UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
| For the quarterly period ended March 31, 2003 |
Commission File Number 000-26819 |
WATCHGUARD TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware |
91-1712427 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
505 Fifth Ave. South, Suite 500, Seattle WA 98104-3892
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (206) 521-8340
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes x No ¨
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
32,843,029 shares of WatchGuard common stock were outstanding as of May 6, 2003.
WATCHGUARD TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
| PART I. |
FINANCIAL INFORMATION |
|||
| ITEM 1. |
3 | |||
| – Consolidated Balance Sheets as of December 31, 2002 and March 31, 2003 |
3 | |||
| – Consolidated Statements of Operations for the three months ended March 31, 2002 and 2003 |
4 | |||
| – Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2003 |
5 | |||
| 6 | ||||
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
12 | ||
| ITEM 3. |
36 | |||
| ITEM 4. |
36 | |||
| PART II. |
OTHER INFORMATION |
|||
| ITEM 6. |
37 |
Page 2
PART I. FINANCIAL INFORMATION
WATCHGUARD TECHNOLOGIES, INC.
(In thousands, except share data)
(unaudited)
| December 31, 2002 |
March 31, 2003 |
|||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ |
8,890 |
|
$ |
12,486 |
| ||
| Short-term investments |
|
80,412 |
|
|
75,739 |
| ||
| Trade accounts receivable, net |
|
8,813 |
|
|
10,183 |
| ||
| Inventories, net |
|
4,442 |
|
|
6,259 |
| ||
| Prepaid expenses and other |
|
4,435 |
|
|
3,935 |
| ||
| Total current assets |
|
106,992 |
|
|
108,602 |
| ||
| Property and equipment, net |
|
6,467 |
|
|
6,512 |
| ||
| Goodwill |
|
66,605 |
|
|
66,605 |
| ||
| Other intangibles, net and other assets |
|
9,234 |
|
|
8,568 |
| ||
| Total assets |
$ |
189,298 |
|
$ |
190,287 |
| ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ |
4,905 |
|
$ |
5,455 |
| ||
| Accrued expenses and other liabilities |
|
5,143 |
|
|
6,796 |
| ||
| Accrued restructuring and acquisition costs |
|
9,035 |
|
|
7,445 |
| ||
| Deferred revenues |
|
18,451 |
|
|
18,814 |
| ||
| Total current liabilities |
|
37,534 |
|
|
38,510 |
| ||
| Stockholders’ equity: |
||||||||
| Preferred stock, $0.001 par value: |
||||||||
| Authorized shares: 10,000,000 |
||||||||
| No shares issued and outstanding |
|
— |
|
|
— |
| ||
| Common stock, $0.001 par value: |
||||||||
| Authorized shares: 80,000,000 |
||||||||
| Shares issued and outstanding: 32,655,404 at December 31, 2002 and |
|
33 |
|
|
33 |
| ||
| Additional paid-in capital |
|
265,932 |
|
|
266,704 |
| ||
| Deferred stock-based compensation |
|
(254 |
) |
|
(154 |
) | ||
| Accumulated other comprehensive income |
|
229 |
|
|
219 |
| ||
| Accumulated deficit |
|
(114,176 |
) |
|
(115,025 |
) | ||
| Total stockholders’ equity |
|
151,764 |
|
|
151,777 |
| ||
| Total liabilities and stockholders’ equity |
$ |
189,298 |
|
$ |
190,287 |
| ||
See accompanying notes.
Page 3
WATCHGUARD TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
| Three Months Ended March 31, |
||||||||
| 2002 |
2003 |
|||||||
| Revenues: |
||||||||
| Product |
$ |
10,558 |
|
$ |
14,579 |
| ||
| Service |
|
4,954 |
|
|
7,230 |
| ||
| Total revenues |
|
15,512 |
|
|
21,809 |
| ||
| Cost of revenues: |
||||||||
| Product |
|
4,297 |
|
|
4,975 |
| ||
| Service |
|
1,516 |
|
|
1,475 |
| ||
| Total cost of revenues |
|
5,813 |
|
|
6,450 |
| ||
| Gross margin |
|
9,699 |
|
|
15,359 |
| ||
| Operating expenses: |
||||||||
| Sales and marketing (1) |
|
7,438 |
|
|
8,673 |
| ||
| Research and development (2) |
|
4,668 |
|
|
5,219 |
| ||
| General and administrative (3) |
|
2,000 |
|
|
1,934 |
| ||
| Stock-based compensation |
|
613 |
|
|
121 |
| ||
| Amortization of other intangible assets acquired |
|
721 |
|
|
518 |
| ||
| Total operating expenses |
|
15,440 |
|
|
16,465 |
| ||
| Operating loss |
|
(5,741 |
) |
|
(1,106 |
) | ||
| Interest income, net |
|
1,120 |
|
|
263 |
| ||
| Loss before income taxes |
|
(4,621 |
) |
|
(843 |
) | ||
| Provision for income taxes |
|
13 |
|
|
6 |
| ||
| Net loss |
$ |
(4,634 |
) |
$ |
(849 |
) | ||
| Basic and diluted net loss per share |
$ |
(0.17 |
) |
$ |
(0.03 |
) | ||
| Shares used in calculation of basic and diluted |
|
27,117 |
|
|
32,740 |
| ||
| (1) | Sales and marketing expenses exclude amortization of stock-based compensation of $12 and $13 for the three months ended March 31, 2002 and 2003, respectively. |
| (2) | Research and development expenses exclude amortization of stock-based compensation of $596 and $94 for the three months ended March 31, 2002 and 2003, respectively. |
| (3) | General and administrative expenses exclude amortization of stock-based compensation of $5 and $14 for the three months ended March 31, 2002 and 2003, respectively. |
See accompanying notes.
Page 4
WATCHGUARD TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
| Three Months Ended March 31, |
||||||||
| 2002 |
2003 |
|||||||
| OPERATING ACTIVITIES: |
||||||||
| Net loss |
$ |
(4,634 |
) |
$ |
(849 |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Noncash expenses: |
||||||||
| Depreciation and amortization of property and equipment |
|
623 |
|
|
722 |
| ||
| Amortization of other intangible assets acquired |
|
723 |
|
|
518 |
| ||
| Amortization of stock-based compensation |
|
613 |
|
|
121 |
| ||
| Changes in operating assets and liabilities: |
||||||||
| Trade accounts receivable, net |
|
(2,581 |
) |
|
(1,370 |
) | ||
| Inventories, net |
|
1,448 |
|
|
(1,817 |
) | ||
| Prepaid expenses and other |
|
875 |
|
|
500 |
| ||
| Other intangibles, net and other assets |
|
5 |
|
|
138 |
| ||
| Accounts payable |
|
(2,113 |
) |
|
550 |
| ||
| Accrued expenses and other liabilities |
|
1,283 |
|
|
1,653 |
| ||
| Accrued restructuring and acquisition costs |
|
(329 |
) |
|
(1,590 |
) | ||
| Deferred revenues |
|
893 |
|
|
363 |
| ||
| NET CASH USED IN OPERATING ACTIVITIES |
|
(3,194 |
) |
|
(1,061 |
) | ||
| INVESTING ACTIVITIES: |
||||||||
| Purchases of property and equipment |
|
(19 |
) |
|
(757 |
) | ||
| Proceeds from maturity of marketable securities |
|
17,845 |
|
|
42,655 |
| ||
| Proceeds from sale of marketable securities |
|
17,336 |
|
|
— |
| ||
| Purchases of marketable securities |
|
(32,775 |
) |
|
(37,992 |
) | ||
| NET CASH PROVIDED BY INVESTING ACTIVITIES |
||||||||