UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended June 30, 2002
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From _______________ to
________________.
Commission file number 0-27074
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SECURE COMPUTING CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 52-1637226
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4810 Harwood Road,
San Jose, CA 95124
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(Address of principal executive offices) (Zip code)
(800) 379-4944
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Registrant's telephone number, including area code
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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 |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date: Common Stock, $.01 par
value - 29,375,909 issued and outstanding as of August 8, 2002.
1
SECURE COMPUTING CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2002
(Unaudited) and December 31, 2001.......................... 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three and six months ended June 30, 2002 and 2001.. 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 2002 and 2001............ 5
Notes to the Condensed Consolidated Financial Statements
(Unaudited)................................................ 6 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 9 - 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 14
Item 2. Changes in Securities.......................................... 14
Item 3. Defaults upon Senior Securities................................ 14
Item 4. Submission of Matters to a Vote of Security Holders............ 14
Item 5. Other Information.............................................. 14
Item 6. Exhibits and Reports on Form 8-K............................... 14
Signatures ..................................................... 15
2
PART 1. FINANCIAL INFORMATION
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
June 30, December 31,
2002 2001
(Unaudited) (See Note)
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,566 $ 15,956
Investments 3,715 5,085
Accounts receivable, net 9,348 11,006
Inventories 670 757
Other current assets 3,390 3,190
--------- ---------
Total current assets 31,689 35,994
PROPERTY AND EQUIPMENT, NET 6,251 5,792
GOODWILL 15,879 --
OTHER ASSETS 3,191 3,047
--------- ---------
$ 57,010 $ 44,833
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,853 $ 1,859
Accrued payroll 2,421 3,523
Other accrued expenses 2,916 1,601
Litigation settlement accrual 7,258 --
Deferred revenue 15,562 9,154
--------- ---------
Total current liabilities 30,010 16,137
STOCKHOLDERS' EQUITY
Common stock, par value $.01; 50,000,000 shares authorized;
issued and outstanding - June 30, 2002- 29,366,726 and
December 31, 2001 - 28,830,992 294 288
Additional paid-in capital 155,290 148,585
Accumulated deficit (128,039) (119,687)
Foreign currency translation (545) (490)
--------- ---------
Total stockholders' equity 27,000 28,696
--------- ---------
$ 57,010 $ 44,833
========= =========
Note: The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to condensed consolidated financial statements.
3
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------------------- ---------------------
Products and services revenue $ 15,578 $ 11,444 $ 28,042 $ 21,664
Advanced Technology contracts revenue 1,033 1,121 2,024 2,144
-------- -------- -------- --------
16,611 12,565 30,066 23,808
Cost of revenue 1,650 2,116 3,551 4,704
-------- -------- -------- --------
Gross profit 14,961 10,449 26,515 19,104
Operating expenses:
Selling and marketing 9,828 9,196 18,285 17,802
Research and development 3,693 3,603 7,186 7,273
General and administrative 1,332 1,052 2,425 2,133
-------- -------- -------- --------
14,853 13,851 27,896 27,208
-------- -------- -------- --------
Operating income/(loss) 108 (3,402) (1,381) (8,104)
Other non-recurring expense (7,258) -- (7,258) --
Interest and other income 71 213 287 424
-------- -------- -------- --------
Loss before income taxes (7,079) (3,189) (8,352) (7,680)
Income tax expense
-------- -------- -------- --------
Net loss $ (7,079) $ (3,189) $ (8,352) $ (7,680)
======== ======== ======== ========
Net loss per share - basic and diluted $ (0.24) $ (0.11) $ (0.29) $ (0.28)
======== ======== ======== ========
Shares used in computing net loss per share -
basic and diluted 29,306 27,942 29,170 27,633
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
SECURE COMPUTING CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
Six months ended June 30,
2002 2001
---------------------
NET CASH USED IN OPERATING ACTIVITIES $ (3,054) $ (5,470)
INVESTING ACTIVITIES
Proceeds from sales of investments 4,610 13,831
Purchase of investments (3,240) (1,516)
Purchase of property and equipment (1,091) (1,693)
Increase in intangibles and other assets (271) (499)
-------- --------
Net cash provided by investing activities 8 10,123
FINANCING ACTIVITIES
Costs associated with issuance of Preferred Stock -- (38)
Proceeds from issuance of Common Stock 1,711 1,974
Proceeds from exercise of Warrants -- 2,082
-------- --------
Net cash provided by financing activities 1,711 4,018
-------- --------
EFFECT OF EXCHANGE RATE CHANGES (55) (293)
-------- --------
Increase (decrease) in cash and cash equivalents (1,390) 8,378
Cash and cash equivalents beginning of period 15,956 12,496
-------- --------
Cash and cash equivalents ending of period $ 14,566 $ 20,874
======== ========
See accompanying notes to condensed consolidated financial statements.
5
SECURE COMPUTING CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1. ORGANIZATION
We develop and sell computer software products and services designed to
provide secure access control for all users engaging in business over public
networks, including the Internet, intranets, and extranets. Our solutions enable
our customers to control, manage, and personalize access for millions of
customers, employees, and partners connecting to their business.
2. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by us without audit and reflect all adjustments (consisting only of
normal and recurring adjustments and accruals) which are, in our opinion,
necessary to present a fair statement of the results for the interim periods
presented. The consolidated financial statements include our accounts and those
of our subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation. The statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission, but omit certain
information and footnote disclosures necessary to present the statements in
accordance with generally accepted accounting principles. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the full fiscal year. The December 31, 2001
Condensed Balance Sheet is derived from our audited Condensed Balance Sheet as
of December 31, 2001. These condensed financial statements should be read in
conjunction with the Consolidated Financial Statements and footnotes thereto
included in our Annual 10-K Report for the year ended December 31, 2001, as
filed with the Securities and Exchange Commission.
3. SIGNIFICANT ACCOUNTING POLICIES
Results of operations are translated using the average exchange rates
throughout the quarter. Translation gains or losses, net of applicable deferred
taxes, are accumulated as a separate component of stockholders' equity and
included in comprehensive income. During the second quarter of 2002 and 2001,
total comprehensive loss amounted to ($7,097) and ($3,468) respectively. During
the first six months of 2002 and 2001, total comprehensive loss amounted to
($8,407) and ($7,973) respectively.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued Statement No. 141, "Business
Combinations," effective for all business combinations initiated after June 30,
2001. The Statement eliminates the pooling-of-interest methods of accounting for
business combinations and further clarifies the criteria to recognize intangible
assets separately from goodwill. Adoption of this Statement will not have an
effect on the accounting treatment of assets we have acquired in business
combinations prior to the effective date of this Statement.
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets," effective for the year ending December 31, 2002. Under this
Statement, goodwill and indefinite-lived intangible assets are no longer
amortized but are reviewed at least annually for impairment. Adoption of this
Statement will not have an effect on the accounting treatment of assets
presented in our Financial Statements prior to the effective date.
6
SECURE COMPUTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
5. ACQUISITION OF THE GAUNTLET(TM)FIREWALL AND VPN BUSINESS
In February 2002, we completed our acquisition of the assets of the
GauntletTM firewall and VPN business from Network Associates Inc.. As a result
of the acquisition, we expect to be the worldwide leader in application-layer
firewalls. The purchase price was 300,354 shares of common stock valued at $5
million. The value of the common shares was determined based on the average
market price of our common shares over the period including the five days before
the terms of the acquisition were agreed to and announced. The transaction will
be accounted for as a purchase in accordance with FASB Statement No. 141,
"Business Combinations" and FASB Statement No. 142, "Goodwill and Other
Intangible Assets", as described in Note 4, "Recently Issued Accounting
Standards."
6. SUBSEQUENT EVENT
In July 2002, we reached a settlement of the class action securities
lawsuit that was brought in United States District Court for the Northern
District of California on behalf of persons who acquired our common stock
between November 10, 1998 and March 31, 1999.
Subject to court approval, the class action case settled for $10.1
million. $2.8 million in cash will be covered by our insurance. The $7.3 million
balance of the settlement will be contributed by us in common stock or in a
combination of common stock and cash at the date of distribution. The final
allocation of the contribution will be determined by us at our sole option.
7. SEGMENT INFORMATION
We have two reportable segments consisting of Products and Services and
Advanced Technology. Our Products and Services segment sells computer software
products and services designed to provide secure access control for users
engaging in business over public networks. Our Advanced Technology Division is a
self-funded organization whose mission is to develop new technologies and
products that meet the emerging needs of the Department of Defense (DoD) and the
commercial sector. Our strategy is to focus only on development contracts that
add value to our products and services offerings. As a result, we continue to
innovate, providing state-of-the-market products for organizations of all types
and sizes. Cash, investments, deferred tax assets, general and administrative
expenses, and stock option compensation costs cannot be readily identified to
the two business segments, therefore, they are presented separately in a
corporate segment.
We evaluate segment performance based on gross profit. Resources are
allocated based on contractual requirements as the Advanced Technology segment
is reimbursed on a cost plus basis from the various agencies of the United
States government. The accounting policies of the reportable segments are the
same as those described in Note 1, "Summary of Significant Accounting Policies"
included in our Annual 10-K Report for the year ended December 31, 2001. Revenue
is recognized at time of shipment and/or when performance of services are
complete for the Products and Services segment. For Advanced Technology,
contract revenue is recognized on the basis of costs incurred for the government
contracts serviced by Advanced Technology and intersegment transfers are
recorded at cost; there are no intercompany profits or losses recorded on
intersegment transfers.
Our reportable segments are business units that offer distinct products
and services to very different customer groups. The reportable segments are each
managed separately because they require different managerial skill sets and are
focused toward different markets.
7
SECURE COMPUTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Significant components of our segments are as follows:
PRODUCTS AND ADVANCED
SERVICES TECHNOLOGY
SIX MONTHS ENDED JUNE 30, 2002 SEGMENT SEGMENT CORPORATE TOTAL
- -------------------------------------------- ----------------- ------------------ --------------- ----------------
Revenues from external customers ....... $ 28,042 $ 2,024 $ --- $ 30,066
Depreciation expense ................... 1,320 8 14 1,342
Segment gross profit .................. 25,906 609 --- 26,515
Segment operating income/(loss) ........ 1,756 (712) (2,425) (1,381)
Interest and other income .............. --- --- 287 287
Segment assets ......................... 19,062 1,007 36,941 57,010
Expenditures for long lived assets ..... 16,160 --- 29 16,189
----------------- ------------------ --------------- ----------------
PRODUCTS AND ADVANCED
SERVICES TECHNOLOGY
SIX MONTHS ENDED JUNE 30, 2001 SEGMENT SEGMENT CORPORATE TOTAL
- -------------------------------------------- ----------------- ------------------ --------------- ----------------
Revenues from external customers ....... $ 21,664 $ 2,144 $ --- $ 23,808
Depreciation expense ................... 1,118 49 16 1,183
Segment gross profit .................. 18,521 583 --- 19,104
Segment operating loss ................. (4,693) (1,126) (2,285) (8,104)
Interest and other income .............. --- --- 424 424
Segment assets ......................... 14,840 710 25,169 40,719
Expenditures for long lived assets ..... 2,159 19 14 2,192
----------------- ------------------ --------------- ----------------
International sales accounted for 30 percent and 28 percent of total
revenue for the six months ended June 30, 2002 and 2001 respectively. Major
foreign markets for our products include Europe and the Pacific Rim. In each
country, we have independent channel partners who are responsible for marketing,
selling and supporting our products to resellers and end-users within their
defined territories.
The following table summarizes information about our international and
domestic sales and operations:
SIX MONTHS ENDED
JUNE 30,
2002 2001
-------------- -------------
Revenues:
United States sales .............. $21,646 $17,045
International sales .............. 9,020 6,763
-------------- -------------
$30,066 $23,808
============== =============
8
SECURE COMPUTING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The following discussion 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, including statements regarding our
expectations, beliefs, intentions or strategies regarding the future. These
statements are not guarantees of future performance and are subject to risks,
uncertainties, and other factors, some of which are beyond our control and
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements. Forward-looking
statements reflect our view only as of the date of this report. We cannot
guarantee future results, levels of activity, performance, or achievements.
In addition, the following information should be read in conjunction
with the financial statements and notes thereto included in Item 1 of this
Quarterly Report, the risk factors detailed in our Annual Report on Form 10-K
for the year ended December 31, 2001 and our Registration Statement on Form S-3
filed with the Securities and Exchange Commission on April 19, 2002, as well as
the factors identified in Forward Looking Statements below.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 AND 2001.
REVENUE. Our revenue increased 32 percent to $16.6 million for the
second quarter of 2002 up from $12.6 million in the same period of 2001.
Products and services revenue was $15.6 million for the quarter, an increase of
36 percent over 2001. For the third and fourth quarters of 2002, we expect year
over year revenue growth of 30 percent and 20 percent, respectively. As a
result, the entire year 2002 product and services revenue growth is expected to
be 27 percent. Advanced Technology contract revenue was $1.0 million for the
quarter, consistent with the same period in 2001 and consistent with our
strategy of focusing only on funded development contracts that add value to our
commercial product offerings. Advanced Technology revenue is projected to remain
fairly constant at approximately $1 million, in each of the third and fourth
quarters of 2002.
GROSS PROFIT. Gross profit as a percentage of revenue increased from 83
percent in the second quarter of 2001 to 90 percent in 2002. This improvement
was driven primarily by our success in growing our higher margin software
revenue. We expect aggregate gross profit to be approximately 90 percent for the
remainder of 2002.
SELLING AND MARKETING. Selling and marketing expenses consist primarily
of salaries, commissions, and benefits related to personnel engaged in selling,
marketing and customer support functions, along with costs related to
advertising, promotions, public relations, travel and allocations of information
technology, facilities and human resources expenses. Selling and marketing
expense increased 7 percent to $9.8 million in the second quarter of 2002, an
increase from $9.2 million in the same period of 2001. The increased spending
levels resulted primarily from investment in a stronger sales presence. As a
percentage of revenue, selling and marketing expense was 59 percent for the
quarter compared to 73 percent in the same period of 2001. Selling and marketing
expenses are expected to grow sequentially by approximately 1 percent in each of
the third and fourth quarters of 2002.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and benefits for our product development personnel and
allocations of information technology, facilities and human resources expenses.
Research and development expense increased by 3 percent to $3.7 million in the
second quarter of 2002 from $3.6 million in the same period of 2001. The
increase resulted primarily from our continued investment in next generation
product development and increased headcount related to the acquisition of the
GauntletTM Firewall business in the first quarter of 2002. As a percentage of
revenue, research and development expense was 22 percent for the quarter
compared to 29 percent in 2001. We expect quarterly research and development
expenses to grow sequentially by approximately 4 percent in the third quarter of
2002 and remain at that level in the fourth quarter of 2002.
GENERAL AND ADMINISTRATIVE. General and administrative expense consists
primarily of salaries, benefits, and related expenses for our executive,
finance, and legal personnel along with allocated information technology,
facilities and human resources expenses. General and administrative expense
increased 27% to $1.3 million in the second
9
quarter of 2002 from $1.1 million in the same period of 2001. As a percentage of
revenue, general and administrative expenses were 8 percent for the second
quarter of 2002 compared to 8 percent for the second quarter of 2001. General
and administrative expenses are expected to decline sequentially by
approximately 8 percent in the third quarter of 2002 and remain at that level in
the fourth quarter of 2002.
SEPARATION COSTS. In addition to normal operating expenses, we expect
to incur $615,000 of expenses in the third quarter of 2002 related to a 6%
reduction in headcount, which occurred early in the third quarter of 2002.
NON-RECURRING EXPENSE. Non-recurring expense of $7.3 million in the
second quarter of 2002 pertains to a one-time charge for a litigation
settlement. In July 2002, we reached a settlement of the class action securities
lawsuit that was brought in United States District Court for the Northern
District of California on behalf of persons who acquired our common stock
between November 10, 1998 and March 31, 1999.
Subject to court approval, the class action case settled for $10.1
million. $2.8 million in cash will be covered by our insurance. The $7.3 million
balance of the settlement will be contributed by us in common stock or in a
combination of common stock and cash at the date of distribution. The final
allocation of the contribution will be determined by us at our sole option.
INTEREST AND OTHER INCOME. Net interest and other income was $71,000 in
the second quarter of 2002, a decrease from $213,000 in the same period of 2001.
The decrease reflects lower average cash and investment balances as well as
lower average interest rates in 2002 as compared to 2001.
INCOME TAXES. We recognized no income tax expense for either of the
periods in 2002 or 2001. We believe it is more likely than not that deferred tax
assets, which total $2.7 million at June 30, 2002, will be realized. The
computations of our deferred tax assets and valuation allowance are based on
taxable income we expect to earn on existing government contracts, commercial
products, and projected interest income. The amount of the deferred tax assets
considered realizable could be reduced in the near term if estimates of future
taxable income are reduced.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 AND 2001.
REVENUE. Our revenue increased 26 percent to $30.1 million for the
first six months of 2002 up from $23.8 million in the same period of 2001.
Products and services revenue was $28.0 million for the six months, an increase
of 29 percent over the same six months of 2001. For the third and fourth
quarters of 2002, we expect year over year revenue growth of 30 percent and 20
percent, respectively. As a result, the entire year 2002 product and services
revenue growth is expected to be 27 percent. Advanced Technology contract
revenue was $2.0 million for the first six months of 2002, a decrease of 6
percent from the first six months of 2001 as we continue our focus on
development contracts that add value to our products and services offerings.
Advanced Technology revenue is projected to remain fairly constant at
approximately $1 million, in each of the third and fourth quarters of 2002.
GROSS PROFIT. Gross profit as a percentage of revenue increased from 80
percent in the first six months of 2002 to 88 percent in 2001. This improvement
was driven primarily by our success in growing our higher margin software
revenue. We expect aggregate gross profit to be approximately 90 percent for the
remainder of 2002.
SELLING AND MARKETING. Selling and marketing expenses consist primarily
of salaries, commissions, and benefits related to personnel engaged in selling,
marketing and customer support functions, along with costs related to
advertising, promotions, public relations, travel and allocations of information
technology, facilities and human resources expenses. Selling and marketing
expense increased 3 percent to $18.3 million in the first of six months of 2001
up from $17.8 million in the same period of 2001. The increased spending levels
resulted primarily from investment in a stronger sales presence. Selling and
marketing expenses are expected to grow sequentially by approximately 1 percent
in each of the third and fourth quarters of 2002.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and benefits for our product development personnel and
allocations of information technology, facilities and human resources expenses.
Research and development expense decreased 1 percent to $7.2 million in the
first six months of 2002 down from $7.3 million in the same period of 2001. We
expect quarterly research and development expense levels to grow sequentially by
approximately 4 percent in the third quarter of 2002 and remain at that level in
the fourth quarter of 2002.
10
GENERAL AND ADMINISTRATIVE. General and administrative expense consists
primarily of salaries, benefits, and related expenses for our executive,
finance, and legal personnel along with allocated information technology,
facilities and human resources expenses. General and Administrative expense
increased 14 percent to $2.4 million in the first six months of 2002 up from
$2.1 million in the same period of 2001. General and administrative expenses are
expected to decline sequentially by approximately 8 percent in the third quarter
of 2002 and remain at that level in the fourth quarter of 2002.
SEPARATION COSTS. In addition to normal operating expenses, we expect
to incur $615,000 of expenses in the third quarter of 2002 related to a 6%
reduction in headcount, which occurred early in the third quarter of 2002.
NON-RECURRING EXPENSE. Non-recurring expense of $7.3 million in the
second quarter of 2002 pertains to a one-time charge for a litigation
settlement. In July 2002, we reached a settlement of the class action securities
lawsuit that was brought in United States District Court for the Northern
District of California on behalf of persons who acquired our common stock
between November 10, 1998 and March 31, 1999.
Subject to court approval, the class action case settled for $10.1
million. $2.8 million in cash will be covered by our insurance. The $7.3 million
balance of the settlement will be contributed by us in common stock or in a
combination of common stock and cash at the date of distribution. The final
allocation of the contribution will be determined by us at our sole option.
INTEREST AND OTHER INCOME. Net interest and other income was $287,000
in the first six months of 2002, a decrease from $424,000 in the same period of
2001. The decrease reflects lower average cash and investment balances as well
as lower average interest rates in 2002 as compared to 2001.
INCOME TAXES. We recognized no income tax expense in the first six
months of 2002 or 2001. We believe it is more likely than not that deferred tax
assets, which total $2.7 million at June 30, 2002, will be realized. The
computations of our deferred tax assets and valuation allowance are based in
part on taxable income we expect to earn on existing government contracts and
projected interest income. The amount of the deferred tax assets considered
realizable could be reduced in the near term if estimates of future taxable
income are reduced.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short term investments decreased by $2.8
million from December 31, 2001 to June 30, 2002. The decrease resulted primarily
from fewer collections available in Q2 from seasonally lower first quarter
revenues and the additional expenses related to the company's acquisition of the
GauntletTM firewall business. As of June 30, 2002 we had working capital of $1.7
million. We anticipate using available cash to fund growth in operations, invest
in capital equipment, acquire businesses, and to license technology or products
related to our line of business.
Capital additions in the first six months of 2002 were $2.3 million and
were made up of computer equipment technology upgrades, and leasehold
improvements. We expect to invest another $1.0 million throughout the remainder
of 2002 mainly for computer equipment and technology upgrades.
We believe that we have sufficient financial resources available to
fund our current working capital and capital expenditure requirements for at
least the next 12 months.
THE EURO CONVERSION
We do not anticipate nor have we experienced any material problems
related to the euro conversion.
FORWARD LOOKING STATEMENTS
Certain statements made above, which are summarized below, are
forward-looking statements that involve risks and uncertainties, and actual
results may be materially different. Factors that could cause actual results to
differ include those identified below:
o FOR THE THIRD AND FOURTH QUARTERS OF 2002, WE EXPECT YEAR OVER YEAR REVENUE
GROWTH OF 30 PERCENT AND 20 PERCENT, RESPECTIVELY. AS A RESULT, THE ENTIRE
YEAR 2002 PRODUCT AND SERVICES REVENUE GROWTH IS EXPECTED TO BE 27 PERCENT.
We may be unable to meet this expectation for a variety of reasons,
including generally soft market conditions for
11
our products and services and other general economic uncertainties and
weaknesses in geographic regions of the world, delays or difficulties in
the development and inability to obtain market acceptance of our new
products, and introduction of products by competitors.
o ADVANCED TECHNOLOGY REVENUE IS PROJECTED TO REMAIN FAIRLY CONSTANT AT
APPROXIMATELY $1 MILLION, IN EACH OF THE THIRD AND FOURTH QUARTERS OF 2002.
Meeting this expectation depends upon our ability to maintain the current
government contracts revenue, which might not occur for a variety of
reasons, including an inability to staff engineers to our current contract
requirements or customer delays or cancellations of contract awards.
o WE EXPECT AGGREGATE GROSS PROFIT TO BE APPROXIMATELY 90 PERCENT FOR THE
REMAINDER OF 2002. Meeting this expectation depends upon our ability to
maintain a higher level of products and services revenue. We may be unable
to meet this expectation for a variety of reasons, including generally soft
market conditions for the Company's products and services and other general
economic uncertainties and weaknesses in geographic regions of the world,
delays or difficulties in the development and inability to obtain market
acceptance of our new products, and introduction of products by
competitors.
o SELLING AND MARKETING EXPENSES ARE EXPECTED TO GROW SEQUENTIALLY BY
APPROXIMATELY 1 PERCENT IN EACH OF THE THIRD AND FOURTH QUARTERS OF 2002.
This expectation depends on us maintaining the current anticipated level of
selling and marketing expenses, which may not occur due to unexpected
increases in such costs or because of a need to accelerate selling and
marketing expenditures, or decreased products and services revenue.
Additionally, meeting this expectation depends upon our ability to control
costs and achieve a higher level of revenue. We may be unable to meet this
expectation for a variety of reasons, including generally soft market
conditions for our products and services, development and acceptance of our
new products, and introduction of products by competitors.
o WE EXPECT QUARTERLY RESEARCH AND DEVELOPMENT EXPENSE LEVELS TO GROW
SEQUENTIALLY BY APPROXIMATELY 4 PERCENT IN THE THIRD QUARTER OF 2002 AND
REMAIN AT THAT LEVEL IN FOURTH QUARTER OF 2002. This expectation depends on
us maintaining the current anticipated level of product development, which
may not occur due to unexpected increases in such costs or because of a
need to accelerate or begin new product development. Additionally, meeting
this expectation depends upon our ability to control costs and achieve a
higher level of revenue. We may be unable to meet this expectation for a
variety of reasons, including generally soft market conditions for our
products and services, development and acceptance of our new products, and
introduction of products by competitors.
o GENERAL AND ADMINISTRATIVE EXPENSES ARE EXPECTED TO DECLINE SEQUENTIALLY BY
APPROXIMATELY 8 PERCENT IN THE THIRD QUARTER OF 2002 AND REMAIN AT THAT
LEVEL IN FOURTH QUARTER OF 2002. This expectation depends on us attaining
our anticipated level of spending which may not occur due to unexpected
increases in such costs.
o IN ADDITION TO NORMAL OPERATING EXPENSES, WE EXPECT TO INCUR $615,000 OF
EXPENSES IN THE THIRD QUARTER OF 2002 RELATED TO A 6% REDUCTION IN
HEADCOUNT, WHICH OCCURRED EARLY IN THE THIRD QUARTER OF 2002. This
expectation depends on timely and favorable receipt of employee separation
agreements which may or may not occur.
o WE BELIEVE IT IS MORE LIKELY THAN NOT THAT DEFERRED TAX ASSETS, WHICH TOTAL
$2,700,000 AT JUNE 30, 2002, WILL BE REALIZED. This expectation depends
primarily on our estimates of future taxable income. The amount of deferred
tax assets considered realizable could be reduced in the near term if
estimates of future taxable income are reduced.
o WE BELIEVE THAT WE HAVE SUFFICIENT FINANCIAL RESOURCES AVAILABLE TO FUND
OUR CURRENT WORKING CAPITAL AND CAPITAL EXPENDITURE REQUIREMENTS FOR AT
LEAST THE NEXT TWELVE MONTHS. Several factors may affect the availability
of sufficient cash resources to fund our product development and marketing
and sales plans for the next twelve months, including:
o our ability to generate revenue as currently expected;
o unexpected expenses;
o the need for additional funds to react to changes in the
marketplace;
o unexpected increases in personnel costs;
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o unexpected increases in operating expenses; or
o currently unplanned acquisitions.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have material exposure to quantitative and qualitative market risks
because we do not own any risk sensitive financial instruments.
13
SECURE COMPUTING CORPORATION
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Beginning on April 2, 1999, several purported securities class action
complaints were filed and consolidated in the United States District Court for
the Northern District of California against us and certain of our present and
former directors and officers by persons who acquired our stock between November
10, 1998 and March 31, 1999. Plaintiffs allege that defendants made false and
misleading statements about our business condition and prospects in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule
10b-5. Plaintiffs seek unspecified monetary damages. The court denied
defendants' motion to dismiss and defendants answered and denied all allegations
of wrongdoing. In July 2002, we reached a settlement of the class action.
Subject to court approval, the class action settled for $10.1 million. $2.8
million in cash will be covered by Secure's insurance. The $7.3 million balance
of the settlement will be contributed by the company in common stock or in a
combination of common stock and cash at the date of distribution. The final
allocation of the contribution will be determined by the company at its sole
option.
On February 11, 2002, a purported derivative action was filed in
California Superior Court, Santa Clara County, against certain of our current
and former officers and directors. We are named as nominal defendant. The
derivative action makes essentially the same factual allegations as the
securities class actions and alleges various causes of action, including that
the defendants breached their corporate fiduciary duties. Although we believe
there are meritorious defenses to this action and intend to defend ourselves
vigorously, an unfavorable resolution could have a material adverse effect on
our business, results of operations and financial condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
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) EXHIBITS
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K:
A form 8-K was not filed during the quarter ended June 30, 2002.
14
SECURE COMPUTING CORPORATION
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.
SECURE COMPUTING CORPORATION
DATE: August 13, 2002 By: /s/ Timothy J. Steinkopf
----------------------------------
Timothy J. Steinkopf
Vice President of Operations and
Chief Financial Officer
(Duly authorized officer and Principal
Financial Officer)
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