##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 September 30, 2005
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   CYBERGUARD CORPORATION
 
  Florida
    
    65-0510339(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)350 SW 12thAvenue, Deerfield Beach, Florida
    
    33442(Address of Principal Executive Offices)
    
    Zip Code)
 954-375-3500
 
   þ  o
  þ  o
  þ  o
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PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II.* OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 2. Changes in Securities and Use of Proceeds
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 5. Other Information
    
    
    21Item 6. Exhibits and Reports on Form 8-K
    
    
    22SIGNATURESSection 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEOSection 906 Certification of CFO




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PART I: FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CYBERGUARD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
 (Unaudited)September 30,
    
    
    June 30,2005
    
    
    2005ASSETSCash and cash equivalents
    
    $
    13,837
    
    
    $
    15,003Restricted cash
    
    
    243
    
    
    
    298Accounts receivable, less allowance for uncollectible accounts of
$1,391at September 30, 2005 and $480 at June 30, 2005
    
    
    20,251
    
    
    
    19,456Inventories, net
    
    
    1,864
    
    
    
    1,753Other current assets
    
    
    4,035
    
    
    
    3,248Total current assets
    
    
    40,230
    
    
    
    39,758Property and equipment at cost, less accumulated depreciation of
$5,904 at September 30, 2005 and $5,562 at June 30, 2005
    
    
    3,225
    
    
    
    3,366Capitalized software, less accumulated amortization of $2,716 at
September 30, 2005 and $2,547 at June 30, 2005
    
    
    3,084
    
    
    
    2,521Intangible assets, less accumulated amortization of $7,696 at
September 30, 2005 and $6,452 at June 30, 2005
    
    
    19,072
    
    
    
    20,316Other assets
    
    
    210
    
    
    
    241Goodwill
    
    
    45,339
    
    
    
    45,339Deferred tax asset, net
    
    
    3,864
    
    
    
    3,864Total assets
    
    $
    115,024
    
    
    $
    115,405LIABILITIES AND SHAREHOLDERS EQUITYAccounts payable
    
    $
    2,449
    
    
    $
    3,769Deferred revenue, current portion
    
    
    16,954
    
    
    
    16,500Note payable
    
    
    488
    
    
    
    974Accrued expenses and other liabilities
    
    
    7,734
    
    
    
    8,813Total current liabilities
    
    
    27,625
    
    
    
    30,056Deferred tax liability
    
    
    5,755
    
    
    
    5,755Deferred revenue, less current portion
    
    
    6,257
    
    
    
    6,310Total long-term liabilities
    
    
    12,012
    
    
    
    12,065Total liabilities
    
    
    39,637
    
    
    
    42,121Commitments and Contingencies
    
    
    
    
    
    
    Shareholders equityPreferred stock par value $0.01; authorized 5,000 shares; none issued
    
    
    
    
    
    
    Common stock par value $0.01; authorized 50,000 shares; issued and
outstanding 31,390 at September 30, 2005 and 31,082 at June 30, 2005
    
    
    314
    
    
    
    311Additional paid-in capital
    
    
    152,683
    
    
    
    150,995Accumulated deficit
    
    
    (77,670
    )
    
    
    (78,011
    )Accumulated other comprehensive income
    
    
    60
    
    
    
    (11
    )Total shareholders equity
    
    
    75,387
    
    
    
    73,284Total liabilities and shareholders equity
    
    $
    115,024
    
    
    $
    115,405
  1




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CYBERGUARD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
 Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004RevenuesProducts
    
    $
    12,170
    
    
    $
    12,475Services
    
    
    5,266
    
    
    
    3,204Total revenues
    
    
    17,436
    
    
    
    15,679Cost of revenuesProducts
    
    
    3,835
    
    
    
    4,155Services
    
    
    1,332
    
    
    
    996Total cost of revenues
    
    
    5,167
    
    
    
    5,151Gross profit
    
    
    12,269
    
    
    
    10,528Operating expensesResearch and development
    
    
    2,146
    
    
    
    2,589Selling, general and administrative
    
    
    9,608
    
    
    
    8,064Total operating expenses
    
    
    11,754
    
    
    
    10,653Operating income / (loss)
    
    
    515
    
    
    
    (125
    )Other incomeInterest income, net
    
    
    59
    
    
    
    46Other (expense) / income
    
    
    (120
    )
    
    
    8Total other (expense) / income
    
    
    (61
    )
    
    
    54Income / (loss) before income taxes
    
    
    454
    
    
    
    (71
    )Income tax (expense) / benefit
    
    
    (113
    )
    
    
    12Net income / (loss)
    
    $
    341
    
    
    $
    (59
    )Basic (loss) earnings per common share
    
    $
    0.01
    
    
    $
    (0.00
    )Basic weighted average number of common shares outstanding
    
    
    31,568
    
    
    
    29,172Diluted (loss) earnings per common share
    
    $
    0.01
    
    
    $
    (0.00
    )Diluted weighted average number of common shares outstanding
    
    
    33,491
    
    
    
    29,172
  2




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CYBERGUARD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
 Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004Cash flows from operating activities:Net income / (loss)
    
    $
    341
    
    
    $
    (59
    )Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    342
    
    
    
    184Amortization
    
    
    1,414
    
    
    
    1,178Provision for inventory
    
    
    
    
    
    
    127Deferred tax benefit
    
    
    
    
    
    
    (12
    )Provision for uncollectible accounts receivable
    
    
    808
    
    
    
    348Stock based compensation expense
    
    
    964
    
    
    
    126Changes in assets and liabilitiesIncrease in accounts receivable
    
    
    (1,603
    )
    
    
    (2,140
    )(Increase) / decrease in other current assets
    
    
    (777
    )
    
    
    8Increase in inventories
    
    
    (111
    )
    
    
    (507
    )Decrease / (increase) in other assets, net
    
    
    21
    
    
    
    (288
    )Decrease in accounts payable
    
    
    (1,320
    )
    
    
    (239
    )(Decrease) / increase in accrued expenses and other liabilities
    
    
    (1,080
    )
    
    
    1,287Increase / (decrease) in deferred revenue
    
    
    402
    
    
    
    (128
    )Net cash used in operating activities
    
    
    (599
    )
    
    
    (115
    )Cash flows used in investing activitiesDecrease / (increase) in restricted cash
    
    
    55
    
    
    
    (3
    )Capitalized software costs
    
    
    (732
    )
    
    
    Purchase of property & equipment
    
    
    (201
    )
    
    
    (799
    )Net cash used in investing activities
    
    
    (878
    )
    
    
    (802
    )Cash flows provided by financing activities:Proceeds from stock options exercised
    
    
    529
    
    
    
    52Payment on note
    
    
    (486
    )
    
    
    Proceeds from warrants exercised
    
    
    
    
    
    
    3,169Proceeds from issuance of common stock in stock purchase plan
    
    
    197
    
    
    
    Net cash provided by financing activities
    
    
    240
    
    
    
    3,221Effect of exchange rate changes on cash
    
    
    71
    
    
    
    (130
    )Net (decrease) / increase in cash
    
    
    (1,166
    )
    
    
    2,174Cash and cash equivalents at beginning of period
    
    
    15,003
    
    
    
    12,447Cash and cash equivalents at end of period
    
    $
    13,837
    
    
    $
    14,621Supplemental disclosure of cash flow informationCash paid for interest
    
    $
    12
    
    
    $
    Cash paid for income taxes
    
    $
    
    
    
    $
    
  3




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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
(Dollars in thousands, except per share data)
 1. Business and Basis of Presentation
      4




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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
(Dollars in thousands, except per share data)
   (i)
    
    Product sales of firewall appliances and software licenses which include the sale of subscription licenses to
resellers and end users;(ii)
    
    Product sales with customer-specific acceptance provisions to original equipment manufacturer (OEM) customers; and(iii)
    
    Service revenue which is primarily maintenance which provides for customer support.
      5




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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
(Dollars in thousands, except per share data)
 2. Earnings Per Share (EPS)
  Three months
    
    
    Three monthsended
    
    
    endedSeptember 30,
    
    
    September 30,2005
    
    
    2004Net Income/(Loss)
    
    $
    341
    
    
    $
    (59
    )Basic weighted average number of
common shares outstanding
    
    
    31,568
    
    
    
    29,172Dilutive effect of:Employee stock options
    
    
    1,698
    
    
    
    Unearned restricted stock
    
    
    
    
    
    
    Warrants
    
    
    225
    
    
    
    Diluted weighted average number
of common shares outstanding
    
    
    33,491
    
    
    
    29,172Earnings per share basic
    
    $
    0.01
    
    
    $
    0.00Earnings per
share diluted
    
    $
    0.01
    
    
    $
    0.00
 3. Stock-Based Compensation
 Stock Option Plans
   6




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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
(Dollars in thousands, except per share data)
 Accounting for Stock Issued to
Employees Accounting for
Stock-Based Compensation Share-Based Payment
     WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOptions at July1, 2005
    
    
    4,877,000
    
    
    $
    4.71Granted
    
    
    125,000
    
    
    $
    6.29Exercised
    
    
    (245,000
    )
    
    $
    2.17Forfeited or expired
    
    
    (89,000
    )
    
    $
    7.41Shares under option at September 30, 2005
    
    
    4,668,000
    
    
    $
    4.87
    
    
    
    5.8
    
    
    $
    15,766Vested or expected to vest at September 30, 2005
    
    
    2,834,000
    
    
    $
    3.54
    
    
    
    4.0
    
    
    $
    13,338Option shares exercisable at September 30, 2005
    
    
    2,834,000
    
    
    $
    3.54
    
    
    
    4.0
    
    
    $
    13,338
  WeightedAverageNumber of
    
    
    ExerciseShares
    
    
    PriceNonvested at July1, 2005
    
    
    1,941,000
    
    
    $
    6.83Granted
    
    
    125,000
    
    
    $
    6.29Vested
    
    
    (176,000
    )
    
    $
    5.19Forfeited
    
    
    (56,000
    )
    
    $
    7.58Nonvested at September 30, 2005
    
    
    1,834,000
    
    
    $
    6.93
  7




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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
(Dollars in thousands, except per share data)
   ThreeMonthsEndedSeptember 30,2004Net loss, as reported
    
    $
    (59
    )Add: Stock-based employee compensation
expense included in net income, net of
related tax effects
    
    
    Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all awards
    
    
    (1,089
    )Pro forma net income / (loss)
    
    $
    (1,148
    )Earnings / (loss) per share:Basicas reported
    
    $
    0.00Basicpro forma
    
    $
    (0.04
    )Dilutedas reported
    
    $
    0.00Dilutedpro forma
    
    $
    (0.04
    )
 4. Software Development Costs
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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
(Dollars in thousands, except per share data)
 5. Recent Accounting Pronouncements
   Share-Based Payment.
    7. Goodwill and Other Intangible Assets
  9




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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
(Dollars in thousands, except per share data)
  September 30,
    
    
    June 30,2005
    
    
    2005Unamortizable Trade Name
    
    $
    5,100
    
    
    $
    5,100Amortizable:Developed Technology
    
    
    7,509
    
    
    
    7,509Customer Base
    
    
    14,159
    
    
    
    14,159Total Gross Intangible Assets
    
    
    26,768
    
    
    
    26,768Accumulated Amortization:Developed Technology
    
    
    (3,947
    )
    
    
    (3,400
    )Customer Base
    
    
    (3,749
    )
    
    
    (3,052
    )Total Accumulated Amortization
    
    
    (7,696
    )
    
    
    (6,452
    )Total Net Book Value
    
    $
    19,072
    
    
    $
    20,316
 1
 Fiscal year2006 (remainder)
    
    $
    3,6872007
    
    
    4,2892008
    
    
    2,9302009
    
    
    2,4232010
    
    
    643$
    13,972
 8. Comprehensive Income
   10




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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
(Dollars in thousands, except per share data)
 Three months
    
    
    Three monthsended
    
    
    endedSeptember 30,
    
    
    September 30,2005
    
    
    2004Net income
    
    $
    341
    
    
    $
    (59
    )Change in CTA
    
    
    71
    
    
    
    (130
    )Total
    
    $
    412
    
    
    $
    (189
    )
 9 Segment Information
  10. Plan of merger
  11. Commitments and Contingencies
 Employment Agreements
  11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  The risks and uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known to us or that we currently consider
immaterial may also impair our operations. If any of the following risks, or any additional risks
and uncertainties, were to materialize, our business, financial condition or results of operations
could be materially adversely affected. Were that to occur, the trading price of our common stock
could decline.
  
    
    Intense competition both domestically and internationally
    
    Decrease in profit margins
    
    Inventory risk due to shifts in market demands
    
    Dependence on information systems
    
    Upgrading our information and internal control systems
 12




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
    
    Credit exposure due to the deterioration of the financial condition of our customers
    
    Inability to obtain required capital
    
    Fluctuations in interest rates
    
    Potential adverse effects of acquisitions
    
    Foreign currency exchange rates and exposure to foreign markets
    
    The impact of changes of income tax and other regulatory legislation
    
    Changes in accounting rules
    
    Product supply and availability
    
    Changes in vendor terms and conditions
    
    Changes in general economic conditions
    
    Exposure to natural disaster, war and terrorism
    
    Volatility of common stock
    
    Accuracy of forecast data
    
    Expansion into new geographic markets
    
    Expansion into new product markets
    
    The ability to sustain profitability in the future
    
    Seasonality and concentration of revenues at the end of the quarter
    
    Dependence on third party channel partners to distribute products
    
    Decrease in the price of our products
    
    Dependence on one primary manufacturer and assembly house
    
    Resource constraints caused by growth
    
    Changes in technology and industry standards could affect our products and services
    
    Litigation in connection with the alleged or actual failure of our products and services
    
    A breach in security could harm public perception of our products
    
    Cost of customizing products for foreign countries
    
    Export and import restrictions, including those affecting encryption commodities and software
    
    Regional economic and political conditions
    
    Intellectual property claims and litigation
    
    Governmental controls over the export or import of encryption technology
    
    Changes in federal regulations and future rules of the Securities and Exchange Commission
    
    Lack of resources compared to our competitors
    
    Limited products or product types
    
    Downturns in the technology sector in the US and key foreign economies
    
    Fluctuations in quarterly operating results
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CRITICAL ACCOUNTING POLICIES
   Revenue Recognition 
 (i)
    
    Product sales of firewall appliances and software licenses which include the sale of subscription licenses to
resellers and end users;(ii)
    
    Product sales with customer-specific acceptance provisions to original equipment manufacturer (OEM) customers; and(iii)
    
    Service revenue which is primarily maintenance which provides for customer support.
    14




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Stock-Based Compensation. Accounting for Stock Issued to
Employees Accounting for
Stock-Based Compensation Share-Based Payment
  Bad Debts.
 Goodwill 
 Intangible Assets 
 Software
Development Costs
 Inventory Valuation 
 15




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Deferred Taxes 
 Recent Accounting Pronouncements and Legislation
  Results of Operations
 The quarter ended September 30, 2005 compared to the quarter ended September 30, 2004
 Total Revenues
    16




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Gross Profit
   Operating Expenses and Net Income
       17




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Liquidity and Capital Resources
  For the three months endedSeptember 30,2005
    
    
    2004Net cash flow (used in) provided by:Operating activities
    
    $
    (599
    )
    
    $
    (115
    )Investing activities
    
    
    (878
    )
    
    
    (802
    )Financing activities
    
    
    240
    
    
    
    3,221Effect of exchange rate changes on cash
    
    
    71
    
    
    
    (130
    )Net (decrease) / increase in cash
    
    $
    (1,166
    )
    
    $
    2,174
       18




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Information Relating to Forward Looking Statements
  www.cyberguard.com www.cyberguard.com
  19




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Item 3. Quantitative and Qualitative Disclosures Concerning Market Risk
    
 Item 4. Controls and Procedures
   Limitations on the Effectiveness of Controls
   20




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PART II: OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders


Item 5. Other Information




21



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Item 6. Exhibits and Reports on Form 8-K
  Exhibit No.
    
    Exhibit Description31.01
    
    Certification by Patrick J. Clawson, Chief Executive Officer, pursuant to Exchange Act Rules 13a-14 and 15d-15.31.02
    
    Certification by Michael D. Matte, Chief Financial Officer, pursuant to Exchange Act Rules 13a-14 and 15d-15.32.01
    
    Certification by Patrick J. Clawson, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.02
    
    Certification by Michael D. Matte, Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   22




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SIGNATURES
  Date: November 8, 2005
    CYBERGUARD CORPORATIONBy:
    /s/Patrick J. ClawsonChairman and Chief Executive OfficerBy:
    /s/Michael D. MatteChief Financial Officer(Principal Financial and Accounting Officer) 23