<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 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 Commission File Number 000-26819
September 30, 1999
- ------------------------------
WATCHGUARD TECHNOLOGIES, INC.
-----------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 91-1712427
- --------------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
316 Occidental Avenue South, Suite 200
--------------------------------------
Seattle WA 98104
----------------
(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_____
19,405,908 shares of WatchGuard common stock were outstanding as of
November 2, 1999.
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WATCHGUARD TECHNOLOGIES, INC.
TABLE OF CONTENTS FOR FORM 10-Q
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- Balance Sheets as of September 30, 1999 and December 31, 1998........................... 3
- Statements of Operations for the three and nine months ended September 30, 1999 and 1998 4
- Statements of Cash Flows for the nine months ended September 30, 1999 and 1998.......... 5
- Notes to Financial Statements........................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 9
Item 3. Quantitative and qualitative disclosures about market risk.............................. 16
PART II. OTHER INFORMATION
Item 2. Changes in securities and use of proceeds............................................... 17
Item 6. Exhibits and Reports on Form 8-K........................................................ 17
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WATCHGUARD TECHNOLOGIES, INC.
BALANCE SHEETS
--------------
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 32,468 $ 1,712
Accounts receivable, net 3,530 3,491
Inventories 1,906 2,156
Prepaid expenses and other 601 450
------------------- -------------------
Total current assets 38,505 7,809
Equipment and furniture, net 1,702 1,140
Deposits, intangibles and other assets 99 83
------------------- -------------------
Total assets $ 40,306 $ 9,032
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ -- $ 2,500
Equipment term loan 462 609
Accounts payable 1,748 2,185
Accrued expenses 1,321 1,016
Deferred revenue 3,431 1,773
------------------- -------------------
Total current liabilities 6,962 8,083
Deferred revenue -- 68
Stockholders' equity:
Preferred stock, par value $0.001 per share, 10,000,000 shares -- 6
Authorized; 0 and 6,712,658 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively
Common stock, par value $0.001 per share, 80,000,000 shares 19 1
authorized; 19,018,029 and 1,479,312 shares issued and
outstanding at September 30, 1999 and December 31, 1998,
respectively
Additional paid-in capital 57,624 16,261
Deferred stock-based compensation (931) (1,466)
Accumulated deficit (23,368) (13,921)
------------------- -------------------
Total stockholders' equity 33,344 881
------------------- -------------------
Total liabilities and stockholders' equity $ 40,306 $ 9,032
=================== ===================
</TABLE>
- ------------------------------------------
The accompanying notes are an integral part of these financial statements.
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WATCHGUARD TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
------------------------
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------- ----------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Product $ 4,614 $ 2,544 $11,832 $ 7,404
Service 907 205 2,264 362
----------------- ----------------- ----------------- -----------------
Total revenues 5,521 2,749 14,096 7,766
Cost of revenues 2,085 1,038 5,566 2,529
----------------- ----------------- ----------------- -----------------
Gross margin 3,436 1,711 8,530 5,237
Operating expenses:
Sales and marketing 3,677 2,315 9,948 6,136
Research and development 1,793 1,465 5,081 3,374
General and administrative 870 645 2,719 1,616
----------------- ----------------- ----------------- -----------------
Total operating expenses 6,340 4,425 17,748 11,126
----------------- ----------------- ----------------- -----------------
Loss from operations (2,904) (2,714) (9,218) (5,889)
Interest income (expense), net 118 24 (229) (59)
----------------- ----------------- ----------------- -----------------
Net loss $(2,786) $(2,690) $(9,447) $(5,948)
================= ================= ================= =================
Net loss per share:
Basic and diluted $ (0.21) $ (3.21) $ (1.76) $ (8.01)
================= ================= ================= =================
Pro forma basic and diluted $ (0.16) $ (0.19) $ (0.60) $ (0.46)
================= ================= ================= =================
Weighted average shares outstanding:
Basic and diluted 13,135 839 5,377 743
================= ================= ================= =================
Pro forma basic and diluted 17,513 14,264 15,753 13,014
================= ================= ================= =================
</TABLE>
- ----------------------------------
The accompanying notes are an integral part of these financial statements.
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WATCHGUARD TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
------------------------
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(9,447) $(5,948)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment 430 144
Stock and warrant issued in exchange for services -- 513
Amortization of deferred stock-based compensation 697 178
Provision for sales returns and allowances 915 1,395
Provision for bad debt expense 74 203
Noncash interest expense 195 --
Changes in operating assets and liabilities:
(Increase) in accounts receivable (1,029) (4,960)
(Increase) decrease in inventories 250 (483)
(Increase) in prepaid expenses and other (150) (46)
(Increase) decrease in deposits, intangibles and other (15) 87
Increase (decrease) in accounts payable and accrued expenses (132) 1,611
Increase in deferred revenue 1,591 2,088
------------------- -------------------
NET CASH USED IN OPERATING ACTIVITIES (6,621) (5,218)
INVESTING ACTIVITIES
Purchase of equipment and furniture (993) (719)
------------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (993) (719)
FINANCING ACTIVITIES
Borrowings on line of credit and notes payable 7,280 1,480
Issuance of warrants 195 --
Principal repayments on line of credit (3,522) (35)
Repayment of note payable (6,600) --
Proceeds from sale of preferred stock -- 7,100
Proceeds from sale of common stock, net of expenses 40,810 --
Proceeds from exercise of common stock options and warrants 207 14
------------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 38,370 8,559
------------------- -------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 30,756 2,622
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,712 603
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $32,468 $ 3,225
=================== ===================
</TABLE>
- ----
The accompanying notes are an integral part of these financial statements.
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WATCHGUARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
WatchGuard Technologies, Inc. ("WatchGuard") is in the business of
developing and marketing Internet security solutions that incorporate a security
appliance, security and management software and an Internet-based broadcast
service designed to keep its products current. WatchGuard was incorporated in
the state of Washington on February 14, 1996 and maintains its headquarters in
Seattle, Washington. In May 1997, WatchGuard reincorporated in the state of
Delaware. In conjunction with the reincorporation, WatchGuard changed its name
from Seattle Software Labs, Inc. to WatchGuard Technologies, Inc. in August
1997.
Interim Financial Information
The accompanying unaudited financial statements of WatchGuard Technologies,
Inc., which include the December 31, 1998 balance sheet that was derived from
audited financial statements, have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, this information includes all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation. The operating
results for the three and nine month periods ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1999. WatchGuard does not separately disclose comprehensive
income because it does not have any components of comprehensive income other
than net loss. The financial statements should be read in conjunction with the
financial statements and notes thereto for the fiscal year ended December 31,
1998 included in WatchGuard's Prospectus, dated July 30, 1999, filed with the
Securities and Exchange Commission in conjunction with WatchGuard's registration
of shares for the initial public offering of its common stock.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Statement of Position ("SOP") 97-2, "Software Revenue Recognition", was
issued in October 1997 by the American Institute of Certified Public Accountants
(AICPA) and was amended by SOP 98-4. In December 1998, the AICPA issued SOP 98-
9, which amends SOP 97-2 and 98-4 and is effective for transactions entered into
after March 15, 1999. WatchGuard adopted SOP 97-2, as amended by SOP 98-9,
effective January 1, 1998. Based upon its interpretation of SOP 97-2 and SOP
98-9, WatchGuard believes its current revenue recognition policies and practices
are consistent with the SOPs. However, full implementation guidelines for the
revenue recognition standard has not yet been issued. Once available,
implementation guidance could lead to unanticipated changes in current revenue
accounting practices, and these changes could materially adversely affect the
timing of WatchGuard's future revenues and earnings.
WatchGuard generates revenues through sales of its Internet security
products, including related software licenses, Internet security appliances and
subscriptions for its LiveSecurity broadcast service, which includes threat
responses, information alerts, expert editorials, user support flashes, software
updates and maintenance. Software license revenues are generated from licensing
the rights to use WatchGuard's products directly to end-users, from sublicense
fees from resellers, distributors and, beginning in late 1998, from sales of its
products to Internet service providers (ISPs), which utilize the product to
provide managed security services to the ISPs' customers. Revenues from
LiveSecurity subscriptions are recognized ratably over the term of the contract,
typically one year.
Revenues from software license agreements are generally recognized upon
delivery of software if persuasive evidence of an arrangement exists, collection
is probable, the fee is fixed or determinable and vendor-specific objective
evidence exists to allocate the total fee to elements of the arrangement.
Payment terms do not extend beyond a year. A limited number of WatchGuard's
distributors have the right to delay payment until the product is sold to the
end-user. Revenues from these few arrangements are not recognized until sale to
the end-user occurs. WatchGuard provides unspecified upgrades on a when-and-if-
available basis. These upgrades are considered post-contract customer support
(PCS) and are recognized as revenues ratably over the term of the PCS
arrangement. Vendor-specific objective evidence is typically based on the price
charged when an element is sold separately, or in the case of an element not
sold separately, on the price established by authorized management, if it is
probable that the price, once established, will not change before market
introduction. WatchGuard uses the residual method, as defined in SOP 98-9, to
allocate revenue to delivered elements once it has established vendor-specific
objective evidence for all undelivered elements. Under the residual method, any
discount in
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the arrangement is allocated to the delivered element. WatchGuard provides for
return rights and pricing protection rights for some of its customers. The
return rights included in these customer agreements are generally limited to a
percentage of purchases by these customers for the previous quarter. The pricing
protection rights in these agreements are generally limited to 60 to 90 days
after notification of a price change. Revenues are reduced by the provision for
estimated returns and allowances at the time the sale is made. The reserves are
reviewed and revised as needed.
Reclassifications
Certain prior-period items have been reclassified to conform to the
current-period presentation.
NOTE 3 - BALANCE SHEET ACCOUNT DETAIL
Accounts Receivable
Accounts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ----------------
<S> <C> <C>
Trade accounts receivable $4,136 $4,522
Reserve for returns (510) (615)
Allowance for uncollectible accounts (304) (449)
---------------- ----------------
Trade accounts receivable, net 3,322 3,458
Other accounts receivable 208 33
---------------- ----------------
Total net accounts receivable $3,530 $3,491
================ ================
</TABLE>
Inventories
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ----------------
<S> <C> <C>
Finished goods $1,122 $1,203
Components 784 953
---------------- ----------------
$1,906 $2,156
================ ================
</TABLE>
NOTE 4 - INITIAL PUBLIC OFFERING
On July 30, 1999, WatchGuard issued 3,500,000 shares of its common stock at
an initial public offering price of $13.00 per share. The proceeds to WatchGuard
from the offering were approximately $40.8 million, net of $4.7 million in
offering expenses, underwriting discounts and commissions. Concurrent with the
offering, all 6,712,658 shares of preferred stock automatically converted into
13,425,316 shares of common stock. In addition, 379,570 shares of common stock
held by selling shareholders were sold in the offering, upon the exercise of
the underwriters' over-allotment option.
NOTE 5 - LOSS PER SHARE
Basic and diluted net loss per common share is calculated by dividing net
loss by the weighted average number of common shares outstanding. Other common
stock equivalents, including stock options and warrants, are excluded from the
computation as their effect is antidilutive. Pro forma net loss per share is
computed using the weighted average number of shares used for basic and diluted
per share amounts and the weighted average convertible preferred stock
outstanding as if such shares were converted to common stock at the time of
issuance.
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The components of calculating net loss per share are set forth in the
following table (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------- -------------------------------------------
1999 1998 1999 1998
------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Net loss $(2,786) $(2,690) $(9,447) $(5,948)
=================== =================== ================== ===================
Weighted average number of shares:
For basic earnings per share 13,135 839 5,377 743
Effect of dilutive securities:
Employee stock options -- -- -- --
------------------- ------------------- ------------------ -------------------
Weighted average number of shares:
For diluted earnings per share 13,135 839 5,377 743
Pro forma adjustment for convertible
preferred stock 4,378 13,425 10,376 12,271
------------------- ------------------- ------------------ -------------------
Pro forma weighted average shares 17,513 14,264 15,753 13,014
=================== =================== ================== ===================
Net loss per share:
Basic and diluted $ (0.21) $ (3.21) $ (1.76) $ (8.01)
=================== =================== ================== ===================
Pro forma basic and diluted $ (0.16) $ (0.19) $ (0.60) $ (0.46)
=================== =================== ================== ===================
</TABLE>
Options to purchase 2,033,000 shares of common stock and warrants to
purchase 234,000 shares of common stock were excluded from the computation of
actual and pro forma diluted net loss per common share, as their effect is
antidilutive.
NOTE 6 - INTERNATIONAL REVENUES
WatchGuard licenses and markets its Internet security products and services
throughout the world and operates in a single industry segment. While certain
expenses for sales and marketing activities are incurred in various geographical
regions, substantially all of WatchGuard's assets are located, and the majority
of its operating expenses are incurred, at its corporate headquarters. Revenue
information by geographic region, which is the only segment information
presented, is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------- -------------------------------------------
1999 1998 1999 1998
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
United States $2,680 $2,084 $ 6,983 $5,029
Rest of World 2,841 665 7,113 2,737
------------------- ------------------- ------------------- -------------------
Total $5,521 $2,749 $14,096 $7,766
=================== =================== =================== ===================
</TABLE>
NOTE 7 - ACQUISITION OF BUSINESS
On October 19, 1999, WatchGuard acquired BeadleNet, LLC, a privately held
innovator of Internet security solutions for small offices and home offices.
Under the terms of the agreement, WatchGuard acquired substantially all of the
assets of BeadleNet for approximately $3,400,000 in cash and 335,931
unregistered shares of WatchGuard common stock. In addition, WatchGuard agreed
to pay BeadleNet an additional $1,000,000 if certain specified technology items
are completed and released to market on or before January 1, 2000. This
additional payment, if earned, will consist of $400,000 in cash and a number of
unregistered shares of WatchGuard common stock valued at $600,000 on January 1,
2000, based on the trading prices of WatchGuard common stock on the Nasdaq
National Market on that date. The transaction will be accounted for using the
purchase method of accounting, and, accordingly, the results of BeadleNet's
operations will be included in WatchGuard's financial statements from the date
of acquisition.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of WatchGuard's results
of operations and financial condition. The discussion should be read in
conjunction with the financial statements and notes thereto. References to
"we," "our" and "us" in this report refer to WatchGuard Technologies, Inc.
Special Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q for WatchGuard contains certain forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 that reflect our views with respect to future events and
financial performance. These forward-looking statements include statements
about our plans, objectives, expectations, intentions, future financial
performance and other statements that are not historical facts. We use words
such as anticipates, believes, expects, future and intends, and similar
expressions, to identify forward-looking statements, but the absence of these
words does not mean that the statement is not forward-looking. Readers should
pay particular attention to the descriptions of risks and uncertainties
described in our Securities and Exchange Commission filings, including the
Prospectus contained in our Registration Statement on Form S-1, dated July 30,
1999, related to our initial public offering. All forward-looking statements
included in this report are based on information available to us on the date of
this report. We assume no obligation or duty to update any such forward-looking
statements.
Overview
WatchGuard is a leading provider of dynamic, comprehensive Internet
security solutions designed to protect small- to medium-sized enterprises, or
SMEs, that use the Internet for electronic commerce and communications. Our
innovative subscription-based LiveSecurity solution broadcasts threat responses,
expert editorials, user support flashes, software updates and information alerts
over the Internet, enabling SMEs to keep their security systems current with
minimal effort. Since our inception, we have invested heavily in the
development of our products and services. In September 1996, we introduced our
initial Internet security appliance and began selling our products both
domestically and internationally. In 1997, we significantly expanded our sales
force, adding 12 sales employees to recruit indirect channel partners around the
world, and expanded our distribution efforts in the European and Asia/Pacific
markets. In September 1998, we launched our managed security service offering
for Internet security providers, or ISPs. We also continue to recruit and hire
additional employees in marketing, development, technical support and finance
and invest in our operational infrastructure to support our growth.
Our revenues totaled $331,000 in 1996 and $5.1 million in 1997. Revenues
grew significantly to $11.4 million in 1998, representing a 123% increase over
1997. Product revenues as a percentage of total revenues were 99% in 1996, 98%
in 1997 and 94% in 1998. Service revenues, although small, are growing and are
expected to be a significant component of our revenues in the future as we
expand our LiveSecurity subscription-based broadcast service. As a result of
our investments in our worldwide sales and distribution channels, development of
new products and services, brand development and investment in our operational
infrastructure, we have incurred net losses in each fiscal quarter. As of
September 30, 1999, we had an accumulated deficit of $23.4 million. We
anticipate significant growth in our operating expenses as we continue to expand
our business. In the future, however, we expect our operating expenses to begin
to decline as a percentage of total revenues.
Sources of Revenues and Revenue Recognition Policy
We generate revenues through:
* sales of products and service subscriptions through our indirect
distribution partners at a discount from list price, typically 40%;
* sales of products and service subscriptions directly to our ISP customers
at volume pricing rates; and
* from time to time, sales of service subscription renewals directly to our
enterprise customers at list price.
Product revenues include perpetual software license fees and sales of our
security appliance. Service revenues include fees for access to our LiveSecurity
broadcast service for product updates, security threat responses, general
security information and technical support. Service revenues also include annual
fees for our LiveSecurity for MSS, which allows our ISP customers access to the
LiveSecurity broadcast service and the ability to manage and update a specific
number of their customers' security appliances. To date, service subscription
renewals directly from our enterprise customers have not been material.
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We recognize revenues only when a contract or agreement has been executed,
delivery has occurred, the fee is fixed and determinable and we believe
collection is probable. We generally recognize product revenues upon shipment
and service subscription revenues ratably on a monthly basis, generally over a
one-year period.
Results of Operations
The following table provides financial data for the periods indicated as a
percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- -----------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product 83.6 % 92.5 % 83.9 % 95.3 %
Service 16.4 7.5 16.1 4.7
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues 37.8 37.8 39.5 32.6
----- ----- ----- -----
Gross margin 62.2 62.2 60.5 67.4
Operating expenses:
Sales and marketing 66.6 84.2 70.6 79.0
Research and development 32.5 53.3 36.0 43.4
General and administrative 15.7 23.5 19.3 20.8
----- ----- ----- -----
Total operating expenses 114.8 161.0 125.9 143.2
----- ----- ----- -----
Operating loss (52.6) (98.8) (65.4) (75.8)
Interest income (expense), net 2.1 0.9 (1.6) (0.8)
----- ----- ----- -----
Net loss (50.5)% (97.9)% (67.0)% (76.6)%
===== ===== ===== =====
</TABLE>
Three Months Ended September 30, 1999 and 1998
Revenues
Total revenues, which consist of product revenues and service revenues,
increased from $2.7 million in the three months ended September 30, 1998 to $5.5
million in the three months ended September 30, 1999, an increase of 101%.
During these periods, no one customer accounted for 10% or more of total
revenues. The increase in total revenues was primarily due to increases in
sales volume caused by increased distribution in the European, Asia/Pacific and
North American markets. Total international revenues represented approximately
24% of total revenues in the three months ended September 30, 1998 and 51% in
the three months ended September 30, 1999.
Product revenues include (1) the perpetual software license fees for our
security management system and the sale of our security appliance as part of the
LiveSecurity System and (2) the sale of our NOC, or network operations center,
security suite software license and our security appliance as part of
LiveSecurity for MSS. Product revenues increased from $2.5 million in the three
months ended September 30, 1998 to $4.6 million in the three months ended
September 30, 1999, an increase of 81%. As a percentage of total revenues,
product revenues decreased from 93% in the three months ended September 30, 1998
to 84% in the three months ended September 30, 1999. We do not believe that the
historical percentage growth rates of product revenues will be sustainable as
our revenue base increases. Historically, we have generated the majority of our
revenues from our product sales, which, until the introduction of LiveSecurity
for MSS in late 1998, consisted primarily of the sale of our LiveSecurity System
for the enterprise. Product revenues from LiveSecurity for MSS are growing and
are expected to be a more significant component of our revenues in the future.
Service revenues include the annual fee for our LiveSecurity broadcast
service and annual client licenses for MSS, which are sold as a part of the
LiveSecurity System and LiveSecurity for MSS. Service revenues increased from
$205,000 in the three months ended September 30, 1998 to $907,000 in the three
months ended September 30, 1999, an increase of 342%.
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As a percentage of total revenues, service revenues increased from 7% in the
three months ended September 30, 1998 to 16% in the three months ended September
30, 1999. As renewals of our service subscriptions and annual client licenses
for the LiveSecurity System and LiveSecurity for MSS increase, we expect service
revenues as a percentage of total revenues to increase.
The provision for sales returns and allowances was $845,000, or 31% of
total revenues, for the three months ended September 30, 1998 and $185,000, or
3% of total revenues, for the three months ended September 30, 1999. The
provision for returns and allowances for the year ended December 31, 1998 was
approximately 14% of total revenues. The returns and allowances reserve,
established in 1998 to address the return rights and pricing protection rights
of some of our customers, primarily related to anticipated returns originating
from the introduction of a new version of our security appliance, the Firebox
II, during the last half of 1998. Returns and allowances before that time were
immaterial. The provision, as a percentage of total revenues, for the three
months ended September 30, 1999 as compared to the provision for both the three
months ended September 30, 1998 and for all of 1998, reflects a reduction in the
expected returns and pricing protection allowances based on actual results over
the last several quarters and no recent introduction of replacement products.
Cost of Revenues
Cost of revenues consists of product and service costs, which include the
costs of manufacturing our security appliance, product packaging, third-party
product licensing fees, various overhead costs of operating our LiveSecurity
broadcast service, and our technical support organization. Historically, cost
of revenues has increased in total dollar amount and as a percentage of total
revenues in each year. Cost of revenues increased from $1.0 million in the
three months ended September 30, 1998 to $2.1 million in the three months ended
September 30, 1999. As a percentage of total revenues, cost of revenues were
38% in both the three-month periods ended September 30, 1998 and 1999.
The dollar increases in cost of revenues were primarily due to increases in
sales volume. The cost of revenues as a percentage of total revenues reflects
an increase in the cost of manufacturing our Firebox II security appliance and
an increase in personnel-related costs of our service organization, but is
offset by the increased leverage of our service costs against an increasing rate
of service revenues. In the third quarter of 1998, we released an enhanced
version of our security appliance, the Firebox II, which incorporated additional
features required to support our LiveSecurity for MSS product. The Firebox II is
more expensive to manufacture than the previous version of our security
appliance, which increased our cost of revenues. Over time, as volume levels
increase, we expect the unit cost to manufacture the Firebox II to decrease.
We expect service costs to increase in total dollar amount as our
enterprise customer base expands and our LiveSecurity for MSS product for ISPs
is deployed. Depending on our product and service mix, which may affect our
margins, we expect our cost of revenues as a percentage of total revenues to
remain at or slightly above our third quarter 1999 level. As revenues from
service subscriptions increase and become a greater percentage of total
revenues, we expect our gross margin to increase.
Operating Expenses
Sales and Marketing. Sales and marketing expenses include salaries,
commissions and related expenses and certain variable marketing expenses,
including public relations costs, marketing collateral and trade show expenses.
Overall, sales and marketing expenses increased from $2.3 million in the three
months ended September 30, 1998 to $3.7 million in the three months ended
September 30, 1999, an increase of 59%. As a percentage of total revenues,
sales and marketing expenses decreased from 84% in the three months ended
September 30, 1998 to 67% in the three months ended September 30, 1999. The
dollar increase in sales and marketing expenses was due primarily to recruiting,
training and supporting our domestic and international resellers and
distributors and, to a lesser extent, to establishing brand recognition of our
products and services. Specifically, major components of the increase included:
* an increase in payroll and related expenses from $927,000 to $1.8
million;
* an increase in travel expenses from $332,000 to $604,000; and
* an increase in variable marketing costs from $572,000 to $969,000.
The decrease in sales and marketing expenses as a percentage of total
revenues reflects both increased productivity of and efficiencies in managing
our indirect channel network and realization of our previous investments to
expand distribution, capture market share and establish brand recognition of our
products. We expect to see a gradual reduction in sales and marketing expenses
as a percentage of total revenues.
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<PAGE>
Research and Development. Research and development expenses consist of
salaries, computing equipment and software tools, nonrecurring costs associated
with our security appliance prototypes and payment of designers and contractors.
Research and development expenses increased from $1.5 million in the three
months ended September 30, 1998 to $1.8 million in the three months ended
September 30, 1999, an increase of 22%. As a percentage of total revenues,
research and development expenses decreased from 53% in the three months ended
September 30, 1998 to 33% in the three months ended September 30, 1999. The
dollar increase in research and development expenses reflects the growth of our
research and development organization to expand our enterprise product line,
development of our recently released LiveSecurity for MSS product and our
efforts to respond to new and emerging security threats through our LiveSecurity
broadcast service. Specifically, major components of the change included:
* an increase in payroll and related expenses from $730,000 to $1.5
million; and
* a decrease in non-cash charges for stock transactions and amortization
of deferred stock based compensation from $232,000 to $91,000.
We will continue to increase our research and development expenses in total
dollar amounts to enhance and expand our current product offerings, develop new
products and enhance our rapid response team and advisory council, which analyze
new security vulnerabilities and threats and provide continuing education to our
employees on Internet security. We expect that research and development
expenses will continue to increase in total dollar amounts but will decrease as
a percentage of total revenues.
General and Administrative. General and administrative expenses include
costs of executive, human resource, finance and administrative support
functions, provision for uncollectible accounts and legal and accounting
professional services. General and administrative expenses increased from
$645,000 in the three months ended September 30, 1998 to $870,000 in the three
months ended September 30, 1999, an increase of 35%. As a percentage of total
revenues, general and administrative expenses decreased from 24% in the three
months ended September 30, 1998 to 16% in the three months ended September 30,
1999. The dollar increase in general and administrative expenses reflects the
expansion of our infrastructure to manage the growth of our operations.
Specifically, major components of the increase included:
* an increase in payroll and related expenses from $234,000 to $393,000;
and
* an increase in professional fees from $32,000 to $142,000.
We expect that these expenses will continue to increase in total dollar
amounts but will decrease as a percentage of total revenues.
Deferred Compensation. Deferred compensation is recorded as the
difference between the exercise price of options we granted and the deemed fair
value for financial reporting purposes of our common stock during the periods in
which the options were granted. Deferred compensation is amortized over the
vesting periods of the options. Total amortization of compensation expense was
$157,000 for the three months ended September 30, 1998 and $186,000 for the
three months ended September 30, 1999. Amortization of deferred compensation is
included in the sales and marketing, research and development and general and
administrative expense categories, as described above.
Interest Income (Expense)
Interest expense of $47,000 in the three months ended September 30, 1998
resulted from borrowings on our bank line of credit and our equipment term loan,
and was offset by $71,000 of interest income generated from our investment of
proceeds from the sale of preferred stock. Interest expense of $135,000 in the
three months ended September 30, 1999 resulted from borrowings on our bank line
of credit, our equipment term loan and our convertible note agreements, and was
partially offset by $253,000 of interest income generated primarily from our
investment of proceeds from the sale of common stock in our initial public
offering.
Nine Months Ended September 30, 1999 and 1998
Revenues
Total revenues increased from $7.8 million in the nine months ended
September 30, 1998 to $14.1 million in the nine months ended September 30, 1999,
an increase of 82%. During these periods, no one customer accounted for 10% or
more of total revenues. The increase in total revenues was primarily due to
increases in sales volume caused by increased distribution in the European,
Asia/Pacific and North American markets. Total international revenues
represented
Page 12
<PAGE>
approximately 35% of total revenues in the nine months ended September 30, 1998
and 50% in the nine months ended September 30, 1999.
Product revenues increased from $7.4 million in the nine months ended
September 30, 1998 to $11.8 million in the nine months ended September 30, 1999,
an increase of 60%. As a percentage of total revenues, product revenues
decreased from 95% in the nine months ended September 30, 1998 to 84% in the
nine months ended September 30, 1999.
Service revenues increased from $362,000 in the nine months ended September
30, 1998 to $2.3 million in the nine months ended September 30, 1999, an
increase of 525%. As a percentage of total revenues, service revenues increased
from 5% in the nine months ended September 30, 1998 to 16% in the nine months
ended September 30, 1999.
The provision for sales returns and allowances was $1,395,000, or 18% of
total revenues, for the nine months ended September 30, 1998 and $915,000, or 6%
of total revenues, for the nine months ended September 30, 1999. The provision,
as a percentage of total revenues, for the nine months ended September 30, 1999
as compared to the nine months ended September 30, 1998, reflects a reduction in
the expected returns remaining from the 1998 introduction of the Firebox II plus
a recurring provision for future expected returns.
Cost of Revenues
Cost of revenues increased from $2.5 million in the nine months ended
September 30, 1998 to $5.6 million in the nine months ended September 30, 1999.
As a percentage of total revenues, cost of revenues increased from 33% in the
nine months ended September 30, 1998 to 39% in the nine months ended September
30, 1999.
The dollar increases in cost of revenues were primarily due to increases in
sales volume. The increase in cost of revenues as a percentage of total
revenues was primarily due to an increase in the cost of manufacturing our
Firebox II security appliance and, to a lesser extent, to an increase in
personnel-related costs of our service organization, both of which are described
above.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased from $6.2
million in the nine months ended September 30, 1998 to $9.9 million in the nine
months ended September 30, 1999, an increase of 62%. As a percentage of total
revenues, sales and marketing expenses decreased from 79% in the nine months
ended September 30, 1998 to 71% in the nine months ended September 30, 1999.
The dollar increase in sales and marketing expenses was due primarily to
recruiting, training and supporting our domestic and international resellers and
distributors and, to a lesser extent, to establishing brand recognition of our
products and services. Specifically, major components of the increase included:
* an increase in payroll and related expenses from $2.7 million to $4.7
million;
* an increase in travel expenses from $1.0 million to $1.8 million;
* an increase in marketing costs from $1.6 million to $2.4 million; and
* an increase in amortization of deferred stock compensation from $63,000
to $256,000.
The decrease in sales and marketing expenses as a percentage of total
revenues reflects both increased productivity of and efficiencies in managing
our indirect channel network and realization of our previous investments to
expand distribution, capture market share and establish brand recognition of our
products.
Research and Development. Research and development expenses increased
from $3.4 million in the nine months ended September 30, 1998 to $5.1 million in
the nine months ended September 30, 1999, a 51% increase. As a percentage of
total revenues, research and development expenses decreased from 43% in the nine
months ended September 30, 1998 to 36% in the nine months ended September 30,
1999. The dollar increase in research and development expenses reflects the
growth of our research and development organization to expand our enterprise
product line, development of our recently released LiveSecurity for MSS product
and our efforts in researching and evaluating new and emerging security threats
through our LiveSecurity broadcast service. Specifically, major components of
the increase included:
* an increase in payroll and related expenses from $1.9 million to $3.7
million and
* an increase in contract labor and consulting services from $270,000 to
$438,000.
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<PAGE>
General and Administrative. General and administrative expenses increased
from $1.6 million in the nine months ended September 30, 1998 to $2.7 million in
the nine months ended September 30, 1999, an increase of 68%. As a percentage
of total revenues, general and administrative expenses decreased slightly from
21% in the nine months ended September 30, 1998 to 19% in the nine months ended
September 30, 1999. The dollar increase in general and administrative expenses
reflects the expansion of our infrastructure to manage the growth of our
operations. Specifically, major components of the increase included:
* an increase in payroll and related expenses from $597,000 to $1.0
million;
* an increase in professional fees from $167,000 to $523,000, related
primarily to legal and accounting costs incurred in conjunction with the
revision and implementation of certain employee benefit plans, as well
as costs associated with the relocation of some international employees;
and
* an increase in deferred stock compensation from $27,000 to $103,000.
Deferred Compensation. Amortization of deferred compensation expenses was
$178,000 for the nine months ended September 30, 1998 and $697,000 for the nine
months ended September 30, 1999. Amortization of deferred compensation is
included in the sales and marketing, research and development and general and
administrative expense categories, as described above.
Interest Income (Expense)
Interest expense of $119,000 in the nine months ended September 30, 1998
resulted from borrowings on our bank line of credit and our equipment term loan,
and was offset by $60,000 of interest income generated from our investment of
proceeds from the sale of preferred stock. Interest expense of $497,000 in the
nine months ended September 30, 1999 resulted from borrowings on our bank line
of credit, our equipment term loan and our convertible note agreements, and was
offset by $268,000 of interest income generated from our investment of proceeds
from the sale of preferred stock and from proceeds from the sale of common stock
in our initial public offering.
Income Taxes
We have experienced losses since inception, resulting in a net operating
loss carryforward position of approximately $19 million as of September 30,
1999. These carryforwards, if not utilized, will begin to expire in 2011, and
may be subject to limitations under Section 382 of the Internal Revenue Code.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through
private placements of convertible preferred stock, and most recently through the
proceeds from our initial public offering. Through September 30, 1999, net
proceeds from private placements of preferred stock and our initial public
offering totaled $54.0 million. We have also financed our operations through
equipment financing, traditional accounts receivable financing arrangements,
bridge financing arrangements and convertible notes. Currently, we have the
following banking arrangements:
(a) We have a working capital revolving line of credit with a bank, secured by
our accounts receivable. The amount available under this facility is
limited to the greater of our borrowing base or $4.5 million. For purposes
of this loan, the borrowing base means the sum of 75% of the net amount of
our eligible domestic accounts receivable and 50% of the net amount of our
eligible foreign accounts receivable. As of September 30, 1999, we had no
borrowings on this line of credit, which expires in November 1999 and bears
interest at prime plus 2% per year. We are currently renegotiating our
line of credit agreement.
(b) We also have two term-loan facilities with the same bank to finance new
capital equipment purchases. The first facility closed to further advances
on March 5, 1998 and is being repaid in 36 equal monthly payments. We made
the first of these payments on April 5, 1998. The loan, which bears
interest at prime plus 1.5% per year, matures on March 5, 2001, at which
time all unpaid principal and interest will be due and payable. The second
facility closed to further advances on December 31, 1998 and is being
repaid in 36 equal monthly payments. We made the first of these payments
on January 31, 1999. The loan, which bears interest at prime plus 1% per
year, matures on December 31, 2002, at which time all unpaid principal and
interest will be due and payable. As of September 30, 1999, we had a
combined principal balance of $462,000 due under these term loans.
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<PAGE>
As of September 30, 1999, we had $32.5 million in cash and cash
equivalents, invested primarily in high-quality money market accounts. We
believe that the market risk arising from our holdings of these financial
instruments is not material. Our working capital as of September 30, 1999 was
$31.5 million.
Operating activities. Our operating activities resulted in net cash
outflows of $5.2 million for the nine months ended September 30, 1998 and $6.6
million for the nine months ended September 30, 1999. The operating cash
outflows in 1998 and 1999 resulted primarily from significant investments in
sales and marketing and research and development, all of which led to operating
losses. Cash used in operating activities was net of noncash charges totaling
$2.4 million for the nine months ended September 30, 1998 and $2.3 million for
the nine months ended September 30, 1999. These noncash charges were primarily
associated with depreciation and amortization of capital assets, provisions for
bad debts and sales returns and allowances, and compensation charges resulting
from the issuance of stock options and warrants. Cash used in operating
activities from working capital components impacting operating activities was
$1.7 for the nine months ended September 30, 1998, and cash provided from
working capital components for operating activities was $515,000 for the nine
months ended September 30, 1999. For the nine months ended September 30, 1999,
there were large fluctuations within some major working capital components, as
described below:
(a) Receivables remained relatively constant at $3.5 million at both December
31, 1998 and September 30, 1999, while revenues for the three months ended
December 31, 1998 and September 30, 1999 were $3.6 million and $5.5
million, respectively. We implemented enhanced credit and collection
processes during 1999 that contributed to improved collection periods.
Days sales outstanding, or DSO, were 86 days for the quarter ended December
31, 1998 compared to 54 days for the quarter ended September 30, 1999.
Based upon sales mix, timing differences arising from varying payment
cycles and terms in our customer agreements, we expect our DSO to generally
range from 55 days to 70 days. Reserves for uncollectable accounts were
$449,000 at December 31, 1998 and $304,000 at September 30, 1999. The
decrease reflects reduced exposure attributed to our improved credit and
collection processes referred to above. Our returns and allowance reserve
was $615,000 at December 31, 1998 and $510,000 at September 30, 1999, and
reflects our estimate of returns and allowances associated with the return
rights and price protection rights of some of our customers. The reserve
may fluctuate from time to time depending upon the timing of product
introductions and pricing program changes.
(b) Deferred revenue increased from $1.8 million at December 31, 1998 to $3.4
million at September 30, 1999. The increase reflects service subscriptions
and annual client licenses associated with the continued growth of product
sales and, to a lesser extent, with service subscription renewals.
Deferred revenue from service subscriptions and annual client licenses is
generally amortized ratably over a one-year period.
Investing activities. Cash used in investing activities totaled $719,000
for the nine months ended September 30, 1998 and $993,000 for the nine months
ended September 30, 1999, and reflect capital expenditures for computing
equipment and furniture.
Financing activities. Cash provided by financing activities totaled $8.6
million for the nine months ended September 30, 1998 and $38.4 million for the
nine months ended September 30, 1999. These activities primarily reflect
proceeds from the sale of preferred stock and borrowings on our line of credit
during 1998 and proceeds from our initial public offering in 1999, offset
somewhat by borrowing and repayments under our bank line of credit and various
bridge financing arrangements.
We believe that existing cash and cash equivalents balances and our lines
of credit will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. The
underlying assumed levels of revenues and expenses, however, may prove to be
inaccurate, and we may need to seek additional funding through public or private
financings or other arrangements before that time, which we believe can be
obtained from existing or new sources.
Year 2000 Compliance
Like many companies, we face risks relating to Year 2000 computer issues.
These issues result from computer systems, software and computer chips embedded
in products that use only two digits to store dates in their year code fields
and are therefore incapable of distinguishing 21st century dates from 20th
century dates. As a result, many computers, programs and chips are unable to
process date-related information beyond December 31, 1999. Unless they are
upgraded to process date information correctly, they will fail or produce
erroneous results when the century changes on January 1, 2000. If our internal
management and external information systems are not Year 2000 compliant when the
century changes, some or all of our business operations could be disrupted.
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<PAGE>
Our products and LiveSecurity service utilize a mixture of hardware and
software technologies. The hardware technology we use in our Firebox family of
security appliance products consists of a combination of industry-standard
components configured to our specifications and driven by internally developed
software technologies. We have tested and analyzed current versions of these
internally developed software technologies in conjunction with our security
appliances and believe them to be Year 2000 compliant. These current versions
include the latest version of our software that drives the Firebox 10 and 100
and the version that drives the Firebox II and Firebox II Plus, which we are
currently shipping. While we are not aware of any significant Year 2000 issues
with previous versions, we are recommending to our customers that they implement
our current versions. In addition to other internally developed software, our
LiveSecurity service incorporates current technologies acquired from third-party
vendors. We have completed our Year 2000 assessment of the internally developed
software incorporated in our LiveSecurity service. In addition, we surveyed the
third-party vendors to determine whether their products are Year 2000 compliant
and applied any updates or arrangements required to correct any Year 2000
problems. We have completed the first phase of our Year 2000 plan and are
continuing to monitor vendors for additional Year 2000 upgrades.
We completed a review of our internal management information and other
administrative systems to identify and modify any products, services or systems
that were not Year 2000 compliant. Our internal information management and
other administrative systems generally are based on technologies and products
acquired from industry-leading third-party vendors. We have contacted these
vendors to determine whose products, services or systems may be impacted by Year
2000 compliance issues and whose technologies and products will require
upgrades. We completed necessary upgrades with these vendors and are continuing
to monitor vendors for additional recommended Year 2000 upgrades for application
as soon as they become available.
Our plan may not adequately and timely address the Year 2000 issue and we
may be unable to upgrade any or all of our products, services and internal
information management and other administrative systems as we have planned. In
addition, any upgrades may not effectively address the Year 2000 issue. If
required upgrades are incomplete, untimely or unsuccessful, our business may be
adversely affected. Furthermore, if our suppliers, vendors, distributors or
producers of products that we use or with which our products exchange data fail
to timely correct their own Year 2000 software, firmware and hardware problems,
or if any of them convert to a system that is incompatible with our systems, our
business could be adversely affected. We may also experience reduced sales of
our products and services as potential customers reduce their budgets for
Internet security because of their own expenditures for Year 2000 compliance.
We currently expect that the total cost of our efforts to assess Year 2000
compliance will not be material. The most reasonably likely worst-case
scenario, however, would involve the incomplete, untimely or unsuccessful
identification or correction of Year 2000 compliance issues of multiple third-
party vendors whose technology is incorporated into our LiveSecurity products
and services. If this were to occur, interruptions in our ability to deliver
our LiveSecurity service would result and our business would be adversely
affected.
Our LiveSecurity service gives us an efficient and timely method of
transferring software patches to our customers if a Year 2000 problem is found
with our internally developed software. In addition, we continue to address
potential Year 2000 issues and establish contingency plans to be taken if we do
not successfully execute our Year 2000 plan on a timely basis. Still, some
problems may remain undetected or uncorrected, and our continuing efforts to
address the Year 2000 issue could involve unforeseen time and expense. Any Year
2000 issues that are not identified and corrected in a timely fashion would
adversely affect our business. We expect that the cost to fix any Year 2000
problems that may be identified, however, will involve internal labor-hours and
will not be material.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have assessed our vulnerability to certain market risks, including
interest rate risk associated with financial instruments included in cash and
cash equivalents. Due to the short-term nature of these investments and our
investment policies and procedures, we have determined that the risk associated
with interest rate fluctuations related to these financial instruments does not
pose a material risk to WatchGuard.
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<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Sales of Unregistered Securities During the Quarter
During the quarter ended September 30, 1999, we issued and sold 61,472
unregistered shares of our common stock to employees, pursuant to the exercise
of stock options under our 1996 stock option plan. In addition, we granted
employees options to purchase 465,750 unregistered shares of our common stock
under our 1996 stock option plan, as consideration for the recipients' services
to WatchGuard. In issuing these securities, WatchGuard relied on an exemption
from registration pursuant to Rule 701 under Section 3(b) of the Securities Act
of 1933.
(d) Use of Proceeds
On July 30, 1999, our registration statement on Form S-1, file number 333-
76587, became effective. The offering date was July 30, 1999. The offering
terminated as a result of all of the shares offered being sold. The managing
underwriters were Dain Rauscher Wessels, Warburg Dillon Read LLC, SoundView
Technology Group and Wit Capital Corporation. The offering consisted of
3,879,570 shares of our common stock, including 3,500,000 shares of common stock
offered by WatchGuard and 379,570 shares of common stock offered by our selling
stockholders pursuant to the exercise of the underwriters' over-allotment
option. The aggregate price of the shares offered and sold by us was $45.5
million, and the aggregate price of the shares offered and sold by the selling
shareholders was $4.9 million. After accounting for approximately $3.2 million
in underwriting discounts and commissions and $1.5 million in other expenses, we
received proceeds of $40.8 million.
We are using the net proceeds raised in our initial public offering for
additional working capital, repayment of short-term indebtedness and general
corporate purposes, including increased domestic and international sales and
marketing expenditures, increased research and development expenditures and
capital expenditures made in the ordinary course of business. We also intend to
use these proceeds for possible acquisitions of businesses, products and
technologies that are complementary to ours, such as our acquisition of the
assets of BeadleNet, LLC described in Item 5 below. Although we have no current
agreements or understandings with respect to any such transactions, we do from
time to time evaluate such opportunities. Pending their use, the majority of
the net proceeds have been invested in investment-grade, interest-bearing
instruments, all of which are short-term.
We used $6.6 million of the net proceeds of the offering to repay all debt
affiliated with Matrix IV Management Co., L.P., OVMC III, L.P. and OVMC IV, LLC.
Andrew W. Verhalen, a director of WatchGuard, serves as general partner of
Matrix IV Management Co., L.P. and Charles P. Waite, Jr., a director of
WatchGuard, serves as a general partner of OVMC III, L.P. and as a managing
member of OVMC IV, LLC.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation of WatchGuard Technologies, Inc.
(Incorporated by reference to Exhibit 3.1 to WatchGuard's Registration
Statement on Form S-1 (file number 333-78813), filed July 30, 1999).
3.2 Restated Bylaws of WatchGuard Technologies, Inc. (incorporated by
reference to Exhibit 3.2 to WatchGuard's Registration Statement on
Form S-1 (file number 333-78813), filed July 30, 1999).
27.1 Financial Data Schedule (filed only with the electronic submissions
of Form 10-Q.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1999.
Page 17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 12, 1999 WATCHGUARD TECHNOLOGIES, INC.
By: /s/ Steven N. Moore
-------------------
Steven N. Moore
Executive Vice President of Finance,
Chief Financial Officer, Secretary
and Treasurer (principal financial
and accounting officer)
Page 18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1999 AND THE RELATED STATEMENTS OF OPERATIONS FOR THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 32,468
<SECURITIES> 0
<RECEIVABLES> 4,344
<ALLOWANCES> (814)
<INVENTORY> 1,906
<CURRENT-ASSETS> 38,505
<PP&E> 2,462
<DEPRECIATION> (760)
<TOTAL-ASSETS> 40,306
<CURRENT-LIABILITIES> 6,962
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0
0
<COMMON> 19
<OTHER-SE> 57,624
<TOTAL-LIABILITY-AND-EQUITY> 40,306
<SALES> 11,832
<TOTAL-REVENUES> 14,096
<CGS> 5,566
<TOTAL-COSTS> 17,748
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> (229)
<INCOME-PRETAX> (9,447)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,447)
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