<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1996
-------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-24544
CYBERGUARD CORPORATION
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(Exact name of Registrant as Specified in Its Charter)
FLORIDA 65-0510339
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2101 WEST CYPRESS CREEK ROAD, FORT LAUDERDALE, FLORIDA 33309
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(Address of Principle Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 954-973-5478
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Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports),
Yes X No
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and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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The number of shares of each of the Registrant's classes of common stock,
outstanding as of February 12, 1997 were 7,379,758
<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYBERGUARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
DEC. 31 DEC. 29 DEC. 31 DEC. 29
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales
Equipment $ 2,835 $ 1,745 $ 5,711 $ 2,575
Services 212 80 403 147
Real time products 0 10,625 0 18,435
--------- --------- --------- ---------
Total sales 3,047 12,450 6,114 21,157
Cost of sales
Equipment 1,408 1,084 3,197 1,719
Services 100 36 185 68
Real time products 0 5,292 0 9,780
--------- --------- --------- ---------
Total cost of sales 1,508 6,412 3,382 11,567
Gross income 1,539 6,038 2,732 9,590
Operating expenses
Research and development 1,011 307 2,067 557
Selling, general and administrative 2,552 1,602 4,896 2,887
Real time operating expenses 0 5,680 0 13,323
--------- --------- --------- ---------
Total operating expenses 3,563 7,589 6,963 16,767
--------- --------- --------- ---------
Operating loss (2,024) (1,551) (4,231) (7,177)
Other income (expense)
Interest income 198 87 363 182
Gain (Loss) on sale of equity securities 997 0 (5,214) 0
Other 12 (1) 3 227
--------- --------- --------- ---------
Total other income (expense) 1,207 86 (4,848) 409
--------- --------- --------- ---------
Net Loss $ (817) $ (1,465) $ (9,079) $ (6,768)
========= ========= ========= =========
Loss per common and common equivalent share $ (0.12) $ (0.25) $ (1.30) $ (1.14)
========= ========= ========= =========
Weighted average number of common and common
equivalent shares outstanding 7,086,692 5,919,000 6,972,919 5,915,219
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE> 3
CYBERGUARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
DEC. 31, JUNE 30,
1996 1996
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<S> <C> <C>
Cash and cash equivalents $ 6,845 $ 3,617
Securities available for sale 2,597 13,600
Accounts and notes receivable, less allowance for
uncollectible accounts of $448 at December 31, 1996
and $318 at June 30, 1996 3,364 3,668
Inventories 1,034 134
Prepaid expenses 622 565
-------- --------
Total current assets 14,462 21,584
Machinery and equipment at cost, less accumulated
depreciation of $1,216 at December 31, 1996 and
$1,035 at June 30, 1996 1,502 1,152
Non-Compete Agreement 980 1,120
Investment in Concurrent Preferred Stock-long term 0 3,853
Other assets 12 3
-------- --------
Total assets $ 16,956 $ 27,712
======== ========
Accounts payable $ 860 $ 0
Deferred revenue 1,045 44
Accrued expenses 2,849 6,223
Loan payable 0 3,200
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Total current liabilities 4,754 9,467
-------- --------
Total liabilities 4,754 9,467
Shareholders' equity
Common stock par value $0.01 authorized 20,000,000 shares
issued and outstanding 7,392,985 at December 31, 1996
and 6,709,371 at June 30, 1996 73 67
Additional paid in capital 59,075 56,152
Accumulated deficit (46,289) (37,210)
Cumulative translation adjustment (657) (764)
-------- --------
Total shareholders' equity 12,202 18,245
-------- --------
Total liabilities and shareholders' equity $ 16,956 $ 27,712
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
CYBERGUARD CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SIX MONTHS ENDED
DEC. 31, DEC. 29,
1996 1995
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<S> <C> <C>
Cash flows from operating activities
Net loss $(9,079) $(6,768)
Adjustment to reconcile net loss to net cash
provided from (used in) operating activities:
Depreciation 217 1,351
Amortization 140 797
Appreciation of securities held for resale (256)
Loss on sale of Concurrent Computer stock 5,219
Deferred income taxes 0 (859)
Changes in assets and liabilities
Receivables 303 (618)
Prepaid Expenses (56) 827
Inventories (900) 2,823
Trade payables 860 1,050
Other expenses and accruals (1,973) 15
Deferred revenue 1,000 (1,239)
Other 176 (212)
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Net cash used in operating activities (4,349) (2,833)
------- -------
Cash flows from investing activities
Additions to machinery and equipment (567) (873)
Software development costs & other assets (9) (1,784)
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Net cash used in investing activities (576) (2,657)
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Cash flows from financing activities
Proceeds from sale of Concurrent Computer Stock 9,893 0
Payoff of short term loan (3,200) 0
Equity contributions 1,460 70
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Net cash provided from financing activities 8,153 70
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Net increase (decrease) in cash 3,228 (5,420)
Cash and cash equivalents at beginning of period 3,617 9,961
------- -------
Cash and cash equivalents at end of period $ 6,845 $ 4,541
======= =======
</TABLE>
4
See accompanying notes to condensed consolidated financial statements
<PAGE> 5
CYBERGUARD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do
not include all information and footnotes necessary for a fair presentation
of financial position, results of operations, and cash flows in conformity
with generally accepted accounting principles. The information furnished,
in the opinion of management, reflects all adjustments, which consist of
normal recurring adjustments, necessary to present fairly the results of
operations of the Company for the three and six month periods ended December
31, 1996 and December 29, 1995 and the financial position of the Company as
of December 31, 1996 and June 30, 1996.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and the notes included in the Form 10-K for the fiscal
period ended June 30, 1996 as filed with the Securities and Exchange
Commission.
The results of operations of interim periods are not necessarily indicative
of results which may be expected for any other interim period or for the
year as a whole.
Effective June 30, 1996, the Company sold the net assets of its real-time
computing business with a book value of $21.6 million and issued 683,178
shares of its common stock valued at $11.8 million to Concurrent Computer
Corporation (Concurrent) in exchange for (i) 10 million newly issued shares
of Concurrent common stock, par value $0.01 per share valued at $17 million
and (ii) convertible exchangeable preferred stock of Concurrent paying a 9%
cumulative annual dividend quarterly in arrears with a liquidation preference
of approximately $6.3 million.
2. EARNINGS PER SHARE
Net loss per share for the periods presented have been computed using the
weighted average number of common shares outstanding. Common equivalent
shares (stock options) outstanding during the period have been excluded due
to their anti-diluting effect.
3. INVENTORIES
Inventories are valued at the lower of cost or market, with cost being
determined by using the first-in, first-out ("FIFO") method.
4. LINE OF CREDIT
As of December 31, 1996, the Company had no debt or bank borrowings, and all
assets of the Company were free from pledges or collateral requirements. On
April 1, 1996, the Company entered into a line of credit of up to $5.0
million with Foothill Capital Corporation. The line of credit allowed for
the borrowing of up to 80% of eligible domestic accounts receivable. The
line was backed by all the domestic assets of the Company. The line of
credit outstanding of $3.2 million was paid in its entirety in August 1996
and the line of credit was terminated.
5
<PAGE> 6
CYBERGUARD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
5. REVENUE RECOGNITION
Revenue is recognized from sales when a product is shipped, from rentals as
they accrue, and from services and maintenance when performed. 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.
6. FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the foreign operations are translated using
the local currency as the functional currency.
6
<PAGE> 7
CYBERGUARD CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The quarter ended December 31, 1996 compared to the quarter ended December 29,
1995
NET SALES
Net revenues consist primarily of network security product sales including
sales of third-party security products, support services, and for the period
ending December 30, 1995 only, the sale of real-time computer products from
the Company's former real-time division which was sold to Concurrent in June
1996. For the quarter ended December 31, 1996, net sales declined by $9.4
million when compared to the quarter ended December 29, 1995. The $9.4
million decline comprises an increase of $1.2 million in network security
product and service sales for the current quarter which partially offsets the
$10.6 million in real-time products included in the prior year's quarterly
results. The $1.2 million or 167% increase in network security product sales
is the result of increased shipments of the Company's CyberGuard firewall
systems as firewall technology, in general, continues to gain wider
acceptance in the commercial marketplace as a viable solution for Internet
and intranet security. Specifically, the Company shipped 120 CyberGuard
systems during the quarter ended December 31, 1996 compared to 28 for the
quarter ending December 29, 1995. Of the 120 CyberGuard systems shipped
during the current quarter, 50 or 42% were CyberGuard Version 3.0 Firewall
systems. The CyberGuard Version 3.0 system was introduced in September 1996
and began shipping in production quantities in October 1996. The CyberGuard
Version 3.0 systems are designed to run on industry standard Intel Pentium
and Pentium Pro based products from suppliers such as IBM, Unisys, Compaq,
Hewlett-Packard, and ALR. The Company also experienced a strong increase in
sales leads during the three months ended December 31, 1996 based upon
increased customer referrals, industry trade show participation and increased
advertising expenditures in leading industry publications
For the quarter ending December 31, 1996, International sales of the
Company's network security products increased to $1.8 million compared to
$1.1 million for the quarter ended December 29, 1995. The increase in
International sales for network security products is the result of increased
market penetration in Japan and Korea, as well as increased Firewall unit
shipments in Europe. The increased demand for CyberGuard Firewall products
in Europe is attributed to customer awareness of the imminent U.K. Government
certification for the CyberGuard Firewall application program suite.
International sales represent 66% and 62% of total security product sales for
the periods ending December 31, 1996 and December 29, 1995 respectively.
Domestic product sales for firewall products increased by $0.3 million to
$1.0 million in the quarter ended December 31, 1996. This increase is due to
continuing customer acceptance for firewall products in domestic markets and
initial shipments to domestic Value-Added Resellers under the CyberGuard
Secure Partners Program.
Revenues from support services related to Firewall products increased from
$80,000 for the three months ended December 29, 1995 to $212,000 for the
three months ended December 31, 1996. This increase is due to the greater
number of installed units and increased customer training in connection with
increased sales. Support services for firewall products accounted for 7%
of sales during the quarter ended December 31, 1996.
7
<PAGE> 8
CYBERGUARD CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GROSS INCOME
Gross income declined from $6.0 million for the quarter ended December 29,
1995 to $1.5 million for the current quarter. This change is due primarily to
the inclusion of Real Time product sales for the prior year's quarter. As a
percent of sales, gross margin increased from 48.5% to 50.5% for the quarter
ended December 31, 1996. The increase is a result of product mix. The
Real-time related products and services accounted for $5.3 million or 88.3%
of prior year's Gross Income. Disregarding the gross income from Real-time
sales, the gross margin for network security products, as considered
separately from Real Time products, improved significantly in the current
quarter compared to the 38.5% gross margin for the quarter ended December 29,
1995. The margin improvement is due primarily to volume shipment of CyberGuard
version 3.0 systems during the quarter ended December 31, 1996. CyberGuard
version 3.0 systems have significantly improved gross margins as compared to
earlier product versions shipped during the quarter ended December 29, 1995.
OPERATING EXPENSES AND NET LOSS
Overall operating expenses declined by $4.0 million in the current quarter to
$3.6 million. This decrease is due to the inclusion of the Real-time division
operating expenses incurred in the December 29, 1995 results. For the quarter
ending December 29, 1995, Real-time operating expenses accounted for $5.68
million. Comparing only the operating expenses for the network security
products, Company operating expenses increased from $1.91 million in the three
month period ended December 29, 1995 to $3.56 million for the period ended
December 31, 1996. This increase of 86% is due primarily to:
- - Increased marketing efforts and promotional expenditures.
- - Increased development efforts related to the CyberGuard Firewall for
Windows NT Operating System and development costs associated with the
SafeNet Enterprise virtual private network solution.
- - Increased costs and hirings associated with running the network security
division as a stand-alone entity following the sale of the Real-time
division to Concurrent in June 1996.
The net loss for the quarter ended December 31, 1996 was $0.8 million compared
to $1.5 million in the prior year's quarter. As part of the current quarter,
the Company recognized a gain of approximately $1.0 million through the sale of
950,000 shares of Concurrent Common Stock (obtained by the Company through the
conversion of a portion of Concurrent Preferred Stock holdings into Concurrent
Common Stock.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The six month period ended December 31, 1996 compared to the six month period
ended December 29, 1995
NET SALES
Net sales were lower in the six month period ended December 31, 1996 compared
to the six month period ended December 29, 1995 primarily as a result of
discontinued Real Time product revenues resulting from the sale of the Real
Time product division which was sold to Concurrent in June 1996. Overall net
sales were $6.1 million for the six months ended December 31, 1996, compared to
$21.1 million for the six months ended December 29, 1995. The prior year's six
month period included $18.4 million of Real Time product revenues. The
remaining $2.7 million in revenues for the six month period ended December 29,
1995 relate to sales of the Company's CyberGuard Firewall and related security
products. This $2.7 million in revenues compares to $6.1 million in CyberGuard
Firewall sales for the six months ending December 31, 1996. The increase of
$3.4 million or 126% is attributable to expanded sales efforts and an overall
rise in market demand for network security products.
For the respective six month periods International Firewall and security
product revenues accounted for 61% of sales in 1996 and 58% of sales in 1995.
Firewall related service revenues increase by 174% to $0.4 million for the six
month period ended December 31, 1996 compared to $0.15 million for the six
month period ended December 29, 1995.
GROSS INCOME
As a percentage of net sales, the gross margins remained constant at 45% for
the six months ended December 31, 1996 and for the six months ended December
29, 1995. The gross margin for Real Time product sales included in the six
months ended December 29, 1995 results were 47%. Gross margins for Firewall
and Security products only, which excludes Real Time products, for the six
months ended December 29, 1995 were 35%. In comparing the 35% gross margin in
1995 to the gross margin of 45% for the six months ended December 31, 1996, the
gross margin increase can be directly attributed to CyberGuard Firewall version
3.0 systems which began shipping in quantity in October 1996. CyberGuard
Firewall version 3.0 systems provided higher gross margins than previous
versions of CyberGuard Firewalls shipped during the 6 month period ended
December 29, 1995.
OPERATING EXPENSES AND NET LOSS
Expenses decreased for the six months ended December 31, 1996 by $9.8 million
to $7.0 million from $16.8 million for the six month period ended December 29,
1995. This $9.8 million decrease is due primarily to the elimination of
operating expenses to support the Real Time products division which was sold to
Concurrent in June 1996. Expenses related to the development, marketing and
support of the CyberGuard Firewall and related security products increased for
the six months ended December 31, 1996 to $7.0 million compared to $3.4 million
for the six months ended December 29, 1995. This increase relates to additional
staffing to support the development of the CyberGuard version 3.0 and CyberGuard
Windows-NT version Firewalls, and additional expenditures to promote and market
these products.
For the six months ended December 31, 1996, the Company recognized a $5.2
million loss on the sale of Concurrent Corporation securities received from the
sale of the Real Time product division to
9
<PAGE> 10
Concurrent. There was no corresponding transactions for the six month period
ended December 29, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash and cash equivalents on hand of $6.8
million representing an increase of $3.2 million from $3.62 million as of June
30, 1996. Accounts receivable decreased by approximately $0.3 million since
June 30, 1996 as a result of increased collection efforts on a world-wide basis
which included several significant collections of past due customer amounts
over 90 days delinquent. Inventory increased by $0.9 million as the Company
established base-level inventory stocking levels to support short lead time
customer shipments for both the Motorola based CyberGuard Systems purchased
from Concurrent and Intel-based systems purchased to support CyberGuard version
3.0 orders. Machinery and equipment additions amounted to $0.6 million for
the 6 months ended December 1996. These additions were used for development
computers and demonstration equipment related to the Company's 3.0 product
line which runs on previously unprocured Intel-based machines. The Company
believes that its current liquidity and capital resources are sufficient to
fund the Company's current business plan for the foreseeable future.
Subsequent to the current fiscal quarter ended December 31, 1996, the Company
increased its cash reserves by approximately $2.5 million when it elected to
convert and sell an additional 1 million shares of Concurrent Common Stock
originating from its existing investment in Concurrent Convertible Preferred
Stock. This transaction is expected to result in a gain of approximately
$900,000 which will be recognized in the statement of operations for the 3
months ending March 31, 1997.
Statements regarding future liquidity and capital resources, as well as other
statements contained in this report that address activities, events or
developments that the Company expects, believes or anticipates will or may occur
in the future, are forward-looking statements. These statements are based upon
certain 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. Such statements 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
actual results may differ materially from those projected in the forward-looking
statements. The future liquidity of the Company will be affected by numerous
factors, including sales volumes, collections of accounts receivable, gross
margins, the levels of selling, general and administrative expenses required to
fully implement Firewall security systems product sales to commercial customers,
levels of required capital expenditures, and access to external sources of
financing.
10
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits:
27 Financial Data Schedule(for SEC use only)
(b) No reports were filed on Form 8-K during the quarter ended
December 31, 1996
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 13, 1996 CYBERGUARD CORPORATION
By: /s/ ROBERT L. CARBERRY
-------------------------------
ROBERT L. CARBERRY
Chairman, President and
Chief Executive Officer
By: /s/ PATRICK O. WHEELER
------------------------------
PATRICK O. WHEELER
Vice President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,845
<SECURITIES> 2,597
<RECEIVABLES> 3,812
<ALLOWANCES> 448
<INVENTORY> 1,034
<CURRENT-ASSETS> 14,462
<PP&E> 2,718
<DEPRECIATION> 1,216
<TOTAL-ASSETS> 16,956
<CURRENT-LIABILITIES> 4,754
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 12,129
<TOTAL-LIABILITY-AND-EQUITY> 16,956
<SALES> 5,711
<TOTAL-REVENUES> 6,114
<CGS> 3,197
<TOTAL-COSTS> 3,382
<OTHER-EXPENSES> 6,963
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,079)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,079)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,079)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.30)
</TABLE>
