UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 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
SECURE COMPUTING CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1637226
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
One Almaden Blvd., Suite 400
San Jose, CA 95113
----------------------------- ----------
(Address of principal executive offices) (Zip code)
(408) 918-6100
--------------------------------------------------
Registrant's telephone number, including area code
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date: Common Stock, $.01 par
value - 24,701,731 issued and outstanding as of May 5, 2000, which number
includes 743,636 Exchangeable Shares that have the same voting and other rights
as Common Stock and are immediately exercisable for shares of Common Stock.
1
<PAGE>
SECURE COMPUTING CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2000
(Unaudited) and December 31, 1999........................... 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended March 31, 2000 and 1999.......... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 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 - 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 12
Item 2. Changes in Securities.......................................... 12
Item 3. Defaults upon Senior Securities................................ 12
Item 4. Submission of Matters to a Vote of Security Holders............ 12
Item 5. Other Information.............................................. 12
Item 6. Exhibits and Reports on Form 8-K............................... 13
Signatures .................................................... 14
2
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PART 1. FINANCIAL INFORMATION
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,824 $ 3,678
Investments 12,881 5,212
Accounts receivable, net 3,670 5,417
Inventories 314 828
Other current assets 1,639 2,714
------------ ------------
Total current assets 23,328 17,849
PROPERTY AND EQUIPMENT, NET 4,192 4,215
OTHER ASSETS 3,611 3,765
------------ ------------
$ 31,131 $ 25,829
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,017 $ 3,198
Accrued payroll 3,842 2,208
Other accrued expenses 2,294 1,364
Deferred revenue 4,712 3,782
------------ ------------
Total current liabilities 12,865 10,552
STOCKHOLDERS' EQUITY
Convertible preferred stock, par value $.01 per share:
Authorized -2,000,000 shares; issued and outstanding shares -
March 31, 2000 - 1,427 and December 31, 1999 - 5,706 -- --
Common Stock, par value $.01; 50,000,000 shares authorized;
issued and outstanding - March 31, 2000- 24,458,465 and
December 31, 1999 - 23,022,884 245 230
Additional paid-in capital 116,322 106,832
Accumulated deficit (98,030) (91,547)
Foreign currency translation (271) (238)
------------ ------------
Total stockholders' equity 18,266 15,277
------------ ------------
$ 31,131 $ 25,829
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
-------------------------------
<S> <C> <C>
Products and services revenue $ 6,520 $ 6,567
Advanced Technology contracts revenue 992 1,663
------------ ------------
7,512 8,230
Cost of revenue 2,844 4,208
------------ ------------
Gross profit 4,668 4,022
Operating expenses:
Selling and marketing 6,668 5,808
Research and development 3,307 2,219
General and administrative 1,203 1,162
Stock option expense -- 4,740
------------ ------------
11,178 13,929
------------ ------------
Operating loss (6,510) (9,907)
Interest and other income 27 173
------------ ------------
Net loss $ (6,483) $ (9,734)
============ ============
Net loss per share - basic and diluted $ (.27) $ (.58)
============ ============
Weighted average shares outstanding 23,654 16,680
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
----------- -----------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 445 $ (5,572)
INVESTING ACTIVITIES
Proceeds from sales of investments -- 1,992
Purchase of investments (7,669) --
Purchase of property and equipment (578) (365)
Increase in intangibles and other assets 24 (380)
----------- -----------
Net cash provided by (used in) investing activities (8,223) 1,247
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 7,931 --
Proceeds from issuance of common stock 1,026 2,897
----------- -----------
Net cash provided by financing activities 8,957 2,897
EFFECT OF EXCHANGE RATE CHANGES (34) 32
----------- -----------
Increase (decrease) in cash and cash equivalents 1,145 (1,396)
Cash and cash equivalents beginning of period 3,678 9,992
----------- -----------
Cash and cash equivalents at end of period $ 4,824 $ 8,596
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1. ORGANIZATION
We develop and sell computer 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 first quarter of 2000 and 1999,
total comprehensive income amounted to ($6,516) and ($9,702) 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 March 31, 2000 81,000 options
remain exercisable. For the quarter ended March 31, 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 per share. In January 2000 we sold 8,750 shares of the
Series E Stock to Westgate resulting in gross proceeds of $8,750. As of March
31, 2000 8,750 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.
As of March 31, 2000 7,323 shares of the Series E preferred stock were
converted into 606,416 shares of our common stock at an average price of $12.10
per share, leaving 1,427 outstanding preferred shares.
As of May 5, 2000 an additional 1,417 shares of the Series E preferred
stock were converted into 213,842 shares of our common stock at a conversion
price of $6.69 per share, leaving 10 outstanding preferred shares.
6
<PAGE>
SECURE COMPUTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
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. Revenue is recognized at time of shipment and/or when
performance of services are complete for the Products and Services segment. For
Advanced Technology, contract revenue is recognized on the basis of costs
incurred for the government contracts serviced by Advanced Technology and
intersegment transfers are recorded at cost; there are no intercompany profits
or losses recorded on intersegment transfers.
Our reportable segments are business units that offer distinct product
and services to very different customer groups. The reportable segments are each
managed separately because they require different managerial skill sets and are
focused toward different markets.
Significant components of our segments are as follows:
<TABLE>
<CAPTION>
PRODUCTS AND ADVANCED
SERVICES TECHNOLOGY
THREE MONTHS ENDED MARCH 31, 2000 SEGMENT SEGMENT CORPORATE TOTAL
- ------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from external customers ...... $ 6,520 $ 992 $ -- $ 7,512
Depreciation expense .................. 397 41 5 443
Segment gross profit .................. 4,344 324 -- 4,668
Segment operating income/(loss) ....... (4,717) (590) (1,203) (6,510)
Other income .......................... -- -- 27 27
Segment assets ........................ 9,778 895 20,458 31,131
Expenditures for long lived assets .... 558 12 8 578
----------- ----------- ----------- -----------
</TABLE>
7
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SECURE COMPUTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRODUCTS AND ADVANCED
SERVICES TECHNOLOGY
THREE MONTHS ENDED MARCH 31, 1999 SEGMENT SEGMENT CORPORATE TOTAL
- ---------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers .... $ 6,567 $ 1,663 $ -- $ 8,230
Depreciation expense ................ 305 55 5 365
Segment gross profit ................ 3,568 454 -- 4,022
Segment operating income/(loss) ..... (3,139) (867) (5,901) (9,907)
Other income ........................ -- -- 173 173
Segment assets ...................... 26,143 2,249 21,139 49,531
Expenditures for long lived assets .. 349 11 5 365
------------ ------------ ------------ ------------
</TABLE>
International sales accounted for 15% of total revenue for the three
months ended March 31, 2000 and 1999. 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------------ -----------
<S> <C> <C>
Revenues:
United States sales ..................... $ 6,385 $ 6,989
International sales ..................... 1,127 1,241
----------- ----------
$ 7,512 $ 8,230
=========== ==========
</TABLE>
8
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SECURE COMPUTING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding our
expectations, beliefs, intentions or strategies regarding the future.
Forward-looking statements include, without limitation, statements regarding the
extent and timing of future revenues and expenses and customer demand.
We base all forward-looking statements in this document on information
available to us as of the date hereof, and we assume no obligation to update any
such forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
factors, including the risk factors detailed in our Annual Report on Form 10-K
for the year ended December 31, 1999 filed with the Securities and Exchange
Commission, as well as the factors identified in Forward Looking Statements
below.
RESULTS OF OPERATIONS
REVENUE. The Company's revenue decreased 8.7 percent to $7,512,000 for
the first quarter of 2000 down from $8,230,000 in the same period of 1999.
Products and services revenue was $6,520,000 for the quarter, a decrease of 0.7
percent over 1999 and an increase of 10.5 percent over fourth quarter 1999. We
expect quarterly revenue from products and services for the remainder of 2000 to
increase from the first quarter of 2000. Advanced Technology contract revenue
was $992,000 for the quarter, a decrease of 40.4 percent from 1999, which
reflects a reduced focus on government contract business that does not
complement our products and services offerings. We expect quarterly revenue from
government contracts for the remainder of 2000 to increase slightly from the
first quarter of 2000. This increase is primarily the result of expected
contract awards.
GROSS PROFIT. Gross profit as a percentage of revenue increased from
48.9 percent in the first quarter of 1999 to 62.1 percent in 2000. The increase
resulted mainly from a decrease in lower margin government contract revenue and
the disposition of our Professional Services consulting group. We believe that
gross profit will trend higher for the remainder of the year as products and
services revenues increase.
SELLING AND MARKETING. Selling and marketing expense increased 14.8
percent to $6,668,000 in the first quarter of 2000, an increase from $5,808,000
in the same period of 1999. As a percentage of revenue, selling and marketing
expense was 88.8 percent for the quarter compared to 70.6 percent 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 in proportion to the increase in revenues for the
rest of 2000 in support of new product launches.
RESEARCH AND DEVELOPMENT. Research and development expense increased by
49.0 percent to $3,307,000 in the first quarter of 2000 from $2,219,000 in the
same period of 1999. As a percentage of revenue, research and development
expense was 44.0 percent for the quarter compared to 27.0 percent in 1999. The
increase resulted primarily from our continued investment in next generation
product development, in particular the releases of Sidewinder 5.0 and SafeWord
Plus 2.0. We expect that research and development expenses for the rest of 2000
will increase slightly over the level of spending in the first quarter of 2000.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased 3.5 percent to $1,203,000 in the first quarter of 2000, from
$1,162,000 in the same period of 1999. As a percentage of revenue, general and
administrative expenses were 16.0 percent for the first quarter of 2000 compared
to 14.1 percent for the first quarter of 1999. We expect the quarterly general
and administrative expenses for the rest of 2000 to remain at levels comparable
to the first quarter of 2000.
INTEREST AND OTHER INCOME. The difference in interest and other income
between the periods reflects interest income on cash and investment balances
comparable between the periods offset by line of credit cancellation fees in the
first quarter of 2000.
9
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INCOME TAXES. We recognized no income tax expense for either of the
periods in 2000 or 1999. We believe it is more likely than not that deferred tax
assets, which total $2,700,000 at March 31, 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
The Company's cash, cash equivalents and short term investments
increased by $8,815,000 from December 31, 1999 to March 31, 2000. The increase
resulted primarily from the gross proceeds of a $8,750,000 Preferred Stock sale
and improved linearity in revenue throughout the quarter offset by the use of
cash to fund operations and purchase capital equipment. As of March 31, 2000, we
had working capital of $10,463,000 as well as the remainder of a January 2000
Series E put/call agreement which provides for the sale of an additional
$8,750,000 in Series E 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 three months of 2000 were $578,000 and
were primarily made up of computer equipment, office furniture and leasehold
improvements. The Company expects to invest another $2,600,000 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 twelve 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:
* WE EXPECT QUARTERLY REVENUE FROM PRODUCTS AND SERVICES FOR THE REMAINDER OF
2000 TO INCREASE FROM THE FIRST QUARTER OF 2000. 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 and inability to obtain market acceptance of
our new products, and introduction of products by competitors.
* WE EXPECT QUARTERLY REVENUE FROM GOVERNMENT CONTRACTS FOR THE REMAINDER OF
2000 TO INCREASE SLIGHTLY FROM THE FIRST QUARTER OF 2000. THIS INCREASE IS
PRIMARILY THE RESULT OF EXPECTED CONTRACT AWARDS. Meeting this expectation
depends upon our ability to achieve a higher level of government contract
revenue. We may be unable to meet this expectation 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 FOR THE REMAINDER OF THE YEAR
AS PRODUCTS AND SERVICES REVENUES INCREASE. Meeting this expectation depends
upon our ability to achieve a higher level of products and services revenue.
We may be unable to meet this expectation for a variety of reasons,
including general market conditions for the Company's 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.
* WE EXPECT SELLING AND MARKETING EXPENSE LEVELS TO INCREASE IN PROPORTION TO
THE INCREASE IN REVENUES FOR THE REST OF 2000 IN SUPPORT OF 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
10
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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.
* WE EXPECT THAT RESEARCH AND DEVELOPMENT EXPENSES FOR THE REST OF 2000 WILL
INCREASE SLIGHTLY OVER THE LEVEL OF SPENDING IN THE FIRST QUARTER 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 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.
* WE EXPECT THE QUARTERLY GENERAL AND ADMINISTRATIVE EXPENSES FOR THE REST OF
2000 TO REMAIN AT LEVELS COMPARABLE TO THOSE OF THE FIRST 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.
* WE BELIEVE IT IS MORE LIKELY THAN NOT THAT DEFERRED TAX ASSETS, WHICH TOTAL
$2,700,000 AT MARCH 31, 2000, 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 month, 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.
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.
11
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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. 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 2. CHANGES IN SECURITIES
In January 2000, we sold 8,750 shares of Series E 4% cumulative
Convertible Preferred Stock ("the Series E Stock") to Westgate International,
L.P. ("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. As of March 31, 2000 7,323 shares of the Series E Stock
had been converted into 606,416 shares of Common Stock leaving 1,427 outstanding
preferred shares. The average conversion price for shares of Series E Stock was
$12.10 per share of Common Stock.
As of May 5, 2000 an additional 1,417 shares of the Series E Preferred
Stock had been converted into 231,842 shares of Common Stock at a conversion
price of $6.69, leaving 10 outstanding preferred shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
See proxy statement of the Company dated April 12, 2000, as filed with
the Commission on April 3, 2000.
ITEM 5. OTHER INFORMATION
None
12
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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 March 31, 2000:
27 Financial Data Schedule
Copies of Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Exhibits.
(b) REPORTS ON FORM 8-K
A Form 8-K was filed on February 9, 2000. Pursuant to Item 5 of Form
8-K, the report contains information about the sale of 7,500 shares of Series D
Preferred Stock to Westgate International, L.P. ("Westgate") in December 1999
and a Put and Call Agreement with Westgate in January 2000 providing for the
sale of up to 17,500 shares of Series E Preferred Stock.
13
<PAGE>
SECURE COMPUTING CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SECURE COMPUTING CORPORATION
DATE: May 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)
14
<PAGE>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
27 Financial Data Schedule Filed Electronically
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 17,705,000
<SECURITIES> 0
<RECEIVABLES> 3,670,000
<ALLOWANCES> 845,000
<INVENTORY> 314,000
<CURRENT-ASSETS> 23,328,000
<PP&E> 12,101,000
<DEPRECIATION> 7,910,000
<TOTAL-ASSETS> 31,131,000
<CURRENT-LIABILITIES> 12,865,000
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0
0
<COMMON> 245,000
<OTHER-SE> 116,322,000
<TOTAL-LIABILITY-AND-EQUITY> 31,131,000
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<TOTAL-REVENUES> 7,512,000
<CGS> 2,844,000
<TOTAL-COSTS> 2,844,000
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<INCOME-PRETAX> (6,483,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,483,000)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,483,000)
<EPS-BASIC> (.27)
<EPS-DILUTED> (.27)
</TABLE>
