<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _________.
COMMISSION FILE NUMBER _________________
Websense, Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED, IN ITS CHARTER)
Delaware 51-0380839
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10240 Sorrento Valley Road
San Diego, CA 92121
(858) 320-8000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
OF PRINCIPAL EXECUTIVE OFFICES)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. (1) YES [X] NO [ ] (2) YES [ ] NO [X]
THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE,
OUTSTANDING AS OF MAY 1, 2000 WAS 19,508,987.
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WEBSENSE, INC.
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Balance Sheets as of March 31, 2000 and December 31, 1999 3
Statements of Operations for the three months ended March 31, 2000 and 1999 4
Statement of Stockholders' Equity for the three months ended March 31, 2000 5
Statements of Cash Flows for the three months ended March 31, 2000 and 1999 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 8
Risks and Uncertainties 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit 27.1 Financial Data Schedule 25
</TABLE>
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WEBSENSE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 76,736 $ 10,735
Accounts receivable, net of allowance for doubtful accounts of
$206 at March 31, 2000 and $253 at December 31, 1999 3,770 3,576
Other current assets 672 329
-------- --------
Total current assets 81,178 14,640
Property and equipment, net of accumulated depreciation of $1,281 at
March 31, 2000 and $1,042 at December 31, 1999 2,189 1,947
Deposits and other assets 130 169
-------- --------
Total assets $ 83,497 $ 16,756
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 589 $ 573
Accrued payroll and related benefits 940 894
Other accrued expenses 1,330 557
Current portion of deferred revenue 8,780 6,889
Long-term debt, current portion 576 504
-------- --------
Total current liabilities 12,215 9,417
Long-term debt, less current portion 843 993
Deferred revenue, less current portion 5,270 4,704
-------- --------
Total liabilities 18,328 15,114
-------- --------
STOCKHOLDERS' EQUITY:
Convertible preferred Series A-par value $0.01; none and 3,705
shares authorized at March 31, 2000 and December 31, 1999,
respectively; none and 3,704 shares issued and outstanding
at March 31, 2000 and December 31, 1999, respectively;
liquidation preference of $0 and $6,000 at March 31, 2000 and
December 31, 1999, respectively -- 37
Convertible preferred Series B-par value $0.01; none and 3,333
shares authorized at March 31, 2000 and December 31, 1999,
respectively; none and 3,333 issued and outstanding at
March 31, 2000 and December 31, 1999, respectively;
liquidation preference of $0 and $9,999 at March 31, 2000 and
December 31, 1999 -- 33
Common stock-par value $0.01; 100,000 and 92,962 shares
authorized at March 31, 2000 and December 31, 1999, respectively;
19,509 and 8,358 shares issued and outstanding at
March 31, 2000 and December 31, 1999, respectively 195 84
Additional paid in capital 85,557 18,936
Deferred compensation (2,911) (2,585)
Accumulated deficit (17,672) (14,863)
-------- --------
Total stockholders' equity 65,169 1,642
-------- --------
Total liabilities and stockholders' equity $ 83,497 $ 16,756
======== ========
</TABLE>
See accompanying notes.
3
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WEBSENSE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Subscriptions $ 2,963 $ 1,198
Other products and services 162 469
----------- -----------
Total revenues 3,125 1,667
----------- -----------
Cost of revenues:
Subscriptions 472 172
Other products and services 147 351
----------- -----------
Total cost of revenues 619 523
----------- -----------
Gross margin 2,506 1,144
----------- -----------
Operating expenses:
Selling and marketing 2,472 997
Research and development 1,577 761
General and administrative 737 869
Amortization of stock-based compensation 633 43
----------- -----------
Total operating expenses 5,419 2,670
----------- -----------
Loss from operations (2,913) (1,526)
Interest income, net 104 16
----------- -----------
Net loss $ (2,809) $ (1,510)
=========== ===========
Basic and diluted net loss per share $ (0.32) $ (0.22)
=========== ===========
Basic and diluted common shares 8,891 7,021
=========== ===========
</TABLE>
See accompanying notes.
4
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WEBSENSE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Convertible Convertible
Preferred Series A Preferred Series B Common Stock
----------------- ----------------- -----------------
Shares Amount Shares Amount Shares Amount
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 3,704 $ 37 3,333 $ 33 8,358 $ 84
Issuance of common stock, net of
offering costs of $6,313 - - - - 4,000 40
Conversion of preferred to common
stock (3,704) (37) (3,333) (33) 7,037 70
Issuance of common stock upon
exercise of options - - - - 64 1
Issuance of common stock upon
exercise of warrant - - - - 50 -
Deferred compensation
- - - - - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
----------------- ----------------- -----------------
Balance at March 31, 2000 - $ - - $ - 19,509 $ 195
================= ================= =================
</TABLE>
See accompanying notes.
WEBSENSE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Additional
Deferred paid-in Accumulated Total stockholders'
compensation capital deficit equity
------------ ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $ (2,585) $ 18,936 $ (14,863) $ 1,642
Issuance of common stock, net of
offering costs of $6,313 - 65,647 - 65,687
Conversion of preferred to common
stock - - - -
Issuance of common stock upon
exercise of options - 13 - 14
Issuance of common stock upon
exercise of warrant - 2 - 2
Deferred compensation (959) 959 - -
Amortization of deferred compensation
633 - - 633
Net loss - - (2,809) (2,809)
--------- ---------- ------------- -----------
Balance at March 31, 2000 $ (2,911) $ 85,557 $ (17,672) $ 65,169
========= ========== ============= ===========
</TABLE>
See accompanying notes.
5
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WEBSENSE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
March 31,
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (2,809) $ (1,510)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 240 97
Issuance of common stock options and warrants for services -- 81
Deferred revenue 2,457 1,933
Amortization of deferred compensation 633 43
Changes in operating assets and liabilities:
Accounts receivable (194) (856)
Other current assets (343) (36)
Accounts payable 17 43
Accrued payroll and related benefits 46 61
Other accrued expenses 773 21
-------- --------
Net cash provided by (used in) operating activities 820 (123)
-------- --------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (482) (224)
Deposits and other assets (43) --
-------- --------
Net cash used in investing activities (525) (224)
-------- --------
FINANCING ACTIVITIES:
Repayments on notes payable (78) (48)
Proceeds from issuance of Series B preferred stock -- (15)
Net proceeds from issuance of common stock 65,768 --
Proceeds from exercise of stock options 14 9
Proceeds from exercise of warrant 2 --
-------- --------
Net cash provided by (used in) financing activities 65,706 (54)
-------- --------
Increase in cash and cash equivalents 66,001 (401)
Cash and cash equivalents at beginning of period 10,735 1,753
-------- --------
Cash and cash equivalents at end of period $ 76,736 $ 1,352
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 36 $ 10
======== ========
Accrued offering costs in 1999 $ -- $ 81
======== ========
Increase in deferred compensation $ 959 $ 400
======== ========
</TABLE>
See accompanying notes.
6
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WEBSENSE, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, certain information or footnote
disclosures normally included in complete financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
statements include all adjustments necessary, which are of a normal and
recurring nature, for the fair presentation of the results of the
interim periods presented.
These financial statements should be read in conjunction with the
audited financial statements and notes thereto for the year ended
December 31, 1999, included in Websense, Inc.'s Registration Statement
on Form S-1 reported to the Securities and Exchange Commission.
Operating results for the three months ended March 31, 2000 are not
necessarily indicative of the results which may be expected for any
other interim period or for the year ended December 31, 2000. The
balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
Certain reclassifications have been made to conform prior years' data to
the current period presentation.
2. Initial Public Offering
On March 28, 2000, we completed our initial public offering, IPO, for
the sale of 4,000,000 shares of common stock at a price to the public of
$18 per share, which resulted in net proceeds of $65.7 million after
payment of the underwriters' commissions and deductions of offering
expenses. Simultaneously with the closing of the initial public
offering, all of the convertible preferred stock was automatically
converted into an aggregate of 7,037,036 shares of common stock.
3. Net Income (Loss) Per Share
We compute net loss per share in accordance with SFAS No. 128, Earnings
Per Share. Under the provisions of SFAS No. 128, basic net income (loss)
per share is computed by dividing the net income (loss) for the period
by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed by dividing the
net income (loss) for the period by the weighted average number of
common and common equivalent shares outstanding during the period.
4. Amortization of Deferred Compensation
For the quarters ended March 31, 2000 and 1999 we recorded $633,000 and
$43,000, respectively, of amortization for stock-based compensation. The
allocation of the expense by operating expense category is as follows:
7
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<TABLE>
<CAPTION>
March 31,
2000 1999
--------- --------
<S> <C> <C>
Selling and marketing $186,000 $ 13,000
Research and development 119,000 15,000
General and administrative 328,000 15,000
--------- --------
Total deferred compensation $ 633,000 $43,000
========= =======
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion may contain forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risks and
Uncertainties" below. We undertake no obligation to release publicly the results
of any revisions to these forward-looking statements to reflect events or
circumstances arising after the date hereof.
OVERVIEW
We provide employee Internet management solutions that enable businesses to
monitor, report and manage how their employees use the Internet. Our Websense
Enterprise solution supports an organization's efforts to improve employee
productivity, conserve network bandwidth and mitigate potential legal liability.
We were founded in 1994 as NetPartners Internet Solutions, a reseller of
computer network security solutions and related services. In 1996, we released
our first software product, Websense Internet Screening System. Since that time,
we have refocused our business on developing and selling employee Internet
management solutions, and no longer focus on software reselling and services
business.
In 1999, we changed our name to Websense, Inc. and completed our change in
business strategy. In the same year, we expanded our senior management team,
raised approximately $9.8 million in a private round of financing and further
strengthened indirect sales channels and business relationships. In December
1999, we released an enhanced and redesigned version of the Websense Enterprise
solution. We currently derive a substantial majority of our revenues from
subscriptions to this solution and expect this trend to continue in the future.
When a purchase decision is made, customers enter into a subscription agreement,
which is generally 12, 24 or 36 months in duration and for a fixed number of
users. Upon entering into the subscription agreement, we promptly invoice
customers for their subscriptions. Generally, payment is due for the full term
of the subscription within 30 days of the invoice. We recognize revenue on a
straight-line basis over the term of the subscription agreement. We record
amounts billed to customers in excess of recognizable revenue as deferred
revenue on our balance sheet. Upon expiration of the subscription, customers
must resubscribe at our then current rates to continue using Websense
Enterprise. Our revenue is significantly influenced by subscription renewals,
and a decrease in subscription renewals could negatively impact our revenue.
We also derive revenues from professional services for the implementation of our
solution and from resale of hardware and software. We recognize revenues for
these services and products upon their completion or delivery. These revenues
declined significantly in the first quarter of 2000 due to the shift in business
strategy. We expect these revenues to remain relatively constant in dollar
volume and to continue to decline as a percent of total revenues for the
foreseeable future.
In the first quarter of 2000, we derived 29 percent of revenues from
international sales. We plan to expand our international operations,
particularly in selected countries in the European and Asia Pacific markets,
because we believe international markets represent a significant growth
opportunity.
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We currently sell solutions through indirect and direct channels; however, our
strategy is to increasingly rely on indirect sales channels. Domestically, we
sell solutions through more than 350 Value Added Resellers, or VARs, and through
our direct sales force. Internationally, we distribute Websense Enterprise
through more than 100 distributors and resellers in over 50 countries who resell
our solution through VARs and their resellers. In addition, we leverage the
sales and marketing capabilities of the original equipment manufacturers
("OEM"), and other key providers of complementary hardware and software
products.
Because we derive revenues from subscription fees, we do not recognize the
entire amount of subscription fees received in the month the subscription
agreements are executed. However, we recognize operating expenses as they are
incurred. Operating expenses have increased more rapidly than revenues in recent
periods due to expanded selling and marketing efforts and investments in
administrative infrastructure to support subscription sales that we will
recognize as revenue in subsequent periods.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, certain
income data for the period indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------ ------
<S> <C> <C>
Revenues:
Subscriptions 95% 72%
Other products and services 5% 28%
------ ------
Total revenues 100% 100%
______ ______
Cost of revenues:
Subscriptions 15% 10%
Other products and services 5% 21%
------ ------
Total cost of revenues 20% 31%
______ ______
Gross margin 80% 69%
______ ______
Operating expenses:
Selling and marketing 79% 60%
Research and development 50% 46%
General and administrative 24% 52%
Amortization of stock-based compensation 20% 3%
------ ------
Total operating expenses 173% 161%
_______ ______
Loss from operations (93%) (92%)
Interest income, net 3% 1%
------ ------
Net loss (90%) (91%)
====== =====
</TABLE>
REVENUES
Subscriptions. Subscription revenue increased $1.8 million, or 147 percent, to
$3.0 million in the quarter ended March 31, 2000, from $1.2 million in the same
period in 1999. Subscription revenue accounted for 95 percent of total revenues
in the first quarter of 2000 compared to 72 percent in 1999. The increase in
subscription revenue in the first quarter was due primarily to subscriptions
from new customers and renewals by existing customers. In addition, we
experienced increased market acceptance of Websense Enterprise products which
contributed to the increases in subscription revenues from new customers.
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Other products and services. Other products and services revenue decreased
$307,000, or 65 percent, to $162,000 in the first quarter of 2000 representing a
decrease as a percentage of total revenues from 28 percent to 5 percent. The
decrease is consistent with the strategy that has transformed Websense from a
network security services organization and reseller of third party security
software to a provider of Websense Enterprise, a subscription-based EIM
solution.
COST OF REVENUES
Cost of subscriptions. Cost of subscriptions consists of the costs of Web site
review, technical support and infrastructure costs associated with maintaining
our database. Cost of subscriptions increased $300,000, or 174 percent, to
$472,000 in the quarter ended March 31, 2000, from $172,000 in the comparable
period in 1999. Cost of subscriptions as a percentage of subscription revenue
increased to 16 percent in the first quarter of 2000 from 14 percent in the
quarter ended March 31, 1999.
Cost of other products and services. Cost of other products and services
consists primarily of the software and hardware that we resell and the salaries
and benefits of professional services personnel. Cost of other products and
services decreased $204,000, or 58 percent, to $147,000 in the quarter ended
March 31, 2000, from $351,000 in the same period in 1999. The decrease was due
to the shift in focus away from reselling hardware and software. Cost of other
products and services as a percentage of products and services revenue increased
to 91 percent in the first quarter of 2000 from 75 percent in the quarter ended
March 31, 1999 primarily due to ongoing costs related to maintenance agreements.
GROSS MARGIN
Gross margin was $2.5 million or 80 percent of revenues for the quarter ended
March 31, 2000 compared to $1.1 million or 69 percent of revenues for the
comparable quarter in 1999. The increase in gross margin is due to the shift of
concentration from resale of hardware and services to subscription sales, which
generate a higher gross margin.
OPERATING EXPENSES
Selling and marketing. Selling and marketing expenses consist primarily of
salaries, commissions and benefits related to personnel engaged in selling,
marketing and customer support functions, along with costs related to public
relations, advertising, promotions and travel. Selling and marketing expenses
increased $1.5 million, or 148 percent, to $2.5 million in the first quarter of
2000, from $997,000 in the same period in 1999. The increase in selling and
marketing expenses in the first quarter was primarily due to increases in
headcount and promotional expenses, and was partially offset by a decrease in
advertising expenses. We expect selling and marketing expenses to increase as
more personnel are added to support the expanding selling and marketing efforts.
Research and development. Research and development expenses consist primarily of
salaries and benefits for software developers, contract programmers, facilities
costs and equipment depreciation. Research and development expenses increased
$816,000, or 107 percent, to $1.6 million in the quarter ended March 31, 2000
from $761,000 in the same period in 1999. The increase in research and
development expenses was primarily a result of increased development efforts and
enhancements to Websense Enterprise.
General and administrative. General and administrative expenses consist
primarily of salaries, benefits and related expenses for executive and
administrative personnel, third party professional service fees and allocated
facilities and depreciation expenses. General and administrative expenses
decreased $132,000, or 15 percent, to $737,000 in the first quarter of 2000 from
$869,000 in the comparable period in 1999. The decrease in general and
administrative expenses in the first quarter of 2000 is primarily due to
non-recurring charges in first quarter 1999 which consisted of an additional
allowance for doubtful accounts and compensation expenses for consultants. We
expect general and
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administrative expenses to increase in the future, reflecting growth in
operations and increased expenses associated with being a public company.
Amortization of stock-based compensation. We recognized $633,000 of stock-based
compensation expense in the first quarter in 2000, compared to $43,000 in the
comparable quarter in 1999 relating to the amortization of deferred
compensation, an increase of $590,000, or 1,372 percent. The increase in the
amortization expense is primarily due to the large number of option grants which
occurred after the first quarter of 1999 for which deferred compensation was
recorded.
Interest Income (Expense), Net
Net interest income increased $88,000, or 550 percent, to $104,000 in the
quarter ended March 31, 2000 from $16,000 in the same period in 1999. This
increase is primarily due to the proceeds from Series B financing being invested
in June of 1999, and is partially offset by $36,000 of interest expense paid to
Silicon Valley Bank on various notes payable.
Net Loss
Net loss increased $1.3 million, or 86 percent, to $2.8 million (or $0.32 loss
per share) in the first quarter of 2000 from $1.5 million (or $0.22 loss per
share) in the quarter ended March 31, 1999. This increase is due to an overall
increase of operating expenses of $2.7 million, or 103 percent, which is
primarily from an increase in employees due to growth in operations and the
$590,000 increase in amortization of stock-based compensation.
LIQUIDITY AND CAPITAL RESOURCES
On March 28, 2000, we completed our initial public offering for the sale of
4,000,000 shares of common stock at a price to the public of $18 per share,
which resulted in net proceeds of $67.0 million after payment of the
underwriters' commissions but before the deduction of $1.3 million of offering
expenses. As of March 31, 2000, we had cash and cash equivalents of $76.7
million, an accumulated deficit of $17.7 million and $1.4 million of long-term
debt, of which $576,000 is current.
Net cash provided by operating activities was $820,000 in the quarter ended
March 31, 2000 compared to net cash used in operating activities of $123,000 in
the quarter ended March 31, 1999. In the quarter ended March 31, 2000, the net
cash provided by operations reflects a net loss before depreciation and
amortization of $1.9 million and an increase in accounts receivable of $194,000,
partially offset by an increase in deferred revenue of $2.5 million and an
increase in other accrued expenses of $773,000.
Net cash used in investing activities was $525,000 in the quarter ended March
31, 2000 compared to $224,000 in the quarter ended March 31, 1999. Net cash used
in investing activities consisted primarily of capital expenditures, related to
investments in computer equipment and facilities, which were required to support
business expansion.
Net cash provided by financing activities was $65.7 million in the quarter ended
March 31, 2000 compared to net cash used in financing activities of $54,000 in
the quarter ended March 31, 1999. The increase is due to the proceeds from our
IPO. As of March 31, 2000, we had various notes to Silicon Valley Bank totaling
$1.4 million which accrued interest at the bank's floating prime rate plus 0.25
percent. As of April 25, 2000, this debt was repaid in its entirety to Silicon
Valley Bank.
RISKS AND UNCERTAINTIES
You should carefully consider the following information in addition to other
information in this quarterly report before you decide to purchase our common
stock. The risks and uncertainties described below are those that we currently
deem to be material and that we believe are specific to our company and our
industry. If any of these or other risks actually occurs, the trading price of
our common stock could decline, and you may lose all or part of your
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investment.
We have a history of losses and, because we expect our operating expenses to
increase in the future, we may never become profitable.
We have experienced net losses in each of the last 13 fiscal quarters, and as of
March 31, 2000, we had an accumulated deficit of $17.7 million. We incurred net
losses of $5.6 million for the year ended December 31, 1998 and $9.3 million for
the year ended December 31, 1999. We expect to continue to incur significant net
losses for the foreseeable future. While we are unable to predict accurately our
future operating expenses, we currently expect these expenses to increase
substantially, as we, among other things:
o expand our domestic and international selling and marketing
activities;
o increase our research and development efforts to upgrade our
existing products and develop new products and technologies;
o develop and expand our proprietary database and systems;
o upgrade our operational and financial systems, procedures and
controls;
o hire additional personnel, including additional engineers and other
technical staff; and
o assume the responsibilities of being a public company.
We will need to significantly increase our revenues to achieve and maintain
profitability. If we fail to increase revenues from subscription fees to
Websense Enterprise, we will continue to experience losses indefinitely. We may
not be able to achieve or maintain profitability. We also may fail to accurately
estimate and assess our increased operating expenses as we grow. If our
operating expenses exceed our expectations, our financial performance will be
adversely affected, which could cause the price of our common stock to decline.
We are an early-stage company with an unproven business model, which makes it
difficult to evaluate our current business and future prospects.
We have only a limited operating history upon which to base an evaluation of our
current business and future prospects. We began offering our employee Internet
management software in September 1996, but only since May 1998, when we released
our first version of Websense Enterprise as a significant enhancement to our
original product, have we directed a majority of our focus on this market. We
introduced the most recent version of Websense Enterprise in December 1999. As a
result, the revenue and income potential of our business and our market are
unproven. In addition, we have very limited historical data with respect to
subscription renewals because we sell subscriptions that range from one to three
years in length and have only been selling Websense Enterprise for less than two
years. Further, because of our limited operating history and because the market
for employee Internet management products is relatively new and rapidly
evolving, we have limited insight into trends that may emerge and affect our
business. We may make errors in predicting and reacting to relevant business
trends, which could harm our business. Before investing, you should consider an
investment in our stock in light of the risks, uncertainties and difficulties
frequently encountered by early-stage companies in new and rapidly evolving
markets such as ours. We may not be able to successfully address any or all of
these risks. Failure to adequately do so could cause our business, results of
operations and financial condition to suffer.
Because we expect to derive substantially all of our future revenue from
subscription fees for Websense Enterprise, any failure of this product to
satisfy customer demands or to achieve more widespread market acceptance will
seriously harm our business.
Substantially all of our revenues come from subscriptions for Websense
Enterprise, and we expect this trend will continue for the foreseeable future.
Subscription revenues accounted for approximately 83 percent of our total
revenues in 1999 and approximately 36 percent in 1998. As a result, if for any
reason revenues from Websense Enterprise decline or do not grow as rapidly as we
anticipate, our operating results and our business will be
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significantly impaired. If Websense Enterprise fails to meet the needs of our
target customers, or if it does not compare favorably in price and performance
to competing products, our growth will be limited. We cannot assure you that
Websense Enterprise will achieve continued market acceptance. Our future
financial performance also will depend, in part, on our ability to diversify our
offerings by successfully developing, introducing and gaining customer
acceptance of new products and enhanced versions of Websense Enterprise. We
cannot assure you, however, that we will be successful in achieving market
acceptance of any new products that we develop or of enhanced versions of
Websense Enterprise. Any failure or delay in diversifying our existing offerings
could harm our business, results of operations and financial condition.
The market for employee Internet management products is emerging, and if we are
not successful in promoting awareness of the need for Websense Enterprise and of
our Websense brand, our growth may be limited.
Based on our experience with potential customers, we believe that many
corporations are unaware of the existence or scope of problems caused by
employee misuse of the Internet. In addition, there may be a time-limited
opportunity to achieve and maintain a significant share of the market for
employee Internet management products due in part to the emerging nature of this
market and the substantial resources available to our existing and potential
competitors. We intend to commit approximately $3.0 million of our marketing
communications resources in 2000 to promote awareness of the problems caused by
employee misuse of Internet access in the workplace, but we cannot assure you
that we will be successful in this effort. If employers do not recognize or
acknowledge these problems, then the market for Websense Enterprise may develop
more slowly than we expect, which could adversely affect our operating results.
Developing and maintaining awareness of our Websense brand is critical to
achieving widespread acceptance of our existing and future employee Internet
management products. Furthermore, we believe that the importance of brand
recognition will increase as competition in our market develops. Successful
promotion of our Websense brand will depend largely on the effectiveness of our
marketing efforts and on our ability to develop reliable and useful products at
competitive prices. If we fail to successfully promote our Websense brand, or if
our expenses to promote and maintain our Websense brand are greater than
anticipated, our results of operations and financial condition could suffer.
We must develop and expand our indirect sales channels to increase revenue and
improve our operating results.
We currently sell our products both indirectly and directly; however, we intend
to rely increasingly on our indirect sales channels. We depend on our indirect
sales channels, including value-added resellers, distributors, original
equipment manufacturers and Internet service providers, to offer Websense
Enterprise to a larger customer base than we can reach through our direct sales
efforts. We will need to expand our existing relationships and enter into new
relationships to increase our current and future market share and revenue. We
cannot assure you that we will be able to maintain and expand our existing
relationships or enter into new relationships, or that any new relationships
will be available on commercially reasonable terms. If we are unable to maintain
and expand our existing relationships or enter into new relationships, we would
lose customer introductions and co-marketing benefits and our operating results
could suffer.
Our reliance on indirect sales channels could result in reduced revenue growth
because we have little control over our value-added resellers, distributors and
original equipment manufacturers.
Our indirect sales channels accounted for approximately 70 percent of our total
revenues in 1999. We anticipate that sales from our various indirect sales
channels, including value-added resellers, distributors, original equipment
manufacturers, Internet service providers and others, will account for an
increasing percentage of our total revenues in future periods. None of these
parties is obligated to continue selling our products or to make any purchases
from us. Our ability to generate increased revenue depends significantly upon
the ability and willingness of our indirect sales channels to market and sell
our products to organizations worldwide. If they are unsuccessful in their
efforts, our operating results will suffer. We cannot control the level of
effort these parties expend or the extent to which any of them will be
successful in marketing and selling our products. Many of our indirect sales
channels also market and
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<PAGE> 14
sell products that compete with Websense Enterprise. We may not be able to
prevent these parties from devoting greater resources to support our
competitors' products.
We face increasing competition from better established companies that may have
significantly greater resources, which could prevent us from increasing revenue
or achieving profitability.
The market for our products is intensely competitive and is likely to become
even more so in the future. Increased competition could result in pricing
pressures, reduced sales, reduced margins or the failure of Websense Enterprise
to achieve or maintain more widespread market acceptance, any of which would
have a material adverse effect on our business, results of operations and
financial condition. Our current principal competitors include:
o companies offering network filtering products, such as JSB Software
Technologies plc., N2H2 Incorporated, Secure Computing Corporation
and Symantec Corporation;
o companies offering network reporting products, such as Telemate Net
Software, Inc. and WebTrends Corporation; and
o companies offering client-based software filtering products, such as
The Learning Company and Log-On Data Corporation.
We also face current and potential competition from vendors of Internet servers,
operating systems and networking hardware, many of which now, or may in the
future, develop and/or bundle employee Internet management products with their
products. We also compete against, and expect increased competition from,
traditional network management software developers and Web management service
providers. Many of our current and potential competitors enjoy substantial
competitive advantages, such as:
o greater name recognition and larger marketing budgets and resources;
o established marketing relationships and access to larger customer
bases; and
o substantially greater financial, technical and other resources.
As a result, they may be able to respond more quickly and effectively than we
can to new or changing opportunities, technologies, standards or customer
requirements. For all of the foregoing reasons, we may not be able to compete
successfully against our current and future competitors.
Our future growth depends on our existing customers renewing and purchasing
additional subscriptions to Websense Enterprise.
Our future success depends on achieving substantial revenue from customer
renewals for subscriptions to Websense Enterprise. Subscriptions for Websense
Enterprise typically have a duration of 12, 24 or 36 months. Our customers have
no obligation to renew their subscriptions upon expiration. We cannot assure you
that we will generate significant revenue from renewals. In order to maintain
our revenues we must continue to sell renewal subscriptions.
Our future success also depends on our ability to sell subscriptions to existing
customers for additional employees within their respective organizations. We
believe that approximately 14 percent of our customers' employees are covered by
Websense Enterprise. As a result, to increase our revenues we must sell our
existing customers additional subscriptions for Websense Enterprise to get
greater coverage of their workforces. This may require increasingly
sophisticated sales efforts targeting senior management and other management
personnel associated with our customers' Internet infrastructure.
Our database categories and our process for classifying web sites within those
categories are subjective, and we may not be able to categorize web sites in
accordance with our customers' expectations.
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<PAGE> 15
We may not succeed in accurately categorizing Internet content to meet our
customers' expectations. We rely upon a combination of automated filtering
technology and human review to categorize Web sites in our proprietary database.
Our customers may not agree with our determinations that particular Web sites
should be included or not included in specific categories of our database. In
addition, it is possible that our filtering processes may place objectionable
material in categories that are generally unrestricted by our users' Internet
access policies, which could result in employees having access to such material
in the workplace. Any miscategorization could result in customer dissatisfaction
and harm our reputation. Furthermore, we select our categories based on Web site
content we believe employers want to manage. We may not now, or in the future,
succeed in properly identifying the categories of Web site content that
employers want to manage. Any failure to effectively categorize and filter Web
sites according to our customers' expectations will impair the growth of our
business and our efforts to increase brand acceptance.
Our database may fail to keep pace with the rapid growth and technological
change of the Internet.
The success of Websense Enterprise depends on the breadth and accuracy of our
database. Although our database currently catalogs more than 1 million Web
sites, it contains only a fraction of the material available on the Internet. In
addition, the total number of Web sites is growing rapidly, and we expect this
rapid growth rate to continue in the future. We cannot assure you that our
database and database technologies will be able to keep pace with the growth in
the number of Web sites, especially the growing number of Web sites containing
foreign languages. Further, the ongoing evolution of the Internet will require
us to continually improve the functionality, features and reliability of our
database. Because Websense Enterprise can only manage access to Web sites
included in our database, if our database does not contain a meaningful portion
of relevant Web sites, the effectiveness of Websense Enterprise will be
significantly diminished. Any failure of our database to keep pace with the
rapid growth and technological change of the Internet will impair the market
acceptance of Websense Enterprise, which in turn will harm our business, results
of operations and financial condition.
Our recent growth has strained our existing personnel and infrastructure
resources, and if we are unable to implement appropriate controls and procedures
to manage our growth, we may not be able to successfully implement our business
plan.
We are currently experiencing a period of rapid growth in our operations, which
has placed, and will continue to place, a significant strain on our management,
administrative, operational and financial infrastructure. Our future success
will depend in part upon the ability of our senior management to manage growth
effectively. This will require us to hire and train additional personnel to
manage our expanding operations. In addition, we will be required to continue to
improve our operational, financial and management controls and our reporting
systems and procedures. If we fail to successfully manage our growth, we will be
unable to execute our business plan.
If we acquire any companies or technologies in the future, they could prove
difficult to integrate, disrupt our business, dilute stockholder value and
adversely affect our operating results.
We may acquire or make investments in complementary companies, services and
technologies in the future. We have not made any acquisitions or investments to
date, and therefore our ability as an organization to make acquisitions or
investments is unproven.
Acquisitions and investments involve numerous risks, including:
o difficulties in integrating operations, technologies, services and
personnel;
o diversion of financial and management resources from existing
operations;
o risk of entering new markets;
o potential loss of key employees; and
o inability to generate sufficient revenues to offset acquisition or
investment costs.
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<PAGE> 16
In addition, if we finance acquisitions by issuing convertible debt or equity
securities, our existing stockholders may be diluted which could affect the
market price of our stock. As a result, if we fail to properly evaluate and
execute acquisitions or investments, our business and prospects may be seriously
harmed.
We are dependent on our management team, and the loss of any key member of this
team may prevent us from implementing our business plan in a timely manner.
Our success depends largely upon the continued services of our executive
officers and other key management and development personnel. In particular, we
rely on John B. Carrington, our President, Chief Executive Officer and Chairman.
We are also substantially dependent on the continued service of our existing
engineering personnel because of the complexity of our products and
technologies. We do not have employment agreements with a majority of our
executive officers, key management or development personnel and, therefore, they
could terminate their employment with us at any time without penalty. We do not
maintain key person life insurance policies on any of our employees. The loss of
one or more of our key employees could seriously harm our business, results of
operations and financial condition. We cannot assure you that in such an event
we would be able to recruit personnel to replace these individuals in a timely
manner, or at all, on acceptable terms.
Our management team was only recently formed, and our success depends on its
ability to work together effectively.
We hired Mr. Carrington in May 1999 and Douglas C. Wride, our Chief Financial
Officer, in June 1999. In addition, a majority of our management team has joined
us in the last 18 months. Our future success depends on the integration of this
management team and its ability to work together effectively. If our management
team fails to work together effectively, our business could be harmed.
Because competition for our target employees is intense, we may not be able to
attract and retain the highly skilled employees we need to support our planned
growth.
To execute our growth plan, we must attract and retain highly qualified
personnel. We need to hire additional personnel in virtually all operational
areas, including selling and marketing, research and development, operations and
technical support, customer service and administration. Competition for these
personnel is intense, especially for engineers with high levels of experience in
designing and developing software and Internet-related products. We cannot
assure you that we will be successful in attracting and retaining qualified
personnel. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. Many of the companies with
which we compete for experienced personnel have greater resources than we have.
If we fail to attract new personnel or retain and motivate our current
personnel, our business and future growth prospects could be severely harmed.
Sales to customers outside the United States have accounted for a significant
portion of our revenue, and we expect this trend to continue, which exposes us
to risks inherent in international sales.
We market and sell our products outside the United States through value-added
resellers, distributors and other resellers. International sales represented
approximately 21 percent of our revenue in the year ended 1999. As a key
component of our business strategy, we intend to expand our international sales.
In addition to the risks associated with our domestic sales, our international
sales are subject to the following risks:
o dependence on foreign distributors and their sales channels;
o the ability of our Websense Enterprise products to properly
categorize and filter Web sites containing foreign languages;
o laws and business practices favoring foreign competitors;
o compliance with multiple, conflicting and changing governmental laws
and regulations, including tax laws and regulations;
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<PAGE> 17
o longer accounts receivable payment cycles and other collection
difficulties; and
o regional economic and political conditions.
Such factors could have a material adverse effect on our future international
sales. Any reduction in international sales, or our failure to further develop
our international distribution channels, could have a material adverse effect on
our business, results of operations and financial condition. Our international
revenue is currently denominated in U.S. dollars. As a result, fluctuations in
the value of the U.S. dollar and foreign currencies may make Websense Enterprise
more expensive for international customers, which could harm our business. We do
not currently engage in currency hedging activities to limit the risk of
exchange rate fluctuation.
Our quarterly operating results may fluctuate significantly, and these
fluctuations may cause our stock price to fall.
Our quarterly operating results have varied significantly in the past, and will
likely vary in the future as the result of fluctuations in our operating
expenses. We expect that our operating expenses will increase substantially in
the future as we expand our selling and marketing activities, increase our
research and development efforts and hire additional personnel. In addition, our
operating expenses historically have fluctuated, and may continue to fluctuate
in the future, as the result of the factors described below and elsewhere in
this quarterly report:
o concentration of marketing expenses for activities such as trade
shows and advertising campaigns;
o a concentration of general and administrative expenses, such as
recruiting expenses and professional services fees; and
o a concentration of research and development costs.
As a result, it is possible that in some future periods, our results of
operations may be below the expectations of current or potential investors. If
this occurs, the price of our common stock may decline.
Because we recognize revenue from subscriptions for Websense Enterprise ratably
over the term of the subscription, downturns in sales may not be immediately
reflected in our revenues.
We expect that a substantial majority of our future revenues will come from
subscriptions to Websense Enterprise. Upon execution of a subscription
agreement, we invoice our customers for the full term of the subscription
agreement. We then recognize revenue from customers over the terms of their
subscription agreements which generally have a duration of 12, 24 or 36 months.
As a result, a majority of revenues we report in each quarter is deferred
revenue from subscription agreements entered into and paid for during previous
quarters. Because of this deferred revenue, the revenues we report in any
quarter or series of quarters may mask significant downturns in sales and the
market acceptance of Websense Enterprise.
Any failure to protect our intellectual property rights could impair our ability
to protect our proprietary technology and establish our Websense brand.
Intellectual property is critical to our success, and we rely upon trademark,
copyright and trade secret laws in the United States and other jurisdictions as
well as confidentiality procedures and contractual provisions to protect our
proprietary technology and our Websense brand. Any of our trademarks may be
challenged by others or invalidated through administrative process or
litigation. We currently have no issued patents and may be unable to obtain
patent protection in the future. In addition, any issued patents may not provide
us with any competitive advantages, or may be challenged by third parties.
Furthermore, legal standards relating to the validity, enforceability and scope
of protection of intellectual property rights are uncertain. Effective patent,
trademark, copyright and trade secret protection may not be available to us in
every country in which our products are available. The laws of some foreign
countries may not be as protective of intellectual property rights as United
States laws, and mechanisms for enforcement of intellectual property rights may
be inadequate. As a result, we cannot assure you that our means of protecting
our proprietary technology and brands will be adequate. Furthermore, despite our
efforts, we may be
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<PAGE> 18
unable to prevent third parties from infringing upon or misappropriating our
intellectual property. Any such infringement or misappropriation could have a
material adverse effect on our business, results of operations and financial
condition.
We may be sued by third parties for alleged infringement of their proprietary
rights.
The software and Internet industries are characterized by the existence of a
large number of patents, trademarks and copyrights and by frequent litigation
based on allegations of patent infringement or other violations of intellectual
property rights. As the number of entrants into our market increases, the
possibility of an intellectual property claim against us grows. Our technologies
and products may not be able to withstand any third-party claims or rights
against their use. Any intellectual property claims, with or without merit,
could be time-consuming and expensive to litigate or settle, and could divert
management attention from executing our business plan.
We may not be able to develop acceptable new products or enhancements to our
existing products at a rate required by our rapidly changing market.
Our future success depends on our ability to develop new products or
enhancements to our existing products that keep pace with rapid technological
developments and that address the changing needs of our customers. Although
Websense Enterprise is designed to operate with a variety of network hardware
and software platforms, we will need to continuously modify and enhance Websense
Enterprise to keep pace with changes in Internet-related hardware, software,
communication, browser and database technologies. We may not be successful in
either developing such products or timely introducing them to the market. In
addition, uncertainties about the timing and nature of new network platforms or
technologies, or modifications to existing platforms or technologies, could
increase our research and development expenses. The failure of our products to
operate effectively with the existing and future network platforms and
technologies will limit or reduce the market for our products, result in
customer dissatisfaction and seriously harm our business, results of operations
and financial condition.
Other vendors may develop products similar to ours for incorporation into their
hardware or software, and thereby reduce demand for Websense Enterprise.
In the future, vendors of Internet-related hardware and software may enhance
their products or develop separate products that include functions that are
currently provided by Websense Enterprise. If employee Internet management
functions become standard features of Internet-related hardware or software, the
demand for Websense Enterprise will decrease. Furthermore, even if Websense
Enterprise provides greater functionality and is more effective than the
products offered by vendors of Internet-related hardware or software, potential
customers might accept this limited functionality in lieu of purchasing our
Websense Enterprise.
Our systems may be vulnerable to security risks or service disruptions that
could harm our business.
Our servers are vulnerable to physical or electronic break-ins and service
disruptions, which could lead to interruptions, delays, loss of data or the
inability to process customer requests. Such events could be very expensive to
remedy, could damage our reputation and could discourage existing and potential
customers from using our products. We may experience break-ins in the future.
Any such events could substantially harm our business, results of operations and
financial condition.
Because our products are complex and are deployed in a wide variety of complex
network environments, they may have errors or defects that users identify after
deployment, which could harm our reputation and our business.
Products as complex as ours frequently contain undetected errors when first
introduced or when new versions or enhancements are released. We have from time
to time found errors in versions of Websense Enterprise, and we may find such
errors in the future. The occurrence of errors could adversely affect sales of
our products, divert the
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attention of engineering personnel from our product development efforts and
cause significant customer relations problems.
Evolving regulation of the Internet may affect us adversely.
As Internet commerce continues to evolve, increasing regulation by federal,
state or foreign agencies becomes more likely. Such regulation is likely in the
areas of user privacy, pricing, content and quality of products and services.
Taxation of Internet use or other charges imposed by government agencies or by
private organizations for accessing the Internet may also be imposed. Laws and
regulations applying to the solicitation, collection or processing of personal
or consumer information could affect our activities. Furthermore, any regulation
imposing fees for Internet use could result in a decline in the use of the
Internet and the viability of Internet commerce, which could have a material
adverse effect on our business, results of operations and financial condition.
The success of our business depends on the continued growth and acceptance of
the Internet as a business tool.
Expansion in the sales of Websense Enterprise depends on the continued
acceptance of the Internet as a communications and commerce platform for
enterprises. The Internet may not prove to be a viable commercial medium due to
inadequate development of the necessary infrastructure, such as a reliable
network backbone, or timely development of complementary products, such as
high-speed modems. Additionally, the Internet could lose its viability as a
business tool due to delays in the development or adoption of new standards and
protocols to handle increased demands of Internet activity, security,
reliability, cost, ease-of-use, accessibility, and quality-of-service. If the
Internet does not continue to become a widespread communications medium and
commercial platform, the demand for Websense Enterprise could be significantly
reduced, which could have a material adverse effect on our business, results of
operations and financial condition.
Our products create risks of potential negative publicity and legal liability.
Because customers rely on Websense Enterprise to provide employee Internet
management, any significant defects or errors in our products may result in
negative publicity or legal claims. Negative publicity or legal claims could
seriously harm our business, results of operations and financial condition. In
addition, Websense Enterprise's capability to report Internet data retrieval
requests and the workstations from which they originated may result in negative
publicity or legal claims based on potential privacy violations.
Our executive officers, directors and principal stockholders own a large
percentage of our voting stock and could delay or prevent a change in our
corporate control or other matters requiring stockholder approval, even if
favored by our other stockholders.
Our executive officers, directors and principal stockholders, and their
respective affiliates, beneficially own approximately 75 percent of our
outstanding common stock. These stockholders, if acting together, would be able
to control substantially all matters requiring approval by our stockholders,
including the election of all directors and approval of significant corporate
transactions.
Because our operating expenses exceed our cash flow from operations, we may need
to raise additional funds in the future, which funds may not be available on
acceptable terms or at all.
We expect that our operating expenses will increase substantially over at least
the next 12 months. In addition, we may experience a material decrease in
liquidity due to unforeseen capital requirements or other events and
uncertainties. As a result, we may need to raise additional funds, and such
funds may not be available on favorable terms, if at all. If we cannot raise
funds on acceptable terms, we may not be able to develop or enhance our software
applications or database, execute on our business plan, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
This may seriously harm our business, results of operations and financial
condition.
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We may seek to raise additional funds, and additional funding may be dilutive to
stockholders or impose operational restrictions.
An additional equity financing may be dilutive to our stockholders and debt
financing, if available, may involve restrictive covenants, which may limit our
operating flexibility. If additional funds are raised through the issuance of
equity securities, the percentage of ownership of our stockholders will be
reduced. These stockholders may experience additional dilution in net book value
per share and any additional equity securities may have rights, preferences and
privileges senior to those of the holders of our common stock.
Our common stock may not develop an active, liquid trading market.
We only recently completed our initial public offering. Prior to this offering,
there was no public market for our common stock. We cannot predict whether an
active trading market in our common stock will develop or how liquid that market
may become.
The market price of our common stock is likely to be highly volatile and subject
to wide fluctuations.
The market price of our common stock is likely to be highly volatile and could
be subject to wide fluctuations in response to a number of factors that are
beyond our control, including:
o announcements of technological innovations or new products or
services by our competitors;
o demand for Websense Enterprise, including fluctuations in
subscription renewals;
o fluctuations in revenues from our indirect sales channels;
o changes in the pricing policies of our competitors; and
o changes in government regulations.
In addition, the market price of our common stock is likely to be highly
volatile and could be subject to wide fluctuations in response to:
o announcements of technological innovations or new products or
services by us;
o changes in our pricing policies;
o quarterly variations in our operating expenses; and
o our technological capabilities to accommodate the future growth in
our operations or our customers.
Further, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market price of the stock of
many Internet-related companies, and that often have been unrelated or
disproportionate to the operating performance of these companies. A number of
publicly traded Internet-related companies have current market prices below
their initial public offering prices. Market fluctuations such as these may
seriously harm the market price of our common stock. In the past, securities
class action suits have been filed following periods of market volatility in the
price of a company's securities. If such an action was instituted, we would
incur substantial costs and a diversion of management attention and resources,
which would seriously harm our business, results of operations and financial
condition.
It may be difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders.
Some provisions of our certificate of incorporation and bylaws, as well as some
provisions of Delaware law, may discourage, delay or prevent third parties from
acquiring us, even if doing so would be beneficial to our stockholders. For
example, our certificate of incorporation provides for a classified board, with
each board member serving a staggered three-year term. It also provides that
stockholders may not fill board vacancies, call stockholder
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meetings or act by written consent. Our bylaws further provide that advance
written notice is required prior to stockholder proposals. Each of these
provisions makes it more difficult for stockholders to obtain control of our
board or initiate actions that are opposed by the then current board.
Additionally, we have authorized preferred stock that is undesignated, making it
possible for the board to issue preferred stock with voting or other rights and
preferences that could impede the success of any attempted change of control.
Delaware law also could make it more difficult for a third party to acquire us.
Section 203 of the Delaware General Corporation Law may have an anti-takeover
effect with respect to transactions not approved in advance by our board,
including discouraging attempts that might result in a premium over the market
price of the shares of common stock held by our stockholders.
Future sales of our common stock may cause our stock price to decline.
The market price of our common stock could decline as a result of sales by our
existing stockholders of a large number of shares of our common stock in the
market or the perception that such sales could occur. These sales also might
make it more difficult for us to sell equity securities in the future at a time
and at a price that we deem appropriate.
We do not intend to pay dividends.
Since we terminated our election to be treated as an "S" corporation in January
1998, we have not declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund growth and, therefore, do
not expect to pay any dividends in the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates primarily from our long-term debt
arrangements and, secondarily, our investments in cash equivalents. Under our
current policies, we do not use interest rate derivative instruments to manage
exposure to interest rate changes. A hypothetical 100 basis point adverse move
in interest rates along the entire interest rate yield curve would not
materially affect the fair value of our interest sensitive financial instruments
at March 31, 2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No events occurred during the quarter covered by this Quarterly Report that
would require response to this item.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) During the three months ended March 31, 2000, following the exercise of
options to purchase shares of common stock that had been granted under the 1998
Equity Incentive Plan by 14 officers and employees, we issued an aggregate of
64,074 shares of common stock for an aggregate purchase price of approximately
$14,000. All of such sales of common stock were made pursuant to the exemption
from the registration requirements of the Securities Act afforded by Rule 701.
On February 11, 2000, the board of directors approved the issuance of options to
purchase 65,000 shares of our common stock at an exercise price of $7.00 per
share and options to purchase 172,000 shares of our common stock at an
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exercise price of $8.50 per share.
On February 4, 2000, we issued 50,000 shares of common stock to Alps System
Integration Co. Ltd. pursuant to the exercise of a warrant granted to Alps on
April 15, 1999 at an exercise price of $0.05 per share. The issuance of these
shares was made pursuant to an exemption from the registration requirements of
the Securities Act afforded by Section 4(2).
On March 24, 2000, we granted options to purchase an aggregate of 87,500 shares
of our common stock at an exercise price of $8.50 per share under our 1998
Equity Incentive Plan to certain of our directors, officers and employees. The
issuance of these options was made pursuant to the exemption from the
registration requirements of the Securities Act afforded by Rule 701.
(d) On March 28, 2000, we completed an initial public offering of our common
stock, $0.01 par value. The managing underwriters of the IPO were Chase
Securities Inc., SG Cowen Securities Corporation and Wit SoundView Corporation.
The shares of common stock sold in the IPO were registered under the Securities
Act of 1933, as amended, pursuant to a Registration Statement on Form S-1,
Registration No. 333-95619 that was declared effective by the Securities
Exchange Commission on March 27, 2000. All 4,000,000 shares of common stock were
sold at a price of $18.00 per share, which resulted in an aggregate offering
amount of $72.0 million. In connection with the IPO, we paid an aggregate of
$5.0 million in underwriting discounts and commissions to the underwriters. In
addition, the following table sets forth all estimated expenses incurred in
connection with the IPO through March 31, 2000, other than underwriting
discounts and commissions.
<TABLE>
<S> <C>
SEC Registration Fee $ 42,000
NASD Filing Fee 8,000
Nasdaq National Market Entry Fee 95,000
Accounting Fees and Expenses 233,000
Legal Fees and Expenses 515,000
Printing and Engraving Expenses 216,000
Miscellaneous 164,000
----------
Total Expenses $1,273,000
==========
</TABLE>
After deducting the underwriting discounts and commissions and the offering
expenses described above, we received net proceeds from the IPO of approximately
$65.7 million. As of March 31, 2000, we had not used any of the net proceeds
from the IPO and had used our existing cash balances to fund our operations. We
intend to use the proceeds for the purposes described in our Form S-1, including
selling and marketing expenses, research and development, development and
expansion of our database technologies and systems, infrastructure and support
improvements, capital expenditures and the remainder for general corporate
purposes. We did not pay any of the net proceeds of the IPO directly or
indirectly to any director, officer, or persons owning 10 percent or more of our
stock or affiliate.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No events occurred during the quarter covered by this Quarterly Report that
would require response to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 11, 2000, we held an annual meeting of stockholders at which our
stockholders, represented by 7,683,123 shares out of 8,357,700 shares of common
stock outstanding and by 6,346,419 shares out of 7,037,036 shares of preferred
stock outstanding, (i) elected John B. Carrington, Robert J. Loarie, Bruce T.
Coleman, John C. Stiska, Donald B. Milder and Gary E. Sutton to serve as
directors until the next annual meeting of stockholders and (ii) ratified the
appointment of Ernst & Young LLP as our independent auditors for the fiscal year
ending December 31, 2000. No stockholder voted against, withheld or abstained
from voting for any of the director nominees or the ratification of Ernst &
Young LLP as our independent auditors.
On February 22, 2000, pursuant to a written consent of stockholders, our
stockholders, represented by 7,586,207 shares out of 8,357,700 shares of common
stock outstanding and by 6,346,419 shares out of 7,037,036 shares of preferred
stock outstanding, (i) authorized our 2000 Stock Incentive Plan and reserved
4,500,000 shares of common stock for issuance under this Plan, (ii) authorized
our 2000 Employee Stock Purchase Plan and reserved 250,000 shares of common
stock for issuance under this Plan, (iii) authorized our Amended and Restated
Certificate of
22
<PAGE> 23
Incorporation, (iv) authorized our Restated Bylaws and (v) approved a form of
Indemnification Agreement and authorized us to enter into the Indemnification
Agreement with each of our officers and directors. The Plans, the Amended and
Restated Certificate of Incorporation and the Restated Bylaws became effective
immediately prior to the closing of the IPO.
ITEM 5. OTHER INFORMATION
No events occurred during the quarter covered by this Quarterly Report that
would require response to this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Restated Bylaws (1)
27.1 Financial Data Schedule
- ---------------------
(1) Incorporated by reference to Exhibits 3.2 and 3.4 filed with our
Registration Statement on Form S-1 (Registration No. 333-95619) on
March 28, 2000.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
March 31, 2000.
23
<PAGE> 24
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WEBSENSE, INC.
Date: May 15, 2000 By: \s\ John B. Carrington
----------------------------
John B. Carrington
Chairman of the Board,
President, and Chief Executive Officer
By: \s\ Douglas C. Wride
--------------------------
Douglas C. Wride
Chief Financial Officer
24
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