<PAGE> 1
UNITED STATES
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, 1997
COMMISSION FILE NUMBER 0-27538
-------
RAPTOR SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 7372 51-0337926
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) 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 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, 1997 there were 13,409,800 outstanding shares of the
issuer's Common Stock, par value $.01 per share.
- Page 1 of 18
- Exhibit Index is on Page 16
Raptor Systems, Inc. 1
<PAGE> 2
RAPTOR SYSTEMS, INC.
TABLE OF CONTENTS
PART I - CONSOLIDATED FINANCIAL INFORMATION
- -------------------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS: PAGE
- ------- ------
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1997 AND
DECEMBER 31, 1996 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND
1996 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1996 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS 14
- -------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
- -------
Raptor Systems, Inc. 2
<PAGE> 3
PART I. CONSOLIDATED FINANCIAL INFORMATION
- -------------------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
RAPTOR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 31,723,687 $ 37,567,372
Marketable securities .............................. 18,711,417 15,396,866
Accounts receivable, less allowances of $624,275 and
$431,000, at June 30, 1997 and December 31, 1996,
respectively .................................... 4,931,652 4,048,456
Other current assets ............................... 2,963,083 733,507
----------------------------
Total current assets ....................... 58,329,839 57,746,201
----------------------------
Net property and equipment ......................... 1,655,606 1,401,447
Equity investments ................................. 4,039,953 4,036,001
----------------------------
Total assets ............................... $ 64,025,398 $ 63,183,649
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... 461,426 481,266
Accrued liabilities ................................ 1,845,734 1,994,329
Accrued non-recurring costs ........................ 2,301,000 --
Deferred revenue ................................... 2,081,595 1,580,289
----------------------------
Total current liabilities .................. 6,689,755 4,055,884
----------------------------
Stockholders' equity:
Preferred stock, $.01 par value;
3,004,161 and 5,000,000 shares authorized at
December 31, 1996 and June 30, 1997, respectively;
none issued and outstanding ....................... -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 13,375,824 and 13,102,528 shares
issued and outstanding at June 30, 1997 and
December 31, 1996, respectively ................. 133,758 131,025
Additional paid-in capital ......................... 61,285,898 60,989,463
Accumulated deficit ................................ (3,404,653) (1,177,620)
Cumulative translation adjustment .................. (16,003) (1,746)
Unearned compensation .............................. (663,357) (813,357)
----------------------------
Total stockholders' equity ................. 57,335,643 59,127,765
----------------------------
Total liabilities and stockholders' equity . $ 64,025,398 $ 63,183,649
============================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Raptor Systems, Inc. 3
<PAGE> 4
RAPTOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1997 1996 1997 1996
---------------------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue .......................................... $ 6,649 $ 2,907 $ 12,289 $ 4,975
Cost of revenue .................................. 547 209 903 361
------------ ------------ ------------ ------------
Gross margin ..................................... 6,102 2,698 11,386 4,614
Operating expenses:
Selling and marketing .......................... 3,125 1,944 5,965 3,541
Research and development ....................... 943 884 1,882 1,451
General and administrative ..................... 981 421 1,878 971
Non-recurring charges .......................... 6,522 -- 6,522 --
------------ ------------ ------------ ------------
Total operating expenses ............... 11,571 3,249 16,247 5,963
------------ ------------ ------------ ------------
Operating loss ................................... (5,469) (551) (4,861) (1,349)
Interest income net ............................. 725 701 1,435 1,070
------------ ------------ ------------ ------------
Income (loss) before income taxes ................ (4,744) 150 (3,426) (279)
Benefit for income taxes ......................... 1,660 -- 1,199 --
------------ ------------ ------------ ------------
Net income (loss) ................................ $ (3,084) $ 150 $ (2,227) $ (279)
============ ============ ============ ============
Net income (loss) per common and common equivalent
share ............................................ $ (.23) $ .01 $(.17 ) $ (.03)
============ ============ ============ ============
Weighted average common and common equivalent
shares outstanding ............................... 13,329,529 14,892,762 13,266,913 10,113,104
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Raptor Systems, Inc. 4
<PAGE> 5
RAPTOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED- IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ........................................... $ (2,227) $ (279)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Depreciation ....................................... 386 152
Provision for sales allowances ..................... 193 1
Compensation stock option expense .................. 150 150
Income tax benefit ................................. (1,199) --
Changes in operating assets and liabilities:
Accounts receivable ............................... (1,076) (816)
Other assets ...................................... (1,031) (283)
Accounts payable .................................. (20) 233
Accrued liabilities ............................... (147) (192)
Accrued non-recurring charges ..................... 2,301 --
Deferred revenue .................................. 501 429
-------- --------
Cash used in operating activities ................... (2,169) (605)
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment .............. (641) (488)
Purchase of marketable securities ................ (3,315) --
Equity investment in common stock ................ (4)
-------- --------
Cash used in investing activities ................ (3,960) (488)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............ 300 45,678
Net proceeds from issuance of preferred stock ..... -- 5,000
Issuance of warrants .............................. -- 1,000
Payment of bank debt .............................. -- (933)
-------- --------
Cash provided by financing activities ............... 300 50,745
-------- --------
Effects of exchange rate changes on cash ............ (14) --
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ (5,843) 49,652
-------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .... 37,567 1,890
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......... $ 31,724 $ 51,542
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Raptor Systems, Inc. 5
<PAGE> 6
RAPTOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The consolidated financial statements of Raptor Systems, Inc. (the "Company" or
"Raptor") for the three and six months ended June 30, 1997 and 1996 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 the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 filed with the Securities and Exchange Commission.
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 and six months ended June 30, 1997 are
not necessarily indicative of the results expected for the full year ending
December 31, 1997.
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, 1997
and December 31, 1996 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.
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.
On December 9, 1996, the Court granted Raptor's motion for summary judgment on
all claims that had been asserted against Raptor. The Court similarly entered an
order dismissing the counterclaims made by Raptor. As set forth in the Court's
order, the case is now closed, subject to any appeal rights the parties may
have. LAI has filed an appeal of the Court's decision, the outcome of which is
not known at this time. During the three months ended June 30, 1997, Raptor
prepared and filed (i) its response to the appeal by LAI, and (ii) a
cross-appeal with respect to the entry of summary judgment on its counterclaims.
Raptor Systems, Inc. 6
<PAGE> 7
On June 10, 1996, Raptor and one of its customers were sued by a former sales
representative of Raptor, claiming that he is owed certain commissions on sales
of Raptor products to this customer. During July 1997, the parties agreed to the
terms of a settlement. Raptor expects the case to be dismissed by the Court.
Raptor believes that the ultimate outcome of the above litigation will not have
a material adverse effect on its financial position. Litigation costs are
included in general and administrative expenses. During the three months ended
June 30, 1997, Raptor incurred legal costs of approximately $105,000 in
connection with the two cases mentioned above.
5. NON RECURRING COSTS:
The non-recurring charge for purchased in-process technology was $6,522,000
($4,239,000 or $.32 per share after taxes) and is related to the May 9, 1997
acquisition of a perpetual license, including the underlying products, to Axcess
technology from Open Market, Inc., of Cambridge, Massachusetts. The technology
will be substantially used in future product offerings currently under
development.
6. RECENT ACCOUNTING PRONOUNCEMENTS:
In February 1997, The Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 128, Earnings per Share, which specifies the
computation, presentation, and disclosure requirements for earnings per share.
The statement is effective for periods ending after December 15, 1997, including
interim periods. The adoption of this statement will not have a material impact
on reported net income per common share.
Raptor Systems, Inc. 7
<PAGE> 8
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 the Risk Factors outlined in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1996.
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. The words "believe," "expect," "anticipate,"
"intend," "estimate," and other expressions which are predictions of or indicate
future events and trends and which do not relate to historical matters identify
forward-looking statements. Reliance should not be placed on forward-looking
statements because they involve known and unknown risks, uncertainties and other
factors, which may cause the actual results, performance or achievements of the
Company to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward looking statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise. 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 EagleMobile 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." The Company's integrated enterprise-wide network security solution
consists of individual product modules that secure organizational networks,
including networks connected to the Internet, LANs (local area networks) and
Intranets, mobile 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 (LOSS) INCOME AND EARNINGS PER SHARE:
On May 9, 1997, the Company entered into an agreement with Open Market, Inc.
("Open Market") of Cambridge, Massachusetts, to license Open Market's secure
intranet technology known as Axcess. The agreement gives the Company an
exclusive, perpetual license to the product, including the underlying product
technology, and worldwide marketing and distribution rights. The Company will
continue the development of the technology and expects to introduce new secure
intranet products based on the Axcess technology in the third and fourth
quarters of 1997. The acquisition cost was $6,522,000 (equal to $4,239,000 or
$.23 per share after tax). The Company incurred a non-recurring charge for the
acquisition costs in the second quarter of 1997 as an in-process research and
development expense.
As a result of the one-time charge, the Company generated a net loss of
$3,084,000 ($.23 per share) on revenues of $6,649,000 in the second quarter of
1997 compared to net income of $150,000 ($.01 per share) on revenues of
$2,907,000 in the second quarter of 1996. For the six-month period ended June
30, 1997
Raptor Systems, Inc. 8
<PAGE> 9
the Company generated a net loss of $2,227,000 ($.17 per share) on revenues of
$12,289,000 compared to a net loss of $279,000 ($.03 per share) on revenues of
$4,975,000 during the same period in 1996.
Net income and earnings per share, calculated as if the non-recurring Open
Market agreement had not been entered into, for the three and six month periods
ended June 30, 1997 would have been $1,156,000 ($.08 per share) and $2,013,000
($.13 per share), respectively. Fully diluted common and common share equivalent
shares outstanding would have been 14,961,354 and 15,010,007 for the three and
six month periods ended June 30, 1997, respectively.
REVENUES:
Total revenues increased 129% in the second quarter of 1997 over the second
quarter of 1996. Eighty-eight percent of the second quarter revenue resulted
from the reseller channel and 12% resulted from direct sales efforts. Revenue by
geographical region as a percentage of total second quarter revenue is as
follows: US and North America 81%, Europe and Asia 19%. Support revenue for the
second quarter increased 312% over the second quarter of 1996 and 26%
sequentially from the first quarter of 1997. Training revenues doubled
sequentially from the first quarter of 1997. As a result of the growth of these
other lines of business, software license sales are now 86% of revenue compared
to 93% of revenue in the first quarter of 1997.
Windows NT-based firewall products accounted for 60% of the second quarter's
revenue from software sales while Unix-based firewall products accounted for 31%
and non-firewall products accounted for 9%. The average selling price for the
second quarter of 1997 was $4,506, which decreased $605, from $5,111 in the
first quarter of 1997. The reduction in the average selling price of its
products is largely due to the change in the mix of the products sold and the
channels the products are sold through. Non-firewall products, like Eagle
NetWatch and WebNOT, have lower selling prices than the firewall products. The
average selling price of high-end firewalls for the second quarter was $5,232, a
decreased of $340 from $5,572 in the first quarter of 1997. During the three
month period ended June 30, 1997 the Company sold 1,657 units. Of these second
quarter unit sales 235 units were Eagle Unix firewalls, compared to 245 Eagle
Unix firewalls in the first quarter of 1997, 694 Eagle NT firewalls, compared to
488 Eagle NT firewalls in the first quarter, 464 The WALL firewalls, compared to
994 The WALL firewalls in the first quarter and 264 non-firewall products such
as NetWatch and WebNot, up 105% from 129 non-firewall units in the first quarter
of 1997. As the Company sells more non-firewall products the average selling
price on all of the Company's products will decrease. Another reason for the
decline in the average selling price is due to the fact that during the second
quarter the company introduced new versions of its firewalls, priced to meet
certain market requirements. In the first quarter of 1997 the Company offered
Eagle firewalls which ranged in price from $6,500 to $25,000. During the second
quarter the company introduced a version of the Eagle NT firewall that does not
have the virtual private networking (VPN) tunneling capability, priced at
$3,995. The Company did not change its list prices in 1996 and there has been no
change in its list prices in 1997. The analysis above does not take into account
the effects of THE WALL(TM) on the average selling price, the average selling
price for THE WALL(TM) product in the second quarter of 1997 was $512, down 10%
from the first quarter average selling price of $570.
During the second quarter the Company sold over 3,200 copies of the EagleMobile
client software, up 190% compared to 1,100 units in the first quarter of 1997.
Life to date the Company has sold over 9,100 mobile units. Life to date, the
Company has sold 6,441 server units; mobile and desktop client products are not
included in that number.
The Company's largest customer during the second quarter of 1997 was
Hewlett-Packard, which accounted for just over 4% of revenue. Revenues from
Master Distributors (Ingram Micro, MicroAge, Tech Data and Access Graphics) were
approximately 7%, collectively. Revenues from these Master Distributors are
reported on a sell-through basis. During the month of June, based on
sell-through reports received from the master distributors, 66 resellers
purchased Raptor products, 18 of which were existing Raptor resellers and 48
were new to Raptor. During the second quarter the Company entered into
agreements with 17 new value added resellers (VAR's), bringing the total number
of VAR's to 304.
Raptor Systems, Inc. 9
<PAGE> 10
Revenue from customer support contracts was $716,000, an increase of 25% from
the first quarter of 1997. Deferred revenue related to support contracts
increased $336,000 during the second quarter to $2,082,000. The deferred revenue
number includes a prepayment from Compaq Computer Corporation ("Compaq") which
was originally recorded in the second quarter of 1996. The Company recognizes
revenue related to the Compaq prepayment as software license revenue, which is
based on royalty reports received from Compaq. These sell-through reports show
that Compaq has licensed Raptor software to end-users in the United States and
in ten other countries, including Canada, Germany, Israel, Norway, Poland,
Singapore, Sweden, Taiwan, the United Arab Emirates and the United Kingdom since
the product began shipping in the first quarter of 1997. Revenue from Compaq was
less than $100,000 during the second quarter of 1997.
COST OF REVENUES:
Cost of revenues includes the cost of training, telephone support, manuals,
packaging, diskettes and fulfillment costs. In addition, cost of revenues
includes royalties paid to third-party developers, inventory obsolescence
reserves and the costs associated with product upgrades. Gross margin as a
percentage of revenues for the second quarter of 1997 decreased 1% compared to
the second quarter of 1996 and decreased 2% from the first quarter of 1997.
Costs associated with training customers as well as the royalties paid to
third-party developers were the primary reasons for the decline in the gross
margin. The increase in training costs was offset with training revenues during
the quarter. Training revenue was 3% of total revenue in the second quarter of
1997.
OPERATING EXPENSES:
In connection with the acquisition of the Axcess technology from Open Market,
Inc., the Company had non-recurring operating costs of $6,522,000. Without these
one-time costs, the Company's operating profit would have been $1,053,000, and
its operating margins would have been 16%. The Company's goal is to continue to
increase operating margins to 20% by the end of 1997. The company's operating
loss, including the non-recurring charge, was $5,469,000.
The Company's operating expenses and the respective percentage of revenues for
the second quarter of 1997 as compared to second quarter of 1996 are as follows,
excluding the one-time charge for purchased in-process technology:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
-------------------------------------------------
% of % of
1997 Revenues 1996 Revenues
----------------------- -----------------------
<S> <C> <C> <C> <C>
Sales and Marketing $3,125 47% $1,944 67%
Research and Development 943 14% 884 30%
General and Administrative 981 15% 421 15%
----------------------- -----------------------
$5,049 76% $3,249 112%
======================= =======================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
-------------------------------------------------
% of % of
1997 Revenues 1996 Revenues
----------------------- -----------------------
<S> <C> <C> <C> <C>
Sales and Marketing 5,965 49% $3,541 71%
Research and Development 1,882 15% 1,451 29%
General and Administrative 1,878 15% 971 20%
----------------------- -----------------------
$9,725 79% $5,963 120%
======================= =======================
</TABLE>
Total operating expenses decreased as a percentage of revenues to 76% in the
second quarter of 1997 compared to 112% in the second quarter of 1996 and 83% in
the first quarter of 1997. This decrease is primarily the result of increased
revenues. The general and administrative expenses for the quarter and six month
period ended June 30, 1997 include $75,000 and $150,000 charges to income,
respectively, related to
Raptor Systems, Inc. 10
<PAGE> 11
unearned compensation for employee stock options granted in 1995, prior to the
Company's initial public offering.
Sales and marketing expenses, which include salary, commissions, advertising,
travel and other selling-related expenses, decreased to 47% of revenues in the
second quarter of 1997 compared to 67% of revenues in the second quarter of 1996
and 50% in the first quarter of 1997. The absolute dollar increase is
attributable to compensation costs as well as increased travel and remote office
costs.
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 14% of revenues in the second
quarter of 1997 compared to 30% of revenues in the second quarter of 1996 and
17% in the first quarter of 1997. As the Company adds features and functionality
to its products, makes its products available on additional platforms and
continues to develop new products the cost of development should continue to
increase. Additionally, costs associated with development and enhancement of the
acquired Open Market technology will require the Company to invest in additional
resources in the second half of 1997.
General and administrative expenses remained unchanged at 15% of revenues in the
second quarter of 1997 compared to the second quarter of 1996 and decreased 1%
from 16% in the first quarter of 1997. General and administrative expenses
include salary, rent, and other expenses associated with the general management
and administration of the Company. Litigation costs are included in general and
administrative expenses. During the second quarter of 1997, the Company incurred
legal costs of approximately $105,000 in connection with two legal matters,
which have been ongoing since February 1995 and June 1996, respectively. During
July 1997, the parties agreed to the terms of a settlement related to one of the
cases. The Company expects the case to be dismissed by the Court.
The Company estimates that the tax rate for 1997 will be 35% and has used that
rate to calculate the income tax benefit from the in-process technology
write-off. The Company expects that the tax rate for the third and fourth
quarters of 1997 will be 35%.
The number of employees increased 12% to 123 at June 30, 1997 compared with 110
at December 31, 1996. Employment will continue to increase in support of higher
revenues, with a majority 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, cash equivalents and marketable securities decreased from $52,964,000 at
December 31, 1996 to $50,435,000 at June 30, 1997 and decreased from $53,754,000
at March 31, 1997. This decrease of $2,529,134 is attributable to $4,200,000
paid to Open Market, Inc., during the second quarter, partially offset by
$300,000 related to the sale of the Company's stock to employees exercising
stock options, $1,435,000 in interest income year to date and cash generated
from operations through the six-months ended June 30, 1997. Although the Company
agreed to pay Open Market $6,200,000 for the Axcess technology, that sum is
payable during the year based on certain milestones in the acquisition
agreement.
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, 1997. The Company continues to investigate the acquisition of
key technology, complementary product lines and other companies, all of which
may be financed by a variety of sources.
Raptor Systems, Inc. 11
<PAGE> 12
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. The words "believe," "expect," "anticipate,"
"intend," "estimate," and other expressions which are predictions of or indicate
future events and trends and which do not relate to historical matters identify
forward-looking statements. Reliance should not be placed on forward-looking
statements because they involve known and unknown risks, uncertainties and other
factors, which may cause the actual results, performance or achievements of the
Company to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward looking statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
A number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, changes in the market, technology,
competition from larger, more established competitors, general economic
conditions, the Company's continued ability to develop and introduce innovative
products, potential delays in product releases, 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. Prior to 1996, there was no public
market for the Company's Common Stock. In addition, in recent years the stock
market in general, and the market for shares of small capitalization companies
in particular, have experienced extreme price fluctuations, which have often
been unrelated to the operating performance of affected companies. There can be
no assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance. General market price declines or
market volatility in the future could have a material adverse effect on the
market price of the Common Stock.
The Company derives substantially 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 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 a Chief Executive Officer and other key members of management, to
help it manage this growth. In 1996, the Company hired 42 additional employees
including its Chief Financial Officer. 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
Raptor Systems, Inc. 12
<PAGE> 13
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 VARs, regional
VARs and international VARs. The success of the Company is therefore dependent
in large part upon the performance of its resellers. The Company's relationships
with most of its resellers have been established within the last year and a
half, 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 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 customers 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. 13
<PAGE> 14
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS:
No reportable events have occurred which would require modification of the
discussion under Item 3 Legal Proceedings contained in the Company's Report on
Form 10-K for the year ended December 31, 1996 and the Company's report on Form
10-Q for the quarter ended March 31, 1997. See Note 4 to the Consolidated
Financial Statements contained in this Form 10-Q for the period ended June 30,
1997 for additional information related to previously disclosed litigation
proceedings.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company held its Annual Meeting of Stockholders on May 21, 1997, and the
following matters were voted on at that meeting:
1. The election of the following Class I members of the Board of Directors
who will serve until the 2000 Annual Meeting of Stockholders and until
their respective successors are duly elected and qualified
<TABLE>
<CAPTION>
Director For Withheld
-------- --- --------
<S> <C> <C>
William S. Kaiser 11,056,196 70,521
Shaun McConnon 11,070,068 56,649
</TABLE>
Other directors whose term of office as a director continued after the
meeting were:
Robert A. Steinkrauss
Brian Owen
Ernest C. Parizeau
Robert Schechter
2. The proposal to amend the Raptor Systems, Inc. 1995 Amended and
Restated Stock Option and Grant Plan (the "Plan") to increase the
number of shares of Common Stock available for issuance under the Plan
by 500,000 shares was approved by the following vote: for 9,775,443;
against 1,323,220; abstain 28,054
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.). Exhibit 11 - Statement re: Computation of Earnings per Share
Exhibit 27 - Financial Data Schedule
b.) Reports on Form 8-K - None filed for the Quarter ended June 30, 1997
Raptor Systems, Inc. 14
<PAGE> 15
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.
August 8, 1997 /s/ John S. Ingalls
-----------------------------------------------------
John S. Ingalls
Vice President of Finance and Chief Financial Officer
(Principal Financial Officer)
August 8, 1997 /s/ John W. Peacock
-----------------------------------------------------
John W. Peacock
Director of Finance and Controller
(Principal Accounting Officer)
Raptor Systems, Inc. 15
<PAGE> 16
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
<S> <C> <C>
EXHIBIT 11 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 17
EXHIBIT 27 FINANCIAL DATA SCHEDULE 18
</TABLE>
Raptor Systems, Inc. 16
<PAGE> 1
COMPUTATION OF EARNINGS PER SHARE:
EXHIBIT 11
RAPTOR SYSTEMS, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock outstanding, beginning of period 13,296 12,358 13,102 2,450
Weighted average number of shares issued 34 109 165 7,663
Weighted average number of common and
common stock equivalents -- 2,649 --
Less: Assumed purchase of treasury shares -- (222) -- --
---------------------------------------------
Weighted average number of common and
common equivalent shares outstanding 13,330 14,894 13,267 10,113
=============================================
Net income (loss) $ (3,084) $ 150 $ (2,227) $ (279)
=============================================
Net income (loss) per common and common
equivalent share $ (.23) $ .01 $ (.17) $ (.03)
=============================================
</TABLE>
- ----------
(1) Fully diluted net income per share is the same as primary net income per
share.
Raptor Systems, Inc. 17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.0
<CASH> 31,723,687
<SECURITIES> 18,711,417
<RECEIVABLES> 4,931,652
<ALLOWANCES> 624,275
<INVENTORY> 0
<CURRENT-ASSETS> 58,329,839
<PP&E> 2,616,324
<DEPRECIATION> 950,718
<TOTAL-ASSETS> 64,025,398
<CURRENT-LIABILITIES> 6,689,755
<BONDS> 0
0
0
<COMMON> 133,758
<OTHER-SE> 57,201,885
<TOTAL-LIABILITY-AND-EQUITY> 64,025,398
<SALES> 6,648,628
<TOTAL-REVENUES> 6,648,628
<CGS> 547,230
<TOTAL-COSTS> 11,571,110
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,744,397)
<INCOME-TAX> (1,660,456)
<INCOME-CONTINUING> (3,083,941)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,083,941)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
