<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
October 19,1999 Commission File Number 000-26819
(Date of earliest event reported)
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.)
<PAGE>
Item 2. Acquisition or Disposition of Assets
On October 19, 1999, WatchGuard Technologies, Inc. ("WatchGuard") acquired
BeadleNet, LLC, a California limited liability company, pursuant to an Asset
Purchase Agreement dated as of October 19, 1999, among BeadleNet, Productivity
Enhancement Products, Inc. ("PEP"), a member of BeadleNet, Danny M. Beadle, the
founder and a member of BeadleNet, and WatchGuard.
BeadleNet, a privately held company established in January of this year, is
an innovator of Internet security solutions for small offices and home offices.
BeadleNet's products, such as the SOHO 2000(TM), are plug-and-play systems that
use centralized, web-based servers for configuration and updates, with minimal
effort by the home or small office user. This technology is complementary to
WatchGuard's subscription-based LiveSecurity(TM) solution, which broadcasts
threat responses, software updates, information alerts, expert editorials and
support flashes over the Internet to keep security systems current with minimal
user effort.
Under the terms and conditions of the asset purchase agreement, in exchange
for substantially all of the assets of BeadleNet, WatchGuard paid BeadleNet
$7,256,000 in three components: (1) cash in the amount of $2,406,000, (2)
335,931 unregistered shares of WatchGuard common stock and (3) assumption and
repayment of $1,000,000 of BeadleNet's outstanding indebtedness to PEP. 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 paid, 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.
BeadleNet, PEP and Mr. Beadle agreed to jointly and severally indemnify
WatchGuard for, among other things, any damages WatchGuard suffers from (a) any
inaccuracy in the representations and warranties made by BeadleNet, PEP or Mr.
Beadle in connection with the asset purchase agreement and the other agreements
and certificates related to the acquisition, (b) breaches of covenants or
agreements made in connection with the acquisition, (c) liabilities not assumed
by WatchGuard, (d) liabilities arising on or before the closing date of the
acquisition, or (e) any claim relating to any of the business or assets of
BeadleNet, PEP or their affiliates that were not acquired by WatchGuard. To
secure these indemnification obligations, 173,160 shares of the WatchGuard
common stock issued to BeadleNet will held by, and pledged by BeadleNet to,
WatchGuard for one year.
In connection with the acquisition, WatchGuard entered into an employment
agreement and a stock vesting agreement with Mr. Beadle. Pursuant to the
employment agreement, WatchGuard granted Mr. Beadle an option, vesting over a
period of four years, to purchase 250,000 shares of WatchGuard common stock at
an exercise price of $14.44. In consideration of certain of Mr. Beadle's
obligations in the employment agreement, including his agreement not to compete
with WatchGuard for a period of three years after his employment terminates,
WatchGuard also issued to Mr. Beadle 51,948 unregistered shares of WatchGuard
common stock, valued at $750,000 on the closing date of
<PAGE>
the acquisition. Under the stock vesting agreement, 34,632 of these shares will
be held by WatchGuard and will be subject to forfeiture in the event that Mr.
Beadle's employment is terminated for cause or if he resigns. One half of these
shares will be released, and will no longer be subject to forfeiture, on October
19, 2000 and the remainder will be released, and will no longer be subject to
forfeiture, on October 19, 2001.
WatchGuard issued the shares to BeadleNet and to Mr. Beadle pursuant to the
exemptions from the registration requirements of the Securities Act of 1933
provided by Section 4(2) and Regulation D of the Securities Act 2. The Asset
Purchase Agreement, the employment agreement and the stock vesting agreement are
filed as exhibits to this report and are incorporated into this report by
reference. This summary of the provisions of these agreements is not complete,
and you should refer to the exhibits for copies of the actual agreements.
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
<TABLE>
<CAPTION>
Page
<S> ----
(a) Financial Statements of Business Acquired <C>
BeadleNet , LLC
Audited Financial Statements:
Independent Auditors' Report................................................................. 5
Balance Sheets as of October 3, 1999 and December 31, 1998................................... 6
Statements of Operations for the period from January 1, 1999 (date of incorporation)
through October 3, 1999, and the period from June 1, 1998 (date of inception) through
December 31, 1998....................................................................... 7
Statements of Capital Deficiency for the period from January 1, 1999 (date of
incorporation) through October 3, 1999, and the period from June 1, 1998 (date of
inception) through December 31, 1998.................................................... 8
Statements of Cash Flows for the period from January 1, 1999 (date of incorporation)
through October 3, 1999, and the period from June 1, 1998 (date of inception) through
December 31, 1998....................................................................... 9
Notes to Financial Statements................................................................ 10
(b) Unaudited Pro Forma Financial Information
Pro Forma Combined Condensed Balance Sheet as of September 30, 1999 for
WatchGuard and as of October 3, 1999 for BeadleNet...................................... 17
Pro Forma Combined Condensed Statement of Operations for the nine month period ended
September 30, 1999 for WatchGuard and for the period from January 1, 1999 (date of
incorporation) through October 3, 1999 for BeadleNet.................................... 18
Pro Forma Combined Condensed Statement of Operations for the year ended December 31, 1998 for
WatchGuard and for the period from June 1, 1998 (date of inception) through
December 31, 1998 for BeadleNet......................................................... 19
Notes to Pro Forma Combined Condensed Financial Statements................................... 20
(c) Exhibits
Exhibit Index................................................................................ 21
Signatures................................................................................... 22
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
BeadleNet, LLC:
We have audited the accompanying balance sheets of BeadleNet, LLC (the Company)
and its predecessor as of October 3, 1999 and December 31, 1998, and the related
statements of operations, capital deficiency, and cash flows for the period from
January 1, 1999 (date of incorporation) through October 3, 1999, and the period
from June 1, 1998 (date of inception) through December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of BeadleNet, LLC as of October 3, 1999, and
its predecessor as of December 31, 1998, and the results of their operations and
their cash flows for the period from January 1, 1999 (date of incorporation)
through October 3, 1999, and the period from June 1, 1998 (date of inception)
through December 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note 7, the Company sold substantially all of its assets on
October 19, 1999, and the operations were ceased. Effective November 25, 1999,
the Company was dissolved.
DELOITTE & TOUCHE LLP
December 24, 1999
<PAGE>
BEADLENET, LLC
BALANCE SHEETS
AS OF OCTOBER 3, 1999 AND DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
(Predecessor)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 8,337 $ -
Accounts receivable, net of allowance for doubtful accounts of
$17,062 (1999) 23,097
------------ ----------
Total current assets 31,434
PROPERTY AND EQUIPMENT, net 58,464 25,068
------------ ----------
$ 89,898 $ 25,068
============ ==========
LIABILITIES AND CAPITAL DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 45,732 $ -
Accrued expenses 50,163
Deferred revenue 136,829
Note payable to Productivity Enhancement Products, Inc. 910,785 212,291
------------ ----------
Total current liabilities 1,143,509 212,291
COMMITMENTS (Note 5)
CAPITAL DEFICIENCY:
Member units, no par value; 100,000,000 units authorized;
10,000,000 units issued and outstanding (1999) 658,291
Accumulated deficit (1,711,902) (187,223)
------------ ----------
Net capital deficiency (1,053,611) (187,223)
------------ ----------
Total liabilities and capital deficiency $ 89,898 $ 25,068
============ ==========
</TABLE>
See notes to financial statements.
-6-
<PAGE>
BEADLENET, LLC
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1999 (DATE OF INCORPORATION)
THROUGH OCTOBER 3, 1999, AND THE PERIOD FROM JUNE 1, 1998
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 1, June 1, 1998
1999 (date of
(date of inception)
incorporation) through
through December 31,
October 3, 1998
1999 (predecessor)
<S> <C> <C>
OPERATING EXPENSES:
Research and development 380,332 187,223
Selling, general and administrative 1,117,064 --
------------ ----------
Total operating expenses 1,497,396 187,223
OTHER EXPENSE, net 27,283
------------ ----------
NET LOSS $(1,524,679) $(187,223)
============ ==========
</TABLE>
See notes to financial statements.
-7-
<PAGE>
BEADLENET, LLC
STATEMENTS OF CAPITAL DEFICIENCY
FOR THE PERIOD FROM JANUARY 1, 1999 (DATE OF INCORPORATION)
THROUGH OCTOBER 3, 1999, AND THE PERIOD FROM JUNE 1, 1998
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Members' units
------------------------ Accumulated
Units Amount deficit Total
<S> <C> <C> <C> <C>
BALANCE, June 1, 1998 (date of inception) $ - $ - $ -
Net loss (187,223) (187,223)
----------- ---------- ------------ ------------
BALANCE, December 31, 1998 (187,223) (187,223)
Conversion of note payable to Productivity
Enhancement Products, Inc. into members'
units 6,751,000 212,291 212,291
Issuance of members' units to an officer 2,894,000 91,000 91,000
Members' contribution for cash 355,000 355,000 355,000
Net loss (1,524,679) (1,524,679)
----------- ---------- ------------ ------------
BALANCE, October 3, 1999 10,000,000 $ 658,291 $(1,711,902) $(1,053,611)
=========== ========== ============ ============
</TABLE>
See notes to financial statements.
-8-
<PAGE>
BEADLENET, LLC
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1999 (DATE OF INCORPORATION)
THROUGH OCTOBER 3, 1999, AND THE PERIOD FROM JUNE 1, 1998
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 1,
1999 June 1, 1998
(date of (date of
incorporation) inception)
through through
October 3, December 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,524,679) $ (187,223)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 16,335 7,613
Members' contribution in the form of services in exchange for
note payable to Productivity Enhancement Products, Inc. 910,785 179,610
Compensation expense related to the issuance of members' units
to an officer 91,000
Changes in operating assets and liabilities:
Accounts receivable (23,097)
Accounts payable 45,732
Accrued expenses 50,163
Deferred revenue 136,829
------------ ------------
Net cash used in operating activities (296,932)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (49,731)
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from members' contribution 355,000
------------ ------------
NET INCREASE IN CASH 8,337
CASH, beginning of period
------------ ------------
CASH, end of period $ 8,337 $ -
============ ============
NONCASH ITEMS:
Conversion of note payable to Productivity Enhancement
Products, Inc. into members' units $ 212,291 $ -
============ ============
Acquisition of property and equipment in exchange for note
payable to Productivity Enhancement Products, Inc. $ - $ 32,681
============ ============
</TABLE>
See notes to financial statements.
-9-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1999 (DATE OF INCORPORATION)
THROUGH OCTOBER 3, 1999, AND THE PERIOD FROM JUNE 1, 1998
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. Nature of Operations
BeadleNet, LLC (the Company) and its predecessor is a provider of secure
Internet and networking solutions that are designed to meet the changing
technology needs of small and medium sized businesses and households with
multiple computers. The Company's headquarters are located in Laguna Hills,
California.
The Company was incorporated on January 1, 1999, as a majority-owned
subsidiary of Productivity Enhancement Products, Inc. (PEP). Beginning June 1,
1998 (date of inception of the Company) through December 31, 1998, research and
development efforts towards new technology products were conducted by PEP and
some of its key employees. The financial statements as of December 31, 1998, and
for the period from June 1, 1998 through December 31, 1998, reflect the
operations of the predecessor while they were a part of PEP. On January 1, 1999,
certain technology products developed from these efforts were transferred from
PEP to the Company for further development and marketing in connection with the
formation of BeadleNet, LLC.
The financial statements include expenses, which have been allocated to the
Company by PEP on a specific identification basis, plus its allocated share of
the costs associated with resources it shares with PEP. Allocations from PEP
for such shared resources have been made primarily on a proportional cost method
based on space occupied. Management believes these allocations are reasonable.
The financial statements of the Company do not necessarily reflect the results
of operations or financial position that would have existed had the Company been
an independent company.
2. Summary of Significant Accounting Policies
Property and Equipment - Property and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the assets' lives, which range from
three to five years.
When assets are retired or otherwise disposed of, the cost and the related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in operations for the period. Renewals and betterments which
extend the life of an existing asset are capitalized, while normal repairs and
maintenance costs are expensed as incurred.
-10-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1999 (DATE OF INCORPORATION)
THROUGH OCTOBER 3, 1999, AND THE PERIOD FROM JUNE 1, 1998
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Revenue Recognition - The Company offers its customers the right to free
software upgrades and customer support on an unlimited basis. As the value of
these upgrades and customer support is not readily determinable under the
requirements of Statement of Position (SOP) 97-2, Software Revenue Recognition,
the Company has deferred all revenues in the amount of $136,829 as of October 3,
1999.
Income Taxes - As a limited liability company, the Company is not subject
to federal and state income taxes. The Company's taxable income or loss is
allocated to each of its members based on the member's ownership interest in the
Company. Each member's tax status, in turn, determines the appropriate income
tax for its allocated share of the Company's taxable income or loss. The
Company is subject to a minimum California franchise tax of $800.
Stock-Based Compensation - The Company accounts for equity-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Concentration of Credit Risk - The Company's revenues will be generated
primarily from product sales. The Company performs ongoing credit evaluations of
its customers and does not require collateral for its receivables. The Company
establishes an allowance for doubtful accounts based on factors surrounding the
credit risk of specific customers, historical trends, and other information.
Software Development Costs - Costs incurred in the research and development
of new software products and enhancements to existing software products are
expensed as incurred until technological feasibility has been established. After
technological feasibility has been established, any additional costs are
capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed. Because the Company believes
that its current process for developing software is essentially completed
concurrently with the establishment of technological feasibility, no software
development costs have been capitalized as of October 3, 1999 and December 31,
1998.
Research and Development - The Company incurs costs in connection with
research and development programs. Such costs are expensed as incurred. Research
and development expenses were $380,332 and $187,223 for the period from January
1, 1999 (date of incorporation) through October 3, 1999 and the period from June
1, 1998 (date of inception) through December 31, 1998, respectively.
Customer Concentration - During the period from January 1, 1999 (date of
incorporation) through October 3, 1999, deferred revenues from two customers
accounted for approximately 16% and 12% of total deferred revenues,
respectively. The loss of, or reduction in, deferred revenues to these
customers would have a material adverse effect on the Company's business,
operating results, and financial condition.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements - For the periods presented in the
accompanying financial statements, the Company has adopted Statement of
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. There was
no difference between comprehensive loss and amounts currently reported in the
accompanying financial statements.
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. Under the requirements of SFAS No. 131, the
Company operates under a single segment based on information used by management
to run the business.
-11-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1999 (DATE OF INCORPORATION)
THROUGH OCTOBER 3, 1999, AND THE PERIOD FROM JUNE 1, 1998
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT
Property and equipment at October 3, 1999 and December 31, 1998, consists
of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Machinery and other equipment $ 40,115 $32,681
Office equipment 30,678
Leasehold improvements 11,619
--------- --------
82,412 32,681
Less accumulated depreciation and amortization (23,948) (7,613)
--------- --------
$ 58,464 $25,068
========= ========
</TABLE>
4. NOTE PAYABLE TO PRODUCTIVITY ENHANCEMENT PRODUCTS, INC.
Beginning on January 1, 1999 (date of incorporation), PEP charged the
Company a management fee for certain administrative functions performed by PEP.
Total management fees charged to the Company were $97,855 for the period from
January 1, 1999 (date of incorporation) through October 3, 1999. No management
fees were allocated to the Company prior to January 1, 1999. These management
fees have been included in the note payable due to PEP in the accompanying
financial statements.
At October 3, 1999, the note payable due to PEP totaled $910,785. The note
payable bears interest at 9% and all outstanding principal and interest is due
and payable by January 1, 2001. The Company recorded interest expense on this
note payable in the amount of $30,817 for the period from January 1, 1999 (date
of incorporation) through October 3, 1999.
The note payable was paid in full as part of the Asset Purchase Agreement
described in Note 7.
5. COMMITMENTS
The Company leases office space under an operating lease which expires
during August 2000. Future annual minimum lease payments under this
noncancelable operating lease arrangement at October 3, 1999, are as follows:
<TABLE>
<S> <C>
1999 (through December 31, 1999) $ 4,587
2000 12,232
--------
$16,819
========
</TABLE>
Rental expense under this operating lease was approximately $15,519 for the
period from January 1, 1999 (date of incorporation) through October 3, 1999.
Rental expense for the periods
-12-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1999 (DATE OF INCORPORATION)
THROUGH OCTOBER 3, 1999, AND THE PERIOD FROM JUNE 1, 1998
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
prior to January 1, 1999, (date of incorporation), were allocated to PEP based
on space occupied.
6. CAPITAL DEFICIENCY
Contributions - During the period from June 1, 1998 (date of inception)
through December 31, 1998, PEP and certain key employees conducted research and
development efforts to develop new technology products. The cost of these
services was $179,610. In exchange for these services and certain property and
equipment with a cost of $32,681, the Company issued PEP a note payable in the
amount of $212,291. On January 1, 1999 (incorporation date), the Company issued
to PEP a total of 6,751,000 members' units in exchange for the note payable. On
the same date, the Company also issued a total of 2,894,000 members' units to an
officer of the Company. The Company has recorded compensation expense of
$91,000 for this issuance during the period from January 1, 1999 (date of
incorporation) through October 3, 1999.
From May 1999 to September 1999, the Company received $355,000 in cash for
the sale of members' units at $1.00 per unit to unrelated parties.
Equity Incentive Plan - In January 1999, the Company adopted the 1999
Equity Incentive Plan (the Plan), which provides for the granting of up to
1,500,000 incentive and nonstatutory equity options to purchase members' units
to officers, key employees, Board members, and service providers. The incentive
and nonstatutory equity options may not be issued at prices less than 85% of the
fair market value at the date of grant. All options expire at a maximum of 10
years from the date of grant. Incentive and nonstatutory equity options vest
ratably over five years.
Equity option activity under the Plan is as follows:
<TABLE>
<CAPTION>
Weighted
average
Shares exercise
under price
option per share
<S> <C> <C>
Outstanding, January 1, 1999 (date of incorporation) - $ -
Granted 866,010 $ 1.00
=======
Outstanding, October 3, 1999 866,010 $ 1.00
=======
</TABLE>
The weighted average fair value of options granted during the period from
January 1, 1999 (date of incorporation) through October 3, 1999, was $0.45 per
share.
-13-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1999 (DATE OF INCORPORATION)
THROUGH OCTOBER 3, 1999, AND THE PERIOD FROM JUNE 1, 1998
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
The following table summarizes information about equity options outstanding
as of October 3, 1999:
<TABLE>
<CAPTION>
Weighted
average Weighted Weighted
remaining average average
Exercise Number contractual exercise Number exercise
price outstanding life price exercisable price
<S> <C> <C> <C> <C> <C>
$1.00 866,010 9.56 $1.00 - $1.00
</TABLE>
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations to account for the Plan. Had
compensation cost for the Plan been determined based on the fair value at the
date of grant consistent with the method of SFAS No. 123, the Company's net loss
for the period from January 1, 1999 (date of incorporation) through October 3,
1999, would have been the pro forma amount indicated below:
<TABLE>
<S> <C>
Net loss, as reported $(1,524,679)
Net loss, pro forma $(1,631,499)
</TABLE>
The fair value of options granted under the Plan was estimated on the date
of grant using the Black-Scholes option-pricing model, with the following
weighted average assumptions: expected volatility of zero, no dividend yield,
risk-free interest rate of 6.0%, and an expected life of 10 years.
On June 1, 1999, the Company granted 80,000 equity options to a service
provider. As a result, the Company will record a total of $35,328 in
compensation expense related to these options over the vesting period. As of
October 3, 1999, none of these options were vested and the Company has recorded
no compensation expense related to these equity options.
7. SUBSEQUENT EVENTS
On October 19, 1999, the Company sold substantially all of its assets to
WatchGuard Technologies, Inc. (WatchGuard) under an Asset Purchase Agreement
(the Agreement) and the Company's operations ceased. Under terms of the
Agreement, WatchGuard paid an aggregate purchase price of $7,256,000 consisting
of $2,406,000 in cash and $4,850,000 in common stock of WatchGuard in exchange
for substantially all of the assets of the Company. The proceeds were
distributed to the holders of the Company's members' units based on percentage
ownership. WatchGuard also assumed and repaid $1,000,000 of the outstanding
intercompany indebtedness as of the date of the Agreement which is owed from the
Company to PEP.
-14-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1999 (DATE OF INCORPORATION)
THROUGH OCTOBER 3, 1999, AND THE PERIOD FROM JUNE 1, 1998
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
WatchGuard will also make an additional payment of $400,000 in cash and
$600,000 in common stock of WatchGuard to the holders of the Company's member
units based on percentage ownership if certain software technology items
described in the Agreement are completed and released to market before January
1, 2000.
Effective November 25, 1999, the Company was dissolved.
* * * * * *
-15-
<PAGE>
(b) Unaudited Pro Forma Financial Information
The following unaudited pro forma combined condensed financial statements
give effect to the BeadleNet acquisition, which occurred on October 19, 1999,
using the purchase method of accounting. Under the purchase method of
accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values. The estimated fair
values of the assets and liabilities of BeadleNet have been combined with the
recorded values of the assets and liabilities of WatchGuard Technologies, Inc.
("WatchGuard") in the unaudited combined condensed financial statements. The
unaudited pro forma combined condensed balance sheet gives effect to the
purchase as if it had occurred on September 30, 1999. The unaudited pro forma
combined condensed statement of operations for the year ended December 31, 1998
for WatchGuard and the period from June 1, 1998 (date of inception) through
December 31, 1998 for BeadleNet, and the nine months ended September 30, 1999
for WatchGuard, and the period from January 1, 1999 (date of incorporation)
through October 3, 1999 for BeadleNet, give effect to the BeadleNet acquisition
as if it had occurred on June 1, 1998.
The unaudited pro forma combined condensed financial statements are for
illustrative purposes only and do not purport to represent what WatchGuard's
financial position or results of operations would have been if the acquisition
had occurred on such dates or to project WatchGuard's financial position or
results of operations as of any future date or for any future period. The
unaudited pro forma combined condensed financial statements, including the notes
thereto, are qualified in their entirety by reference to, and should be read in
conjunction with, the historical financial statements of WatchGuard included in
its: (a) Form S-1 Registration Statement, as amended, for the year ended
December 31, 1998 and (b) Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, as well as the historical financial statements and the
related notes thereto of BeadleNet included in this report.
The unaudited pro forma adjustments have been applied to the financial
information derived from the financial statements of WatchGuard and BeadleNet to
account for the acquisition as a purchase and, accordingly, the assets acquired
and liabilities assumed are reflected at their estimated fair values.
The unaudited pro forma financial information has been prepared based on
the assumptions described in the notes thereto and includes assumptions relating
to the allocation of the consideration paid for the assets of WatchGuard based
on the estimates of their fair value. In the opinion of WatchGuard, all
adjustments necessary to present fairly such unaudited pro forma financial
information have been made based on the terms and structure of the acquisition.
-16-
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
------------------------------------------
As of September 30, 1999
------------------------
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
WatchGuard BeadleNet Pro Forma Pro Forma
---------- --------- --------- ---------
Adjustments Balances
----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 32,468 $ 8 $(3,414) a,b $ 29,062
Accounts receivable, net 3,530 23 (23) b 3,530
Inventories 1,906 -- -- 1,906
Prepaid expenses and other 601 -- -- 601
--------- -------- -------- ---------
Total current assets 38,505 31 (3,437) 35,099
Equipment and furniture, net 1,702 59 -- 1,761
Goodwill and other intangibles, net -- -- 5,101 d 5,101
Deposits and other assets 99 -- -- 99
--------- -------- -------- ---------
Total assets $ 40,306 $ 90 $ 1,664 $ 42,060
========= ======== ======== =========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY)
Current liabilities:
Note payable to PEP $ -- $ 911 $ (911) a $ --
Equipment term loan 462 -- -- 462
Accounts payable 1,748 46 (46) b 1,748
Accrued expenses 1,321 50 250 a,b 1,621
Deferred revenue 3,431 137 (137) b 3,431
--------- -------- -------- ---------
Total current liabilities 6,962 1,144 (844) 7,262
Shareholders' equity (deficiency):
Members' capital, no par value -- 658 (658) c --
Common stock, $.001 par value 19 -- -- 19
Additional paid-in capital 57,624 -- 5,585 a,b,d 63,209
Deferred stock-based compensation (931) -- (750) d (1,681)
Accumulated deficit (23,368) (1,712) (1,669) c,d (26,749)
--------- -------- -------- ---------
Total shareholders' equity (deficiency) 33,344 (1,054) 2,508 34,798
--------- -------- -------- ---------
Total liabilities and shareholders' equity
(deficiency) $ 40,306 $ 90 $ 1,664 $ 42,060
========= ======== ======== =========
</TABLE>
__________________________
The accompanying notes are an integral part of these financial statements.
-17-
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
----------------------------------------------------
For the Nine Months Ended September 30, 1999
--------------------------------------------
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
WatchGuard BeadleNet Pro Forma Pro Forma
---------- --------- ----------- ---------
Adjustments Balances
----------- --------
<S> <C> <C> <C> <C> <C>
Revenues $ 14,096 $ -- $ -- $ 14,096
Cost of revenues 5,566 -- -- 5,566
--------- ---------- ------------ ----------
Gross margin 8,530 -- -- 8,530
Operating expenses:
Operating expenses, excluding acquisition costs 17,748 1,498 188 d 19,434
Acquisition related costs, including amortization
of goodwill and purchased intangibles -- -- 965 d 965
--------- ---------- ------------ ----------
Total operating expenses 17,748 1,498 1,153 20,399
--------- ---------- ------------ ----------
Loss from operations (9,218) (1,498) (1,153) (11,869)
Other expense:
Interest expense, net (229) -- -- (229)
Other expense, net -- (27) -- (27)
--------- ---------- ------------ ----------
Net loss $ (9,447) $ (1,525) $ (1,153) $ (12,125)
========= ========== ============ ==========
Net loss per share:
Basic and diluted $ (1.76) $ (2.10)
========= ==========
Weighted average number of common
shares outstanding: 5,377 388 5,765
========= ============ ==========
</TABLE>
__________________________
The accompanying notes are an integral part of these financial statements.
-18-
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
----------------------------------------------------
For the Year Ended December 31, 1998
------------------------------------
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
WatchGuard BeadleNet Pro Forma Pro Forma
---------- --------- --------- ---------
Adjustments Balances
----------- --------
<S> <C> <C> <C> <C> <C>
Revenues $11,379 $ -- $ -- $ 11,379
Cost of revenues 3,925 -- -- 3,925
-------- ---------- -------- ----------
Gross margin 7,454 -- -- 7,454
Operating expenses:
Operating expenses, excluding acquisition costs 16,454 187 146 d 16,787
Acquisition related costs, including amortization
of goodwill and purchased intangibles -- -- 750 d 750
-------- ---------- -------- ----------
Total operating expenses 16,454 187 896 17,537
-------- ---------- -------- ----------
Loss from operations (9,000) (187) (896) (10,083)
Other expense:
Interest expense, net (119) -- -- (119)
Other expense, net -- -- -- --
-------- ---------- -------- ----------
Net loss $(9,119) $ (187) $ (896) $ (10,202)
======== ========== ======== ==========
Net loss per share:
Basic and diluted $(11.34) $ (9.90)
======== ==========
Weighted average number of common
shares outstanding: 804 226 1,030
======== ======== ==========
</TABLE>
__________________________
The accompanying notes are an integral part of these financial statements.
-19-
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION
- ---------------------
The purchase price for BeadleNet was approximately $8.6 million, including
approximately $300,000 of acquisition costs, and was comprised of cash in the
amount of $2.4 million, 335,031 shares of WatchGuard common stock, par value
$.001 per share, and the assumption and repayment of $1.0 million of notes
payable to PEP. In addition, WatchGuard agreed to pay BeadleNet an additional
$1,000,000 in cash and stock if certain specified technology items are completed
and released to market on or before January 1, 2000.
This purchase was accounted for under the purchase method of accounting in
accordance with APB No. 16, whereby the purchase price is allocated to the
assets acquired and liabilities assumed based on their estimated fair values.
Estimates of the fair values of the assets and liabilities of BeadleNet have
been combined with the WatchGuard column in the unaudited pro forma combined
condensed financial statements. The BeadleNet purchase price was allocated to
goodwill, $4.0 million; and other purchased intangibles, $1.1 million.
Approximately $3.4 million in costs associated with the purchase were expensed
under the purchase method of accounting as in-process research and development
costs and were not included in the pro forma combined condensed statements of
operations since they are considered to be a one-time nonrecurring charge.
PRO FORMA ADJUSTMENTS FOR BEADLENET
- -----------------------------------
(a) To record the purchase of BeadleNet including the issuance of
WatchGuard Common Stock having an aggregate value of $4.9 million,
and payment in cash of $2.4 million, including repayment of the note
payable in the amount of $911,000 to PEP at October 3, 1999 (amount
was $1.0 million as of the actual acquisition date).
(b) To eliminate historical assets and liabilities not included in the
BeadleNet acquisition.
(c) To eliminate the historical equity of BeadleNet.
(d) To record the excess of the purchase price over the estimated fair
value of assets and liabilities acquired in connection with the
BeadleNet acquisition and the related amortization. The intangible
components of the consideration for this transaction, which includes
goodwill and other purchased intangibles, will be amortized on a
straight-line basis over a period ranging between 26 months to five
years. The deferred stock-based compensation, which was the result of
restricted shares issued pursuant to the employment agreement entered
into by WatchGuard and one key employee of BeadleNet, will be
amortized over three years. In process research and development costs
in the amount were immediately expensed upon purchase as is reflected
in the pro forma combined balance sheet at September 30, 1999.
PRO FORMA LOSS PER COMMON SHARE
- -------------------------------
Basic and diluted pro forma earnings per share is computed using the
weighted average number of WatchGuard common shares outstanding during the
period plus shares of WatchGuard common stock issued in connection with the
BeadleNet acquisition. Shares issued in connection with the BeadleNet
acquisition are assumed to be issued and outstanding on June 1, 1998 (date of
inception for BeadleNet).
CONFORMING AND RECLASSIFICATION ADJUSTMENTS
- -------------------------------------------
There were no adjustments required to conform the accounting policies of
BeadleNet. There have been no intercompany transactions.
-20-
<PAGE>
(c) Exhibits
2.1 * Asset Purchase Agreement dated as of October 19, 1999, by and among
BeadleNet, LLC, Productivity Enhancement Products, Inc., Danny M.
Beadle and WatchGuard Technologies, Inc.
10.1* Employment Agreement dated as of October 19, 1999, by and between
Danny M. Beadle and WatchGuard Technologies, Inc.
10.2* Stock Vesting Agreement dated as of October 19, 1999, by and between
Danny M. Beadle and WatchGuard Technologies, Inc.
* Incorporated by reference to the Company's Report on Form 8-K, as
filed with the Securities and Exchange Commission on October 19, 1999.
-21-
<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.
January 3, 2000 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)
-22-
