbursed on a cost plus basis from the various agencies of the United
States government. The accounting policies of the reportable segments are the
same as those described in Note 3, "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 the Advanced Technology segment,
contract revenue is recognized on the basis of costs incurred for the government
contracts serviced by Advanced Technology and intersegment transfers are
recorded at cost; there are no intercompany profits or losses recorded on
intersegment transfers.
Our reportable segments are business units that offer distinct product
and services to very different customer groups. The reportable segments are each
managed separately because they require different managerial skill sets and are
focused toward different markets.
Significant components of our segments are as follows:
<TABLE>
<CAPTION>
ADVANCED
PRODUCTS AND TECHNOLOGY
SIX MONTHS ENDED JUNE 30, 2000 SERVICES SEGMENT SEGMENT CORPORATE TOTAL
-------------------------------------------- ----------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Revenues from external customers ....... $ 14,083 $ 2,251 $ --- $ 16,334
Depreciation expense ................... 868 41 3 912
Segment gross profit .................. 10,019 788 --- 10,807
Segment operating loss ................. (8,840) (1,262) (2,342) (12,444)
Interest and other income .............. --- --- 216 216
Segment assets ......................... 12,450 1,117 22,792 36,359
Expenditures for long lived assets ..... 2,066 --- 27 2,093
----------------- ------------------ --------------- ----------------
</TABLE>
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SECURE COMPUTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADVANCED
PRODUCTS AND TECHNOLOGY
SIX MONTHS ENDED JUNE 30, 1999 SERVICES SEGMENT SEGMENT CORPORATE TOTAL
-------------------------------------------- ----------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Revenues from external customers ....... $ 11,330 $ 2,410 $ --- $ 13,740
Depreciation expense ................... 680 51 10 741
Segment gross profit .................. 1,958 (53) --- 1,905
Segment operating loss ................. (16,680) (2,908) (9,219) (28,807)
Interest and other income .............. --- --- 301 301
Segment assets ......................... 13,815 4,000 13,981 31,796
Expenditures for long lived assets ..... 773 24 11 808
----------------- ------------------ --------------- ----------------
</TABLE>
International sales accounted for 21% and 15% of total revenue for the
six months ended June 30, 2000 and 1999 respectively. Major foreign markets for
the our products include Europe and the Pacific Rim, with the United Kingdom,
Germany, Scandinavia and Japan being particularly strong. In each country, 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:
SIX MONTHS ENDED
JUNE 30,
2000 1999
-------------- -------------
Revenues:
United States sales .............. $12,980 $11,663
International sales .............. 3,354 2,076
-------------- -------------
$16,334 $13,739
============== =============
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SECURE COMPUTING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding our
expectations, beliefs, intentions or strategies regarding the future.
Forward-looking statements include, without limitation, statements regarding the
extent and timing of future revenues and expenses and customer demand.
We base all forward-looking statements in this document on information
available to us as of the date hereof, and we assume no obligation to update any
such forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
factors, including the risk factors detailed in our Annual Report on Form 10-K
for the year ended December 31, 1999, filed with the Securities and Exchange
Commission, as well as the factors identified in Forward Looking Statements
below.
RESULTS OF OPERATIONS
Significant additional expense charges of $11,700,000 in aggregate are
included in the second quarter 1999 income statement. These expenses relate to
rationalizing our product line, refocusing on e-commerce products and
streamlining our executive management structure.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 AND 1999.
REVENUE. Our revenue increased 60.1 percent to $8,822,000 for the
second quarter of 2000 up from $5,510,000 in the same period of 1999. Products
and services revenue was $7,563,000 for the quarter, an increase of 58.8 percent
over second quarter 1999 which was negatively impacted by purchasing delays
based on "Year 2000" concerns. We expect quarterly revenue from products and
services for the remainder of 2000 to increase from the second quarter of 2000.
Advanced Technology contract revenue was $1,259,000 for the quarter, an increase
of 68.5 percent over the second quarter of 1999 as we continue our focus on
development contracts that add value to our products and services offerings. We
expect quarterly revenue from Advanced Technology contracts for the remainder of
2000 to remain comparable to the second quarter of 2000.
GROSS PROFIT. Gross profit as a percentage of revenue increased from
43.6 percent in the second quarter of 1999 (excluding significant charges
related to discontinued products) to 69.6 percent in 2000. The increase resulted
primarily from increased software license revenues and the disposition of our
lower margin Professional Services consulting group in the first quarter of
2000. We believe that gross profit will trend slightly higher for the remainder
of the year as products and services revenues increase.
SELLING AND MARKETING. Selling and marketing expense decreased 24.9
percent to $7,899,000 in the second quarter of 2000 down from $10,511,000 in the
same period of 1999.
Excluding significant charges in the second quarter of 1999 resulting
from discontinued product activities and severance pay associated with the
streamlining of our management structure, selling and marketing expense
increased 22.2 percent to $7,899,000 in the second quarter of 2000 up from
$6,464,000 in the same period of 1999. The increased spending levels resulted
primarily from investment in a stronger sales and marketing presence. We expect
selling and marketing expense levels to increase slightly from the second
quarter as we strengthen our presence in Europe and the Pacific Rim while
supporting new product launches.
RESEARCH AND DEVELOPMENT. Research and development expense increased
2.7 percent to $3,035,000 in the second quarter of 2000 up from $2,955,000 in
the same period of 1999.
Excluding significant charges in the second quarter of 1999 mainly for
employee relocation expense, research and development expense increased 13.5
percent to $3,035,000 in the second quarter of 2000 up from $2,674,000 in the
same period of 1999. The increased spending levels resulted primarily from our
continued investment in next
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generation product development. We expect that research and development expenses
for the rest of 2000 will increase slightly over the level of spending in the
second quarter of 2000.
GENERAL AND ADMINISTRATIVE. General and Administrative expense
decreased 65.7 percent to $1,139,000 in the second quarter of 2000 down from
$3,317,000 in the same period of 1999.
Excluding significant charges in the second quarter of 1999 mainly for
severance pay associated with the streamlining of our management structure and
litigation settlements, general and administrative expense decreased 24.9
percent to $1,139,000 in the second quarter of 2000 down from $1,516,000 in the
same period of 1999. The decreased spending levels resulted primarily from
duplicative executive compensation during our Chief Executive Officer's
transition period, additional investment in our accounting department and
increased legal fees related to current legal proceedings in the second quarter
of 1999. We expect the quarterly general and administrative expenses for the
rest of 2000 to remain at levels comparable to the second quarter of 2000.
INTEREST AND OTHER INCOME. Net interest and other income was $189,000
in the second quarter of 2000, an increase from $128,000 in the same period of
1999. The increase reflects higher average cash and investment balances in 2000
as compared to 1999.
INCOME TAXES. We recognized no income tax expense in the second quarter
of 2000 as we incurred a net operating loss for the quarter compared to an
income tax expense in the second quarter of 1999 of $900,000 as we anticipated
reduced Advanced Technology contract revenue. We believe it is more likely than
not that deferred tax assets, which total $2,700,000 million at June 30, 2000,
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 are reduced.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999.
REVENUE. Our revenue increased 18.9 percent to $16,334,000 for the
first six months of 2000 up from $13,740,000 in the same period of 1999.
Products and services revenue was $14,083,000 for the six months, an increase of
24.3 percent over the same six months of 1999 which were negatively impacted by
purchasing delays based on "Year 2000" concerns. We expect quarterly revenue
from products and services for the remainder of 2000 to increase from the first
six months of 2000. Advanced Technology contract revenue was $2,251,000 for the
first six months of 2000, a decrease of 6.6 percent from the first six months of
1999 as we continue our focus on development contracts that add value to our
products and services offerings. We expect revenue from Advanced Technology
contracts for the remainder of 2000 to remain comparable to the first six months
of 2000.
GROSS PROFIT. Gross profit as a percentage of revenue increased from
46.7 percent in the first six months of 1999 (excluding significant charges
related to discontinued products) to 66.2 percent in 2000. The increase resulted
primarily from increased software license revenues and the disposition of our
lower margin Professional Services consulting group in first quarter of 2000. We
believe that gross profit will trend slightly higher for the remainder of the
year as products and services revenues increase.
SELLING AND MARKETING. Selling and marketing expense decreased 10.7
percent to $14,567,000 in the first of six months of 2000 down from $16,319,000
in the same period of 1999.
Excluding significant charges in the first six months of 1999 resulting
from discontinued product activities and severance pay associated with the
streamlining of our management structure, selling and marketing expense
increased 18.7 percent to $14,567,000 in the first six months of 2000 up from
$12,272,000 in the same period of 1999. The increased spending levels resulted
primarily from investment in a stronger sales and marketing presence. We expect
selling and marketing expense levels to increase slightly from the second
quarter as we strengthen our presence in Europe and the Pacific Rim while
supporting new product launches.
RESEARCH AND DEVELOPMENT. Research and development expense
increased 22.6 percent to $6,342,000 in the first six months of 2000 up from
$5,174,000 in the same period of 1999.
Excluding significant charges in the first six months of 1999 mainly
for employee relocation expense, research and development expense increased 29.6
percent to $6,342,000 in the first six months of 2000 up from $4,893,000 in the
same period of 1999. The increased spending levels resulted primarily from our
continued investment in next
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generation product development. We expect that research and development expenses
for the rest of 2000 will increase slightly over the level of spending in the
first six months of 2000.
GENERAL AND ADMINISTRATIVE. General and Administrative expense
decreased 47.7 percent to $2,342,000 in the first six months of 2000 down from
$4,479,000 in the same period of 1999.
Excluding significant charges in the first six months of 1999 mainly
for severance pay associated with the streamlining of our management structure
and litigation settlements, general and administrative expense decreased 12.5
percent to $2,342,000 in the first six months of 2000 down from $2,678,000 in
the same period of 1999. The decreased spending levels resulted primarily from
duplicative executive compensation during our Chief Executive Officer's
transition period, additional investment in our accounting department and
increased legal fees related to current legal proceedings in the first six
months of 1999. We expect the quarterly general and administrative expenses for
the rest of 2000 to remain at levels comparable to the second quarter of 2000.
INTEREST AND OTHER INCOME. Net interest and other income was $216,000
in the first six months of 2000, a decrease from $301,000 in the same period of
1999. The decrease reflects interest income on cash and investment balances
comparable between the periods offset by line of credit cancellation fees in the
first six months of 2000.
INCOME TAXES. We recognized no income tax expense in the first six
months of 2000 compared to an income tax expense for the same period in 1999 of
$900,000. We believe it is more likely than not that deferred tax assets, which
total $2,700,000 million at June 30, 2000, 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 are reduced.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short term investments increased by
$11,134,000 from December 31, 1999 to June 30, 2000. The increase resulted
primarily from the gross proceeds of $17,500,000 from two preferred stock sales
and improved linearity in revenue throughout the quarter offset by the use of
cash to fund operations and purchase capital equipment. As of June 30, 2000 we
had working capital of $12,529,000 as well as a June 2000 Series F put/call
agreement which provides for the sale of an additional $15,250,000 in Series F
preferred stock. 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 in the first six months of 2000 were $2,093,000 and
were primarily made up of computer equipment, and technology upgrades. We expect
to invest another $2,000,000 throughout the remainder of 2000 mainly for
computer equipment, and technology upgrades.
We believe that we have sufficient financial resources available to
fund our current working capital and capital expenditure requirements for at
least the next 12 months.
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:
o WE EXPECT QUARTERLY REVENUE FROM PRODUCTS AND SERVICES FOR THE REMAINDER OF
2000 TO INCREASE FROM THE SECOND QUARTER/FIRST SIX MONTHS OF 2000. Meeting
this expectation depends upon our ability to achieve a higher level of
products and services revenue, which may not occur for a variety of
reasons, including general market conditions for our products and services,
delays or difficulties in the development and inability to obtain market
acceptance of our new products, and introduction of products by
competitors.
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o WE EXPECT QUARTERLY REVENUE FROM ADVANCED TECHNOLOGY CONTRACTS FOR THE
REMAINDER OF 2000 TO REMAIN COMPARABLE TO THE SECOND QUARTER/FIRST SIX
MONTHS OF 2000. We may be unable to meet this expectation for a variety of
reasons, including an inability to staff engineers to our current contract
requirements or customer delays or cancellations of contract awards.
o WE BELIEVE THAT GROSS PROFIT WILL TREND SLIGHTLY HIGHER FOR THE REMAINDER
OF THE YEAR AS PRODUCTS AND SERVICES REVENUES INCREASE. Meeting this
expectation depends upon our ability to achieve a higher level of products
and services revenue, which may not occur for a variety of reasons,
including general market conditions for our products and services, delays
or difficulties in the development and inability to obtain market
acceptance of our new products, and introduction of products by
competitors.
o WE EXPECT SELLING AND MARKETING EXPENSE TO INCREASE SLIGHTLY FROM THE
SECOND QUARTER AS WE STRENGTHEN OUR PRESENCE IN EUROPE AND THE PACIFIC RIM
WHILE SUPPORTING NEW PRODUCT LAUNCHES. 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. We may be unable to
meet this expectation 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.
o WE EXPECT THAT RESEARCH AND DEVELOPMENT EXPENSES FOR THE REST OF 2000 WILL
INCREASE SLIGHLTY OVER THE LEVEL OF SPENDING IN THE SECOND QUARTER/FIRST
SIX MONTHS OF 2000. 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 the
Company's results of operations. Additionally, meeting this expectation
depends upon our ability to control costs and achieve a higher level of
revenue. We may be unable to meet this expectation 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.
o WE EXPECT THE QUARTERLY GENERAL AND ADMINISTRATIVE EXPENSES FOR THE REST OF
2000 TO REMAIN AT LEVELS COMPARABLE TO THE SECOND QUARTER OF 2000. This
expectation depends on us maintaining the current anticipated level of
spending which may not occur due to unexpected increases in such costs.
o WE BELIEVE IT IS MORE LIKELY THAN NOT THAT DEFERRED TAX ASSETS, WHICH TOTAL
$2,700,000 AT JUNE 30, 2000, WILL BE REALIZED. This expectation depends
primarily on us maintaining, at current levels, our existing Advanced
Technology 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.
o WE EXPECT TO INVEST ANOTHER $2,000,000 THROUGHOUT THE REMAINDER OF 2000
MAINLY FOR COMPUTER EQUIPMENT AND TECHNOLOGY UPGRADES. This expectation
depends primarily on us maintaining our current level of investment in
property and equipment. Unexpected changes in our structure could change
the level of expenditures.
o WE BELIEVE THAT WE HAVE SUFFICIENT FINANCIAL RESOURCES AVAILABLE TO FUND
OUR CURRENT WORKING CAPITAL AND CAPITAL EXPENDITURE REQUIREMENTS FOR AT
LEAST THE NEXT 12 MONTHS. Several factors may affect the availability of
sufficient cash resources to fund our product development and marketing and
sales plans for the next twelve months, including:
o our ability to generate revenue as currently expected;
o unexpected expenses;
o the need for additional funds to react to changes in the marketplace;
o unexpected increases in personnel costs;
o unexpected increases in selling and marketing expenses;
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o currently unplanned acquisitions; or
o our ability to satisfy the conditions and obligations in our
agreement with Westgate.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have material exposure to quantitative and qualitative market
risks because we do not own any risk sensitive financial instruments.
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SECURE COMPUTING CORPORATION
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 2, 9, 12, 14 and 20, 1999, purported class action complaints
were filed in the United States District Court for the Northern District of
California by Myron Goldstein, Herbert Silverberg, William Preiner, Charles
McInnis, and George H. Rosenquist and Melvin Freedenberg, respectively, against
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 compliant. On February 14, 2000,
defendants filed a motion to dismiss the complaint. On June 14, 2000,
plaintiffs' complaint was dismissed with leave to amend. Plaintiffs are expected
to amend the complaint in August 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 2. CHANGES IN SECURITIES
In February 2000, we sold 8,750 shares of Series E 4% cumulative
Convertible Preferred Stock (the "Series E Stock") to Westgate International,
L.P. ("Westgate"). In June 2000, we sold an additional 8,750 shares of the
Series E preferred stock to Westgate. The offer and sale of these securities
were completed pursuant to the exemption provided by Regulation D under the
Securities Act of 1933.
The Series E Stock is convertible at the election of the holder into
shares of Common Stock. Each share of Series E Stock has a face value of $1,000
and is convertible, at the election of the holder, into that number of shares of
our Common Stock equal to $1,000 divided by the conversion price. The conversion
price is equal to the lower of (i) an amount equal to 20% above the average
closing price of our Common Stock for a five day trading period before the date
that notice was given to sell the Series E preferred stock (or, if lower in the
event of a put by us, 20% above the average closing price of our Common Stock
for a five day trading period after the date that notice is given to sell the
preferred stock); and (ii) an amount equal to the average of the two lowest
daily trading prices for the 12 trading days before the day of conversion.
The conversion price of the Series E Stock is subject to modification
and adjustment, for example, in connection with the stock splits, distributions
and certain issuances of securities below the then existing conversion price.
The Series E Stock is also subject to mandatory conversion into Common
Stock four months after the registration statement covering the resale of the
Common Stock issuable upon conversion of the Series E Stock becomes effective.
Mandatory conversion will be deferred, however, under certain circumstances.
Additionally, the holders of Series E Stock are not obligated to
convert the Series E Stock into Common Stock unless all conditions are
satisfied.
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As of June 30, 2000 8,740 shares of the Series E Stock had been
converted into 820,258 shares of Common Stock leaving 8,760 outstanding
preferred shares. The average conversion price for shares of Series E Stock was
$10.69 per share of Common Stock.
As of July 6, 2000 an additional 4,857 shares of the Series E Preferred
Stock had been converted into 399,825 shares of Common Stock at a conversion
price of $12.16, leaving 3,903 outstanding preferred shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were approved at the Company's Annual
Meeting of Stockholders held on May 11, 2000:
a) The following directors were elected:
Common Shares Voted
Directors For Against
--------------------------------------------------------------
Robert J. Frankenberg 21,664,848 332,968
John McNulty 21,671,862 325,954
Such directors were elected to three year terms commencing
upon their election. Directors, Eric Rundquist, Stephen M.
Puricelli, and Alexander Zakupowsky, Jr. continued in office
until expiration of their respective roles.
b) Amendment of the Employee Stock Purchase Plan
Number of Common Shares Voted
Employee Stock Purchase Plan For Against Abstain
--------------------------------------------------------------
Amendment of the Employee 10,101,165 296,470 1,173,096
Stock Purchase Plan
c) Amendment of the Amended and Restated 1995 Omnibus Stock
Plan
Number of Common Shares Voted
1995 Omnibus Stock Plan For Against Abstain
--------------------------------------------------------------
Amendment of the Amended and 7,227,964 3,185,021 1,157,747
Restated Omnibus Stock Plan
d) The stockholders also approved the following proposal:
Number of Common Shares Voted
Independent Accountants For Against Abstain
--------------------------------------------------------------
Ratification of Ernst & Young 21,907,648 33,003 57,165
LLP As independent accountants
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2000:
3.1 Restated Certificate of Incorporation, effective March 6,
1996, as amended by the Certificate of Amendment of
Certificate of Incorporation effective December 11, 1998, the
Certification of Designations of Series E 4% Cumulative
Convertible Preferred Stock effective January 26, 2000, and
the Certificate of Designations of Series F 4% Cumulative
Convertible Preferred Stock effective June 30, 2000.
4.1 Put/Call Agreement between Westgate International, L.P. and
Secure Computing Corporation dated as of June 30, 2000.*
10.1 Registration Rights Agreement between Westgate International,
L.P. and Secure Computing Corporation dated as of June 30,
2000.*
27.1 Financial Data Schedule.
Copies of Exhibits will be furnished upon request and payment of our
reasonable expenses in furnishing the Exhibits.
* Incorporated by reference on the Form S-3 filed by Secure Computing
on August 4, 2000.
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SECURE COMPUTING CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SECURE COMPUTING CORPORATION
DATE: August 11, 2000 By: /s/ Timothy P. McGurran
--------------------------------------
Timothy P. McGurran,
Senior Vice President of Operations
and Chief Financial Officer
(Duly authorized officer and
Principal Financial Officer)
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INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
3.1 Restated Certification of Incorporation FILED ELECTRONICALLY
4.1 Put/Call Agreement between Westgate INCORPORATED BY REFERENCE
International, L.P. and Secure Computing
Corporation dated as of June 30, 2000.
10.1 Registration Rights Agreement between INCORPORATED BY REFERENCE
Westgate Internation, L.P. and Secure
Computing Corporation dated as of June 30,
2000.
27.1 Financial Data Schedule FILED ELECTRONICALLY
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