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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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<S> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE NUMBER: 0-24544
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CYBERGUARD CORPORATION
(Exact name of Registrant as specified in its charter)
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<S> <C>
FLORIDA 65-0510339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
2000 WEST COMMERCIAL BOULEVARD
SUITE 200
FORT LAUDERDALE, FLORIDA 33309
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (954) 958-3900
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01 PER SHARE
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 twelve months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $77,014,314 (based upon the closing sale price of
$9.88 per share on the Nasdaq National Market System on September 23, 1997).
As of September 23, 1997 8,015,557 shares of the Registrant's $0.01 par
value Common Stock were outstanding.
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PART I
ITEM 1. BUSINESS
OVERVIEW
CyberGuard Corporation (the "Company") is a leading Internet and Intranet
security solutions provider to Fortune 1000 and other companies and Government
agencies worldwide. The Company's CyberGuard firewall and related security
products comprise a software suite of products that are designed to protect the
integrity of electronic data and customer applications from unauthorized
individuals and digital thieves. The Company extended its product offering with
the April 1997 formation of its TradeWave subsidiary. TradeWave provides digital
certificate authority products and services to safeguard electronic commerce
applications.
The Company is the former Computer Systems Division of Harris Corporation
("Harris") and was incorporated in August 1994 for the purposes of consolidating
such division's Real-time and trusted computer businesses in a separate
corporate entity. On October 7, 1994, Harris effected a tax-free distribution,
on a pro rata basis to its shareholders, of all of the Company's issued and
outstanding capital stock. In May 1995 the Company separated its business
operations into two units: the Real-time Computing Business and the Trusted
Systems Division, which developed network security products. Effective June 30,
1996, the Company sold to Concurrent Computer Corporation ("Concurrent") the
assets of its Real-time computer business. With the completion of this
transaction, the Company is focused solely on the business of developing and
marketing security solutions which include firewall products, authentication
products, content/virus scanning products, certificate authority solutions and
comprehensive service and support.
Unless otherwise indicated, references in this Item 1 to the "Company" with
respect to periods before the Real-time Sale (described below) are to the
Company's Trusted Systems Division.
The Company expanded its security products and service offering with the
formation of its TradeWave electronic commerce subsidiary. The TradeWave
subsidiary, located in Austin, Texas, began operations in April 1997 following
the completion of the purchase of the related business assets from Sun River
Corporation. The Company's TradeWave subsidiary specializes in electronic
commerce solutions and operates OASIS, one of the largest electronic
commerce/certificate authority applications using the Internet. OASIS supports
the trading of excess electrical capacity for the public utility industry and
has over 400 customers trading in excess of $25 billion annually.
Information in this report contains forward looking statements that involve
risks and uncertainties. The Company's actual accomplishments and results may
differ significantly from those discussed in the forward looking statements. See
Item 7, "Management's Discussion and Analysis" for a more complete statement of
information regarding forward looking statements.
INDUSTRY BACKGROUND
CyberGuard competes in the network security and electronic commerce
markets. Network security has historically been the focus of primarily those
businesses in security-sensitive industries such as healthcare, financial
services, insurance, telecommunications, government and others. Businesses in
these industries historically maintained a secure network environment by
isolating their networks privately and allowing only authorized users to connect
to their privately managed networks.
In recent years, organizations have increasingly begun using the TCP/IP
protocol for their enterprise networks or using the Internet as an inexpensive
alternative to establishing their own wide area networks. An enterprise network
that uses the TCP/IP protocol is called an "intranet." An intranet can extend
internal information systems and enterprise applications to geographically
dispersed facilities, remote offices and mobile employees using personal
computers running on incompatible operating systems. Using any "web browser," an
employee can view electronic information notwithstanding the incompatible
operating systems utilized by the employee and the information source. In many
cases, different departments within the same organization can create "home
pages" used to share information among coworkers. The increasing ability to
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interconnect with disparate enterprise units has increased the use of mobile or
"nomadic" computing by which users connect to enterprise networks from remote
offices and while traveling. The increasing use of the non-proprietary TCP/IP
network protocol for internal network communications is due, in large part, to
(i) the widely distributed nature of such protocol, (ii) the fact that TCP/IP
network protocol support is available on nearly all types of computer systems
currently manufactured, and (iii) cost considerations.
As popularity and use of the Internet and intranets for business
applications has increased, companies have become increasingly concerned that
data collected and stored electronically by organizations might be vulnerable to
access by unauthorized users, including certain of a company's own employees.
This concern is due in part to the fact that the TCP/IP protocol is particularly
susceptible to penetration, and, as a result, interest in and purchases of
firewall software to protect enterprise networks have increased. In February
1996, International Data Corporation ("IDC") estimated that the worldwide
firewall market would grow from $160 million in 1995 to an estimated $987
million in 2000.
The Company believes that more than half of the firewall software and
services market is related to the use of firewalls within intranets. This is
because each intranet subnet can use a firewall to protect its data from the
numerous other subnets of the same intranet, whereas firewalls for Internet
access may protect only a small number of Internet connections, often only one.
The intranet-related firewall market is generally comprised of large, often
multinational corporations that typically segment their internal networks into a
number of subnets. The Company believes that worldwide demand for firewall
products will exceed the market growth rates expected in the United States.
The following elements are principal means for protecting organizations
from digital mischief. These elements require substantial integration and
interoperability to smoothly implement an organization's security policy.
Security Policy. Security products will not do much good unless they
follow a well thought enterprise security policy. Creating a policy requires
cooperation between information technology staffers, business unit managers and
senior executives. Generally, a policy should follow one of two philosophies.
The first is, "That which is not expressly prohibited is permitted." The second
is, "That which is not expressly permitted is prohibited." The former is less
intrusive but will not provide maximum protection. The latter requires
discussion and support from management because it affects workflow of the entire
organization -- all the way down to rules for locking offices and filing
cabinets, and discarding waste paper. The use of security technology such as a
firewall generally is associated with the second philosophy.
LAN Security. Popular local area network operating system software
provides many security options -- many of which are seldom used. Network
managers can immediately improve protection by implementing security features
such as log-in restrictions on specific workstations, days of the week and hours
of the day. More stringent password policies also create extra barriers, such as
increasing the minimum password length and forcing regular password changes.
Another overlooked area is share-level security rarely used with appropriate
precision. Rigorous application of LAN security features can bolster protection
from internal breaches.
Firewalls. Firewalls provide access control. They usually are aimed at
preventing external security breaches, but also can provide additional internal
security for corporate intranets. Firewalls are a combination of software and
hardware, usually consisting of a fast workstation located outside the LAN but
inside the router link to the Internet. To be effective, all network traffic
must pass through the firewall, whether going to the outside world or entering
the LAN. The firewall permits only authorized traffic to pass either way. And
the firewall must be impervious to unauthorized penetration. Premium firewalls
run on special versions of the UNIX operating system, although Windows NT-based
versions are starting to see some use. Some firewalls also support ancillary
special features, such as Web URL filtering.
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Firewall features and the underlying operating system of the firewall
generally determine the level of security which the firewalls provide. Presented
below is the security spectrum of firewall products available today.
CHART
Generally, these technologies build on each other so that the most secure
technologies can also perform the functions of the less secure ones and,
depending on price and other factors, can serve markets for such products.
Encryption. Encryption is a data-scrambling technique that prevents
information from being read by unauthorized people. It is used to protect data
packets during transmission from one point to another. Encryption can be
implemented in two ways: from the PC that originates the data, or from the
server or Internet connection device that passes the data outside the LAN.
Protected data is decrypted by a reciprocating destination LAN server or PC.
Digital key technology is a common means of implementing encryption. A digital
key bearing a secret value is used to encrypt data. Decryption can occur only by
someone who possesses the same key -- much like secret agents passing coded
messages from behind enemy lines. Encryption is a common security technique used
to protect Virtual Private Networks (VPNs) and standard intranets.
Anti-Virus. A computer virus modifies programs and data, sometimes in an
innocuous manner and sometimes with malicious intent. Some viruses erase
applications and data from systems. Anti-virus protection software can be run
from individual workstations or from a network server or firewall. This software
scans incoming files and attachments to E-mail messages to protect PCs and the
LAN from infection.
Identification and Authentication. On the Internet, no one can see who is
using the system. Digital identification technology is used to identify who you
are before you start using an information system. Authentication is the means
for proving to the system that you actually are the person you claim to be. This
is similar to the process of signing a check, then showing a driver's license
and a major credit card to a store clerk. Digital identification and
authentication employs passwords, keys, physical tokens, badges and smart
cards -- even fingerprints or voiceprints in advanced systems. Digital
identification and authentication are particularly important for securing
electronic commerce which mostly operates outside the protection of a corporate
intranet's security infrastructure.
Certificate Authority. Applications requiring absolute user identification
employ digital signatures managed by a trusted organization called a certificate
authority. Digital signatures are locked and unlocked with electronic keys, and
filed in a directory of certificates that identify users owning the keys. A
trusted organization called a certificate authority manages and distributes
these certificates with their corresponding keys. A certificate authority can be
an in-house department or a third-party service provider. It is responsible for
the complex process of registering new users, securing Web servers, distributing
and updating private keys and certificates, recovering lost or forgotten keys
and maintaining audit trails. A certificate authority is required for large
electronic commerce applications such as the Open Access Same-time Information
System (OASIS), which underpins deregulated trade of electric power transmission
between more than 400 electric utilities and cooperatives throughout the United
States.
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THE CYBERGUARD SOLUTION
The Company's secure operating system and secure networking software
technologies allow it to position the CyberGuard product suite to address the
broad range of customer requirements in the commercial network security market.
Generically speaking, a firewall consists of a firewall application, an
operating system and networking software, each playing an important role in the
receipt and processing of data through the firewall. In standard network
security products, only the firewall application has been designed to resist
penetration by an attacker, leaving the operating system and network software
unsecure. Therefore, an attacker can penetrate a standard firewall through the
unsecure operating system or networking software. The Company's CyberGuard
Firewall uses a secure operating system and secure networking software to
prevent network penetration by requiring network communication to pass through
the firewall application.
The graphic presentation below depicts the three major components of a
firewall system and demonstrates the fundamental security deficiency of an
application-only solution as compared to the CyberGuard Firewall.
CHART
Both the secure operating system and secure networking software are based
on multi-level security ("MLS"), that is, they restrict access to information
based on the sensitivity of the information and the access authorization of
system users. In an MLS system, a user cannot read data that has been labeled at
a level more sensitive than the security level given the user and cannot create
or modify data having a different security label. The operating system and
programs reside at a protected level that cannot be read or modified by network
users.
The Company's secure operating system and networking software have been
rated by the Network Computer Security Center ("NCSC") at a B1 level. The NCSC
ratings range from D (systems with minimal security) to A1 (systems with assured
security). Certain agencies of the United States government have incorporated
the NCSC ratings into their procurement requirements, and commercial users,
while not having specific NCSC-rating requirements, often look to an NCSC rating
as an indication of the product's proven reliability. The Company's CyberGuard
Firewall is the only commercially available firewall built on an integrated
operating system and networking software with a rating as high as B1. These
components have also been successfully evaluated by the Centre d'Electronique de
l'Armement ("CELAR") in France and United Kingdom against the European
Information Technology Security Evaluation Criteria ("ITSEC"). The Company has
completed a two-year evaluation process with Logica U.K. and has received the E3
rating for its products which, in the Company's opinion, has increased the
marketability of the CyberGuard Firewall in
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international markets. Logica U.K. is an international industry-sponsored
agency. Additionally, the Company has completed a similar E-3 evaluation process
with the Australian Defense Security Directorate (DSD) and has been granted the
E-3 level for that country.
The Company's CyberGuard Firewall also addresses the high performance end
of the commercial network security market because the underlying operating
system and networking software were designed for demanding security
environments. The Company's secure operating system is designed to function as a
high performance, Real-time operating system able to process high levels of
throughput without time-consuming failures. This same operating system
technology underlies the Company's secure networking software and firewall
technology.
The CyberGuard Firewall product is the basis for the Company's ability to
offer a complete suite of enterprise-wide security products including mobile
security applications, secure data base application, and network access control
filters.
STRATEGY
The markets for network security products, systems and services continues
to grow at rapid rates. Strategically, CyberGuard believes that it has
established a core competence in the area of firewall application and related
secure operating systems and network programs. This competency should be
extensible into the related areas of authentication and encryption, in the form
of both products and services. The process for planning the extension of its
core competency and establishing the strategic direction for the Company
consists of identifying the markets the Company chooses to serve, the products
and services appropriate for those markets, and the distribution channels
required to deliver such products and services to such markets. Finally, the
overall business case for each possible extension or new market opportunity
remains the ultimate criteria for entry into new markets. Each of these
strategic process steps is briefly summarized below:
The Markets CyberGuard Chooses to Serve. The focus of the Company
begins with its customers and determining which markets its chooses to
serve. Market research, released in January 1997 by the United Bank of
Switzerland (UBS) indicates that from 1995 through the year 2000, there is
a projected revenue growth of 44% in the firewall market, which is
currently the market for the Company's products. This is the core business
area for the Company which it intends to continue to serve. The market
research further indicates that the rapidly growing related product areas
of authentication and encryption, which further extend the level of
security provided to our customers by the firewall product, offer new
business opportunities for CyberGuard. The Company plans to address these
market opportunities as well.
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CYBERGUARD -- ELECTRONIC INFOSEC SOFTWARE MARKET
CHART
CHART
CHART
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Source: UBS Securities LLC January 1997
Core Product Transition. CyberGuard's core firewall business has been
based upon the CyberGuard Firewall Release 2 product line which employs a
proprietary hardware platform. A key part of the Company's strategy to
improve the overall profitability of the business was the October 1996
introduction of its CyberGuard Firewall new release 3 product line based
upon the Intel(TM) Personal Computer (PC) platform. This product line
offers the customer a broader choice of PC hardware platforms with better
prices. Additionally this product line allows CyberGuard to transition to a
software and services company; and provide significantly improved profit
margins In the first quarter of introduction, Release 3 products accounted
for nearly 40% of total unit sales. During the period January 1, 1997 to
June 30, 1997, the Release 3 product was recognized with eight separate
"best of breed awards" from major trade press evaluations. Most important
was the positive impact on the Company's gross margin since introduction of
the CyberGuard Firewall Release 3 into the CyberGuard product line (see
Management and Discussion Analysis). The Company intends to further extend
its core firewall product line to include intranet products with the
introduction of a Microsoft NT(TM) based
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CyberGuard Firewall. This product would be developed with specific product
attributes such as proxies which support various work group environments to
better position to address the Intranet market.
Extending Distribution Channels. CyberGuard has continued to focus on
matching the company's distribution channels to the markets it serves and
in particular to those vertical industries, such as finance, healthcare and
communications, that account for a significant amount of the total dollars
spent on network security products and services. On a world-wide basis, the
Company's strategy is to increase the amount of product provided to the
market through the reseller channel. Two key reseller relationships were
entered into during the past year with Data General Corporation and with
Tech Data Corporation. The Data General relationship includes their
"pre-loading" the CyberGuard Firewall product on a Data General AViiON
personal computer and offering the combined product to the market place as
the "Firewall in a box" integrated system. Tech Data, with more than 70,000
resellers worldwide, has agreed to distribute the CyberGuard product line
beginning with the CyberGuard NT firewall.
Strategic Corporate Initiatives. The UBS market research indicates
that the future market direction for the network security industry includes
the growing demand for products and services associated with the
authentication and encryption portions of network security. During this
past year, CyberGuard acquired the assets of TradeWave, formerly an
operating division of SunRiver Corporation. TradeWave develops and sells a
suite of authentication and encryption products and services. TradeWave
also operates one of the largest electronic commerce networks in the United
States referred to as the OASIS network. The OASIS application is
associated with the electric power utility industry and is projected to
conduct more than $25 billion worth of transactions of this network in
calendar year 1997. This acquisition is consistent with the market
direction of the network security industry and allows CyberGuard rapid
entry into this developing strategic market.
PRODUCTS AND SERVICES
Products
The Company's products are used to secure access to distributed electronic
data and to safeguard the integrity of electronic commerce applications. The
products offered by the Company include the CyberGuard Firewall, the TradeVPI
suite of software products developed by the Company's TradeWave subsidiary and
related third party products offered by the Company with its strategic partners.
Additional information regarding each of these products is presented below.
CyberGuard Firewall. The CyberGuard Firewall is built upon the Company's
B1-evaluated secure operating system and secure networking software. The
CyberGuard Firewall includes the following features:
Packet Filtering. The CyberGuard Firewall implements packet filtering
technology allowing the firewall to expressly permit or deny connections
using criteria based upon source and destination host or network and the
type of network service being requested.
Security Auditing and Alarms. The CyberGuard Firewall incorporates a
built-in auditing and alarm function that permits administrators to review
a chronological record of system activities allowing the reconstruction of
security sensitive activities. The CyberGuard Firewall can be configured to
dynamically process the security auditing information and, in Real-time,
take explicit actions in response to actions deemed security sensitive or
possible attempts to attack the network or firewall.
Application Proxies. The CyberGuard Firewall supports a number of
security enhanced application proxies for many network services, including
remote login ("rlogin"), terminal emulation ("Telnet"), file transfer
protocol ("FTP"), hypertext transport protocol ("HTTP") (used with the
WWW), network news transport protocol ("NNTP"), simple mail transport
protocol ("SMTP"), and simple network management protocol ("SNMP").
Remote Administration. The CyberGuard Firewall supports the ability
to remotely monitor and administer a firewall from a "Network Operations
Center." Using this remote administration capability, a
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CyberGuard Firewall can be managed from a remote site as if the system
administrator were physically located with the firewall.
Network Address Translation. The CyberGuard Firewall can be
configured to translate all internal addresses to the firewall's network
address. From the Internet, the firewall appears to be the only machine
connected, reducing the risk of possible penetration attacks against the
internal network.
Graphical User Interface. The CyberGuard Firewall provides a
Motif-based graphical user interface, or "GUI," designed to facilitate
system configuration and administration. A GUI is generally considered
easier to use than the traditional command-line interface.
Split Domain Name Service. The CyberGuard Firewall can function as a
Domain Name Service ("DNS") server. With Split DNS, the network responds to
queries differently depending on their source. For example, responses to
requests from the Internet might contain only the CyberGuard Firewall
information; responses from internal requests might contain a complete list
of hosts.
Virtual Private Networking. The CyberGuard Firewall supports a
variety of Virtual Private Networking ("VPN") products, including the
SafeNet product offered jointly by the Company and by Information Resource
Engineering, Inc. ("IRE"). VPN products provide a mechanism for
establishing a logically separate network between multiple CyberGuard
Firewall systems. This logical network supports fully encrypted
communication among the machines of the network. PVN supports
high-performance encrypted communication between CyberGuard Firewalls,
distributed SafeNet/LANs and any of three remote user options.
Additionally, centralized security management of all encryption and
firewall products is offered with the option of outsourcing management
functions.
High Availability CyberGuard Firewall. The CyberGuard Firewall
supports an optional High Availability configuration, which combines two
firewalls to operate as a single logical unit. If the primary firewall
should fail, the secondary firewall takes over to provide nearly continuous
network connectivity. For critical connections, such as electronic commerce
sites, this High Availability configuration minimizes the risk of loss
network connectivity.
Originally introduced in October 1994, the CyberGuard Firewall was a
combined hardware/software solution which ran exclusively on the Concurrent
Nighthawk UNIX platform. In October 1996, the Company introduced the version 3
CyberGuard Firewall which is based on the SCO UNIXWare(TM) operating system. The
version 3 CyberGuard product is a "software only" solution that runs on all
industry-standard Intel(TM) pentium-based platform from leading suppliers such
as IBM, Hewlett Packard, Compaq and Data General. The recently introduced
version 4 CyberGuard Firewall includes new product features such as centralized
firewall management and embedded virus checking.
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DATE OF
FIRST
PRODUCT SHIPMENT DESCRIPTION
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(CALENDAR QUARTERS)
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CyberGuard Firewall:
Version 1.......................................... Q4 1994 Commercial firewall built on an evaluated
Version 2.......................................... Q1 1995 secure operating system and secure
Version 3.......................................... Q4 1996 networking software. Features included
Version 4.......................................... Q3 1997 packet filtering, security alarms,
auditing and application proxies.
Graphical User Interface............................. Q1 1996 Point-and-click administration
Split Domain Name Service............................ Q1 1996 Hides internal host names to
complicate hacker attempts
High Availability CyberGuard Firewall................ Q1 1996 CyberGuard feature designed to ensure
minimal network downtime
Virtual Private Networking........................... Q4 1995 Encrypted firewall-to-firewall link
WebTrack URL Blocker................................. Q1 1996 Monitors and controls access to
selected WWW sites
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DATE OF
FIRST
PRODUCT SHIPMENT DESCRIPTION
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(CALENDAR QUARTERS)
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Token Authentication Devices:
Enigma Logic....................................... Q3 1995 Authenticates network users through use
Axent Technologies................................. Q1 1997 of token authentication cards in place
Security Dynamics.................................. Q2 1996 of static password
Informix Online/Client Server Systems................ Q4 1992 Secure database tool for server and
electronic commerce applications
CX/SX Secure Operating System........................ Q2 1989 B1-evaluated secure operating system
LAN/SX Secure Networking Software.................... Q3 1990 B1-evaluated secure networking software
Centralized Management............................... Q3 1997 Allows multiple firewalls to be
administered and monitored from a
central location
Virus scanning....................................... Q3 1997 Scans packets and files at the
Firewall to detect computer viruses
</TABLE>
TradeVPI. The TradeVPI product suite from TradeWave provides a software
framework for secure electronic commerce transactions: encryption,
authentication, integrity, non-repudiation and authorization. The current
TradeVPI product family includes:
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DATE OF
FIRST
PRODUCT SHIPMENT DESCRIPTION
- ------- -------- -----------
(CALENDAR QUARTERS)
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Trade VPI............................................ Q2 1997 TradeAgent Client software for Web
browsers, TradeAgent Server
software for Web servers, and
TradeAccess Control Server software
for certificate-based access
management
TradeAgent SDK....................................... Q2 1997 Software developer's toolkit to
support secure programmatic access
without a browser or interactive
user
TradeAuthority....................................... Q2 1997 Third party certificate authority.
Online registration and approval
according to an organization's
security policies
</TABLE>
Third Party Products and Services. Through strategic alliances, the
Company offers certain network security products for use with the CyberGuard
Firewall. These products include:
WebTrack URL Blocking. Together with its CyberGuard Firewall, the
Company offers WebTrack, a product developed by Webster Network Strategies
(a division of Secure Computing). WebTrack is a software product that
monitors and controls access to non-business related WWW sites such as
pornography, hate speech, on-line shopping, job searching and sports. The
Company offers WebTrack through a strategic alliance with Webster Network
Strategies.
Token Authentication Products. With the CyberGuard Firewall, the
Company offers a number of third-party token authentication devices,
including those offered by the Company through alliances with Axent
Technologies, Security Dynamics and Enigma Logic, among others. Token
authentication devices provide for an alternative to the use of static
passwords for user authentication, resulting in reduced likelihood of
system penetration through the reuse of an old password.
Informix Online/Secure Client Server Systems. The Company, through a
strategic alliance with Informix, Inc. ("Informix"), offers the Informix
Online/Secure B1-evaluated secure relational database management system
("Online/Secure"). Online/Secure extends the Company's security policy into
the
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relational database product technology of Informix, providing a fully
secure, high-performance, multi-level secure database environment for
secure transaction processing and secure database applications.
Secure Operating Systems. The Company offers secure operating systems
based on the Intel Pentium and Motorola RISC technologies. The Company's
CX/SX operating system is a multi-threaded, fully preemptive operating
system for high performance, secure UNIX-based applications. The Company's
CX/SX operating system has received rigorous evaluation from the NCSC in
the United States and CELAR in France. The NCSC performed an evaluation of
the Company's CX/SX operating system and subsequently granted it a B1
security rating. The Company anticipates it will submit its latest secure
operating system release based upon UnixWare 2.0, as well as future
releases for secure Windows NT-based systems, for similar U.S. and
international-based evaluations.
Secure Networking Software. The Company's LAN/SX product is a secure
network software product that provides a multi-level secure interface
between CX/SX and a heterogeneous networking environment. The NCSC
performed an evaluation of the Company's LAN/SX operating system and
subsequently granted it a B1 rating.
Services
System Integration Services. The Company offers a number of systems
integration services, both directly and through strategic alliances, with the
purpose of offering customers network security expertise for their particular
networking environment. In addition, the Company markets several specific types
of pre-packaged consulting services relating to, among others, penetration
testing, Internet gateway security and technical evaluation, system security,
corporate data security policies and management control, network security policy
and management control, Internet security policy and management controls,
network security analysis, and information security training.
Key Management Services. The Company has announced and is currently
bidding service-type arrangements to outsource the setup and sustaining
operations for customers who wish to employ Virtual Private Networks and
certificate authorities. The Company will manage network security products such
as encryption tokens and firewalls as a turn-key option through the partnerships
with IBM, IRE and other potential third party providers.
PRODUCT DEVELOPMENT
The following table shows the significant products and product enhancements
that the Company expects to introduce during the last quarter of calendar year
1997 and during calendar year 1998.
<TABLE>
<CAPTION>
PRODUCT INTRODUCTION DESCRIPTION
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(CALENDAR QUARTERS)
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CyberGuard Intranet Firewall......................... Q4 1997 Windows NT based firewall with
intranet-specific features
Integrated link-level encryption..................... Q1 1998 Provides secure communications
from firewall-to-firewall and
remote user-to- firewall.
This effort will integrate
CyberGuard firewall and
TradeWave Trade VPI
technologies
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT INTRODUCTION DESCRIPTION
- ------- ------------------- -----------
(CALENDAR QUARTERS)
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ITSEC Evaluated Firewall............................. Q2 1998 ITSEC Evaluation of Windows NT
and UNIXWare firewalls
Firewall integration with B2 operating system........ Q2 1998 Firewall product which is
integrated with an operating
system which has received a
"B2" evaluation from the NCSC
NT based Internet Firewall........................... 1998 Microsoft NT based firewall
with Internet features similar
to the UNIX-based firewall
Browser-based administration......................... 1998 Firewall administration via
Netscape/Microsoft Explorer
based browsers.
</TABLE>
The expected dates of introduction in the above table are forward looking
statements and are based on certain assumptions, including certain assumed
levels of staffing and capital resources, contractual arrangements with
suppliers, customers or strategic allies, market conditions, overall product
development costs and related sales and marketing expenses, the nature of
available competing and complementary technologies and products, and other
assumptions. Should these assumptions change or prove to be inaccurate, or
should the Company's plans change due to certain unforeseen factors, the
development of such products may be delayed or discontinued.
Development of new products and features is performed by the Company's
internal engineering staff and through third-party licensing. The Company has 45
employees devoted to product development and expects to increase this number
modestly during fiscal year 1998. The Company supplements the development staff
from time to time with contract engineers as needed to meet product demands in
the market. For the fiscal year ended June 30, 1997, the nine-month period ended
June 30, 1996 and the fiscal years ended September 30, 1995 and June 30, 1994,
the Company spent $4.7 million, $2.9 million and $1.5 million and $1.6 million,
respectively, on research and development, an equivalent of 30%, 40%, 31%, and
18% of total sales during such periods, respectively. These amounts include
software development costs that have been capitalized during such periods.
JOINT PRODUCT DEVELOPMENT AND STRATEGIC ALLIANCES
In July 1996, the Company entered into an agreement with Information
Resource Management Inc. ("IRE") of Baltimore, Maryland to jointly develop and
market a family of security products for VPN applications on the Internet. VPN's
offer a secure, cost-effective alternative to private leased communication
lines. This suite of products, offered under the Safenet/Enterprise name, first
shipped in December 1996 and is currently marketed and sold through the direct
sales forces and reseller partners of each company. The Company believes the
Safenet/Enterprise products offer advantages in the cost and implementation of
processing secure encrypted information as a turnkey security solution.
In December 1996, CyberGuard and Santa Cruz Operations (SCO), the world's
largest supplier of UNIX server and host applications, announced a strategic
joint marketing agreement that allows the two companies to market the CyberGuard
Firewall to SCO's premier resellers and major accounts worldwide. SCO's premier
resellers consist of over 100 top resellers who specialize in UNIX application
software integration and training. Since January 1997, the Company has signed
several of the SCO premier resellers who actively market and/or recommend the
products of both CyberGuard and SCO.
In June 1997, the Company and Data General Corp. entered into a joint
development and marketing agreement to offer the CyberGuard Firewall on Data
General's AViiON line of network servers. As part of the agreement, Data General
announced its SECURELiiNE product offering which includes a preconfigured
hardware/software "firewall in the box" solution featuring the CyberGuard
Firewall product. This product is expected to be marketed through Data General's
direct sales force and authorized reseller channels. Another aspect of the Data
General agreement calls for Data General to include CyberGuard's NT-based
Firewall into
11
<PAGE> 13
the SECURELiiNE offering following its introduction which is expected in Q4 of
calendar 1997. Finally, under the development portion of the agreement, the
Company has committed to port its CyberGuard Firewall product to Data General's
DG/UX "secure" operating system which is currently being evaluated for B-2
certification by the NCSC.
To complement CyberGuard Firewall product sales, the Company offers
consulting and security products through a series of strategic alliances with
prominent organizations. The Company has formed alliances with several
consulting partners world-wide, including with EG&G, Inc. and Coopers & Lybrand
Consulting since 1995 and with Coopers & Lybrand L.L.P. since February 1996.
Consulting services include network and on-site analysis services, network
penetration testing, security policy and management control, migration planning
and security training.
The Company has alliances for the purpose of reselling the Company's
products with several strategic partners, including BTG Inc. and Electronic Data
Systems Corp. ("EDS"). The Company has additional strategic resellers outside
the United States, which include Nissin Electric Co., Ltd., and Hucom, Inc.
(Japan), Concurrent Computer Company (Russia) and QPSX Communications Limited, a
subsidiary of Australia's Telstra Corporation.
The Company has also entered into product-related strategic alliances with
Axent Technologies Inc., Security Dynamics, Inc., Entrust and PC Security Ltd.
to offer a variety of value-added products to its CyberGuard Firewall and
TradeVPI family of products. In March 1996, the Company announced a strategic
alliance with Webster Network Strategies to provide the WebTrack Internet
monitoring and blocking service on the CyberGuard Firewall. In June 1997, the
Company announced a strategic alliance with Elia Shim Inc. to include its virus
scanning software engine as a standard feature for CyberGuard Firewall products.
The Company also has strategic alliances with Informix, Inc. and Oracle
Corporation to provide database or database proxy support on the Company's
Firewall and Secure Server products. As a charter member of the IBM Commerce
Print Program, the Company's TradeWave subsidiary has partnered successfully
with IBM. Today the two companies jointly support the certificate authority
processing for the OASIS Program.
The Company is actively seeking additional strategic alliances for product
development and sales and marketing purposes. The Company expects such alliances
to contribute to efforts to develop additional products or enhancements to its
existing product offerings, particularly those relating to encryption, token
authentication and virus detection. The Company is also actively pursuing sales
and marketing alliances, particularly with value added resellers and
distributors, in order to expand the geographic distribution of the Company's
products.
CUSTOMERS AND MARKETS
End-users of CyberGuard products include commercial businesses, government
agencies, public-utility consortiums, and educational institutions. In most
cases, CyberGuard supplies its product to authorized resellers, distributors,
business partners, or system integrators who ultimately sell to and support the
end-users. The Company in turn supports these reseller channels which are
marketed by the Company's direct sales force. The Company's current and
prospective commercial customers include medium to large domestic and
multinational companies that routinely create and store proprietary and/or
highly sensitive information which is accessible via corporate networks
including Intranets and Extranets (wide area networks). These customers are
likely to consider network security and network throughput performance as
decisive factors in their procurement decisions. Target markets for the
Company's products include financial institutions, financial news services,
insurance companies, health care institutions and companies who market
electronic commerce applications to businesses and consumers.
For the year ended June 30, 1997 sales to Hucom Inc., a Japanese reseller
of CyberGuard product, accounted for 11% of the total revenues of the Company.
No other single customer accounted for more than 10% of sales for the current
fiscal year. See note 19 of Notes to the Company's Consolidated Financial
Statements. The loss of Hucom as a customer could have a material adverse effect
on the Company's business, financial conditions and results of operations.
12
<PAGE> 14
Sales of CyberGuard Firewalls and related products include government-related
customers, but are sold on the same terms and conditions as to
non-government-related commercial customers. During the fiscal years ended June
30, 1997, June 30, 1996 and September 30, 1995 sales of CyberGuard Firewalls and
related products to agencies of the United States government and its contractors
accounted for 9%, 51% and 43% respectively of overall sales for such products.
Sales of secure operating systems and secure networking software sold separately
from CyberGuard Firewalls have been primarily to government agencies (both in
the United States and internationally), including the United States government
and government contractors. During the nine-month period ended June 30, 1996,
total sales to the British MOD were 8% of the Company's sales, and during the
fiscal year ended September 30, 1995, a single government-related customer
accounted for 39% of the Company's sales. There were no equivalent sales for the
fiscal year ended June 30, 1997.
SALES, MARKETING AND DISTRIBUTION
The Company has established a broad range of indirect channels by which to
market its products in the United States and internationally, including VARs,
distributors and manufacturers' representatives, as well as direct sales
representatives. Within the last 18 months, the Company has entered into
contracts with over 40 VARs, distributors, and manufacturing representatives to
resell its products. Key resellers and distributors include: Hucom Inc., EDS,
Tech Data Corporation, Dacom Corp., EMJ America, Inc., Lucent, QPSX
Communications Limited, a subsidiary of Australia's Telestra Corporation, Public
IP Exchange Limited, a U.K. subsidiary of UUnet Technologies, and Nissin
Electric Co. LTD (a member of Japan's Sumitomo Group). During the year ended
June 30, 1997, the indirect marketing channels for the Company's products
accounted for 57% of the Company's sales. See also "Strategic Alliances" above.
The Company is seeking to expand its indirect sales channels for the marketing
of its products and has a goal to have its indirect channels account for 80% of
its sales by the end of fiscal year 1998.
The Company employs 24 sales representatives and maintains sales offices in
Atlanta, Georgia; Boston,Massachusetts; Chicago, Illinois; Dayton, Ohio; Fort
Lauderdale, Florida; Dallas and Austin, Texas; Los Angeles and San Francisco,
California; New York, New York; Washington, D.C.; London, England; Paris,
France; Munich, Germany and Ottawa, Canada. The sales force focuses its sales
and marketing efforts towards customers and VARs in selected vertical markets
such as healthcare, financial services, insurance, telecommunications and
electronic commerce application providers. The Company's sales staff also
solicits prospective customers and provides technical advice and support with
respect to the Company's products.
In support of its sales efforts, the Company markets its products through
direct mail, advertising, seminars, trade shows, telemarketing, and on-going
customer and third-party communications programs. The Company has entered into
strategic marketing relationships with various vendors of communications,
security and network management products and consulting services. Certain of
these vendors recommend the Company's products along with their own solutions to
meet a customer's security needs. The Company also seeks to generate interest
in, and to educate potential customers about, computer and network security
through its speaking engagements, contributed articles, interviews and
documentaries.
The Company focuses its direct and indirect marketing efforts on commercial
businesses that the Company perceives as having a need for network security due
to the sensitive nature of data they collect or due to the devastating potential
impact of computer "hacking." The Company intends to address this market both
with its direct sales force and through indirect channels such as VARs and
systems integrators who already serve such markets. The Company also believes
its products are particularly well suited to Internet service providers ("ISP"),
electronic commerce service providers ("ESPs") and Internet-based retailers of
subscription products and services.
COMPETITION
The market for network security products is intensely competitive and
characterized by frequent technological change. The Company believes that
competition in this market is likely to persist and to intensify if demand for
network security products continues to increase.
13
<PAGE> 15
In the market segments requiring the highest levels of network security,
the Company competes with Secure Computing and Trusted Information Systems Inc.,
which also offer a firewall with a security enhanced operating system. The
Company also competes with manufacturers of proxy application firewalls and
hybrid systems, such as Check Point Software Technologies LTD, V-One Corp., ANS
Inc. and Raptor, whose products lack a secure operating system but might
nonetheless be considered competing products by some consumers. The Company
competes with a number of manufacturers, such as Cisco, whose products consist
mainly of network routers which offer embedded firewall features (such as packet
filtering rules). These products may be considered to be alternatives to the
Company's. In addition, companies such as IBM, DEC and Sun sell products with
similar features and functions that could be considered competitors of the
Company's. In addition, certain companies, such as Microsoft and McAfee, that
have historically provided shrink-wrapped software products have now begun to
offer network related security products that could eventually compete with the
Company's firewall products.
With the acquisition of TradeWave Corporation in April 1997, the Company
now competes in the relatively new and rapidly evolving market for electronic
commerce security products. Within this market, the Company competes with
digital certificate providers such as Verisign Inc., as well as traditional Web
browser products such as Navigator from Netscape and Explorer from Microsoft.
Additionally, since many of the electronic commerce applications require some
level of customization or multi-product integration, customers may elect to
develop the products "in-house" after procuring the underlying software
technology from companies such as Entrust. While the Company believes that it
does not compete against manufacturers of other classes of security products,
such as token authentication or encryption, due to the complementary functions
performed by such other classes, the Company's customers may perceive such other
companies as competitors of the Company.
Most of the Company's competitors offer network security products based
upon Microsoft's NT operating system that compete with the Company's products.
The Company believes that its customer base will broaden as a result of the
commercial introduction of its own NT firewall scheduled for introduction in
calendar Q4 1997. However, there can be no assurance that the Company's NT
firewall product, if introduced as planned, will achieve broad market acceptance
or that the Company can maintain its competitive position against current and
potential competitors, especially those with significantly greater financial,
marketing, service, support, technical and other competitive resources. Certain
of the Company's competitors may determine, for strategic reasons, to
consolidate, substantially lower the price of their network security products or
bundle their products with other products, such as hardware products or other
enterprise software products. In addition, current and potential competitors
have established or may establish financial or strategic relationships among
themselves, with existing or potential customers, resellers or other third
parties. For example, Compaq Computer Corporation maintains a financial interest
in Raptor and agreed to bundle Raptor's network security software with certain
of its product offerings.
The Company believes that the principal competitive factors affecting the
market for computer and network security products include the product's level of
security, performance and reliability (particularly maximum levels of
throughput), technical features including interoperability, ease of use,
capabilities, customer service and support, distribution channels and price.
Based upon its understanding of the features of the products and services
offered by the Company's competitors, the Company believes that its products
currently compete favorably with respect to such factors. Based upon its
experience and understanding of the existing network security market, the
Company believes that potential purchasers of the Company's security products
who do not differentiate between the level of security provided by competing
security products are as likely to base their purchasing decisions on price,
ease of use, or other considerations as they are to base such decisions on the
level of security provided. In circumstances where a potential purchaser's
primary concern is the level of security provided by products being considered,
the Company, based upon its understanding of the features in products and of the
services offered by the Company's competitors, believes that its products
compete favorably.
Additionally, the Company believes a key competitive factor in the network
security market is a computer system's security rating by intelligence and other
government agencies such as the NCSC and ITSEC. The CyberGuard Firewall is the
only commercially available firewall built on an integrated secure
14
<PAGE> 16
operating system and secure networking software components that are rated B1 by
the NCSC. The Company's secure operating system has also successfully completed
evaluation by CELAR. In March 1997 the CyberGuard firewall successfully
completed its ITSEC Certification testing in the United Kingdom and was awarded
an E-3 rating allowing it to be utilized for restricted government programs. The
CyberGuard Firewall was the first commercially available firewall to receive
such a rating. In July 1997 the Australian government also awarded its E-3
Certification to the CyberGuard Firewall. Certain of the Company's competitors
have either recently received an ITSEC Certification or have submitted their
products for review against the ITSEC E-3 Requirements. As a result, the Company
anticipates greater competition for government firewall procurements in the
United Kingdom and Australia in the future.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company relies upon license agreements with customers; trademark,
copyright and trade secret laws; employee conflict of interest and third-party
non-disclosure agreements and other methods to protect the trade secrets,
proprietary know-how and other proprietary rights on which the Company's
business depends. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known to or independently
developed by competitors. The Company currently holds patents acquired through
its acquisition of the TradeWave operating unit from Sun River Corporation. It
has no pending patent applications to cover any aspects of its technology. The
Company intends to introduce patent applications to protect aspects of its
technology; however, there can be no assurance that any future patent
applications will be granted or that any future patent applications will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages to the Company.
The Company is not aware of any patent infringement charge or any violation
of other proprietary rights claimed by any third party relating to the Company
or the Company's products. In response to certain public statements made by
CheckPoint Software Technologies, Inc. related to a patented technology referred
to as "Statefull Inspection", the Company retained patent counsel in February
1997 to thoroughly review the patent as compared to the Company's intellectual
property and associated products. The patent counsel has completed such a review
and rendered a documented legal opinion that the Company does not infringe this
third party patent. The computer technology market is characterized by frequent
and substantial intellectual property litigation. Intellectual property
litigation is complex and expensive, and the outcome of such litigation is
difficult to predict.
The Company has received trademark registration in the United States,
Canada and numerous other countries for its "CyberGuard Firewall" marks and its
CyberGuard logo. The Company has acquired certain other logo's and trademarks as
a result of the acquisition of the TradeWave subsidiary.
REGULATION
The Company is not currently subject to direct regulation by any government
agency other than regulations applicable to businesses generally and U.S.
Commerce Department licensing of export of cryptographic products. Export
controls on cryptographic products restrict the export of the Company's products
outside the U.S. In addition, certain of the Company's government products are
subject to U.S. government contracting regulations and to the International
Trade in Arms Regulation ("ITAR"), which restricts the exports of certain
products affecting national security. These regulations could restrict the
Company's ability to sell its products to foreign governments and businesses
identified from time to time by the U.S. Department of State. The combined
effect of these regulations is to create delays in the introduction of the
Company's products in international markets, and in some cases to prohibit them
altogether.
There are currently few laws or regulations directly applicable to access
to or commerce on the Internet. The Communications Reform Act, which applies to,
among other things, communications over the Internet, became effective in 1996,
and additional laws and regulations could be adopted with respect to the
Internet, covering issues such as user privacy, pricing and characteristics and
quality of products and services. The Company believes that some regulations
could be addressed by application of the Company's Internet-related
15
<PAGE> 17
network security products and that certain types of regulation would be
beneficial to the Company. However, the adoption of laws or regulations may
decrease the growth of the Internet, which could in turn decrease the demand for
the Company's products and increase the Company's cost of doing business or
otherwise have an adverse effect on the Company's business, operating results or
financial condition.
EMPLOYEES
On September 24, 1997, the Company employed 97 employees through its Fort
Lauderdale headquarters, an additional nine employees throughout its European
field offices, and twenty-five employees at the TradeWave subsidiary location in
Austin, Texas. The Company also utilizes the services of approximately fifteen
contract engineers on a temporary basis for software development or
documentation. All employees are bound by agreement containing confidentiality
and conflict of interest provisions.
CyberGuard's future success will depend in significant part on the
continued service of its key technical, sales and senior management personnel.
Competition for such personnel is intense and there can be no assurance that
CyberGuard can retain its key managerial, sales and technical employees, or that
it can attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future. None of CyberGuard's employees is
represented by a labor union. CyberGuard has not experienced any work stoppages
and considers its relations with its employees to be good.
EXECUTIVE OFFICERS
The Company's executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert L. Carberry....... 54 President, Chief Executive Officer and Chairman of the Board
of Directors
Patrick O. Wheeler....... 38 Vice President Finance and Chief Financial Officer, Acting
Vice President of Sales -- North America
Katherine K. Hutchison... 39 Executive Vice President and General Manager, TradeWave
Corporation
Tom Patterson............ 37 Corporate Vice President and Senior Vice President,
TradeWave Corporation
Robert L. Lawten......... 50 Vice President Marketing
Bradley C. Lesher........ 61 Vice President International Operations
Robert F. Perks.......... 53 Vice President North American Operations
Rick A. Siebenaler....... 34 Vice President Software Development
</TABLE>
Robert L. Carberry. Mr. Carberry was appointed Chairman, President and
Chief Executive Officer of CyberGuard Corporation in June 1996. Before joining
the Company, Mr. Carberry served as Vice President, New Technology for
Blockbuster/Viacom Group and Vice President, Managing Executive for Blockbuster
Technology Holding Corporation. Prior to Blockbuster, Mr. Carberry's 20-year
career with IBM included positions of President of Multimedia Investment
Organization, a division of IBM; Vice President Technology/Business Development
for the Personal Computer Division; Director of the Large Systems Programming
Laboratory; and IBM Corporate Director of Technology.
Patrick O. Wheeler. Mr. Wheeler was appointed Chief Financial Officer and
Vice President Finance for CyberGuard Corporation in April 1996. Additionally,
in July 1997, Mr. Wheeler was appointed Acting Vice President of Sales for North
America. Mr. Wheeler previously held various financial and sales positions of
increasing responsibility with the Company including Midwest Regional Sales
Manager, Director of Accounting and Senior Account Manager. Prior to joining the
Company in 1984, Mr. Wheeler was employed by Price Waterhouse L.L.P.
Katherine K. Hutchison. Ms. Hutchison was appointed Executive Vice
President and General Manager of TradeWave Corporation, CyberGuard's electronic
commerce subsidiary, in April 1997. Prior to this, Ms. Hutchison held various
positions of increasing responsibility with the Company, including Vice
President
16
<PAGE> 18
of Business Development and Director of Marketing. Ms. Hutchison joined the
Company in 1993 from Texas Instruments where she spent 11 years in various
management positions in the Information Technology Group. She also served as an
engineer with the Optical Technology Division of Perkin-Elmer Corporation.
Tom Patterson. Mr. Patterson joined CyberGuard Corporation in July 1997 as
Corporate Vice President and Senior Vice President of TradeWave Corporation. He
was formerly the chief strategist for electronic commerce at IBM. Prior to IBM,
Mr. Patterson was Information Security Director for MicroElectronics and
Computer Technology Corp. (MCC), leading the development of secure web products
and the first certificate authority. Prior to MCC, he led the development and
marketing of a line of PC and network security products for Centel Corp. With
over 15 years of experience in information security and electronic commerce, Mr.
Patterson has advised the White House, U.S. Congress, National Information
Infrastructure Committee, Departments of Defense, Treasury, Energy and Commerce,
and scores of large businesses and organizations around the world on electronic
commerce issues.
Robert L. Lawten. Mr. Lawten joined CyberGuard Corporation as vice
president of worldwide marketing in April 1997. He was formerly the Director of
Entertainment on Demand Market Development for Viacom's Blockbuster
Entertainment Group. Prior to this, Mr. Lawten served as vice president and
managing director of a semiconductor unit of Western Digital Corporation. He was
previously employed with IBM for 23 years, primarily in marketing and sales
management positions.
Bradley C. Lesher. Mr. Lesher joined CyberGuard in July 1994 from IBM
where he served as General Manager of the Latin American Caribbean operations
since November 1991. From 1988 to 1991 Mr. Lesher served as Director of General
Business Systems in IBM's Latin American Headquarters Operation. In this
capacity, Mr. Lesher was responsible for developing and supporting a
distribution channel network of over 200 dealer and agent organizations. He
joined IBM in 1957 and has over 30 years of diverse international management
experience including 19 years of living abroad.
Robert F. Perks. Mr. Perks was appointed Vice President North American
Operations for CyberGuard in July 1996, responsible for worldwide customer
support, Government program sales and integration, and manufacturing. In the
prior year, he served as Director of North American Sales for the Company. Mr.
Perks was employed by Computer Products' Real Time Products Corporation from
1992 to 1995 as Director, Customer Service. He was employed by Harris
Corporation from 1977 to 1992.
Rick A. Siebenaler. Mr. Siebenaler was appointed Vice President of
Software Development for CyberGuard Corporation in April 1996. He also serves as
CyberGuard's Chief Security Technologist. From 1994 to 1996, Mr. Siebenaler
served as Director of Software Development for the Company, and from 1991 to
1994, he served as Chief Engineer. Mr. Siebenaler was previously employed by the
National Security Agency (NSA), an agency within the US Department of Defense,
as chief scientist for the Division of Standards and Guidelines.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, development,
engineering, production and support facilities are located in Fort Lauderdale,
Florida. In August 1997, the Company relocated its principle offices to a new
location in Fort Lauderdale, Florida and now occupies approximately 26,000
square feet of leased office space. The lease on the facility expires in August
2007, although the Company has retained sublease provisions from its landlord.
Additionally, the Company maintains two other offices which perform sales and
product development functions. These facilities, located in Austin, Texas and
London, England also function as the administrative offices for the Company's
two subsidiaries, TradeWave Corporation and CyberGuard -- Europe, respectively.
The Company leases its sales office locations in the United States and
abroad. CyberGuard believes that its existing facilities are adequate for its
current needs and additional space will be available at current market rates as
required in the future.
17
<PAGE> 19
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company or any
of its subsidiaries is a party or to which any of the Company's or any of its
subsidiaries' property is subject. To the Company's knowledge, there are no
material legal proceedings to which any director, officer or affiliate of the
Company, or any beneficial owner of more than five percent (5%) of Common Stock,
or any associate of any of the foregoing, is a party adverse to the Company or
any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended June 30, 1997.
18
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted and traded on the Nasdaq/NMS under the
symbol "CYBG." There were approximately 6,998 holders of record of Common Stock
as of September 23, 1997. The table below sets forth, for the quarters
indicated, the high and low bid prices of the Company's Common Stock as reported
by the Nasdaq/NMS.
<TABLE>
<CAPTION>
BID PRICES(1)
----------------------
HIGH LOW
--------- ---------
<S> <C> <C> <C> <C>
FISCAL YEAR 1996
Quarter Ended December 31, 1995............................. $ 5 1/2 $ 3 5/64
Quarter Ended March 31, 1996................................ 16 21/64 3 35/64
Quarter Ended June 30, 1996................................. 23 1/4 13 1/2
FISCAL YEAR 1997
Quarter Ended September 30, 1996............................ $17 1/4 $ 8 1/2
Quarter Ended December 31, 1996............................. 14 8
Quarter Ended March 31, 1997................................ 11 3/4 9
Quarter Ended June 30, 1997................................. 10 1/2 8 1/2
</TABLE>
- ---------------
(1) Adjusted to reflect a three-for-one split of the Company's Common Stock
effective March 18, 1996.
The Company has never paid dividends on its Common Stock. The Company
intends to retain earnings, if any, to finance future operations and expansion
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future. Any future payment of dividends will depend upon the financial
condition, capital requirements and earnings of the Company, as well as upon
other factors that the Board of Directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the twelve months ended June 30, 1997
and the nine months ended June 30, 1996, and for the fiscal years ended
September 30, 1995, and June 30, 1994 and 1993, selected historical consolidated
financial data for the Company, which combines the Trusted Systems Division (the
operations of which continue to be carried on by the Company) and the Real-time
Business (which, effective June 30, 1996, was sold to Concurrent). The financial
data for the fiscal year ended June 30, 1997, nine-months ended June 30, 1996
and the fiscal year ended September 30, 1995 have been derived from audited
financial statements of the Company for such periods audited by KPMG Peat
Marwick LLP. Such data have been derived from, and should be read in conjunction
with, the audited financial statements and other financial information,
including the notes thereto, appearing elsewhere in this Annual Report. The
consolidated financial data that relate to the year ended June 30, 1994 has been
derived from consolidated financial statements audited by Ernst & Young LLP.
Financial data for the nine months ended June 1995 and the fiscal years ended
June 30, 1994 and 1993 have been derived from unaudited consolidated financial
statements that include all adjustments that the Company considers necessary for
a fair presentation of the financial data set forth therein, in accordance with
generally accepted accounting principles. Because the Company did not become an
independent entity until October 1994, the historical financial statements do
not necessarily reflect
19
<PAGE> 21
the results of operations or financial position that would have been attained if
the Company had been a separate, independent company.
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS FISCAL YEAR ENDED
ENDED ENDED ---------------------------------------
JUNE 30, JUNE 30, SEPTEMBER 30, JUNE 30, JUNE 30,
1997 1996(B) 1996(B) 1994 1993
----------- ----------- ------------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues......................... 1$5,621... $ 37,411 $ 45,111 $64,640 $55,540
Cost of Sales.................... 7,240.... 21,022 25,764 31,236 29,863
-------- -------- -------- ------- -------
Gross Profit..................... 8,381.... 16,389 19,347 33,404 25,677
Selling, General and
Administrative expenses........ 11,410 18,021 22,984 19,791 19,770
Research and development......... 4,723.... 5,360 7,903 6,725 6,850
Other operating expenses......... 262 4,253(C) -- -- --
-------- -------- -------- ------- -------
Operating Income (loss).......... (8,014) (11,245) (11,540) 6,888 (943)
Interest Income (expense), net... 646 180 456 (4) --
Other Income (expense), net...... (5,122)(D) 103 (4) (1,271) (1,074)
Loss on Sale of Real-time
Business....................... -- (15,160) -- -- --
-------- -------- -------- ------- -------
Net income (loss) before income
tax............................ (12,490) (26,122) (11,088) 5,613 (2,017)
Income tax expense (benefit)..... -- -- -- 1,086 (1,560)
-------- -------- -------- ------- -------
Net income (loss) before
cumulative effect of change in
accounting principal........... (12,490) (26,122) (11,088) 4,527 (457)
Cumulative effect of change in
accounting principal........... -- -- -- (135) --
-------- -------- -------- ------- -------
Net income (loss)................ $(12,490) $(26,122) $(11,088) $ 4,392 $ (457)
======== ======== ======== ======= =======
Loss per share................... $ (1.76) $ (4.32) $ (1.88) --(E) --(E)
======== ======== ======== ======= =======
</TABLE>
- ---------------
(A) During fiscal year 1995, the Company changed its fiscal year end from June
30 to September 30.
(B) Coinciding with the sale of the Real-time Business to Concurrent on June 26,
1996, the Company elected to change its fiscal year end from September 30 to
June 30.
(C) In 1997, represents the write-off of purchased in-process research and
development. In 1996, represents the write-off of capitalized software
($3,244) and costs associated with a canceled secondary offering ($1,009).
(D) Includes a loss of $4,414 on the sale of investments.
(E) Because the Company operated as a division of Harris Corp. prior to October
1994, loss per share data for the fiscal years ended June 30, 1994 and 1993
have been excluded.
The Company's audited financial statements included in Item 8 are as of and
for the year ended June 30, 1997, as of and for the nine months ended June 30,
1996, and as of for the year ended September 30, 1995. To facilitate
comparability between periods and for the purposes of this Item 7, management
has prepared the following table to effectively annualize the nine months ended
June 30, 1996 to the year ended June 30, 1996. Such annualization was
accomplished by adding the results of operations for the three months ended
September 30, 1995 (which three month period is unaudited but, in the opinion of
management, contains all adjustments necessary to present the information
fairly) to the nine months ended June 30, 1996.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1997 1996 1996 1995
-------- -------- -------- -------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues............................................... $ 15,621 $ 46,118 $ 37,411 $36,404
Cost of sales.......................................... 7,240 26,177 21,022 20,609
-------- -------- -------- -------
Gross profit........................................... 8,381 19,941 16,389 15,795
Selling, general and administrative expenses........... 11,410 25,266 18,021 15,739
Research and development............................... 4,723 7,293 5,360 5,970
Transaction expense.................................... -- 1,009 1,009 --
Write-off Capitalized software......................... 262 3,244 3,244 --
-------- -------- -------- -------
Operating income (loss)................................ (8,014) (16,871) (11,245) (5,914)
Interest income (expense), net......................... 646 275 180 361
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1997 1996 1996 1995
-------- -------- -------- -------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Other income (expense), net............................ (5,122) -- 103 (232)
Loss on Sale of Real-time Business..................... -- (15,160) (15,160) --
-------- -------- -------- -------
Net income (loss) before income tax.................... $(12,490) $(31,425) $(26,122) $(5,785)
======== ======== ======== =======
Loss per share......................................... $(1.76) $(5.20) $(4.32) $(.98)
======== ======== ======== =======
</TABLE>
- ---------------
(a) Unaudited Statements-Information represented for the twelve months ended
June 30, 1996 are derived from audited information.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. A more complete
statement of information regarding forward looking statements is contained at
the end of this item 7. References to the Company's results of operations from
October 7, 1994 are to the Company's Trusted Systems Division and, prior to such
time, to the Company's network security business and operations as part of the
Computer Systems Division of Harris Corporation. The following information
should be read in conjunction with the financial statements of the Company's
appearing elsewhere in this Report.
OVERVIEW
The Company is a leading developer and marketer of commercial network
security products designed to protect data on computer networks from
unauthorized users. The Company began marketing its CX/SX secure operating
system in 1989 and its LAN/SX secure networking software in 1990. In 1993, these
products received a B1 rating from the NCSC, which qualified the products for a
number of government and civilian applications and resulted in increased
marketability of such products. Until the introduction of the CyberGuard
Firewall during the first quarter of fiscal year 1995, the Company's sales were
attributable exclusively to sales of its secure operating system and secure
networking software on Night Hawk computer platforms, and largely to government
customers. During fiscal year 1993 and 1994, the Company derived substantial
revenues from two contracts: a multi-unit government contract with the British
Ministry of Defense ("British MOD") and a secure operating system porting
contract with IBM.
In May 1995, in response to initial and anticipated market acceptance of
the CyberGuard Firewall, the Company established a sales force separate from the
sales force of its former Real-time Business to focus on the Company's network
security products. At the same time, the Company began an aggressive expansion
of indirect sales channels to market its products in the United States and
internationally and since May 1995 has formed relationships with more than 45
VARs, distributors and manufacturers' representatives. As a result of these and
other efforts since such time, which coincided with greater market acceptance of
firewall products in general, sales of the Company's network security products
have shown strong quarter-to-quarter increases. However, given the Company's
short operating history in the commercial network security market, the Company
believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indicator of future
performance. The Company intends to increase its marketing staff to promote its
products and also to continue to invest a significant amount of resources in the
continued development of the CyberGuard technologies, including Windows NT based
products and products that support interoperability with industry standard
communication protocols, computer platforms and networks. The Company's planned
levels of investment are based on an expectation of higher revenue from
increased product sales. As a result, net income for a given period could be
disproportionately affected by any reductions in sales.
21
<PAGE> 23
Prior to June 30, 1996, the Company's operations included the Real-time
Business, which provided significant cash flows and certain economies of scale
with respect to sales, general and administrative costs. Many of the Company's
sales and administrative personnel and facilities were transferred to Concurrent
in connection with the Real-time Sale. As a result, the Company incurred
significant costs during fiscal year 1997 to establish the administrative,
logistical, and support groups necessary to operate the Company as a stand-alone
entity.
The Company reported certain non-recurring charges for the fiscal year
ended June 30, 1997 and the nine months ended June 30, 1996. During fiscal year
1997, the Company recognized a loss of approximately $4.4 million on the sale of
securities of Concurrent which were originally received in June 1996 as
consideration for the sale of the Company's Real-time Business operations. Other
non-recurring transactions for the current fiscal year included a write-off of
$.5 million for accumulated transaction adjustment of foreign currency-based
assets relating to the Company's former international subsidiaries sold to
Concurrent in June 1996, and $0.3 in expensed Research and Development related
to the purchase of the Company's TradeWave operations from SunRiver Corp. in
April 1997. For the nine months ended June 30, 1996, the Company incurred a loss
of approximately $15.2 million on the sale of the Real-time Business (based on a
market price of Concurrent Common Stock of $1.70 per share); approximately $3.2
million for the write-off of certain capitalized software; and approximately
$1.0 million in additional expenses related to the Company's canceled public
stock offering.
In July 1996, the Company changed its fiscal year end to June. Accordingly,
the information contained herein relating to the nine-month period ended June
30, 1996 represents the Company's 1996 fiscal year. Such period, along with the
current fiscal year ended June 30, 1997 have been audited by the Company's
independent auditors and the financial statements related thereto are attached
to this Annual Report. The information contained herein relating to the
unaudited twelve months ended June 30, 1996 and the nine months ended June 30,
1995 are derived from audited information.
RESULTS OF OPERATIONS
Twelve-month Period Ended June 30, 1997 Compared to the twelve-month Period
Ended June 30, 1996
Net Revenues. For the 12 months ended June 30, 1997 net revenues were
derived solely from the sale of the Company's firewall systems, add-on security
products, and service and support related to security products. For the 12
months ended June 30, 1996, a substantial portion of the net revenues of the
company were related to the sale of the Real-time computer systems and services,
a segment of the business which was sold to Concurrent Computer Corporation on
June 26, 1996. Specifically, net revenues for the 12 months ended June 30, 1997
were $15.6 million compared to $46.1 million for the 12 months ended June 30,
1996. This represents a decrease of $30.5 million or 66.1%. Of the $46.1 million
in net revenues for the 12 month period ended June 30, 1996, approximately $38.0
million or 82.4% represented sales and services for Real-time products. Net
revenues from the sales and service of security products increased by $7.4
million or 90.2% from $8.2 million for the 12 months ended June 30, 1996 to
$15.6 million for the 12 months ended June 30, 1997. The increase in net
revenues from security products for 1997 is the result of continued customer
acceptance of firewall technology as an adequate safeguard for electronic data
and increased customer awareness of the CyberGuard Firewall based upon numerous
positive reviews from leading-industry publications of the company's
softwareonly Version 3 firewall introduced in October 1996. Net product and
services revenues for the 12 months ended June 30, 1997 include the operations
of the company's TradeWave subsidiary which was established in April 1997. The
TradeWave subsidiary accounted for $.4 million in total revenues or 2.6% of
total revenues for the 12 months ended June 30, 1997. Additionally, the company
realized strong growth internationally during the 12 months ended June 30, 1997.
International revenues for security products and services were $9.1 million , up
$5.4 million or 144.0% compared to $3.7 million for the same 12 month period in
1996. This increase in International security products revenues is attributable
to (1) the expansion of the company's reseller channels in the Pacific-Rim
region, most notably Japan, Korea and Taiwan, and (2) to the increase in
customer orders in the United Kingdom and Western Europe following the formal
award of the ITSEC E3 certification standard to the CyberGuard Firewall in March
1997.
22
<PAGE> 24
For the year ended June 30, 1997 the Company shipped a total of 667
firewall units compared to 203 for the 12 months ended June 30, 1996. One
customer, Hucom, Inc. accounted for 11% of the revenues during the 12 months
ended June 30, 1997. There were no other customer that accounted for more than
10% of the revenues during the 12 months ended June 30, 1996.
CyberGuard provides its customer base with a comprehensive service offering
which includes the installation of its firewall and TradeWave products, customer
support including hotline assistance, and product training and consulting. For
the 12 month period ended June 30, 1997 the Company reported service revenue for
its security products of $1.0 million an increase of $.6 or 150% compared to the
like-type revenues of $.4 for the 12 months ending June 30, 1996. As a
percentage of total security revenues, service revenues accounted for 6.7% in
1997 compared to 1% in 1996. The increase in net revenues from services is
attributable to a larger base of customers under maintenance agreements in 1997
stemming from increased product shipments.
Gross Profit. CyberGuard's Cost of sales includes license fees to third
parties, media and packaging costs, equipment costs, and certain presales,
post-sales and contract labor support costs. The Company's overall gross profit
declined by $11.6 million from $19.9 million for the 12 months ended June 30,
1996 to $8.4 million for the 12 months ended June 30, 1997. The results for 1996
include the operations of the Real-time Division which accounted for $17.0
million or 85% of the total gross profit. Comparing only the sales of security
products and services, gross profits increased by $5.5 million or 189% from $2.9
million for the 12 months ended June 30, 1996 to $8.4 million for the 12 months
ended June 30, 1997. Gross margin percentages for security products and services
also increased during 1997. For the 12 months ended June 30, 1997 gross margin
percentage for security products was 53.6% compared to 35.6% for the 12 month
period ended June 30, 1996. The increase in both gross profit and gross margin
percentages for 1997 is attributable to an overall increase in unit volume
shipments and the transition of product line revenues towards the version 3
(software only) CyberGuard Firewall. Introduced in October 1996, the version 3
CyberGuard Firewall is a software-based product with substantially higher gross
margin percentages than the Company's historical Firewall products which were
only available as a combined hardware/software product. The Company has
recognized continued gross margin percentage improvements for each successive
quarter of fiscal year 1997 as a result of higher percentage shipments of the
version 3 CyberGuard Firewall as compared to the previous product versions.
Gross profit for security-related services, as measured in dollars and as a
percentage of service revenues, was $.47 million and 45% respectively for the 12
months ended June 30, 1997 compared to $.24 million or 55% respectively for the
12 months ended June 30, 1996. The increase in service related gross profit is
the result of a greater number of customers under firewall maintenance support
contracts and the addition of OASIS customer support contracts through the
Company's TradeWave subsidiary. The decline in gross margin percentage for
security services is attributable to increased staffing of CyberGuard's customer
support operations to support the larger installed based of end-customers and
authorized CyberGuard distributors and resellers.
Operating Expenses. The primary operating expenses of the Company are
research and development costs and sales, general and administration costs.
Research and development costs consist primarily of personnel-related costs
including salaries, benefits, payments to third-party or contract labor
development firms, travel, training and other personnel-related expenses to
determine the technical feasibility of products, develop the necessary product
features/functions for marketability, and maintain the product after customer
installation. The Company expenses all research and development costs as
incurred. Sales, general and administrative costs consist of personnel costs
including commissions, bonuses, and benefits, travel, communication including
MIS-related costs, marketing-related costs such as advertising, trade shows,
seminars, finance and accounting expenses, legal, insurance, company general
management, and other professional services.
CyberGuard currently anticipates that both Research and Development, and
Sales, General and Administrative expenses may increase in absolute dollars in
the future as the Company commits substantial resources to develop complementary
security products and features, and to garner a greater market percentage of
world-wide security product procurements.
23
<PAGE> 25
For the 12 months ended June 30, 1997 the Company reported total operating
expenses of $16.4 million compared to $36.8 million for the 12 months ended June
30, 1996. For the 12 months ended June 30, 1996, $23.4 million or 64% of the
total operating expenses related to the operations of the Company's Real-time
Business which was sold to Concurrent in June 1996. The operating expenses for
both 12-month periods include certain non-recurring charges. For the 12 months
ended June 30, 1997, the Company expensed $0.3 million of in-process research
and development work related to the purchase of the TradeWave business assets
from SunRiver Corporation in April 1997. The operating expenses for the 12
months ended June 30, 1996 include a provision for $1.0 million in costs
associated with the Company's canceled public stock offering in July 1996, and a
charge to write off approximately $3.2 in previously capitalized Software
Development costs. Excluding these one-time charges and the operating expenses
for the Real-time Business in 1996, total operating expenses for the 12 months
ended June 30, 1997 would be $16.1 million compared to $9.1 million for the same
12-month period in 1996. This increase of $7.0 million is the result of expanded
world-wide sales and marketing efforts to promote the Company's Firewall
products during 1997, and increased costs incurred in the 4th fiscal quarter of
1997 to operate the TradeWave subsidiary. Additionally, the operational expenses
for the 12 months ended June 30, 1997 include expenditures to develop an
NT-based firewall, and to co-develop the Safenet Enterprise Firewall Product
with Information Resource Management Corp. No similar expenses were incurred
during the 12 months ended June 30, 1996.
Net Loss. For the 12 months ended June 30, 1997 the Company recognized a
net loss of $12.5 million compared to a net loss of $31.4 million for the 12
months ended June 30, 1996. The net loss for the 12 months ended June 30, 1997
included a non-recurring charge of $4.4 million on the disposition of the common
stock of Concurrent Computer Corporation received in June 1996 in exchange for
assets of the Real-time Business of the Company. An additional non-cash charge
of $0.5 million was taken during the 12 months ended June 30, 1997 to write-off
the cumulative translation adjustment of the former European subsidiaries of the
Company which were sold to Concurrent in June 1996. The net loss for the 12
months ended June 30, 1996 includes a $15.2 million provision for the loss on
the sale of the Real Time Operating Division to Concurrent.
Nine-month Period Ended June 30, 1996 Compared to Nine-month Period Ended June
30, 1995
Net Revenues. Net revenues consist primarily of Firewall Systems,
Real-time Computer Systems, system integration and support services and sales
relating to third party security products. Overall revenue increased by $1
million to $37.4 million for the nine months ended June 30, 1996 compared to the
nine months ended June 30, 1995. This overall increase in net sales is
attributable to an increase in firewall product sales for the Trusted Systems
Division which offset lower sales for Real-time related products. Specifically,
the Company shipped 184 turn-key firewall systems during the nine months ended
June 30, 1996 compared to 72 units for the same period in 1995. Firewall and
related security products revenues increased by 86% during the nine months ended
June 30, 1996 when compared to the nine months ended June 30, 1995. The nine
months ended June 30, 1995 included a $1.9 million sale (or 48% of total secure
revenues) to one government related customer for 43 units; the nine months ended
June 30, 1996 included sales to a single international customer of approximately
$.6 million or 8% of total secure revenues. There were no sales in the year
ended June 30, 1996 for more than five units to any one customer. The increase
in product sales is the result of increased acceptance in the commercial
marketplace for the CyberGuard Firewall. The Company also experienced a strong
increase in sales leads during the nine months ended June 30, 1996 as several
prominent periodicals and industry-based magazines rated the CyberGuard highly
based upon their published testing results. During the nine months ended June
30, 1996, 71% of the Company's sales were to commercial customers, compared to
39% for the same period in 1995.
Compared to the corresponding prior year period international secure
product revenues increased $2.2 million to $3.3 million for the nine months
ended June 30, 1996, and domestic sales increased $1.2 million to $4.0 million.
The domestic sales figure for the year ended September 30, 1995 includes $1.9
million in sales to one domestic customer.
Gross Profit. The Company's overall gross profit increased $.6 million to
$16.4 million for the nine months ended June 30, 1996 from the nine months ended
June 30, 1995. The Company's overall gross margin percentages remained constant
at approximately 43.5% for both periods. The gross margin percentages for the
24
<PAGE> 26
CyberGuard and related security product sales remained constant at 37% for the
nine months ended June 30, 1995 and 1996.
Net Loss. The Company experienced a net loss of approximately $26.1
million for the nine-month period ended June 30, 1996, compared to a loss of
$5.8 million for nine-month period ended June 30, 1995. The Company's operating
expenses increased by $5.9 million from $21.7 million for the nine months ended
June 30, 1995 to $27.6 million for the nine months ended June 30, 1996. The 1996
results include several significant non-recurring charges, including the
write-off of approximately $3.2 million in previously capitalized software
developments costs (see Note 16 to the accompanying consolidated financial
statements) and a provision of approximately $1.0 million for costs associated
with the Company's canceled secondary stock offering (see Note 4 to the
accompanying consolidated financial statements). In addition to these one-time
charges, the Company also recognized a loss of $15.2 million on the sale of the
Real-time Business during the nine months ended June 30, 1996. The major
components of this loss were the change, between the date that the Real-time
Sale was approved by the Company and the transaction closing date, in the value
of the Company's common stock issued by the Company to Concurrent; the transfer
to Concurrent of $5.6 million-worth of capitalized software at a minimal cost to
Concurrent, and approximately $2.7 million in transaction-related expenses.
Reducing the June 30, 1996 net loss by these non-recurring charges results in an
adjusted net loss of $6.7 million compared to $5.8 million for the same period
in 1995. The increased net loss of $0.9 million for nine months ended June 30,
1996 is attributable to an increase in expenses to enhance the marketability of
the CyberGuard Firewall and to increase its features and functionality.
Additionally, the results for the nine-month period ended June 30, 1996 include
costs associated with the product definition, technical feasibility study, and
efforts related to the "porting" of the Company's Secure UNIX Operating System
to an Intel-based P.C. running a secure version of UNIX. No similar expenses
were incurred for the nine months ended June 30, 1995.
Fiscal Year Ended September 30, 1995 Compared to Fiscal Year Ended June 30, 1994
During fiscal year 1995, the Company operated both its Real-time Business
(which has been sold to Concurrent) and the Trusted System Division, the
operations of which are continued by the Company. During the fiscal year ended
September 30, 1995, the Company's principal products were the Night Hawk
Real-time computer (the "Real-time system"), the Power UX Real-time operating
systems as sold on Motorola's Power PC 604 CPU boards or computers, the Night
Hawk Real-time computer as enhanced with either the Company's CX/SX or Power UX
secure Real-time operating system (the "trusted system"), the commercial
CyberGuard Firewall product and maintenance and support of its installed
computer systems.
Net Sales, consolidated. During the year ended September 30, 1995, the
Company's net sales decreased to $45.1 million for fiscal year 1995 from $64.6
million for fiscal year 1994. Net product sales for fiscal year 1995 were $31.2
million as compared to $50.1 million for fiscal year 1994. Fiscal year 1995 net
sales attributable to Real-time open systems were $26.4 million as compared to
$37.0 million for fiscal year 1994. Management believes that approximately $5.7
million of the decrease in revenue from Real-time open systems was the result of
the implementation of the Company's income-recognition policies related to
Real-time systems that were ordered in fiscal year 1994 but, due to delays in
receiving acceptable Motorola 88110 microprocessor chips, were not shipped until
fiscal year 1995. During fiscal year 1995, the Company also experienced a slow
down in Real-time product sales due to the inability of IBM Corporation to
complete a secondary cache chip critical to the Company's Real-time product.
Also, the Company was not successful in moving its Real-time products to a more
commercial focus and as such experienced the delays inherent in the government
markets. Fiscal year 1995 net sales attributable to Real-time proprietary
systems, reflecting sales for replacement or add-on parts for the Company's
installed base of proprietary systems, were $3.3 million as compared to $4.3
million for fiscal year 1994.
Maintenance revenue decreased to $13.6 million for fiscal year 1995 from
$14.5 million for fiscal year 1994. This decrease was principally a result of
the shift in market demand to open systems. The Company's Real-time open systems
required less maintenance as compared to proprietary systems, and open systems
could, in many cases, be serviced by the customers themselves. Maintenance
revenues also declined as the Company's installed base of proprietary systems
reached the end of its useful life.
25
<PAGE> 27
During fiscal year 1995, the Company's net product sales to agencies of the
United States government and their prime contractors were $14.6 million and
maintenance revenue was $8.4 million. During fiscal year 1994, the comparable
net product sales were $25.7 million and the comparable maintenance revenue was
$7.4 million.
International net sales decreased to $11.9 million for fiscal year 1995
from $16.8 million for fiscal year 1994. This decrease is attributable
principally to the completion during fiscal year 1994 of a trusted systems
contract with a government contractor in the U.K., which had resulted in $4.9
million of revenue during fiscal year 1994.
Net Sales, Trusted Systems Division. The Trusted System Division's net
sales decreased to $4.8 million for fiscal year 1995 compared to $8.5 million
for fiscal year 1994. Sales in fiscal year 1994 included $5.4 million in sales
of the Company's secure operating system to the British MOD for a single project
involving the deployment of secure office automation systems and $1.6 million in
sales of the Company's secure operating system to IBM. Sales in fiscal year 1995
included sales of $1.9 million (or 39% of total sales) to a government-related
customer and sales of approximately $0.7 million (or 14% of total sales) related
to porting the Company's secure operating system to Groupe Bull S.A.'s Escala
workstation. Sales of CyberGuard Firewalls, introduced during the first quarter
of fiscal year 1995, represented $2.5 million in sales (including sales of $1.9
million to the government-related customer). During the fiscal year ended
September 30, 1995, sales to customers in commercial markets accounted for 42%
of the Division's sales.
For the Company's Trusted Systems Division, overall domestic sales were
$3.3 million and $3.0 million for the fiscal years 1995 and 1994, respectively.
International sales decreased $3.9 million to $1.5 million for fiscal year 1995.
The higher international sales for fiscal year 1994 were attributable to the
contract with the British MOD for sales of the Company's secure operating
system. International sales in fiscal year 1995 related primarily to sales of
the CyberGuard Firewall. International sales represented approximately 31% of
total sales, compared to approximately 64% in fiscal year 1994; the decrease is
attributable to the British MOD contract that ended during fiscal year 1994.
Gross Margin, consolidated. Gross margin for sales and rentals decreased
to 40.5% in fiscal year 1995 from 54.4% in fiscal year 1994 as a result of
decreased sales of Night Hawk Series computers and $2.4 million of inventory
reserve taken. Service and maintenance gross margins increased to 48.2% from
42.1% as a result of decrease in expenses as the product mix of service moves
more to the open system Night Hawk computer. Open systems are generally more
reliable and therefore require less service. International maintenance revenue
increased, which also resulted in improved gross margins.
Gross Margin, Trusted Systems Division. The Company's gross profit for its
Trusted Systems Division decreased $2.9 million to $1.7 million in fiscal year
1995. The corresponding gross margin decreased to 34.8% for fiscal year 1995
from 54.6% for fiscal year 1994. This decrease is the result of lower sales and
significantly lower profit margins for commercial CyberGuard Firewalls when
compared to sales of secure operating systems and secure networking software
installed separately as an added feature on Real-time-oriented computer systems.
Indirect Expenses. Research, development, marketing, administrative and
general expenses for fiscal year 1995 increased by $4.4 million as the Company
invested to introduce its trusted product in the commercial market. The Company
also booked a reserve of $1.3 million for a shipment made to Lukon, a Russian
corporation, and the Company's joint venture partner.
Net Income (Loss), consolidated. Net loss for fiscal year 1995 was $11.1
million compared to a profit of $4.4 million for fiscal year 1994. The decrease
was principally the result of the decrease in revenue experienced during fiscal
year 1995. Additions to the reserves for inventory and doubtful accounts
accounted for $4.0 million of the loss. See "Fiscal Year Ended June 30, 1995
Compared to Fiscal Year Ended June 30, 1994 -- Net Sales." The Company received
interest income of $0.5 million on its cash and marketable securities compared
to a slight charge for fiscal year 1994. The Company paid no income taxes during
fiscal year 1995 and is currently operating with a tax loss carry forward in all
of its operations.
26
<PAGE> 28
Net Income, Trusted Systems Division. The Company experienced a net loss
of $3.1 million for fiscal year 1995, compared to net income of $0.1 million for
fiscal year 1994. The net loss is the result of lower product sales and gross
margins and increased operating expenses incurred to establish sales and
marketing programs for the commercial introduction of the CyberGuard Firewall.
Change in Fiscal Year. The Company changed its fiscal year end from June
30 to September 30 effective the year beginning October 1, 1994. Revenue for the
three months ending September 30, 1994 was $7.7 million. Sales were lower than
expected due in part to the protracted nature of the spin-off from Harris
Corporation and its effects on product sales focus by management. The loss after
tax for the period was $7.6 million compared to a profit of $375,000 for the
quarter ending September 30, 1993. The loss for the period was impacted by a
$1.3 million charge for restructuring, $2.5 million pre-tax and $2.4 million of
after-tax charges for expenses relating to the spin-off from Harris Corporation
and a $1.7 million charge in connection with the repatriation of cash from the
Company's German subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical uses of cash have been to fund net losses from
operations, establish adequate inventory stocking levels, and fund capital
expenditures for property, equipment and software. Capital expenditures for the
fiscal year ended June 30, 1997 and the 9 month period ended June 30, 1996 were
$1.0 million and $1.8 million respectively.
Prior to the Real-time Sale, the Company funded its cash requirements from
its working capital and cash flows generated, primarily, by the Real-time
Business. Subsequent to the Real-time sale in June 1996, the Company canceled
its proposed secondary public stock offering, and elected instead to liquidate
the majority of its holdings in Concurrent common and preferred stock received
as consideration for the sale of the Real-time assets to Concurrent. Sales of
Concurrent securities throughout the course of fiscal year 1997 generated
approximately $12.4 in proceeds. These funds were used to pay off the Company's
outstanding line of credit balance of $3.2 million in July 1997. The remaining
funds were used to establish the necessary working capital to support the
operations of the Company. At June 30, 1997, the Company had cash, cash
equivalents and short term securities totaling $4.2 million.
In May of 1997 CyberGuard announced it had secured a $7.5 million
Equity-Based line of credit to further support the Company's available working
capital and market expansion plans. Terms of this private placement instrument
allow CyberGuard at its discretion, with certain limitations and restrictions,
to issue unrestricted shares of its stock in exchange for cash proceeds. An S-3
filing documenting this instrument was filed on May 19, 1997. As of June 30,
1997 no sales of common stock were issued in relation to this instrument.
The future liquidity of the Company will be affected by numerous factors,
including sales volumes, gross margins, the levels of selling, general and
administrative expenses required to fully implement product sales to commercial
customers, levels of required capital expenditures and access to external
sources of financing. The Company expects expenditures to increase commensurate
with increased development and marketing of CyberGuard Firewalls and other
network security products. The Company may elect to sell the remaining Preferred
Stock of Concurrent that the Company received in the Real-time Sale. The timing
of such sale and the price at which such stock may be sold may be affected by
other factors beyond the Company's control, such as the absence of a trading
market of such stock, the value of the underlying Concurrent common stock, and
changes in the business, operations or prospects of Concurrent. The Company is
currently negotiating with a commercial lender to provide a revolving line of
credit that will utilize certain current and intangible assets as collateral.
If adequate funds are not available, the Company may be required to curtail
certain activities, including product development, marketing and sales
activities. There can be no assurance that additional financing will be
available to the Company on acceptable terms.
27
<PAGE> 29
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board ("FASB") Issued SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. SFAS No. 130 requires all
items to be reported in a separate financial statement. The Company does not
believe that adoption of SFAS No. 130 will have a significant impact on its
financial reporting.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. SFAS 131
establishes standards for the way the public business enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. The Company does not believe that adoption of SFAS No.
131 will have a significant impact on its financial reporting.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" (SFAS
No. 128). SFAS No. 128 specifies new standards designed to improve the earnings
per share ("EPS") information provided in statements by simplifying the existing
computational guidelines, revising the disclosure requirements and increasing
the comparability of EPS data on an international basis. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Company does not believe that adoption of
SFAS No. 128 will have a significant impact on its financial reporting.
Forward Looking Statements
Statements regarding future products, future prospects, business plans and
strategies, future revenues and revenue sources, future liquidity and capital
resources, computer network security market directions, future acceptance of the
Company's products, possible growth in markets, as well as other statements
contained in this Report on Form 10-K that address activities, events or
developments that the Company expects, believes or anticipates will or may occur
in the future, and similar statements are forward looking statements. These
statements are based upon assumptions and analyses made by the Company in light
of current conditions, future developments and other factors the Company
believes are appropriate in the circumstances, or information obtained from
third parties and are subject to a number of assumptions, risks and
uncertainties. Readers are cautioned that forward looking statements are not
guarantees of future performance and that the actual results might differ
materially from those suggested or projected in the forward looking statements.
Some of the factors that might cause future actual events to differ from those
predicted or assumed include: future advances in technologies and computer
security; risks related to the early stage of the Company's existence and its
products' development; the Company's ability to execute on its business plans;
the Company's dependence on outside parties such as its key customers and
alliance partners; competition from major computer hardware, software, and
networking companies; risk and expense of Government regulation and effects on
changes in regulation; the limited experience of the company in marketing its
products; uncertainties associated with product performance liability; risks
associated with growth and expansion; risks associated with obtaining patent and
intellectual property right protection; uncertainties in availability of
expansion capital in the future and other risks associated with capital markets.
28
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following items are attached and incorporated into this Item 8.
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets as of June 30, 1997 and June 30,
1996...................................................... F-2
Consolidated Statements of Operations for the year ended
June 30, 1997, the Nine-months ended June 30, 1996, and
the year ended September 30, 1995......................... F-3
Statement of Cash Flows for the year ended June 30, 1997,
Nine-months ended June 30, 1996, and the year ended
September 30, 1995........................................ F-4
Consolidated Statements of Shareholders' Equity for the year
ended June 30, 1997, the nine months ended June 30, 1996,
and the year ended September 30, 1995..................... F-5
Notes to Financial Statements............................... F-6
</TABLE>
29
<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required by this item is contained in and incorporated
herein by reference to the caption "Executive Officers" in Item I hereof, and
the remainder will be contained in and incorporated herein by reference to the
Company's Proxy Statement for the Company's Annual Meeting of Stockholders
expected to be mailed to stockholders during October 1997.
Officers are selected on an annual basis and serve at the discretion of the
Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's
1997 Proxy Statement and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's
1997 Proxy Statement and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company's
1997 Proxy Statement and is incorporated herein by this reference.
30
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. The Financial Statements filed as part of this report are
listed separately in the index to Financial Statements beginning on page F-1 of
this report.
(b) During its fourth fiscal quarter of 1997, the Company filed two reports
on Form 8-K (dated April 9, and June 23, 1997) to provide information regarding
the acquisition of the assets of TradeWave Corp. These reports contained
information under Items 2 and 7, and also contained financial statements of
TradeWave Corp. and pro forma financial information for CyberGuard to reflect
the TradeWave assets acquisition.
The following exhibits are included in this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <C> <S>
2.01 -- Restated Purchase and Sale Agreement between Concurrent
Computer Corporation and the Company dated May 23, 1996(i)
3.01 -- Articles of Incorporation of the Company, as amended(viii)
3.02 -- Bylaws of the Company(ii)
4.01 -- Form of Common Stock Certificate(iv)
4.02 -- Form of Stockholder Rights Plan(ii)
4.04 -- Form of Share Holding Agreement between Concurrent Computer
Corporation and the Company(iv)
10.01 -- Employment Agreement dated March 5, 1996 between the Company
and Robert L. Carberry(viii)
10.02 -- Employment Agreement dated July 1, 1996 between the Company
and Patrick O. Wheeler(viii)
10.03 -- Employment Agreement dated April 21, 1997 between the
Company and Robert Lawten
10.04 -- Employment Agreement dated July 1, 1996 between the Company
and Katherine K. Hutchison(viii)
10.05 -- Employment Agreement dated July 1, 1996 between the Company
and Rick A. Siebenaler(viii)
10.06 -- Employment Agreement dated October 1, 1994 between the
Company and Bradley C. Lesher(viii)
10.07 -- Employment Agreement dated July 24, 1997 between the Company
and Thomas Patterson
10.08 -- Joint Development and Marketing Agreement between the
Company and Information Resource Engineering, Inc. (viii)
10.09 -- Employee Stock Incentive Plan(vi)
10.10 -- Amendment to Employee Stock Incentive Plan(vii)
10.11 -- Employee Savings Plan(v)
10.12 -- Form of Non-Statutory Stock Option Agreement dated as of
February 4, 1996 between the Company and the following
executive officers: Patrick O. Wheeler; Katherine K.
Hutchison; Robert Perks; Rick Siebenaler(vi)
10.13 -- Form of Incentive Stock Option Agreement dated as of
February 4, 1996 between the Company and the following
executive officers: Patrick O. Wheeler; Katherine K.
Hutchison; Robert Perks; and Rick Siebenaler(vi)
10.14 -- Non-Statutory Stock Option Agreement dated as of March 5,
1996 between the Company and Robert L. Carberry(vi)
10.15 -- Incentive Stock Option Agreement dated as of July 23, 1996
between the Company and Robert L. Carberry(vi)
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <C> <S>
10.16 -- Form of Non-Statutory Stock Option Agreement between the
Company and non-executive officers(vi)
10.17 -- Form of Incentive Stock Option Agreement between the Company
and non-executive officers(vi)
10.18 -- Form of Stock Option Agreement between the Company and
non-employee directors(vi)
10.19 -- TradeWave Asset Purchase Agreement(ix)
10.20 -- Agreement (regarding noncompetition, nonsolicitation and
confidentiality)(ix)
10.21 -- Private Securities Subscription Agreement dated May 15, 1997
between the Company and Capital Ventures International(x)
10.22 -- Registration Rights Agreement dated May 15, 1997 between the
Company and Capital Ventures International(x)
10.23 -- Consulting agreement with David Proctor dated March 18, 1997
23.01 -- Consent of KPMG Peat Marwick LLP, Independent Certified
Public Accountants
27.01 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
(i) Incorporated by reference to Annex A of the Registrant's Definitive
Proxy Statement as filed with the Commission on May 24, 1996
(ii) Filed with Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form 10, dated September 29, 1994, File No. 0-24544 and
incorporated herein by reference.
(iii) Filed with the Company's Quarterly Report on Form 10-Q for the period
[used to refer to 10.06, revised to ix]
(iv) Filed with the Company's Registration Statement on Form S-3 dated
May 23, 1996 (File No. 333-04407) and incorporated herein by reference.
(v) Incorporated by reference from Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (Commission File Number 33-88446) filed on January
13, 1995.
(vi) Incorporated by reference from Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (Commission File Number 33-88448) filed on January
13, 1995.
(vii) Incorporated by reference to Annex E of the Registrant's Definitive
Proxy Statement as filed with the Commission on May 24, 1996.
(viii) Incorporated by reference to Company's Annual Report on Form 10-K for
fiscal year ended June 30, 1996.
(ix) Incorporated by reference to the Company's Current Report on Form 8-K
dated April 9, 1997.
(x) Incorporated by reference to the Company's Registration Statement on
Form S-3 (Commission File Number 333-28693) filed on June 12, 1997.
32
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf of the undersigned, thereunto duly authorized.
CYBERGUARD CORPORATION
By: /s/ ROBERT L. CARBERRY
------------------------------------
Robert L. Carberry
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT L. CARBERRY Chairman, President and September 29, 1997
- ----------------------------------------------------- Chief Executive Officer and
Robert L. Carberry Director (Principal
Executive Officer)
/s/ PATRICK O. WHEELER Vice President Finance and September 29, 1997
- ----------------------------------------------------- Chief Financial Officer
Patrick O. Wheeler (Principal Financial and
Principal Accounting
Officer)
/s/ C. SHELTON JAMES Director September 29, 1997
- -----------------------------------------------------
C. Shelton James
/s/ MICHAEL F. MAGUIRE Director September 29, 1997
- -----------------------------------------------------
Michael F. Maguire
/s/ RICHARD P. RIFENBURGH Director September 29, 1997
- -----------------------------------------------------
Richard P. Rifenburgh
/s/ DAVID PROCTOR Director September 29, 1997
- -----------------------------------------------------
David Proctor
</TABLE>
33
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CyberGuard Corporation:
We have audited the accompanying consolidated balance sheets of CyberGuard
Corporation and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year ended June 30, 1997, the nine months ended June 30, 1996 and the year
ended September 30, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted audited
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CyberGuard
Corporation and subsidiaries as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for the year ended June 30, 1997, the nine
months ended June 30, 1996 and the year ended September 30, 1995 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Miami, Florida
September 23, 1997
F-1
<PAGE> 36
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,975 $ 3,617
Accounts and notes receivable, less allowance for
uncollectible accounts of $547 and $318 at June 30, 1997
and June 30, 1996, respectively (Note 5).................. 6,642 3,668
Inventories................................................. 1,588 134
Prepaid expenses............................................ 520 285
Securities available for sale (Note 7)...................... 1,268 13,600
-------- --------
Total current assets.............................. 12,993 21,304
Property and equipment, net (Note 6)........................ 1,706 1,152
Investment in Concurrent preferred stock (Note 7)........... -- 3,853
Non-compete agreements (Note 15)............................ 1,120 1,400
Other assets................................................ 155 3
-------- --------
Total Assets...................................... $ 15,974 $ 27,712
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................ $ 1,144 --
Deferred revenue............................................ 1,277 44
Accrued expenses and other liabilities (Note 8)............. 3,636 6,223
Loan payable (Note 9)....................................... -- 3,200
-------- --------
Total liabilities (all current)................... 6,057 9,467
-------- --------
Shareholders' equity (Note 12)
Common stock par value $0.01 authorized 20,000,000 shares;
issued and outstanding 7,452,314 shares and 6,709,371
shares at June 30, 1997 and June 30, 1996,
respectively........................................... 74 67
Additional paid in capital................................ 59,507 56,152
Accumulated deficit....................................... (49,700) (37,210)
Unrealized gain on securities available for sale.......... 173 --
Cumulative foreign currency translation adjustment........ (137) (764)
-------- --------
Total shareholders' equity........................ 9,917 18,245
-------- --------
Total liabilities and shareholders' equity........ $ 15,974 $ 27,712
======== ========
</TABLE>
See notes to the accompanying consolidated financial statements.
F-2
<PAGE> 37
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
1996 1996 1995
---------- ----------- -------------
<S> <C> <C> <C>
Revenues
Products................................................. $ 14,574 $ 6,898 $ 4,534
Services................................................. 1,047 371 283
Real Time Business....................................... -- 30,142 40,294
-------- -------- --------
15,621 37,411 45,111
Cost of Revenues
Products................................................. 6,669 4,427 3,001
Services................................................. 571 162 139
Real Time Business....................................... -- 16,433 22,624
-------- -------- --------
7,240 21,022 25,764
Gross Profit............................................... 8,381 16,389 19,347
Operating Expenses
Research and development................................. 4,723 5,360 7,903
Selling, general and administrative...................... 11,410 18,021 22,984
Write-off of capitalized computer software development
costs (Note 16)....................................... -- 3,244 --
Costs relating to canceled secondary offering............ -- 1,009 --
In process research and development (Note 2)............. 262 -- --
-------- -------- --------
Total operating expenses......................... 16,395 27,634 30,887
Operating loss............................................. (8,014) (11,245) (11,540)
Interest income, net....................................... 646 180 456
Other income (expense), net................................ (708) 103 (4)
Loss on sale of securities available for sale.............. (4,414) -- --
Loss on sale of Real-time Business (Note 1)................ -- (15,160) --
-------- -------- --------
(4,476) (14,877) 452
-------- -------- --------
Net loss................................................... $(12,490) $(26,122) $(11,088)
======== ======== ========
Loss per common share...................................... $ (1.76) $ (4.32) $ (1.88)
======== ======== ========
Weighted average number of shares outstanding.............. 7,100,014 6,046,182 5,911,437
======== ======== ========
</TABLE>
See notes to the accompanying consolidated financial statements.
F-3
<PAGE> 38
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
1997 1996 1995
-------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss................................................. $(12,490) $(26,122) $(11,088)
Adjustment to reconcile net loss to net cash provided by
operating activities:
Depreciation.......................................... 540 2,121 3,446
Amortization.......................................... 800 1,735 1,305
In process research and development written-off....... 262 -- --
Loss on disposal of assets............................ 169 -- --
Compensation and benefits............................. 125 500 --
Write-off of capitalized software development costs... -- 3,244 --
Loss on sale of securities available for sale......... 4,414 -- --
Loss on sale of Real-time Computing Business
(Non-cash).......................................... -- 12,490 --
Changes in assets and liabilities net of effect of sale
of Real-time Computing Business and acquisitions
Receivables........................................... (2,894) (3,569) 1,393
Due from Harris Corporation........................... -- -- 6,369
Inventories........................................... (1,438) 3,537 4,998
Accounts payable...................................... 1,144 (2,049) (1,201)
Accrued expenses...................................... (1,302) 2,675 (1,051)
Deferred revenue...................................... 1,073 392 (383)
Deferred income taxes................................. -- -- (166)
Prepaid expenses and other assets..................... (147) (265) 827
Other................................................. (529) (227) 391
-------- -------- --------
Net cash provided (used) by operating
activities..................................... (10,273) (5,538) 4,840
-------- -------- --------
Cash flows from investing activities
Additions to property and equipment...................... (969) (1,818) (1,900)
Purchase of business, net of cash acquired............... (400) -- --
Cash included with sale of Real-time Computing
Business.............................................. -- (420) --
Software development costs -- capitalized................ -- (3,688) (2,324)
-------- -------- --------
Net cash used by investing activities...................... (1,369) (5,926) (4,224)
-------- -------- --------
Cash flows from financing activities
Proceeds (repayments) from short term borrowings......... (3,200) 3,200 --
Proceeds from sale of Concurrent stock................... 12,363 3,400 --
Equity contributions..................................... 1,837 216 --
-------- -------- --------
Net cash provided by financing activities.................. 11,000 6,816 --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (642) (4,648) 616
-------- -------- --------
Cash and cash equivalents at beginning of the period....... 3,617 8,265 7,649
-------- -------- --------
Cash and cash equivalents at end of the period............. $ 2,975 $ 3,617 $ 8,265
======== ======== ========
</TABLE>
See notes to the accompanying consolidated financial statements.
F-4
<PAGE> 39
CYBERGUARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1997, NINE MONTHS ENDED JUNE 30, 1996
AND YEAR ENDED SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL UNREALIZED GAIN CURRENCY
------------------ PAID IN ACCUMULATED ON SECURITIES TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT AVAILABLE FOR SALE ADJUSTMENT TOTAL
--------- ------ ---------- ----------- ------------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance September 30,
1994.................... 5,911,437 $59 $43,662 -- $ -- $(928) $ 42,793
Net Loss.................. -- -- -- (11,088) -- -- (11,088)
Translation adjustment.... -- -- -- -- -- 391 391
--------- --- ------- -------- ----- ----- --------
Balance September 30,
1995.................... 5,911,437 59 43,662 (11,088) -- (537) 32,096
Net Loss.................. -- -- -- (26,122) -- -- (26,122)
Translation adjustment.... -- -- -- -- -- (227) (227)
Issuance of common stock
relating to the sale of
the Real-time Computing
Business................ 683,178 7 11,778 -- -- -- 11,785
Issuance of common stock,
other................... 114,756 1 712 -- -- -- 713
--------- --- ------- -------- ----- ----- --------
Balance June 30, 1996..... 6,709,371 67 56,152 (37,210) -- (764) 18,245
Net Loss.................. -- -- -- (12,490) -- -- (12,490)
Change in market value of
Preferred Stock
available for sale...... -- -- -- -- 173 -- 173
Translation adjustment.... -- -- -- -- -- 627 627
Issuance of common stock,
for the non compete
agreement............... 91,800 1 1,399 -- -- -- 1,400
Issuance of common
stock................... 651,143 6 1,956 -- -- -- 1,962
--------- --- ------- -------- ----- ----- --------
Balance June 30, 1997..... 7,452,314 $74 $59,507 $(49,700) $173 $(137) $ 9,917
========= === ======= ======== ===== ===== ========
</TABLE>
See notes to the accompanying consolidated financial statements.
F-5
<PAGE> 40
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. BUSINESS OVERVIEW
CyberGuard Corporation and Subsidiaries (the "Company"), is a leading
developer and marketer of commercial network security products designed to
protect data on computer networks from access by unauthorized users. The Company
was among the first companies to establish a business unit devoted to developing
and marketing network security products. As early as 1989 the Company had
developed and begun to market an integrated secure operating system and secure
networking software solution. With the announcement of its firewall application
in 1994, the Company began offering multi-level network security solutions to
the commercial market through its CyberGuard Firewall suite of products.
In May 1995 the Company separated its business operation into two units;
Real-time Business and the Trusted Systems Division, which developed network
security products. On March 26, 1996, the Company and Concurrent Computer
Corporation ("Concurrent") signed a Purchase and Sale Agreement effective as of
that date and amended and restated as of May 23, 1996 ("Agreement"). This
Agreement was approved by the shareholders of both companies on June 27, 1996
and the transaction was closed effective June 30, 1996. In connection with this
sale, the Company changed its fiscal year end from September 30 to June 30,
effective in the year beginning October 1, 1995. Under the Agreement, the
Company sold the net assets of its Real-time computing business with a book
value of $21,561 and issued 683,178 shares of its common stock valued at $11,785
to Concurrent (the Transaction) in exchange for (i) 10 million newly issued
shares of Concurrent common stock, par value $0.01 per share valued at $17,000,
and (ii) convertible exchangeable preferred stock of Concurrent paying a 9%
cumulative annual dividend quarterly in arrears with a liquidation preference of
approximately $6,264. The Preferred Stock is redeemable by Concurrent when the
current market price exceeds $3.75, and is mandatorily redeemable on June 27,
2006, at the liquidation preference plus accrued and accumulated unpaid
dividends. The conversion ratio is at a rate equal to the liquidation preference
divided by the conversion price, which is initially $2.50, but can be adjusted
in certain circumstances. The Preferred Stock at June 30, 1996 is reflected at
its estimated market value of $3,853 which was calculated using a discount rate
of 14% and that no dividends will be paid until the mandatory redemption date.
Since the Company has been actively selling the Preferred Stock, it has been
reclassified as securities available for sale. The Preferred Stock at June 30,
1997 is reflected at current market price, inclusive of all cumulative dividends
earned (See Note 7 for further details).
2. ACQUISITIONS
On April 9, 1997 the Company purchased substantially all the assets of
TradeWave Corporation, a wholly owned subsidiary of SunRiver Corporation.
CyberGuard created a new wholly owned subsidiary, TradeWave Corporation, a
Florida corporation to which it contributed all the assets purchased. The
transaction was accounted for as a purchase and, accordingly, TradeWave
Corporation results are included in the consolidated financial statements since
the date of acquisition. The aggregate purchase price was approximately $400.
The fair value of net assets acquired was approximately $138. The balance of
excess of cost over net assets acquired was allocated to in-process research and
development for projects that had not reached technical feasibility and had no
probable alternative future uses, which the Company expensed at the date of
acquisition. On the basis of a pro forma consolidation of the results of
operations, as if the acquisition had taken place at October 1, 1995
consolidated net sales would have been $16,551 and $39,054 for the year ended
June 30, 1997 and for the nine months ended June 30, 1996, respectively. The net
loss and net loss per common share would have been $18,646 and $2.62 per share
for the year ended June 30, 1997 and $29,177 and $4.81 per share for the nine
months ended June 30, 1996, respectively. Such pro forma amounts are unaudited
and are not necessarily indications of what the actual consolidated results of
operations might have been if the acquisition had been effective at October 1,
1995.
F-6
<PAGE> 41
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LIQUIDITY
The Company's historical uses of cash have been to fund net losses from
operations, property, and equipment acquisitions and software development costs.
Capital expenditures for the fiscal year ended June 30, 1997 and nine months
ended June 30, 1996 were $969 and $1,818 respectively. Software development
costs were $4,723 and $5,360 respectively for the same periods.
Prior to the Transaction, the Company funded its cash requirements from its
working capital and cash flow provided from the Real time business. The Company
sold all its investment in the common stock of Concurrent and substantially all
its investment in the preferred stock of Concurrent to pay off its line of
credit and to fund operations for the fiscal year 1997.
On May 19, 1997 the Company entered into an equity financing arrangement as
filed with the Securities and Exchange Commission under the S-3 to sell
privately up to a maximum 1,470,085 shares of the Company's common stock. Under
this private placement equity offering, the Company has the right, subject to
certain conditions, to sell common stock for up to $7.5 million. Pursuant to the
Subscription Agreement, the Company either (i) must make a call for proceeds of
at least $3,750 by May 14, 1998 and for all of the proceeds by November 15, 1998
or (ii) issue to the purchaser warrants with respect to a maximum of 170,000
shares of the Company's common stock at an exercise price equal to the market
price of common stock on November 15, 1998.
If the Company determines additional equity and/or debt financing is
necessary to support its on-going or strategic requirements, it may need to
pledge certain working capital assets. Although there can be no assurance that
external sources of financing will be available or that, if available, such
financing will be on acceptable terms, the Company believes that such funding
should be available if required.
4. SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include those of
CyberGuard Corporation and its wholly-owned subsidiaries. All significant
intercompany balances and transactions between entities have been eliminated.
Inventories -- are carried at the lower of cost, determined by the
First-In-First-Out (FIFO) method, or market.
Long-Lived Assets -- property and equipment is carried on the basis of
cost. Depreciation is computed by the straight-line method using the estimated
useful lives of the assets.
The Company implemented the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", effective July 1, 1996. The Company
reviews its long-lived assets (property and equipment) for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value. The adoption of Statement No. 121 had no impact on the Company's
financial position or results of operations.
Software Development Costs -- The Company capitalized costs related to the
development of certain software products. Capitalization began when
technological feasibility had been established and ended when the product was
available for general release to customers. Software development costs incurred
prior to technological feasibility were considered research and development
costs and are expensed as incurred. Capitalized costs were amortized as the
greater of the amount computed using the ratio that current gross revenues for a
product bear to the total current and anticipated future gross revenues for that
product or the straight-line method over five years. There were no software
development costs capitalized for the year ended
F-7
<PAGE> 42
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1997, $3,688 for the nine months ended June 30, 1996 and $2,324 for the
year ended September 30, 1995. Software amortization expense was $0 for the year
ended June 30, 1997, $1,414 for the nine months ended June 30, 1996 and $1,305
for the year ended September 30, 1995. Effective June 30, 1996, the Company sold
its Real-time computing business to Concurrent. As a result of this transaction,
management made the decision to move from the Night Hawk based platform to an
Intel PC-based platform and accordingly, wrote-off the related software
development costs. See Note 16 for further details.
Revenue Recognition -- The Company accounts for software revenues in
accordance with the American Institute of Certified Public Accountants Statement
of Position 91-1, Software Revenue Recognition. Revenues earned under software
license agreements with end users are generally recognized when the software has
been shipped, payment is due within one year, collectibility is probable, and
there are no significant obligations remaining. Unearned income on service
contracts is amortized by the straight-line method over the term of the
contracts. Revenue from long-term software contracts is accounted for by the
percentage of completion method whereby income is recognized based on the
estimated stage of completion of individual contracts using costs incurred as a
percentage of total estimated costs at completion. Losses on long-term contracts
are recognized in the period in which such losses are determined.
Foreign Currency Translation -- The assets and liabilities of the foreign
operations are translated using the local currency as the functional currency.
Income Taxes -- The Company files a consolidated Federal income tax return.
The Company follows the asset and liability method of accounting for income
taxes. Under the asset and liability method, a deferred tax asset or liability
is recognized for temporary differences between financial reporting and income
tax bases of assets and liabilities, tax credit carryforwards and operating loss
carryforwards. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that such deferred tax assets will not be
realized.
Cash Equivalents -- The Company considers all investments purchased with an
original maturity of three months or less at the time of purchase to be cash
equivalents.
Marketable Securities -- The Company accounts for marketable securities in
accordance with the Statement of Financial Accounting Standards No. 115 ("SFAS
No. 115"), Accounting for Certain Investments in Debt and Equity Securities. In
accordance with the provisions of SFAS No. 115, marketable securities, which
have been classified by the Company as available for sale, are carried at market
value, with the unrealized gains or losses, net of tax, reported as a separate
component of shareholders' equity. The Company sold all its investment in common
stock of Concurrent Computer Corporation at June 30, 1997 and the majority of
its investment in Preferred Stock in Concurrent Computer Corporation during the
fiscal year ended June 30, 1997. (See Note 7).
Loss per Common Share -- Loss per common share is calculated by dividing
the net loss by the weighted-average number of common shares outstanding during
the period. Common stock equivalents are excluded due to their anti-dilutive
effect.
Stock Option Plan -- Prior to January 1, 1996, the Company accounted for
its stock option plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On July 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option grants made
in 1995 and future years as if the fair-value-based method defined in SFAS No.
123 had
F-8
<PAGE> 43
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Use of Estimates -- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Cancellation of the Secondary Public Offering -- On August 5, 1996, The
Company decided to withdraw a secondary offering of common stock due to
unfavorable market conditions. Expenditures associated with the cancellation of
this stock offering amounting to approximately $1 million were written off and
appear on the Company's consolidated statement of operations in the year ended
June 30, 1997.
Reclassifications -- Certain items previously reported in specific
financial statement captions have been reclassified to conform with the 1996
presentation.
5. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Changes in the allowance for uncollectible accounts follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
1997 1996 1995
---------- ----------- -------------
<S> <C> <C> <C>
Balance at beginning of year....................... $318 $ 1,513 $ 213
Additions charged to expense....................... 327 421 1,660
Less net write off of uncollectible accounts....... (98) (355) (360)
Less allowance transferred in the sale of the real
time business.................................... -- (1,261) --
---- ------- ------
Balance at end of year............................. $547 $ 318 $1,513
==== ======= ======
</TABLE>
Bad debt expense is included in "Selling, general, and administrative expenses"
on the consolidated statement of operations.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, ESTIMATED
1997 1996 USEFUL LIFE
-------- -------- -----------
(IN YEARS)
<S> <C> <C> <C>
Property and equipment................................... $ 2,645 $ 1,553 5-10
Loan equipment and service parts......................... 418 634 1-5
Software................................................. 198 -- 3
Leasehold improvements................................... 27 -- 3-5
------- -------
Gross property and equipment............................. 3,288 2,187
Less: accumulated depreciation........................... (1,582) (1,035)
------- -------
Net property and equipment............................... $ 1,706 $ 1,152
======= =======
</TABLE>
7. SECURITIES AVAILABLE FOR SALE
As part of the sale of the Real-time Computing Business, the Company
received 10,000,000 shares of Common Stock of Concurrent valued at $17,000 and
1,000,000 shares of 9% cumulative dividend, convertible Preferred Stock at a
liquidation preference of $6,264. At June 30, 1996 the Preferred Stock was
recorded at its
F-9
<PAGE> 44
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated market value which was calculated using a discount rate of 14%, and
the assumption that no dividends would be paid until the mandatory redemption
date. The Preferred Stock was considered a non current asset, as the Company's
intention was to hold the investment until maturity at June 26, 2006. However,
during the course of the year, the Company decided to sell the majority of the
Preferred Stock and use its proceeds to fund operations. As such, these
securities, which are convertible into Common Stock have been reclassified as
securities available-for-sale and valued at their market value as of June 30,
1997 which is calculated by taking the number of common share equivalents times
the price per common share at June 30, 1997.
Securities available for sale is summarized below:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST APPRECIATION DEPRECIATION VALUE
--------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
June 30, 1997:
Concurrent Computer Corp.
Preferred Stock........................... $ 1,095 $173 $-- $ 1,268
Common Stock.............................. -- -- -- --
------- ---- --- -------
Total............................. $ 1,095 $173 $-- $ 1,268
======= ==== === =======
June 30, 1996:
Concurrent Computer Corp.
Preferred Stock........................... $ 3,853 $ -- -- $ 3,853
Common Stock.............................. 13,600 -- -- 13,600
------- ---- --- -------
Total............................. $17,453 $ -- $-- $17,453
======= ==== === =======
</TABLE>
8. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
Salaries, wages and other compensation...................... $1,167 $ 656
Accrued interest and sundry taxes........................... 168 180
Other....................................................... 1,557 1,462
Royalties payable(a)........................................ 674 285
Secondary offering expenses................................. -- 398
Non-compete agreement (Note 15)............................. -- 1,400
Expenses for the sale of Real-time computing business....... -- 1,842
------ ------
$3,636 $6,223
====== ======
</TABLE>
- ---------------
(a) Represents various software license royalty payments due to third-parties
for products sold by the company.
9. LOAN PAYABLE
On April 1, 1996, the Company entered into a loan and security agreement
with Foothill Capital Corporation ("Foothill") pursuant to which Foothill agreed
to make revolving advances to the Company on an amount of up to $5,000,000
subject to certain borrowing base requirements and at an interest rate equal to
the prime or reference rate announced by Norwest Bank Minnesota, National
Association, plus two percent. On June 27, 1996, this agreement was amended to,
among other things, extend the maturity date to the earlier
F-10
<PAGE> 45
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of (a) September 30, 1996 or (b) the date on which the Company consummates a
secondary common stock offering. As collateral for the loan, the Company granted
Foothill a security interest in its assets (including 7,000,000 shares of the
Concurrent common and all of the preferred stock received by the Company in
connection with the Transaction).
In addition, the Company granted Foothill warrants to purchase 100,000
shares of common stock at a price equal to the lower of the price of a share of
common stock issued to the public pursuant to a registration statement or $17.00
per share. The warrant is exercisable in whole or in part from the date that is
the earlier of August 1, 1996 and five days after the closing of a public
offering through June 27, 2001.
In August 1996, the Foothill loan was repaid. As of June 30, 1997, there
are no outstanding amounts due on the loan.
10. STOCK SPLIT
On March 5, 1996, the Board of Directors declared a three-for-one common
stock split distributable on March 29, 1996 to shareholders of record at the
close of business on March 18, 1996. All applicable share and per share data
have been retroactively restated for the stock split.
11. INCOME TAXES
There is no provision for income taxes due to the loss carryforward.
The components of deferred income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
Charitable contributions.................................... $ 279 $ 275
Inventory valuations........................................ 21 2
Depreciation................................................ (149) (16)
Capitalized software........................................ -- --
Restructuring costs......................................... -- 19
Accrued vacation............................................ 76 62
Net operating losses available carryforwards................ 12,727 11,043
Capital loss carryforwards.................................. 2,291 --
All other -- net............................................ 727 154
Valuation allowance......................................... (15,972) (11,539)
-------- --------
Net deferred income tax liability........................... $ -- $ --
======== ========
</TABLE>
F-11
<PAGE> 46
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the effective income tax rate and the statutory United
States income tax rate follows:
<TABLE>
<CAPTION>
NINE
YEAR MONTHS
ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
1997 1996 1995
-------- -------- -------------
<S> <C> <C> <C>
Statutory U.S. income tax rate...................... (34.0)% (34.0)% (34.0)%
State taxes......................................... -- -- (1.9)
Capitalized restructuring costs..................... -- -- --
Operating loss carryforwards........................ 33.5 28.9 32.2
Payment of tax to Former Parent on German
dividend.......................................... -- -- 21.8
Contributions....................................... -- --
Other items......................................... .5 5.1 1.8
----- ----- -----
Effective income tax rate........................... -- -- --
===== ===== =====
</TABLE>
United States income taxes have not been provided on the undistributed
earnings of international subsidiaries because the Company has intended to
reinvest these earnings. If the Company distributes international earnings, a
U.S. tax would be provided in future periods. As of June 30, 1997, the Company
does not intend to distribute international earnings, therefore no US tax has
been projected. The determination of the amount of these undistributed earnings
and any related unrecognized deferred US tax liability is not practicable.
As of June 30, 1997, the Company has U.S. net operating loss carryforwards
of approximately $37 million. The Company's net operating loss carryforwards
begin to expire in 2010. As of June 30, 1997, the Company has a U.S. net capital
loss carryforward of approximately $6,740. The Company may utilize these capital
loss carryforwards only to offset future capital gains.
Pretax loss from European operations was ($55) for the twelve months ended
June 30, 1997; ($998) for the nine months ended June 30, 1996; and ($3,136) for
the year ended September 30, 1995.
12. SHAREHOLDERS' EQUITY
Each share of the Company's common stock has attached to it one right. Each
right entitles its registered holder to purchase from the Company after the
"Separation Time", as hereinafter defined, one-hundredth of a share of
Participating Preferred Stock, par value $.01 per share, for an amount
calculated in accordance with the Agreement. The rights will not trade
separately from the common stock unless and until the Separation Time. The
Separation Time is defined as the earlier of the tenth business day after the
date on which any person commences a tender or exchange offer which, if
consummated, would result in an acquisition, and the first date of public
announcement by the Company of such offering. In the event of any voluntary, or
involuntary liquidation of the Company, the holders of the Preferred Stock shall
be paid an amount as calculated in accordance with the Preferred Stock
Agreement.
Effective October 8, 1994, the Company adopted a Stock Incentive Plan which
permits the issuance of stock options, stock appreciation rights, performance
awards, restricted stock and/or other stock based awards to directors and
salaried employees. On February 4, 1996, the Board of Directors approved an
amendment to the plan to reserve 2,025,000 shares of common stock for grant. The
option price shall be determined by the Board Committee effective on the Grant
Date. The option price shall not be less than one hundred percent of the Fair
Market Value of a share of common stock on the Grant Date. If Incentive Stock
Options are granted to a participant who on the Grant Date is a ten percent
holder, such price shall be not less than one hundred and ten percent of the
Fair Market Value of a share of common stock on the Grant Date. All options
become immediately exercisable upon the occurrence of a Change in Control of the
Company. Vesting of these options
F-12
<PAGE> 47
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
occurs based on years of service. It begins at 33% after one year, 66% after two
years, and 100% after the third year of service.
The Company also elected to have non-qualified stock options for key
executives as part of their compensation plan. The Board of Directors has the
authority to determine to whom options may be granted, period of exercise, the
option price at the date of grant, and what other restrictions, if any, should
apply.
Pro forma information regarding net loss and loss per common share is
required by FAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to September 30, 1995 under the fair value method of FAS 123. The fair value
method for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996, respectively: risk-free interest rates ranged
from 5.8% to 6.3% and 4.9% to 5.8%, expected dividend yield of 0% and 0%,
volatility factors of the expected market price of the Company's common stock
ranged from .87 to .90 and .76 to .93, and a weighted average expected life of
the option of 3 years and 1.9 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The adoption of FAS 123 under the fair value based method would have
increased compensation expense by $1,728 for the year ended June 30, 1997 and
$681 for the nine months ended June 30, 1996. The effect of FAS 123 under the
fair value based method would have effected net loss and loss per share as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
JUNE 30, JUNE 30,
1996 1997
---------- -----------
<S> <C> <C>
Net loss.................................................... $(12,490) $(26,122)
======== ========
Pro forma................................................... $(14,218) $(26,803)
======== ========
Loss per common share as reported........................... $ ( 1.76) $ ( 4.32)
======== ========
Pro forma................................................... $ ( 2.00) $ (4.43)
======== ========
</TABLE>
F-13
<PAGE> 48
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information relating to the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Shares under option at September 30, 1994................ -- --
Granted................................................ 715,200 $2.60
Exercised.............................................. -- --
Forfeited.............................................. -- --
--------- ------
Shares under option at September 30, 1995................ 715,200 $2.60
========= ======
Shares exercisable at September 30, 1995................. -- --
========= ======
Shares under option at September 30, 1995................ 715,200 $2.60
Granted................................................ 984,300 7.17
Exercised.............................................. (84,630) 2.87
Forfeited.............................................. (25,206) 2.60
--------- ------
Shares under option at June 30, 1996..................... 1,589,664 $5.46
========= ======
Shares exercisable at June 30, 1996...................... 803,163 $3.50
========= ======
Shares under option at June 30, 1996..................... 1,589,664 $3.50
Granted................................................ 947,850 9.37
Exercised.............................................. (636,559) 3.00
Forfeited.............................................. (75,033) 8.75
--------- ------
Shares under option at June 30, 1997..................... 1,825,922 $7.77
========= ======
Shares exercisable at June 30, 1997...................... 594,442 $6.43
========= ======
</TABLE>
At June 30, 1997, 739,605 stock options outstanding have exercise prices
ranging from $2.58 to $5.50. The weighted average exercise price of these
options is $4.88 and weighted remaining contractual life of these options is
3.38 years. Of these options, 397,905 are exercisable at a weighted average
price of $4.35.
At June 30, 1997, 747,317 stock options outstanding have exercise prices
ranging from $8.87 to $10.75. The weighted average exercise price of these
options is $9.31 and weighted remaining contractual life of these options is
4.45 years. Of these options, 84,667 are exercisable at a weighted average price
of $10.62.
At June 30, 1997, 339,000 stock options outstanding has an exercise price
of $10.67. The remaining contractual life of these options is 8.7 years. Of
these options, 111,870 are currently exercisable.
As of June 30, 1997 there were 100,000 warrants outstanding to Nissin
Electric Company, granted as a part of a joint sales and marketing agreement to
address the Japanese Firewall market. These warrants are exercisable based upon
Nissin fulfilling certain minimum purchase obligations at predetermined dates
through December 31, 1998. The price of the options are exercisable at $15.00
per common share.
13. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Savings Plan ("the Plan") which covers the
eligible employees of CyberGuard Corporation, and any related company. An
employee is eligible to participate in the Plan on the date of hire The amount
of profit-sharing contributions made by the Company into the Plan is
discretionary and shall be determined based on a percentage of the Company's
adjusted net income before taxes. Each participant may contribute up to 12% of
compensation into the Plan. The Company makes a matching contribution on behalf
of each participant for the first 6% of their individual contribution.
Participant's profit-sharing and matching contribution vests over a seven year
period. The Company contributions to the Plan
F-14
<PAGE> 49
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were $221 for the year ended June 30, 1997; $738 for the nine months ended June
30, 1996 and $966 for the year ended September 30, 1995.
14. CONTINGENCIES
Certain claims have been filed or are pending against the Company. It is
management's opinion that all matters are without merit or are of such kind, or
involve such amounts, as would not have a material effect on the consolidated
financial position of the Company if disposed of unfavorably.
15. NON-COMPETE AGREEMENTS
In connection with the sale of the Real-time computing business, the
Company entered into non-compete agreements for a period of five years with two
former officers of the Company. In consideration for the these non-compete
agreements, these officers received 91,800 shares of the Company's Common Stock.
These shares were valued at market price as of the date of the agreement, June
28, 1996, and were accrued for as of June 30, 1996. These amounts will be
amortized over the life of the agreement. The amortization expense for the year
ended June 30, 1997 is $280.
16. WRITE OFF OF CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS
After the sale of the Real-time Computing Division to Concurrent Computer
Corporation, a decision was made by new management of the Company to move from
the Night Hawk based platform to an Intel-PC based platform running on the
UnixWare operating system which the Company licenses from Santa Cruz Operations
The Company had capitalized computer software development costs, which relate to
the Night Hawk based systems. As a result of new management's decision to move
to a different platform, such capitalized computer software development costs of
approximately $3,244 became worthless and accordingly have been charged to
operations during the year ended June 30, 1996.
17. LEASE COMMITMENTS
Rent expense was $231 for the year ended June 30, 1997; $1,382 for the nine
months ended June 30, 1996, $1,814 for the year ended September 30, 1995.
On June 10, 1997, the Company entered into a ten year term office lease for
its corporate office located in a commercial building in Fort Lauderdale,
Florida. The lease provides for a 5 year renewal option.
Total future minimum rental commitments under non-cancelable operating
leases, primarily for buildings and equipment, for the years following June 30,
1997 are: 1998 -- $648; 1999 -- $710; 2000 -- $711; 2001 -- $477; and 2002 and
thereafter -- $450.
18. CONCENTRATIONS OF CREDIT RISK AND RELATED PARTY TRANSACTIONS
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash, cash equivalents and
trade receivables. The Company holds any excess cash in short-term investments
consisting of commercial paper. Concentrations of credit risk with respect to
receivables are limited due to the Company's large number of customers. Credit
risk with respect to securities consist of Concurrent stock received in
connection with the sale of the Real-time Computing Business and is limited due
to the fact that the Company sold all its ownership in the common stock and the
majority of its ownership in the preferred stock at June 30, 1997.
F-15
<PAGE> 50
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. GEOGRAPHIC INFORMATION
The Company operates exclusively in the computer systems industry.
Substantially all revenues result from the sale of computer systems and related
software and services. Major customers during 1997, 1996, and 1995 include the
United States Government, Hucom, Inc., and Boeing Company. In many cases,
agencies of the United States Government are the ultimate purchasers of the
Company's products. Sales to the United States Government combined with sales
for which the Company acted as subcontractor on government projects have
represented approximately 9%, 51%, and 43% of total sales for the year ended
June 30, 1997, the nine months ended June 30, 1996 and the year ended September
30, 1995, respectively. Sales made to Hucom represented 11% in 1997. Sales made
to Boeing Company as a percentage of total sales were 0%, 7% and 4%, for the
year ended June 30, 1997, the nine months ended June 30, 1996 and the year ended
September 30, 1995, respectively. During the year ended September 30, 1995, the
Company's largest customer was Lockheed Martin Corporation. Sales made to
Lockheed Martin Corporation as a percentage of total sales were 11% for the year
ended September 30, 1995.
All intercompany revenues and expenses are eliminated in computing revenues
and operating income.
A summary of the Company's operations by geographic area is summarized
below:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
1997 1996 1995
---------- ----------- -------------
<S> <C> <C> <C>
United States Operations
Net sales........................................ $ 11,257 $ 31,402 $36,138
Net loss......................................... (12,435) (25,124) (7,952)
Identifiable assets.............................. 15,606 22,756 33,658
European Operations
Net sales........................................ 4,364 6,009 8,973
Net loss......................................... (55) (998) (3,136)
Identifiable assets.............................. 368 4,956 8,186
</TABLE>
US Export Sales were $5,209 for the year ended June 30, 1997; $3,812 for
the nine months ended June 30, 1996; $2,945 for the year ended September 30,
1995.
20. SHARED SERVICE AGREEMENT
On June 30, 1996, the Company entered into an agreement with Concurrent to
provide certain administrative and personnel-related services for the Company.
The Company was billed monthly for these services which totaled $461 for the
year ended June 30, 1997. Effective June 30, 1997 the only service provided was
for rental of facilities.
CYBERGUARD RESELLER AGREEMENT:
A reseller agreement exists, effective June 27, 1996, between The Company
and Concurrent to act as a reseller of CyberGuard products. For each CyberGuard
Product sold by Concurrent, Concurrent shall pay to CyberGuard a predetermined
fee. The initial term of this agreement shall be for a period of twelve months
beginning with the effective date of this agreement and may be renewed for two
additional terms of twelve months each with the written consent of both the
Company and Concurrent. During the current fiscal year, the Company elected to
extend the reseller agreement to Concurrent for an additional twelve month
period.
Sales to Concurrent Computer Corporation and its subsidiaries were $60 for
the year ended June 30, 1997.
F-16
<PAGE> 51
CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NIGHTHAWK SUPPLIER AGREEMENT:
A supplier agreement exists, effective June 27, 1996 between the Company
and Concurrent. During the term of this agreement, the Company shall pay
Concurrent a fee of $5 per month. The initial term of this agreement shall be
for a period of twelve months beginning with the effective date of this
agreement and may be renewed for two additional terms of twelve months each with
the written consent of both the Company and Concurrent . During the current
fiscal year the NightHawk Supplier Agreement with Concurrent was renegotiated
with new pricing established and an extension of the agreement until December
31, 1997.
21. RESELLER AGREEMENTS
On August 6, 1996, the Company entered into a Joint Development and
Marketing Agreement with Information Resources Engineering, Inc. (IRE) whereas
the Company and IRE will jointly develop and market a product offering
consisting of a combination of the CyberGuard Firewall and IRE SafeNet products
in an interoperable centrally managed system configured for use with a virtual
private network (VPN). In connection with this Agreement IRE paid CyberGuard $1
million in prepaid licenses of which approximately $.85 million remains as
deferred revenue as of June 30, 1997.
Subject to the terms and conditions of this Joint Agreement, the Company
and IRE agree to cooperate with and assist each other in the joint design and
development of any product.
The Company entered into a Master Software Licensing Agreement with Data
General on June 23, 1997. The agreement calls for mutual software development,
sales, and support toward a strategic alliance that fully integrates the
CyberGuard Firewall with Data General's Secureline hardware servers. In
connection with this agreement, the Company has agreed to pay Data General $.5
million of prepaid royalties. Prepaid royalties of $166,000 have been accrued as
of June 30, 1997.
22. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board ("FASB") Issued SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. SFAS No. 130 requires all
items to be reported in a separate financial statement. The Company does not
believe that adoption of SFAS No. 130 will have a significant impact on its
financial reporting.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. SFAS 131
establishes standards for the way the public business enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. The Company does not believe that adoption of SFAS No.
131 will have a significant impact on its financial reporting.
In February 1997, the FASB issued SFAS No. 128," Earnings Per Share" (SFAS
No. 128"). SFAS No. 128 specifies new standards designed to improve the earnings
per share ("EPS") information provided in statements by simplifying the existing
computational guidelines, revising the disclosure requirements and increasing
the comparability of EPS data on an international basis. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Company does not believe that adoption of
SFAS No. 128 will have a significant impact on its financial reporting.
F-17
<PAGE> 1
EXHIBIT 10.03
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
April 21, 1997 by and between CyberGuard Corporation, a Florida corporation
(the Company), and Robert Lawten ("Employee").
WHEREAS, the Company, through its Board of Directors, desires to retain the
services of Employee, and Employee desires to be retained by the Company, on
the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
accepts employment, as Vice President Marketing of the Company upon the terms
of and subject to this Agreement.
2. TERM. The term (the "Term") of this Agreement shall commence on April
21, 1997, and shall continue for a period of one year in accordance with the
terms hereof.
3. DUTIES. During his employment hereunder, Employee will serve in such
capacity and with such duties as shall be assigned from time to time by the
Chief Executive Officer of the Company. Employee shall diligently perform such
duties and shall devote his entire business skill, time and effort to his
employment and his duties hereunder and shall not during the Term, directly or
indirectly, alone or as a member of a partnership, or as an officer, director,
employee or agent of any other person, firm or business organization engage in
any other business activities or pursuits requiring his personal service that
materially conflict with his duties hereunder or the diligent performance of
such duties.
4. COMPENSATION.
a. SALARY. During his employment hereunder, Employee shall be paid a
salary of $90,000 year, payable in equal installments not less than
monthly ("Base Salary"). The Employee's Base Salary shall be reviewed at
least annually by the Board of Directors or any Committee of the Board
delegated the authority to review executive compensation.
b. OPTION AND BONUS. In addition to salary, Employee shall be entitled
to participate in the Company's Stock Incentive Plan as adopted by the
Board of Directors of the Company on September 14, 1994, effective on
October 8, 1994, and amended from time to time (the "Stock Incentive
Plan"). In addition, Employee shall participate in a Management Bonus
Program anticipated to be established by the Company with an initial
annual targeted bonus equal to 50% of Employee's Base Salary (hereafter
the "Management Bonus Program").
c. INSURANCE. During his employment hereunder, Employee shall be
entitled to participate in all such health, life, disability and other
insurance programs, if any, that the Company may offer to other key
executive employees of the Company from time to time.
d. OTHER BENEFITS. During his employment hereunder, Employee shall be
entitled to all such other benefits, if any, that the Company may offer to
other key executive employees of the Company from time to
time.
e. VACATION. Employee shall be entitled to that number of weeks,
vacation leave (in addition to holidays) in each calendar year during the
Term in accordance with the Company's vacation policy for executives as
it may be in effect from time to time. Except with respect to vacation
time unused as the result of a request by the Company to postpone a
vacation, any unused vacation from one calendar year shall not carry-over
to any subsequent calendar year.
f. EXPENSE REIMBURSEMENT. Employee shall, upon submission of
appropriate supporting documentation, be entitled to reimbursement of
reasonable out-of-pocket expenses incurred in the performance of his
duties hereunder in accordance with policies established by the Company.
Such expenses shall include, without limitation, reasonable entertainment
expenses, gasoline and toll expenses and cellular phone use charges, if
such charges are directly related to the business of the Company.
<PAGE> 2
5. GROUNDS FOR TERMINATION. The Board of Directors of the Company may
terminate this Agreement for Cause. As used herein, "Cause" shall mean any of
the following: (i) an act of willful misconduct or gross negligence by Employee
in the performance of his material duties or obligations to the Company; if
such act is capable of cure, Employee shall be given written notice and such
act shall not be deemed a basis for Cause if cured within 60 days after written
notice is received by Employee specifying the alleged failure in -.reasonable
detail (and during such 60 day period, Employee shall continue to be employed
by the Company at full pay), or (ii) conviction of Employee of a felony
involving moral turpitude or (iii) a material act of dishonesty or breach of
trust on the part of Employee resulting or intended to result directly or
indirectly in personal gain or enrichment at the expense of the Company.
6. TERMINATION BY EMPLOVEE. Employee may terminate this Agreement with Good
Reason. In the event of termination by Employee for Good Reason, Employee shall
be entitled to the benefits of Paragraph 7b. of this Agreement. "Good Reason"
means:
a. A material breach of the provisions of this Agreement by the
Company (except those set forth in Paragraph 4a.) and Employee provides
at least 15 days' prior written notice to the Company of the existence of
such breach and his intention to terminate this Agreement (no such
termination shall be effective if such breach is cured during such
period); or
b. The failure of the Company to comply with the provisions of
Paragraph 4a. or to pay any amounts due under the Management Bonus Program
provisions of Paragraph 4b. for an uninterrupted 10 day period.
7. PAYMENT AND OTHER PROVISIONS UPON TERMINATION.
a. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for Cause as provided in
Paragraph 5 then, on or before Employee's last day of employment with the
Company, the provisions of this Paragraph 7a. shall apply. These same
provisions shall apply if Employee terminates his employment without Good
Reason as described in Paragraph 6.
i. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. The Company
shall pay in a lump sum to Employee at the time of Employee's
termination such amount of compensation due Employee for services
rendered to the Company, as well as compensation for unused vacation
time and earned bonus, as has accrued but remains unpaid. Any and all
other rights granted to Employee under this Agreement shall terminate
as of the date of termination.
ii. NONCOMPETITION/NONSOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall, at the option of the Company in its sole
discretion, continue to apply with respect to Employee for a period of
up to one year following the date of termination, so long as the
Company: (x) provides a written notice to Employee within 5 business
days after Employee's termination that the Company wishes to exercise
its right to require that Employee not compete and not solicit in
accordance with Paragraphs 14 and 15 hereof; and (y) Company
thereafter pays to Employee in periodic installments, without
interest, in accordance with the regular salary payment practices of
the Company an amount equal to (.1) the amount of Employee's annual
Base Salary as in effect immediately prior to Employee's date of
termination, multiplied by (.2) the number of months that the Company
is requiring the non-competition and non-solicitation covenants to
remain in place, divided by 12. The first such installment of Base
Salary and target bonus shall be paid on or before the delivery of the
notice described in the prior sentence of this Paragraph 7a(ii) . The
non-competition and non-solicitation provisions of this Agreement
shall no longer apply to Employee if the Company fails to pay the
amounts required under this Section 7a(ii) for an uninterrupted 10 day
period and such failure is not cured with 5 days after written notice
of such failure is delivered to the Company.
<PAGE> 3
b. In the event Employee's employment with the Company (including its
subsidiaries) is terminated by the Company for any reason other than for
Cause as provided in Paragraph 5 and other than as a consequence of
Employee's death, disability, or normal retirement under the Company's
retirement plans and practices, then the following provisions apply. These
same provisions shall apply if Employee terminates his employment with
Good Reason as described in Paragraph 6. In addition to the amounts stated
below, Employee shall be paid any other amounts by the Company to which he
is entitled.
SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. On or before
Employee's last day of employment with the Company, the Company shall pay
in a lump sum to Employee as compensation for services rendered to the
Company a cash amount equal to one-half the amount of Employee's annual
Base Salary and the greater of (x) one-half the target bonus under the
Management Bonus Program as in effect immediately prior to his date of
termination or (y) the amount of the bonus under the Management Bonus
Program to which he is entitled but which remains unpaid. At the election
of the Company, the cash amount referred to in this Paragraph 7b.i. may
be paid to Employee in periodic installments, without interest, in
accordance with the regular salary payment practices of the Company, with
the first such installment to be paid on or before Employee's last day of
employment with the Company, and no interest shall be paid with respect
to any amount not paid on the Employee's date of termination.
VESTING OF OPTIONS AND RIGHTS. Notwithstanding the
vesting period provided for in the Stock Incentive Plan and any related
stock option agreements between the Company and Employee for stock
options ("options") and stock appreciation rights ("rights") granted
Employee by the Company, all options and stock appreciation rights that
were exercisable at the date of termination or within 12 months
thereafter shall be immediately exercisable upon termination of
employment. In addition, Employee will have the right to exercise all
such options and rights for the shorter of (a) six months following his
termination of employment or (b) with respect to each option, the
remainder of the period of exercisability under the terms of the
appropriate documents that grant such options.
iii. BENEFIT PLAN COVERAGE. The Company shall maintain in full force
and effect for Employee and his dependents for six months after the date
of termination, all life, health, accident, and disability benefit plans
and other similar employee benefit plans, programs and arrangements in
which Employee or his dependents were entitled to participate immediately
prior to the date of termination, in such amounts as were in effect
immediately prior to the date of termination, provided that such
continued participation is possible under the general terms and
provisions of such benefit plans, programs and arrangements.
In the event that participation in any benefit plan, program or arrangement
described above is barred, or any such benefit plan, program or arrangement is
discontinued or the benefits thereunder materially reduced, the Company shall
arrange to provide Employee and his dependents for six months after the date of
termination with benefits substantially similar to those that they were
entitled to receive under such benefit plans, programs and arrangements
immediately prior to the date of termination. Notwithstanding any time period
for continued benefits stated in this Paragraph 7b.iii., all benefits in this
Paragraph 7b.iii. will terminate on the date that Employee becomes an employee
of another employer and eligible to participate in the employee benefit plans
of such other employer. To the extent that Employee was required to contribute
amounts for the benefits described in this Paragraph 7b.iii. prior to his
termination, he shall continue to contribute such amounts for such time as
these benefits continue in effect after termination.
iv. OTHER COMPENSATION. Any awards previously made to Employee under any
of the Company's compensation plans or programs and not previously paid shall
immediately vest on the date of his termination and shall be paid on that date
and included as compensation in the year paid.
v. SAVINGS AND OTHER PLANS. Except as otherwise more specifically
provided herein or under the terms of the respective plans relating to
termination of employment, Employee's active participation in
<PAGE> 4
any applicable savings, retirement, profit sharing or supplemental employee
retirement plans or any deferred compensation or similar plan of the Company or
any of its subsidiaries shall continue only through the last day of his
employment. All other provisions, including any distribution and/or vested
rights under such plans, shall be governed by the terms of those respective
plans.
vi. NONCOMPETITION/NONSOLICITATION PERIOD. The provisions of
Paragraphs 14 and 15 shall continue, beyond the time periods set forth in such
paragraphs, to apply with respect to Employee for six (6) months following the
date of termination, and at the end of such six (6) month period, the Company
shall have the right to extend the time period of noncompetition and
nonsolicitation for an additional six (6) months by giving written notice to
Employee of such extension and paying to Employee an amount equal to one-half
the amount of Employee's annual Base Salary and one-half the target bonus under
the Management Bonus Program as in effect immediately prior to his date of
termination. At the election of the Company, the cash amount referred to in the
prior sentence of this Paragraph 7b.vi. may be paid to Employee in periodic
installments in accordance with the regular salary payment practices of the
Company, with the first such installment to be paid on or before the delivery
of the notice described in the first sentence of this Paragraph 7b.vi., and no
interest shall be paid with respect to any amount paid in installments. The
noncompetition and nonsolicitation provisions of this Agreement shall no longer
apply to Employee if the Company fails to pay the amounts required under the
provisions of Paragraph 7b.i. or the first two sentences of this Paragraph
7b.vi. for an uninterrupted 10-day period and such failure is not cured within
5 days after written notice of such failure is delivered to the Company.
c. The provisions of this Paragraph 7 shall apply if Employee's employment
is terminated prior to or more than one year after the occurrence of a Change
of Control (as defined in Paragraph 8c.). From the occurrence of any Change of
Control until the first anniversary of such Change of Control, the provisions
of Paragraph 8 shall apply in place of this Paragraph 7, except that in the
event that Employee's employment is terminated by Employee after a Change of
Control without Good Reason, then the provisions of Paragraph 8 shall not apply
and the provisions of Paragraph 7a. shall apply. Termination upon death,
disability and retirement are covered by Paragraphs 9, 10, and 11,
respectively.
8. PAYMENT AND OTHER PROVISIONS AFTER CHANCRE OF CONTROL.
a. SALARY, PERFORMANCE AWARD, AND BONUS PAYMENTS. In the event Employee's
employment with the Company is terminated within one year following the
occurrence of a Change of Control (other than as a consequence of his death or
disability, or of his normal retirement under the Company's retirement plans
and practices) either (i) by the Company for any reason whatsoever or (ii) by
Employee with Good Reason as provided in Paragraph 6, then Employee shall be
entitled to receive from the Company, the following:
i. BASE SALARY. An amount equal to one-half the Employee's annual Base
Salary as in effect at the date of termination shall be paid on the date
of termination;
ii. TARGET BONUS. An amount equal to one-half the Employee's target
bonus under the Management Bonus Program for the fiscal year in which the
date of termination occurs shall be paid on the date of termination; and
iii. OTHER BENEFITS. All benefits under Paragraphs 7b.i, 7.b.ii.,
7b.iii. 7b.iv. and 7b.v. shall be extended to Employee as described in
such paragraphs except that all options and rights shall be immediately
exercisable and the period for exercise of options and rights described in
the
6
<PAGE> 5
last sentence of Paragraph 7b.ii and benefit plan coverage as described in
Paragraph 7.b.iii shall be one half year.
b. NONCOMPETITION/NONSOLICITATION PERIOD. In the event of a termination
under the circumstances described in Paragraph 8a., the provisions of
Paragraphs 14 and 15 shall be without force and effect and shall not apply
to Employee.
c. For purposes of this Agreement, the term "Change of Control" shall
mean:
i. The acquisition, other than from the Company, by any individual,
entity or group (within the meaning of ss. 13(d)(3) or ss. 14 (d) (2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) (any of the foregoing described in this Paragraph
hereafter a "Person") of 30% or more of either (a) the then outstanding
shares of Capital Stock of the Company (the "Outstanding Capital Stock")
or (b) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Voting Securities") , provided, however, that any
acquisition by (x) the Company or any of its subsidiaries, or any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any of its subsidiaries or (y) any Person that is eligible,
pursuant to Rule 13d-l(b) under the Exchange Act, to file a statement on
Schedule 13G with respect to its beneficial ownership of Voting
Securities, whether or not such Person shall have filed a statement on
Schedule 13G, unless such Person shall have filed a statement on Schedule
13D with respect to beneficial ownership of 30% or more of the Voting
Securities or (z) any corporation with respect to which, following such
acquisition, more than 60% of, respectively, the then outstanding shares
of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Capital Stock and Voting Securities immediately prior to such
acquisition in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the outstanding Capital Stock
and Voting Securities, as the case may be, shall not constitute a Change
of Control; or
ii. Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority
of the Board, provided that any individual becoming a director subsequent
to the date hereof whose election or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption
of office is in connection with an actual or threatened election contest
relating to the election of the Directors of the Company (as such terms
are used in Rule 14a-11 of Regulation 14A, or any successor section,
promulgated under the Exchange Act); or Approval by the shareholders of
the Company of a reorganization, merger or consolidation (a "Business
Combination") , in each case, with respect to which all or substantially
all holders of the Outstanding Capital Stock and Voting Securities
immediately prior to such Business Combination do not, following such
Business Combination, beneficially own, directly or indirectly, more than
60% of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled
to vote generally in the election of directors, as the case may be, of
the corporation resulting from Business Combination; or v. (a) a complete
liquidation or dissolution of the Company or (b) a sale or other
disposition of all or substantially all of the assets of the Company
other than to a corporation with respect to which, following such sale or
disposition, more than 60% of, respectively, the then outstanding shares
of common stock and the combined voting power of the then
<PAGE> 6
outstanding voting securities entitled to vote generally in the election of
directors is then owned beneficially, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Capital Stock and Voting
Securities immediately prior to such sale or disposition in substantially
the same proportion as their ownership of the Outstanding Capital Stock and
Voting Securities, as the case may be, immediately prior to such sale or
disposition.
9. TERMINATION BY REASON OF DEATH. If Employee shall die while employed by
the Company both prior to termination of employment and during the effective
term of this Agreement, all Employee's rights under this Agreement shall
terminate with the payment of such amounts of annual Base Salary as have
accrued but remain unpaid and a prorated amount of targeted bonus under the
Company's Management Bonus Program through the month in which his death occurs,
plus three additional months of the fixed salary and targeted bonus. All
benefits under 7b.ii., 7b.iv and 7b.v. shall be extended to Employee's estate
as described in such paragraphs.
In addition, Employee's eligible dependents shall receive continued benefit
plan coverage under Paragraph 7b.iii. for three months from the date of
Employee's death.
10. TERMINATION BY DISABILITY. Employee's employment hereunder may be
terminated by the Company for disability. In such event, all Employee's rights
under this Agreement shall terminate with the payment of such amounts of annual
Base Salary as have accrued but remain unpaid as of thirtieth (30th) day after
such notice is given except that all benefits under Paragraphs 7b.ii, 7b.iii,
7b.iv. and 7b.v. shall be extended to Employee as described in such paragraphs.
In addition, the noncompetition and nonsolicitation provisions of Paragraphs 14
and 15 shall continue to apply to Employee for a period of one year from the
date of termination.
For purposes of this Agreement, "disability" is defined to mean that, as a
result of Employee's incapacity due to physical or mental illness:
a. Employee shall have been absent from his duties as an officer of the
Company on a substantially full-time basis for six (6) consecutive months;
and
b. Within thirty (30) days after the Company notifies Employee in
writing that it intends to replace him, Employee shall not have returned to
the performance of his duties as an officer of the Company on a full-time
basis.
ii. RETIREMENT. Retirement by Employee, whether occurring as a result of a
voluntary termination by Employee or an involuntary termination as the result
of reaching the age retirement as set forth in the Company's retirement
policies, shall be treated as a voluntary termination without Good Reason and
the provisions of Paragraph 7a. shall apply. If during the Term or any
extension thereof, the Company adopts a retirement plan with respect to
executive officers of the Company, Employee shall have the right to participate
in such policy and the provisions of such policy shall supersede the provisions
of the preceding sentence.
12. INDEMNIFICATION. If litigation shall be brought, in the event of breach
or to enforce or interpret any provision contained herein, the non-prevailing
party shall indemnify the prevailing party for reasonable attorney's fees
(including those for negotiations, trial and appeals) and disbursements
incurred by the prevailing party in such litigation, and hereby agrees to pay
prejudgment interest on any money judgment obtained by the prevailing party
calculated at the generally prevailing NationsBank of Florida, N.A. base
<PAGE> 7
rate of interest charged to its commercial customers in effect from time to time
from the date that payment(s) to him should have been made under this
Agreement.
13. (Omitted Intentionally)
14. NONCOMPETITION.
a. At all times during Employee's employment hereunder, and for such
additional periods as may otherwise be set forth in this Agreement in
reference to this Paragraph 14, Employee shall not, directly or
indirectly, engage in any business, enterprise or employment, whether as
owner, operator, shareholder, director, partner, creditor, consultant,
agent or any capacity whatsoever that manufactures products designed to
compete directly with products of the Company or markets such products
anywhere in the world where the Company (i) is engaged in business or (ii)
has evidenced an intention of engaging in business. Employee acknowledges
that he has read the foregoing and agrees that the nature of the
geographical restrictions are reasonable given the international nature of
the Company's business.
In the event that these geographical or temporal restrictions are
judicially determined to be unreasonable, the parties agree that these
restrictions shall be judicially reformed to the maximum restrictions which
are reasonable.
b. Notwithstanding the provisions of the preceding Paragraph 14a.,
Employee may accept employment with a company that would be deemed to be a
competitor of the Company as described in the previous sentence
("Competitor") , so long as (i) the Competitor has had annual revenues of
at least $1 billion in each of the prior two fiscal years, (ii) the
Competitor's revenues for products and maintenance in direct competition
with the Company does not exceed 50% of its total revenues and (iii)
Employee's responsibilities are solely for divisions or subsidiaries of the
Competitor that do not compete with the Company.
15. NONSOLICITATION OF EMPLOYEES AND CUSTOMERS. At all times during
Employee's employment hereunder, or for such additional periods as may
otherwise be set forth in this Agreement in reference to this Paragraph 15,
Employee shall not, directly or indirectly, for himself or for any other
person, firm, corporation, partnership, association or other entity (a) attempt
to employ, employ or enter into any contractual arrangement with any employee
or former employee of the Company, its affiliates, subsidiaries or predecessors
in interest, unless such employee or former employee has not been employed by
the Company, its affiliates, subsidiaries or predecessors in interest during
the twelve months prior to Employee's attempt to employ him, or (b) call on or
solicit any of the actual or targeted prospective customers of the Company or
its affiliates, subsidiaries or predecessors in interest with respect to any
matters related to or competitive with the business of the Company.
16. CONFIDENTIALITY.
a. NONDISCLOSURE. Employee acknowledges and agrees that the
Confidential Information (as defined below) is a valuable, special and
unique asset of the Company's business. Accordingly, except in connection
with the performance of his duties hereunder, Employee shall not at any
time during or subsequent to the term of his employment hereunder
disclose, directly or indirectly, to any person, firm, corporation,
partnership, association or other entity any proprietary or confidential
information relating to the Company or any information concerning the
Company's financial condition or prospects, the Company's customers, the
design, development, manufacture, marketing or sale of the
<PAGE> 8
Company's products or the Company's methods of operating its business
(collectively "Confidential Information"). Confidential Information shall
not include information which, at the time of disclosure, is known or
available to the general public by publication or otherwise through no act
or failure to act on the part of Employee.
b. RETURN OF CONFIDENTIAL INFORMATION. Upon termination of Employee's
employment, for whatever reason and whether voluntary or involuntary, or
at any time at the request of the Company, Employee shall promptly return
all Confidential Information in the possession or under the control of
Employee to the Company and shall not retain any copies or other
reproductions or extracts thereof. Employee shall at any time at the
request of the Company destroy or have destroyed all memoranda, notes,
reports, and documents, whether in "hard copy" form or as stored on
magnetic or other media, and all copies and other reproductions and
extracts thereof, prepared by Employee and shall provide the Company with
a certificate that the foregoing materials have in fact been returned or
destroyed.
c. BOOKS AND RECORDS. All books, records and accounts whether prepared
by Employee or otherwise coming into Employee's possession, shall be the
exclusive property of the Company and shall be returned immediately to
the Company upon termination of Employee's employment hereunder or upon
the Company's request at any time.
17. INIUNCTION/SPECIFIC PERFORMANCE SETOFF. Employee acknowledges that a
breach of any of the provisions of Paragraphs 14, 15 or 16 hereof would result
in immediate and irreparable injury to the Company which cannot be adequately
or reasonably compensated at law. Therefore, Employee agrees that the Company
shall be entitled, if any such breach shall occur or be threatened or
attempted, to a decree of specific performance and to a temporary and permanent
injunction, without the posting of a bond, enjoining and restraining such
breach by Employee or his agents, either directly or indirectly, and that such
right to injunction shall be cumulative to whatever other remedies for actual
damages to which the Company is entitled. Employee further agrees that the
Company may set off against or recoup from any amounts due under this Agreement
to the extent of any losses incurred by the Company as a result of any breach
by Employee of the provisions of Paragraphs 14, 15 or 16 hereof.
18. SEVERABILITY. Any provision in this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
19. SUCCESSORS. This Agreement shall be binding upon Employee and inure to
his and his estate's benefit, and shall be binding upon and inure to the
benefit of the Company and any permitted successor of the Company. Neither this
Agreement nor any rights arising hereunder may be assigned or pledged by:
Employee or anyone claiming through Employee; or by the Company, except to any
corporation which is the successor in interest to the Company by reason of a
merger, consolidation or sale of substantially all of the assets of the
Company.
The foregoing sentence shall not be deemed to have any effect upon the rights
of Employee upon a Change of Control.
20. CONTROLLING LAW. This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the State of Florida.
<PAGE> 9
21. NOTICES. Any notice required or permitted to be given hereunder shall
be written and sent by registered or certified mail, telecommunicated or hand
delivered at the address set forth herein or to any other address of which
notice is given:
To the Company: CyberGuard Corporation
2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309
Attention: President
To Employee: Robert Lawten
6786 Viento Way
Boca Raton, FL 33433
22. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto on the subject matter hereof and may not be modified
without the written agreement of both parties hereto.
23. WAIVER. A waiver by any party of any of the terms and conditions hereof
shall not be construed as a general waiver by such party.
24. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original and both of which together shall constitute a
single agreement.
25. INTERPRETATION. In the event of a conflict between the provisions of
this Agreement and any other agreement or document defining rights and duties
of Employee or the Company upon Employee's termination, the rights and duties
set forth in this Agreement shall control.
26. CERTAIN LIMITATIONS ON REMEDIES. Paragraph 7b. provides that certain
payments and other benefits shall be received by Employee upon the termination
of Employee by the Company other than for Cause and states that these same
provisions shall apply if Employee terminates his employment for Good Reason.
It is the intention of this Agreement that if the Company terminates Employee
other than for Cause (and other than as a consequence of Employee's death,
disability or normal retirement) or if Employee terminates his employment with
Good Reason, then the payments and other benefits set forth in Paragraph 7b.
shall constitute the sole and exclusive remedies of Employee.
27. SURVIVAL. Notwithstanding the provisions of Paragraph 2, the provisions
of Paragraphs 14, 15, and 16 shall survive the expiration or early termination
of this Agreement.
IN WITNESS WHEREOF, this Employment Agreement has been executed by the
parties as of the date first above written.
COMPANY:
EMPLOYEE:
<PAGE> 1
EXHIBIT 10.07
Employment Agreement
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
as of July 24, 1997 by and between CyberGuard Corporation, a Florida
corporation (the "Company"), and Thomas W. Patterson ("Employee").
WHEREAS, the Company, through its Board of Directors, desires to
retain the services of Employee, and Employee desires to be retained by the
Company, on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Employment. The Company hereby employs Employee, and Employee
hereby accepts employment, as Senior Vice President of TradeWave, and Corporate
Vice President for Business Development of the Company upon the terms of and
subject to this Agreement.
2. Term. The term (the "Term") of this Agreement shall commence on
July 24, 1997, and shall continue for a period of one year in accordance with
the terms hereof.
3. Duties. During his employment hereunder, Employee will serve in
such capacity and with such duties as shall be assigned from time to time by
the Chief Executive Officer of the Company. Employee shall diligently perform
such duties and shall devote his entire business skill, time and effort to his
employment and his duties hereunder and shall not during the Term, directly or
indirectly, alone or as a member of a partnership, or as an officer, director,
employee or agent of any other person, firm or business organization engage in
any other business activities or pursuits requiring his personal service that
materially conflict with his duties hereunder or the diligent performance of
such duties. It is understood and agreed to that the Employee does and will
continue to serve on Board of Directors on other companies which the Company
shall agree are non-competitive. It is additionally understood that the
Employee shall be able to author books, papers, articles and other publications
which do not detract from the performance of duties as described above.
<PAGE> 2
4. Compensation.
a) Salary. During his employment hereunder, Employee shall be paid a
salary of $125,000 year, payable in equal installments not less than monthly
("Base Salary"). The Employee's Base Salary shall be reviewed at least annually
by the Board of Directors or any Committee of the Board delegated the authority
to review executive compensation.
b) Option and Bonus. In addition to salary, the Employee shall be
entitled to participate in the Company's Stock Incentive Plan as adopted by the
Board of Directors of the Company on September 14, 1994, effective on October
8, 1994, and amended from time to time (the "Stock Incentive Plan" to be
provided under separate cover). An option to purchase 100,000 shares of
CyberGuard Common Stock at a date of grant price as of June 27, 1997. The
option will vest 33% of the shares on July 24, 1998; 66% on July 24, 1999 and
100% of the shares on July 24, 2000. In addition, Employee shall participate in
a Management Bonus Program anticipated to be established by the Company with an
initial annual targeted bonus equal to 40% of Employee's Base Salary (hereafter
the "Management Bonus Program"). Bonuses are payable on an annual basis and, at
the company's discretion, may be paid as stock grants or cash. The Employee
prorata share of the calendar 1997 portion of the Bonus program shall be
guaranteed.
c) Special Incentive Awards. In addition to eligibility for the
Companies Stock Incentive Plan, and the Management Bonus Program, the Employee
shall be eligible for four Special Incentive Awards during the Agreement
period. Each of the four incentives shall be based upon achievement of (an
expected present value) of $1.5M of TradeWave new business revenue in each of
the second through the fourth quarters. The first quarter achievement level
will be based upon current "new business work in process at TradeWave and the
achievement level would be $750,000. Each of the awards will be in the form of
stock grants equal in market value of $50,000. In lieu of anyone of these
awards and at the soul discretion of the Chief Executive Officer of the Company
may elect to offer one incentive award or any part thereof for contributions to
the Company. All special incentive awards are subject to the approval of the
Compensation Committee of the Board of Directors.
d) One Time Grant. An initial grant of 2,000 shares of CyberGuard
restricted stock with a date of grant price equal to the close of market on
June 27, 1997 will be granted with a restriction that the shares cannot be sold
until January 1, 1998.
e) Insurance. During his employment hereunder, Employee shall be entitled
to participate in all such health, life, disability and other insurance
programs, if any, that the Company may offer to other key executive employees
of the Company from time to time.
f. Other Benefits. During his employment hereunder, Employee shall be
entitled to all such other benefits, if any, that the
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<PAGE> 3
Company may offer to other key executive employees of the Company from time to
time.
g. Vacation. Employee shall be entitled to four weeks' vacation leave (in
addition to holidays) in each calendar year during the Term in accordance with
the Company's vacation policy for executives as it may be in effect from time
to time. Except with respect to vacation time unused as the result of a request
by the Company to postpone a vacation, any unused vacation from one calendar
year shall not carry-over to any subsequent calendar year.
h. Expense Reimbursement. Employee shall, upon submission of appropriate
supporting documentation, be entitled to reimbursement of reasonable
out-of-pocket expenses incurred in the performance of his duties hereunder in
accordance with policies established by the Company. Such expenses shall
include, without limitation, reasonable entertainment expenses, gasoline and
toll expenses and cellular phone use charges, if such charges are directly
related to the business of the Company.
i. Relocation Expense Reimbursement. Employee shall, upon submission of
appropriate supporting documentation, be entitled to reimbursement of
relocation expense consistent with the CyberGuard relocation policy (sent under
separate cover).
5. Grounds for Termination. The Board of Directors of the Company may
terminate this Agreement for Cause. As used herein, "Cause" shall mean any of
the following: (i) an act of willful misconduct or gross negligence by Employee
in the performance of his material duties or obligations to the Company; if
such act is capable of cure, Employee shall be given written notice and such
act shall not be deemed a basis for Cause if cured within 60 days after written
notice is received by Employee specifying the alleged failure in reasonable
detail (and during such 60 day period, Employee shall continue to be employed
by the Company at full pay), or (ii) conviction of Employee of a felony
involving moral turpitude or (iii) a material act of dishonesty or breach of
trust on the part of Employee resulting or intended to result directly or
indirectly in personal gain or enrichment at the expense of the Company.
6. Termination by Employee. Employee may terminate this Agreement with
Good Reason. In the event of termination by Employee for Good Reason, Employee
shall be entitled to the benefits of Paragraph 7b. of this Agreement. "Good
Reason" means:
a. A material breach of the provisions of this Agreement by
the Company (except those set forth in Paragraph 4a.) and Employee
provides at least 15 days' prior written notice to the Company of the
existence of such breach and his intention to terminate this Agreement
(no such termination shall be effective if such breach is cured during
such period); or
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b. The failure of the Company to comply with the provisions
of Paragraph 4a. or to pay any amounts due under the Management Bonus
Program provisions of Paragraph 4b. for an uninterrupted 10 day
period.
7. Payment and Other Provisions Upon Termination.
a. In the event Employee's employment with the Company
(including its subsidiaries) is terminated by the Company for Cause as
provided in Paragraph 5 then, on or before Employee's last day of
employment with the Company, the provisions of this Paragraph 7a.
shall apply. These same provisions shall apply if Employee terminates
his employment without Good Reason as described in Paragraph 6.
i. Salary, Performance Award, and Bonus Payments. The Company
shall pay in a lump sum to Employee at the time of Employee's
termination such amount of compensation due Employee for services
rendered to the Company, as well as compensation for unused vacation
time and earned bonus, as has accrued but remains unpaid. Any and
all other rights granted to Employee under this Agreement shall
terminate as of the date of termination.
ii. Non-competition/Non-solicitation Period. The provisions of
Paragraphs 14 and 15 shall, at the option of the Company in its sole
discretion, continue to apply with respect to Employee for a period
of up to one year following the date of termination, so long as the
Company: (x) provides a written notice to Employee within 5 business
days after Employee's termination that the Company wishes to
exercise its right to require that Employee not compete and not
solicit in accordance with Paragraphs 14 and 15 hereof; and (y)
Company thereafter pays to Employee in periodic installments,
without interest, in accordance with the regular salary payment
practices of the Company an amount equal to (.1) the amount of
Employee's annual Base Salary as in effect immediately prior to
Employee's date of termination, multiplied by (.2) the number of
months that the Company is requiring the non-competition and
non-solicitation covenants to remain in place, divided by 12. The
first such installment of Base Salary and target bonus shall be paid
on or before the delivery of the notice described in the prior
sentence of this Paragraph 7a(ii). The non-competition and
non-solicitation provisions of this Agreement shall no longer apply
to Employee if the Company fails to pay the amounts required under
this Section 7a(ii) for an uninterrupted 10-day period and such
failure is not cured with 5 days after written notice of such
failure is delivered to the Company.
b. In the event Employee's employment with the Company
(including its subsidiaries) is terminated by the Company for any
reason other than for Cause as provided in Paragraph 5 and other than
as a consequence of Employee's death, disability, or normal retirement
under the Company's retirement plans and
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<PAGE> 5
practices, then the following provisions apply. These same provisions
shall apply if Employee terminates his employment with Good Reason as
described in Paragraph 6. In addition to the amounts stated below,
Employee shall be paid any other amounts by the Company to which he is
entitled.
i. Salary, Performance Award, and Bonus Payments. On or
before Employee's last day of employment with the Company, the Company
shall pay the first of six equal monthly payments to Employee as
compensation for services rendered to the Company an amount equal to
one-half the amount of Employee's annual Base Salary and the greater
of (x) one-half the target bonus under the Management Bonus Program as
in effect immediately prior to his date of termination or (y) the
amount of the bonus under the Management Bonus Program to which he is
entitled but which remains unpaid. At the election of the Company, the
cash amount referred to in this Paragraph 7b.i. will be paid to
Employee in periodic installments, without interest, in accordance
with the regular salary payment practices of the Company, with the
first such installment to be paid on or before Employee's last day of
employment with the Company, and no interest shall be paid with
respect to any amount not paid on the Employee's date of termination.
ii. Vesting of Options and Rights. Notwithstanding the
vesting period provided for in the Stock Incentive Plan and any
related stock option agreements between the Company and Employee for
stock options ("options") and stock appreciation rights ("rights")
granted Employee by the Company, all options and stock appreciation
rights that were exercisable at the date of termination or within 6
months thereafter shall be immediately exercisable upon termination of
employment. In addition, Employee will have the right to exercise all
such options and rights for the shorter of (a) three months following
his termination of employment or (b) with respect to each option, the
remainder of the period of exercisability under the terms of the
appropriate documents that grant such options.
iii. Benefit Plan Coverage. The Company shall maintain in
full force and effect for Employee and his dependents for six months
after the date of termination, all life, health, accident, and
disability benefit plans and other similar employee benefit plans,
programs and arrangements in which Employee or his dependents were
entitled to participate immediately prior to the date of termination,
in such amounts as were in effect immediately prior to the date of
termination, provided that such continued participation is possible
under the general terms and provisions of such benefit plans, programs
and arrangements.
In the event that participation in any benefit plan, program or
arrangement described above is barred, or any such benefit plan,
program or arrangement is discontinued or the benefits thereunder
materially reduced, the Company shall arrange to
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<PAGE> 6
provide Employee and his dependents for three months after the date of
termination with benefits substantially similar to those that they
were entitled to receive under such benefit plans, programs and
arrangements immediately prior to the date of termination.
Notwithstanding any time period for continued benefits stated in this
Paragraph 7b.iii., all benefits in this Paragraph 7b.iii. will
terminate on the date that Employee becomes an employee of another
employer and eligible to participate in the employee benefit plans of
such other employer. To the extent that Employee was required to
contribute amounts for the benefits described in this Paragraph
7b.iii. prior to his termination, he shall continue to contribute such
amounts for such time as these benefits continue in effect after
termination.
iv. Other Compensation. Any awards previously made to
Employee under any of the Company's compensation plans or programs and
not previously paid shall immediately vest on the date of his
termination and shall be paid on that date and included as
compensation in the year paid.
v. Savings and Other Plans. Except as otherwise more
specifically provided herein or under the terms of the respective
plans relating to termination of employment, Employee's active
participation in any applicable savings, retirement, profit sharing or
supplemental employee retirement plans or any deferred compensation or
similar plan of the Company or any of its subsidiaries shall continue
only through the last day of his employment. All other provisions,
including any distribution and/or vested rights under such plans,
shall be governed by the terms of those respective plans.
vi. Non-competition/Non-solicitation Period. The provisions
of Paragraphs 14 and 15 shall continue, beyond the time periods set
forth in such paragraphs, to apply with respect to Employee for six
(6) months following the date of termination, and at the end of such
six (6) month period, the Company shall have the right to extend the
time period of non-competition and non-solicitation for an additional
six (6) months by giving written notice to Employee of such extension
and paying to Employee an amount equal to one-half the amount of
Employee's annual Base Salary and one-half the target bonus under the
Management Bonus Program as in effect immediately prior to his date of
termination. At the election of the Company, the cash amount referred
to in the prior sentence of this Paragraph 7b.vi. may be paid to
Employee in periodic installments in accordance with the regular
salary payment practices of the Company, with the first such
installment to be paid on or before the delivery of the notice
described in the first sentence of this Paragraph 7b.vi., and no
interest shall be paid with respect to any amount paid in
installments. The non-competition and non-solicitation provisions of
this Agreement shall no longer apply to Employee if the Company fails
to pay the amounts required under the provisions of
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Paragraph 7b.i. or the first two sentences of this
Paragraph 7b.vi. for an uninterrupted 10-day period and such
failure is not cured within 5 days after written notice of
such failure is delivered to the Company.
c. The provisions of this Paragraph 7 shall apply if
Employee's employment is terminated prior to or more than one year
after the occurrence of a Change of Control (as defined in Paragraph
8c.). From the occurrence of any Change of Control until the first
anniversary of such Change of Control, the provisions of Paragraph 8
shall apply in place of this Paragraph 7, except that in the event
that Employee's employment is terminated by Employee after a Change of
Control without Good Reason, then the provisions of Paragraph 8 shall
not apply and the provisions of Paragraph 7a. shall apply. Termination
upon death, disability and retirement are covered by Paragraphs 9, 10,
and 11, respectively.
8. Payment and Other Provisions after Change of Control.
a. Salary, Performance Award, and Bonus Payments. In the
event Employee's employment with the Company is terminated within one
year following the occurrence of a Change of Control (other than as a
consequence of his death or disability, or of his normal retirement
under the Company's retirement plans and practices) either (i) by the
Company for any reason whatsoever or (ii) by Employee with Good Reason
as provided in Paragraph 6, then Employee shall be entitled to receive
from the Company, the following:
i. Base Salary. An amount equal to one-half the
Employee's annual Base Salary as in effect at the date of
termination shall be paid on the date of termination;
ii. Target Bonus. An amount equal to one-half the
Employee's target bonus under the Management Bonus Program
for the fiscal year in which the date of termination occurs
shall be paid on the date of termination; and
iii. Other Benefits. All benefits under Paragraphs
7b.i, 7.b.ii., 7b.iii. 7b.iv. and 7b.v. shall be extended to
Employee as described in such paragraphs.
b. Non-competition/Non-solicitation Period. In the event of a
termination under the circumstances described in Paragraph 8a., the
provisions of Paragraphs 14 and 15 shall be without force and effect
and shall not apply to Employee.
c. For purposes of this Agreement, the term "Change of
Control" shall mean:
i. The acquisition, other than from the Company, by
any individual, entity or group (within the meaning of ss.
13(d)(3) or ss. 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) of beneficial ownership
(within
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<PAGE> 8
the meaning of Rule 13d-3 promulgated under the Exchange Act) (any of
the foregoing described in this Paragraph hereafter a "Person") of 30%
or more of either (a) the then outstanding shares of Capital Stock of
the Company (the "Outstanding Capital Stock") or (b) the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Voting
Securities"), provided, however, that any acquisition by (x) the
Company or any of its subsidiaries, or any employee benefit plan (or
related trust) sponsored or maintained by the Company or any of its
subsidiaries or (y) any Person that is eligible, pursuant to Rule
13d-1(b) under the Exchange Act, to file a statement on Schedule 13G
with respect to its beneficial ownership of Voting Securities, whether
or not such Person shall have filed a statement on Schedule 13G,
unless such Person shall have filed a statement on Schedule 13D with
respect to beneficial ownership of 30% or more of the Voting
Securities or (z) any corporation with respect to which, following
such acquisition, more than 60% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting
power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Capital Stock and Voting Securities
immediately prior to such acquisition in substantially the same
proportion as their ownership, immediately prior to such acquisition,
of the Outstanding Capital Stock and Voting Securities, as the case
may be, shall not constitute a Change of Control; or
ii. Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board, provided that any individual becoming a
director subsequent to the date hereof whose election or nomination
for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the
Directors of the Company (as such terms are used in Rule 14a-11 of
Regulation 14A, or any successor section, promulgated under the
Exchange Act); or
iii. Approval by the shareholders of the Company of a
reorganization, merger or consolidation (a "Business Combination"), in
each case, with respect to which all or substantially all holders of
the Outstanding Capital Stock and Voting Securities immediately prior
to such Business Combination do not, following such Business
Combination, beneficially own, directly or indirectly, more than 60%
of, respectively, the then outstanding shares of common stock and
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<PAGE> 9
the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from Business Combination; or
iv. (a) a complete liquidation or dissolution of the Company
or (b) a sale or other disposition of all or substantially all of the
assets of the Company other than to a corporation with respect to
which, following such sale or disposition, more than 60% of,
respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors is then owned
beneficially, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Capital Stock and Voting Securities
immediately prior to such sale or disposition in substantially the
same proportion as their ownership of the Outstanding Capital Stock
and Voting Securities, as the case may be, immediately prior to such
sale or disposition.
v. Notwithstanding the foregoing, if any event or series of
events occur or commence within 180 days after the date of this
Agreement that otherwise would be considered a Change in Control, then
such event or series of events shall not be considered to constitute a
Change in Control. Under the circumstances described in this Section
8.c.v., the relative rights and duties of the Employee and the Company
shall be governed by the provisions of this Agreement as though such
Change in Control had not occurred.
9. Termination by Reason of Death. If Employee shall die while employed
by the Company both prior to termination of employment and during the effective
term of this Agreement, all Employee's rights under this Agreement shall
terminate with the payment of such amounts of annual Base Salary as have
accrued but remain unpaid and a prorated amount of targeted bonus under the
Company's Management Bonus Program through the month in which his death occurs,
plus three additional months of the fixed salary and targeted bonus. All
benefits under 7b.ii., 7b.iv and 7b.v. shall be extended to Employee's estate
as described in such paragraphs. In addition, Employee's eligible dependents
shall receive continued benefit plan coverage under Paragraph 7b.iii. for three
months from the date of Employee's death.
10. Termination by Disability. Employee's employment hereunder may be
terminated by the Company for disability. In such event, all Employee's rights
under this Agreement shall terminate with the payment of such amounts of annual
Base Salary as have accrued but remain unpaid as of thirtieth (30th) day after
such notice is given except that all benefits under Paragraphs 7b.ii, 7b.iii,
7b.iv. and 7b.v. shall be extended to Employee as described in such paragraphs.
In addition, the non-competition and non-solicitation provisions of Paragraphs
14 and 15 shall continue to
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apply to Employee for a period of one year from the date of termination.
For purposes of this Agreement, "disability" is defined to mean that, as a
result of Employee's incapacity due to physical or mental illness:
a. Employee shall have been absent from his duties as an officer of the
Company on a substantially full-time basis for six (6) consecutive months;
and
b. Within thirty (30) days after the Company notifies Employee in
writing that it intends to replace him, Employee shall not have returned to
the performance of his duties as an officer of the Company on a full-time
basis.
11. Retirement. Retirement by Employee, whether occurring as a result of a
voluntary termination by Employee or an involuntary termination as the result
of reaching the age retirement as set forth in the Company's retirement
policies, shall be treated as a voluntary termination without Good Reason and
the provisions of Paragraph 7a. shall apply. If during the Term or any
extension thereof, the Company adopts a retirement plan with respect to
executive officers of the Company, Employee shall have the right to participate
in such policy and the provisions of such policy shall supersede the provisions
of the preceding sentence.
12. Indemnification. If litigation shall be brought, in the event of breach
or to enforce or interpret any provision contained herein, the non-prevailing
party shall indemnify the prevailing party for reasonable attorney's fees
(including those for negotiations, trial and appeals) and disbursements
incurred by the prevailing party in such litigation, and hereby agrees to pay
prejudgment interest on any money judgment obtained by the prevailing party
calculated at the generally prevailing NationsBank of Florida, N.A. base rate
of interest charged to its commercial customers in effect from time to time
from the date that payment(s) to him should have been made under this
Agreement.
13. (Omitted Intentionally)
14. Non-competition.
a. At all times during Employee's employment hereunder, and for such
additional periods as may otherwise be set forth in this Agreement in
reference to this Paragraph 14, Employee shall not, directly or indirectly,
engage in any business, enterprise or employment, whether as owner, operator,
shareholder, director, partner, creditor, consultant, agent or any capacity
whatsoever that manufactures products designed to compete directly with
products of the Company or markets such products anywhere in the world where
the Company (i) is engaged in business or (ii) has evidenced an intention of
engaging in business. Employee acknowledges that he has read the foregoing
and agrees that the nature of the geographical restrictions are
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reasonable given the international nature of the Company's business.
In the event that these geographical or temporal restrictions are judicially
determined to be unreasonable, the parties agree that these restrictions
shall be judicially reformed to the maximum restrictions which are
reasonable.
b. Notwithstanding the provisions of the preceding Paragraph 14a.,
Employee may accept employment with a company that would be deemed to be a
competitor of the Company as described in the previous sentence
("Competitor"), so long as (i) the Competitor has had annual revenues of at
least $1 billion in each of the prior two fiscal years, (ii) the Competitor's
revenues for products and maintenance in direct competition with the Company
does not exceed 50% of its total revenues and (iii) Employee's
responsibilities are solely for divisions or subsidiaries of the Competitor
that do not compete with the Company.
15. Non-solicitation of Employees and Customers. At all times during
Employee's employment hereunder, or for such additional periods as may
otherwise be set forth in this Agreement in reference to this Paragraph 15,
Employee shall not, directly or indirectly, for himself or for any other
person, firm, corporation, partnership, association or other entity (a) attempt
to employ, employ or enter into any contractual arrangement with any employee
or former employee of the Company, its affiliates, subsidiaries or predecessors
in interest, unless such employee or former employee has not been employed by
the Company, its affiliates, subsidiaries or predecessors in interest during
the twelve months prior to Employee's attempt to employ him, or (b) call on or
solicit any of the actual or targeted prospective customers of the Company or
its affiliates, subsidiaries or predecessors in interest with respect to any
matters related to or competitive with the business of the Company.
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16. Confidentiality.
a. Nondisclosure. Employee acknowledges and agrees that the
Confidential Information (as defined below) is a valuable, special and unique
asset of the Company's business. Accordingly, except in connection with the
performance of his duties hereunder, Employee shall not at any time during or
subsequent to the term of his employment hereunder disclose, directly or
indirectly, to any person, firm, corporation, partnership, association or
other entity any proprietary or confidential information relating to the
Company or any information concerning the Company's financial condition or
prospects, the Company's customers, the design, development, manufacture,
marketing or sale of the Company's products or the Company's methods of
operating its business (collectively "Confidential Information").
Confidential Information shall not include information which, at the time of
disclosure, is known or available to the general public by publication or
otherwise through no act or failure to act on the part of Employee.
b. Return of Confidential Information. Upon termination of Employee's
employment, for whatever reason and whether voluntary or involuntary, or at
any time at the request of the Company, Employee shall promptly return all
Confidential Information in the possession or under the control of Employee
to the Company and shall not retain any copies or other reproductions or
extracts thereof. Employee shall at any time at the request of the Company
destroy or have destroyed all memoranda, notes, reports, and documents,
whether in "hard copy" form or as stored on magnetic or other media, and all
copies and other reproductions and extracts thereof, prepared by Employee and
shall provide the Company with a certificate that the foregoing materials
have in fact been returned or destroyed.
c. Books and Records. All books, records and accounts whether prepared
by Employee or otherwise coming into Employee's possession, shall be the
exclusive property of the Company and shall be returned immediately to the
Company upon termination of Employee's employment hereunder or upon the
Company's request at any time.
17. Injunction/Specific Performance Setoff. Employee acknowledges that a
breach of any of the provisions of Paragraphs 14, 15 or 16 hereof would result
in immediate and irreparable injury to the Company which cannot be adequately
or reasonably compensated at law. Therefore, Employee agrees that the Company
shall be entitled, if any such breach shall occur or be threatened or
attempted, to a decree of specific performance and to a temporary and permanent
injunction, without the posting of a bond, enjoining and restraining such
breach by Employee or his agents, either directly or indirectly, and that such
right to injunction shall be cumulative to whatever other remedies for actual
damages to which the Company is entitled. Employee further agrees that the
Company may set off against or recoup from any amounts due under this Agreement
to the extent of any losses incurred by the Company
12
<PAGE> 13
as a result of any breach by Employee of the provisions of Paragraphs 14, 15 or
16 hereof.
18. Severability. Any provision in this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
19. Successors. This Agreement shall be binding upon Employee and inure to
his and his estate's benefit, and shall be binding upon and inure to the
benefit of the Company and any permitted successor of the Company. Neither this
Agreement nor any rights arising hereunder may be assigned or pledged by:
Employee or anyone claiming through Employee; or by the Company, except to any
corporation which is the successor in interest to the Company by reason of a
merger, consolidation or sale of substantially all of the assets of the
Company.
The foregoing sentence shall not be deemed to have any effect upon the rights
of Employee upon a Change of Control.
20. Controlling Law. This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the State of Florida.
21. Notices. Any notice required or permitted to be given hereunder shall
be written and sent by registered or certified mail, telecommunicated or hand
delivered at the address set forth herein or to any other address of which
notice is given:
To the Company: CyberGuard Corporation
2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309
Attention: President
To Employee: Thomas W. Patterson
(Employee Address)____________________________
_____________________
_____________________
2. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto on the subject matter hereof and may not be modified
without the written agreement of both parties hereto.
23. Waiver. A waiver by any party of any of the terms and conditions hereof
shall not be construed as a general waiver by such party.
24. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original and both of which together shall constitute a
single agreement.
13
<PAGE> 14
25. Interpretation. In the event of a conflict between the provisions of
this Agreement and any other agreement or document defining rights and duties of
Employee or the Company upon Employee's termination, the rights and duties set
forth in this Agreement shall control. Not withstanding anything contained in
this Agreement, any Change In Control that occurs on or before 180 days from the
date of this Agreement shall not be considered a Change In Control for any
purpose under this Agreement.
26. Certain Limitations on Remedies. Paragraph 7b. provides that certain
payments and other benefits shall be received by Employee upon the termination
of Employee by the Company other than for Cause and states that these same
provisions shall apply if Employee terminates his employment for Good Reason. It
is the intention of this Agreement that if the Company terminates Employee other
than for Cause (and other than as a consequence of Employee's death, disability
or normal retirement) or if Employee terminates his employment with Good Reason,
then the payments and other benefits set forth in Paragraph 7b. shall constitute
the sole and exclusive remedies of Employee.
27. Survival. Notwithstanding the provisions of Paragraph 2, the provisions
of Paragraphs 14, 15, and 16 shall survive the expiration or early termination
of this Agreement.
14
<PAGE> 15
IN WITNESS WHEREOF, this Employment Agreement has been executed by the
parties as of the date first above written.
COMPANY:
CYBERGUARD CORPORATION
-------------------------------------
By:
Its:
EMPLOYEE:
-------------------------------------
Thomas W. Patterson
15
<PAGE> 1
EXHIBIT 10.22
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT made and entered into as of March 18, 1997,
by and between CyberGuard Corporation (the "Company"), and David R. Proctor,
an individual residing in Travis County, Texas (the "Consultant");
WHEREAS, subject to the terms and conditions hereinafter set forth,
the Company wishes to retain the services of the Consultant, and the Consultant
is willing to provide consulting services to the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
promises and covenants contained herein, and intending to be legally bound
hereby, the parties hereto agree as follows:
1. Engagement and Term. Subject to the provisions for termination
hereinafter set forth, the Company hereby engages the Consultant, and
the Consultant hereby accepts such engagement by the Company, as a
consultant, on the basis as an independent contractor, for a term
commencing on the date hereof, continuing through a period of one year
and renewable on the anniversary date each year thereafter, by the
mutual agreement of both parties herein or until termination by either
party as defined by the terms'of "Termination of Agreement" below (the
"Term").
2. Duties. During the Term, the Consultant shall perform such services
and complete such duties as are assigned to him by the Chief Executive
Officer (CEO) of the Company. Acting in the capacity of Assistant to
the CEO, Consultant will provide services to CyberGuard's Austin
Division, TradeWave Corporation, at approximately three quarters of
time per week for nine months from commencement of this agreement,
then one half of time per week beyond nine months. Further, Consultant
will provide services to CyberGuard Corporate at one quarter time per
week for three months from commencement of agreement, and then as
available depending on requirements of TradeWave Corporation. The
Consultant will be available to provide all such services on a near
full-time basis.
3. Fees and Expenses. For the due and faithful performance of the
services contemplated by this Agreement, the Company will pay to the
Consultant during the Term a fee in the amount of $500.00 per day
("the Daily Feel,), payable on a monthly basis. The Company will
reimburse the Consultant for his reasonable and necessary business
expenses for travel related to the performance of duties herewith
which occur outside the Travis County, Texas, area. In support of
hours worked and expenses to be reimbursed, consultant will submit
monthly billing/invoice documents. Further, the Consultant will
receive an immediate and unconditional Stock Option grant of fifteen
thousand (15,000) shares of CyberGuard Corporation stock, at a date of
grant exercise price as of the date of the related Option Agreement
("First Option"). Vesting of the First Option shall be in 4 equal
increments of 3750 shares commencing quarterly on July 1, 1997. Up to
an additional fifteen thousand shares will vest on the one year
anniversary date of this Agreement, with the same date of grant
exercise price as the First Option, conditional on agreed-upon
performance achievement criteria, to be mutually agreed upon by the
Company and the Consultant (the "Second Option"; the First Option and
the Second Option are sometimes hereinafter referred to collectively
as the "Options"). All Options expire in three years or as otherwise
stated in section 4, below (dealing with Option expiration upon
termination of this Agreement).
4. Termination of Agreement. Notwithstanding any other provision of this
Agreement to the contrary, the Consultant's engagement hereunder and
fees shall terminate and cease to accrue forthwith upon the first to
occur of the following (the "Termination Date"):
<PAGE> 2
a) if Consultant is offered a position as a full time employee of the
Company or any successor to the Company (including a successor by acquisition
of substantially all the Company's assets), then the Termination Date shall
occur upon the first day of such employment or the first day on which the
Consultant rejects such offer of employment (a rejection shall be deemed to
include a failure by Consultant to accept the offer of employment within the
time period set forth in such offer), in which case, the Consultant shall be
paid at the rate of the Daily Fee through Termination Date;
b) the Termination Date shall occur upon notice of termination being
given to such Consultant by the Company and
c) the Termination Date shall occur immediately if at anytime the
Consultant resigns, in which event the Consultant shall be paid through the
date of such resignation at the rate of the Daily Fee.
If the Company should terminate this Agreement prior to April April 1, 1998,
then (i) in the event that Consultant contemporaneously is offered an
employment position with the Company and accepts such position, the Options
shall continue; (ii) in the event that the Consultant does not become an
Employee of the Company, the Option shall terminate except for any vested
options and the prorated portions of any non-vested Options, which vested
Options shall survive the termination of this Agreement for one year.
5. Integration. This Agreement constitutes and expresses the entire
agreement of the parties with respect to the subject matter hereof and
supersedes and cancels all prior negotiations, discussions, agreements and
understandings relating to such subject matter. This Agreement may not be
modified or amended except by an instrument in writing executed by both parties
hereto.
6. Independent Contractor. The Consultant shall be and remain only an
independent contractor. Nothing contained herein shall be deemed or construed
to create an employer/employee relationship. The Consultant shall not be
eligible to participate in any benefit plans, programs or arrangements made
available to employees of the Company.
7. Notices. All required or permitted notices, requests, demands and
other communications hereunder shall be in writing and shall be deemed
effectively given on the day of delivery if delivered by hand, or on the third
day after mailing if mailed within the continental United States by first class
certified mail, return receipt requested, postage prepaid, addressed as
follows:
(a) if to the Company, to:
Robert L. Carberry, CEO 2101 West Cypress Creek Road
Fort Lauderdale, Florida 33309-1892
or subsequent forwarding addresses.
(b) to the Consultant, to:
David R. Proctor
17 Cousteau Lane
Austin, Texas 78746
<PAGE> 3
or subsequent forwarding addresses
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
8. Insider Trading provisions. Based upon the consultant's position as a
Director on the Company's Board, the Consultant agrees to abide by the
provisions of the Company's Insider Trading Policy as it relates to the sale of
the Stock Option grants referenced in 3) above.
9. Miscellaneous.
a) The invalidity or unenforceability of any particular provisions of this
Agreement shall not affect the other provisions hereof; and this Agreement
shall be construed in all respects as if such invalid or unenforceable
provisions were omitted.
b) This Agreement shall be construed in accordance with the laws of the
State of Texas other than the conflict of laws provisions of such laws.
c) This Agreement shall be binding upon the parties hereto, their heirs,
legal representatives, successors, and assigns and shall not be assignable by
either party, except upon prior written consent by both parties to this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and
year first above written.
CYBERGUARD CORPORATION
By:
Chairman, President & CEO
Consultant:
David Proctor
4
<PAGE> 1
EXHIBIT 23.01
Independent Auditors' Consent
The Board of Directors
CyberGuard Corporation
We consent to incorporation by reference in the following registration
statements: Form S-8 (No. 333-88446); Form S-8 (No. 333-28813); Form S-3 (No.
333-06253); Form S-3 (No. 333-09211); and Form S-3 (No. 333-28693) of
CyberGuard Corporation of our report dated September 23, 1997, relating to the
consolidated balance sheets of CyberGuard Corporation and subsidiaries as of
June 30, 1997 and 1996, and the related consolidated statements of operations,
shareholders equity, and cash flows for the year ended June 30, 1997, the nine
months ended June 30, 1996, and the year ended September 30, 1995, which report
appears in the June 30, 1997 annual report on Form 10-K of CyberGuard
Corporation.
KPMG PEAT MARWICK LLP
Miami, Florida
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AT JUNE 30, 1997 AND CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,975
<SECURITIES> 1,268
<RECEIVABLES> 7,189
<ALLOWANCES> 517
<INVENTORY> 1,588
<CURRENT-ASSETS> 12,933
<PP&E> 3,288
<DEPRECIATION> 1,582
<TOTAL-ASSETS> 15,974
<CURRENT-LIABILITIES> 6,057
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 9,843
<TOTAL-LIABILITY-AND-EQUITY> 15,974
<SALES> 14,574
<TOTAL-REVENUES> 15,621
<CGS> 6,669
<TOTAL-COSTS> 7,240
<OTHER-EXPENSES> 16,395
<LOSS-PROVISION> 327
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,014)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,490)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,490)
<EPS-PRIMARY> (1.76)
<EPS-DILUTED> (1.76)
</TABLE>
