UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 September 30, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___ to ___
Commission File Number 000-30093
Websense, Inc.
| Delaware | 51-0380839 | |
| (State or other jurisdiction of incorporation or organization) | (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 October 31, 2003 was 22,374,542.
Websense, Inc.
Form 10-Q
For the Period Ended September 30, 2003
TABLE OF CONTENTS
| Page | ||||||||
| Part I. Financial Information | ||||||||
| Item 1. | Consolidated Financial Statements (Unaudited) | |||||||
Consolidated Balance Sheets as of September 30, 2003 and December 31,
2002 |
1 | |||||||
Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and 2002 |
2 | |||||||
Consolidated Statement of Stockholders’ Equity for the nine months ended
September 30, 2003 |
3 | |||||||
Consolidated Statements of Cash Flows for the nine months ended September 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 | 9 | ||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 19 | ||||||
| Item 4. | Controls and Procedures | 19 | ||||||
| Part II. Other Information | ||||||||
| Item 1. | Legal Proceedings | 20 | ||||||
| Item 2. | Changes in Securities and Use of Proceeds | 20 | ||||||
| Item 3. | Defaults upon Senior Securities | 20 | ||||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 20 | ||||||
| Item 5. | Other Information | 20 | ||||||
| Item 6. | Exhibits and Reports on Form 8-K | 21 | ||||||
| Signatures | 22 | |||||||
i
Part I – Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Websense, Inc.
Consolidated Balance Sheets
(Unaudited and in thousands)
| September 30, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
| (See Note 1) | ||||||||||
Assets |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 90,563 | $ | 61,713 | ||||||
Marketable securities |
76,734 | 78,753 | ||||||||
Accounts receivable, net of allowance for
doubtful accounts |
21,601 | 19,840 | ||||||||
Deferred income
taxes
|
8,731 | 8,731 | ||||||||
Other current
assets
|
1,321 | 1,184 | ||||||||
Total current assets |
198,950 | 170,221 | ||||||||
Property and equipment,
net
|
3,247 | 2,967 | ||||||||
Deferred income taxes, less current portion |
6,701 | 6,701 | ||||||||
Deposits and other
assets
|
392 | 299 | ||||||||
Total assets |
$ | 209,290 | $ | 180,188 | ||||||
Liabilities and stockholders’ equity |
||||||||||
Current liabilities: |
||||||||||
Accounts
payable
|
$ | 551 | $ | 761 | ||||||
Accrued payroll and related
benefits
|
5,152 | 3,627 | ||||||||
Other accrued
expenses
|
3,353 | 3,440 | ||||||||
Income taxes
payable
|
4,406 | 970 | ||||||||
Current portion of deferred
revenue
|
55,804 | 46,964 | ||||||||
Total current
liabilities
|
69,266 | 55,762 | ||||||||
Deferred revenue, less current
portion
|
22,464 | 17,715 | ||||||||
Stockholders’ equity: |
||||||||||
Common
stock
|
225 | 217 | ||||||||
Additional paid-in
capital
|
110,924 | 107,058 | ||||||||
Treasury
stock
|
(4,818 | ) | — | |||||||
Deferred
compensation
|
(7 | ) | (83 | ) | ||||||
Retained earnings
(deficit)
|
11,223 | (957 | ) | |||||||
Accumulated other comprehensive
income |
13 | 476 | ||||||||
Total stockholders’ equity |
117,560 | 106,711 | ||||||||
Total liabilities and stockholders’
equity |
$ | 209,290 | $ | 180,188 | ||||||
See accompanying notes.
1
Websense, Inc.
Consolidated Statements of Operations
(Unaudited and in thousands, except per share amounts)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||
| September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
Revenue |
$ | 21,006 | $ | 16,005 | $ | 59,034 | $ | 43,590 | |||||||||||
Cost of revenue |
1,412 | 1,081 | 4,007 | 3,075 | |||||||||||||||
Gross
margin |
19,594 | 14,924 | 55,027 | 40,515 | |||||||||||||||
Operating expenses: |
|||||||||||||||||||
Selling and marketing |
8,236 | 6,610 | 22,417 | 18,845 | |||||||||||||||
Research and development |
3,224 | 3,063 | 9,548 | 7,941 | |||||||||||||||
General and administrative
|
1,770 | 1,503 | 4,986 | 4,548 | |||||||||||||||
Amortization of
stock-based compensation |
11 | 95 | 76 | 380 | |||||||||||||||
Total operating expenses
|
13,241 | 11,271 | 37,027 | 31,714 | |||||||||||||||
Income from operations |
6,353 | 3,653 | 18,000 | 8,801 | |||||||||||||||
Other income, net |
418 | 665 | 1,873 | 2,066 | |||||||||||||||
Income before income taxes |
6,771 | 4,318 | 19,873 | 10,867 | |||||||||||||||
Provision for income taxes |
2,539 | 280 | 7,693 | 627 | |||||||||||||||
Net income |
$ | 4,232 | $ | 4,038 | $ | 12,180 | $ | 10,240 | |||||||||||
Net income per share: |
|||||||||||||||||||
Basic net income per share |
$ | 0.19 | $ | 0.19 | $ | 0.56 | $ | 0.49 | |||||||||||
Diluted net income per share |
$ | 0.18 | $ | 0.18 | $ | 0.53 | $ | 0.44 | |||||||||||
Weighted average shares – basic |
22,072 | 21,319 | 21,917 | 21,069 | |||||||||||||||
Weighted average shares – diluted |
23,035 | 22,913 | 22,805 | 23,170 | |||||||||||||||
See accompanying notes.
2
Websense, Inc.
Consolidated Statement of Stockholders’ Equity
(Unaudited and in thousands)
| Common stock | ||||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||
| Additional | Deferred | Accumulated | other comprehensive | Total stockholders' | ||||||||||||||||||||||||||||||
| Shares | Amount | paid-in capital | Treasury 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 |
716 | 7 | 3,014 | — | — | — | — | 3,021 | ||||||||||||||||||||||||||
Issuance of common stock for ESPP purchase |
70 | 1 | 852 | — | — | — | — | 853 | ||||||||||||||||||||||||||
Issuance of common stock upon exercise of warrant |
4 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Amortization of deferred compensation |
— | — | — | — | 76 | — | — | 76 | ||||||||||||||||||||||||||
Purchase of treasury stock |
(289 | ) | — | — | (4,818 | ) | — | — | — | (4,818 | ) | |||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||
Net income |
— | — | — | — | — | 12,180 | — | 12,180 | ||||||||||||||||||||||||||
Net change in unrealized gain on marketable securities |
— | — | — | — | — | — | (463 | ) | (463 | ) | ||||||||||||||||||||||||
Comprehensive income |
11,717 | |||||||||||||||||||||||||||||||||
Balance at September 30, 2003 |
22,235 | $ | 225 | $ | 110,924 | $ | (4,818 | ) | $ | (7 | ) | $ | 11,223 | $ | 13 | $ | 117,560 | |||||||||||||||||
See accompanying notes.
3
Websense, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
| Nine Months Ended | |||||||||||
| September 30, | September 30, | ||||||||||
| 2003 | 2002 | ||||||||||
Operating activities: |
|||||||||||
Net income |
$ | 12,180 | $ | 10,240 | |||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
|||||||||||
Depreciation |
1,500 | 1,448 | |||||||||
Amortization of deferred
compensation |
76 | 380 | |||||||||
Deferred revenue |
13,589 | 11,656 | |||||||||
Changes in operating assets and liabilities: |
|||||||||||
Accounts receivable |
(1,761 | ) | (2,844 | ) | |||||||
Deposits and other assets |
(230 | ) | (347 | ) | |||||||
Accounts payable |
(210 | ) | 392 | ||||||||
Accrued payroll and related benefits |
1,525 | 1,037 | |||||||||
Other accrued expenses |
(87 | ) | 841 | ||||||||
Income taxes payable |
3,436 | 437 | |||||||||
Net cash provided by operating activities |
30,018 | 23,240 | |||||||||
Investing activities: |
|||||||||||
Purchases of property and equipment |
(1,780 | ) | (1,558 | ) | |||||||
Purchases of marketable securities |
(134,085 | ) | (66,143 | ) | |||||||
Maturities and sales of marketable securities |
135,641 | 74,229 | |||||||||
Net cash provided by (used in) investing activities |
(224 | ) | 6,528 | ||||||||
Financing activities: |
|||||||||||
Proceeds from exercise of stock options |
3,021 | 2,462 | |||||||||
Proceeds from issuance of common stock for
stock purchase plan |
853 | 722 | |||||||||
Purchases of treasury stock |
(4,818 | ) | — | ||||||||
Net cash provided by (used in) financing
activities |
(944 | ) | 3,184 | ||||||||
Increase in cash and cash equivalents |
28,850 | 32,952 | |||||||||
Cash and cash equivalents at beginning of period |
61,713 | 23,715 | |||||||||
Cash and cash equivalents at end of period |
$ | 90,563 | $ | 56,667 | |||||||
See accompanying notes.
4
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 nine months ended September 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.
5
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) | & | ||||||||||||