<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 June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-20191
-------
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)
ODS Networks, Inc.
-------------------------------------------
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 July 31, 2000 was 19,714,442.
-------------------------------------------------------------------------------
<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 June 30, 2000
and December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 2000 and June 30, 1999 . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and June 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 4. Submission of Matters to a Vote of Security Holders . . . . 25
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . 25
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 26
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</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>
June 30, Dec 31,
2000 1999
----------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,162 $ 12,602
Securities available for sale - 67,633
Short-term investments 34,180 6,100
Accounts receivable, less of allowance of $1,103 in 2000
and $1,171 in 1999 for doubtful accounts and returns 6,224 5,404
Inventories, net 12,875 5,534
Other assets 1,646 1,392
Deferred tax asset 3,805 -
Net current assets - discontinued operations 4,419 5,158
---------- ----------
Total current assets 74,311 103,823
Property and equipment, net 2,950 2,592
Long-term investments 14,070 2,750
Intangible assets, net 6,303 3,508
Other assets 1,520 684
Net noncurrent assets - discontinued operations 5,956 7,145
---------- ----------
TOTAL ASSETS $ 105,110 $ 120,502
========== ==========
LIABILITES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 8,491 $ 11,901
Deferred revenue 3,202 2,039
Income taxes payable 6,295 -
Deferred tax liability - current - 23,305
---------- ----------
Total current liabilities 17,988 37,245
Deferred tax liability - noncurrent 1,571 1,669
Capital lease obligation 9 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 - 19,702 in 2000 and 18,623 in 1999,
Outstanding shares - 19,662 in 2000 and 18,583 in 1999 197 186
Common stock held in Treasury, at cost - 40 shares (362) (362)
Additional paid-in capital 37,588 29,996
Net unrealized gain on securities available for sale - 44,083
Retained earnings 48,510 9,242
Note receivable from stockholder - (1,177)
Foreign currency translation adjustment (391) (391)
---------- ----------
Total stockholders' equity 85,542 81,577
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 105,110 $ 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 Six Months Ended
----------------------------- -----------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 5,123 $ 2,953 $ 12,119 $ 3,376
Cost of sales 4,350 1,557 9,382 1,714
---------- ---------- ---------- ----------
Gross profit 773 1,396 2,737 1,662
Operating expenses:
Sales and marketing 7,048 2,642 12,460 5,479
Research and development 3,445 1,863 6,404 3,386
General and administrative 1,580 413 2,795 845
Amortization of intangibles 153 111 305 241
---------- ---------- ---------- ----------
Operating loss (11,453) (3,633) (19,227) (8,289)
Interest income, net 1,220 211 1,628 461
Other income - - 66,353 -
---------- ---------- ---------- ----------
Income (loss) before income taxes (10,233) (3,422) 48,754 (7,828)
Income tax (benefit) expense (3,206) - 9,397 -
---------- ---------- ---------- ----------
Income (loss) from continuing
operations (7,027) (3,422) 39,357 (7,828)
Income (loss) from discontinued
operations, net of tax 154 3,568 (89) 5,725
---------- ---------- ---------- ----------
Net income (loss) $ (6,873) $ 146 $ 39,268 $ (2,103)
========== ========== ========== ==========
Basic earnings (loss) per
share, continuing operations $ (0.36) $ (0.18) $ 2.06 $ (0.42)
========== ========== ========== ==========
Diluted earnings (loss) per
share, continuing operations $ (0.36) $ (0.18) $ 1.93 $ (0.42)
========== ========== ========== ==========
Basic earnings (loss) per share $ (0.35) $ 0.01 $ 2.05 $ (0.11)
========== ========== ========== ==========
Diluted earnings (loss) per share $ (0.35) $ 0.01 $ 1.93 $ (0.11)
========== ========== ========== ==========
Weighted average common shares
outstanding 19,497 18,550 19,117 18,540
========== ========== ========== ==========
Weighted average shares outstanding
assuming dilution 19,497 18,773 20,364 18,540
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
INTRUSION.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
June 30, June 30,
2000 1999
---------- ----------
<S> <C> <C>
Operating Activities:
Net income (loss) $ 39,268 $ (2,103)
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 2,509 1,755
Deferred income tax (benefit) expense (3,065) 897
Changes in operating assets and liabilities:
Accounts receivable (819) (6,234)
Income taxes receivable -- 4,749
Inventories (6,602) 2,266
Other assets (89) (30)
Accounts payable and accrued expenses (3,512) 1,858
Income taxes payable 5,002 --
Deferred revenue 1,163 (1,039)
---------- ----------
Net cash provided by (used in) operating activities (32,500) 2,119
---------- ----------
Investing Activities:
Proceeds from sale of available for sale security 67,055 --
Acquisition of MimeStar, Inc. (4,000) --
Purchases of available for sale investments (39,998) (3,043)
Maturities of available for sale investments 598 1,000
Purchases of property and equipment (1,373) (409)
---------- ----------
Net cash provided by (used in) investing activities 22,282 (2,452)
---------- ----------
Financing Activities:
Exercise of warrants and employee stock options 7,603 174
Net repayment of capital lease (2) (7)
Payments on stockholder loan 1,177 5
---------- ----------
Net cash provided by financing activities 8,778 172
---------- ----------
Effect of foreign currency translation adjustments
on cash and cash equivalents -- (25)
---------- ----------
Net decrease in cash and cash equivalents (1,440) (186)
Cash and cash equivalents at beginning of period 12,602 16,791
---------- ----------
Cash and cash equivalents at end of period $ 11,162 $ 16,605
========== ==========
</TABLE>
See accompanying notes
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 until
final disposition.
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
six month periods ending June 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 in
one year subject to indemnification and other performance 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 July 2000. Subject to the indemnification and other
performance provisions of the escrow agreement, the remaining $2 million
contingent purchase price will be capitalized as purchased software and other
intangibles in June 2001 and will be amortized over six years beginning in
July 2001.
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>
June 30, December 31,
2000 1999
----------- -------------
(Unaudited)
<S> <C> <C>
Raw materials $ 1,828 $ 410
Work in progress 2,621 762
Finished goods 3,351 3,478
Demonstration systems 5,075 884
Net inventory from discontinued
operations 4,419 5,158
---------- ----------
$ 17,294 $ 10,692
========== ==========
</TABLE>
7
<PAGE>
6. Goodwill and Intangibles (In thousands)
Included in goodwill and intangibles are the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -------------
(Unaudited)
<S> <C> <C>
CMDS purchased software $ 4,136 $ 4,136
CMDS intangible asset 135 135
MimeStar purchased software 2,407 --
MimeStar intangible asset 693 --
---------- ----------
Gross intangibles - continuing operations 7,371 $ 4,271
Accumulated amortization (1,068) (763)
---------- ----------
Net intangibles - continuing operations 6,303 3,508
Net intangibles - discontinued operations 4,389 5,515
---------- ----------
$ 10,692 $ 9,023
========== ==========
</TABLE>
7. Accounts Payable and Accrued Expenses (In thousands)
Included in accounts payable and accrued expenses are the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -------------
(Unaudited)
<S> <C> <C>
Trade accounts payable $ 4,535 $ 8,229
Accrued sales commissions 329 527
Accrued incentive bonus 350 108
Accrued vacation 851 863
Accrued property taxes 78 222
Accrued warranty expense 475 475
Other (individually less than 5%of
current liabilities) 1,873 1,477
---------- ----------
$ 8,491 $ 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 carryforwards 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
carryforwards. In addition, the Company had tentative minimum tax credit
carryforward of approximately $0.4 million which may be carried forward
indefinitely.
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
8
<PAGE>
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 tentative minimum tax credit was utilized as a result of the
sale.
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 six months ended June 30, 2000, the decrease of the
valuation allowance in the amount of $8.8 million resulted in a reduction to
income tax expense for the six months ended June 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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- ----------------------------
Jun 30, Jun 30, Jun 30, Jun 30,
2000 1999 2000 1999
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (6,873) $ 146 $ 39,268 $ (2,103)
----------- ----------- ---------- -----------
Numerator for basic and diluted
Earnings per share $ (6,873) $ 146 $ 39,268 $ (2,103)
Income (loss) from continuing operations $ (7,027) $ (3,422) $ 39,357 $ (7,828)
----------- ----------- ---------- -----------
Numerator for basic and diluted
Earnings per share, continuing
Operations $ (7,027) $ (3,422) $ 39,357 $ (7,828)
Denominator:
Denominator for basic earnings per
Share - weighted average common shares
Outstanding 19,497 18,550 19,117 18,540
Effect of dilutive securities:
Stock options and warrants - 223 1,247 -
----------- ----------- ---------- -----------
Denominator for diluted earnings per
Share - adjusted weighted average
Common shares outstanding 19,497 18,773 20,364 18,540
=========== =========== ========== ===========
Basic earnings (loss) per share,
Continuing operations $ (0.36) $ (0.18) $ 2.06 $ (0.42)
=========== =========== ========== ===========
Diluted earnings (loss) per share,
Continuing operations $ (0.36) $ (0.18) $ 1.93 $ (0.42)
=========== =========== ========== ===========
Basic earnings (loss) per share $ (0.35) $ 0.01 $ 2.05 $ (0.11)
=========== =========== ========== ===========
Diluted earnings (loss) per share $ (0.35) $ 0.01 $ 1.93 $ (0.11)
=========== =========== ========== ===========
</TABLE>
9
<PAGE>
11. Increase in Shares Outstanding
On March 23, 2000, SAIC Venture Capital Corporation ("SAIC VCC") exercised its
warrant to purchase 750,000 shares of the Company's common stock for $8.00 per
share generating $6 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 the Computer Misuse
Detection System and certain other intellectual property from SAIC. SAIC VCC
holds an additional warrant to purchase 750,000 shares of the Company's common
stock for $10.50 per share on or before September 25, 2000.
One 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 11 - 7,592 - - - 7,603
Net income - - - - 39,268(1) - 39,268
Stockholder note
repayments - - - 1,177 - - 1,177
Unrealized (loss)
from securities
available for sale - - - - - (44,083)(1) (44,083)
---- ----- ------- ------- ------- -------- --------
End of Period -
June 30, 2000 $197 $(362) $37,588 $ - $48,510 $ (391) $ 85,542
==== ===== ======= ======= ======= ======== ========
</TABLE>
(1) Comprehensive loss for the six months ended June 30, 2000 was $4,815,000.
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 this disposition, 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>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Inventories, net $ 4,419 $ 5,158
Property and equipment, net 1,566 1,629
Intangible assets, net 4,389 5,515
Other 1 1
---------- ----------
$ 10,375 $ 12,303
========== ==========
</TABLE>
The following represents a summary of net income (loss) from discontinued
operations (In thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- ---------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 5,336 $ 15,552 $ 11,298 $ 29,194
Cost of sales 3,232 7,596 6,983 15,328
--------- --------- ---------- ---------
Gross profit 2,104 7,956 4,315 13,866
Operating expenses 1,911 4,388 4,453 8,139
--------- --------- ---------- ---------
Operating (loss) profit 193 3,568 (138) 5,727
Other, net 0 0 0 (2)
--------- --------- ---------- ---------
Income (loss) before income taxes 193 3,568 (138) 5,725
Income tax (benefit) expense 39 0 (49) 0
--------- --------- ---------- ---------
Income (loss) from discontinued
operations $ 154 $ 3,568 $ (89) $ 5,725
========= ========= ========== =========
</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 Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 84.9 52.7 77.4 50.8
-------- -------- -------- --------
Gross profit 15.1 47.3 22.6 49.2
Operating expenses:
Sales and marketing 137.6 89.4 102.8 162.3
Research and development 67.2 63.1 52.8 100.3
General and administrative 30.8 14.0 23.1 25.0
Amortization of intangibles 3.0 3.8 2.5 7.1
-------- -------- -------- --------
Operating loss (223.5) (123.0) (158.6) (245.5)
Interest income, net 23.8 7.1 13.4 13.7
Other income - - 547.5 -
-------- -------- -------- --------
Income (loss) before income taxes (199.7) (115.9) 402.3 (231.8)
Income tax (benefit) expense (62.5) - 77.5 -
-------- -------- -------- --------
Income (loss) from continuing
operations (137.2) (115.9) 324.8 (231.8)
Income (loss) from discontinued
operations, net of tax 3.0 120.8 (0.8) 169.6
-------- -------- -------- --------
Net income (loss) (134.2) 4.9 324.0 (62.2)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Domestic sales 77.8% 86.4% 85.9% 82.6%
Export sales to:
Europe 9.3 6.5 5.0 8.8
Canada 9.0 0.0 4.2 0.2
Asia 3.9 7.1 4.5 8.4
Latin America 0.0 0.0 0.4 0.0
-------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========
</TABLE>
13
<PAGE>
Net Sales. Net sales for the quarter and six months ended June 30, 2000
increased to $5.1 million and $12.1 million, respectively, compared to $3.0
million and $3.4 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. Demand for the Company's security products is
expected to continue to increase.
Export Sales. Export sales for the quarter and six months ended June 30, 2000
increased to $1.1 million and $1.7 million, respectively, compared to $0.4
million and $0.6 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. 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 29.9% and 14.4% for the quarter
and six months ended June 30, 2000, respectively, compared to 3.7% and 3.2%
for the same periods of 1999. Sales to Motorola were 21.0% and 8.9% for the
quarter and six months ended June 30, 2000, respectively, compared to 0.0% for
the same periods of 1999. Sales to TRW Systems & Information Technology
("TRW") were 0.0% and 35.7% for the quarter and six months ended June 30,
2000, respectively, compared to 18.4% and 16.9% for the same periods of 1999.
Direct net sales to various agencies of the U.S. Government were 13.6% and
5.8% of net sales during the quarter and six months ended June 30, 2000,
respectively, compared to 0.0% of net sales for the same periods of 1999. In
addition, a portion of the Company's sales to Igov.com, Motorola, TRW and
other corporations were resold by those organizations to various agencies of
the U.S. Government.
Gross Profit. Gross profit decreased to $0.8 million or 15.1% of net sales for
the quarter ended June 30, 2000 compared to $1.4 million or 47.3% of net sales
for the quarter ended June 30, 1999. For the six months ended June 30, 2000,
gross profit increased to $2.7 million or 22.6% of net sales compared to $1.7
million or 49.2% of net sales. Gross profit margins as a percentage of net
sales were negatively impacted during the three months and six months ended
June 30, 2000 due primarily to low sales volume and the fixed cost of the
manufacturing infrastructure relative to the size of the Company's security
business and certain start-up costs related to the Company's new integrated
network security solutions. 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.
Sales and Marketing. Sales and marketing expenses increased to $7.0 million or
137.6% of net sales for the quarter ended June 30, 2000 compared to $2.6
million or 89.4% of net sales for the quarter ended June 30, 1999. Sales and
marketing expenses increased to $12.5 million or 102.8% of net sales for the
six months ended June 30, 2000 compared to $5.5 million or 162.3% of net sales
for the six months ended June 30, 1999. Sales and marketing expenses increased
in the three and six month periods ended June 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, but may vary as a percentage of net
sales in the future.
14
<PAGE>
Research and Development. Research and development expenses increased to $3.4
million or 67.2% of net sales for the quarter ended June 30, 2000 compared to
$1.9 million or 63.1% of net sales for the quarter ended June 30, 1999.
Research and development expenses increased to $6.4 million or 52.8% of net
sales for the six months ended June 30, 2000 compared to $3.4 million or
100.3% of net sales for the six months ended June 30, 1999. The Company's
research and development costs are expensed in the period incurred. Research
and development expenses increased in the three and six months ended June 30,
2000 compared to the same periods of 1999 as the Company continues to increase
its research and development efforts on its security products. With the
acquisition of MimeStar, Inc. on June 30, 2000, it is expected that research
and development expenses will continue to increase each quarter throughout
2000, but may vary as a percentage of net sales in the future.
General and Administrative. General and administrative expenses increased to
$1.6 million or 30.8% of net sales for the quarter ended June 30, 2000
compared to $0.4 million or 14.0% of net sales for the quarter ended June 30,
1999. General and administrative expenses increased to $2.8 million or 23.1%
of net sales for the six months ended June 30, 2000 compared to $0.8 million
or 25.0% of net sales for the six months ended June 30, 1999. General and
administrative expenses increased in the three and six months ended June 30,
2000 as certain non-recurring expenses were incurred in the second quarter
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 remained relatively unchanged at $0.2
million or 3.0% of net sales for the quarter ended June 30, 2000 compared to
$0.1 million or 3.8% of net sales for the quarter ended June 30, 1999.
Amortization expenses remained relatively unchanged at $0.3 million or 2.5% of
net sales for the six months ended June 30, 2000 compared to $0.2 million or
7.1% of net sales for the six months ended June 30, 1999. This amortization
expense is primarily 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. On June 30, 2000, the Company
acquired MimeStar, Inc. for $4 million in cash and 95,969 shares of the
Company's common stock (see note 3). Transaction costs approximated $0.1
million. $1 million of cash and all the stock was placed in escrow payable to
the stockholder of MimeStar in one year subject to indemnification and certain
performance 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 July 2000, which will
increase amortization expense by approximately $0.1 million a quarter
beginning with the third quarter of 2000. The remaining $2.0 million will be
capitalized on June 30, 2001, subject to satisfaction of the indemnification
and other performance conditions, and amortized over six years beginning in
July 2001, which will increase amortization expense approximately $0.1 million
a quarter beginning with the third quarter of 2001.
15
<PAGE>
Interest. Net interest income increased to $1.2 million and $1.6 million,
respectively, for the quarter and six months ended June 30, 2000 compared to
$0.2 million and $0.5 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 September 30, 2000 compared to the quarter ended June 30, 2000 due to
reduced cash balances primarily due to operating losses, a second quarter 2000
federal income tax payment of $6.2 million and $4 million paid for the
acquisition of MimeStar. 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 June 30,
2000 was 31.3%, compared to zero for the quarter ended June 30, 1999. The
Company's effective tax rate for the six months ended June 30, 2000 was 19.3%
compared to zero for the six months ended June 30, 1999. The effective tax
rate for the quarter ended June 30, 2000 varied from the U.S. statutory rate
primarily due to the increase of the Company's valuation allowance in the
amount of $0.3 million. The effective tax rate for the six months ended June
30, 2000 varied from the U.S. statutory rate primarily due to the reduction of
the valuation allowance in the amount of $8.8 million. Without such changes to
the valuation allowance, the Company's effective tax rate for the quarter and
six months ended June 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 options exercises; (ii) the issuance of common stock associated with the
Company's employee stock purchase program or outstanding warrants; (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; (iv) the issuance of common stock to effect business
combinations should the Company enter into such transactions; and (v) the
repurchase of common stock by the Company should the Company acquire shares of
its common stock under its stock repurchase program authorized in October,
1999.
16
<PAGE>
Liquidity and Capital Resources
The Company's principal sources of liquidity at June 30, 2000 were $11.2
million of cash and cash equivalents, $34.2 million of short-term investments
and $14.1 million of investments with a stated maturity beyond one year. As of
June 30, 2000, working capital was $56.3 million compared to $66.6 million as
of December 31, 1999.
Cash flows used in operations for the six months ended June 30, 2000 were
$32.5 million, primarily due to an operating loss of $19.2 million and an
increase in inventory. Inventories increased primarily due to the Company
growing its security business. 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 as to 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 six months ended June 30, 2000
was $22.3 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 $39.4 million, $4.0 million used in the acquisition of
MimeStar and equipment purchases of $1.4 million.
Cash provided by financing activities in the six months ended June 30, 2000
was $8.8 million, which consisted of $7.6 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. To-date, the Company has repurchased 40,000 shares at an average
price of $9.05 per share.
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 in one year subject to
indemnification and certain performance conditions (see note 3).
At June 30, 2000, the Company did not have any material commitments for
capital expenditures.
During the six months ended June 30, 2000, the Company funded its operations
through the use of cash and cash equivalents.
17
<PAGE>
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. However, there can be no assurance that the Company's cash resources
will be sufficient for the year 2000.
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,
manufacturing and suppliers, 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
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.
18
<PAGE>
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, 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, its networking division which includes its
Essential division and its local area networking assets. The net assets held
for sale of this division were $10.4 million as of June 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.
On June 30, 2000, the Company acquired MimeStar, Inc., developer of SecureNet
Pro-TM- a networked-based intrusion detection system. 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. 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. 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.
19
<PAGE>
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.
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 2000 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.
20
<PAGE>
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 Cisco Systems, Inc., Nokia Corporation, Network
Associates, Inc., Bindview Development Corporation, Symantec Corp., Axent
Technologies, Inc., Internet Security Systems, 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.
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.
21
<PAGE>
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.
22
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange. The Company's revenue originating outside the U.S. in the
quarters ended June 30, 2000, 1999 and 1998 were 22.2%, 13.6% and 20.3% of
total revenues, respectively. Revenue originating outside the U.S. in the six
months ended June 30, 2000, 1999 and 1998 were 14.1%, 17.5% and 45.2% 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 June 30, 2000 was 5.8%. The fair value of investments held at
June 30, 2000 approximate amortized cost.
23
<PAGE>
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES.
On March 23, 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 $8.00 per share. The warrant was 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 in one year subject to indemnification
and certain performance conditions.
During the quarter ended June 30, 2000, the Company issued
approximately 92,593 shares of common stock to employees
pursuant to exercises of stock options (with exercise prices
ranging from $1.88 per share to $13.00 per share) under the
Company's stock option plans. During the six months ended June
30, 2000, the Company issued approximately 221,110 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 11,492 shares of
common stock at $4.89 per share to employees pursuant to
purchases under the Company's employee stock purchase plans.
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 case,
appropriate restrictive transfer legends were affixed to share
certificates issued.
24
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on April 19, 2000
at the Holiday Inn Richardson Select in Richardson, Texas. The
following is a brief description of each matter voted upon by
stockholders, including number of votes cast for, against, or
withheld with regard to each matter of nominee.
(1) Election of seven (7) directors to serve until the next
Annual Meeting of Stockholders and until their
respective successors are duly elected and qualified.
<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
G. Ward Paxton 17,501,433 69,950
J. Fred Bucy 17,501,833 69,550
T. Joe Head 17,501,733 69,650
Donald M. Johnston 17,503,233 68,150
Timothy W. Kinnear 17,493,833 77,550
William A. Roper, Jr. 16,997,471 573,912
Douglas M. Schrier 17,502,733 68,650
</TABLE>
(2) Approval of the amendment to the Company's 1995 Stock
Option Plan as described in the Proxy Statement dated
March 20, 2000.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ------- -------
<S> <C> <C>
17,263,030 269,321 39,032
</TABLE>
(3) Ratification and approval of selection by the Board of
Directors of Ernst & Young LLP as independent auditors
of the Registrant for the fiscal year ending December
31, 2000.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ------- -------
<S> <C> <C>
17,493,341 53,775 24,267
</TABLE>
Item 5. OTHER INFORMATION.
Stockholder Proposals.
Stockholders may submit proposals on matters appropriate for
stockholder action at subsequent annual meetings of the
stockholders consistent with Rule 14a-8 promulgated under the
Exchange Act. For such proposals to be considered for
inclusion in the Proxy Statement and Proxy relating to the
2001 Annual Meeting of Stockholders, such proposals must be
received by the Company no later than November 20, 2000. Such
proposals should be directed to Intrusion.com, Inc., 1101 East
Arapaho Road, Richardson, Texas 75081, Attention: Secretary
(telephone: (972) 234-6400; telecopy: (972) 234-1467).
Pursuant to the new amendments to Rule 14a-4(c) of the
Securities Exchange Act of 1934, as amended, if a stockholder
who intends to present a proposal at the 2001 annual meeting
of stockholders does not notify the Company of such proposal
on or prior to February 3, 2001, then management proxies would
be allowed to use their discretionary voting authority to vote
on the proposal when the proposal is raised at the annual
meeting, even though there is no discussion of the proposal in
the 2001 proxy statement.
25
<PAGE>
<TABLE>
<CAPTION>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
<S> <C>
(A.) EXHIBITS. The following exhibits are included herein:
(27) Financial Data Schedule
(B.) FORM 8-K.
(i) On June 7, 2000 the Company filed a
Current Report on Form 8-K (Item 5) dated
June 1, 2000 in order to report the
Company's name change from ODS Networks,
Inc. to Intrusion.com, Inc. effective from
June 1, 2000.
(ii) 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 in one year subject to
indemnification and other performance
conditions.
</TABLE>
26
<PAGE>
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: August 11, 2000 /s/ Jay R. Widdig
--------------------------
Jay R. Widdig
Vice President, Chief Financial Officer,
Treasurer & Secretary
(Principal Financial & Accounting Officer)
27
