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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
---------------
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 0-27538
RAPTOR SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 51-0337926
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
---------------
RAPTOR SYSTEMS, INC.
69 HICKORY DRIVE
WALTHAM, MASSACHUSETTS 02154
(Address of Principal Executive Offices)
(617) 487-7700
(Registrant's Telephone Number, Including Area Code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
As of November 1, 1996 there were 13,053,357 outstanding shares of the
issuer's Common Stock, par value $.01 per share.
- Page 1 of 19
- Exhibit Index is on Page 17
Raptor Systems, Inc. 1
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RAPTOR SYSTEMS, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
----
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 1996 AND DECEMBER
31, 1995 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
Raptor Systems, Inc 2
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
RAPTOR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 44,924,171 $ 1,889,584
Marketable securities 6,530,345 --
Accounts receivable, less allowances
of $431,010 and 197,000 , at September 30, 1996
and December 31,1995, respectively 3,303,043 1,497,385
Other current assets 694,419 272,591
------------ ------------
Total current assets 55,451,978 3,659,560
Net property and equipment 1,306,701 625,550
------------ ------------
Total assets $ 56,758,679 $ 4,285,110
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 282,930 $ 131,851
Accrued liabilities 1,288,861 573,250
Accrued litigation 217,868 820,115
Bank debt -- 681,972
Deferred revenue 1,319,904 530,928
------------ ------------
Total current liabilities 3,109,563 2,738,116
------------ ------------
Long-term bank debt -- 253,333
Mandatory redeemable convertible preferred stock -- 5,769,649
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 5,000,000 and
3,004,161 shares authorized at September 30, 1996
and December 31, 1995, respectively, none issued
and outstanding -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 12,657,192 and 2,449,770 shares
issued and outstanding at September 30, 1996 and
December 31, 1995, respectively 126,571 24,498
Additional paid-in capital 56,964,107 (408,549)
Accumulated deficit (2,552,456) (2,978,580)
Unearned compensation (888,357) (1,113,357)
Cumulative Translation Adjustment (749) --
------------ ------------
Total stockholders' equity (deficit) 53,649,116 (4,475,988)
============ ============
Total liabilities and stockholders' equity (deficit) $ 56,758,679 $ 4,285,110
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Raptor Systems, Inc. 3
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RAPTOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------- -----------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenue $ 4,141 $ 1,104 $ 9,116 $ 2,247
Cost of revenue 223 107 584 202
------------------ ------------------ ------------------ ------------------
Gross margin 3,918 997 8,532 2,045
Operating expenses:
Selling and marketing 2,458 1,086 5,999 2,121
Research and development 827 335 2,278 891
General and administrative 584 351 1,555 803
------------------ ------------------ ------------------ ------------------
Total operating expenses 3,869 1,772 9,832 3,815
------------------ ------------------ ------------------ ------------------
Operating income (loss) 49 (775) (1,300) (1770)
Interest income, net 656 45 1,726 66
------------------ ------------------ ------------------ ------------------
Net income (loss) $ 705 $ (730) $ 426 $ (1,704)
================== ================== ================== ==================
Net income (loss) per common and
common equivalent share $ .05 $ (.10) $ .03 $ (.24)
================== ================== ================== ==================
Weighted average common and
common equivalent shares
outstanding 14,797,988 7,047,923 13,402,751 7,047,923
------------------ ------------------ ------------------ ------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Raptor Systems, Inc. 4
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RAPTOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED- IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 426 $ (1,704)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH USED IN OPERATING
ACTIVITIES:
Depreciation 280 85
Provision for reserve allowances 234 --
Compensation stock option expense 225 --
Changes in operating assets and liabilities:
Accounts receivable (2,040) (943)
Other assets (421) (203)
Accounts payable 150 291
Accrued liabilities 713 4
Accrued litigation (602) --
Deferred revenue 789 604
------------------ ------------------
Cash used in operating activities (246) (1,866)
INVESTING ACTIVITIES:
Investment in marketable securities (6,530) --
Purchases of property and equipment (962) (559)
------------------ ------------------
Cash used in investing activities (7,492) (559)
------------------ ------------------
FINANCING ACTIVITIES:
Amounts payable to related parties -- 406
Proceeds from issuance of common stock 45,705 8
Net proceeds from issuance
of preferred stock 5,000 3,919
Net proceeds from issuance of warrants 1,000 --
Payment of bank debt (933) (172)
------------------ ------------------
Cash provided by financing activities 50,772 4,161
------------------ ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 43,034 1,736
------------------ ------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 1,890 949
------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,924 $ 2,685
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Raptor Systems, Inc. 5
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RAPTOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The consolidated financial statements for the three-months and nine-months ended
September 30, 1996 and 1995 are unaudited and reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. These consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in Raptor Systems,
Inc.'s (the "Company" or "Raptor") Form S-1 filing February 6, 1996 with the
Securities and Exchange Commission (the "IPO").
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets, liabilities and accrued litigation at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and would
impact future results of operations and cash flows.
The results of operations for the three-month and nine-month periods ended
September 30, 1996 are not necessarily indicative of the results expected for
the full year ending December 31, 1996.
2. RISKS AND UNCERTAINTIES
The Company invests its cash in deposits with commercial banks, and in money
market funds, commercial paper and government securities. The Company has not
experienced any losses to date on its invested cash. The values at September 30,
1996 and December 31, 1995 approximate fair value.
The Company sells its products to a wide variety of customers in a variety of
industries. The Company performs ongoing credit evaluations of its customers but
does not require collateral or other security to support customer receivables.
The Company maintains reserves for credit losses and such losses have been
within management's expectations.
3. COMPUTATION OF NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT
SHARE:
Net income (loss) per common share is computed based upon the weighted average
number of common shares and common equivalent shares outstanding. Common
equivalent shares are included in the per share calculations where the effect of
their inclusion would be dilutive. In accordance with the Securities and
Exchange Commission Staff Accounting Bulletin No. 83 ("SAB No. 83"), all common
and common equivalent shares and other potentially dilutive instruments
(including stock options and redeemable convertible preferred stock) issued
during the twelve month period prior to the initial filing date in December 1995
of the registration statement for the IPO have been included in the calculation
as if they were outstanding for all periods prior to the date of the IPO. The
common equivalent shares for stock options were determined using the treasury
stock method at an assumed initial public offering price of $11.00 per share.
The redeemable convertible preferred stock was included on an as-if converted
basis. The weighted average shares outstanding at September 30, 1995 is the same
as that on December 31, 1995. Fully diluted net income (loss) per common share
is the same as primary.
Raptor Systems, Inc. 6
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4. LITIGATION:
On February 27, 1995, Lightburn and Associates, Inc. ("LAI"), a former reseller
of Raptor products, commenced an action against Raptor in the United States
District Court for the District of Maryland. This action is based on allegations
that Raptor engaged in unfair competition, fraud, intentional and/or negligent
misrepresentation, tortious interference with business relationships and breach
of contract by entering into direct contractual arrangements with two customers.
LAI alleges that Raptor directly solicited and accepted purchase orders from the
first customer at a time when LAI was party to a contract with Raptor granting
LAI the exclusive contractual right to sell Raptor products to that customer,
and that Raptor's direct contact with that customer violated a non-disclosure
agreement between Raptor and LAI. LAI alleges that, as a result of these
improper actions by Raptor, LAI was deprived of the opportunity to sell
additional Raptor products to that customer. LAI's claims with respect to the
second customer are based on allegations that, at a time when LAI was attempting
to sell Raptor products to that customer, Raptor directly solicited and accepted
purchase orders from that customer in violation of a non-disclosure agreement
between Raptor and LAI, thereby depriving LAI of the opportunity to sell Raptor
products to that customer.
In this litigation, LAI is seeking compensatory damages in the amount of $12.7
million and punitive damages in the amount of $20.0 million. The compensatory
damage claim appears to be based upon LAI's projection that, but for Raptor's
alleged illegal acts, LAI would have sold 200 Eagle firewalls and 200 EagleLAN
products to the first customer and 500 Eagle firewalls and 300 EagleLAN products
to the second customer. Raptor has denied any liability to LAI with respect to
this matter and that LAI has suffered any damages in connection therewith.
Raptor has also asserted claims against LAI and James Lightburn alleging that
they tortiously interfered with Raptor's business relationships and that they
made defamatory statements to a customer of Raptor. Discovery in this litigation
is ongoing. Raptor is unable to determine the ultimate outcome of this
litigation. However, Raptor intends to vigorously defend the claims asserted
against it and has accrued the probable, estimated litigation expenses to defend
this case. The company believes that it has a meritorious defense and that the
ultimate outcome will not have a material adverse effect on the Company's
financial position.
On June 10, 1996, Raptor and one of its customers were sued by a former employee
( a sales representative of Raptor whose employment had been previously
terminated by Raptor) claiming that he is owed certain commissions on sales of
Raptor products to this customer. Raptor anticipates that it will vigorously
defend the claims asserted in this action. Discovery has just commenced and
Raptor is unable to determine the ultimate outcome of the litigation.
Raptor Systems, Inc. 7
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5. CHANGES IN STOCKHOLDERS' EQUITY:
Changes to stockholders' equity for the period from December 31, 1995 to
September 30, 1996 were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
------------------
<S> <C>
Total stockholders' deficit December 31, 1995 .............................. $ (4,475,988)
Proceeds from:
363,636 warrants to buy 363,636 shares of common stock sold to Compaq ...... 1,000,000
Exercise of stock options to buy 359,405 shares of common stock for the nine
months ended September 30, 1996, respectively .............................. 83,025
Net proceeds from initial public offering of 3 million shares of common
stock ...................................................................... 45,622,055
Conversion of preferred stock upon initial public offering ................. 5,769,649
Conversion of preferred stock sold to Compaq upon initial public offering .. 5,000,000
Unearned compensation ...................................................... 225,000
Income for the nine months ended September 30, 1996 ........................ 426,124
Cumulative Translation Adjustment .......................................... (749)
------------------
Total stockholders' equity at September 30, 1996 ........................... $ 53,649,116
==================
</TABLE>
As a result of these transactions the common shares issued and outstanding
increased from 2,449,770 at December 31, 1995 to 12,657,192 at September 30,
1996.
On April 15, 1996, the Company and Compaq Computer Corporation ("Compaq")
executed a definitive Network Security Partnership Agreement. As a result of
that agreement, warrants to purchase 363,636 share of the Company's common stock
became exercisable. These warrants were exercised in the fourth quarter, on
October 11, 1996 at $11 per share.
6. SUBSEQUENT EVENTS:
On October 11, 1996 Compaq, through a wholly-owned subsidiary, exercised
warrants to purchase 363,636 shares of Raptor's Common Stock at a price of
$11.00 per share. Compaq acquired the warrants prior to Raptor's initial public
offering in February 1996. Compaq's ownership percentage of common stock of the
Company after this transaction is approximately 6.6% and amounts to
approximately $10 million.
Raptor Systems, Inc. 8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with the Risk
Factors outlined in the Company's Form S-1, filed February 6, 1996 with the
Securities and Exchange Commission and covering the year ended December 31,
1995.
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Factors that might cause such a
difference are discussed in the section entitled "Certain Factors That May
Affect Future Results" below.
INTRODUCTION:
Raptor Systems, Inc. (the "Company" or "Raptor") develops, markets, licenses and
supports a family of integrated network security software products that provide
comprehensive, enterprise-wide security for organizational networks, including
networks that are connected to the Internet. The Company's application-level
Eagle firewall and EagleConnect virtual private network technology form the
basis of a network security solution that enables an organization to protect its
network from unauthorized access by internal and external users and to secure
organizational communications over the Internet and internal networks, including
"Intranets." Raptor's integrated, enterprise-wide network security solution
consists of individual product modules that secure organizational networks,
including networks connected to the Internet, and local area network ("LAN")
workgroups, mobile personal computer ("PC") users and remote sites. The
Company's product modules interact seamlessly, are easy-to-use and are supported
by a common management and monitoring capability that enable a network
administrator to manage the security of a large, geographically dispersed
organizational network from a single location. Raptor's network security
solutions are designed to enable organizations to protect valuable data, extend
the boundaries of organizational networks without compromising network integrity
and capitalize on the emergence of the Internet as a medium of communications
and commerce.
RESULTS OF OPERATIONS:
NET INCOME (LOSS):
The Company generated net income of $705,012 ($.05 per share) on revenues of
$4,141,000 for the three-month period ended September 30, 1996 compared to a net
loss of $730,000 ($.10 per share) on revenues of $1,104,000 for the three-month
period ended September 30, 1995. For the nine-month period ended September 30,
1996 the Company generated a net income of $426,000 ($.03 per share) on revenues
of $9,116,000 for the nine-month period ended September 30, 1996 compared to a
net loss of $1,704,000 ($.24 per share) on revenues of $2,247,000 for the
nine-month period ended September 30, 1995.
REVENUE:
Revenue increased 275% for the third quarter of 1996 compared to the third
quarter of 1995 and 306% for the nine-month period ended September 30, 1996
compared to the nine-month period ended September 30, 1995. The primary reasons
for this increase were the continued acceptance by the
Raptor Systems, Inc. 9
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marketplace of the Company's firewall products, the introduction of the
Company's Windows NT based firewall (Eagle-NT) in the first quarter of 1996, the
continued addition of Value Added Resellers (VAR's), and the sales channels
becoming more efficient. 86% of third quarter revenue came through Resellers and
14% resulted from direct sales efforts. The company added 47 new resellers
during the quarter. The total number of resellers at September 30, 1996 was 209
with 75% being domestic and the other 25% international. Revenue by geographical
region as a percentage of total third quarter revenue is as follows: US and
North America 76%, Europe 11% and Asia 13%. During the third quarter Raptor
opened a European sales office in the Netherlands. Currently there are plans to
establish a permanent sales office in Japan in the first quarter of 1997.
Windows NT-based products accounted for 71% of the third quarter shipments while
Unix-based products accounted for 29%. In excess of 90% of the Company's
business came from firewalls. During the third quarter 1996 the Company shipped
approximately 400 firewall evaluation units, 78% of these were Windows NT-based.
The third quarter average selling price was $5,238, a decrease of approximately
$560 from the second quarter of 1996. The reduction in the Company's average
selling price of its products is largely due to the change in the mix of the
products sold. Non-firewall products, like Eagle NetWatch, have a lower selling
price than the firewall products. As the Company sells more non-firewall
products the average selling price on all of the Company's products will
decrease.
COST OF REVENUE:
Cost of revenue includes the cost of telephone support, manuals, packaging,
diskettes and fulfillment costs. In addition, cost of revenue includes royalties
paid to third-party developers, inventory obsolescence reserves and the costs
associated with product upgrades. Cost of revenue as a percentage of revenue for
the third quarter of 1996 improved significantly, from 10% of revenue for the
quarter ended September 30, 1995 compared to 5% of revenue for the quarter ended
September 30, 1996. As a percentage of revenue the cost of revenue also improved
for the nine-month period ended September 30, 1996 over that of the nine-month
period ended September 30, 1995. During this period cost of revenue as a
percentage of revenue improved from 9% of revenue for the nine-month period
ended September 30, 1995 compared to 7% for the nine-month period ended
September 30, 1996.
OPERATING EXPENSES:
The Company's operating expenses, and the respective percentage of revenue for
the three-month and nine-month periods ended September 30, 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
------------------------------------------------------------------------------------
% % % %
1996 Revenue 1995 Revenue 1996 Revenue 1995 Revenue
---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and Marketing $2,458 59% $1,086 98% $5,999 66% $2,121 94%
Research
and Development 827 20% 335 30% 2,278 25% 891 40%
General and
Administrative 584 14% 351 32% 1,555 17% 803 36%
---------------------------------------- ----------------------------------------
$3,869 93% $1,772 160% $9,832 108% $3,815 170%
======================================== ========================================
</TABLE>
Total operating expenses decreased as a percentage of revenue to 93% in the
third quarter of 1996 compared with 160% in the third quarter of 1995. This
decrease is primarily the result of
Raptor Systems, Inc. 10
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increased revenues and the effects of efficiencies achieved in all departments.
The operating expenses for the quarter ended September 30, 1996 include a charge
related to compensation for employee stock options. For the nine-month period
ended September 30, 1996 total operating expenses decreased as a percentage of
revenue to 108% from 170% for the nine-month period ended September 30, 1995.
Sales and marketing expenses, which include salary, commission, advertising,
travel and other selling-related expenses decreased to 59% of revenue in the
third quarter of 1996 compared to 67% of revenue for the same period in 1995.
For the nine-month period ended September 30, 1996 sales and marketing expenses
decreased to 66% of revenue compared to 94% for the same period in 1995. The
increase in absolute dollars from the second quarter 1996 relates to headcount
additions, selling costs associated with the increased revenues and costs
associated with the opening of a European sales office, in the Netherlands.
Research and development expenses, which include salary, payments to independent
contractors and other costs associated with the development of new products and
the enhancement of existing products, decreased to 20% of revenues in the third
quarter of 1996 compared to 30% of revenue for the same period in 1995. For the
nine-month period ended September 30, 1996 research and development expenses
decreased to 25% of revenue compared to 40% for the same period in 1995.
General and administrative expenses decreased to 14% of revenue in the third
quarter of 1996 compared to 32% for the same period in 1995. For the nine-month
period ended September 30, 1996, general and administrative expenses decreased
to 17% of revenue compared to 36% for the same period in 1995. General and
administrative expenses include salary, rent and other expenses associated with
the general management and administration of the Company.
The number of employees increased 72% to 100 at September 30, 1996 compared with
58 at December 31, 1995. Employment has increased significantly to support
higher revenue, with the largest portion of this growth occurring in the sales
and marketing and research and development departments.
LIQUIDITY AND CAPITAL RESOURCES:
The Company considers all short-term investments, which consist of money market
accounts and Government securities, with original maturities of less than 90
days, to be cash equivalents. In addition, securities held with maturities
greater than 90 days but less than a year are classified as marketable
securities.
Cash and cash equivalents increased from $1,900,000 at December 31, 1995 to
$44,924,000 at September 30, 1996. This increase is attributable to $45,000,000
received from the Company's IPO on February 6, 1996, funds received upon the
exercise of employee stock options, $1,000,000 received from the sale of stock
warrants and $5,000,000 received from the sale of Series C Preferred Stock to
Compaq in January 1996. For the three-month period ended September 30, 1996,
cash and cash equivalents decreased $6,618,000 from $51,542,000 to $44,924,000.
The decrease in cash and cash equivalents for the three-month period ended
September 30, 1996 was due to the purchase of fixed assets of $474,000 and the
investment in marketable securities of $6,530,000.
Raptor Systems, Inc. 11
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In September 1995, the Company obtained a working capital line of credit from a
commercial bank in the amount of $600,000 at the bank's prime rate plus 1/2%,
with final payment due in August 1996, and an equipment line of credit of
$400,000 at the bank's prime rate plus 1%, which was available through December
31, 1995, with final payment due in June 1998. Amounts outstanding at December
31, 1995 totaled $535,305 and $400,000 under the working capital line and
equipment line; there are no borrowings under any of these lines of credit.
These lines of credit are secured by all of the Company's assets.
In January 1996, the Company received commitment letters from its commercial
banks to amend its existing credit facilities. The commitment letters provide
(i) a working capital line of $2.0 million which increased to $5.0 million upon
the closing of the IPO, at the bank's prime rate plus 1/2% with final payment
due in January 1997, (ii) an additional equipment line of credit in the amount
of $500,000 which increased to $1.0 million upon the closing of the IPO, at the
bank's prime rate plus 1%, which is available through September 1996, to be
repaid in 30 equal monthly installments beginning in November 1996 and (iii) a
stand-by line of credit of $1.0 million at the bank's prime rate plus 2%, which
is due in July 1996. At September 30, 1996 and December 31, 1995, the bank's
prime rate was 8 1/4% and 8 1/2%, respectively. As of September 30, 1996 all
lines have been amended to incorporate the terms indicated above for each.
The Company believes that its existing cash and marketable securities balances
together with cash generated from operations will be sufficient to meet the
Company's working capital, financing and capital expenditure needs through at
least December 31, 1996.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, and Section 21E of the Securities Exchange
Act of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Factors that might cause such a
difference are set forth below.
A number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, changes in the market, changes in
technology, competition from larger more established competitors, general
economic conditions, the Company's continued ability to develop and introduce
innovative products, new product announcements from other companies, pricing
practices of competitors, the Company's ability to control costs and its ability
to attract and retain key employees.
Market prices for securities of software companies have generally been volatile.
In particular the market price of the Company's common stock has been and may
continue to be subject to significant fluctuations. These fluctuations may be
due to factors specific to the Company or to factors affecting the computer
industry or securities markets in general.
The Company derives all of its revenue from its Eagle family of network security
products, all of which are dependent upon the Company's Eagle application-level
firewall. As a result, any factor adversely affecting sales of this product
could have a material adverse effect on the Company.
The market for network security products and services is new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to intensify in the future. Due to the rapid
expansion of the network security market, the Company may face competition from
new entrants in the network security industry, possibly including the
Raptor Systems, Inc. 12
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Company's resellers. There can be no assurance that the Company's current and
potential competitors will not develop network security products that may be
more effective than the Company's current or future products or that the
Company's technologies and products would not be rendered obsolete by such
developments. An increase in competition could result in price reductions and
loss of market share. Such competition and any resulting reduction in gross
margins could have a material adverse effect on the Company's business,
financial condition and results of operations. While the Company believes that
it does not compete against manufacturers of other classes of security products
(such as encryption and authentication), there can be no assurance that the
Company's customers will not perceive the products of such other companies as
substitutes for the Company's products.
The Company recently has experienced significant growth in both revenue and in
employees. This growth has resulted in an increase in responsibilities placed
upon the Company's management and has placed added pressures on the Company's
operating and financial systems. In 1995, the Company hired 50 new employees,
including its Chief Executive Officer and other key members of management, to
help it manage this growth. The Company's ability to assimilate new personnel
will be critical to the Company's performance, and there can be no assurance
that the management and systems currently in place will be adequate if the
Company continues to grow or that the Company will be able to implement
additional systems successfully and in a timely manner as required.
The Company's future success depends to a significant extent on its senior
management and other key employees, including key development personnel. The
Company has no employment agreements with any of its employees. The Company also
believes that its future success will depend in large part on its ability to
attract and retain additional key employees. Any inability on the part of the
Company to attract and retain additional key employees or the loss of one or
more of its current key employees could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company distributes its products primarily through strategic value added
resellers ("VARs"), regional VARs and international VARs. The success of the
Company is therefore dependent in large part upon the performance of its
resellers, and is therefore outside the Company's control. In particular, the
Company is dependent upon a small number of strategic VARs for a significant
amount of its revenue. The Company's relationships with most of its resellers
have been established within the last year, and the Company is unable to predict
with accuracy the extent to which its resellers will be successful in marketing
and selling the Company's products.
In addition, as the network security industry continues to evolve, the Company
plans to develop and introduce new products to address the changing needs of the
evolving network security market. There can be no assurance that the Company
will be able to develop new products or that such products will achieve market
acceptance or, if market acceptance is achieved, that the Company will be able
to maintain such acceptance for a significant period of time. Any inability of
the Company to develop products on a timely basis that address changing customer
requirements may require the Company to substantially increase development
expenditures or may result in a loss of market share to a competitor. Moreover,
products as complex as those offered by the Company may contain undetected
errors when first introduced or when new versions are released. The Company has
in the past discovered software errors in certain of its product offerings after
their introduction and has experienced delays and lost revenue during the
Raptor Systems, Inc. 13
<PAGE> 14
period required to correct these errors. In particular, the personal computer
hardware environment is characterized by a wide variety of non-standard
configurations that make pre-release testing for programming or compatibility
errors very difficult and time-consuming. There can be no assurance that,
despite testing by the Company, errors will not occur in new products or
releases after commencement of commercial shipments, resulting in adverse
publicity, in loss of or delay in market acceptance, or in claims by the
customer against the Company, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
A high percentage of the Company's revenues are expected to be realized in the
third month of each quarter and tend to be concentrated in the latter half of
that month. The Company's orders early in a quarter will not generally be large
enough to assure that it will meet its revenue targets for any particular
quarter. Accordingly, the Company's quarterly results may be difficult to
predict until the end of the quarter, and a shortfall in shipments or contract
orders at the end of any particular quarter may cause the results for that
quarter to fall short of anticipated levels.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
No reportable events have occurred which would require modification of the
discussion under Item 1 - Legal Proceedings contained in the Company's Report on
Form 10-Q for the Quarter Ended June 30, 1996. See Note 4 to the Consolidated
Financial Statements contained in this Form 10-Q for the period ended September
30, 1996 for additional information related to previously disclosed litigation
proceedings.
Raptor Systems, Inc. 14
<PAGE> 15
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 11 - Computation of Net income (loss) per Share
b) Exhibit 27 - Financial Data Schedule
c) Reports on Form 8-K - None
Raptor Systems, Inc. 15
<PAGE> 16
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.
RAPTOR SYSTEMS, INC.
--------------------
Registrant
November 12, 1996 By: John S. Ingalls
-------------------------------------------
John S. Ingalls
Vice President and Chief Financial Officer
(principal financial officer)
November 12, 1996 By: Robert H. Fincke
-------------------------------------------
Robert H. Fincke
Vice President, Treasurer and Controller
(principal accounting officer)
Raptor Systems, Inc. 16
<PAGE> 17
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
EXHIBIT 11 - COMPUTATION OF NET INCOME (LOSS) PER SHARE 19
EXHIBIT 27 - FINANCIAL DATA SCHEDULE 20
Raptor Systems, Inc. 17
<PAGE> 1
COMPUTATION OF NET INCOME (LOSS) PER SHARE:
EXHIBIT 11
RAPTOR SYSTEMS, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock outstanding, beginning of period 12,560 2,065 2,450 2,065
Weighted average cheap stock -- 2,630 -- 2,630
Weighted average Series B Redeemable Convertible
Preferred Stock -- 2,443 -- 2,443
Weighted average number of shares issued 46 -- 8,495 --
Weighted average common stock equivalents 2,664 -- 2,706 --
Less: assumed purchase of treasury shares (472) (91) (248) (91)
--------------------------------------------------------------
Weighted average number of common and common
equivalent shares outstanding 14,798 7,047 13,403 7,047
==============================================================
Net income (loss) $705 $(730) $426 $(1,704)
==============================================================
Net income (loss) per common and common
equivalent share $.05 $(.10) $.03 $(.24)
==============================================================
</TABLE>
(1) All common share amounts have been restated to reflect a 3 for 1 stock
split on December 15, 1995.
(2) In accordance with the Securities and Exchange Commission Staff
Accounting Bulletin No. 83 ("SAB No. 83"), all common and common
equivalent shares and other potentially dilutive instruments (including
stock options and the redeemable convertible preferred stock) issued
during the twelve month period prior to the initial filing date in
December 1995 of the Registration Statement have been included in the
calculation as if they were outstanding for all periods presented for
1995. The common equivalent shares for stock options were determined
using the treasury stock method at an assumed initial public offering
price of $11.00 per share. The redeemable convertible preferred stock
was included on an as-if converted basis.
(3) Fully diluted net income per share is the same as primary net income
per share.
(4) Common stock equivalents only included when the effect of their
inclusion would be dilutive.
Raptor Systems, Inc. 18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 44,924
<SECURITIES> 6,530
<RECEIVABLES> 3,303
<ALLOWANCES> 431
<INVENTORY> 0
<CURRENT-ASSETS> 55,452
<PP&E> 1,739
<DEPRECIATION> 433
<TOTAL-ASSETS> 56,759
<CURRENT-LIABILITIES> 3,110
<BONDS> 0
0
0
<COMMON> 127
<OTHER-SE> 53,380
<TOTAL-LIABILITY-AND-EQUITY> 56,759
<SALES> 4,141
<TOTAL-REVENUES> 4,141
<CGS> 223
<TOTAL-COSTS> 223
<OTHER-EXPENSES> 3,869
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 705
<INCOME-TAX> 0
<INCOME-CONTINUING> 705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 705
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
