UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 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 - 25,504,988 issued and outstanding as of November 6, 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
September 30, 2000 (Unaudited) and December
31, 1999.................................................. 3
Condensed Consolidated Statements of Operations
(Unaudited) for the three and nine months ended
September 30, 2000 and 1999............................... 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the nine months ended September
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 - 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 13
Item 2. Changes in Securities....................................... 13 - 14
Item 3. Defaults upon Senior Securities............................. 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 5. Other Information........................................... 14
Item 6. Exhibits and Reports on Form 8-K............................ 14
Signatures ................................................. 15
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PART 1. FINANCIAL INFORMATION
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,971 $ 3,678
Investments 13,805 5,212
Accounts receivable, net 4,719 5,417
Inventories 643 828
Other current assets 3,111 2,714
------------ ------------
Total current assets 28,249 17,849
PROPERTY AND EQUIPMENT, NET 5,709 4,215
OTHER ASSETS 3,587 3,765
------------ ------------
$ 37,545 $ 25,829
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,128 $ 3,198
Accrued payroll 3,587 2,208
Other accrued expenses 2,479 1,364
Deferred revenue 5,371 3,782
------------ ------------
Total current liabilities 15,565 10,552
STOCKHOLDERS' EQUITY
Convertible preferred stock, par value $.01 per share:
Authorized -2,000,000 shares; issued and outstanding shares-
September 30, 2000 - 4,727 and December 31, 1999 - 5,706 -- --
Common stock, par value $.01; 50,000,000 shares authorized;
issued and outstanding - September 30, 2000- 25,459,437 and
December 31, 1999 - 23,022,884 255 230
Additional paid-in capital 130,729 106,832
Accumulated deficit (108,650) (91,547)
Foreign currency translation (354) (238)
------------ ------------
Total stockholders' equity 21,980 15,277
------------ ------------
$ 37,545 $ 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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------------- -------------------------
<S> <C> <C> <C> <C>
Products and services revenue $ 9,515 $ 5,318 $ 23,598 $ 16,647
Advanced Technology contracts revenue 1,100 1,157 3,351 3,567
---------- ---------- ---------- ----------
10,615 6,475 26,949 20,214
Cost of revenue 3,039 3,881 8,566 15,716
---------- ---------- ---------- ----------
Gross profit 7,576 2,594 18,383 4,498
Operating expenses:
Selling and marketing 8,270 6,209 22,837 22,528
Research and development 3,243 2,842 9,585 8,015
General and administrative 1,167 1,510 3,509 5,989
Stock option expense -- -- -- 4,740
---------- ---------- ---------- ----------
12,680 10,561 35,931 41,272
---------- ---------- ---------- ----------
Operating loss (5,104) (7,967) (17,548) (36,774)
Interest and other income 229 61 445 362
---------- ---------- ---------- ----------
Loss before income taxes (4,875) (7,906) (17,103) (37,312)
Income tax expense -- -- -- (900)
---------- ---------- ---------- ----------
Net loss $ (4,875) $ (7,906) $ (17,103) $ (36,412)
========== ========== ========== ==========
Net loss per share - basic and diluted $ (0.19) $ (0.38) $ (0.69) $ (2.03)
========== ========== ========== ==========
Weighted average shares outstanding 25,264 20,628 24,619 18,359
========== ========== ========== ==========
</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>
Nine months ended
September 30,
2000 1999
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<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (9,083) $ (17,312)
INVESTING ACTIVITIES
Proceeds from sales of investments 7,925 5,462
Purchase of investments (16,519) --
Purchase of property and equipment (3,080) (1,502)
Increase (decrease) in intangibles and other assets (209) 100
---------- ----------
Net cash provided by (used in) investing activities (11,883) 4,060
FINANCING ACTIVITIES
Proceeds from issuance of Preferred Stock 21,346 (125)
Proceeds from issuance of Common Stock 2,028 3,624
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Net cash provided by financing activities 23,374 3,499
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EFFECT OF EXCHANGE RATE CHANGES (116) (18)
---------- ----------
Increase (decrease) in cash and cash equivalents 2,292 (9,771)
Cash and cash equivalents beginning of period 3,678 9,992
---------- ----------
Cash and cash equivalents ending of period $ 5,970 $ 221
========== ==========
</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 safe, secure extranets for electronic business ("e-business"). Our
secure extranet solutions provide authentication, authorization, and secure
network access 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 third quarter of 2000 and 1999,
total comprehensive loss amounted to ($4,941) and ($7,904) respectively. During
the first nine months of 2000 and 1999, total comprehensive loss amounted to
($17,219) and ($37,330) respectively.
4. STOCK OPTION EXPENSE
We have 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 September 30, 2000,
81,000 options remain exercisable. For the nine months ended September 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 September 30, 2000 13,597 shares of the Series E Stock were
converted into 1,220,083 shares of our common stock at an average price of
$11.14 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
share. In August 2000, Westgate assigned, and Elliott Associates, L.P.
("Elliott") assumed, 50% of Westgate's
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SECURE COMPUTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
rights and obligations under the put/call agreement. Later in August 2000, we
sold to each of Westgate and Elliott 2,625 shares of the Series F Stock
resulting in total gross proceeds of $5,250. As of September 30, 2000, 10,000
shares remain available. All sales of securities to Westgate and Elliott were
completed pursuant to the exemption provided by Regulation D under the
Securities Act of 1933.
As of September 30, 2000 4,426 shares of the Series F Stock were
converted to 256,073 shares of our common stock at an average price of $17.28
per share, leaving 824 outstanding preferred shares.
As of November 3, 2000 the remaining 824 shares of the Series F Stock
were converted to 42,762 shares of our common stock at an average price of
$19.44 per share.
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>
PRODUCTS AND ADVANCED
SERVICES TECHNOLOGY
NINE MONTHS ENDED SEPTEMBER 30, 2000 SEGMENT SEGMENT CORPORATE TOTAL
------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers ..... $ 23,598 $ 3,351 $ -- $ 26,949
Depreciation expense ................. 1,351 42 19 1,412
Segment gross profit ................. 17,258 1,125 -- 18,383
Segment operating loss ............... (12,272) (1,767) (3,509) (17,548)
Interest and other income ............ -- -- 445 445
Segment assets ....................... 14,045 950 22,550 37,545
Expenditures for long lived assets ... 3,040 -- 40 3,080
------------ ------------ ------------ ------------
</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>
PRODUCTS AND ADVANCED
SERVICES TECHNOLOGY
NINE MONTHS ENDED SEPTEMBER 30, 1999 SEGMENT SEGMENT CORPORATE TOTAL
------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers ..... $ 16,647 $ 3,567 $ -- $ 20,214
Depreciation expense ................. 997 101 15 1,113
Segment gross profit ................. 4,201 297 -- 4,498
Segment operating loss ............... (22,175) (3,870) (10,729) (36,774)
Interest and other income ............ -- -- 362 362
Segment assets ....................... 14,620 1,445 8,396 24,461
Expenditures for long lived assets ... 1,440 42 20 1,502
------------ ------------ ------------ ------------
</TABLE>
International sales accounted for 18% and 12% of total revenue for the
nine months ended September 30, 2000 and 1999 respectively. Major foreign
markets for our products include Europe and the Pacific Rim. The majority of our
revenue in these markets is generated by independent channel partners who are
responsible for marketing, selling and supporting our products to resellers and
end-users within their defined territories.
The following table summarizes information about our international and
domestic sales and operations:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
--------- ---------
<S> <C> <C>
Revenues:
United States sales .................... $ 22,073 $ 17,713
International sales .................... 4,876 2,501
--------- ---------
$ 26,949 $ 20,214
========= =========
</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 discussion 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. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control and
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements. These
forward-looking statements reflect our view only as of the date of this report.
We cannot guarantee future results, levels of activity, performance or
achievements.
In addition, the following information should be read in conjunction
with the financial statements and notes thereto included in Item 1 of this
Quarterly Report, the risk factors detailed in our Annual Report of Form 10-K
for the year ended December 31, 1999 and our Registration Statement on Form S-3
filed with the Securities and Exchange Commission on September 15, 2000, as well
as the factors identified in Forward Looking Statements below.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.
REVENUE. Our revenue increased 63.9 percent to $10,615,000 for the
third quarter of 2000 up from $6,475,000 in the same period of 1999. Products
and services revenue was $9,515,000 for the quarter, an increase of 78.9 percent
over third quarter 1999 which was negatively impacted by purchasing delays based
on "Year 2000" concerns. We expect fourth quarter revenue from products and
services to grow 80% to 85% over the fourth quarter of 1999. Advanced Technology
contract revenue was $1,100,000 for the quarter, a decrease of 4.9 percent over
the third 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 fairly
constant when compared to the third quarter of 2000.
GROSS PROFIT. Gross profit as a percentage of revenue increased from
40.1 percent in the third quarter of 1999 to 71.4 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 expect gross profit to ramp between 1 and 2 percentage points in the
fourth quarter of 2000 as products and services revenues increase.
SELLING AND MARKETING. Selling and marketing expense increased 33.2
percent to $8,270,000 in the third quarter of 2000 up from $6,209,000 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 on an actual dollar basis, but continue to
decline as a percent of revenue as we strengthen our presence in Europe and the
Pacific Rim while supporting new product launches.
RESEARCH AND DEVELOPMENT. Research and development expense increased
14.1 percent to $3,243,000 in the third quarter of 2000 up from $2,842,000 in
the same period of 1999. The increased spending levels resulted primarily from
our continued investment in next generation product development, including our
Distributed Secure Architecture product line. We expect research and development
expenses to increase on an actual dollar basis but continue to decline as a
percent of revenue when compared to the third quarter of 2000.
GENERAL AND ADMINISTRATIVE. General and Administrative expense
decreased 22.7 percent to $1,167,000 in the third quarter of 2000 down from
$1,510,000 in the same period of 1999 reflecting a streamlined executive
management team. We expect the quarterly general and administrative expenses to
increase on an actual dollar basis but continue to decline as a percent of
revenue for the fourth quarter of 2000.
INTEREST AND OTHER INCOME. Net interest and other income was $229,000
in the third quarter of 2000, an increase from $61,000 in the same period of
1999. The increase reflects higher average cash and investment balances in 2000
as compared to 1999.
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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 September 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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.
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.
REVENUE. Our revenue increased 33.3 percent to $26,949,000 for the
first nine months of 2000 up from $20,214,000 in the same period of 1999.
Products and services revenue was $23,598,000 for the nine months, an increase
of 41.8 percent over the same nine months of 1999 which were negatively impacted
by purchasing delays based on "Year 2000" concerns. We expect fourth quarter
revenue from products and services to grow 80% to 85% over the fourth quarter of
1999 resulting in full year 2000 products and services growth in excess of 50%
over 1999. Advanced Technology contract revenue was $3,351,000 for the first
nine months of 2000, a decrease of 6.1 percent from the first nine 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 fairly constant when compared to
the first nine months of 2000.
GROSS PROFIT. Gross profit as a percentage of revenue increased from
44.6 percent in the first nine months of 1999 (excluding significant charges
related to discontinued products) to 68.2 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
expect gross profit to ramp between 1 and 2 percentage points in the fourth
quarter of 2000 as products and services revenues increase.
SELLING AND MARKETING. Selling and marketing expense increased 1.4
percent to $22,837,000 in the first of nine months of 2000 up from $22,528,000
in the same period of 1999.
Excluding significant charges in the first nine months of 1999
resulting from discontinued product activities and severance pay associated with
the streamlining of our management structure, selling and marketing expense
increased 23.6 percent to $22,837,000 in the first nine months of 2000 up from
$18,481,000 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 on an actual dollar basis but
continue to decline as a percent of revenue from the third 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
19.6 percent to $9,585,000 in the first nine months of 2000 up from $8,015,000
in the same period of 1999.
Excluding significant charges in the first nine months of 1999 mainly
for employee relocation expense, research and development expense increased 23.9
percent to $9,585,000 in the first nine months of 2000 up from $7,735,000 in the
same period of 1999. The increased spending levels resulted primarily from our
continued investment in next generation product development, including our
Distributed Secure Architecture product line. We expect that research and
development expenses for the rest of 2000 will increase on an actual dollar
basis but continue to decline as a percent of revenue.
GENERAL AND ADMINISTRATIVE. General and Administrative expense
decreased 41.4 percent to $3,509,000 in the first nine months of 2000 down from
$5,989,000 in the same period of 1999.
Excluding significant charges in the first nine months of 1999 mainly
for severance pay associated with the streamlining of our management structure
and litigation settlements, general and administrative expense decreased 16.2
percent to $3,509,000 in the first nine months of 2000 down from $4,188,000 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 nine
months of 1999. We expect the quarterly general and administrative
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expenses to increase on an actual dollar basis but continue to decline as a
percent of revenue for the fourth quarter of 2000.
INTEREST AND OTHER INCOME. Net interest and other income was $445,000
in the first nine months of 2000, an increase from $362,000 in the same period
of 1999. The increase reflects higher average cash and investment balances in
the first nine months of 2000 as compared to 1999.
INCOME TAXES. We recognized no income tax expense in the first nine
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 at September 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
$10,886,000 from December 31, 1999 to September 30, 2000. The increase resulted
primarily from the gross proceeds of $22,750,000 from three 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 September 30,
2000 we had working capital of $12,684,000 as well as the remainder of a June
2000 Series F put/call agreement which provides for the sale of an additional
$10,000,000 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 nine months of 2000 were $3,080,000 and
were primarily made up of computer equipment and technology upgrades. We expect
to invest another $1,000,000 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:
* WE EXPECT FOURTH QUARTER REVENUE FROM PRODUCTS AND SERVICES TO GROW 80% TO
85% OVER THE FOURTH QUARTER OF 1999 RESULTING IN FULL YEAR 2000 PRODUCTS
AND SERVICES GROWTH IN EXCESS OF 50% OVER 1999. 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.
* WE EXPECT QUARTERLY REVENUE FROM ADVANCED TECHNOLOGY CONTRACTS FOR THE
REMAINDER OF 2000 TO REMAIN FAIRLY CONSTANT WHEN COMPARED TO THE THIRD
QUARTER/FIRST NINE 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.
* WE EXPECT GROSS PROFIT TO RAMP BETWEEN 1 AND 2 PERCENTAGE POINTS IN THE
FOURTH QUARTER OF 2000 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.
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* WE EXPECT SELLING AND MARKETING EXPENSE LEVELS TO INCREASE ON AN ACTUAL
DOLLAR BASIS, BUT CONTINUE TO DECLINE AS A % OF REVENUE 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.
* WE EXPECT RESEARCH AND DEVELOPMENT EXPENSES TO INCREASE ON AN ACTUAL DOLLAR
BASIS BUT CONTINUE TO DECLINE AS A % OF REVENUE WHEN COMPARED TO THE THIRD
QUARTER/FIRST NINE 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.
* WE EXPECT THE QUARTERLY GENERAL AND ADMINISTRATIVE EXPENSES TO INCREASE ON
AN ACTUAL DOLLAR BASIS BUT CONTINUE TO DECLINE AS A PERCENT OF REVENUE FOR
THE FOURTH 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 SEPTEMBER 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.
* WE EXPECT TO INVEST ANOTHER $1,000,000 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.
* 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:
* 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 and Elliott.
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.
12
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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. On August 18, 2000,
plaintiffs were served an amended complaint. On September 29, 2000, defendants
filed a motion to dismiss the amended complaint. Defendants' motion is scheduled
to be heard on January 5, 2001.
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.
In August 2000, Westgate assigned, and Elliott Associates, L.P.
("Elliott") assumed, 50% of Westgate's rights and obligations under the put/call
agreement. Later in August 2000, we sold to each of Westgate and Elliott 2,625
shares of Series F 4% cumulative Convertible Preferred Stock (the "Series F
Stock") to resulting in total gross proceeds of $5,250. As of September 30, 2000
10,000 shares remain available.
The Series E and Series F Stock are convertible at the election of the
holder into shares of common stock. Each share of Series E and Series F 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 or
Series F 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 either the Series E or Series F 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 and Series F 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 either the Series E or
Series F Stock becomes effective. Mandatory conversion will be deferred,
however, under certain circumstances.
13
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Additionally, the holders of either Series E or Series F Stock are not
obligated to convert the Series E or Series F Stock into common stock unless all
conditions are satisfied.
As of September 30, 2000 13,597 shares of the Series E Stock had been
converted into 1,220,083 shares of common stock leaving 3,903 outstanding
preferred shares. The average conversion price for shares of Series E Stock was
$11.14 per share of common stock.
As of September 30, 2000 4,426 shares of the Series F Stock had been
converted into 256,073 shares of common stock leaving 824 outstanding preferred
shares. The average conversion price for shares of Series F Stock was $17.29 per
share of common stock.
As of November 3, 2000 the remaining 824 shares of the Series F Stock
had been converted into 42,762 shares of common stock at an average conversion
price of $19.44 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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 September 30, 2000:
27.1 Financial Data Schedule.
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.
Copies of Exhibits will be furnished upon request and payment of our
reasonable expenses in furnishing the Exhibits.
14
<PAGE>
SECURE COMPUTING CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SECURE COMPUTING CORPORATION
DATE: November 13, 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)
15
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INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
3.1 Restated Certificate of Incorporation, FILED ELECTRONICALLY
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.
27.1 Financial Data Schedule FILED ELECTRONICALLY
16
