<PAGE> 1
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 JUNE 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 August 1, 1996 there were 12,602,293 outstanding shares of the
issuer's Common Stock, par value $.01 per share.
- Page 1 of 20
- Exhibit Index is on Page 18
<PAGE> 2
RAPTOR SYSTEMS, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
- - ------------------------------
ITEM 1. FINANCIAL STATEMENTS: PAGE
- - ------- --------
BALANCE SHEETS AT JUNE 30, 1996 AND DECEMBER 31, 1995 3
STATEMENTS OF OPERATIONS FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 1996 AND 1995 4
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1995 5
NOTES TO 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 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
Raptor Systems, Inc. 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
- - -----------------------------
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
RAPTOR SYSTEMS, INC.
BALANCE SHEETS
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $51,541,741 $ 1,889,584
Accounts receivable, less allowances of $198,010 and
$197,000, at June 30, 1996 and December 31, 1995,
respectively .................................... 2,311,999 1,497,385
Other current assets ............................... 555,554 272,591
----------- -----------
Total current assets ....................... 54,409,294 3,659,560
Net property and equipment .......................... 959,533 625,550
----------- -----------
Total assets ............................... $55,368,827 $ 4,285,110
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................... $ 364,688 $ 131,851
Accrued liabilities ................................ 923,629 573,250
Accrued litigation ................................. 277,730 820,115
Bank debt .......................................... -- 681,972
Deferred revenue ................................... 960,018 530,928
----------- -----------
Total current liabilities .................. 2,526,065 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; 3,004,161 shares
authorized, none issued and outstanding ......... -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 12,556,297 and 2,449,770 shares
issued and outstanding at June 30, 1996 and
December 31, 1995, respectively ................. 125,563 24,498
Additional paid-in capital ......................... 56,938,024 (408,549)
Accumulated deficit ................................ (3,257,468) (2,978,580)
Unearned compensation .............................. (963,357) (1,113,357)
----------- -----------
Total stockholders' equity (deficit) ............... 52,842,762 (4,475,988)
=========== ===========
Total liabilities and stockholders' equity (deficit) $55,368,827 $ 4,285,110
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Raptor Systems, Inc. 3
<PAGE> 4
<TABLE>
RAPTOR SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
---------------------------- ----------------------------
<S> <C> <C> <S> <C>
Revenue $2,907 $ 725 $ 4,975 $1,143
Cost of revenue 209 66 361 95
---------------------------- ----------------------------
Gross margin 2,698 659 4,614 1,048
Operating expenses:
Selling and marketing 1,944 635 3,541 1,035
Research and development 884 368 1,451 556
General and administrative 421 235 971 451
---------------------------- ----------------------------
Total operating expenses 3,249 1,238 5,963 2,042
---------------------------- ----------------------------
Operating loss (551) (579) (1,349) (994)
Interest income, net 701 20 1,070 21
---------------------------- ----------------------------
Net income (loss) $ 150 $ (559) $ (279) $ (973)
============================ ============================
Net income (loss) per common and
common equivalent share $ .01 $ (.08) $ (.03) $ (.14)
============================ ============================
Weighted average common and
common equivalent shares
outstanding 14,892,762 7,047,923 10,113,104 7,047,923
---------------------------- ----------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Raptor Systems, Inc. 4
<PAGE> 5
<TABLE>
RAPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED- IN THOUSANDS)
<CAPTION>
SIX MONTHS ENDED
--------------------------------------
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .......................................... $ (279) $ (973)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
Depreciation ...................................... 152 39
Provision for reserve allowances .................. 1 --
Compensation stock option expense .................. 150 --
Changes in operating assets and liabilities:
Accounts receivable .............................. (816) (634)
Other assets ..................................... (283) (57)
Accounts payable ................................. 233 150
Accrued liabilities .............................. 350 4
Accrued litigation ............................... (542) --
Deferred revenue ................................. 429 108
------- -------
Cash used in operating activities .................. (605) (1,363)
INVESTING ACTIVITIES:
Purchases of property and equipment ................ (488) (405)
------- -------
Cash used in investing activities .................. (488) (405)
------- -------
FINANCING ACTIVITIES:
Amounts payable to related parties ............... -- 406
Proceeds from issuance of common stock ........... 45,678 8
Net proceeds from issuance of preferred stock .... 5,000 3,919
Issuance of warrants ............................. 1,000 --
Payment of bank debt ............................. (933)
(500)
------- -------
Cash provided by financing activities .............. 50,745 3,833
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......... 49,652 2,066
------- -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ........................................ 1,890 949
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......... $51,542 $ 3,015
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Raptor Systems, Inc. 5
<PAGE> 6
RAPTOR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The financial statements for the three-months and six-months ended June 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 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 six-month periods ended June
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 June 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
Raptor Systems, Inc. 6
<PAGE> 7
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 June 30, 1995 is the same as that on
December 31, 1995. Fully diluted net income (loss) per common share is the same
as primary.
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 was sued by a former
employee (a sales representative of Raptor who 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 not commenced and Raptor is unable
to determine the ultimate outcome of the litigation.
Raptor Systems, Inc. 7
<PAGE> 8
5. CHANGES IN STOCKHOLDERS' EQUITY:
<TABLE>
Changes to stockholders' equity for the period from December 31, 1995 to
June 30, 1996 were as follows:
<CAPTION>
Six Months
Ended
June 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 259,010 shares of common stock for the
six months ended June 30, 1996, respectively .............................. 59,577
Net proceeds from initial public offering of 3 million shares of common
stock ..................................................................... 45,618,421
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 ..................................................... 150,000
Loss for the six months ended June 30, 1996 ............................... (278,897)
-----------
Total stockholders' equity at June 30, 1996 ............................... $52,842,762
===========
</TABLE>
As a result of these transactions the common shares issued and outstanding
increased 2,449,770 at December 31, 1995 to 12,556,297 at June 30, 1996.
On April 15, 1996, the Company finalized a comprehensive Network Security
Partnership Agreement with Compaq Computer Corporation ("Compaq"). Upon the
signing of this agreement, warrants to purchase 363,636 shares of the
Company's common stock for its estimated fair value of $1 million in
January 1996 became vested.
Raptor Systems, Inc. 8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the 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 enables 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 $150,000 ($.01 per share) on revenues of
$2,907,000 for the three-month period ended June 30, 1996 compared to a net loss
of $559,000 ($.08 per share) on revenues of $725,000 for the three-month period
ended June 30, 1995. For the six-month period ended June 30, 1996 the Company
generated a net loss of $279,000 ($.03 per share) on revenues of $4,975,000 for
the six-month period ended June 30, 1996 compared to a net loss of $973,000
($.14 per share) on revenues of $1,143,000 for the six-month period ended June
30, 1995.
Raptor Systems, Inc. 9
<PAGE> 10
REVENUE:
Revenue increased 301% for the second quarter of 1996 compared to the second
quarter of 1995 and 335% for the six-month period ended June 30, 1996 compared
to the six-month period ended June 30, 1995. The primary reasons for this were
the continued acceptance by the marketplace for 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 and the
sales channels becoming more efficient.
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 second quarter of 1996 improved slightly, from 9% of revenue for the quarter
ended June 30, 1995 compared to 7% of revenue for the quarter ended June 30,
1996. As a percentage of revenue the cost of revenue also improved for the
six-month period ended June 30, 1996 over that of the six-month period ended
June 30, 1995. During this period cost of revenue as a percentage of revenue
improved from 8% of revenue for the six-month period ended June 30, 1995
compared to 7% for the six-month period ended June 30, 1996.
OPERATING EXPENSES:
<TABLE>
The Company's operating expenses, and the respective percentage of revenue for
the three-month and six-month periods ended June 30, 1996 are as follows:
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 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 $1,944 67% $ 635 88% $3,541 71% $1,035 91%
Research and
Development 884 30% 368 51% 1,451 29% 556 49%
General and
Administrative 421 14% 235 32% 971 20% 451 40%
------------------------------------- --------------------------------------
$3,249 112% $1,238 171% $5,963 120% $2,042 179%
===================================== ======================================
</TABLE>
Total operating expenses decreased as a percentage of revenue to 112% in the
second quarter of 1996 compared with 171% in the second quarter of 1995. This
decrease is primarily the result of increased revenue and the effects of
investments made in all departments in 1995 and 1996. The operating expenses
for the quarter ended June 30, 1996 include a charge related to compensation
for employee stock options. For the six-month period ended June 30, 1996 total
operating expenses decreased as a percentage of revenue to 120% from 179% for
the six-month period ended June 30, 1995.
Raptor Systems, Inc. 10
<PAGE> 11
Sales and marketing expenses, which include salary, commission, advertising,
travel and other selling-related expenses decreased to 67% of revenue in the
second quarter of 1996 compared to 88% of revenue for the same period in 1995.
For the six-month period ended June 30, 1996 Sales and marketing expenses
decreased to 71% of revenue compared to 91% for the same period in 1995.
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 30% of revenues
in the second quarter of 1996 compared to 51% of revenue for the same period in
1995. For the six-month period ended June 30, 1996 Research and development
expenses decreased to 29% of revenue compared to 49% for the same period in
1995. The Company anticipates that its expenditures in Research and development
will increase in absolute dollars during 1996 as the Company expands the
functionality of products, makes its products available on additional platforms
and develops new products. The Company expects that, as a percentage of
revenue, Research and development expenses will continue to decline through the
end of 1996.
General and administrative expenses decreased to 14% of revenue in the second
quarter of 1996 compared to 32% of revenue for the same period in 1995. For the
six-month period ended June 30, 1996, General and administrative expenses
decreased to 20% of revenue compared to 40% for the same period in 1995. General
and administrative expenses include salary, rent, other expenses associated with
the general management and administration of the Company.
The number of employees increased 40% to 81 at June 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.
Cash and cash equivalents increased from $1.890 million at December 31, 1995 to
$51.542 million at June 30, 1996. This increase is attributable to $45 million
received from the Company's initial public offering February 6, 1996, funds
received upon the exercise of employee stock options, $1 million received from
the issuance of stock warrants to Compaq Computer Corporation ("Compaq") and $5
million received from the sale of Series C Preferred Stock to Compaq in January
1996. For the three-month period ended June 30, 1996, cash and cash equivalents
decreased $633,000 from $52.175 million to $51.542 million. The decrease in
cash and cash equivalents for the three-month period ended June 30, 1996 was
due to the purchase of fixed assets of $342,000 and the pay-off of the
equipment line of credit for $360,000.
Raptor Systems, Inc. 11
<PAGE> 12
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, all amounts outstanding under these lines of credit were paid
during the six months ended June 30, 1996. 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 June 30, 1996 and December 31, 1995, the bank's prime
rate was 8 1/4% and 8 1/2%, respectively. As of June 30, 1996 all lines have
been amended to incorporate to the terms indicated above for each.
The Company believes that its existing cash and short-term investment 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, general economic conditions, the
Company's continued ability to develop and introduce innovative products, the
introduction of new products by competitors, 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.
Raptor Systems, Inc. 12
<PAGE> 13
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 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 dependent in large part upon the performance of its resellers, and
is 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.
Raptor Systems, Inc. 13
<PAGE> 14
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 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.
Raptor Systems, Inc. 14
<PAGE> 15
PART II. OTHER INFORMATION
- - --------------------------
ITEM 1. LEGAL PROCEEDINGS:
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. On June 30, 1996, the Company submitted a request
that the District Court summarily dismiss Lightburn's Claim. Raptor is unable to
determine the ultimate outcome of this litigation.
On June 10, 1996, Raptor and one of its customers was sued by a former
employee (a sales representative of Raptor who 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 not commenced and Raptor is unable
to determine the ultimate outcome of the litigation.
Raptor Systems, Inc. 15
<PAGE> 16
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. 16
<PAGE> 17
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
By:
August 13, 1996 -------------------------------------------
Robert H. Fincke
Vice President, Treasurer, Controller
(principal financial and accounting officer)
Raptor Systems, Inc. 17
<PAGE> 18
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. 18
<PAGE> 1
COMPUTATION OF NET INCOME (LOSS) PER SHARE:
EXHIBIT 11
<TABLE>
RAPTOR SYSTEMS, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS SIX MONTHS
JUNE 30, JUNE 30,
----------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock outstanding, beginning of period .... 12,359 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 ........ 109 -- 7,663 --
Weighted average common stock equivalents ........ 2,649 -- -- --
Less: Assumed purchase of treasury shares ........ (222) (91) -- (91)
----------------------------------------------
Weighted average number of common and common
equivalent shares outstanding ............... 14,892 7,047 10,113 7,047
==============================================
Net income (loss) ................................ $150 $(559) $(279) $(973)
==============================================
Net income (loss) per common and common equivalent
share ....................................... $.01 $(.08) $(.03) $(.14)
==============================================
- - -------------------------------------------------------------------------------------------------------
<FN>
(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.
</TABLE>
Raptor Systems, Inc. 19
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 51,542
<SECURITIES> 0
<RECEIVABLES> 2,510
<ALLOWANCES> 198
<INVENTORY> 0
<CURRENT-ASSETS> 54,409
<PP&E> 1,265
<DEPRECIATION> 306
<TOTAL-ASSETS> 55,369
<CURRENT-LIABILITIES> 2,526
<BONDS> 0
<COMMON> 126
0
0
<OTHER-SE> 52,717
<TOTAL-LIABILITY-AND-EQUITY> 55,369
<SALES> 2,907
<TOTAL-REVENUES> 2,907
<CGS> 209
<TOTAL-COSTS> 209
<OTHER-EXPENSES> 3,248
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (551)
<INCOME-TAX> 0
<INCOME-CONTINUING> 150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
Raptor System, Inc 20
</TABLE>
