-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GIhc7WzkDPB7FC3q6Lgt+QEODyQFKgTq1YN7ulX3VWzwzzF7KpLNJ3ScRSr3LfC8 vqXJo13Snakvnd0bHoTSjg== /in/edgar/work/20001103/0000912057-00-047028/0000912057-00-047028.txt : 20001106 0000912057-00-047028.hdr.sgml : 20001106 ACCESSION NUMBER: 0000912057-00-047028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTRUSION COM INC CENTRAL INDEX KEY: 0000736012 STANDARD INDUSTRIAL CLASSIFICATION: [3576 ] IRS NUMBER: 751911917 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20191 FILM NUMBER: 752255 BUSINESS ADDRESS: STREET 1: 1101 ARAPAHO ROAD CITY: RICHARDSON STATE: TX ZIP: 75081 BUSINESS PHONE: 9722346400 MAIL ADDRESS: STREET 1: 1101 ARAPAHO ROAD CITY: RICHARDSON STATE: TX ZIP: 75081 FORMER COMPANY: FORMER CONFORMED NAME: ODS NETWORKS INC DATE OF NAME CHANGE: 19970507 FORMER COMPANY: FORMER CONFORMED NAME: OPTICAL DATA SYSTEMS INC DATE OF NAME CHANGE: 19950517 10-Q 1 a2029172z10-q.txt 10-Q - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q ---------------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 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 0-20191__ INTRUSION.COM, INC. (Exact name of Registrant as specified in its charter) Delaware 75-1911917 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1101 East Arapaho Road, Richardson, Texas 75081 ------------------------------------------------ (Address of principal executive offices) (Zip Code) (972) 234-6400 ---------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable -------------------------------------------- (Former name, 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 / / The number of shares outstanding of the Registrant's Common Stock, $.01 par value, on October 31, 2000 was 20,469,143. - -------------------------------------------------------------------------------- INTRUSION.COM, INC. INDEX
PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 . . . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2000 and September 30, 1999. 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and September 30, 1999 . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements . . . . . . . . 6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . 12-22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II - OTHER INFORMATION Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . 24 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 25 Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS. INTRUSION.COM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value amounts)
Sept 30, Dec 31, ASSETS 2000 1999 ----------- --------- (Unaudited) Current Assets: Cash and cash equivalents $ 23,685 $ 12,602 Securities available for sale - 67,633 Short-term investments 22,355 6,100 Accounts receivable, less of allowance of $1,069 in 2000 and $1,171 in 1999 for doubtful accounts and returns 7,679 5,404 Inventories, net 9,160 5,534 Other assets 1,915 1,392 Deferred tax asset 3,905 - Net current assets - discontinued operations 3,704 5,158 --------- --------- Total current assets 72,403 103,823 Property and equipment, net 6,506 2,592 Long-term investments 11,071 2,750 Intangible assets, net 7,969 3,508 Other assets 437 684 Net noncurrent assets - discontinued operations 5,646 7,145 --------- --------- TOTAL ASSETS $104,032 $120,502 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 9,426 $ 11,901 Deferred revenue 3,019 2,039 Income taxes payable 2,642 - Deferred tax liability - current - 23,305 --------- --------- Total current liabilities 15,087 37,245 Deferred tax liability - noncurrent 1,752 1,669 Capital lease obligation 8 11 Stockholders' Equity: Preferred stock, $.01 par value, authorized shares - 5,000, no shares issued and outstanding - - Common stock, $.01 par value, authorized shares - 80,000, Issued shares - 20,508 in 2000 and 18,623 in 1999, Outstanding shares - 20,468 in 2000 and 18,583 in 1999 205 186 Common stock held in treasury, at cost - 40 shares (362) (362) Additional paid-in capital 46,853 29,996 Net unrealized gain on securities available for sale - 44,083 Retained earnings 40,958 9,242 Note receivable from stockholder - (1,177) Foreign currency translation adjustment (469) (391) --------- --------- Total stockholders' equity 87,185 81,577 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $104,032 $120,502 ========= =========
See accompanying notes. 3 INTRUSION.COM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended -------------------------- ----------------------------- Sept 30, Sept 30, Sept 30, Sept 30, 2000 1999 2000 1999 --------- -------- --------- -------- Net Sales $ 6,456 $ 1,192 $ 18,575 $ 4,567 Cost of sales 5,046 548 14,428 2,262 --------- -------- --------- -------- Gross profit 1,410 644 4,147 2,305 Operating expenses: Sales and marketing 7,571 3,303 20,033 8,782 Research and development 3,488 2,141 9,892 5,527 General and administrative 1,421 459 4,217 1,305 Amortization of intangibles 334 153 640 394 --------- -------- --------- -------- Operating loss (11,404) (5,412) (30,635) (13,703) Interest income, net 885 327 2,513 789 Other income 8 _ 66,361 _ --------- -------- --------- -------- Income (loss) before income taxes (10,511) (5,085) 38,239 (12,914) Income tax (benefit) expense (3,445) _ 5,952 _ --------- -------- --------- -------- Income (loss) from continuing operations (7,066) (5,085) 32,287 (12,914) Income (loss) from discontinued operations, net of tax (486) 1,228 (571) 6,954 --------- -------- ---------- -------- Net income (loss) $ (7,552) $(3,857) $ 31,716 $(5,960) ========== ========== ========= ======== Basic earnings (loss) per share, continuing operations $ (0.36) $ (0.27) $ 1.67 $ (0.70) ========= ======== ========= ======== Diluted earnings (loss) per share, continuing operations $ (0.36) $ (0.27) $ 1.58 $ (0.70) ========= ======== ========= ======== Basic earnings (loss) per share $ (0.38) $ (0.21) $ 1.64 $ (0.32) ========= ========= ========= ======== Diluted earnings (loss) per share $ (0.38) $ (0.21) $ 1.56 $ (0.32) ========= ========= ========= ======== Weighted average common shares outstanding 19,778 18,577 19,339 18,557 ========= ======== ========= ======== Weighted average shares outstanding assuming dilution 19,778 18,577 20,374 18,557 ========= ======== ========= ========
See accompanying notes. 4 INTRUSION.COM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended --------------------------------- Sept 30, Sept 30, 2000 1999 ------------- -------------- Operating Activities: Net income (loss) $ 31,716 $ (5,960) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on sale of available for sale security (66,355) - Depreciation and amortization 3,433 2,662 Deferred income tax (benefit) expense (2,608) 897 Changes in operating assets and liabilities: Accounts receivable (2,275) (40) Income taxes receivable - 4,749 Inventories (2,172) 2,121 Other assets (275) (1,082) Accounts payable and accrued expenses (2,576) 977 Income taxes payable 973 - Deferred revenue 980 (1,524) ---------- --------- Net cash provided by (used in) operating activities (39,159) 2,800 ---------- --------- Investing Activities: Proceeds from sale of available for sale security 67,055 - Acquisition of MimeStar, Inc. (4,000) - Purchases of available for sale investments (50,979) (11,142) Maturities of available for sale investments 26,403 4,750 Purchases of property and equipment (5,209) (676) ---------- --------- Net cash provided by (used in) investing activities 33,270 (7,068) ---------- --------- Financing Activities: Exercise of warrants and employee stock options 15,876 227 Net repayment of capital lease (3) (7) Payments on stockholder loan 1,177 9 ---------- --------- Net cash provided by financing activities 17,050 229 ---------- --------- Effect of foreign currency translation adjustments on cash and cash equivalents (78) (25) ---------- --------- Net increase (decrease) in cash and cash equivalents 11,083 (4,064) Cash and cash equivalents at beginning of period 12,602 16,791 ---------- --------- Cash and cash equivalents at end of period $ 23,685 $ 12,727 ========== ========= See accompanying notes.
5 INTRUSION.COM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ---------------------------------------------------------------- 1. Description of Business Intrusion.com, Inc. ("Intrusion.com", the "Company" or the "Registrant"), formerly ODS Networks, Inc. ("ODS"), develops, markets and supports a suite of security software and appliances to protect and secure critical information assets and to allow customers to create networks that are protected from access, theft and damage by unauthorized network users and protected from misuse by curious or disgruntled employees, contractors and other authorized users. The Company was organized in Texas in September 1983 and reincorporated in Delaware in October 1995. On June 1, 2000, ODS Networks, Inc. changed its name to Intrusion.com, Inc. and its NASDAQ ticker symbol from ODSI to INTZ. On April 17, 2000, the Company announced plans to sell, or otherwise dispose of, its networking divisions which includes its Essential Communications division and its local area networking assets. In accordance with this plan, the Company will account for these businesses as discontinued operations. 2. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The December 31, 1999 balance sheet was derived from audited financial statements, but does not include all the disclosures required by generally accepted accounting principles. However, the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all the adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. The results of operations for the three and nine month periods ending September 30, 2000 are not necessarily indicative of the results which may be achieved for the full fiscal year or for any future period. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1999. Certain prior year information has been reclassified to conform with current year presentation. 6 3. Acquisition On June 30, 2000, the Company acquired MimeStar, Inc. ("MimeStar"), a Virginia corporation. MimeStar developed an advanced, network based intrusion detection system called SecureNet Pro-TM-. The acquisition was affected by the merger of a wholly owned subsidiary of the Company ("Merger Sub") with and into MimeStar, pursuant to an Agreement and Plan of Merger, by and among the Company, MimeStar, the Merger Sub and the sole stockholder of MimeStar (the "Merger"). Pursuant to the Merger, the stockholder of MimeStar received $3 million in cash with an additional $1 million in cash and 95,969 shares of the Company's common stock (which was valued at approximately $1 million on the date of the Merger) placed in escrow, payable to the stockholder of MimeStar within one year subject to indemnification and other conditions. Transaction costs for this acquisition totaled approximately $100 thousand. The initial acquisition costs of $3.1 million were capitalized as purchased software and other intangibles on June 30, 2000 and will be amortized over seven years beginning in June 2000. The remaining $2 million contingent purchase price was capitalized as purchased software and other intangibles on July 1, 2000 and will also be amortized over seven years beginning on July 1, 2000. 4. Securities Available for Sale The Company held 770,745 shares of the common stock of Alteon WebSystems, Inc. ("Alteon") (Nasdaq:ATON) valued at $67.6 million as of December 31, 1999. Alteon, previously a privately-held company, announced its initial public offering of 4 million shares of its common stock at $19 per share on September 24, 1999. The Company's accounting of this investment was in accordance with Financial Accounting Standard No. 115 (FAS 115), "Accounting for Certain Investments in Debt and Equity Securities". Under FAS 115, the Company's investment in Alteon, which was classified as securities available-for-sale, was presented at its fair value as of December 31, 1999, which was $87.75 per share or $67.6 million. On March 2, 2000, the Company sold its investment of 770,745 shares of Alteon common stock for $87.00 per share, net of applicable expenses, generating cash of approximately $67.1 million. The disposition of this stock generated a pre-tax gain of approximately $66.4 million which was recognized as other income. 5. Inventories (In thousands) Inventories consist of:
Sept. 30, December 31, 2000 1999 ----------- ------------- (Unaudited) Raw materials $ 814 $ 410 Work in progress 786 762 Finished goods 5,163 3,478 Demonstration systems 2,397 884 ----------- ------------ $ 9,160 $ 5,534 =========== ============
7 6. Goodwill and Intangibles (In thousands) Included in goodwill and intangibles are the following:
Sept. 30, December 31, 2000 1999 ------------ ------------ (Unaudited) CMDS purchased software $ 4,136 $ 4,136 CMDS intangible asset 135 135 MimeStar goodwill 450 - MimeStar purchased software 3,610 - MimeStar intangible asset 1,040 - ----------- ------------ Gross intangibles - continuing operations 9,371 $4,271 Accumulated amortization (1,402) (763) ----------- ------------ Net intangibles - continuing operations $ 7,969 $ 3,508 ========== ============
7. Accounts Payable and Accrued Expenses (In thousands) Included in accounts payable and accrued expenses are the following:
Sept. 30, December 31, 2000 1999 ------------- --------------- (Unaudited) Trade accounts payable $ 5,172 $ 8,229 Accrued sales commissions 293 527 Accrued incentive bonus 250 108 Accrued vacation 866 863 Accrued property taxes 117 222 Accrued warranty expense 475 475 Other (individually less than 5% of current liabilities) 2,253 1,477 ----------- -------------- $ 9,426 $ 11,901 =========== ==============
8. Income Taxes Payable At December 31, 1999, the Company had federal net operating loss carryforwards of $15.8 million for income tax purposes that begin to expire in 2018, including federal net operating loss carryfowards of approximately $4.3 million subject to ownership change limitations under the Internal Revenue Code, as a result of the acquisition of Essential, which begin to expire in 2008. The Company also had $29.3 million of state net operating loss carryfowards. In addition, the Company had a minimum tax credit carryforward of approximately $0.4 million. The gain realized from the sale of the Alteon stock during the quarter ended March 31, 2000 (see note 4) utilized $13.2 million of federal net operating loss carryforwards, which included approximately $1.8 million of the federal net operating loss carryforwards subject to certain limitations. In addition, the $0.4 million of minimum tax credit was utilized as a result of the sale. 8 Accordingly, the Company reduced the valuation allowance related to its net deferred tax assets as a result of the gain realized from the sale of the Alteon stock. For the nine months ended September 30, 2000, the decrease of the valuation allowance in the amount of $9.2 million resulted in a reduction to income tax expense for the nine months ended September 30, 2000 and a reduction to goodwill (for approximately $0.6 million which is the portion of the Company's valuation allowance attributable to net operating losses acquired from Essential). The Company continues to carry a valuation allowance with respect to the state net operating loss carryforwards as well as for the remaining $2.6 million of federal net operating loss carryovers subject to limitation under I.R.C. Section 382. 9. Note Receivable from Stockholder Note receivable from stockholder of approximately $1.2 million at December 31, 1999 represents amounts loaned to an officer during the third quarter of 1998 secured by the Company's common stock. These amounts were classified as contra-equity because in the event the officer failed to remit payment, the Company would have received shares of the Company's common stock. On February 28, 2000, the officer repaid the Company in full including principal of $1.2 million and interest of approximately $98,000. 10. Earnings per Share (In thousands, except per share amounts)(Unaudited)
Three Months Ended Nine Months Ended ------------------------- -------------------------- Sept 30, Sept 30, Sept 30, Sept 30, 2000 1999 2000 1999 --------- --------- -------- --------- Numerator: Net income (loss) $ (7,552) $(3,857) $ 31,716 $ (5,960) --------- -------- -------- --------- Numerator for basic and diluted Earnings per share $ (7,552) $(3,857) $ 31,716 $ (5,960) Income (loss) from continuing operations $ (7,066) $(5,085) $ 32,287 $(12,914) --------- -------- -------- --------- Numerator for basic and diluted Earnings per share, continuing Operations $ (7,066) $(5,085) $ 32,287 $(12,914) Denominator: Denominator for basic earnings per Share - weighted average common shares Outstanding 19,778 18,577 19,339 18,557 Effect of dilutive securities: Stock options and warrants - - 1,035 - --------- -------- --------- -------- Denominator for diluted earnings per Share - adjusted weighted average Common shares outstanding 19,778 18,577 20,374 18,557 ========= ======== ========= ======== Basic earnings (loss) per share, Continuing operations $ (0.36) $ (0.27) $ 1.67 $ (0.70) ========= ======== ========= ======== Diluted earnings (loss) per share, Continuing operations $ (0.36) $ (0.27) $ 1.58 $ (0.70) ========= ======== ========= ======== Basic earnings (loss) per share $ (0.38) $ (0.21) $ 1.64 $ (0.32) ========= ======== ========= ======== Diluted earnings (loss) per share $ (0.38) $ (0.21) $ 1.56 $ (0.32) ========= ======== ========= ========
9 11. Increase in Shares Outstanding On September 22, 2000, SAIC Venture Capital Corporation ("SAIC VCC") exercised its second and final warrant to purchase 750,000 shares of the Company's common stock for $10.50 per share generating cash of $7,875,000. On March 23, 2000, SAIC VCC exercised its first warrant to purchase 750,000 shares of the Company's common stock for $8.00 per share generating cash of $6 million. The warrants were issued to SAIC VCC's parent, Science Applications International Corporation ("SAIC"), on September 25, 1998 in conjunction with the acquisition by the Company of Kane Secure Enterprise (formerly Computer Misuse Detection System) and certain other intellectual property from SAIC. On June 30, 2000, the Company issued, subject to certain conditions, an additional 95,969 shares of the Company's common stock as a part of the acquisition of MimeStar (see Note 3). 12. Comprehensive Income (In thousands) The following table represents a statement of changes in stockholders' equity including comprehensive income disclosures:
Note Other Common Additional from Compre- Common Stock - Paid-In Stock- Retained hensive Stock Treasury Capital holder Earnings income Total ------ -------- ---------- ------- -------- ------- ----- Beginning of year - Dec. 31, 1999 $186 $(362) $29,996 $(1,177) $9,242 $43,692 $81,577 Issuance of stock under stock option & purchase plans and warrants 19 - 15,857 - - - 15,876 Acquisition of Mimestar - - 1,000 - - - 1,000 Net income - - - - 31,716(1) - 31,716 Stockholder note repayments - - - 1,177 - - 1,177 Foreign currency Translation adj - - - - - (78)(1) (78) Unrealized (loss) from securities available for sale - - - - - (44,083)(1) (44,083) ----- -------- -------- ------- ------ -------- -------- End of Period - September 30, 2000 (unaudited) $205 $(362) $46,853 $ $40,958 $ (469) $87,185 ==== ====== ======= ====== ======= ======== =======
(1) Comprehensive loss for the nine months ended September 30, 2000 was $12,445,000. 10 13. Discontinued Operations In the second quarter of 2000, the Company discontinued its networking operations and accordingly has shown the networking operations as discontinued in the accompanying financial statements. Certain prior year information has been reclassified to conform with the current presentation. While the Company does not expect a significant gain or loss from these dispositions, the Company cannot reasonably estimate the amount of the gain or loss. Such gain or loss, if any, will be realized in the quarter of final disposition. The following represents a summary of assets classified as discontinued operations (In thousands): Discontinued assets consist of:
Sept. 30, December 31, 2000 1999 ------------ ------------ (Unaudited) Inventories, net $ 3,704 $ 5,158 Property and equipment, net 1,483 1,629 Intangible assets, net 4,162 5,515 Other 1 1 ---------- ----------- $ 9,350 $ 12,303 ========== ===========
The following represents a summary of net income (loss) from discontinued operations (In thousands)(Unaudited):
Three Months Ended Nine Months Ended ----------------------- ------------------------- Sept 30, Sept 30, Sept 30, Sept 30, 2000 1999 2000 1999 --------- -------- --------- -------- Net Sales $ 3,777 $ 11,991 $ 15,075 $41,185 Cost of sales 2,668 6,879 9,650 22,207 --------- -------- --------- -------- Gross profit 1,109 5,112 5,425 18,978 Operating expenses 1,651 3,889 6,101 12,028 --------- -------- --------- -------- Operating profit (loss) (542) 1,223 (676) 6,950 Other, net 0 5 0 4 --------- -------- --------- -------- Income (loss) before income taxes (542) 1,228 (676) 6,954 Income tax (benefit) expense (56) 0 (105) 0 --------- -------- ---------- -------- Income (loss) from discontinued operations $ (486) $ 1,228 $ (571) $ 6,954 ========== ======== ========== ========
11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report 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, that involve risks and uncertainties, such as statements concerning: growth and future operating results; developments in the company's markets and strategic focus; new products and product enhancements; potential acquisitions and the integration of acquired businesses, products and technologies; strategic relationships; and future economic, business and regulatory conditions. Such forward-looking statements are generally accompanied by words such as "plan," "estimate," "expect," "believe," "should," "would," "could," "anticipate," "may" or other words that convey uncertainty of future events or outcomes. These forward-looking statements and other statements made elsewhere in this report are made in reliance on the Private Securities Litigation Reform Act of 1995. The section below entitled "Factors That May Affect Future Results of Operations" sets forth and incorporates by reference certain factors that could cause actual future results of the company to differ materially from these statements. Overview The Company develops, markets and supports a suite of network security software and appliances to protect and secure critical information assets and to allow customers to create networks that are protected from access, theft and damage by unauthorized network users and protected from misuse by curious or disgruntled employees, contractors and other authorized users. On June 1, 2000, the Company changed its name from ODS Networks, Inc. to Intrusion.com, Inc. and its NASDAQ ticker symbol from ODSI to INTZ to reflect the strategic direction of the Company as a provider of premier security management, intrusion detection, risk assessment, behavioral profiling and statistical analysis solutions to government and commercial customers worldwide. Also during the second quarter of 2000, the Company announced its plan to sell, or otherwise dispose of, its networking divisions which includes its Essential Communications division and its local area networking assets and began accounting for these networking divisions as discontinued operations. Given the Company's change in strategy, the Company's results of operations prior to 2000 do not necessarily reflect the Company's current business. 12 The following management's discussion and analysis of financial condition and results of operations pertains only to the Company's continuing operations unless otherwise disclosed. Certain prior year information has been reclassified to conform with the current presentation. Results of Operations The following table sets forth, for the periods indicated, certain financial data as a percentage of net sales. The period to period comparison of financial results is not necessarily indicative of future results.
Three Months Ended Nine Months Ended ----------------------- ------------------------- Sept 30, Sept 30, Sept 30, Sept 30, 2000 1999 2000 1999 --------- -------- --------- -------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 78.2 46.0 77.7 49.5 --------- --------- --------- -------- Gross profit 21.8 54.0 22.3 50.5 Operating expenses: Sales and marketing 117.3 277.1 107.8 192.3 Research and development 54.0 179.6 53.3 121.0 General and administrative 22.0 38.5 22.7 28.6 Amortization of intangibles 5.2 12.8 3.4 8.6 --------- --------- --------- -------- Operating loss (176.7) (454.0) (164.9) (300.0) Interest income, net 13.7 27.4 13.5 17.3 Other income 0.1 - 357.3 - --------- --------- --------- -------- Income (loss) before income taxes (162.9) (426.6) 205.9 (282.7) Income tax (benefit) expense (53.4) - 32.0 - --------- --------- --------- -------- Income (loss) from continuing operations (109.5) (426.6) 173.9 (282.7) Income (loss) from discontinued operations, net of tax (7.5) 103.0 (3.1) 152.3 ---------- --------- --------- -------- Net income (loss) (117.0) (323.6) 170.8 (130.4) ========== ========== ========= ======== Three Months Ended Nine Months Ended ----------------------- ------------------------- Sept 30, Sept 30, Sept 30, Sept 30, 2000 1999 2000 1999 --------- -------- --------- -------- Domestic sales 73.2% 88.7% 81.5% 84.2% Export sales to: Europe 8.1 8.8 6.0 8.8 Canada 0.6 0.0 3.0 0.1 Asia 14.0 2.5 7.8 6.9 Latin America 4.1 0.0 1.7 0.0 --------- --------- --------- -------- Net sales 100.0% 100.0% 100.0% 100.0% ========= ========= ========= ========
13 Net Sales. Net sales for the quarter and nine months ended September 30, 2000 increased to $6.5 million and $18.6 million, respectively, compared to $1.2 million and $4.6 million, respectively, for the same periods of 1999 as the Company continued to focus more on its security business and the security market continued to grow. Export Sales. Export sales for the quarter and nine months ended September 30, 2000 increased to $1.7 million and $3.4 million, respectively, compared to $0.1 million and $0.7 million, respectively, for the same periods of 1999 as the Company continued to focus more on its security business and the security market continued to grow. Though the Company expects increased sales from export sales going forward, such export sales may vary as a percentage of net sales in the future. Concentration of Sales. Sales to iGov.com were 17.5% and 15.5% for the quarter and nine months ended September 30, 2000, respectively, compared to 24.7% and 8.8% for the same periods of 1999. Sales to TRW Systems & Information Technology ("TRW") were 10.6% and 27.0% for the quarter and nine months ended September 30, 2000, respectively, compared to 4.0% and 12.9% for the same periods of 1999. Sales to Lockheed Martin were 12.8% and 4.5% for the quarter and nine months ended September 30, 2000, respectively, compared to 1.3% and 0.3% for the same periods of 1999. Sales to SecureGate Limited were 11.5% and 4.0% for the quarter and nine months ended September 30, 2000, respectively, compared to 0.0% for the same periods of 1999. Sales to Science Applications International Corporation ("SAIC") were 3.3% and 4.2% for the quarter and nine months ended September 30, 2000, respectively, compared to 14.3 and 3.7% for the same periods of 1999. Sales to AT&T Corp. ("AT&T") were 0.0% for the quarter and nine months ended September 30, 2000, respectively, compared to 11.8 and 6.3% for the same periods of 1999. Direct net sales to various agencies of the U.S. Government were 5.5% and 5.7% of net sales during the quarter and nine months ended September 30, 2000, respectively, compared to 11.2% and 2.9% of net sales for the same periods of 1999. In addition, a portion of the Company's sales to iGov.com, TRW, Lockheed Martin, SAIC and other corporations were resold by those organizations to various agencies of the U.S. Government. Gross Profit. Gross profit increased to $1.4 million or 21.8% of net sales for the quarter ended September 30, 2000 compared to $0.6 million or 54.0% of net sales for the quarter ended September 30, 1999. For the nine months ended September 30, 2000, gross profit increased to $4.1 million or 22.3% of net sales compared to $2.3 million or 50.5% of net sales for the same period of 1999. Gross profit margins as a percentage of net sales were negatively impacted during the three months and nine months ended September 30, 2000 due primarily to the amount of the Company's fixed costs of its manufacturing infrastructure compared to the sales volume generated in these periods and a product mix that consisted primarily of security appliance products. Gross profit margins in future periods may be affected by several factors such as continued product transition, declining market demand for prior generation products, obsolescence or surplus of inventory, shifts in product mix, changes in channels of distribution, sales volume, fluctuation in manufacturing costs, pricing strategies of the Company and its competitors and fluctuations in sales of integrated third-party products. Gross profit margins are typically lower on sales of integrated third-party products. 14 Sales and Marketing. Sales and marketing expenses increased to $7.6 million or 117.2% of net sales for the quarter ended September 30, 2000 compared to $3.3 million or 277.1% of net sales for the quarter ended September 30, 1999. Sales and marketing expenses increased to $20.0 million or 107.8% of net sales for the nine months ended September 30, 2000 compared to $8.8 million or 192.3% of net sales for the nine months ended September 30, 1999. Sales and marketing expenses increased in the three and nine month periods ended September 30, 2000 compared to the same periods of 1999 as the Company expanded its security sales and marketing force. It is expected that sales and marketing expenses will continue to increase each quarter throughout 2000 and 2001, but may vary as a percentage of net sales in the future. Research and Development. Research and development expenses increased to $3.5 million or 54.0% of net sales for the quarter ended September 30, 2000 compared to $2.1 million or 179.6% of net sales for the quarter ended September 30, 1999. Research and development expenses increased to $9.9 million or 53.3% of net sales for the nine months ended September 30, 2000 compared to $5.5 million or 121.0% of net sales for the nine months ended September 30, 1999. The Company's research and development costs are expensed in the period incurred. Research and development expenses increased in the three and nine months ended September 30, 2000 compared to the same periods of 1999 as the Company continues to increase its research and development efforts on its security products. It is expected that research and development expenses will continue to increase each quarter throughout 2000 and 2001, but may vary as a percentage of net sales in the future. General and Administrative. General and administrative expenses increased to $1.4 million or 22.0% of net sales for the quarter ended September 30, 2000 compared to $0.5 million or 38.7% of net sales for the quarter ended September 30, 1999. General and administrative expenses increased to $4.2 million or 22.7% of net sales for the nine months ended September 30, 2000 compared to $1.3 million or 28.6% of net sales for the nine months ended September 30, 1999. General and administrative expenses decreased in the third quarter of 2000 when compared to the second quarter of 2000 or $1.4 million in the three months ended September 30, 2000 compared to $1.6 million in the three months ended June 30, 2000, as certain non-recurring expenses were incurred in the second quarter of 2000 related to the renaming of the Company from ODS Networks, Inc. to Intrusion.com, Inc. and other related activities. General and administrative expense may vary as a percentage of net sales in the future. Amortization. Amortization expenses increased to $0.3 million or 5.2% of net sales for the quarter ended September 30, 2000 compared to $0.2 million or 12.8% of net sales for the quarter ended September 30, 1999. Amortization expenses increased to $0.6 million or 3.4% of net sales for the nine months ended September 30, 2000 compared to $0.4 million or 8.6% of net sales for the nine months ended September 30, 1999. Amortization expenses increased in the three and nine month periods ended September 30, 2000 compared to the same periods in 1999 primarily as a result of amortization of the acquisition costs incurred with the Company's purchase of MimeStar. This amortization expense in total is associated with the amortization of intangible assets related to the acquisition of certain assets and intellectual property from SAIC in the quarter ending September 30, 1998 and the June 30, 2000 acquisition of MimeStar. The Company acquired MimeStar for $4 million in cash and 95,969 shares of the Company's common stock (see note 3). Transaction costs approximated $0.1 million. 15 $1 million of cash and all the stock was placed in escrow, payable to the stockholder of MimeStar within one year subject to indemnification and certain conditions. The initial acquisition cost of $3.1 million dollars was capitalized as purchased software and other intangibles on June 30, 2000 and will be amortized over seven years beginning in June 2000. The remaining $2 million contingent purchase price was capitalized as purchased software and other intangibles on July 1, 2000 and will also be amortized over seven years beginning on July 1, 2000. The combined $5.1 million purchase price increased amortization expense by approximately $0.2 million a quarter beginning with the third quarter of 2000. Interest. Net interest income increased to $0.9 million and $2.5 million, respectively, for the quarter and nine months ended September 30, 2000 compared to $0.3 million and $0.8 million, respectively, for the same periods in 1999. Net interest income increased primarily due to the additional cash balance resulting from the sale of the Company's Alteon investment (see note 4) in March 2000. The Company expects net interest income to decline in the quarter ended December 31, 2000 compared to the quarter ended September 30, 2000 due to reduced cash balances resulting from operating losses. Net interest income may vary in the future based on the Company's cash flow and rate of return on investments. Income Taxes. The Company's effective tax rate for the quarter ended September 30, 2000 was 32.8%, compared to zero for the quarter ended September 30, 1999. The Company's effective rate for the nine months ended September 30, 2000 was 15.6% compared to zero for the nine months ended September 30, 1999. The effective tax rate for the nine months ended September 30, 2000 varied from the U.S. statutory rate primarily due to the reduction in the valuation allowance in the amount of $9.2 million. Without such changes to the valuation allowance, the Company's effective tax rate for the quarter and nine months ended September 30, 2000 would have been 38%. On June 14, 2000, the Company made a federal tax deposit payment for the year ending December 31, 2000 in the amount of $6.2 million. Earnings per Share. The Company's earnings per share is calculated in accordance with Financial Accounting Standards No. 128, "Earnings Per Share". This method requires calculation of both basic earnings per share and earnings per share, assuming dilution both for net income (loss) and income (loss) from continuing operations. Basic earnings per share excludes the dilutive effect of common stock equivalents such as stock options and warrants, while earnings per share, assuming dilution includes such dilutive effects. Future weighted-average shares outstanding calculations will be impacted by the following factors: (i) the ongoing issuance of common stock associated with stock option exercises; (ii) the issuance of common stock associated with the Company's employee stock purchase program; (iii) any fluctuations in the Company's stock price, which could cause changes in the number of common stock equivalents included in the earnings per share assuming dilution computation; and (iv) the issuance of common stock to effect business combinations should the Company enter into such transactions. 16 Liquidity and Capital Resources The Company's principal sources of liquidity at September 30, 2000 were $23.7 million of cash and cash equivalents, $22.4 million of short-term investments and $11.1 million of investments with a stated maturity beyond one year. As of September 30, 2000, excluding discontinued operations, working capital was $53.6 million compared to $61.4 million as of December 31, 1999. Cash flows used in operations for the nine months ended September 30, 2000 were $39.2 million, primarily due to an operating loss of $30.6 million, an increase in inventory and accounts receivable and a decrease in accounts payable and accrued expenses. Inventories increased primarily due to the Company's growth in the security business. Accounts receivable increased as the sales of the Company's security revenue increased. Future fluctuations in accounts receivable and inventory balances will be dependent upon several factors, including, but not limited to, quarterly sales, ability to collect accounts receivable timely, the Company's strategy in building inventory in advance of receiving orders from customers, and the accuracy of the Company's forecasts of product demand and component requirements. Cash provided by investing activities in the nine months ended September 30, 2000 was $33.3 million, which consisted of net proceeds from the sale of the Alteon investment (see note 4) of $67.1 million offset by net purchases of available for sale securities of $24.6 million, $4.0 million used in the acquisition of MimeStar and equipment purchases of $5.2 million. Cash provided by financing activities in the nine months ended September 30, 2000 was $17.1 million, which consisted of $15.9 million for the issuance of common stock upon the exercise of employee stock options and warrants (see note 11) and $1.2 million for the repayment of a loan made to a stockholder (see note 9). On March 2, 2000, the Company sold its investment of 770,745 shares of Alteon common stock for $87.00 per share, net of expenses, generating cash of approximately $67.1 million. The disposition of this stock generated a pre-tax gain of approximately $66.4 million (see note 4). On October 14, 1999, the Company announced a Stock Repurchase Program under which up to 1.0 million shares of the Company's outstanding common stock may be acquired in the open market over a 12 month period at the discretion of management. During the program's duration, the Company repurchased 40,000 shares at an average price of $9.05 per share. The program expired on October 14, 2000. On June 30, 2000, the Company acquired MimeStar. Pursuant to the acquisition, the stockholder of MimeStar received $3 million in cash with an additional $1 million in cash and 95,969 shares of the Company's common stock placed in escrow, payable to the stockholder of MimeStar within one year subject to indemnification and certain other conditions (see note 3). On September 22, 2000, SAIC Venture Capital Corporation ("SAIC VCC") exercised its second and final warrant to purchase 750,000 shares of the Company's common stock for $10.50 per share generating cash of $7,875,000. On March 23, 2000, SAIC VCC exercised its first warrant to purchase 750,000 shares of the Company's common stock for $8.00 per share generating cash of $6 million. The warrants 17 were issued to SAIC VCC's parent, Science Applications International Corporation ("SAIC"), on September 25, 1998 in conjunction with the acquisition by the Company of Kane Secure Enterprise (formerly Computer Misuse Detection System) and certain other intellectual property from SAIC. At September 30, 2000, the Company did not have any material commitments for capital expenditures. During the nine months ended September 30, 2000, the Company funded its operations through the use of cash and cash equivalents. The Company believes that its cash, cash equivalents, investment balances and potential cash flow from operations will provide sufficient cash resources to finance its operations and currently projected capital expenditures through 2000 and 2001. However, there can be no assurance that the Company's cash resources will be sufficient for the year 2001 and beyond. The Company intends to explore possible acquisitions of businesses, products and technologies that are complementary to those of the Company. The Company is continuing to identify and prioritize additional network security technologies which it may wish to develop, either internally or through the licensing or acquisition of products from third parties. While the Company engages from time to time in discussions with respect to potential acquisitions, there can be no assurances that any acquisitions will be made or that the Company will be able to successfully integrate any acquired business. Any material acquisition could result in a decrease to working capital depending on the amount, timing and nature of the consideration to be paid. In order to finance acquisitions, it may be necessary for the Company to raise additional funds through public or private financings. There can be no assurance that such financings will be available at acceptable terms, if at all. Equity financings, if any, may result in dilution to the Company's stockholders. Factors That May Affect Future Results of Operations Numerous factors may affect the Company's business and future results of operations. These factors include, but are not limited to, technological changes, competition and market acceptance, acquisitions, product transitions, linearity of orders, manufacturing and suppliers, reliance on outsourcing vendors and other partners, intellectual property and licenses, third-party products, dependence on key customers, international operations and intellectual property issues. The discussion below addresses some of these and other factors. For a more thorough discussion of these and other factors that may affect the Company's business and future results, see the discussion under the caption "Factors That May Affect Future Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Technological Changes. The market for the Company's products is characterized by frequent product introductions, rapidly changing technology and continued evolution of new industry standards. The market for security products requires the Company's products to be compatible and interoperable with products and architectures offered by various vendors, including networking products, workstation and personal computer architectures and computer and network operating systems. The Company's success will depend to a substantial degree 18 upon its ability to develop and introduce in a timely manner new products and enhancements to its existing products that meet changing customer requirements and evolving industry standards. The development of technologically advanced products is a complex and uncertain process requiring high levels of innovation as well as the accurate anticipation of technological and market trends. There can be no assurance that the Company will be able to identify, develop, manufacture, market and support new or enhanced products successfully in a timely manner. Further, the Company or its competitors may introduce new products or product enhancements that shorten the life cycle of or make obsolete the Company's existing product lines, any of which could have a material adverse effect on the Company's business, operating results and financial condition. Market Acceptance. The Company is pursuing a strategy to increase the percentage of its revenue generated through indirect sales channels including distributors, value added resellers, system integrators, managed service providers, original equipment manufacturers and security service providers. There can be no assurance that the Company's products will gain market acceptance in these indirect sales channels. Further, competition among security companies to sell products through these indirect sales channels could result in significant price competition and reduced profit margins. The Company is also pursuing a strategy to broaden and further differentiate its product line by introducing complementary security products and incorporating new technologies into its existing product line. There can be no assurance that the Company will successfully introduce these products or that such products will gain market acceptance. The Company anticipates competition from networking companies, network security companies and others in each of its product lines. The Company anticipates that profit margins will vary among its product lines and that product mix fluctuations could have an adverse effect on the Company's overall profit margins. Plans for Dispositions. On April 17, 2000, the Company announced plans to sell, or otherwise dispose of, the assets of its networking division which includes its Essential division and its local area networking assets. The net assets held for sale of this division were $9.4 million as of September 30, 2000. There can be no assurance that the Company will be able to realize its net book value of these assets upon sale or disposition. Additionally, there are inherent problems associated with selling a substantial division which may adversely affect the continuing operations of the remaining company. Acquisitions. Cisco Systems, Inc., Symantec Corp., Internet Security Systems, Inc. and other competitors have recently acquired several security companies with complementary technologies, and the Company anticipates that such acquisitions will continue in the future. These acquisitions may permit such competitors to accelerate the development and commercialization of broader product lines and more comprehensive solutions than the Company currently offers. In the past, the Company has relied upon a combination of internal product development and partnerships with other vendors to provide competitive solutions to customers. Certain of the recent and future acquisitions by the Company's competitors may have the effect of limiting the Company's access to commercially significant technologies. Further, the business combinations and acquisitions in the security industry are creating companies with larger market shares, customer bases, sales forces, product offerings and technology and marketing expertise. There can be no assurance that the Company will be able to compete successfully in such an environment. 19 On June 30, 2000, the Company acquired MimeStar, Inc., developer of SecureNet Pro-TM- a networked-based intrusion detection system. On September 30, 1999, the Company entered a technology licensing agreement with RSA Security, Inc. ("RSA") under which the Company is the exclusive licensee of RSA's Kane Security products in North America and Europe. In September 1998, the Company completed an acquisition of certain assets of the Computer Misuse and Detection System ("CMDS") Division from Science Applications International Corporation ("SAIC"), a privately held company in San Diego, California. The Company may, in the future, acquire or invest in additional companies, business units, product lines, or technologies to accelerate the development of products and sales channels complementary to the Company's existing products and sales channels. Acquisitions involve numerous risks, including: difficulties in assimilation of operations, technologies, and products of the acquired companies; risks of entering markets in which the Company has no or limited direct prior experience and where competitors in such markets have stronger market positions; the potential loss of key employees of the acquired company; and the diversion of management's attention from normal daily operation of the Company's business. There can be no assurance that any potential acquisition or investment will be consummated or that such acquisition or investment will be realized. Product Transitions. Once current security products have been in the market place for a period of time and begin to be replaced by higher performance products (whether of the Company's or a competitor's design), the Company expects the net sales of the older products to decrease. In order to achieve revenue growth in the future, the Company will be required to design, develop and successfully commercialize higher performance products in a timely manner. There can be no assurance that the Company will be able to introduce new products and gain market acceptance quickly enough to avoid adverse revenue transition patterns during current or future product transitions. Nor can there be any assurance that the Company will be able to respond effectively to technological changes or new product announcements by competitors, which could render portions of the Company's inventory obsolete. Manufacturing and Suppliers. All of the materials used in the Company's products are purchased under contracts or purchase orders with third parties. While the Company believes that many of the materials used in the production of its products are generally readily available from a variety of sources, certain components such as microprocessors are available from one or a limited number of suppliers. The lead times for delivery of components vary significantly and exceed twelve weeks for certain components. If the Company should fail to forecast its requirements accurately for components, it may experience excess inventory or shortages of certain components which could have an adverse effect on the Company's business and operating results. Further, any interruption in the supply of any of these components, or the inability of the Company to procure these components from alternative sources at acceptable prices within a reasonable time, could have an adverse effect on the Company's business and operating results. On July, 11, 2000, the Company announced a manufacturing alliance with Assured Industries, Inc. ("Assured") where Assured provides prototyping, pilot run and manufacturing services to the Company. The Company previously handled these functions in-house. While contract manufacturing and outsourcing of related activities is a strategy of the Company to reduce manufacturing costs, there can be no assurance that this strategy will be successful. 20 The Company's operational strategy relies on outsourcing of product assembly and certain other operations. There can be no assurance that the Company will effectively manage its third-party contractors or that these contractors will meet the Company's future requirements for timely delivery of products of sufficient quality and quantity. Further, the Company intends to introduce a number of new products and product enhancements in the quarter ending December 31, 2000 and 2001 which will require that the Company rapidly achieve volume production of those new products by coordinating its efforts with those of its suppliers and contractors. The inability of the third-party contractors to provide the Company with adequate supplies of high-quality products could cause a delay in the Company's ability to fulfill orders and could have an adverse effect on the Company's business, operating results and financial condition. Intellectual Property and Licenses. There are many patents held by companies which relate to the design and manufacture of data security systems. Potential claims of infringement could be asserted by the holders of those patents. The Company could incur substantial costs in defending itself and its customers against any such claim regardless of the merits of such claims. In the event of a successful claim of infringement, the Company may be required to obtain one or more licenses from third parties. There can be no assurance that the Company could obtain the necessary licenses on reasonable terms, if at all. Third-Party Products. The Company believes that it is beneficial to work with third parties with complementary technologies to broaden the appeal of the Company's network security products. These alliances allow the Company to provide integrated solutions to its customers, combining Intrusion.com developed technology with third-party products. As the Company also competes with these technology partners in certain segments of the market, there can be no assurance that the Company will have access to all of the third-party products which may be desirable or necessary in order to offer fully integrated solutions to Intrusion.com customers. Dependence on Key Customers. A relatively small number of customers have accounted for a significant portion of the Company's revenue. U.S. government agencies and large system integrators are expected to continue to account for a substantial portion of the Company's net revenue. The Company continuously faces competition from Internet Security Systems, Inc., Cisco Systems, Inc., Nokia Corporation, Network Associates, Inc., Bindview Development Corporation, Symantec Corp., Axent Technologies, Inc. and others for U.S. government networking and security projects and corporate networking and security installations. Any reduction or delay in sales of the Company's products to these customers could have a material adverse effect on the Company's operating results. International Operations. The Company's international operations may be affected by changes in demand resulting from fluctuations in currency exchange rates and local purchasing practices, including seasonal fluctuations in demand, as well as by risks such as increases in duty rates, difficulties in distribution, regulatory approvals and other constraints upon international trade. The Company's sales to foreign customers are subject to export regulations. In particular, certain sales of the Company's security products require clearance and export licenses from the U.S. Department of Commerce under these regulations. Any inability to obtain such clearances or any required foreign regulatory approvals on a timely basis could have a material adverse effect on the Company's operating results. 21 Impact of Government Customers. A significant portion of the Company's revenue is derived from sales to the U.S. government, either directly by the Company or through system integrators and other resellers. Sales to the government present risks in addition to those involved in sales to commercial customers, including potential disruptions due to appropriation and spending patterns and the government's reservation of the right to cancel contracts and purchase orders for its convenience. General. Sales of the Company's products fluctuate, from time to time, based on numerous factors, including customers' capital spending levels and general economic conditions. While certain industry analysts believe that there is a significant market for security products, there can be no assurance as to the rate or extent of the growth of such market or the potential adoption of alternative technologies. Future declines in security product sales as a result of general economic conditions, adoption of alternative technologies or any other reason could have a material adverse effect on the Company's business, operating results and financial condition. Due to the factors noted above and in "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Company's future earnings and common stock price may be subject to significant volatility, particularly on a quarterly basis. Past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. Any shortfall in revenue and earnings from the levels anticipated by securities analysts could have an immediate and significant effect on the trading price of the Company's common stock in any given period. Also, the Company participates in a highly dynamic industry which often results in volatility of the Company's common stock price. 22 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Exchange. The Company's revenue originating outside the U.S. in the quarters ended September 30, 2000, 1999 and 1998 were 26.8%, 11.3% and 19.3% of total revenues, respectively. Revenue originating outside the U.S. in the nine months ended September 30, 2000, 1999 and 1998 were 18.5%, 15.8% and 28.9% of total revenues, respectively. International sales are made mostly from the Company's foreign sales subsidiaries in the local countries and are typically denominated in U.S. dollars. These subsidiaries incur most of their expenses in the local currency. The Company's international business is subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Accordingly, the Company's future results could be materially adversely affected by changes in these or other factors. The effect of foreign exchange rate fluctuations on the Company in 2000, 1999 and 1998 was not material. Interest Rates. The Company invests its cash in a variety of financial instruments, including bank time deposits, fixed rate obligations of corporations, municipalities, and state and national governmental entities and agencies. These investments are denominated in U.S. dollars. Cash balances in foreign currencies overseas are operating balances and are invested in short-term time deposits of the local operating bank. Investments in fixed rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely affected due to a rise in interest rates. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses of principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. The Company's investment securities are held for purposes other than trading. Several investment securities have a maturity in excess of one year. The weighted-average interest rate on investment securities at September 30, 2000 was 5.9%. The fair value of investments held at September 30, 2000 approximate amortized cost. 23 PART II - OTHER INFORMATION Item 2. CHANGES IN SECURITIES. On September 22, 2000, the Company issued 750,000 shares of its common stock in connection with the exercise of a warrant, by SAIC Venture Capital Corporation ("SAIC VCC"), at an exercise price of $10.50 per share. On March 23, 2000, the Company issued 750,000 shares of its common stock in connection with the exercise of a warrant, by SAIC VCC, at an exercise price of $8.00 per share. The warrants were originally issued to SAIC VCC's parent corporation, Science Applications International Corporation, on September 25, 1998. The shares of common stock issued to SAIC VCC were issued pursuant to a Section 4(2) exemption from the registration requirements of Section 5 of the Securities Act. On June 30, 2000, the Company acquired MimeStar, Inc. for $4 million in cash and 95,969 shares of the Company's common stock. This stock was placed in escrow, payable to the stockholder of MimeStar within one year subject to indemnification and certain performance conditions. During the quarter ended September 30, 2000, the Company issued approximately 36,336 shares of common stock to employees pursuant to exercises of stock options (with exercise prices ranging from $2.50 per share to $8.38 per share) under the Company's stock option plans. During the nine months ended September 30, 2000, the Company issued approximately 257,446 shares of common stock to employees pursuant to exercises of stock options (with exercise prices ranging from $1.88 per share to $23.25 per share) under the Company's stock option plans. In addition, the Company issued approximately 20,213 shares of common stock during the quarter ended September 30, 2000 at a price of $8.45 per share to employees pursuant to purchases under the Company's employee stock purchase plan. During the nine months ended September 30, 2000, the Company issued approximately 31,705 shares of common stock to employees pursuant to purchases under the Company's employee stock purchase plan (with purchase prices ranging from $4.89 per share to $8.45 per share). These issuances were deemed exempt from registration under Section 5 of the Securities Act in reliance on Rule 701 thereunder. With respect to the common stock issued pursuant to the warrants, the recipient of securities represented their intention to acquire the securities issued to them for investment only and not with a view to, or for, sale in connection with any distribution thereof. In such cases, appropriate restrictive transfer legends were affixed to the share certificates issued. 24 Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (A.) EXHIBITS. The following exhibits are included herein: (27) Financial Data Schedule (B.) FORM 8-K. (i) On July 12, 2000, the Company filed a Current Report on Form 8-K (Item 5) dated June 30, 2000 in order to report the June 30, 2000 acquisition of MimeStar, Inc. ("MimeStar"), developer of SecureNet Pro-TM-, a network based intrusion detection system. Under the terms of the agreement, the sole stockholder of MimeStar received $3 million in cash with an additional $1 million in cash and 95,969 shares of the Company's common stock placed in escrow, payable to the stockholder of MimeStar within one year subject to indemnification and certain other conditions. (ii) On September 29, 2000, the Company filed a Current Report on Form 8-K (Item 5) dated September 22, 2000 in order to report the exercise of 750,000 warrants of the Company's common stock by SAIC Venture Capital Corporation ("SAIC VCC") for $10.50 per share generating cash of approximately $7.9 million. The warrant was issued to SAIC VCC's parent, Science Applications International Corporation ("SAIC"), on September 25, 1998 in conjunction with the acquisition by the Company of Kane Secure Enterprise (formerly Computer Misuse Detection System) and certain other intellectual property from SAIC. 25 S I G N A T U R E S 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. INTRUSION.COM, INC. Date: November 3, 2000 /s/ JAY R. WIDDIG ---------------------------- Jay R. Widdig Vice President, Chief Financial Officer, Treasurer & Secretary (Principal Financial & Accounting Officer) 26 EX-27 2 a2029172zex-27.txt EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON PAGES 3 AND 4 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 23,685 22,355 8,748 1,069 9,160 72,403 14,854 8,348 104,032 15,087 0 0 0 205 86,980 104,032 18,575 18,575 14,428 14,428 34,782 0 1 38,239 5,952 32,287 (571) 0 0 31,716 1.64 1.56
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