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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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.
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(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
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(Address of principal executive offices)
(Zip Code)
(972) 234-6400
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(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 April 30, 2001 was 20,532,894.
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1
INTRUSION.COM, INC.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2001 and March 31, 2000. . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and March 31, 2000 . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 10-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . 19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 20
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
INTRUSION.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
Mar 31, Dec 31,
ASSETS 2001 2000
----------- --------
Current Assets: (Unaudited)
Cash and cash equivalents $ 22,270 $ 20,345
Short-term investments 18,021 17,506
Accounts receivable, less of allowance of $1,144 in 2001
and $919 in 2000 for doubtful accounts and returns 7,746 6,887
Income taxes receivable 2,560 1,743
Inventories, net 5,387 8,359
Other assets 2,116 1,714
Deferred tax asset - 3,764
Net current assets - discontinued operations 2,310 3,958
-------- --------
Total current assets 60,410 64,276
Property and equipment, net 6,449 7,134
Long-term investments 6,257 7,575
Intangible assets, net 7,299 7,634
Other assets 276 361
Net noncurrent assets - discontinued operations 2,165 5,434
-------- --------
TOTAL ASSETS $ 82,856 $ 92,414
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 14,160 $ 9,884
Deferred revenue 2,341 1,878
-------- --------
Total current liabilities 16,501 11,762
Deferred tax liability - noncurrent - 1,841
Capital lease obligation 24 24
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 - 20,572 in 2001 and 20,525 in 2000
Outstanding shares - 20,532 in 2001 and 20,485 in 2000 206 205
Common stock held in treasury, at cost - 40 shares (362) (362)
Additional paid-in capital 47,129 46,916
Retained earnings 19,848 32,453
Foreign currency translation adjustment (490) (425)
--------- --------
Total stockholders' equity 66,331 78,787
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 82,856 $ 92,414
======== ========
See accompanying notes.
3
INTRUSION.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
-------------------------
Mar 31, Mar 31,
2001 2000
-------- -------
Net Sales $ 5,318 $ 6,996
Cost of sales 4,499 5,032
-------- -------
Gross profit 819 1,964
Operating expenses:
Sales and marketing 8,008 5,411
Research and development 4,282 2,959
General and administrative 1,807 1,213
Amortization of intangibles 335 153
-------- -------
Operating loss (13,613) (7,772)
Interest income, net 711 408
Other income 33 66,353
-------- -------
Income (loss) before income taxes (12,869) 58,989
Income tax (benefit) expense (1,036) 12,603
-------- -------
Income (loss) from continuing operations (11,833) 46,386
Loss from discontinued
operations, net of tax (772) (245)
-------- -------
Net income (loss) $(12,605) $46,141
======== =======
Basic earnings (loss) per
share, continuing operations $ (0.58) $ 2.48
======== =======
Diluted earnings (loss) per
share, continuing operations $ (0.58) $ 2.28
======== =======
Basic earnings (loss) per share
$ (0.61) $ 2.46
======== =======
Diluted earnings (loss) per share
$ (0.61) $ 2.27
======== =======
Weighted average common shares outstanding 20,516 18,736
======== =======
Weighted average shares outstanding
assuming dilution 20,516 20,331
======== =======
See accompanying notes.
4
INTRUSION.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
---------------------------
Mar 31, Mar 31,
2001 2000
--------- --------
Operating Activities:
Income (loss) from continuing operations $ (11,833) $ 46,386
Adjustments to reconcile income (loss) from
continuing operations to net cash used in operating
activities of continuing operations:
Gain on sale of available for sale security - (66,355)
Depreciation and amortization 1,216 1,602
Deferred income tax (benefit) expense 1,923 (3,115)
Changes in operating assets and liabilities:
Accounts receivable (223) (4,966)
Income taxes receivable (817) -
Inventories 559 (4,439)
Other assets (317) (142)
Accounts payable and accrued expenses 1,037 (549)
Income taxes payable - 14,605
Deferred revenue 463 888
--------- --------
Net cash used in operating activities of continuing
operations (7,992) (16,085)
--------- --------
Investing Activities:
Proceeds from sale of available for sale security - 67,055
Purchases of available for sale investments (6,627) (28,718)
Maturities of available for sale investments 7,430 1,500
Purchases of property and equipment (196) (673)
--------- --------
Net cash provided by investing activities of
continuing operations 607 39,164
--------- --------
Financing Activities:
Exercise of warrants and employee stock options 214 6,937
Payments on stockholder loan - 1,177
--------- --------
Net cash provided by financing activities of
continuing operations 214 8,114
--------- --------
Effect of foreign currency translation adjustments
on cash and cash equivalents (71) -
Net cash provided by (used in) discontinued
Operations 9,167 (245)
--------- --------
Net increase in cash and cash equivalents 1,925 30,948
Cash and cash equivalents at beginning of period 20,345 12,602
--------- --------
Cash and cash equivalents at end of period $ 22,270 $ 43,550
========= ========
See accompanying notes.
5
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Description of Business
We develop, market and support a family of security software and
appliances that address vital security issues facing organizations deploying
business applications over the Internet or internally via Intranets. We
currently provide electronic security solutions, or e-security, including
intrusion detection systems, security assessment systems, virtual private
network appliances and firewall appliances.
We market and distribute our products through a direct sales force
to end-users, distributors and by numerous domestic and international system
integrators, service providers and value-added resellers. Our end-user
customers include high-technology, manufacturing, telecommunications, retail,
transportation, health care, insurance, entertainment, utilities and energy
companies, government agencies, financial institutions, and academic
institutions.
Our company was organized in Texas in September 1983 and
reincorporated in Delaware in October 1995. For more than 15 years, we
provided local area networking equipment and were known as Optical Data
Systems or ODS Networks. On April 17, 2000, we announced plans to sell, or
otherwise dispose of, our networking divisions which include our Essential
Communications division ("Essential") and our local area networking assets.
In accordance with these plans, we have accounted for these businesses as
discontinued operations. On June 1, 2000, we changed our name from ODS
Networks, Inc. to Intrusion.com, Inc. and our NASDAQ ticker symbol from ODSI
to INTZ to reflect our focus on e-security solutions.
Our principal executive offices are located at 1101 E. Arapaho Road,
Richardson, Texas 75081, and our telephone number is (972) 234-6400.
References to "we", "us", "our" or "Intrusion.com" refer to Intrusion.com,
Inc. and its subsidiaries.
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, 2000 balance sheet was derived from audited financial
statements, but does not include all the disclosures required by generally
accepted accounting principles. However, we believe that the disclosures are
adequate to make the information presented not misleading. In our opinion,
all the adjustments (consisting of normal recurring adjustments) considered
necessary for fair presentation have been included. The results of operations
for the three-month period ending March 31, 2001 are not necessarily
indicative of the results that 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, 2000. Certain prior year information has
been reclassified to conform with current year presentation.
6
3. Disposition of Discontinued Operations
In January 2001, we announced an agreement to sell our discontinued
IS (Infinite Switch) 6000 product line to Shanghai Video and Audio
Electronics Co., Ltd. ("SVA") for $6 million. Under the agreement, all
existing IS 6000 inventory, design specifications, manufacturing
documentation and equipment were acquired by SVA. Additionally, we will
provide technical support to SVA for 12 months. We received $5.4 million of
the purchase price in January 2001 and the remaining $0.6 million in April
2001.
4. Establishment of Joint Venture
In January 2001, we announced an agreement to establish a joint
venture with SVA. The new venture, SVA-Intrusion.com Co. Ltd., will
manufacture, market, distribute and sell our security products in China (PRC
Mainland) under an exclusive multi-year licensing agreement. Under terms of
the agreement, we transferred certain technology and SecureCom inventory in
exchange for $4.8 million and a 30% interest in cumulative profits generated,
if any, by the joint venture. We received the $4.3 million fee, net of
withholding taxes, in March 2001.
Due to the interrelationship of the agreements governing the sale of
IS 6000 product line and the creation of the joint venture, we accounted for
both agreements within our discontinued operations.
5. Inventories (In thousands)
Inventories consist of: March 31, December 31,
2001 2000
----------- -----------
(Unaudited)
Raw materials $ 1,224 $ 1,550
Work in progress 197 1,350
Finished goods 2,695 4,231
Demonstration systems 1,271 1,228
-------- --------
Net inventory - continuing operations $ 5,387 $ 8,359
======== ========
Net inventory - discontinued operations $ 2,310 $ 3,958
======== ========
6. Income Taxes
Our effective tax rate for the quarter ended March 31, 2001 was
8.0%. The effective tax rate for the three months ended March 31, 2001 varied
from the U.S. statutory rate primarily due to the increase in the valuation
allowance for deferred tax assets which recognizes that tax benefits
associated with a significant portion of our operating losses may not be
realized. Without such changes to the valuation allowance, the Company's
effective tax rate for the quarter ended March 31, 2001 would have been 38%.
7
7. Earnings per Share (In thousands, except per share amounts)(Unaudited)
Three Months Ended
----------------------------
March 31, March 31,
2001 2000
-------- --------
Numerator:
Net income (loss) and numerator for basic and diluted earnings per share $(12,605) $ 46,141
======== ========
Income (loss) from continuing operations and numerator for basic and
diluted earnings per share, continuing operations $(11,833) $ 46,386
======== ========
Denominator:
Denominator for basic earnings per share - weighted
average common shares outstanding 20,516 18,736
Effect of dilutive securities:
Stock options and warrants - 1,595
-------- --------
Denominator for diluted earnings per share -
adjusted weighted average common shares
outstanding $ 20,516 $ 20,331
======== ========
Basic earnings (loss) per share, continuing
Operations $ (0.58) $ 2.48
======== ========
Diluted earnings (loss) per share, continuing
Operations $ (0.58) $ 2.28
======== ========
Basic earnings (loss) per share $ (0.61) $ 2.46
======== ========
Diluted earnings (loss) per share $ (0.61) $ 2.27
======== ========
Total stock options outstanding at March 31, 2001 and March 31, 2000
that are not included in the diluted earnings per share computation due to
the antidilutive effect are 2.2 million and 235 thousand, respectively. Such
options are excluded due to either a net loss per share or due to exercise
prices exceeding the average market value of our common stock in the
applicable period.
8. Comprehensive Income
Comprehensive income (loss) for the three months ended March 31,
2001 and 2000 was $(12,670) thousand and $2,058 thousand, respectively. The
difference between net loss of $(12,605) thousand for the three months ended
March 31, 2001 relates to foreign currency translation adjustments of $65
thousand. The difference between net income of $46,141 thousand for the three
months ended March 31, 2000 relates to the realization of the unrealized gain
on available for sale securities of $44,083 thousand.
8
9. Discontinued Operations
In the second quarter of 2000, we discontinued our networking
operations and accordingly have 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 we do not expect a significant gain or loss from these dispositions, we
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.
During the first quarter of 2001, we closed the sale of our legacy
local area networking business by selling our Infinite Switch 6000 product
line to SVA, generating a gain of $2.4 million. The gain of $2.4 million was
offset by a corresponding reduction in the estimated realizable value of
remaining intangible assets of our discontinued operations. We still have one
local area networking division remaining, Essential, that is currently being
accounted for as discontinued operations.
The following represents a summary of assets classified as
discontinued operations (In thousands):
Discontinued assets consist of: March 31, December 31,
2001 2000
----------- -----------
(Unaudited)
Inventories, net $ 2,310 $ 3,958
Property and equipment, net 814 1,499
Intangible assets, net 1,351 3,935
-------- --------
$ 4,475 $ 9,392
======== ========
The following represents a summary of net loss from discontinued
operations (In thousands)(Unaudited):
Three Months Ended
-------------------------
Mar. 31, Mar. 31,
2001 2000
--------- -------
Net Sales $ 1,397 $ 5,961
Cost of sales 837 3,751
--------- -------
Gross profit 560 2,210
Operating expenses 1,388 2,544
--------- -------
Operating loss (828) (334)
Other, net (1) -
--------- -------
Loss before income taxes (829) (334)
Income tax benefit (57) (89)
--------- -------
Loss from discontinued operations $ (772) $ (245)
========= =======
9
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
We develop, market and support a family of security software and
appliances that address vital security issues facing organizations deploying
business applications over the Internet or internally via Intranets. We
currently provide e-security solutions including intrusion detection systems,
security assessment systems, virtual private network appliances and firewall
appliances. On June 1, 2000, we changed our name from ODS Networks, Inc. to
Intrusion.com, Inc. and our NASDAQ ticker symbol from ODSI to INTZ to reflect
our focus on e-security solutions. During the second quarter of 2000, we
announced our plan to sell, or otherwise dispose of, our networking divisions
which includes our Essential Communications division and our local area
networking assets and began accounting for these networking divisions as
discontinued operations. Given our change in strategy, our results of
operations prior to 2001 do not necessarily reflect our current business.
The following management's discussion and analysis of financial
condition and results of operations pertains only to our continuing
operations unless otherwise disclosed. Certain prior year information has
been reclassified to conform with the current presentation.
10
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
----------------------
Mar. 31, Mar. 31,
2001 2000
------- -------
Net Sales 100.0% 100.0%
Cost of sales 84.6 71.9
------- -------
Gross profit 15.4 28.1
Operating expenses:
Sales and marketing 150.6 77.3
Research and development 80.5 42.3
General and administrative 34.0 17.3
Amortization of intangibles 6.3 2.3
------- -------
Operating loss (256.0) (111.1)
Interest income, net 13.4 5.8
Other income 0.6 948.5
------- -------
Income (loss) before income taxes (242.0) 843.2
Income tax (benefit) expense (19.5) 180.1
------- -------
Income (loss) from continuing operations (222.5) 663.1
Income (loss) from discontinued
operations, net of tax (14.5) (3.5)
------- -------
Net income (loss) (237.0) 659.6
======= =======
Three Months Ended
----------------------
Mar. 31, Mar. 31,
2001 2000
------- -------
Domestic sales 78.3% 91.8%
Export sales to:
Europe 13.0 1.8
Canada 3.2 0.7
Asia 4.9 4.9
Latin America 0.6 0.8
------- -------
Net sales 100.0% 100.0%
======= =======
11
NET SALES. Net sales for the quarter ended March 31, 2001 decreased
to $5.3 million, compared to $7.0 million for the same period of 2000, as
more than 50% of the revenue recognized in the first quarter of 2000 came
from one large nonrecurring government order.
EXPORT SALES. Export sales for the quarter ended March 31, 2001
increased to $1.1 million, compared to $0.6 million for the same period of
2000 as the security market continued to grow internationally. Though we
expect 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 TRW Systems & Information
Technology ("TRW") were 13.0% for the quarter ended March 31, 2001, compared
to 61.9% for the same period of 2000. Sales to Lockheed Martin Federal
Systems ("Lockheed Martin") were 11.8% for the quarter ended March 31, 2001,
compared to 0.2% for the same period of 2000. In addition, a portion of our
sales to TRW, Lockheed Martin and other corporations were for products resold
by those organizations to various agencies of the U.S. Government.
GROSS PROFIT. Gross profit decreased to $0.8 million or 15.4% of net
sales for the quarter ended March 31, 2001 compared to $2.0 million or 28.1%
of net sales for the quarter ended March 31, 2000. This decrease is primarily
due to a reduced sales volume coupled with an increase in our operations
infrastructure, which includes operations management, supply chain
management, purchasing, quality, order entry, planning and other related
functions as well as certain period costs associated with starting up new
products and processes.
Gross profit as a percentage of net sales is impacted by several
factors, including shifts in product mix, changes in channels of
distribution, sales volume, fluctuations in manufacturing costs, pricing
strategies, and fluctuations in sales of integrated third-party products.
SALES AND MARKETING. Sales and marketing expenses increased to $8.0
million or 150.6% of net sales for the quarter ended March 31, 2001, compared
to $5.4 million or 77.3% of net sales for the quarter ended March 31, 2000.
Sales and marketing expenses increased in the three-month period ended March
31, 2001, compared to the same period of 2000, as we expanded our security
sales and marketing force during 2000. In early April 2001, we reorganized
our sales and marketing departments and, as such, expect sales and marketing
expenses to decline in the second and third quarters, sequentially, when
compared with the first quarter of 2001. Sales and marketing expenses may
vary as a percentage of net sales in the future.
RESEARCH AND DEVELOPMENT. Research and development expenses
increased to $4.3 million or 80.5% of net sales for the quarter ended March
31, 2001, compared to $3.0 million or 42.3% of net sales for the quarter
ended March 31, 2000. Research and development costs are expensed in the
period incurred. Research and development expenses increased in the three
months ended March 31, 2001, compared to the same periods of 2000, as we
continued to increase our research and development efforts on our security
products. It is expected that research and development expenses will decrease
in the second and third quarters of 2001, sequentially, when compared to the
first quarter of 2001. Research and development expenses may vary as a
percentage of net sales in the future.
12
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $1.8 million or 34.0% of net sales for the quarter ended March
31, 2001, compared to $1.2 million or 17.3% of net sales for the quarter
ended March 31, 2000. General and administrative expenses increased in the
first quarter of 2001 compared to the first quarter of 2000 primarily due to:
1) fewer general and administrative costs allocated to discontinued
operations and 2) additional costs related to various company-wide
initiatives. It is expected that general and administrative expenses will
decrease in the second and third quarters of 2001, sequentially, when
compared to the first quarter of 2001. General and administrative expense may
vary as a percentage of net sales in the future.
AMORTIZATION. Amortization expenses increased to $0.3 million or
6.3% of net sales for the quarter ended March 31, 2001 compared to $0.2
million or 2.2% of net sales for the quarter ended March 31, 2000.
Amortization expenses increased in the three-month period ended March 31,
2001, compared to the same period in 2000, primarily as a result of
amortization of the acquisition costs incurred with the purchase of MimeStar,
Inc. on June 30, 2000. The amortization expense in total is associated with
the amortization of intangible assets related to the acquisition of certain
assets and intellectual property from Science Applications International
Corporation in the quarter ending September 30, 1998 and the MimeStar
acquisition.
INTEREST. Net interest income increased to $0.7 million for the
quarter ended March 31, 2001, compared to $0.4 million for the same period in
2000. Net interest income increased primarily due to the additional cash
balance resulting from proceeds of the sale of part of our discontinued local
area networking business and creation of a joint venture in China (see notes
3 and 4 of notes to condensed consolidated financial statements) in the first
quarter of 2001 and the sale of our common stock of Alteon WebSystems in the
first quarter of 2000. We expect net interest income to decrease in the
quarter ended June 30, 2001 due to decreased 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
March 31, 2001 was 8.0%, compared to 21.3% for the quarter ended March 31,
2000. The effective tax rate for the three months ended March 31, 2001 varied
from the U.S. statutory rate primarily due to the increase in the valuation
allowance for deferred tax assets which recognizes that tax benefits
associated with a significant portion of our operating losses may not be
realized. Without such changes to the valuation allowance, the Company's
effective tax rate for the quarter ended March 31, 2001 would have been 38%.
EARNINGS PER SHARE. 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 our
employee stock purchase program; (iii) any fluctuations in our 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 we enter into
such transactions.
13
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity at March 31, 2001 is $22.3 million
of cash and cash equivalents, $18.0 million of short-term investments and
$6.3 million of investments with a stated maturity beyond one year. As of
March 31, 2001, excluding discontinued operations, working capital was $41.6
million compared to $48.6 million as of December 31, 2000.
Cash used in continuing operations for the three months ended March
31, 2001 were $8.0 million, primarily due to an operating loss from
continuing operations of $13.6 million, offset by a decrease in net deferred
tax assets and an increase in accounts payable. Future fluctuations in
inventory balances, accounts receivable and accounts payable will be
dependent upon several factors, including, but not limited to, quarterly
sales, our strategy in building inventory in advance of receiving orders from
customers, and the accuracy of our forecasts of product demand and component
requirements.
Cash provided by investing activities of continuing operations for
the three months ended March 31, 2001 was $0.6 million, which consisted
primarily of the net proceeds of $0.8 million from the maturities and
purchase of available for sale securities and the purchase of property and
equipment of $0.2 million.
Cash provided by financing activities of continuing operations for
the three months ended March 31, 2001 was $0.2 million, which was entirely
the result of the issuance of common stock upon the exercise of employee
stock options.
Cash provided by discontinued operations for the three months ended
March 31, 2001 was $9.2 million, which consisted primarily of the net
proceeds of the sale of our legacy local area networking business (see note 9
of notes to condensed consolidated financial statements).
At March 31, 2001, the Company did not have any material commitments
for capital expenditures.
During the three months ended March 31, 2001, the Company funded its
operations through the use of cash and cash equivalents.
We believe that our cash, cash equivalents and investment balances
will provide sufficient cash resources to finance our operations and
currently projected capital expenditures through 2001. However, there can be
no assurance that our cash resources will be sufficient for the year 2001 and
beyond.
We intend to explore the possible acquisitions of businesses,
products and technologies that are complementary to our existing business. We
are continuing to identify and prioritize additional security technologies
which we may wish to develop, either internally or through the licensing or
acquisition of products from third parties. While we engage from time to time
in discussions with respect to potential acquisitions, there can be no
assurances that any such acquisitions will be made or that we will be able to
successfully integrate any acquired business. In order to finance such
acquisitions, it may be necessary for us to raise additional funds through
public or private financings. Any equity or debt financings, if available at
all, may be on terms which are not favorable to us and, in the case of equity
financings, may result in dilution to our stockholders.
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FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Numerous factors may affect our business and future results of
operations. These factors include, but are not limited to, current economic
and market conditions, 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 our business and future results, see the discussion under the caption
"Factors That May Affect Future Results of Operations" in our Annual Report
on Form 10-K for the year ended December 31, 2000.
TECHNOLOGICAL CHANGES. The market for our products is characterized
by frequent product introductions, rapidly changing technology and continued
evolution of new industry standards. The market for security products
requires our products to be compatible and interoperable with products and
architectures offered by various vendors, including other security products,
networking products, workstation and personal computer architectures and
computer and network operating systems. Our success will depend to a
substantial degree upon our ability to develop and introduce in a timely
manner new products and enhancements to our 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 we will be able to identify, develop, manufacture, market and support
new or enhanced products successfully in a timely manner. Further, we or our
competitors may introduce new products or product enhancements that shorten
the life cycle of or make obsolete our existing product lines, any of which
could have a material adverse effect on our business, operating results and
financial condition.
MARKET ACCEPTANCE. We are pursuing a strategy to increase the
percentage of our revenue generated through indirect sales channels including
distributors, value added resellers, system integrators, original equipment
manufacturers and managed service providers. There can be no assurance that
our 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.
We are also pursuing a strategy to further differentiate our product
line by introducing complementary security products and incorporating new
technologies into our existing product line. There can be no assurance that
we will successfully introduce these products or that such products will gain
market acceptance. We anticipate competition from networking companies,
network security companies and others in each of our product lines. We
anticipate that profit margins will vary among our product lines and that
product mix fluctuations could have an adverse effect on our overall profit
margins.
PLANS FOR DISPOSITIONS. On April 17, 2000, we announced plans to
sell, or otherwise dispose of, the assets in our networking divisions which
include our Essential Communications division and our local area networking
assets. The disposition of our local area networking assets was completed in
the quarter ended March 31, 2001 generating a deferred gain of approximately
$2.4 million,
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offsetting the net assets held for sale of the Essential division, which were
$6.8 million as of March 31, 2001. There can be no assurance that we will be
able to realize a net gain upon sale or disposition of Essential in excess of
the carrying value of our discontinued operations, which was $4.5 million as
of March 31, 2001. Additionally, there are inherent problems associated with
selling a substantial division, which may adversely affect the continuing
operations of the remaining company.
ACQUISITIONS. Internet Security Systems, Inc. ("ISS"), Cisco
Systems, Inc. ("Cisco"), Symantec Corp. ("Symantec"), Cabletron Systems, Inc.
("Cabletron"), Nokia Corporation ("Nokia"), Nortel Networks ("Nortel") and
other competitors have recently acquired several security companies with
complementary technologies, and we anticipate 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 we currently offer. In the past, we have
relied upon a combination of internal product development and partnerships
with other security vendors to provide competitive solutions to customers.
Certain of the recent and future acquisitions by our competitors may have the
effect of limiting our 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 we will be able to compete successfully in such an
environment.
In September 1998, we 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. On September 30, 1999, we entered a technology
licensing agreement with RSA Security Inc. ("RSA") under which we are the
exclusive licensee of RSA's Kane Security products in North America and
Europe. On June 30, 2000, we acquired MimeStar, Inc. ("MimeStar"), a Virginia
corporation. MimeStar developed an advanced, network based intrusion
detection system called SecureNet Pro(TM). We 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 our 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 we have 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
our attention from normal daily operation of our business. There can be no
assurance that any other 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 our design or a competitor's design), we
expect the net sales of such products to decrease. In order to achieve
revenue growth in the future, we will be required to design, develop and
successfully commercialize higher performance products in a timely manner.
There can be no assurance that we 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 we will be able to respond effectively to technological
changes or new product announcements by competitors, which could render
portions of our inventory obsolete.
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MANUFACTURING AND SUPPLIERS. Our operational strategy relies on
outsourcing of product assembly and certain other operations. There can be no
assurance that we will effectively manage our third-party contractors or that
these contractors will meet our future requirements for timely delivery of
products of sufficient quality and quantity. Further, we intend to introduce
a number of new products and product enhancements in 2001 which will require
that we rapidly achieve volume production of those new products by
coordinating our efforts with those of our suppliers and contractors. The
inability of the third-party contractors to provide us with adequate supplies
of high-quality products could cause a delay in our ability to fulfill orders
and could have an adverse effect on our business, operating results and
financial condition.
All of the materials used in our products are purchased under
contracts or purchase orders with third parties. While we believe that many
of the materials used in the production of our products are generally readily
available from a variety of sources, certain components such as
microprocessors and mother boards are available from one or a limited number
of suppliers. The lead times for delivery of components vary significantly
and can exceed twelve weeks for certain components. If we should fail to
forecast our requirements accurately for components, we may experience excess
inventory or shortages of certain components which could have an adverse
effect on our business and operating results. Further, any interruption in
the supply of any of these components, or the inability to procure these
components from alternative sources at acceptable prices within a reasonable
time, could have an adverse effect on our business and operating results.
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. We could incur substantial costs in defending ourself and our
customers against any such claim regardless of the merits of such claims. In
the event of a successful claim of infringement, we may be required to obtain
one or more licenses from third parties. There can be no assurance that we
could obtain the necessary licenses on reasonable terms.
THIRD-PARTY PRODUCTS. We believe that it is beneficial to work with
third parties with complementary technologies to broaden the appeal of our
security products. These alliances allow us to provide integrated solutions
to our customers by combining our developed technology with third-party
products. As we also compete with these technology partners in certain
segments of the market, there can be no assurance that we will have access to
all of the third-party products which may be desirable or necessary in order
to offer fully integrated solutions to our customers.
DEPENDENCE ON KEY CUSTOMERS. A relatively small number of customers
have accounted for a significant portion of our revenue. For example, TRW
Systems & Information Technology and Lockheed Martin Federal Systems
accounted for 13.0% and 11.8%, respectively, of our revenues for the quarter
ended March 31, 2001. U.S. government agencies, large system integrators and
managed service providers are expected to continue to account for a
substantial portion of our net revenue. We continuously face competition from
ISS, Cisco, Symantec, Cabletron, Nokia, Network Assoc., SonicWALL, WatchGuard
and others for U.S. government security projects and corporate security
installations. Any reduction or delay in sales of our products to these
customers could have a material adverse effect on our operating results.
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INTERNATIONAL OPERATIONS. Our 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. Our sales to foreign customers are subject to export
regulations. In particular, certain sales of our data 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 our operating results.
IMPACT OF GOVERNMENT CUSTOMERS. A significant portion of our revenue
is derived from sales to the U.S. government, either directly by
Intrusion.com 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 our 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 data 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 data 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 our
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", our 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 our common stock in any given period. Also, we participate
in a highly dynamic industry which often results in volatility of our common
stock price.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE. Revenue originating outside the U.S. in the
quarters ended March 31, 2001, 2000 and 1999 were 21.7%, 8.2%, and 44.2% of
total revenues, respectively. International sales are made mostly from our
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.
Our 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, our future results could be materially adversely affected by
changes in these or other factors. The effect of foreign exchange rate
fluctuations on us in 2001, 2000 and 1999 was not material.
INTEREST RATES. We invest our 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, our future investment income may fall short of expectations due to
changes in interest rates or we may suffer losses of principal if forced to
sell securities which have seen a decline in market value due to changes in
interest rates. Our 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 March 31, 2001
was 6.3%. The fair value of investments held at March 31, 2001 approximates
amortized cost.
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PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A.) EXHIBITS. The following exhibits are included herein:
None
(B.) FORM 8-K. We filed no reports on Form 8-K during the
three months ended March 31, 2001.
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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: May 15, 2001 /s/ Jay R. Widdig
------------------------------
Jay R. Widdig
Vice President, Chief Financial Officer,
Treasurer & Secretary
(Principal Financial & Accounting Officer)
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