WEBSENSE INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
____________________________

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number 000-30093

Websense, Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		51-0380839 (I.R.S. Employer Identification Number)

10240 Sorrento Valley Road
San Diego, California 92121
858-320-8000
(Address of principal executive offices, zip code and telephone number)

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. (1) Yes [X] No [ ] (2) Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12(b)-2): Yes [X] No [ ]

The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of July 31, 2003 was 21,968,835.

TABLE OF CONTENTS


Part I – Financial Information
	Item 1. Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets
	Consolidated Statements of Operations
	Consolidated Statement of Stockholders’ Equity
	Consolidated Statements of Cash Flows
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II — Other Information
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

Websense, Inc.
Form 10-Q
For the Period Ended June 30, 2003

TABLE OF CONTENTS


			Page

Part I. Financial Information

	Item 1. Consolidated Financial Statements (Unaudited)
		Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002		1
		Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002		2
		Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2003		3
		Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002		4
		Notes to Consolidated Financial Statements		5
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			20
	Item 4. Controls and Procedures			20

Part II. Other Information

	Item 1. Legal Proceedings			21
	Item 2. Changes in Securities and Use of Proceeds			21
	Item 3. Defaults upon Senior Securities			21
	Item 4. Submission of Matters to a Vote of Security Holders			21
	Item 5. Other Information			22
	Item 6. Exhibits and Reports on Form 8-K			22

Signatures				23

Part I – Financial Information

Item 1. Consolidated Financial Statements (Unaudited)

Websense, Inc.
Consolidated Balance Sheets
(In thousands)


			June 30, 2003			December 31, 2002

			(Unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	98,270		$	61,713
	Marketable securities			58,586			78,753
	Accounts receivable, net of allowance for doubtful accounts			18,458			19,840
	Deferred income taxes			8,731			8,731
	Other current assets			1,497			1,184

		Total current assets		185,542			170,221
	Property and equipment, net			2,985			2,967
	Deferred income taxes, less current portion			6,701			6,701
	Deposits and other assets			259			299

	Total assets		$	195,487		$	180,188

Liabilities and stockholders’ equity
Current liabilities:
	Accounts payable		$	777		$	761
	Accrued payroll and related benefits			3,949			3,627
	Other accrued expenses			2,975			3,440
	Income taxes payable			3,541			970
	Current portion of deferred revenue			51,492			46,964

		Total current liabilities		62,734			55,762
Deferred revenue, less current portion				19,601			17,715
Stockholders’ equity:
	Common stock			221			217
	Additional paid-in capital			108,308			107,058
	Treasury stock			(2,416	)		—
	Deferred compensation			(18	)		(83	)
	Retained earnings (deficit)			6,991			(957	)
	Accumulated other comprehensive income			66			476
		Total stockholders’ equity		113,152			106,711

	Total liabilities and stockholders’ equity		$	195,487		$	180,188

See accompanying notes.

Websense, Inc.
Consolidated Statements of Operations
(Unaudited and in thousands, except per share amounts)


				Three Months Ended				Six Months Ended

				June 30,		June 30,		June 30,		June 30,
				2003		2002		2003		2002

Revenue				$	19,524	$	14,550	$	38,028	$	27,585
Cost of revenue					1,290		1,061		2,595		1,994

Gross margin					18,234		13,489		35,433		25,591

Operating expenses:
		Selling and marketing			7,546		6,296		14,181		12,235
		Research and development			3,106		2,571		6,324		4,878
		General and administrative			1,672		1,378		3,216		3,045
		Amortization of stock-based compensation			22		125		65		285

			Total operating expenses		12,346		10,370		23,786		20,443

Income from operations					5,888		3,119		11,647		5,148
Other income, net					780		688		1,455		1,401

Income before income taxes					6,668		3,807		13,102		6,549
Provision for income taxes					2,580		261		5,154		347

Net income				$	4,088	$	3,546	$	7,948	$	6,202

Net income per share:
	Basic net income per share			$	0.19	$	0.17	$	0.36	$	0.30

	Diluted net income per share			$	0.18	$	0.15	$	0.35	$	0.26

	Weighted average shares – basic				21,882		21,105		21,838		20,942

	Weighted average shares – diluted				22,613		23,411		22,673		23,411

See accompanying notes.

Websense, Inc.
Consolidated Statement of Stockholders’ Equity
(Unaudited and in thousands)


			Common stock
																			Accumulated
																			other			Total
								Additional		Treasury			Deferred			Accumulated			comprehensive			stockholders'
			Shares			Amount		paid-in capital		stock			compensation			deficit			income			equity

Balance at December 31, 2002				21,734		$	217	$	107,058	$	—		$	(83	)	$	(957	)	$	476		$	106,711
	Issuance of common stock upon exercise of options			275			3		398		—			—			—			—			401
	Issuance of common stock for ESPP purchase			70			1		852		—			—			—			—			853
	Amortization of deferred compensation			—			—		—		—			65			—			—			65
	Purchase of treasury stock			(165	)		—		—		(2,416	)		—			—			—			(2,416	)
	Comprehensive income:
		Net income		—			—		—		—			—			7,948			—			7,948
		Net change in unrealized gain on marketable securities		—			—		—		—			—			—			(410	)		(410	)

		Comprehensive income																					7,538

Balance at June 30, 2003				21,914		$	221	$	108,308	$	(2,416	)	$	(18	)	$	6,991		$	66		$	113,152

See accompanying notes.

Websense, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)


		Six months ended

		June 30,			June 30,
		2003			2002

Operating activities:
Net income		$	7,948		$	6,202
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation		489			953
	Amortization of deferred compensation		65			285
	Deferred revenue		6,414			6,538
Changes in operating assets and liabilities:
	Accounts receivable		1,382			(208	)
	Deposits and other assets		(273	)		(321	)
	Accounts payable		16			(19	)
	Accrued payroll and related benefits		322			(68	)
	Other accrued expenses		(465	)		1,252
	Income taxes payable		2,571			—

Net cash provided by operating activities			18,469			14,614

Investing activities:
Purchases of property and equipment			(507	)		(948	)
Purchases of marketable securities			(69,227	)		(52,544	)
Maturities of marketable securities			88,984			47,678

Net cash provided by (used in) investing activities			19,250			(5,814	)

Financing activities:
Proceeds from exercise of stock options			401			2,214
Proceeds from issuance of common stock for stock purchase plan			853			722
Purchases of treasury stock			(2,416	)		—

Net cash provided by (used in) financing activities			(1,162	)		2,936

Effect of exchange rate changes on cash			—			(41	)

Increase in cash and cash equivalents			36,557			11,695
Cash and cash equivalents at beginning of period			61,713			23,715

Cash and cash equivalents at end of period		$	98,270		$	35,410

See accompanying notes.

WEBSENSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of our financial position and of the results for the interim periods presented.

These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2002, included in Websense, Inc.’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. Operating results for the three and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2003. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

2. Net Income Per Share

Basic net income per common share (“Basic EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income per common share.

The following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for all periods presented:

Net Income

Shares

Per Share

(Numerator)

(Denominator)

Amount

(In thousands, except per share amounts)

For the Three Months Ended:

June 30, 2003:

Basic EPS

4,088

21,882

0.19

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