Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report -- [x] Reg. S-K Item 405 48 251K
2: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, 2 9K
Liquidation or Succession
3: EX-3.1 Articles of Incorporation/Organization or By-Laws 7 30K
4: EX-3.2 Articles of Incorporation/Organization or By-Laws 26 125K
5: EX-4.1 Instrument Defining the Rights of Security Holders 2 15K
6: EX-10.13 Material Contract 49 149K
7: EX-10.14 Material Contract 7 39K
8: EX-21 Subsidiaries of the Registrant 1 8K
9: EX-23 Consent of Experts or Counsel 1 7K
10: EX-27 Exhibit 27 FDS 2 8K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
(MARK ONE)
[Download Table]
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-20191
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INTRUSION.COM, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 75-1911917
(State of incorporation) (IRS Employer Identification No.)
1101 EAST ARAPAHO ROAD 75081
RICHARDSON, TEXAS (zip code)
(Address of principal executive offices)
(Registrant's telephone number, including area code): (972) 234-6400
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
As of February 27, 2001, the aggregate market value of the Registrant's
voting stock held by non-affiliates of the Registrant was approximately
$59,862,086 (affiliates being, for these purposes only, directors, executive
officers and holders of more than 5% of Registrant's Common Stock). As of
February 27, 2001, 20,529,894 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement filed in connection
with the Registrant's 2001 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K.
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INTRUSION.COM, INC.
INDEX
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PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition 16
And Results of Operations.................................
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 21
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting 21
and Financial Disclosure..................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 22
Item 11. Executive Compensation...................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 22
Item 13. Certain Relationships and Related Transactions.............. 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 22
Signatures ............................................................ 24
2
PART I
ITEM 1. BUSINESS.
In addition to the historical information contained herein, the discussion
in this Form 10-K contains certain 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 anticipated operating results, developments in
Intrusion.com'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 and
business conditions. The cautionary statements made in this Form 10-K should be
read as being applicable to all related forward-looking statements whenever they
appear in this Form 10-K. Intrusion.com's actual results could differ materially
from the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed under the section captioned "Factors That May Affect Future Results of
Operations" in Item 1 of this Form 10-K as well as those cautionary statements
and other factors set forth elsewhere herein.
GENERAL
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.
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 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.
RECENT DEVELOPMENTS
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"). Under the agreement, all existing IS 6000 inventory, design
specifications, manufacturing documentation and equipment are to be acquired by
SVA. Additionally, we will provide technical support to SVA for 12 months. Under
the terms of the agreement, subject to appropriate government approval, we will
receive $6 million in the first quarter of 2001.
In January 2001, we announced an agreement to establish a joint venture with
SVA. The new venture, Shanghai SVA Intrusion.com Joint Venture, will
manufacture, market, distribute and sell our
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security products in China (PRC Mainland) under an exclusive multi-year
licensing agreement. Subject to appropriate government approvals, the joint
venture is expected to be established in the first quarter of 2001 and under
terms of the Agreement, we will receive $4.75 million in the first half of 2001.
INDUSTRY BACKGROUND
In the last decade, network computing has evolved from local-area networks
to global systems communicating through open Internet connections. The
widespread adoption of open computing environments, such as the Internet,
enables organizations to increase revenue and reduce costs with electronic
business-to-business and business-to-consumer transactions, business process
re-engineering and secure messaging for telecommuters and widely distributed
workforces.
Although open computing environments such as the Internet have many business
advantages, their openness and accessibility make these systems, and the
integrity of the information that is stored on them, vulnerable to security
threats. These systems can be breached by computer hackers, curious or
disgruntled employees, contractors and competitors who may compromise or destroy
sensitive information within the system or otherwise disrupt the normal
operation of the system. In addition, open computing environments such as the
Internet are complex and typically involve a variety of hardware, operating
systems and applications provided by numerous vendors. Each addition or change
to the hardware, operating system or application may introduce new
vulnerabilities and security risks to the system.
Enterprises are therefore adopting a variety of security solutions to meet
the challenge posed by malicious intruders, curious hackers and disgruntled
employees. To be effective, an organization requires an enterprise-wide
information risk management process that can be managed centrally and
implemented on a distributed basis. Organizations seek a set of individual,
best-of-breed solutions designed to work standalone and in concert with one
another to provide an integrated view of their security status. These solutions
often include:
- firewalls to control the flow of data between an internal network and
outside networks or the Internet;
- virtual private network ("VPN") systems to protect information during
transmission and provide authentication of users;
- security assessment systems to identify potential security risks by
comparing security policy with actual system configuration;
- intrusion detection systems to monitor the packet traffic on network
segments to identify and respond to security breaches; and
- a comprehensive reporting system to automate the analysis and correlation
of data generated by multiple security applications.
As e-business and open computing environments continue to expand, security
management will become an essential system on the network. We are poised to take
advantage of this requirement for robust security technologies.
INTRUSION.COM SOLUTION AND PRODUCTS
Intrusion.com's approach to the challenges of information security is to
develop, market and support a family of intrusion detection and security
assessment software and firewall and VPN appliances for deployment by
enterprises and use by security service providers. We seek to protect
information assets from attack and misuse and to safeguard data integrity.
Implementing adequate perimeter defense, monitoring network traffic, profiling
user behavior and responding rapidly to network intrusions are critical elements
for the protection of information integrity.
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SECURITY SOFTWARE PRODUCTS
SECURENET PRO-TM-
Intrusion.com's SecureNet Pro, introduced in July 2000, is a sophisticated
network intrusion detection system ("NIDS"). SecureNet Pro allows security
administrators to automatically monitor high speed network traffic, detect and
respond to suspicious activity, and respond to internal and external network
abuse. The SecureNet Pro architecture enables the recognition and response to a
large number of attack patterns on high-speed networks. Additionally, SecureNet
Pro provides for complete packet analysis, resulting in fewer false positives,
thereby increasing the efficiency and effectiveness of security personnel. When
a SecureNet Pro sensor detects an attack or misuse, it transmits an alarm to the
SecureNet Pro console for administrative review. In addition, SecureNet Pro can
respond immediately to an attack or misuse by terminating a connection, sending
e-mail or pager alerts, recording the session or taking other user-definable
actions. Its easy-to-use interface, monitoring and reporting capabilities
increase the effectiveness of security professionals and enable them to secure
their networks efficiently.
SECURITYANALYST-TM-
Intrusion.com's SecurityAnalyst is a security assessment system that helps
to address security risks through identification of security weaknesses and
deviations from security policies for Microsoft and Novell servers and
workstations. SecurityAnalyst identifies security weaknesses by comparing actual
computer configurations with an organization's security policy as well as
industry "best practices." SecurityAnalyst enables fast, easy-to-use security
compliance audits and provides more than 60 comprehensive reports, ranging from
executive-level security report cards to a detailed identification of security
risks and corrective actions.
Maintaining an effective security policy requires ongoing verification that
the written policies are being complied with. SecurityAnalyst gives a
big-picture view that generates measurable data about security policy compliance
while providing comprehensive reporting capabilities. SecurityAnalyst evaluates
the security health of the network in six critical areas: password strength,
access control, user account restrictions, system monitoring, data integrity and
data confidentiality.
SECUREENTERPRISE-TM-
Intrusion.com's SecureEnterprise is a centralized security monitoring
system. SecureEnterprise blends the data from a variety of disparate systems,
infrastructure devices and applications in a multivendor environment to enable
security administrators to assess security events across a network.
With the gigabytes of data generated by hundreds of agents and devices,
getting value from the data produced by myriad security devices has become
increasingly complex and burdensome for time-constrained security professionals.
SecureEnterprise enables security administrators to see the macro view of
security events within networks and systems. A centralized security analysis
tool that delineates itself with statistical behavioral profiling,
SecureEnterprise detects anomalies and user misuse by analyzing data from
firewalls, intrusion detection systems, routers, and workstations. By
integrating audit and event data from these various sources into a single,
standardized data-set, SecureEnterprise increases staff efficiencies, enables
deeper security system analysis, and makes daily evaluation and assessment
reviews easier.
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SECURITY APPLIANCES
SECURECOM-TM- PERIMETER DEFENSE SYSTEM (PDS) SERIES
Effective deployment of a security strategy involves installation,
configuration, validation, and implementation of all systems. The optimal
solution is a combined software/appliance solution that enables optimized
performance, effectively leverages personnel and reduces the total cost of
ownership to the enterprise.
As organizations expand their operations to include remote offices, regional
divisions, branch locations and telecommuters, securing the enterprise becomes
more complex. The need to deploy complete, cost-effective security solutions
that enable centralized management is paramount. Intrusion.com offers integrated
security software/appliance solutions that allow businesses to more easily
secure their networks by enabling a variety of complementary security
technologies.
The SecureCom PDS Series of security appliances are Linux-based platforms
integrating pre-configured software to secure enterprise networks reliably and
affordably. These innovative perimeter defense systems deliver security software
solutions to the managed service provider, large enterprise, small business, or
enterprise remote offices.
While many security platforms can be difficult or costly to manage, a PDS
appliance delivers Web-based setup and administration with centralized policy
management. The PDS Series enables the deployment of complementary
technologies--firewall, VPN and network intrusion detection systems, and needs
only a Web browser for easy, centralized administration.
- The SecureNet PDS integrates Intrusion.com's SecureNet Pro network
intrusion detection software with the PDS 2300 for cost-effective
installation that can extend across the network. Its easy-to-use interface
increases administrative efficiencies.
- The PDS 2315 offers the full version of Check Point Software Technologies'
VPN-1/FireWall-1 software. Designed for larger user environments, the PDS
2315 enables a variety of centralized security management options.
- The PDS 2110 features Check Point's VPN-1/FireWall-1 SmallOffice software
for the 5-to-50 user environment, and it needs only a Web browser for
easy, centralized administration.
SECURECOM 8000 SERIES
The SecureCom 8000 Series is a family of security platforms that includes
both stand-alone gateways and intelligent modular chassis solutions. This
multivendor security platform integrates routing, firewall software, intrusion
detection systems, virtual private networking, LAN connectivity and other
security application modules in a multiblade 19" rack-mountable appliance.
SECURECOM 6000 SERIES
The SecureCom 6000 Series is a field-deployable, fault-tolerant platform
that integrates network and application servers, routing, firewall software,
intrusion detection systems, virtual private networking and LAN connectivity
into a single, compact unit. Utilized in numerous military operations, this
flexible chassis-based system greatly reduces equipment complexity and is
reliable in battlefield conditions.
THIRD-PARTY PRODUCTS
We believe that it is beneficial to work with third parties with
complementary technologies to provide integrated solutions to our customers. As
we also compete with these technology partners in
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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 in order to
offer fully integrated solutions to our customers.
CUSTOMER SERVICES
In addition to offering best-of-breed security products, we also offer a
wide range of services, including design and configuration, project planning and
management, training, security analysis and installation and maintenance.
PRODUCT DEVELOPMENT
The data security industry is characterized by rapidly changing technology,
standards and customer demands. We believe that our future success depends in
large part upon the timely enhancement of existing products as well as the
development of technologically advanced new products which meet industry
standards, perform successfully and achieve market acceptance. We are currently
developing and marketing next-generation data security products. We are also
investing in the development of products which comply with emerging industry
standards and are continuously engaged in testing to ensure that our products
interoperate with other manufacturers' products which comply with industry
standards.
During 2000, 1999 and 1998, our research and development expenditures were
$13.1 million, $8.2 million and $2.8 million, respectively. All of our
expenditures for hardware and software research and development costs have been
expensed as incurred. At December 31, 2000, we had 59 employees engaged in
research and product development.
MANUFACTURING AND SUPPLIES
Our operational strategy relies on outsourcing of manufacturing of
components, assembly and certain other operations to reduce fixed costs and to
provide flexibility in meeting market demand.
Our internal manufacturing operations consist primarily of replication of
software on CDs, packaging, final assembly, testing and quality control of
subassemblies and finished units. Materials used in our manufacturing processes
include semiconductors such as microprocessors, memory chips and application
specific integrated circuits ("ASICs"), printed circuit boards, power supplies
and enclosures.
INTELLECTUAL PROPERTY AND LICENSES
Our success and our ability to compete is dependent, in part, upon our
proprietary technology. While we have applied for certain patents, we do not
hold any issued patents and currently rely on a combination of contractual
rights, trade secrets and copyright laws to establish and protect our
proprietary rights in our products. We have also entered into confidentiality
agreements with our employees and enter into non-disclosure agreements with our
suppliers, resellers and certain customers to limit access to and disclosure of
proprietary information. There can be no assurance that the steps taken by us to
protect our intellectual property will be adequate to prevent misappropriation
of our technology or that our competitors will not independently develop
technologies that are substantially equivalent or superior to our technology.
We have entered into several software and product license agreements. These
license agreements provide us with additional software and hardware components
that add value to our security products. These license agreements do not provide
proprietary rights which are unique or exclusive to us and are generally
available to other parties on the same or similar terms and conditions, subject
to payment of applicable license fees and royalties.
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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. The Kane security products
include SecurityAnalyst, a host-based security assessment tool. We are
responsible for marketing, sales, support, maintenance and development for the
Kane security software.
SALES, MARKETING AND CUSTOMERS
We market and distribute our products primarily through a direct sales force
to end users supplemented by numerous domestic and international distributors,
system integrators and value added resellers. At December 31, 2000, our sales
and marketing organization consisted of 131 individuals, including managers,
sales representatives, marketing personnel and technical support personnel.
FIELD SALES FORCE. Our direct sales organization focuses on major account
sales, promotes our products to current and potential customers, and monitors
evolving customer requirements. Our channel sales force promotes our products to
distributors, system integrators and value added resellers. The field sales and
technical support force provides training and technical support to our resellers
and end users and assists our customers to design secure data networking
solutions.
We currently conduct sales and marketing efforts from our principal office
in Richardson (Dallas), Texas; through domestic field offices located in the
following metropolitan areas: Anaheim, Atlanta, Boston, Denver, San Diego,
Vancouver and Vienna (Washington, D.C.); and through foreign sales offices
located in the following countries: Canada, England, France, Germany, Japan,
Malaysia, New Zealand and South Korea.
DISTRIBUTORS. We have signed distribution agreements with distributors in
the United States, Europe and Asia. In general, these relationships are
non-exclusive. Distributors typically maintain an inventory of our products.
Under these agreements, we provide certain protection to the distributors for
their inventory of our products for price reductions as well as products that
are slow-moving or have been discontinued. Recognition of sales to distributors
and related gross profits are deferred until the merchandise is resold by the
distributors.
RESELLERS. Domestic and international system integrators and value added
resellers (collectively, "resellers") sell our products as stand-alone solutions
to end users and integrate our products with products sold by other vendors into
data security systems that are sold to end users. Our field sales force and
technical support organization provide support to these resellers. Our
agreements with resellers are non-exclusive, and our resellers generally sell
other products which may compete with our products. Resellers may place higher
priority on products of other suppliers who are larger than and have more name
recognition than Intrusion.com, and there can be no assurance that resellers
will continue to sell and support our products.
FOREIGN SALES. We believe that rapidly evolving international markets are
important sources of future net sales. Our export sales are currently being made
through a direct sales force supplemented by international resellers in Europe,
Asia, Latin America and Canada. Export sales accounted for approximately 19.2%,
14.0% and 25.3% of net sales in 2000, 1999 and 1998, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this report for a geographic breakdown of our product
revenue in 2000, 1999 and 1998. Sales to foreign customers and resellers
generally have been made in United States dollars.
MARKETING. We have implemented several methods to market our products,
including regular participation in trade shows and seminars, advertisement in
trade journals, telemarketing, distribution of sales literature and product
specifications and ongoing communication with our resellers and installed base
of end-user customers.
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CUSTOMERS. Our end-user customers include manufacturing, high-technology,
telecommunications, retail, transportation, health care, insurance,
entertainment, utilities and energy companies, government agencies, financial
institutions and academic institutions. Sales to certain customers and groups of
customers can be impacted by seasonal capital expenditure approval cycles, and
sales to customers within certain geographic regions can be subject to seasonal
fluctuations in demand.
Although we sell our products to many customers, direct sales to seven such
resellers and end-user customers, iGov.com, TRW Systems & Information Technology
("TRW"), AT&T Corp. ("AT&T"), Federal Data Corporation ("Federal Data"), NCR
Corp. ("NCR"), Comstor, Inc. ("Comstor") and Concentric Network Corp.
("Concentric") have each accounted for 10% or more of our net sales in at least
one of the past three fiscal years as indicated in the following schedule.
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PERCENTAGE OF NET SALES
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CUSTOMER 2000 1999 1998
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iGov.com.................................................... 14.2% 21.3% 4.0%
TRW......................................................... 24.1 7.4 0.0
AT&T........................................................ 0.2 10.9 7.8
Federal Data................................................ 1.9 16.0 0.0
NCR......................................................... 0.3 0.8 17.3
Comstor..................................................... 0.0 12.1 0.0
Concentric.................................................. 0.1 0.0 11.9
A large portion of the products sold to iGov.com, TRW and Federal Data
during the periods shown were integrated with other products or services and
sold to U.S. government customers by those system integrators. No other customer
accounted for 10% or more of our net sales in 2000, 1999 or 1998, respectively.
The loss of any of these customers could have a material adverse effect on
Intrusion.com and our operating results if not replaced.
Most of our business with U.S. government agencies is on a fixed-price
basis. Government contracts customarily include provisions which provide for
cancellation at the convenience of the government. In addition, upon
cancellation by the government, we generally would be entitled to reimbursement
of costs incurred, plus a pro rata share of profit. We have never received a
cancellation of a material government contract and have no reason to anticipate
any such cancellation. The products sold, characteristics and business risks
associated with our sales to U.S. government agencies do not differ materially
from those associated with sales of our products to commercial customers.
BACKLOG. We believe that only a small portion of our order backlog is
noncancelable and that the dollar amount associated with the noncancelable
portion is immaterial. We purchase our products based upon our forecast of
customer demand and maintain inventories of sub-assemblies and finished products
in advance of receiving firm orders from customers. Orders are generally
fulfilled within two to eight weeks following receipt of an order. Due to the
generally short cycle between order and shipment and occasional
customer-initiated changes in delivery schedules or cancellation of orders which
are made without significant penalty, we do not believe that our backlog as of
any particular date is indicative of future net sales.
CUSTOMER SUPPORT, SERVICE AND WARRANTY. We service, repair and provide
technical support for our products. The Intrusion.com field sales and technical
support force work closely with resellers and end-user customers on-site and by
telephone to assist with pre- and post-sales support services such as network
security design, system installation and technical consulting. By working
closely with our customers, Intrusion.com employees gain a thorough
understanding of end-user requirements and provide input to the product
development process.
9
We warrant all of our products against defects in materials and workmanship
for periods ranging from 90 days to 12 months. Before and after expiration of
the product warranty period, we offer both on-site and factory-based support,
parts replacement and repair services. Extended warranty services are separately
invoiced on a time and materials basis or under an annual maintenance contract.
COMPETITION
The market for data security solutions is intensely competitive and subject
to frequent product introductions with improved price/performance
characteristics. Industry suppliers compete in areas such as conformity to
existing and emerging industry standards, interoperability with networking and
other security products, management and security capabilities, performance,
price, ease of use, scalability, reliability, flexibility, product features and
technical support. We believe that our solutions-oriented approach (combining
security network design services, Intrusion.com products and third-party
products to provide superior, secure networking systems to customers) provides
us with a competitive advantage with large organizations with complex security
requirements.
There are numerous companies competing in various segments of the data
security markets. Our principal competitors include Internet Security
Systems, Inc. ("ISS"), Cisco Systems, Inc. ("Cisco"), Symantec Corp.
("Symantec"), Cabletron Systems, Inc. ("Cabletron"), Nokia Corporation
("Nokia"), Nortel Networks ("Nortel"), Network Associates, Inc. ("Network
Assoc."), SonicWALL, Inc. ("SonicWALL") and WatchGuard Technologies, Inc.
("WatchGuard"). Several of our competitors have substantially greater financial,
technical, sales and marketing resources, better name recognition and a larger
customer base than we do. In addition, many of our competitors offer customers a
broader product line which provides a more comprehensive networking and security
solution than we currently offer. Even if we do introduce advanced products
which meet evolving customer requirements in a timely manner, there can be no
assurance that our new products will gain market acceptance.
Certain companies in the data security industry have expanded their product
lines or technologies in recent years as a result of acquisitions. Further, more
companies have developed products which conform to existing and emerging
industry standards and have sought to compete on the basis of price. We
anticipate increased competition from large networking equipment vendors which
are expanding their capabilities in the data security market. For example in
2000, Symantec acquired Axent Technologies, Nokia acquired Ramp Networks, Inc.
and Cabletron acquired Network Security Wizards. We anticipate increased
competition from private "start-up" companies that have developed or are
developing advanced security products. Increased competition in the security
industry could result in significant price competition, reduced profit margins
or loss of market share, any of which could have a material adverse effect on
our business, operating results and financial condition. There can be no
assurance that we will be able to compete successfully in the future with
current or new competitors.
EMPLOYEES
As of December 31, 2000, we employed a total of 294 persons, including 131
in sales, marketing and technical support, 35 in manufacturing and operations,
59 in research and product development, 30 in administration and finance, and 39
in the our discontinued networking operations.
None of our employees are represented by a labor organization, and we are
not a party to any collective bargaining agreement. We have not experienced any
work stoppages and consider our relations with our employees to be good.
Competition in the recruiting of personnel in the networking and data
security industry is intense. We believe that our future success will depend in
part on our continued ability to hire, motivate and retain qualified management,
sales and marketing, and technical personnel. To date, we have not experienced
significant difficulties in attracting and retaining qualified employees.
10
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating Intrusion.com and our business.
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 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.
ACQUISITIONS. ISS, Cisco, Symantec, Cabletron, Nokia, 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 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
11
called SecureNet Pro-TM-. The stockholder of MimeStar received $3 million in
cash with an additional $1 million in cash and 95,969 shares of our 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. 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.
Our goal is to transition an increasing proportion of our revenue from
hardware products (which accounted to 81% of our net sales in 2000) to our
software products or solutions that include both our hardware and software
products. Such a transition would improve our gross profit margins. Our ability
to achieve our revenue and product mix objectives over the next several quarters
will largely depend upon the extent to which these product lines are accepted in
the security marketplace. There can be no assurance that we will improve our
product mix, nor can we assure an improvement in gross profit margins.
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.
12
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 Intrusion.com to provide integrated solutions to
our customers by combining Intrusion.com 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 Intrusion.com customers.
DEPENDENCE ON KEY CUSTOMERS. A relatively small number of customers have
accounted for a significant portion of our revenue. 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.
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.
13
ITEM 2. PROPERTIES.
Our headquarters is located in a modern, two-story building in Richardson,
Texas, with an aggregate of approximately 95,000 square feet of floor space.
This facility includes our corporate administration, manufacturing, marketing,
research and development, sales and technical support personnel. We occupy this
facility under a lease, the base term of which expires in February 2005, with
two seven-year options to extend the lease term, subject to compliance with
certain conditions. We also lease a separate warehouse facility consisting of
approximately 8,000 square feet, adjacent to our headquarters, under a lease
that expires in June 2002.
Personnel of the Essential division (part of the our discontinued
operations) are located in a 15,120 square foot leased property in Albuquerque,
New Mexico. The lease will expire in February 2009. Research and development,
administrative, manufacturing, marketing and sales personnel occupy this
property.
Much of our security software research and development staff is located in
an 11,400 square foot leased property in San Diego, California. The lease will
expire in August 2002. Research and development, sales and administrative
personnel occupy this facility.
We have a sales office located in Vienna, Virginia occupying a 9,747 square
foot leased property. The lease will expire in April 2004, with a five-year
option to extend the lease term, subject to compliance with certain conditions.
In addition, we lease small amounts of office space for sales and technical
support personnel domestically in California, Colorado, Georgia, Massachusetts
and Washington, and internationally in Canada, England, France, Germany,
Malaysia, New Zealand and South Korea. We also opened an office in Tokyo, Japan,
in January 2001, under an initial 6-month lease. With the addition of the Japan
office, we believe that the existing facilities at December 31, 2000 will be
adequate to meet our requirements through 2001. See Note 6 of Notes to
Consolidated Financial Statements for additional information regarding our
obligations under leases.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material litigation and are not aware of any
threatened litigation which would have a material adverse effect on
Intrusion.com, our operating results or our financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders of
Intrusion.com during the fourth quarter of 2000.
PART II
ITEM 5. MARKET FOR INTRUSION.COM'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is traded on The Nasdaq Stock Market (National Market
System) under the symbol "INTZ". Prior to June 1, 2000, our symbol was "ODSI".
As of February 27, 2001 there were approximately 230 holders of record of the
common stock. The following table sets forth, for the periods indicated, the
high and low per share sales prices for the common stock, as reported by The
Nasdaq Stock Market.
[Enlarge/Download Table]
2000 1999
------------------------ --------------------------
HIGH LOW HIGH LOW
---------- ----------- ------------ -----------
First Quarter................................... $31 1/2 $8 11/16 $ 5 5/8 $2 1/2
Second Quarter.................................. 24 7 9/16 4 3/8 2 1/2
Third Quarter................................... 17 1/4 9 7 15/32 3 15/16
Fourth Quarter.................................. 12 1/2 2 7/8 14 15/16 4 7/8
14
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 of this Form 10-K and the consolidated
statements and notes thereto included in Item 14 of this Form 10-K. Continuing
operations consisted of our information security business which began operations
in 1998. Discontinued operations are composed of our local area networking
divisions which were discontinued in April 2000.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------- -------- -------- -------- --------
INCOME STATEMENT DATA:
Revenue............................................... $ 23,210 $ 7,963 $ 1,920 $ -- $ --
Cost of Sales......................................... 19,009 3,877 968 -- --
-------- -------- -------- ------- -------
Gross profit.......................................... 4,201 4,086 952 -- --
Operating expenses:
Sales and marketing................................. 27,740 12,236 17,806 -- --
Research and development............................ 13,073 8,171 2,847 -- --
In-process research and development................. -- -- 1,047 (1) -- --
General and administrative.......................... 5,865 2,466 731 -- --
Amortization of intangibles......................... 975 547 272 -- --
-------- -------- -------- ------- -------
Operating loss........................................ (43,452) (19,334) (21,751) -- --
Interest income, net.................................. 3,301 1,104 1,398 -- --
Other income (expense)................................ 66,335 (2) -- (1,122) -- --
-------- -------- -------- ------- -------
Income (loss) before income taxes..................... 26,184 (18,230) (21,475) -- --
Income taxes provision (benefit)...................... 1,999 -- (3,104) --
-------- -------- -------- ------- -------
Income (loss) from continuing operations.............. 24,185 (18,230) (18,371) -- --
Income (loss) from discontinued operations, net of
tax................................................. (974) 6,190 (7,379) (4,937) 11,051
-------- -------- -------- ------- -------
Net income (loss)..................................... $ 23,211 $(12,040) $(25,750) $(4,937) $11,051
======== ======== ======== ======= =======
Basic earnings (loss) per share, continuing
operations.......................................... $ 1.23 $ (0.98) $ (1.07) $ 0.00 $ 0.00
======== ======== ======== ======= =======
Diluted earnings (loss) per share, continuing
operations.......................................... $ 1.18 $ (0.98) $ (1.07) $ 0.00 $ 0.00
======== ======== ======== ======= =======
Basic earnings (loss) per share....................... $ 1.18 $ (0.65) $ (1.50) $ (0.30) $ 0.68
======== ======== ======== ======= =======
Dilutive earnings (loss) per share.................... $ 1.13 $ (0.65) $ (1.50) $ (0.30) $ 0.66
======== ======== ======== ======= =======
Weighted average shares outstanding
--Basic............................................. 19,624 18,565 17,190 16,437 16,261
======== ======== ======== ======= =======
--Diluted........................................... 20,478 18,565 17,190 16,437 16,825
======== ======== ======== ======= =======
BALANCE SHEET DATA:
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Working capital....................................... $ 52,514 $ 66,578 $ 31,763 $51,847 $54,529
Total assets.......................................... 92,414 120,502 61,710 77,178 81,935
Total liabilities..................................... 13,627 38,925 12,204 10,799 10,997
Total stockholders' equity............................ 78,787 81,577 49,506 66,379 70,938
--------------------------
(1) The write-off of acquired in-process research and development in the year
ending December 31, 1998, is comprised of approximately $1.0 million
resulting from the acquisition of Computer Misuse and Detection System
assets from Science Applications International Corporation.
(2) Other income for the year ending December 31, 2000 comprised primarily of a
$66.4 million pre-tax gain realized on the sale of Alteon WebSystems, Inc.
common stock.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Notes to the Consolidated Financial Statements.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE LITIGATION REFORM ACT OF 1995
This Annual Report, other than historical information, may include
forward-looking statements, including statements with respect to financial
results, product introductions, market demand, sales channels, industry trends,
sufficiency of cash resources and certain other matters. These statements are
made under the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 and involve risks and uncertainties which could cause actual
results to differ materially from those in the forward-looking statements,
including those discussed in the section entitled "Factors That May Affect
Future Results of Operations" in Item 1 and elsewhere in this Annual Report on
Form 10-K and other filings with the Securities and Exchange Commission.
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 2000 do not necessarily
reflect our current business.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, certain financial
data as a percentage of net sales.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Net sales................................................... 100.0% 100.0% 100.0%
Cost of Sales............................................... 81.9 48.7 50.4
------ ------ --------
Gross profit................................................ 18.1 51.3 49.6
Operating expenses:
Sales and marketing....................................... 119.5 153.7 927.4
Research and development.................................. 56.3 102.6 148.3
In-process research and development....................... 0.0 0.0 54.5
General and administrative................................ 25.3 31.0 38.1
Amortization of intangibles............................... 4.2 6.9 14.2
------ ------ --------
Operating loss.............................................. (187.2) (242.9) (1,132.9)
Interest income, net........................................ 14.2 13.9 72.8
Other income (expense)...................................... 285.8 0.0 (58.4)
------ ------ --------
Income (loss) before income taxes........................... 112.8 (229.0) (1,118.5)
Income taxes provision (benefit)............................ 8.6 0.0 (161.7)
------ ------ --------
Income (loss) from continuing operations.................... 104.2 (229.0) (956.8)
Income (loss) from discontinued operations, net of tax...... (4.2) 77.7 (384.3)
------ ------ --------
Net income (loss)........................................... 100.0 (151.3) (1,341.1)
====== ====== ========
16
[Enlarge/Download Table]
2000 1999 1998
-------- -------- --------
Domestic sales.............................................. 80.8% 86.0% 74.7%
Export sales to:
Europe.................................................... 7.6 8.3 9.5
Canada.................................................... 2.7 0.1 2.9
Asia...................................................... 7.4 5.6 12.9
Latin America............................................. 1.5 0.0 0.0
------ ------ --------
Net sales................................................... 100.0% 100.0% 100.0%
====== ====== ========
2000 COMPARED WITH 1999
NET SALES
Net sales increased 191.5% to $23.2 million in 2000 from $8.0 million in
1999. Our increased revenue is attributed to several factors including:
increased sales in our SecureCom product line, SecurityAnalyst availability for
all of 2000 compared to only the fourth quarter of 1999, and new product
introductions of SecureNet Pro and PDS 2100.
Export sales in 2000 increased to $4.5 million, or 19.2% of net sales,
compared to $1.1 million, or 14.0% of net sales in 1999 primarily due to greater
international acceptance of our security products.
Sales to iGov.com in 2000 and 1999 were 14.2% and 21.3%, respectively of net
sales. Sales to TRW in 2000 and 1999 were 24.1% and 7.4%, respectively of net
sales. Sales to AT&T in 2000 and 1999 were 0.2% and 10.9%, respectively of net
sales. Sales to Federal Data in 2000 and 1999 were 1.9% and 16.0%, respectively
of net sales. Sales to Comstor in 2000 and 1999 were 0.0% and 12.1%,
respectively of net sales. In addition, a portion of our sales to iGov.com, TRW,
Federal Data and other corporations were resold by those organizations to
various agencies of the U.S. government.
GROSS PROFIT
Gross profit increased 2.8% to $4.2 million in 2000 from $4.1 million in
1999. As a percentage of net sales, gross profit decreased to 18.1% for 2000
from 51.3% in 1999. This decrease is primarily associated to 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 126.7% to $27.7 million in 2000 from
$12.2 million in 1999 as we expanded our sales and marketing programs and staff
to support more products and new channels. As a percentage of net sales, sales
and marketing expenses decreased to 119.5% in 2000 from 153.7% in 1999. We
expect sales and marketing expenses to increase in 2001 compared to 2000 as we
continue to invest in sales and marketing programs and personnel. We expect
sales and marketing expenses, as a percentage of net sales, to decrease in 2001
compared to 2000. Sales and marketing expenses may vary as a percentage of net
sales in the future.
17
RESEARCH AND DEVELOPMENT
Research and development expenses increased 60.0% to $13.1 million, or 56.3%
of net sales, in 2000 compared to $8.2 million, or 102.6% of net sales, in 1999.
Much of this increase was to support product development of new products
including SecureNet Pro, SecurityAnalyst and the PDS 2100. Our research and
development costs are expensed in the period in which they are incurred. We
expect research and development expenses to increase in 2001 compared to 2000 as
we continue to invest in security software and appliances. The Company expects
research and development, as a percentage of net sales, to decrease in 2001
compared to 2000. Research and development expenses may vary as a percentage of
net sales in the future.
GENERAL AND ADMINISTRATIVE
General and administrative expenses, excluding amortization expenses,
increased 137.8% to $5.9 million in 2000 from $2.5 million in 1999 primarily due
to the shift of general and administrative personnel from our discontinued
operations to our continuing operations. As a percentage of net sales, general
and administrative expenses decreased to 25.3% in 2000 from 31.0% in 1999. We
expect general and administration expenses to increase in 2001 compared to 2000
to support the sales and marketing and research and development infrastructure.
General and administrative expenses may vary as a percentage of net sales in the
future.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased to $1.0 million in 2000 from
$0.5 million in 1999, due to the acquisition of MimeStar in June 2000. We expect
amortization expense to increase in 2001 to reflect a full year amortization of
MimeStar intangibles. Amortization expenses may vary as a percentage of net
sales in the future.
INTEREST INCOME, NET
Net interest income increased to $3.3 million in 2000 from $1.1 million in
1999 primarily due to an increase in average cash and interest-bearing
investment balances related to our sale of Alteon WebSystems' common stock,
generating gross proceeds of $67.1 million in the first quarter of 2000. As a
percentage of net sales, net interest income was 14.2% and 13.9% in 2000 and
1999, respectively. We expect net interest income to decrease in 2001 compared
to 2000 as we expect our average cash and interest-bearing investment balances
to decline for 2001 when compared to 2000. Net interest income may vary in the
future based on our cash flow and rate of return on investments.
INCOME TAXES
Our effective income tax rate was 7.6% in 2000 compared to an income tax
rate of 0% in 1999. We fully utilized our net operating loss carryback in 1998.
We did not record an income tax benefit in 1999 related to the net operating
losses which can be carried forward to offset taxable income in future years.
Due to our sale of Alteon WebSystems' common stock in 2000, we recognized the
tax benefit of the 1999 net operating loss carryforward in 2000. See Note 9 of
the Notes to Consolidated Financial Statements.
1999 COMPARED WITH 1998
NET SALES
Net sales increased 314.7% to $8.0 million in 1999 from $1.9 million in
1998. This increase occurred as we began focusing more resources on our security
products compared to our networking and high performance switching products (now
discontinued operations).
18
Export sales in 1999 increased to $1.1 million, or 14.0% of net sales,
compared to $0.5 million, or 25.3% of net sales in 1998 primarily due to greater
international acceptance of our security products.
Sales to iGov.com in 1999 and 1998 were 21.3% and 4.0%, respectively of net
sales. Sales to AT&T in 1999 and 1998 were 10.9% and 7.8%, respectively of net
sales. Sales to Federal Data in 1999 and 1998 were 16.0% and 0.0%, respectively
of net sales. Sales to NCR in 1999 and 1998 were 0.8% and 17.3%, respectively of
net sales. Sales to Comstor in 1999 and 1998 were 12.1% and 0.0%, respectively
of net sales. Sales to Concentric in 1999 and 1998 were 0.0% and 11.9%,
respectively of net sales. In addition, a portion of our sales to iGov.com,
Federal Data and other corporations were resold by those organizations to
various agencies of the U.S. government.
GROSS PROFIT
Gross profit increased 329.2% to $4.1 million in 1999 from $1.0 million in
1998. As a percentage of net sales, gross profit remained relatively flat at
51.3% for 1999 compared to 49.6% in 1998.
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 decreased 31.3% to $12.2 million in 1999 from
$17.8 million in 1998. As a percentage of net sales, sales and marketing
expenses decreased to 153.7% in 1999 from 927.4% in 1998.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 187.0% to $8.2 million in 1999
from $2.8 million in 1998 as we continued to develop additional security
products, primarily SecureEnterprise, which was acquired from SAIC in
September 1998. As a percentage of net sales, research and development expenses
decreased to 102.6% in 1999 from 148.3% in 1998. The Company's research and
development costs are expensed in the period in which they are incurred.
IN-PROCESS RESEARCH AND DEVELOPMENT
In 1998, we incurred one-time charges totaling $1.0 million associated with
the acquisition of certain assets of SAIC. Such charges were necessary in order
to expense the purchased in-process research and development that had not yet
reached technological feasibility.
GENERAL AND ADMINISTRATIVE
General and administrative expenses, excluding amortization expenses,
increased 237.3% to $2.5 million in 1999 from $0.7 million in 1998. As a
percentage of net sales, general and administrative expenses decreased to 31.0%
in 1999 from 38.1% in 1998.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased to $0.5 million in 1999 from
$0.3 million in 1998 to reflect a full year amortization related to the
acquisition of certain assets of SAIC in September 1998. As a percentage of net
sales, amortization of intangibles decreased to 6.9% in 1999 from 14.2% in 1998.
19
INTEREST INCOME, NET
Net interest income decreased to $1.1 million in 1999 from $1.4 million in
1998 primarily due to a decrease in the average cash and interest-bearing
investment balances.
INCOME TAXES
Our effective income tax rate was 0% in 1999 compared to an income tax
benefit of 14.5% in 1998. We fully utilized our net operating loss carryback in
1998. We did not record an income tax benefit in 1999 related to the net
operating losses which can be carried forward to offset taxable income in future
years. We recognize the benefit of our net operating loss carryforwards at such
time as we generate taxable income and can be assured that such net operating
loss carryforwards can be utilized. See Note 9 of the Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity at December 31, 2000 were $20.3 million
of cash and cash equivalents, $17.5 million of short-term investments and
$7.6 million of investments with a stated maturity beyond one year. As of
December 31, 2000, working capital was $52.5 million compared to $66.6 million
as of December 31, 1999.
Net cash flows used in operating activities in 2000 were $49.8 million,
primarily due to an operating loss for the year, increased accounts receivable
and inventories, and a decrease in accounts payable. Future fluctuations in
accounts receivable, inventory balances and accounts payable will be dependent
upon several factors, including but not limited to quarterly sales, timely
collection of accounts receivable, and the accuracy of our forecasts of product
demand and component requirements.
Net cash provided by investing activities in 2000 was $40.4 million,
consisting of $67.1 million in proceeds from the sale of securities available
for sale, offset by $16.2 million for net purchases of investments,
$6.4 million for purchases of property and equipment and $4.0 for the purchase
of MimeStar.
Net cash provided by financing activities in 2000 was $17.1 million,
consisting of the receipt of $1.2 million for a note receivable and
$15.9 million related to the exercise of warrants and certain employee stock
options.
At December 31, 2000, we did not have any material commitments for capital
expenditures. During 2000, we funded our operations through cash, cash
equivalents and investments.
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
our cash resources will be sufficient for 2001.
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.
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Exchange. Our revenue originating outside the U.S. in 2000, 1999
and 1998 was 19.2%, 14.0% and 25.3% of total revenues, respectively. Revenues
generated from the European region in 2000, 1999 and 1998 were 7.6%, 8.3% and
9.5% of total revenues, respectively. Revenues generated from the Asia region in
2000, 1999 and 1998 were 7.4%, 5.6% and 12.9% of total revenues, respectively.
International sales are generated primarily 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, import and export regulations,
other regulations and restrictions, and foreign exchange rate volatility.
Accordingly, our results could be materially adversely impacted by changes in
these or other factors. The effect of foreign exchange rate fluctuations on our
business in 2000, 1999 and 1998 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.
Interest income on our investments is carried in "Interest income, net". We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). All of the cash equivalents and short-term
investments are treated as available-for-sale under SFAS 115.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted 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 in 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.
Certain of the investment securities had maturities in excess of one year. The
weighted-average interest rate on investment securities at December 31, 2000 was
6.1%. The fair value of investments held at December 31, 2000 approximated
amortized cost.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is included in Part IV Item 14(a)(1
and 2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
21
PART III
Certain information required by Part III is omitted from this Form 10-K
because we will file a definitive Proxy Statement for our 2001 annual meeting of
stockholders pursuant to Regulation 14A (the "Proxy Statement") no later than
120 days after the end of the fiscal year covered by this Form 10-K, and certain
information to be included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF INTRUSION.COM.
The information regarding Directors and Executive Officers of Intrusion.com
appearing under the captions "Election of Directors", "Compliance with
Section 16 Reporting Requirements" and "Executive Officers" contained in the
Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation"
contained in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS.
The following consolidated financial statements of Intrusion.com, Inc. and
subsidiaries, are submitted as a separate section of this report (See F-pages,
and are incorporated by reference in Item 8:
[Download Table]
PAGE NO.
--------
Report of Independent Auditors.............................. F-1
Consolidated Balance Sheets at December 31, 2000 and 1999... F-2
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998.............. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... F-5
Notes to Consolidated Financial Statements.................. F-6
2. FINANCIAL STATEMENT SCHEDULES.
PAGE NO.
--------
SCHEDULE II--Valuation and Qualifying Accounts.............. S-1
All other schedules are omitted because they are either not required or not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
22
(b) REPORTS ON FORM 8-K.
None
(c) EXHIBITS
The following Exhibits are filed herewith pursuant to Item 601 of
Regulation S-K or incorporated herein by reference to previous filings as noted:
[Download Table]
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------------------- ------------------------------------------------------------
2.1(5) Certificate of Ownership and Merger Merging Intrusion.com,
Inc. into ODS Networks, Inc.
3.1(5) Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(5) Bylaws of the Registrant.
4.1(5) Specimen of Common Stock Certificate.
10.1(1) Lease Agreement, dated September 12, 1989, between G.D.A.F.
Associates and The Registrant for the Registrant's
headquarters.
10.2(1) 1983 Incentive Stock Option Plan of Intrusion.com, Inc.
(formerly ODS Networks, Inc. and Optical Data Systems,
Inc.), as amended.
10.3(1) 1987 Incentive Stock Option Plan of Intrusion.com,
Inc.(formerly ODS Networks, Inc. and Optical Data Systems,
Inc.), as amended.
10.4(1) Form of Indemnification Agreement.
10.5(2) 1995 Stock Option Plan of Intrusion.com, Inc. (formerly ODS
Networks, Inc. and Optical Data Systems, Inc.).
10.6(2) 1995 Non-Employee Directors Stock Option Plan of
Intrusion.com, Inc. (formerly ODS Networks, Inc. and
Optical Data Systems, Inc.).
10.7(3) Supplemental Lease Agreement, dated March 7, 1995, between
G.D.A.F. Assoc., subsequently assigned to CIIF Assoc. II
Limited Partnership, Landlord, and the Registrant, as
Tenant, relative to the Registrant's Headquarters.
10.8(4) Registration Rights Agreement, dated as of September 25,
1998, by and between the Registrant and Science
Applications International Corporation.
10.9(4) Stockholder and Voting Agreement, dated as of September 25,
1998, by and among Science Applications International
Corporation, the Registrant and certain stockholders of
the Registrant.
10.10(4) Strategic Alliance Agreement, dated as of September 25,
1998, by and between Science Applications International
Corporation and the Registrant.
10.11(4) Software Royalty, Grant Back and Improvements License
Agreement, dated as of September 25, 1998, by and between
Science Applications International Corporation and the
Registrant.
10.12(4) PartnersPlus Agreement, dated September 25, 1998, by and
between the Registrant and Science Applications
International Corporation.
10.13(5) Amended and Restated Intrusion.com 401(k) Savings Plan.
10.14(5) 1997 Employee Stock Purchase Plan of Intrusion.com, Inc. as
amended January 17, 2001.
21(5) List of Subsidiaries of the Registrant.
23(5) Consent of Independent Auditors.
27(5) Financial Data Schedule.
--------------------------
(1) Filed as an Exhibit in the Registrant's Registration Statement on Form S-1,
as amended (File No. 33-6899) which was declared effective on May 21, 1992,
by the Securities and Exchange Commission, which Exhibit is incorporated
herein by reference.
(2) Filed as an Exhibit to the Registrant's definitive Proxy Statement in
connection with the solicitation of proxies for its 1995 Annual Meeting of
Stockholders (File No. 0-20191), which Exhibit is incorporated herein by
reference.
(3) Filed as an Exhibit in the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995 (File No. 0-20191), which Exhibit is
incorporated herein by reference.
(4) Filed as an Exhibit in the Registrant's Current Report on Form 8-K (Item 5),
dated October 13, 1998 (File No. 0-20191), which Exhibit is incorporated
herein by reference.
(5) Filed herewith.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
[Download Table]
Dated: March 21, 2001 INTRUSION.COM, INC.
(Registrant)
By: /s/ TIMOTHY W. KINNEAR
-----------------------------------------
Timothy W. Kinnear
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ G. WARD PAXTON
-------------------------------------- Chairman of the Board March 21, 2001
G. Ward Paxton and Director
/s/ TIMOTHY W. KINNEAR
-------------------------------------- President, Chief Executive March 21, 2001
Timothy W. Kinnear Officer and Director
/s/ T. JOE HEAD
-------------------------------------- Vice Chairman of the Board March 21, 2001
T. Joe Head and Director
Vice President, Chief Financial
/s/ JAY R. WIDDIG Officer, Treasurer and Secretary
-------------------------------------- (Principal Financial and March 21, 2001
Jay R. Widdig Accounting Officer)
/s/ J. FRED BUCY
-------------------------------------- Director March 21, 2001
J. Fred Bucy
/s/ GRANT A. DOVE
-------------------------------------- Director March 21, 2001
Grant A. Dove
/s/ DONALD M. JOHNSTON
-------------------------------------- Director March 21, 2001
Donald M. Johnston
24
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(1)
LIST OF FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2000
INTRUSION.COM, INC.
RICHARDSON, TEXAS
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders,
Intrusion.com, Inc.
We have audited the accompanying consolidated balance sheets of
Intrusion.com, Inc., and subsidiaries (the "Company") as of December 31, 2000,
and 1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2000. Our audits also included the financial statement schedule
included in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Intrusion.com, Inc., and its subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information therein.
[SIG]
Dallas, Texas
January 17, 2001
F-1
INTRUSION.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
[Download Table]
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents................................. $20,345 $ 12,602
Securities available for sale............................. -- 67,633
Short-term investments.................................... 17,506 6,100
Accounts receivable, net of allowance for doubtful
accounts and returns of $919 in 2000 and $1,171 in
1999.................................................... 6,887 5,404
Income taxes receivable................................... 1,743 --
Inventories (Note 4)...................................... 8,359 5,534
Deferred taxes--current (Note 9).......................... 3,764 --
Other current assets...................................... 1,714 1,392
Net current assets from discontinued operations........... 3,958 5,158
------- --------
Total current assets........................................ 64,276 103,823
Property and Equipment
Machinery and equipment................................... 13,223 7,211
Furniture and fixtures.................................... 1,573 1,364
Leasehold improvements.................................... 1,125 1,060
------- --------
15,921 9,635
Accumulated depreciation.................................... (8,787) (7,043)
------- --------
7,134 2,592
Long-term investments....................................... 7,575 2,750
Goodwill and intangible assets, net (Note 4)................ 7,634 3,508
Other assets................................................ 361 684
Net non-current assets from discontinued operations......... 5,434 7,145
------- --------
TOTAL ASSETS................................................ $92,414 $120,502
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses (Note 4)............ $ 9,884 $ 11,901
Deferred revenue.......................................... 1,878 2,039
Deferred taxes--current (Note 9).......................... -- 23,305
------- --------
Total current liabilities................................... 11,762 37,245
Deferred taxes--noncurrent (Note 9)......................... 1,841 1,669
Capital lease obligation.................................... 24 11
Commitments and contingencies (Note 6)...................... -- --
Stockholders' Equity (Note 10):
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--20,525 in 2000 and 18,623 in 1999
Outstanding shares--20,485 in 2000 and 18,583 in 1999... 205 186
Additional paid-in-capital................................ 46,916 29,996
Common stock held in Treasury, at cost--40 shares in 2000
and 1999................................................ (362) (362)
Net unrealized gain on securities available for sale...... -- 44,083
Retained earnings......................................... 32,453 9,242
Note receivable from stockholder.......................... -- (1,177)
Foreign currency translation adjustments.................. (425) (391)
------- --------
Total stockholders' equity.................................. 78,787 81,577
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $92,414 $120,502
======= ========
See accompanying notes.
F-2
INTRUSION.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Net sales................................................... $ 23,210 $ 7,963 $ 1,920
Cost of sales............................................... 19,009 3,877 968
-------- -------- --------
Gross profit................................................ 4,201 4,086 952
Operating expenses:
Sales and marketing....................................... 27,740 12,236 17,806
Research and development.................................. 13,073 8,171 2,847
In-process research and development....................... -- -- 1,047
General and administrative................................ 5,865 2,466 731
Amortization of intangibles............................... 975 547 272
-------- -------- --------
Operating loss.............................................. (43,452) (19,334) (21,751)
Interest income, net........................................ 3,301 1,104 1,398
Other income (expense)...................................... 66,335 -- (1,122)
-------- -------- --------
Income (loss) from continuing operations before income
taxes..................................................... 26,184 (18,230) (21,475)
Income taxes provision (benefit)............................ 1,999 -- (3,104)
-------- -------- --------
Income (loss) from continuing operations.................... 24,185 (18,230) (18,371)
Income (loss) from discontinued operations, net of tax...... (974) 6,190 (7,379)
-------- -------- --------
Net income (loss)........................................... $ 23,211 $(12,040) $(25,750)
======== ======== ========
Basic earnings (loss) per share, continuing operations...... $ 1.23 $ (0.98) $ (1.07)
======== ======== ========
Diluted earnings (loss) per share, continuing operations.... $ 1.18 $ (0.98) $ (1.07)
======== ======== ========
Basic earnings (loss) per share............................. $ 1.18 $ (0.65) $ (1.50)
======== ======== ========
Diluted earnings (loss) per share........................... $ 1.13 $ (0.65) $ (1.50)
======== ======== ========
Weighted average shares outstanding
--Basic................................................... 19,624 18,565 17,190
======== ======== ========
--Diluted................................................. 20,478 18,565 17,190
======== ======== ========
See accompanying notes.
F-3
INTRUSION.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
NUMBER OF SHARES -- ISSUED
Balance, beginning of year................................ 18,623 18,513 16,486
Issuance of common stock under warrants, stock option and
purchase plans.......................................... 1,902 110 121
Issuance of common stock for Essential Communication
acquisition............................................. -- -- 306
Issuance of common stock for acq. of certain assets from
SAIC.................................................... -- -- 1,600
-------- ------- --------
Balance, end of year...................................... 20,525 18,623 18,513
-------- ------- --------
NUMBER OF SHARES -- OUTSTANDING
Balance, beginning of year................................ 18,583 18,513 16,486
Issuance of common stock under warrants, stock option and
purchase plans.......................................... 1,902 110 121
Issuance of common stock for Essential Communication
acquisition............................................. -- -- 306
Repurchase of common stock into treasury.................. -- (40) --
Issuance of common stock for acq. of certain assets from
SAIC.................................................... -- -- 1,600
-------- ------- --------
Balance, end of year...................................... 20,485 18,583 18,513
-------- ------- --------
COMMON STOCK
Balance, beginning of year................................ $ 186 $ 185 $ 165
Issuance of common stock under warrants, stock option and
purchase plans.......................................... 19 1 1
Issuance of common stock for Essential Communication
acquisition............................................. -- -- 3
Issuance of common stock for acq. of certain assets from
SAIC.................................................... -- -- 16
-------- ------- --------
Balance, end of year...................................... $ 205 $ 186 $ 185
-------- ------- --------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year................................ $ 29,996 $29,551 $ 19,488
Issuance of common stock under warrants, stock option and
purchase plans.......................................... 15,312 378 383
Issuance of common stock for Essential Communication
acquisition............................................. -- -- 2,941
Issuance of common stock for acq. of certain assets from
SAIC.................................................... -- -- 6,704
Issuance of common stock for MimeStar acquisition......... 1,000 -- --
Tax benefit derived from exercise of employee stock
options................................................. 608 67 35
-------- ------- --------
Balance, end of year...................................... $ 46,916 $29,996 $ 29,551
-------- ------- --------
TREASURY SHARES
Balance, beginning of year................................ $ (362) $ -- $ --
Purchase of treasury shares............................... -- (362) --
-------- ------- --------
Balance, end of year...................................... $ (362) $ (362) $ --
-------- ------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of year................................ $ 43,692 $ (323) $ (306)
Foreign currency translation adjustment (a)............... (34) (68) (17)
Unrealized gain from securities available for sale (b).... (44,083) 44,083 --
-------- ------- --------
Balance, end of year...................................... $ (425) $43,692 $ (323)
-------- ------- --------
NOTE RECEIVABLE FROM STOCKHOLDER
Balance, beginning of year................................ $ (1,177) $(1,189) $ --
Loan to stockholder....................................... -- -- (1,265)
Repayments on stockholder loan............................ 1,177 12 76
-------- ------- --------
Balance, end of year...................................... $ -- $(1,177) $ (1,189)
-------- ------- --------
RETAINED EARNINGS
Balance, beginning of year................................ $ 9,242 $21,282 $ 47,032
Net income (loss) (c)..................................... 23,211 (12,040) (25,750)
-------- ------- --------
Balance, end of year...................................... $ 32,453 $ 9,242 $ 21,282
-------- ------- --------
TOTAL STOCKHOLDERS' EQUITY.................................. $ 78,787 $81,577 $ 49,506
======== ======= ========
TOTAL COMPREHENSIVE INCOME (LOSS) (A+B+C)................... $(20,906) $31,975 $(25,767)
======== ======= ========
See accompanying notes.
F-4
INTRUSION.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Operating Activities:
Net income (loss)......................................... $23,211 $(12,040) $(25,750)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Sale of property and equipment.......................... -- (7) --
Gain on sale of available for sale securities........... (66,355) -- --
Depreciation and amortization........................... 4,555 3,840 4,601
In-process research and development..................... -- -- 3,347
Impaired investment in affiliate........................ -- -- 1,122
Non-cash restructuring charge........................... -- -- 3,460
Provision for deferred income taxes..................... (4,219) 763 979
Provision for doubtful accounts and returns............. -- 85 147
Changes in operating assets and liabilities:
Accounts receivable................................... (1,483) 776 3,115
Income tax receivable................................. (1,571) 4,749 (1,555)
Inventories........................................... (1,625) (1,430) 5,755
Other assets.......................................... 2 (1,135) 349
Accounts payable and accrued expenses................. (2,118) 4,201 (1,924)
Deferred revenue...................................... (161) (1,084) 1,061
------- -------- --------
Net cash used in operating activities....................... (49,764) (1,282) (5,293)
Investing Activities:
Equity investment in affiliate............................ -- -- (1,250)
Acquisitions (net of cash required)....................... (4,000) -- (5,604)
Proceeds from sale of property and equipment.............. -- 2,611 --
Proceeds from sale of available for sale securities....... 67,055 -- --
Purchases of available for sale investments............... (57,504) (16,372) (4,043)
Maturities of available for sale investments.............. 41,273 12,282 17,118
Purchases of property and equipment....................... (6,412) (1,446) (2,333)
------- -------- --------
Net cash provided by (used in) investing activities......... 40,412 (2,925) 3,888
Financing Activities:
Issuance of common stock and warrants..................... -- -- 1,500
Note receivable secured by company's common stock......... 1,177 12 (1,189)
Repayment of line of credit............................... -- -- (400)
Exercise of warrants and employee stock options........... 15,939 445 384
Capital lease obligation.................................. 13 (9) 7
Purchase of treasury stock................................ -- (362) --
------- -------- --------
Net cash provided by financing activities................... 17,129 86 302
------- -------- --------
Effect of foreign currency translation adjustment on cash
and cash equivalents...................................... (34) (68) (17)
Net increase (decrease) in cash and cash equivalents........ 7,743 (4,189) (1,120)
Cash and cash equivalents at beginning of period............ 12,602 16,791 17,911
------- -------- --------
Cash and cash equivalents at end of period.................. $20,345 $ 12,602 $ 16,791
======= ======== ========
See accompanying notes.
F-5
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Intrusion.com, Inc. ("Intrusion.com", the "Company" or the "Registrant")
develops, markets and supports a family of security software and appliances that
address vital security issues facing organizations deploying business
applications over the Internet or internally via Intranets. The Company
currently provides e-security solutions including intrusion detection systems,
security assessment systems, virtual private network appliances and firewall
appliances.
The Company markets and distributes its products through a direct sales
force to end-users, distributors and by numerous domestic and international
system integrators, service providers and value-added resellers. The Company's
end-user customers include manufacturing, high-technology, telecommunications,
retail, transportation, health care, insurance, entertainment, utilities and
energy companies, government agencies, financial institutions, and academic
institutions.
The Company was organized in Texas in September 1983 and reincorporated in
Delaware in October 1995. For more than 15 years, the Company provided local
area networking equipment and was known as Optical Data Systems or ODS Networks.
On April 17, 2000, the Company announced plans to sell, or otherwise dispose of,
its networking divisions which include its Essential Communications division and
its local area networking assets. In accordance with these plans, the Company
has accounted for these businesses as discontinued operations. 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 its focus on e-security
solutions.
The Company's principal executive offices are located at 1101 E. Arapaho
Road, Richardson, Texas 75081, and its telephone number is (972) 234-6400.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Intrusion.com, Inc. and its wholly-owned subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers cash and all highly liquid investments purchased with
an original or remaining maturity of less than three months as of the balance
sheet date to be cash equivalents.
SHORT-TERM INVESTMENTS
The Company's short-term investments consist of U.S. government obligations,
government agencies, and corporate securities with maximum maturities of one
year. Short-term investments are classified as available for sale. These
investments are valued at market value, which approximates amortized cost. The
difference between fair market value and amortized cost is not material.
RISK CONCENTRATION
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash-equivalents,
investments and accounts receivable. The Company places its investments in U.S.
government obligations, corporate securities and money market funds.
Substantially
F-6
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
all of the Company's cash, cash equivalents and investments are maintained with
two major financial institutions.
The Company sells its products to customers in diversified industries
worldwide, primarily in North America, Europe, Asia and Latin America.
Fluctuations in currency exchange rates and adverse economic developments in
foreign countries could adversely effect the Company's operating results. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral. The Company maintains reserves
for potential credit losses and such losses, in the aggregate, have not exceeded
management expectations.
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 are available from one or a limited number of suppliers. The
inability of any supplier or manufacturer to fulfill supply requirements of the
Company could impact future results.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is computed
using standard cost, which approximates actual cost on a first-in, first-out
basis. Management estimates the allowance required to state inventory at the
lower of cost or market. There is a risk that the Company will forecast demand
for its products and market conditions incorrectly and produce excess
inventories. Therefore, there can be no assurance that the Company will not
produce excess inventory and incur inventory lower of cost or market charges in
the future.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets. Such lives vary from 3 to
20 years. Leasehold improvements are amortized over the shorter of their useful
lives or the terms of the leases. Repair and maintenance costs are expensed as
incurred.
LONG-TERM INVESTMENTS
Long-term investments consist of U.S. government and corporate obligations
with maturities which range up to two years from December 31, 2000. Long-term
investments are classified as available for sale. These investments are valued
at market value, which approximates amortized cost. The difference between fair
value and amortized cost is not material.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of purchase price and related direct costs
over the value assigned to the net tangible and specifically identifiable
intangible assets of businesses acquired. Goodwill is being amortized using the
straight-line method over 7 years. Intangibles generally relate to software and
developed technology acquired in a purchase business combination or an
acquisition of assets. Intangibles are being amortized over their estimated
useful lives, generally estimated at 7 years. Annual amortization expense
related to goodwill and other intangible assets for the years ended
December 31, 2000 and 1999 was $1.0 million and $0.5 million, respectively.
F-7
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company assesses whether its goodwill and other intangible assets are
impaired as required by Statement of Financial Accounting Standard ("SFAS")
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSET AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, based on the evaluation of undiscounted projected cash
flows through the remaining amortization period. If an impairment exists, the
amount of such impairment is calculated based on the estimated fair value of the
asset.
FOREIGN CURRENCY TRANSLATION
The Company's international subsidiaries use their local currencies as their
functional currencies. Assets and liabilities are translated at the exchange
rate in effect at the balance sheet date, and income and expense accounts at
average exchange rates during the year. Resulting translation adjustments are
recorded directly to a separate component of stockholders' equity.
ACCOUNTING FOR STOCK OPTIONS
The Company has elected to continue to follow APB Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, (APB 25) and related interpretations in
accounting for its employee stock options. Under APB 25, if the exercise price
of an employee's stock option equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, which provides for either recognition
or disclosure of a hypothetical charge for stock options. The Company did not
recognize any charge in its income statement, but has provided the required
disclosure in Note 10.
NET INCOME PER SHARE
The Company reports two separate earnings per share numbers, basic EPS and
diluted EPS with additional disclosure made between continuing and discontinued
operations. Diluted EPS includes the dilutive impact of employee stock options
and warrants.
REVENUE RECOGNITION
The Company generally recognizes product revenue upon shipment of product.
The Company accrues for estimated warranty costs, sales returns and other
allowances at the time of shipment based on its experience. Revenue from
maintenance contracts is deferred and recognized over the contractual period the
services are performed. To date, warranty costs and sales returns have not been
material. There is a risk that technical issues on new products could result in
unexpected warranty costs and returns.
The Company recognizes software revenue from the licensing of its software
products in accordance with Statement of Position ("SOP") No. 97-2 "Software
Revenue Recognition" and SOP 98-9 "Modification of 97-2, Software Revenue
Recognition, with respect to certain transactions" whereby revenue from the
licensing of the Company's products is not recognized until all four of the
following have been met: i) execution of a written purchase order, license
agreement or contract; ii) shipment of the product has occurred; iii) the
license fee is fixed and determinable; and iv) collectibility is probable. The
Company defers and recognizes maintenance and support revenue over the term of
the contract period, which is generally one year.
F-8
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has signed distribution agreements with distributors in the
United States, Europe and Asia. In general, these relationships are
non-exclusive. Distributors typically maintain an inventory of Intrusion.com
products. Under these agreements, Intrusion.com provides certain protection to
the distributors for their inventory of Intrusion.com products for price
reductions as well as products that are slow-moving or have been discontinued by
the Company. Recognition of sales to distributors and related gross profits are
deferred until the merchandise is resold by the distributors.
ADVERTISING COSTS
Advertising expense is charged to operations in the period in which such
costs are incurred. Total advertising included in sales and marketing expenses
was $1.3 million, $0.1 million and $0.4 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
RESEARCH AND DEVELOPMENT COSTS
The Company incurs research and development costs that relate primarily to
the development of new security software, appliances and integrated solutions,
and major enhancements to existing services and products. Research development
costs are comprised primarily of salaries and related benefits expenses,
contract labor and prototype and other related expenses.
Software development costs are included in research and development and are
expensed as incurred. Statement of Financial Accounting Standards No. 86,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE
MARKETED, requires that software development costs incurred subsequent to
reaching technological feasibility be capitalized, if material. If the process
of developing a new product or major enhancement does not include a detailed
program design, technological feasibility is determined only after completion of
a working model. To date, the period between achieving technological feasibility
and the general availability of such software has been short, and the software
development costs qualifying for capitalization have been insignificant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Estimates are used for, but not limited
to, the accounting for doubtful accounts, sales discounts, sales returns,
distribution revenue, warranty costs, inventory obsolescence, depreciation and
taxes. Actual results could differ from these estimates.
INCOME TAXES
The income tax provision is based on pretax financial accounting income or
loss. The Company accounts for income taxes pursuant to SFAS No. 109, ACCOUNTING
FOR INCOME TAXES, which uses the liability method to calculate deferred income
taxes. Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts. The realization of deferred tax assets
is based on historical tax positions and expectations about future taxable
income. The liability method also requires the recognition of future tax
benefits such as net operating loss carryforwards, to the extent that
realization of such benefits is more likely than not.
F-9
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION
Certain amounts in prior year financial statements have been reclassified to
conform with current year presentation.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS 133, as amended by SFAS 138, is effective
for fiscal years beginning after June 15, 2000. The adoption of SFAS 133 as of
January 1, 2001 is not expected to have a material impact on the financial
position or results of operations of the Company because the Company has no
derivatives or hedges.
3. BUSINESS COMBINATIONS AND ACQUISITION OF ASSETS
On September 25, 1998, the Company completed an acquisition of certain
assets from Science Applications International Corporation ("SAIC"), a
privately-held company in San Diego, California. The Company acquired certain
assets of the Computer Misuse and Detection System ("CMDS") Division of SAIC and
certain other information security products under development. In exchange for
the CMDS assets, the information security products under development and
$1.5 million dollars in cash, Intrusion.com issued to SAIC 1.6 million shares of
the Company's common stock and warrants to purchase an additional 1.5 million
shares of its common stock. Two separate warrants each grant SAIC the right to
purchase 750,000 shares of Intrusion.com common stock. The first warrant had an
exercise price of $8.00 per share and a term of 18 months and was exercised on
March 23, 2000. The second warrant had an exercise price of $10.50 per share and
a term of 24 months and was exercised on September 22, 2000. Intrusion.com's
acquisition has been accounted for as a purchase of software, in-process
research and development and certain other assets. The transaction value of
approximately $6.9 million less the $1.5 million cash received was allocated to
the net assets acquired based on their estimated fair market value. Assets
acquired included approximately $1.1 million of in-process research and
development, $0.1 million of other intangible assets and approximately
$4.2 million of purchased software to be amortized over seven years on a
straight-line basis. During 1998, the Company recognized a one-time charge of
$0.7 million (net of taxes), or $0.04 per share, for the write-off of the
acquired in-process research and development. The acquisition of certain assets
of SAIC does not meet the reporting requirements for pro forma financial
information.
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. The Kane Security
Products include the Kane SecurityAnalyst, a security assessment tool, and the
Kane Security Monitor, a host based intrusion detection tool. The Company is
responsible for marketing, sales, support, maintenance and development for Kane
Security software.
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, accounted for using
the purchase method, was affected by the merger of a wholly
F-10
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS COMBINATIONS AND ACQUISITION OF ASSETS (CONTINUED)
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 $100,000. The acquisition costs of $5.1 million were
capitalized as purchased software, goodwill and other intangibles and are being
amortized over seven years beginning on July 1, 2000.
4. BALANCE SHEET DETAIL (IN THOUSANDS)
INVENTORIES
[Download Table]
DECEMBER 31,
-------------------
2000 1999
-------- --------
Raw materials............................................... $1,550 $ 410
Work in process............................................. 1,350 762
Finished products........................................... 4,231 3,478
Demonstration systems....................................... 1,228 884
------ ------
Net inventory--continuing operations........................ $8,359 $5,534
====== ======
Net inventory--discontinued operations...................... $3,958 $5,158
====== ======
INTANGIBLE ASSETS, NET
[Download Table]
DECEMBER 31,
-------------------
2000 1999
-------- --------
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.................................... (1,737) (763)
------- ------
Net intangibles--continuing operations...................... $ 7,634 $3,508
======= ======
Net intangibles--discontinued operations.................... $ 3,935 $5,515
======= ======
F-11
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BALANCE SHEET DETAIL (IN THOUSANDS) (CONTINUED)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
[Download Table]
DECEMBER 31,
-------------------
2000 1999
-------- --------
Trade accounts payable...................................... $5,892 $ 8,229
Accrued sales commissions................................... 547 527
Accrued incentive bonus..................................... 100 108
Accrued vacation............................................ 920 863
Accrued property taxes...................................... 51 222
Accrued warranty expense.................................... 475 475
Other (individually less than 5% of current liabilities).... 1,899 1,477
------ -------
$9,884 $11,901
====== =======
5. NOTE RECEIVABLE FROM STOCKHOLDER
Note receivable from stockholder of $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.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space for its corporate headquarters in
Richardson, Texas under an operating lease, the base term of which expires in
February 2005, with two seven-year options to extend the term of the lease,
subject to compliance with certain conditions. The Company also leases a
separate warehouse facility adjacent to its headquarters under a lease which
expires in June 2002. The Company leases office space in Albuquerque, New Mexico
for Essential (discontinued operations) under an operating lease that expires in
February 2009. The Company leases office space in San Diego, California for a
portion of its security software research and development staff under an
operating lease that expires in August 2002. In addition, the Company leases
office space for its U.S. and international sales and engineering offices. Total
rental expense of $1.9 million, $1.8 million and $2.3 million was charged to
operations during 2000, 1999, and 1998, respectively.
F-12
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments consisted of the following on December 31,
2000 (in thousands):
[Download Table]
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS
---------- ------------
2001.................................................. $1,674 $ 169
2002.................................................. 1,329 169
2003.................................................. 1,138 169
2004.................................................. 973 169
2005.................................................. 149 169
Thereafter............................................ -- 529
------ ------
$5,263 $1,374
====== ======
7. 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
presently cannot reasonably estimate the amount of the gain or loss. Such gain
or loss, if any, will be realized at the time of final disposition.
The following represents a summary of assets classified as discontinued
operations (In thousands):
[Download Table]
DECEMBER 31,
-------------------
2000 1999
-------- --------
Inventories, net........................................... $3,958 $ 5,158
Property and equipment, net................................ 1,499 1,629
Intangible assets, net..................................... 3,935 5,515
Other...................................................... -- 1
------ -------
$9,392 $12,303
====== =======
F-13
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DISCONTINUED OPERATIONS (CONTINUED)
The following represents a summary of net income (loss) from discontinued
operations (In thousands):
[Download Table]
2000 1999 1998
-------- -------- --------
Net Sales........................................ $16,856 $49,988 $72,690
Cost of sales.................................... 10,693 28,227 49,262
------- ------- -------
Gross profit..................................... 6,163 21,761 23,428
Operating expenses............................... 7,446 15,578 32,048
------- ------- -------
Operating profit (loss).......................... (1,283) 6,183 (8,620)
Other, net....................................... 1 7 --
------- ------- -------
Income (loss) before income taxes................ (1,282) 6,190 (8,620)
Income tax benefit............................... (308) -- (1,241)
------- ------- -------
Income (loss) from discontinued operations....... $ (974) $ 6,190 $(7,379)
======= ======= =======
8. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PLAN
On April 24, 1997, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") under which 0.5 million shares of common stock have been
reserved for issuance. Eligible employees may designate not more than 10% of
their compensation to be deducted each pay period for the purchase of common
stock under the Purchase Plan. The Purchase Plan was amended January 17, 2001 to
increase the maximum number of shares that can be purchased per participant from
500 shares to 1,000 shares per offering. Each participant may purchase up to
2,000 shares in any one calendar year. On January 31 and July 31 of each
calendar year, shares of common stock are purchased with the employees' payroll
deductions over the immediately preceding six months at a price per share of 85%
of the lesser of the market price of the common stock on the purchase date or
the market price on the first day of the six-month period. The Purchase Plan
will terminate no later than April 24, 2007. A total of 71,163 shares have been
issued under the Purchase Plan as of December 31, 2000. Subsequent to
December 31, 2000, 21,615 shares of stock were issued under the Purchase Plan
for an aggregate purchase price of approximately $136,000 related to the
purchase period which commenced on August 1, 2000 and ended on January 31, 2001.
EMPLOYEE 401(K) PLAN
The Company has adopted a plan known as the Intrusion.com 401(k) Savings
Plan (formerly the ODS 401(k) Savings Plan) (the "Plan") to provide retirement
and incidental benefits for its employees. The Plan covers substantially all
employees who meet minimum age and service requirements. As allowed under
Section 401(k) of the Internal Revenue Code, the Plan provides tax deferred
salary deductions for eligible employees.
Employees may contribute from 1% to 19% of their annual compensation to the
Plan, limited to a maximum amount as set by the Internal Revenue Service. The
Company matches employee contributions at the rate of $0.25 per each $1.00 of
contribution on the first 4% of deferred
F-14
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
compensation. Company matching contributions to the Plan were approximately
$120,000, $112,000, and $119,000 in 2000, 1999 and 1998, respectively.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 2000, 1999
and 1998 are as follows (in thousands):
[Download Table]
2000 1999
-------- --------
Deferred tax assets:
Foreign subsidiaries net operating loss carryforward...... $ 341 $ 382
Net operating loss carryover.............................. 1,592 6,135
Minimum tax credit........................................ -- 410
Book over tax depreciation................................ 273 273
Intangibles............................................... 595 501
Equity investments........................................ 458 459
Vacation accrual.......................................... 386 348
Allowance for doubtful accounts and returns............... 413 430
Warranty accrual.......................................... 174 174
Inventory................................................. 2,615 2,575
Deferred revenue.......................................... -- 34
Other..................................................... 176 215
------- --------
Deferred tax assets..................................... 7,023 11,936
Valuation allowance for deferred tax assets............... (1,932) (11,936)
------- --------
Deferred tax assets, net of allowance................... 5,091 --
------- --------
Deferred tax liabilities:
Intangibles............................................... 668 938
Unrealized gain on securities held for sale............... -- 22,850
Other..................................................... 2,500 1,186
------- --------
Total deferred tax liabilities.......................... 3,168 24,974
------- --------
Net deferred tax assets (liabilities)....................... $ 1,923 $(24,974)
======= ========
Current deferred assets (liabilities)....................... $ 3,764 $(23,305)
Noncurrent deferred assets (liabilities).................... $(1,841) $ (1,669)
------- --------
Net deferred tax assets (liabilities)....................... $ 1,923 $(24,974)
======= ========
Deferred tax assets are required to be reduced by a valuation allowance if
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Realization of the future benefits related to the deferred
tax assets is dependent on many factors, including the Company's ability to
recover taxes previously paid and to generate taxable income within the near to
medium term. Management has considered these factors in determining the
valuation allowance in 2000.
F-15
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes for the years ended
2000, 1999 and 1998 are as follows (in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- --------- --------
Income tax provision
Federal:
Current................................................. $4,864 $ -- $(5,630)
Deferred................................................ (5,270) -- 1,478
State:
Current................................................. 236 -- 200
Deferred................................................ 1,861 -- (433)
Foreign:
Current................................................. -- -- 40
------ --------- -------
$1,691 $ -- $(4,345)
====== ========= =======
Income tax expense (benefit) is included in the consolidated financial
statements for the years ended 2000, 1999 and 1998 are as follows (in
thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- --------- --------
Continuing Operations....................................... $1,999 $ -- $(3,104)
Discontinued Operations..................................... (308) -- (1,241)
------ --------- -------
$1,691 $ -- $(4,345)
====== ========= =======
The reconciliation of income tax computed at the statutory rate for the
years ended 2000, 1999 and 1998 are as follows (in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Reconciliation of income tax provision to statutory rate:
Income tax expense (benefit) at statutory rate......... $8,716 $(4,131) $(10,513)
State income taxes, net of federal income tax
benefit................................................ 1,393 -- (151)
Utilization of NOLs and credits not previously
benefited.............................................. (4,953) -- --
Increase (decrease) in valuation allowance............. (4,373) 4,075 5,136
In-process research and development.................... -- -- 805
Goodwill amortization.................................. 164 193 132
Minimum tax credit..................................... (361) -- --
Other.................................................. 1,105 (137) 246
------ ------- --------
$1,691 $ -- $ (4,345)
====== ======= ========
At December 31, 2000, the Company had federal net operating loss
carryforwards of $2.6 million for income tax purposes that begin to expire in
2008 and are subject to the ownership change limitations under Internal Revenue
Code Section 382. The Company also has $27.0 million of state net
F-16
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
operating loss carryforwards. Net operating loss carryforwards of the foreign
subsidiaries of $0.7 million at December 31, 2000 are available for offset only
against taxable income generated by the foreign subsidiaries.
The Company has made income tax payments of $6.2 million, $0.1 million and
$0.1 million during 2000, 1999 and 1998, respectively.
10. STOCK, STOCK OPTIONS AND WARRANTS
On September 25, 1998, in connection with the Company's acquisition of
certain assets from Science Applications International Corporation ("SAIC"), the
Company issued to SAIC 1.6 million shares of the Company's common stock and
warrants to purchase an additional 1.5 million shares of its common stock. Two
separate warrants each grant SAIC the right to purchase 750,000 shares of its
common stock. The first warrant had an exercise price of $8.00 per share and a
term of 18 months. The second warrant had an exercise price of $10.50 per share
and a term of 24 months. On March 23, 2000, SAIC exercised the first warrant for
750,000 at an exercise price of $8.00 per share. On September 22, 2000, SAIC
exercised the remaining 750,000 shares at an exercise price of $10.50 per share.
On May 7, 1998, in connection with the Company's acquisition of Essential,
the Company issued approximately 306,000 shares of the Company's common stock
for all outstanding shares of Essential capital stock, and the Company issued
approximately 104,000 stock options in exchange for all unexpired and
unexercised options to acquire Essential capital stock. At December 31, 2000,
there are 27,543 options outstanding from the Essential assumed options.
At December 31, 2000, the Company has four stock-based compensation plans,
which are described below. These plans were developed to retain and attract key
employees and directors.
The Company established an Incentive Stock Option Plan in 1983, which
provides for the issuance of options to key employees of the Company to purchase
common stock of the Company. The 1983 Incentive Stock Option Plan was terminated
on November 10, 1993.
In 1987, an additional Incentive Stock Option Plan was established with
similar provisions to allow for further issuance of options. The 1987 Incentive
Stock Option Plan was terminated on January 26, 1997. The 1983 and 1987 plans
each provided for the issuance of up to 1.2 million shares of common stock upon
exercise of options granted pursuant to the plans.
In 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan")
which provides for the issuance of up to 1.6 million shares of common stock upon
exercise of options granted pursuant to the 1995 Plan. On April 19, 2000, the
stockholders approved a 850,000 share increase to the 1995 Plan, which increased
the overall shares available for issuance pursuant to the plan to 2,450,000
shares. The 1995 Plan provides for the issuance of both non-qualified and
incentive stock options to employees, officers, and employee-directors of the
Company.
In 1995, the Company adopted the 1995 Non-employee Director Stock Option
Plan (the "1995 Non-employee Director Plan") which provides for the issuance of
up to 160,000 shares of common stock upon exercise of options granted pursuant
to the 1995 Non-employee Director Plan. The Plan provides for the issuance of
non-qualified stock options to non-employee directors.
F-17
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK, STOCK OPTIONS AND WARRANTS (CONTINUED)
In 2000, 1995 and 1994, options to purchase 20,000 shares, 60,000 shares,
and 12,000 shares, respectively, were granted to directors. The terms and
exercise prices of these options are similar to the incentive stock options.
Common shares reserved for future issuance under all of the stock option
plans and employee stock purchase plans total approximately 3 million shares at
December 31, 2000.
The Compensation Committee of the Board of Directors determines the term of
each option, option exercise price within limits set forth in the plans, number
of shares for which each option is granted and the rate at which each option is
exercisable (generally ratably over three or five years from grant date).
However, the exercise price of any incentive stock option may not be less than
the fair market value of the shares on the date granted (or less than 110% of
the fair market value in the case of optionees holding more than 10% of the
voting stock of the Company), and the term cannot exceed ten years (five years
for incentive stock options granted to holders of more than 10% of the Company's
voting stock).
A summary of the Company's stock option activity and related information for
the years ended December 31, 2000, 1999 and 1998, is as follows:
[Enlarge/Download Table]
2000 1999 1998
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
OPTIONS (IN EXERCISE OPTIONS (IN EXERCISE OPTIONS (IN EXERCISE
THOUSANDS) PRICE THOUSANDS) PRICE THOUSANDS) PRICE
----------- -------- ----------- -------- ----------- --------
Outstanding at beginning of year......... 1,454 $7.83 1,683 $7.53 1,572 $14.34
Granted.................................. 1,087 11.60 479 4.95 2,358 4.36
Exercised................................ (275) 4.47 (91) 3.26 (101) 2.69
Cancelled................................ (677) 10.10 (617) 6.77 (2,146) 9.76
----- ----- ------
Outstanding at end of year............... 1,589 10.03 1,454 7.83 1,683 7.53
===== ===== ======
Options exercisable at end of year....... 454 551 535
Information related to stock options outstanding at December 31, 2000, is
summarized below:
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
12/31/00 (IN REMAINING EXERCISE 12/31/00 (IN EXERCISE
RANGE OF EXERCISE PRICES THOUSANDS) CONTRACTUAL LIFE PRICE THOUSANDS) PRICE
------------------------ -------------- ---------------- -------- -------------- --------
1.88$- $ 7.50...... 597 7.77 years $ 4.38 271 $ 3.82
8.00 - 12.81....... 600 9.08 years 10.46 25 8.42
13.00 - 31.25...... 392 6.28 years 17.96 158 20.86
----- ---
1,589 7.90 years 10.03 454 10.00
===== ===
SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, requires the
disclosure of pro forma net income and earnings per share information computed
as if the Company had accounted for its employee stock options granted
subsequent to December 31, 1994, under the fair value method set
F-18
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK, STOCK OPTIONS AND WARRANTS (CONTINUED)
forth in SFAS 123. The fair value for these options was estimated using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
[Enlarge/Download Table]
EMPLOYEE STOCK OPTIONS
------------------------------------
2000 1999 1998
-------- -------- --------
Expected dividend yield..................................... 0.0% 0.0% 0.0%
Risk-free interest rate..................................... 6.7% 5.5% 4.8%
Expected volatility......................................... 120.0% 70.0% 70.0%
Expected life (in years).................................... 2.0 2.0 2.0
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. In addition, because
SFAS 123 is applicable only to options granted subsequent to December 31, 1994,
the pro forma information does not reflect the pro forma effect of all previous
stock option grants of the Company, and thus the pro forma information is not
necessarily indicative of future amounts until SFAS 123 is applied to
outstanding stock options.
Information relating to the fair value of option grants made during 2000,
1999 and 1998 is as follows:
[Enlarge/Download Table]
2000 1999 1998
-------- -------- --------
Options granted (all with exercise price equal to fair value
of common stock):
Number of options (in thousands).......................... 1,087 479 2,358
Weighted average exercise price per share................. $11.60 $4.95 $4.36
Weighted average fair value of stock options grants per
Black-Sholes option valuation model..................... $ 8.40 $2.44 $2.24
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. For purposes
of pro forma disclosure, the Company assumed that it would not receive a tax
deduction or tax benefit for financial reporting purposes related to incentive
stock options. In management's opinion, the pro forma disclosure is not
necessarily indicative of the net financial effect, assuming the Company was
required to expense the fair value of employee stock options, because an
incentive stock option often generates a tax deduction for the Company whereby
the stock option holder does not comply with the holding period requirements
under applicable tax laws. The Company's pro forma information follows (in
thousands, except earnings per share information):
[Enlarge/Download Table]
2000 1999 1998
-------- -------- --------
Pro forma net income (loss)................................. $20,511 $(12,884) $(27,201)
Pro forma earnings per share................................ $ 1.00 $ (0.69) $ (1.58)
F-19
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Numerator:
Net income (loss)........................................... $23,211 $(12,040) $(25,750)
------- -------- --------
Numerator for basic and diluted earnings per share.......... $23,211 $(12,040) $(25,750)
Income (loss) from continuing operations.................... $24,185 $(18,230) $(18,371)
------- -------- --------
Numerator for basic and diluted earnings per share,
continuing operations..................................... $24,185 $(18,230) $(18,371)
Denominator:
Denominator for basic earnings per share--weighted average
common shares outstanding................................. 19,624 18,565 17,190
Effect of dilutive securities:
Stock options and warrants................................ 854 -- --
------- -------- --------
Denominator for diluted earnings per share--adjusted
weighted average common shares outstanding................ 20,478 18,565 17,190
======= ======== ========
Basic earnings (loss) per share, continuing Operations...... $ 1.23 $ (0.98) $ (1.07)
======= ======== ========
Diluted earnings (loss) per share, continuing Operations.... $ 1.18 $ (0.98) $ (1.07)
======= ======== ========
Basic earnings (loss) per share............................. $ 1.18 $ (0.65) $ (1.50)
======= ======== ========
Diluted earnings (loss) per share........................... $ 1.13 $ (0.65) $ (1.50)
======= ======== ========
Total stock options and warrants outstanding in 2000, 1999 and 1998 that are
not included in the diluted earnings per share computation due to the
antidilutive effect are 378 thousand, 3 million, and 3.2 million, respectively.
Such options are excluded due to the Company incurring a net loss per share in
that year or due to exercise prices exceeding the average market value of the
Company's common stock in the applicable period.
12. OTHER INCOME
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.
F-20
INTRUSION.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company's continuing operations are concentrated in one segment--the
design, development, marketing and support of data security via a suite of
security software and appliances. Sales to customers exceeding 10% of total
sales were as follows: 2000--$3.3 million to iGov.com and $5.6 million to TRW;
1999--$1.7 million to iGov.com, $0.9 million to AT&T, $1.3 million to Federal
Data and $1.0 million to Comstor; 1998--$0.3 million to NCR and $0.2 million to
Concentric.
Export sales, primarily to Europe, Asia, Latin America and Canada, were
$4.5 million in 2000, $1.1 million in 1999 and $0.5 million in 1998. No
significant long-lived assets were deployed outside of the United States.
14. SUBSEQUENT EVENTS
In January 2001, the Company announced an agreement to sell its IS (Infinite
Switch) 6000 discontinued product line to Shanghai Video and Audio Electronics
Co., Ltd. ("SVA"). Under the agreement, all existing IS 6000 inventory, design
specifications, manufacturing documentation and equipment are to be acquired by
SVA. Additionally, Intrusion.com will provide technical support to SVA for
12 months. Under the terms of the agreement, subject to appropriate government
approval, Intrusion.com will receive $6 million in the first quarter of 2001.
In January 2001, the Company announced an agreement to establish a joint
venture with SVA. The new venture, Shanghai SVA Intrusion.com Joint Venture
("SVA/Intrusion.com JV) will manufacture, market, distribute and sell
Intrusion.com products in China (PRC Mainland) under an exclusive multi-year
licensing agreement. Subject to appropriate government approvals, the joint
venture will be established in the first quarter of 2001 and under terms of the
Agreement, Intrusion.com will receive $4.75 million in the first half of 2001.
F-21
SUPPLEMENTAL FINANCIAL DATA
SUMMARIZED QUARTERLY DATA (UNAUDITED)
(In thousands, except per share amounts)
[Enlarge/Download Table]
2000
----------------------------------------------------
Q1(1) Q2 Q3 Q4 TOTAL
-------- -------- -------- -------- --------
Continuing Operations:
Revenue......................................... $ 6,997 $ 5,123 $ 6,456 $ 4,634 $23,210
Gross profit(2)................................. 1,965 773 1,410 53 4,201
Net income (loss)............................... 46,379 (7,027) (7,066) (8,101) 24,185
Net income (loss) per share--Basic.............. 2.48 (0.36) (0.36) (0.40) 1.23
Net income (loss) per share--Diluted............ 2.48 (0.36) (0.36) (0.40) 1.18
Discontinued Operations:
Income (loss), net of tax....................... (240) 154 (486) (402) (974)
Net income (loss) per share--Basic.............. (0.01) 0.01 (0.02) (0.02) (0.05)
Net income (loss) per share--Diluted............ (0.01) 0.01 (0.02) (0.02) (0.05)
1999
----------------------------------------------------
Q1 Q2 Q3 Q4 TOTAL
-------- -------- -------- -------- --------
Continuing Operations:
Revenue......................................... $ 423 $ 2,953 $ 1,192 $ 3,395 $ 7,963
Gross profit(2)................................. 266 1,396 644 1,780 4,086
Net loss........................................ (4,406) (3,422) (5,087) (5,315) (18,230)
Net loss per share--basic....................... (0.24) (0.18) (0.27) (0.29) (0.98)
Net loss per share--diluted..................... (0.24) (0.18) (0.27) (0.29) (0.98)
Discontinued Operations:
Income (loss), net of tax....................... 2,158 3,568 1,228 (764) 6,190
Net income (loss) per share--Basic.............. 0.12 0.19 0.07 (0.04) 0.33
Net income (loss) per share--Diluted............ 0.12 0.19 0.07 (0.04) 0.33
------------------------
(1) The results for the first quarter of 2000 include a $66.4 million pre-tax
gain realized on the sale of Alteon WebSystems, Inc. common stock.
(2) Gross profit 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. Gross profit decreased, as a percentage of
net sales, from 1999 to 2000 primarily due to an increase in the Company's
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.
F-22
SCHEDULE II
INTRUSION.COM, INC, AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
[Enlarge/Download Table]
Balance Charged to Balance
at beg. costs and Additions at end of
of period expense Transfers (Deductions) period
--------- ------- --------- ------------ ------
Year ended December 31, 1998
Deducted from a sset accounts:
Allowance for doubtful accounts
and returns $ 758 $ 146 $ 74(2) $ (98)(1) $ 880
Year ended December 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts
and returns $ 880 $ 85 $ - $ 206 (3) $ 1,171
Year ended December 31, 2000
Deducted from asset accounts:
Allowance for doubtful accounts
and returns $ 1,171 $ - $ - $ (252)(1) $ 919
(1) Uncollectible accounts written off.
(2) Reserves related to acquisition of Essential Communication Corporation.
(3) Unapplied cash, net of write-offs.
S-1
Dates Referenced Herein and Documents Incorporated by Reference
18 Subsequent Filings that Reference this Filing
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