<PAGE>
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
----------------------
[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 0-20191__
INTRUSION.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-1911917
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1101 East Arapaho Road, Richardson, Texas 75081
------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(972) 234-6400
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
--------------------------------------------
(Former name, 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 / /
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, on October 31, 2000 was 20,469,143.
--------------------------------------------------------------------------------
<PAGE>
INTRUSION.COM, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 2000 and September 30, 1999. 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and September 30, 1999 . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 12-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II - OTHER INFORMATION
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 25
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
INTRUSION.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
<TABLE>
<CAPTION>
Sept 30, Dec 31,
ASSETS 2000 1999
----------- ---------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 23,685 $ 12,602
Securities available for sale - 67,633
Short-term investments 22,355 6,100
Accounts receivable, less of allowance of $1,069 in 2000
and $1,171 in 1999 for doubtful accounts and returns 7,679 5,404
Inventories, net 9,160 5,534
Other assets 1,915 1,392
Deferred tax asset 3,905 -
Net current assets - discontinued operations 3,704 5,158
--------- ---------
Total current assets 72,403 103,823
Property and equipment, net 6,506 2,592
Long-term investments 11,071 2,750
Intangible assets, net 7,969 3,508
Other assets 437 684
Net noncurrent assets - discontinued operations 5,646 7,145
--------- ---------
TOTAL ASSETS $104,032 $120,502
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 9,426 $ 11,901
Deferred revenue 3,019 2,039
Income taxes payable 2,642 -
Deferred tax liability - current - 23,305
--------- ---------
Total current liabilities 15,087 37,245
Deferred tax liability - noncurrent 1,752 1,669
Capital lease obligation 8 11
Stockholders' Equity:
Preferred stock, $.01 par value, authorized
shares - 5,000, no shares issued and outstanding - -
Common stock, $.01 par value, authorized shares - 80,000,
Issued shares - 20,508 in 2000 and 18,623 in 1999,
Outstanding shares - 20,468 in 2000 and 18,583 in 1999 205 186
Common stock held in treasury, at cost - 40 shares (362) (362)
Additional paid-in capital 46,853 29,996
Net unrealized gain on securities available for sale - 44,083
Retained earnings 40,958 9,242
Note receivable from stockholder - (1,177)
Foreign currency translation adjustment (469) (391)
--------- ---------
Total stockholders' equity 87,185 81,577
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $104,032 $120,502
========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
INTRUSION.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- -----------------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net Sales $ 6,456 $ 1,192 $ 18,575 $ 4,567
Cost of sales 5,046 548 14,428 2,262
--------- -------- --------- --------
Gross profit 1,410 644 4,147 2,305
Operating expenses:
Sales and marketing 7,571 3,303 20,033 8,782
Research and development 3,488 2,141 9,892 5,527
General and administrative 1,421 459 4,217 1,305
Amortization of intangibles 334 153 640 394
--------- -------- --------- --------
Operating loss (11,404) (5,412) (30,635) (13,703)
Interest income, net 885 327 2,513 789
Other income 8 _ 66,361 _
--------- -------- --------- --------
Income (loss) before income taxes (10,511) (5,085) 38,239 (12,914)
Income tax (benefit) expense (3,445) _ 5,952 _
--------- -------- --------- --------
Income (loss) from continuing
operations (7,066) (5,085) 32,287 (12,914)
Income (loss) from discontinued
operations, net of tax (486) 1,228 (571) 6,954
--------- -------- ---------- --------
Net income (loss) $ (7,552) $(3,857) $ 31,716 $(5,960)
========== ========== ========= ========
Basic earnings (loss) per
share, continuing operations $ (0.36) $ (0.27) $ 1.67 $ (0.70)
========= ======== ========= ========
Diluted earnings (loss) per
share, continuing operations $ (0.36) $ (0.27) $ 1.58 $ (0.70)
========= ======== ========= ========
Basic earnings (loss) per share
$ (0.38) $ (0.21) $ 1.64 $ (0.32)
========= ========= ========= ========
Diluted earnings (loss) per share
$ (0.38) $ (0.21) $ 1.56 $ (0.32)
========= ========= ========= ========
Weighted average common shares
outstanding 19,778 18,577 19,339 18,557
========= ======== ========= ========
Weighted average shares outstanding
assuming dilution 19,778 18,577 20,374 18,557
========= ======== ========= ========
</TABLE>
See accompanying notes.
4
<PAGE>
INTRUSION.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------
Sept 30, Sept 30,
2000 1999
------------- --------------
<S> <C> <C>
Operating Activities:
Net income (loss) $ 31,716 $ (5,960)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Gain on sale of available for sale security (66,355) -
Depreciation and amortization 3,433 2,662
Deferred income tax (benefit) expense (2,608) 897
Changes in operating assets and liabilities:
Accounts receivable (2,275) (40)
Income taxes receivable - 4,749
Inventories (2,172) 2,121
Other assets (275) (1,082)
Accounts payable and accrued expenses (2,576) 977
Income taxes payable 973 -
Deferred revenue 980 (1,524)
---------- ---------
Net cash provided by (used in) operating activities (39,159) 2,800
---------- ---------
Investing Activities:
Proceeds from sale of available for sale security 67,055 -
Acquisition of MimeStar, Inc. (4,000) -
Purchases of available for sale investments (50,979) (11,142)
Maturities of available for sale investments 26,403 4,750
Purchases of property and equipment (5,209) (676)
---------- ---------
Net cash provided by (used in) investing activities 33,270 (7,068)
---------- ---------
Financing Activities:
Exercise of warrants and employee stock options 15,876 227
Net repayment of capital lease (3) (7)
Payments on stockholder loan 1,177 9
---------- ---------
Net cash provided by financing activities 17,050 229
---------- ---------
Effect of foreign currency translation adjustments
on cash and cash equivalents (78) (25)
---------- ---------
Net increase (decrease) in cash and cash equivalents 11,083 (4,064)
Cash and cash equivalents at beginning of period 12,602 16,791
---------- ---------
Cash and cash equivalents at end of period $ 23,685 $ 12,727
========== =========
See accompanying notes.
</TABLE>
5
<PAGE>
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
1. Description of Business
Intrusion.com, Inc. ("Intrusion.com", the "Company" or the "Registrant"),
formerly ODS Networks, Inc. ("ODS"), develops, markets and supports a suite
of security software and appliances to protect and secure critical
information assets and to allow customers to create networks that are
protected from access, theft and damage by unauthorized network users and
protected from misuse by curious or disgruntled employees, contractors and
other authorized users.
The Company was organized in Texas in September 1983 and reincorporated in
Delaware in October 1995. On June 1, 2000, ODS Networks, Inc. changed its
name to Intrusion.com, Inc. and its NASDAQ ticker symbol from ODSI to INTZ.
On April 17, 2000, the Company announced plans to sell, or otherwise dispose
of, its networking divisions which includes its Essential Communications
division and its local area networking assets. In accordance with this plan,
the Company will account for these businesses as discontinued operations.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The December 31, 1999 balance
sheet was derived from audited financial statements, but does not include all
the disclosures required by generally accepted accounting principles.
However, the Company believes that the disclosures are adequate to make the
information presented not misleading. In the opinion of management, all the
adjustments (consisting of normal recurring adjustments) considered necessary
for fair presentation have been included. The results of operations for the
three and nine month periods ending September 30, 2000 are not necessarily
indicative of the results which may be achieved for the full fiscal year or
for any future period. The condensed consolidated financial statements
included herein should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1999. Certain prior year information has
been reclassified to conform with current year presentation.
6
<PAGE>
3. Acquisition
On June 30, 2000, the Company acquired MimeStar, Inc. ("MimeStar"), a
Virginia corporation. MimeStar developed an advanced, network based intrusion
detection system called SecureNet Pro-TM-. The acquisition was affected by
the merger of a wholly owned subsidiary of the Company ("Merger Sub") with
and into MimeStar, pursuant to an Agreement and Plan of Merger, by and among
the Company, MimeStar, the Merger Sub and the sole stockholder of MimeStar
(the "Merger"). Pursuant to the Merger, the stockholder of MimeStar received
$3 million in cash with an additional $1 million in cash and 95,969 shares of
the Company's common stock (which was valued at approximately $1 million on
the date of the Merger) placed in escrow, payable to the stockholder of
MimeStar within one year subject to indemnification and other conditions.
Transaction costs for this acquisition totaled approximately $100 thousand.
The initial acquisition costs of $3.1 million were capitalized as purchased
software and other intangibles on June 30, 2000 and will be amortized over
seven years beginning in June 2000. The remaining $2 million contingent
purchase price was capitalized as purchased software and other intangibles on
July 1, 2000 and will also be amortized over seven years beginning on July 1,
2000.
4. Securities Available for Sale
The Company held 770,745 shares of the common stock of Alteon WebSystems,
Inc. ("Alteon") (Nasdaq:ATON) valued at $67.6 million as of December 31,
1999. Alteon, previously a privately-held company, announced its initial
public offering of 4 million shares of its common stock at $19 per share on
September 24, 1999.
The Company's accounting of this investment was in accordance with Financial
Accounting Standard No. 115 (FAS 115), "Accounting for Certain Investments in
Debt and Equity Securities". Under FAS 115, the Company's investment in
Alteon, which was classified as securities available-for-sale, was presented
at its fair value as of December 31, 1999, which was $87.75 per share or
$67.6 million. On March 2, 2000, the Company sold its investment of 770,745
shares of Alteon common stock for $87.00 per share, net of applicable
expenses, generating cash of approximately $67.1 million. The disposition of
this stock generated a pre-tax gain of approximately $66.4 million which was
recognized as other income.
5. Inventories (In thousands)
Inventories consist of:
<TABLE>
<CAPTION>
Sept. 30, December 31,
2000 1999
----------- -------------
(Unaudited)
<S> <C> <C>
Raw materials $ 814 $ 410
Work in progress 786 762
Finished goods 5,163 3,478
Demonstration systems 2,397 884
----------- ------------
$ 9,160 $ 5,534
=========== ============
</TABLE>
7
<PAGE>
6. Goodwill and Intangibles (In thousands)
Included in goodwill and intangibles are the following:
<TABLE>
<CAPTION>
Sept. 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
CMDS purchased software $ 4,136 $ 4,136
CMDS intangible asset 135 135
MimeStar goodwill 450 -
MimeStar purchased software 3,610 -
MimeStar intangible asset 1,040 -
----------- ------------
Gross intangibles - continuing operations 9,371 $4,271
Accumulated amortization (1,402) (763)
----------- ------------
Net intangibles - continuing operations $ 7,969 $ 3,508
========== ============
</TABLE>
7. Accounts Payable and Accrued Expenses (In thousands)
Included in accounts payable and accrued expenses are the following:
<TABLE>
<CAPTION>
Sept. 30, December 31,
2000 1999
------------- ---------------
(Unaudited) <C>
<S> <C>
Trade accounts payable $ 5,172 $ 8,229
Accrued sales commissions 293 527
Accrued incentive bonus 250 108
Accrued vacation 866 863
Accrued property taxes 117 222
Accrued warranty expense 475 475
Other (individually less than 5% of
current liabilities) 2,253 1,477
----------- --------------
$ 9,426 $ 11,901
=========== ==============
</TABLE>
8. Income Taxes Payable
At December 31, 1999, the Company had federal net operating loss carryforwards
of $15.8 million for income tax purposes that begin to expire in 2018,
including federal net operating loss carryfowards of approximately $4.3
million subject to ownership change limitations under the Internal Revenue
Code, as a result of the acquisition of Essential, which begin to expire in
2008. The Company also had $29.3 million of state net operating loss
carryfowards. In addition, the Company had a minimum tax credit carryforward
of approximately $0.4 million.
The gain realized from the sale of the Alteon stock during the quarter ended
March 31, 2000 (see note 4) utilized $13.2 million of federal net operating
loss carryforwards, which included approximately $1.8 million of the federal
net operating loss carryforwards subject to certain limitations. In addition,
the $0.4 million of minimum tax credit was utilized as a result of the sale.
8
<PAGE>
Accordingly, the Company reduced the valuation allowance related to its net
deferred tax assets as a result of the gain realized from the sale of the
Alteon stock. For the nine months ended September 30, 2000, the decrease of
the valuation allowance in the amount of $9.2 million resulted in a reduction
to income tax expense for the nine months ended September 30, 2000 and a
reduction to goodwill (for approximately $0.6 million which is the portion of
the Company's valuation allowance attributable to net operating losses
acquired from Essential). The Company continues to carry a valuation
allowance with respect to the state net operating loss carryforwards as well
as for the remaining $2.6 million of federal net operating loss carryovers
subject to limitation under I.R.C. Section 382.
9. Note Receivable from Stockholder
Note receivable from stockholder of approximately $1.2 million at December
31, 1999 represents amounts loaned to an officer during the third quarter of
1998 secured by the Company's common stock. These amounts were classified as
contra-equity because in the event the officer failed to remit payment, the
Company would have received shares of the Company's common stock. On February
28, 2000, the officer repaid the Company in full including principal of $1.2
million and interest of approximately $98,000.
10. Earnings per Share (In thousands, except per share amounts)(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- --------------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2000 1999 2000 1999
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (7,552) $(3,857) $ 31,716 $ (5,960)
--------- -------- -------- ---------
Numerator for basic and diluted
Earnings per share $ (7,552) $(3,857) $ 31,716 $ (5,960)
Income (loss) from continuing operations $ (7,066) $(5,085) $ 32,287 $(12,914)
--------- -------- -------- ---------
Numerator for basic and diluted
Earnings per share, continuing
Operations $ (7,066) $(5,085) $ 32,287 $(12,914)
Denominator:
Denominator for basic earnings per
Share - weighted average common shares
Outstanding 19,778 18,577 19,339 18,557
Effect of dilutive securities:
Stock options and warrants - - 1,035 -
--------- -------- --------- --------
Denominator for diluted earnings per
Share - adjusted weighted average
Common shares outstanding 19,778 18,577 20,374 18,557
========= ======== ========= ========
Basic earnings (loss) per share,
Continuing operations $ (0.36) $ (0.27) $ 1.67 $ (0.70)
========= ======== ========= ========
Diluted earnings (loss) per share,
Continuing operations $ (0.36) $ (0.27) $ 1.58 $ (0.70)
========= ======== ========= ========
Basic earnings (loss) per share $ (0.38) $ (0.21) $ 1.64 $ (0.32)
========= ======== ========= ========
Diluted earnings (loss) per share $ (0.38) $ (0.21) $ 1.56 $ (0.32)
========= ======== ========= ========
</TABLE>
9
<PAGE>
11. Increase in Shares Outstanding
On September 22, 2000, SAIC Venture Capital Corporation ("SAIC VCC")
exercised its second and final warrant to purchase 750,000 shares of the
Company's common stock for $10.50 per share generating cash of $7,875,000. On
March 23, 2000, SAIC VCC exercised its first warrant to purchase 750,000
shares of the Company's common stock for $8.00 per share generating cash of
$6 million. The warrants were issued to SAIC VCC's parent, Science
Applications International Corporation ("SAIC"), on September 25, 1998 in
conjunction with the acquisition by the Company of Kane Secure Enterprise
(formerly Computer Misuse Detection System) and certain other intellectual
property from SAIC.
On June 30, 2000, the Company issued, subject to certain conditions, an
additional 95,969 shares of the Company's common stock as a part of the
acquisition of MimeStar (see Note 3).
12. Comprehensive Income (In thousands)
The following table represents a statement of changes in stockholders' equity
including comprehensive income disclosures:
<TABLE>
<CAPTION>
Note Other
Common Additional from Compre-
Common Stock - Paid-In Stock- Retained hensive
Stock Treasury Capital holder Earnings income Total
------ -------- ---------- ------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning of year
- Dec. 31, 1999 $186 $(362) $29,996 $(1,177) $9,242 $43,692 $81,577
Issuance of stock
under stock option
& purchase plans
and warrants 19 - 15,857 - - - 15,876
Acquisition of Mimestar - - 1,000 - - - 1,000
Net income - - - - 31,716(1) - 31,716
Stockholder note
repayments - - - 1,177 - - 1,177
Foreign currency
Translation adj - - - - - (78)(1) (78)
Unrealized (loss)
from securities
available for sale - - - - - (44,083)(1) (44,083)
----- -------- -------- ------- ------ -------- --------
End of Period -
September 30, 2000
(unaudited) $205 $(362) $46,853 $ $40,958 $ (469) $87,185
==== ====== ======= ====== ======= ======== =======
</TABLE>
(1) Comprehensive loss for the nine months ended September 30, 2000 was
$12,445,000.
10
<PAGE>
13. Discontinued Operations
In the second quarter of 2000, the Company discontinued its networking
operations and accordingly has shown the networking operations as
discontinued in the accompanying financial statements. Certain prior year
information has been reclassified to conform with the current presentation.
While the Company does not expect a significant gain or loss from these
dispositions, the Company cannot reasonably estimate the amount of the gain
or loss. Such gain or loss, if any, will be realized in the quarter of final
disposition.
The following represents a summary of assets classified as discontinued
operations (In thousands):
Discontinued assets consist of:
<TABLE>
<CAPTION>
Sept. 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Inventories, net $ 3,704 $ 5,158
Property and equipment, net 1,483 1,629
Intangible assets, net 4,162 5,515
Other 1 1
---------- -----------
$ 9,350 $ 12,303
========== ===========
</TABLE>
The following represents a summary of net income (loss) from discontinued
operations (In thousands)(Unaudited):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -------------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net Sales $ 3,777 $ 11,991 $ 15,075 $41,185
Cost of sales 2,668 6,879 9,650 22,207
--------- -------- --------- --------
Gross profit 1,109 5,112 5,425 18,978
Operating expenses 1,651 3,889 6,101 12,028
--------- -------- --------- --------
Operating profit (loss) (542) 1,223 (676) 6,950
Other, net 0 5 0 4
--------- -------- --------- --------
Income (loss) before income taxes (542) 1,228 (676) 6,954
Income tax (benefit) expense (56) 0 (105) 0
--------- -------- ---------- --------
Income (loss) from discontinued
operations $ (486) $ 1,228 $ (571) $ 6,954
========== ======== ========== ========
</TABLE>
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report 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, that involve risks and uncertainties, such as
statements concerning: growth and future operating results; developments in
the company's markets and strategic focus; new products and product
enhancements; potential acquisitions and the integration of acquired
businesses, products and technologies; strategic relationships; and future
economic, business and regulatory conditions. Such forward-looking statements
are generally accompanied by words such as "plan," "estimate," "expect,"
"believe," "should," "would," "could," "anticipate," "may" or other words
that convey uncertainty of future events or outcomes. These forward-looking
statements and other statements made elsewhere in this report are made in
reliance on the Private Securities Litigation Reform Act of 1995. The section
below entitled "Factors That May Affect Future Results of Operations" sets
forth and incorporates by reference certain factors that could cause actual
future results of the company to differ materially from these statements.
Overview
The Company develops, markets and supports a suite of network security
software and appliances to protect and secure critical information assets and
to allow customers to create networks that are protected from access, theft
and damage by unauthorized network users and protected from misuse by curious
or disgruntled employees, contractors and other authorized users. On June 1,
2000, the Company changed its name from ODS Networks, Inc. to Intrusion.com,
Inc. and its NASDAQ ticker symbol from ODSI to INTZ to reflect the strategic
direction of the Company as a provider of premier security management,
intrusion detection, risk assessment, behavioral profiling and statistical
analysis solutions to government and commercial customers worldwide. Also
during the second quarter of 2000, the Company announced its plan to sell, or
otherwise dispose of, its networking divisions which includes its Essential
Communications division and its local area networking assets and began
accounting for these networking divisions as discontinued operations. Given
the Company's change in strategy, the Company's results of operations prior
to 2000 do not necessarily reflect the Company's current business.
12
<PAGE>
The following management's discussion and analysis of financial condition and
results of operations pertains only to the Company's continuing operations
unless otherwise disclosed. Certain prior year information has been
reclassified to conform with the current presentation.
Results of Operations
The following table sets forth, for the periods indicated, certain financial
data as a percentage of net sales. The period to period comparison of
financial results is not necessarily indicative of future results.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -------------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 78.2 46.0 77.7 49.5
--------- --------- --------- --------
Gross profit 21.8 54.0 22.3 50.5
Operating expenses:
Sales and marketing 117.3 277.1 107.8 192.3
Research and development 54.0 179.6 53.3 121.0
General and administrative 22.0 38.5 22.7 28.6
Amortization of intangibles 5.2 12.8 3.4 8.6
--------- --------- --------- --------
Operating loss (176.7) (454.0) (164.9) (300.0)
Interest income, net 13.7 27.4 13.5 17.3
Other income 0.1 - 357.3 -
--------- --------- --------- --------
Income (loss) before income taxes (162.9) (426.6) 205.9 (282.7)
Income tax (benefit) expense (53.4) - 32.0 -
--------- --------- --------- --------
Income (loss) from continuing
operations (109.5) (426.6) 173.9 (282.7)
Income (loss) from discontinued
operations, net of tax (7.5) 103.0 (3.1) 152.3
---------- --------- --------- --------
Net income (loss) (117.0) (323.6) 170.8 (130.4)
========== ========== ========= ========
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -------------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Domestic sales 73.2% 88.7% 81.5% 84.2%
Export sales to:
Europe 8.1 8.8 6.0 8.8
Canada 0.6 0.0 3.0 0.1
Asia 14.0 2.5 7.8 6.9
Latin America 4.1 0.0 1.7 0.0
--------- --------- --------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
========= ========= ========= ========
</TABLE>
13
<PAGE>
Net Sales. Net sales for the quarter and nine months ended September 30, 2000
increased to $6.5 million and $18.6 million, respectively, compared to $1.2
million and $4.6 million, respectively, for the same periods of 1999 as the
Company continued to focus more on its security business and the security
market continued to grow.
Export Sales. Export sales for the quarter and nine months ended September
30, 2000 increased to $1.7 million and $3.4 million, respectively, compared
to $0.1 million and $0.7 million, respectively, for the same periods of 1999
as the Company continued to focus more on its security business and the
security market continued to grow. Though the Company expects increased sales
from export sales going forward, such export sales may vary as a percentage
of net sales in the future.
Concentration of Sales. Sales to iGov.com were 17.5% and 15.5% for the
quarter and nine months ended September 30, 2000, respectively, compared to
24.7% and 8.8% for the same periods of 1999. Sales to TRW Systems &
Information Technology ("TRW") were 10.6% and 27.0% for the quarter and nine
months ended September 30, 2000, respectively, compared to 4.0% and 12.9% for
the same periods of 1999. Sales to Lockheed Martin were 12.8% and 4.5% for
the quarter and nine months ended September 30, 2000, respectively, compared
to 1.3% and 0.3% for the same periods of 1999. Sales to SecureGate Limited
were 11.5% and 4.0% for the quarter and nine months ended September 30, 2000,
respectively, compared to 0.0% for the same periods of 1999. Sales to Science
Applications International Corporation ("SAIC") were 3.3% and 4.2% for the
quarter and nine months ended September 30, 2000, respectively, compared to
14.3 and 3.7% for the same periods of 1999. Sales to AT&T Corp. ("AT&T") were
0.0% for the quarter and nine months ended September 30, 2000, respectively,
compared to 11.8 and 6.3% for the same periods of 1999. Direct net sales to
various agencies of the U.S. Government were 5.5% and 5.7% of net sales
during the quarter and nine months ended September 30, 2000, respectively,
compared to 11.2% and 2.9% of net sales for the same periods of 1999. In
addition, a portion of the Company's sales to iGov.com, TRW, Lockheed Martin,
SAIC and other corporations were resold by those organizations to various
agencies of the U.S. Government.
Gross Profit. Gross profit increased to $1.4 million or 21.8% of net sales
for the quarter ended September 30, 2000 compared to $0.6 million or 54.0% of
net sales for the quarter ended September 30, 1999. For the nine months ended
September 30, 2000, gross profit increased to $4.1 million or 22.3% of net
sales compared to $2.3 million or 50.5% of net sales for the same period of
1999. Gross profit margins as a percentage of net sales were negatively
impacted during the three months and nine months ended September 30, 2000 due
primarily to the amount of the Company's fixed costs of its manufacturing
infrastructure compared to the sales volume generated in these periods and a
product mix that consisted primarily of security appliance products. Gross
profit margins in future periods may be affected by several factors such as
continued product transition, declining market demand for prior generation
products, obsolescence or surplus of inventory, shifts in product mix,
changes in channels of distribution, sales volume, fluctuation in
manufacturing costs, pricing strategies of the Company and its competitors
and fluctuations in sales of integrated third-party products. Gross profit
margins are typically lower on sales of integrated third-party products.
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Sales and Marketing. Sales and marketing expenses increased to $7.6 million
or 117.2% of net sales for the quarter ended September 30, 2000 compared to
$3.3 million or 277.1% of net sales for the quarter ended September 30, 1999.
Sales and marketing expenses increased to $20.0 million or 107.8% of net
sales for the nine months ended September 30, 2000 compared to $8.8 million
or 192.3% of net sales for the nine months ended September 30, 1999. Sales
and marketing expenses increased in the three and nine month periods ended
September 30, 2000 compared to the same periods of 1999 as the Company
expanded its security sales and marketing force. It is expected that sales
and marketing expenses will continue to increase each quarter throughout 2000
and 2001, but may vary as a percentage of net sales in the future.
Research and Development. Research and development expenses increased to $3.5
million or 54.0% of net sales for the quarter ended September 30, 2000
compared to $2.1 million or 179.6% of net sales for the quarter ended
September 30, 1999. Research and development expenses increased to $9.9
million or 53.3% of net sales for the nine months ended September 30, 2000
compared to $5.5 million or 121.0% of net sales for the nine months ended
September 30, 1999. The Company's research and development costs are expensed
in the period incurred. Research and development expenses increased in the
three and nine months ended September 30, 2000 compared to the same periods
of 1999 as the Company continues to increase its research and development
efforts on its security products. It is expected that research and
development expenses will continue to increase each quarter throughout 2000
and 2001, but may vary as a percentage of net sales in the future.
General and Administrative. General and administrative expenses increased to
$1.4 million or 22.0% of net sales for the quarter ended September 30, 2000
compared to $0.5 million or 38.7% of net sales for the quarter ended
September 30, 1999. General and administrative expenses increased to $4.2
million or 22.7% of net sales for the nine months ended September 30, 2000
compared to $1.3 million or 28.6% of net sales for the nine months ended
September 30, 1999. General and administrative expenses decreased in the
third quarter of 2000 when compared to the second quarter of 2000 or $1.4
million in the three months ended September 30, 2000 compared to $1.6 million
in the three months ended June 30, 2000, as certain non-recurring expenses
were incurred in the second quarter of 2000 related to the renaming of the
Company from ODS Networks, Inc. to Intrusion.com, Inc. and other related
activities. General and administrative expense may vary as a percentage of
net sales in the future.
Amortization. Amortization expenses increased to $0.3 million or 5.2% of net
sales for the quarter ended September 30, 2000 compared to $0.2 million or
12.8% of net sales for the quarter ended September 30, 1999. Amortization
expenses increased to $0.6 million or 3.4% of net sales for the nine months
ended September 30, 2000 compared to $0.4 million or 8.6% of net sales for
the nine months ended September 30, 1999. Amortization expenses increased in
the three and nine month periods ended September 30, 2000 compared to the
same periods in 1999 primarily as a result of amortization of the acquisition
costs incurred with the Company's purchase of MimeStar. This amortization
expense in total is associated with the amortization of intangible assets
related to the acquisition of certain assets and intellectual property from
SAIC in the quarter ending September 30, 1998 and the June 30, 2000
acquisition of MimeStar. The Company acquired MimeStar for $4 million in cash
and 95,969 shares of the Company's common stock (see note 3). Transaction
costs approximated $0.1 million.
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$1 million of cash and all the stock was placed in escrow, payable to the
stockholder of MimeStar within one year subject to indemnification and
certain conditions. The initial acquisition cost of $3.1 million dollars was
capitalized as purchased software and other intangibles on June 30, 2000 and
will be amortized over seven years beginning in June 2000. The remaining $2
million contingent purchase price was capitalized as purchased software and
other intangibles on July 1, 2000 and will also be amortized over seven years
beginning on July 1, 2000. The combined $5.1 million purchase price increased
amortization expense by approximately $0.2 million a quarter beginning with
the third quarter of 2000.
Interest. Net interest income increased to $0.9 million and $2.5 million,
respectively, for the quarter and nine months ended September 30, 2000
compared to $0.3 million and $0.8 million, respectively, for the same periods
in 1999. Net interest income increased primarily due to the additional cash
balance resulting from the sale of the Company's Alteon investment (see note
4) in March 2000. The Company expects net interest income to decline in the
quarter ended December 31, 2000 compared to the quarter ended September 30,
2000 due to reduced cash balances resulting from operating losses. Net
interest income may vary in the future based on the Company's cash flow and
rate of return on investments.
Income Taxes. The Company's effective tax rate for the quarter ended
September 30, 2000 was 32.8%, compared to zero for the quarter ended
September 30, 1999. The Company's effective rate for the nine months ended
September 30, 2000 was 15.6% compared to zero for the nine months ended
September 30, 1999. The effective tax rate for the nine months ended
September 30, 2000 varied from the U.S. statutory rate primarily due to the
reduction in the valuation allowance in the amount of $9.2 million. Without
such changes to the valuation allowance, the Company's effective tax rate for
the quarter and nine months ended September 30, 2000 would have been 38%. On
June 14, 2000, the Company made a federal tax deposit payment for the year
ending December 31, 2000 in the amount of $6.2 million.
Earnings per Share. The Company's earnings per share is calculated in
accordance with Financial Accounting Standards No. 128, "Earnings Per Share".
This method requires calculation of both basic earnings per share and
earnings per share, assuming dilution both for net income (loss) and income
(loss) from continuing operations. Basic earnings per share excludes the
dilutive effect of common stock equivalents such as stock options and
warrants, while earnings per share, assuming dilution includes such dilutive
effects. Future weighted-average shares outstanding calculations will be
impacted by the following factors: (i) the ongoing issuance of common stock
associated with stock option exercises; (ii) the issuance of common stock
associated with the Company's employee stock purchase program; (iii) any
fluctuations in the Company's stock price, which could cause changes in the
number of common stock equivalents included in the earnings per share
assuming dilution computation; and (iv) the issuance of common stock to
effect business combinations should the Company enter into such transactions.
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Liquidity and Capital Resources
The Company's principal sources of liquidity at September 30, 2000 were $23.7
million of cash and cash equivalents, $22.4 million of short-term investments
and $11.1 million of investments with a stated maturity beyond one year. As
of September 30, 2000, excluding discontinued operations, working capital was
$53.6 million compared to $61.4 million as of December 31, 1999.
Cash flows used in operations for the nine months ended September 30, 2000
were $39.2 million, primarily due to an operating loss of $30.6 million, an
increase in inventory and accounts receivable and a decrease in accounts
payable and accrued expenses. Inventories increased primarily due to the
Company's growth in the security business. Accounts receivable increased as
the sales of the Company's security revenue increased. Future fluctuations in
accounts receivable and inventory balances will be dependent upon several
factors, including, but not limited to, quarterly sales, ability to collect
accounts receivable timely, the Company's strategy in building inventory in
advance of receiving orders from customers, and the accuracy of the Company's
forecasts of product demand and component requirements.
Cash provided by investing activities in the nine months ended September 30,
2000 was $33.3 million, which consisted of net proceeds from the sale of the
Alteon investment (see note 4) of $67.1 million offset by net purchases of
available for sale securities of $24.6 million, $4.0 million used in the
acquisition of MimeStar and equipment purchases of $5.2 million.
Cash provided by financing activities in the nine months ended September 30,
2000 was $17.1 million, which consisted of $15.9 million for the issuance of
common stock upon the exercise of employee stock options and warrants (see
note 11) and $1.2 million for the repayment of a loan made to a stockholder
(see note 9).
On March 2, 2000, the Company sold its investment of 770,745 shares of Alteon
common stock for $87.00 per share, net of expenses, generating cash of
approximately $67.1 million. The disposition of this stock generated a
pre-tax gain of approximately $66.4 million (see note 4).
On October 14, 1999, the Company announced a Stock Repurchase Program under
which up to 1.0 million shares of the Company's outstanding common stock may
be acquired in the open market over a 12 month period at the discretion of
management. During the program's duration, the Company repurchased 40,000
shares at an average price of $9.05 per share. The program expired on October
14, 2000.
On June 30, 2000, the Company acquired MimeStar. Pursuant to the acquisition,
the stockholder of MimeStar received $3 million in cash with an additional $1
million in cash and 95,969 shares of the Company's common stock placed in
escrow, payable to the stockholder of MimeStar within one year subject to
indemnification and certain other conditions (see note 3).
On September 22, 2000, SAIC Venture Capital Corporation ("SAIC VCC")
exercised its second and final warrant to purchase 750,000 shares of the
Company's common stock for $10.50 per share generating cash of $7,875,000. On
March 23, 2000, SAIC VCC exercised its first warrant to purchase 750,000
shares of the Company's common stock for $8.00 per share generating cash of
$6 million. The warrants
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were issued to SAIC VCC's parent, Science Applications International
Corporation ("SAIC"), on September 25, 1998 in conjunction with the
acquisition by the Company of Kane Secure Enterprise (formerly Computer
Misuse Detection System) and certain other intellectual property from SAIC.
At September 30, 2000, the Company did not have any material commitments for
capital expenditures.
During the nine months ended September 30, 2000, the Company funded its
operations through the use of cash and cash equivalents.
The Company believes that its cash, cash equivalents, investment balances and
potential cash flow from operations will provide sufficient cash resources to
finance its operations and currently projected capital expenditures through
2000 and 2001. However, there can be no assurance that the Company's cash
resources will be sufficient for the year 2001 and beyond.
The Company intends to explore possible acquisitions of businesses, products
and technologies that are complementary to those of the Company. The Company
is continuing to identify and prioritize additional network security
technologies which it may wish to develop, either internally or through the
licensing or acquisition of products from third parties. While the Company
engages from time to time in discussions with respect to potential
acquisitions, there can be no assurances that any acquisitions will be made
or that the Company will be able to successfully integrate any acquired
business. Any material acquisition could result in a decrease to working
capital depending on the amount, timing and nature of the consideration to be
paid. In order to finance acquisitions, it may be necessary for the Company
to raise additional funds through public or private financings. There can be
no assurance that such financings will be available at acceptable terms, if
at all. Equity financings, if any, may result in dilution to the Company's
stockholders.
Factors That May Affect Future Results of Operations
Numerous factors may affect the Company's business and future results of
operations. These factors include, but are not limited to, technological
changes, competition and market acceptance, acquisitions, product
transitions, linearity of orders, manufacturing and suppliers, reliance on
outsourcing vendors and other partners, intellectual property and licenses,
third-party products, dependence on key customers, international operations
and intellectual property issues. The discussion below addresses some of
these and other factors. For a more thorough discussion of these and other
factors that may affect the Company's business and future results, see the
discussion under the caption "Factors That May Affect Future Results of
Operations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
Technological Changes. The market for the Company's products is characterized
by frequent product introductions, rapidly changing technology and continued
evolution of new industry standards. The market for security products
requires the Company's products to be compatible and interoperable with
products and architectures offered by various vendors, including networking
products, workstation and personal computer architectures and computer and
network operating systems. The Company's success will depend to a substantial
degree
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upon its ability to develop and introduce in a timely manner new products and
enhancements to its existing products that meet changing customer
requirements and evolving industry standards. The development of
technologically advanced products is a complex and uncertain process
requiring high levels of innovation as well as the accurate anticipation of
technological and market trends. There can be no assurance that the Company
will be able to identify, develop, manufacture, market and support new or
enhanced products successfully in a timely manner. Further, the Company or
its competitors may introduce new products or product enhancements that
shorten the life cycle of or make obsolete the Company's existing product
lines, any of which could have a material adverse effect on the Company's
business, operating results and financial condition.
Market Acceptance. The Company is pursuing a strategy to increase the
percentage of its revenue generated through indirect sales channels including
distributors, value added resellers, system integrators, managed service
providers, original equipment manufacturers and security service providers.
There can be no assurance that the Company's products will gain market
acceptance in these indirect sales channels. Further, competition among
security companies to sell products through these indirect sales channels
could result in significant price competition and reduced profit margins.
The Company is also pursuing a strategy to broaden and further differentiate
its product line by introducing complementary security products and
incorporating new technologies into its existing product line. There can be
no assurance that the Company will successfully introduce these products or
that such products will gain market acceptance. The Company anticipates
competition from networking companies, network security companies and others
in each of its product lines. The Company anticipates that profit margins
will vary among its product lines and that product mix fluctuations could
have an adverse effect on the Company's overall profit margins.
Plans for Dispositions. On April 17, 2000, the Company announced plans to
sell, or otherwise dispose of, the assets of its networking division which
includes its Essential division and its local area networking assets. The net
assets held for sale of this division were $9.4 million as of September 30,
2000. There can be no assurance that the Company will be able to realize its
net book value of these assets upon sale or disposition. Additionally, there
are inherent problems associated with selling a substantial division which
may adversely affect the continuing operations of the remaining company.
Acquisitions. Cisco Systems, Inc., Symantec Corp., Internet Security Systems,
Inc. and other competitors have recently acquired several security companies
with complementary technologies, and the Company anticipates that such
acquisitions will continue in the future. These acquisitions may permit such
competitors to accelerate the development and commercialization of broader
product lines and more comprehensive solutions than the Company currently
offers. In the past, the Company has relied upon a combination of internal
product development and partnerships with other vendors to provide
competitive solutions to customers. Certain of the recent and future
acquisitions by the Company's competitors may have the effect of limiting the
Company's access to commercially significant technologies. Further, the
business combinations and acquisitions in the security industry are creating
companies with larger market shares, customer bases, sales forces, product
offerings and technology and marketing expertise. There can be no assurance
that the Company will be able to compete successfully in such an environment.
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On June 30, 2000, the Company acquired MimeStar, Inc., developer of SecureNet
Pro-TM- a networked-based intrusion detection system. On September 30, 1999,
the Company entered a technology licensing agreement with RSA Security, Inc.
("RSA") under which the Company is the exclusive licensee of RSA's Kane
Security products in North America and Europe. In September 1998, the Company
completed an acquisition of certain assets of the Computer Misuse and
Detection System ("CMDS") Division from Science Applications International
Corporation ("SAIC"), a privately held company in San Diego, California. The
Company may, in the future, acquire or invest in additional companies,
business units, product lines, or technologies to accelerate the development
of products and sales channels complementary to the Company's existing
products and sales channels.
Acquisitions involve numerous risks, including: difficulties in assimilation
of operations, technologies, and products of the acquired companies; risks of
entering markets in which the Company has no or limited direct prior
experience and where competitors in such markets have stronger market
positions; the potential loss of key employees of the acquired company; and
the diversion of management's attention from normal daily operation of the
Company's business. There can be no assurance that any potential acquisition
or investment will be consummated or that such acquisition or investment will
be realized.
Product Transitions. Once current security products have been in the market
place for a period of time and begin to be replaced by higher performance
products (whether of the Company's or a competitor's design), the Company
expects the net sales of the older products to decrease. In order to achieve
revenue growth in the future, the Company will be required to design, develop
and successfully commercialize higher performance products in a timely
manner. There can be no assurance that the Company will be able to introduce
new products and gain market acceptance quickly enough to avoid adverse
revenue transition patterns during current or future product transitions. Nor
can there be any assurance that the Company will be able to respond
effectively to technological changes or new product announcements by
competitors, which could render portions of the Company's inventory obsolete.
Manufacturing and Suppliers. All of the materials used in the Company's
products are purchased under contracts or purchase orders with third parties.
While the Company believes that many of the materials used in the production
of its products are generally readily available from a variety of sources,
certain components such as microprocessors are available from one or a
limited number of suppliers. The lead times for delivery of components vary
significantly and exceed twelve weeks for certain components. If the Company
should fail to forecast its requirements accurately for components, it may
experience excess inventory or shortages of certain components which could
have an adverse effect on the Company's business and operating results.
Further, any interruption in the supply of any of these components, or the
inability of the Company to procure these components from alternative sources
at acceptable prices within a reasonable time, could have an adverse effect
on the Company's business and operating results.
On July, 11, 2000, the Company announced a manufacturing alliance with
Assured Industries, Inc. ("Assured") where Assured provides prototyping,
pilot run and manufacturing services to the Company. The Company previously
handled these functions in-house. While contract manufacturing and
outsourcing of related activities is a strategy of the Company to reduce
manufacturing costs, there can be no assurance that this strategy will be
successful.
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The Company's operational strategy relies on outsourcing of product assembly
and certain other operations. There can be no assurance that the Company will
effectively manage its third-party contractors or that these contractors will
meet the Company's future requirements for timely delivery of products of
sufficient quality and quantity. Further, the Company intends to introduce a
number of new products and product enhancements in the quarter ending
December 31, 2000 and 2001 which will require that the Company rapidly
achieve volume production of those new products by coordinating its efforts
with those of its suppliers and contractors. The inability of the third-party
contractors to provide the Company with adequate supplies of high-quality
products could cause a delay in the Company's ability to fulfill orders and
could have an adverse effect on the Company's business, operating results and
financial condition.
Intellectual Property and Licenses. There are many patents held by companies
which relate to the design and manufacture of data security systems.
Potential claims of infringement could be asserted by the holders of those
patents. The Company could incur substantial costs in defending itself and
its customers against any such claim regardless of the merits of such claims.
In the event of a successful claim of infringement, the Company may be
required to obtain one or more licenses from third parties. There can be no
assurance that the Company could obtain the necessary licenses on reasonable
terms, if at all.
Third-Party Products. The Company believes that it is beneficial to work with
third parties with complementary technologies to broaden the appeal of the
Company's network security products. These alliances allow the Company to
provide integrated solutions to its customers, combining Intrusion.com
developed technology with third-party products. As the Company also competes
with these technology partners in certain segments of the market, there can
be no assurance that the Company will have access to all of the third-party
products which may be desirable or necessary in order to offer fully
integrated solutions to Intrusion.com customers.
Dependence on Key Customers. A relatively small number of customers have
accounted for a significant portion of the Company's revenue. U.S. government
agencies and large system integrators are expected to continue to account for
a substantial portion of the Company's net revenue. The Company continuously
faces competition from Internet Security Systems, Inc., Cisco Systems, Inc.,
Nokia Corporation, Network Associates, Inc., Bindview Development
Corporation, Symantec Corp., Axent Technologies, Inc. and others for U.S.
government networking and security projects and corporate networking and
security installations. Any reduction or delay in sales of the Company's
products to these customers could have a material adverse effect on the
Company's operating results.
International Operations. The Company's international operations may be
affected by changes in demand resulting from fluctuations in currency
exchange rates and local purchasing practices, including seasonal
fluctuations in demand, as well as by risks such as increases in duty rates,
difficulties in distribution, regulatory approvals and other constraints upon
international trade. The Company's sales to foreign customers are subject to
export regulations. In particular, certain sales of the Company's security
products require clearance and export licenses from the U.S. Department of
Commerce under these regulations. Any inability to obtain such clearances or
any required foreign regulatory approvals on a timely basis could have a
material adverse effect on the Company's operating results.
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Impact of Government Customers. A significant portion of the Company's
revenue is derived from sales to the U.S. government, either directly by the
Company or through system integrators and other resellers. Sales to the
government present risks in addition to those involved in sales to commercial
customers, including potential disruptions due to appropriation and spending
patterns and the government's reservation of the right to cancel contracts
and purchase orders for its convenience.
General. Sales of the Company's products fluctuate, from time to time, based
on numerous factors, including customers' capital spending levels and general
economic conditions. While certain industry analysts believe that there is a
significant market for security products, there can be no assurance as to the
rate or extent of the growth of such market or the potential adoption of
alternative technologies. Future declines in security product sales as a
result of general economic conditions, adoption of alternative technologies
or any other reason could have a material adverse effect on the Company's
business, operating results and financial condition.
Due to the factors noted above and in "Management's Discussion and Analysis
of Financial Condition and Results of Operations", the Company's future
earnings and common stock price may be subject to significant volatility,
particularly on a quarterly basis. Past financial performance should not be
considered a reliable indicator of future performance and investors should
not use historical trends to anticipate results or trends in future periods.
Any shortfall in revenue and earnings from the levels anticipated by
securities analysts could have an immediate and significant effect on the
trading price of the Company's common stock in any given period. Also, the
Company participates in a highly dynamic industry which often results in
volatility of the Company's common stock price.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange. The Company's revenue originating outside the U.S. in the
quarters ended September 30, 2000, 1999 and 1998 were 26.8%, 11.3% and 19.3%
of total revenues, respectively. Revenue originating outside the U.S. in the
nine months ended September 30, 2000, 1999 and 1998 were 18.5%, 15.8% and
28.9% of total revenues, respectively. International sales are made mostly
from the Company's foreign sales subsidiaries in the local countries and are
typically denominated in U.S. dollars. These subsidiaries incur most of their
expenses in the local currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to: differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions and foreign exchange rate volatility.
Accordingly, the Company's future results could be materially adversely
affected by changes in these or other factors. The effect of foreign exchange
rate fluctuations on the Company in 2000, 1999 and 1998 was not material.
Interest Rates. The Company invests its cash in a variety of financial
instruments, including bank time deposits, fixed rate obligations of
corporations, municipalities, and state and national governmental entities
and agencies. These investments are denominated in U.S. dollars. Cash
balances in foreign currencies overseas are operating balances and are
invested in short-term time deposits of the local operating bank.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely affected due to a rise in interest rates. Due in part to these
factors, the Company's future investment income may fall short of
expectations due to changes in interest rates or the Company may suffer
losses of principal if forced to sell securities which have seen a decline in
market value due to changes in interest rates. The Company's investment
securities are held for purposes other than trading. Several investment
securities have a maturity in excess of one year. The weighted-average
interest rate on investment securities at September 30, 2000 was 5.9%. The
fair value of investments held at September 30, 2000 approximate amortized
cost.
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PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES.
On September 22, 2000, the Company issued 750,000 shares of
its common stock in connection with the exercise of a warrant,
by SAIC Venture Capital Corporation ("SAIC VCC"), at an
exercise price of $10.50 per share. On March 23, 2000, the
Company issued 750,000 shares of its common stock in
connection with the exercise of a warrant, by SAIC VCC, at an
exercise price of $8.00 per share. The warrants were
originally issued to SAIC VCC's parent corporation, Science
Applications International Corporation, on September 25, 1998.
The shares of common stock issued to SAIC VCC were issued
pursuant to a Section 4(2) exemption from the registration
requirements of Section 5 of the Securities Act.
On June 30, 2000, the Company acquired MimeStar, Inc. for $4
million in cash and 95,969 shares of the Company's common
stock. This stock was placed in escrow, payable to the
stockholder of MimeStar within one year subject to
indemnification and certain performance conditions.
During the quarter ended September 30, 2000, the Company
issued approximately 36,336 shares of common stock to
employees pursuant to exercises of stock options (with
exercise prices ranging from $2.50 per share to $8.38 per
share) under the Company's stock option plans. During the nine
months ended September 30, 2000, the Company issued
approximately 257,446 shares of common stock to employees
pursuant to exercises of stock options (with exercise prices
ranging from $1.88 per share to $23.25 per share) under the
Company's stock option plans. In addition, the Company issued
approximately 20,213 shares of common stock during the quarter
ended September 30, 2000 at a price of $8.45 per share to
employees pursuant to purchases under the Company's employee
stock purchase plan. During the nine months ended September
30, 2000, the Company issued approximately 31,705 shares of
common stock to employees pursuant to purchases under the
Company's employee stock purchase plan (with purchase prices
ranging from $4.89 per share to $8.45 per share). These
issuances were deemed exempt from registration under Section 5
of the Securities Act in reliance on Rule 701 thereunder.
With respect to the common stock issued pursuant to the
warrants, the recipient of securities represented their
intention to acquire the securities issued to them for
investment only and not with a view to, or for, sale in
connection with any distribution thereof. In such cases,
appropriate restrictive transfer legends were affixed to the
share certificates issued.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A.) EXHIBITS. The following exhibits are included herein:
(27) Financial Data Schedule
(B.) FORM 8-K.
(i) On July 12, 2000, the Company filed a Current
Report on Form 8-K (Item 5) dated June 30, 2000 in
order to report the June 30, 2000 acquisition of
MimeStar, Inc. ("MimeStar"), developer of SecureNet
Pro-TM-, a network based intrusion detection system.
Under the terms of the agreement, the sole
stockholder of MimeStar received $3 million in cash
with an additional $1 million in cash and 95,969
shares of the Company's common stock placed in
escrow, payable to the stockholder of MimeStar
within one year subject to indemnification and
certain other conditions.
(ii) On September 29, 2000, the Company filed a
Current Report on Form 8-K (Item 5) dated September
22, 2000 in order to report the exercise of 750,000
warrants of the Company's common stock by SAIC
Venture Capital Corporation ("SAIC VCC") for $10.50
per share generating cash of approximately $7.9
million. The warrant was issued to SAIC VCC's
parent, Science Applications International
Corporation ("SAIC"), on September 25, 1998 in
conjunction with the acquisition by the Company of
Kane Secure Enterprise (formerly Computer Misuse
Detection System) and certain other intellectual
property from SAIC.
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S I G N A T U R E S
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.
INTRUSION.COM, INC.
Date: November 3, 2000 /s/ JAY R. WIDDIG
----------------------------
Jay R. Widdig
Vice President, Chief Financial Officer,
Treasurer & Secretary
(Principal Financial & Accounting Officer)
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