##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 
 FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 0-24544
 
 CYBERGUARD CORPORATION
 (Exact Name of Registrant as Specified in its Charter)
 
 Florida(State or Other Jurisdiction of
Incorporation or Organization)
    
    65-0510339(I.R.S. Employer
Identification No.)
 350 SW 12thAvenue, Deerfield Beach, Florida(Address of Principal Executive Offices)
    
    33442(Zip Code)
 Registrants telephone number, including area code: (954) 958-3900
 
 Securities Registered Pursuant to Section 12(b) of the Act: None
 Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
 
 þ o
 o o
 o
 þ o




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Table of Contents
  Part I:Item 1: Business
    
    
    2Item 2: Properties
    
    
    9Item 3: Legal Proceedings
    
    
    9Item 4: Submission of Matters to a Vote of Security Holders
    
    
    9Part II:Item 5: Market for Registrants Common Equity and Related Stockholder Matters
    
    
    10Item 6: Selected Financial Data
    
    
    10Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 8: Financial Statements and Supplementary Data
    
    
    24Item 9: Changes In and Disagreements with Accountants on Accounting and Financial Disclosures
    
    
    46Item 9A: Controls and Procedures
    
    
    46Part III:Item 10: Directors and Executive Officers of the Registrant
    
    
    48Item 11: Executive Compensation
    
    
    48Item 12: Security Ownership of Certain Beneficial Owners and Management
    
    
    48Item 13: Certain Relationships and Related Transactions
    
    
    48Item 14: Principal Accounting Fees and Services
    
    
    48Part IV:Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    49Signatures
    
    
    51Patent License AgreementList of SubsidiariesConsent of Grant Thornton, LLPSection 302 CEO CertificationSection 302 CFO CertificationSection 906 CEO CertificationSection 906 CFO Certification
  
 PART I
   
 ITEM 1. BUSINESS
 Overview
     Recent Developments
  2




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##### Table of Contents



Industry Background
  Increase in Security Risks
  
    
    Unauthorized access to private company data and applications;
    
    Exposure to malicious software, worms, spyware, and viruses that cause
damage to a companys data and business operations or that bypasses
security and enables unauthorized access;
    
    Unavailability of network and applications due to denial-of-service attacks (DoS);
    
    Confidentiality leaks via email and unauthorized attachments that leave private networks unfiltered or unencrypted;
    
    Legal liability resulting from inappropriate employee Internet access; and
    
    Privacy violations associated with governmental regulations such as HIPAA.
  Increasing Sophistication and Frequency of Security Attacks
     The CyberGuard Solution
    3




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##### Table of Contents



Multi-level security.
 High performance appliances.
 Ease of implementation and management.
 Low cost of ownership.
 High reliability and availability.
 Strategy
  Extend our application and deep-packet inspection security capabilities.
 Maintain focus on customer service and support.
 Further penetrate and expand our existing customer base.
 Heighten our brand awareness and strengthen distribution channels.
 Extend our product offerings. 
 Continue to grow our business organically as well as through strategic acquisitions.
 Products
 Firewall/VPN Appliances
   4




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##### Table of Contents









Classic Series


FS Series




KS Series




SL Series


























Embedded Firewall/VPN Solutions




SG630 and SG635 Series




Secure Content Management Software







    
    URL Filter.Manages access to inappropriate or distracting Web content to minimize
organizations legal risks, increase network security and improve employee productivity.


5



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##### Table of Contents




    
    Anti-Virus.Provides in-depth protection against a multitude of blended threats at the
corporate gateway while offering high performance through our innovative Antivirus
technology.
    
    Anti-spam.Combines the strengths of multiple complementary spam detection methods for
unmatched accuracy, delivering spam detection well in excess of 90% and a false-positive
rate of less than 1%.
    
    Instant Message Filter.Detects, reports, and selectively blocks the unauthorized use of
high-risk and evasive Peer-to-Peer file sharing (P2P) and Public Instant Messaging (IM)
from enterprise networks.
    
    Content Protection.Ensures that your systems are protected against the myriad of
threats transported in Web and e-mail traffic. Content Protection screens the HTTP data
stream, filtering out unwanted and potentially dangerous content. In addition, Content
Protection filters out-going content (Web and e-mail) to stop leakage of confidential
materials.
    
    SSL Scanner.Enables enterprises to apply their existing security and Internet usage
policies to the HTTPS protocol.
  Security Management Platform
   Professional Services
 Global education programs.
 Customer Support
  Security Certifications
   
    
    We believe that we were the first firewall appliance to complete the
Common Criteria evaluation for our networking software and were
awarded Evaluation Assurance Level 4. In addition, we received an
augmented Evaluation Assurance Level 4 certificate under the Common
Criteria Assurance Maintenance Scheme. This allows for continuing
certification of any patches, enhancements, or upgrades without
further evaluation;
    
    We have achieved Common Criteria evaluation of the latest version of
our products at Evaluation Assurance Level 4+ and claiming conformance
to the following two U.S. Department of Defense protection profiles:
 (1)
    
    Final U.S. Government Traffic-Filter Firewall Protection Profile for Low-Risk Environments, Version 1.1, dated April 1999;(2)
    
    Final U.S. Department of Defense Applicationlevel Firewall Protection
Profile for Basic Robustness Environments, Version 1.0, dated June 22,
2000;
  (1)
    
    Final U.S. Department of Defense Application-level Firewall Protection
Profile For Medium Robustness Environments Version 1.0 June 28, 2000;
and(2)
    
    Final U.S. Department of Defense Traffic-Filter Firewall Protection
Profile For Medium Robustness Environments Version 1.4 May 1, 2000.
 
    
    We achieved the Federal Information Processing Standard (FIPS) 140-1
certification for our Classic product line and are currently working
on FIPS 140-2 certification for our TSP and SG product families.
 6




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##### Table of Contents




    
    Our firewall appliance line has been recognized by ICSA Labs, a
division of TruSecure Corporation, as having achieved ICSA Labs
Firewall Certification Versions 3.0a and 4.0. We are currently
working on ICSA Labs Firewall Certification Versions 4.0 for our TSP
product family.
    
    We have been certified by the VPNC (VPN Consortium) for Interoperability for all product lines.
 Strategic Relationships
   Customers and Markets
      Sales and Distribution
      Marketing
  7




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##### Table of Contents



Competition
    
    
    A broad set of firewall/VPN appliances that are well positioned to meet the requirements of enterprise and mid-market customers.
    
    A sophisticated central management solutionGlobal Command Centerthat
provides the foundation for managing enterprise security policies
implemented with our solutions and also those from our competitors. We
believe that Global Command Center will provide powerful incentives
for organizations to standardize on CyberGuard as their security
infrastructure provider.
    
    A fully integrated suite of Webwasher Web and e-mail content security
solutions. We are not aware of any other company in this space that
can address our range of content security requirements with a solution
that is as modular, feature rich, and fully integrated.
    
    Our continuing leadership in providing application-layer security. Our
capabilities to inspect and eliminate restricted application commands
and content are even stronger today thanks to our acquisition of
Webwasher.
    
    Our demonstrated commitment to service and support.
    
    An experienced team of developers, some of who helped create our multi-level secure operating system and other core technologies.
 ® ® ® ® 
 ® ®
 Patents and Proprietary Technology
 ®
  Government Regulation
  8




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Employees
  Executive Officers
  Name
    
    Age
    
    PositionPatrick J. Clawson
    
    
    41
    
    
    Chief Executive Officer and Chairman of the Board of DirectorsMichael G. Wittig
    
    
    41
    
    
    President and Chief Technology OfficerMichael Matte
    
    
    46
    
    
    Chief Financial Officer and Vice President FinanceMark S. Reese
    
    
    43
    
    
    Chief Operating OfficerGary Taggart
    
    
    52
    
    
    Senior Vice President, Worldwide Sales
 Patrick J. Clawson
 Michael G. Wittig.
 Michael Matte.
 Mark S. Reese.
 Gary Taggart
 Available Information
 www.cyberguard.com
 
 ITEM 2. PROPERTIES
 th
  
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  9




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##### Table of Contents



PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    BID PRICESHIGH
    
    
    LOWFISCAL YEAR 2004Quarter Ended September 30, 2003
    
    $
    10.70
    
    
    $
    6.95Quarter Ended December 31, 2003
    
    
    12.25
    
    
    
    7.25Quarter Ended March 31, 2004
    
    
    12.19
    
    
    
    8.40Quarter Ended June 30, 2004
    
    
    11.07
    
    
    
    5.52FISCAL YEAR 2005Quarter Ended September 30, 2004
    
    $
    8.36
    
    
    $
    5.29Quarter Ended December 31, 2004
    
    
    6.87
    
    
    
    4.91Quarter Ended March 31, 2005
    
    
    8.24
    
    
    
    5.53Quarter Ended June 30, 2005
    
    
    8.35
    
    
    
    4.75
   EQUITY COMPENSATION PLAN INFORMATION
 Number of Securities to be
    
    
    Weighted-average exercise
    
    
    Number of securitiesissued upon exercise of
    
    
    price of outstanding
    
    
    remaining available foroutstanding options,
    
    
    options, warrants and
    
    
    future issuance underPlan Category
    
    warrants and rights
    
    
    rights
    
    
    equity compensation plansEquity compensation
plans approved by
security holders
    
    
    4,729,000
    
    
    $
    4.76
    
    
    
    2,181,000
 
 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
  10




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##### Table of Contents



Fiscal year ended June 30,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands, except per share data)Statement of Operations Data:Revenues
    
    $
    66,098
    
    
    $
    47,812
    
    
    $
    32,980
    
    
    $
    22,340
    
    
    $
    24,406Cost of revenues:
    
    
    21,060
    
    
    
    15,662
    
    
    
    8,571
    
    
    
    7,163
    
    
    
    7,977Gross profit
    
    
    45,038
    
    
    
    32,150
    
    
    
    24,409
    
    
    
    15,177
    
    
    
    16,429Operating expensesResearch and development
    
    
    9,791
    
    
    
    7,420
    
    
    
    5,941
    
    
    
    4,705
    
    
    
    5,450Selling, general and administrative
    
    
    34,641
    
    
    
    20,797
    
    
    
    14,947
    
    
    
    11,313
    
    
    
    13,919Compensation expense related to restricted stock in the SnapGear, Inc.
acquisition
    
    
    
    
    
    
    4,387
    
    
    
    
    
    
    
    
    
    
    
    Class action settlement
    
    
    
    
    
    
    
    
    
    
    3,900
    
    
    
    
    
    
    
    Total operating expenses
    
    
    44,317
    
    
    
    32,604
    
    
    
    24,788
    
    
    
    16,018
    
    
    
    19,369Operating income (loss)
    
    
    721
    
    
    
    (454
    )
    
    
    (379
    )
    
    
    (841
    )
    
    
    (2,940
    )Other income (expense):Interest income (expense), net
    
    
    202
    
    
    
    148
    
    
    
    111
    
    
    
    58
    
    
    
    (830
    )Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    (18
    )
    
    
    (106
    )Other income (expense)
    
    
    (50
    )
    
    
    376
    
    
    
    205
    
    
    
    193
    
    
    
    (90
    )Total other income (expense)
    
    
    152
    
    
    
    524
    
    
    
    283
    
    
    
    233
    
    
    
    (1,026
    )Income (loss) before income taxes and cumulative effect of change in
accounting principle
    
    
    873
    
    
    
    70
    
    
    
    (96
    )
    
    
    (608
    )
    
    
    (3,966
    )Income tax (expense) / benefit
    
    
    (112
    )
    
    
    1,700
    
    
    
    4,167
    
    
    
    
    
    
    
    Net Income ( loss) before cumulative effect of change in accounting principle
    
    
    761
    
    
    
    1,770
    
    
    
    4,071
    
    
    
    (608
    )
    
    
    (3,966
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (431
    )Net income (loss)
    
    
    761
    
    
    
    1,770
    
    
    
    4,071
    
    
    
    (608
    )
    
    
    (4,397
    )Diluted income (loss) per share
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    0.16
    
    
    $
    (0.03
    )
    
    $
    (0.33
    )Balance Sheet Data:Current assets
    
    $
    39,758
    
    
    $
    26,958
    
    
    $
    27,908
    
    
    $
    12,605
    
    
    $
    11,024Total assets
    
    
    115,405
    
    
    
    96,727
    
    
    
    35,159
    
    
    
    14,130
    
    
    
    13,099Long term obligations
    
    
    12,065
    
    
    
    10,278
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    73,284
    
    
    
    66,042
    
    
    
    14,671
    
    
    
    6,956
    
    
    
    6,474
 11




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Information Regarding Forward-Looking Statements
   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
    
    Credit exposure due to the deterioration of the financial condition of our customers
    
    Inability to obtain required capital
    
    Fluctuation in interest rates
    
    Potential adverse affects 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
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
    
    Decrease in the price of our products
    
    Dependence on one primary manufacturer and assembly house
    
    Resources 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
  Overview
     Acquisitions
      13




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14




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The following table sets forth certain of our consolidated statement of operations data as a
percentage of total revenues for the periods indicated.
 Fiscal year ended June 30,2005
    
    2004
    
    2003(in percentages)Revenues:Products
    
    
    75
    
    
    
    75
    
    
    
    69Services
    
    
    25
    
    
    
    25
    
    
    
    31Total revenues
    
    
    100
    
    
    
    100
    
    
    
    100Cost of revenues:Products
    
    
    25
    
    
    
    25
    
    
    
    18Services
    
    
    7
    
    
    
    8
    
    
    
    8Total cost of revenues
    
    
    32
    
    
    
    33
    
    
    
    26Gross profit
    
    
    68
    
    
    
    67
    
    
    
    74Operating expenses:Research and development
    
    
    15
    
    
    
    16
    
    
    
    18Selling, general and administrative
    
    
    52
    
    
    
    43
    
    
    
    45Class action settlement
    
    
    
    
    
    
    
    
    
    
    12Compensation expense related to restricted stock in the SnapGear, Inc. acquisition
    
    
    
    
    
    
    9
    
    
    
    Total operating expenses
    
    
    67
    
    
    
    68
    
    
    
    75Operating income / (loss)
    
    
    1
    
    
    
    (1
    )
    
    
    (1
    )Other income:Interest income (expense), net
    
    
    
    
    
    
    
    
    
    
    Gain (loss) on sale of assets
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    1
    
    
    
    1Total other income
    
    
    
    
    
    
    1
    
    
    
    1Income/ (Loss) before income taxes
    
    
    1
    
    
    
    
    
    
    
    Income tax benefit
    
    
    
    
    
    
    4
    
    
    
    13Net income
    
    
    1
    
    
    
    4
    
    
    
    13
 15




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Comparison of the Years Ended June 30, 2005 and 2004


Total revenues






Product revenues


Service revenues


Cost of revenues and gross profit


Operating
expenses Non-GAAP Financial Information.


Research and development expenses


Selling, general and administrative expenses


16



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##### Table of Contents



Net interest income.
 Other expense / income.
 Income tax expense
 Net income and earnings per share.
 Non-GAAP Financial Information
  Year Ended June 30, 2005
    
    
    Year Ended June 30, 2004GAAP
    
    
    Proforma
    
    
    Proforma
    
    
    GAAP
    
    
    Proforma
    
    
    ProformaPresentation
    
    
    Adjustments
    
    
    Presentation
    
    
    Presentation
    
    
    Adjustments
    
    
    PresentationRevenues:Products
    
    $
    49,677
    
    
    $
    
    
    
    $
    49,677
    
    
    $
    35,796
    
    
    $
    
    
    
    $
    35,796Services
    
    
    16,421
    
    
    
    
    
    
    
    16,421
    
    
    
    12,016
    
    
    
    
    
    
    
    12,016Total revenues
    
    
    66,098
    
    
    
    
    
    
    
    66,098
    
    
    
    47,812
    
    
    
    
    
    
    
    47,812Cost of revenues:Products
    
    
    16,783
    
    
    
    (2,066
    )1
    
    
    14,717
    
    
    
    11,743
    
    
    
    (905
    )1
    
    
    10,838Services
    
    
    4,277
    
    
    
    
    
    
    
    4,277
    
    
    
    3,919
    
    
    
    
    
    
    
    3,919Total cost of revenues
    
    
    21,060
    
    
    
    (2,066
    )
    
    
    18,994
    
    
    
    15,662
    
    
    
    (905
    )
    
    
    14,757Gross profit
    
    
    45,038
    
    
    
    2,066
    
    
    
    47,104
    
    
    
    32,150
    
    
    
    905
    
    
    
    33,055Operating expenses:Research and development
    
    
    9,791
    
    
    
    
    
    
    
    9,791
    
    
    
    7,420
    
    
    
    
    
    
    
    7,420Selling, general and administrative
    
    
    34,641
    
    
    
    (2,463
    )1
    
    
    32,178
    
    
    
    20,797
    
    
    
    (844)1
    
    
    
    19,953Compensation expense related to
restricted stock in the SnapGear,
Inc. acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,387
    
    
    
    (4,387

)2
    
    
    Total operating expenses
    
    
    44,317
    
    
    
    (2,463
    )
    
    
    41,854
    
    
    
    32,604
    
    
    
    (5,231
    )
    
    
    27,373Operating income (loss)
    
    
    721
    
    
    
    4,529
    
    
    
    5,250
    
    
    
    (454
    )
    
    
    6,136
    
    
    
    5,682
 17




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##### Table of Contents



Year Ended June 30, 2005
    
    
    Year Ended June 30, 2004GAAP
    
    
    Proforma
    
    
    Proforma
    
    
    GAAP
    
    
    Proforma
    
    
    ProformaPresentation
    
    
    Adjustments
    
    
    Presentation
    
    
    Presentation
    
    
    Adjustments
    
    
    PresentationOther income (expense)Interest income, net
    
    
    202
    
    
    
    
    
    
    
    202
    
    
    
    148
    
    
    
    
    
    
    
    148Other (expense) / income
    
    
    (50
    )
    
    
    
    
    
    
    (50
    )
    
    
    376
    
    
    
    
    
    
    
    376Total other income
    
    
    152
    
    
    
    
    
    
    
    152
    
    
    
    524
    
    
    
    
    
    
    
    524Income before income taxes
    
    
    873
    
    
    
    4,529
    
    
    
    5,402
    
    
    
    70
    
    
    
    6,136
    
    
    
    6,206Income tax
(expense) / benefit3
    
    
    (112
    )
    
    
    
    
    
    
    (112
    )
    
    
    1,700
    
    
    
    
    
    
    
    1,700Net income
    
    $
    761
    
    
    $
    4,529
    
    
    $
    5,290
    
    
    $
    1,770
    
    
    $
    6,136
    
    
    $
    7,906Basic earnings per common share
    
    $
    0.03
    
    
    
    
    
    
    $
    0.17
    
    
    $
    0.07
    
    
    
    
    
    
    $
    0.34Weighted average number of common
shares outstanding
    
    
    30,270
    
    
    
    
    
    
    
    30,270
    
    
    
    23,829
    
    
    
    (522
    )2
    
    
    23,307Diluted earnings per common share
    
    $
    0.02
    
    
    
    
    
    
    $
    0.16
    
    
    $
    0.06
    
    
    
    
    
    
    $
    0.28Weighted average number of common
shares outstanding
    
    
    32,087
    
    
    
    
    
    
    
    32,087
    
    
    
    28,363
    
    
    
    (522
    )2
    
    
    27,841
 
 1 -
    
    The proforma adjustment relates to amortization of acquisition related intangible assets and other acquisition related costs.2 -
    
    The proforma adjustment relates to a one-time non-recurring charge related to non-cash compensation for the SnapGear, Inc. acquisition.3 -
    
    The proforma adjustments have no tax effect since the Company
is not in a tax paying position in the years presented. Comparison of Years Ended June 30, 2004 and June 30, 2003
 Total revenues
   Product revenues
 Service revenues
 Cost of revenues and gross profit
 18




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##### Table of Contents



Operating expenses Non-GAAP Financial
Information.
 Research and development expenses
 Selling, general and administrative expenses
  Compensation expense related to restricted stock.
 Net interest income.
 Other income.
 Income tax benefit
 Net income and earnings per share.
 Non-GAAP Financial Information
  19




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##### Table of Contents



Year Ended June 30, 2004
    
    
    Year Ended June 30, 2003GAAP
    
    
    Proforma
    
    
    Proforma
    
    
    GAAP
    
    
    Proforma
    
    
    ProformaPresentation
    
    
    Adjustments
    
    
    Presentation
    
    
    Presentation
    
    
    Adjustments
    
    
    PresentationRevenues:Products
    
    $
    35,796
    
    
    $
    
    
    
    $
    35,796
    
    
    $
    22,632
    
    
    $
    
    
    
    $
    22,632Services
    
    
    12,016
    
    
    
    
    
    
    
    12,016
    
    
    
    10,348
    
    
    
    
    
    
    
    10,348Total revenues
    
    
    47,812
    
    
    
    
    
    
    
    47,812
    
    
    
    32,980
    
    
    
    
    
    
    
    32,980Cost of revenues:Products
    
    
    11,743
    
    
    
    (905
    )1
    
    
    10,838
    
    
    
    5,884
    
    
    
    (130
    )1
    
    
    5,754Services
    
    
    3,919
    
    
    
    
    
    
    
    3,919
    
    
    
    2,687
    
    
    
    
    
    
    
    2,687Total cost of revenues
    
    
    15,662
    
    
    
    (905
    )
    
    
    14,757
    
    
    
    8,571
    
    
    
    (130
    )
    
    
    8,441Gross profit
    
    
    32,150
    
    
    
    905
    
    
    
    33,055
    
    
    
    24,409
    
    
    
    130
    
    
    
    24,539Operating expenses:Research and development
    
    
    7,420
    
    
    
    
    
    
    
    7,420
    
    
    
    5,941
    
    
    
    
    
    
    
    5,941Selling, general and administrative
    
    
    20,797
    
    
    
    (844)1
    
    
    
    19,953
    
    
    
    14,947
    
    
    
    (173
    )1
    
    
    14,774Compensation expense related to
restricted stock in the SnapGear
acquisition
    
    
    4,387
    
    
    
    (4,387
    )3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Class action settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,900
    
    
    
    (3,900
    )2
    
    
    Total operating expenses
    
    
    32,604
    
    
    
    (5,231
    )
    
    
    27,373
    
    
    
    24,788
    
    
    
    (4,073
    )
    
    
    20,715Operating income (loss)
    
    
    (454
    )
    
    
    6,136
    
    
    
    5,682
    
    
    
    (379
    )
    
    
    4,203
    
    
    
    3,824Other income (expense)Interest income, net
    
    
    148
    
    
    
    
    
    
    
    148
    
    
    
    111
    
    
    
    
    
    
    
    111Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    (33
    )Other income
    
    
    376
    
    
    
    
    
    
    
    376
    
    
    
    205
    
    
    
    
    
    
    
    205Total other income
    
    
    524
    
    
    
    
    
    
    
    524
    
    
    
    283
    
    
    
    
    
    
    
    283Income / (Loss) before income taxes
    
    
    70
    
    
    
    6,136
    
    
    
    6,206
    
    
    
    (96
    )
    
    
    4,203
    
    
    
    4,107Income tax
benefit4
    
    
    1,700
    
    
    
    
    
    
    
    1,700
    
    
    
    4,167
    
    
    
    
    
    
    
    4,167Net income
    
    $
    1,770
    
    
    $
    6,136
    
    
    $
    7,906
    
    
    $
    4,071
    
    
    $
    4,203
    
    
    $
    8,274Basic earnings per common share
    
    $
    0.07
    
    
    
    
    
    
    $
    0.34
    
    
    $
    0.21
    
    
    
    
    
    
    $
    0.42Weighted average number of common
shares outstanding
    
    
    23,829
    
    
    
    (522
    )2
    
    
    23,307
    
    
    
    19,856
    
    
    
    
    
    
    
    19,856Diluted earnings per common share
    
    $
    0.06
    
    
    
    
    
    
    $
    0.28
    
    
    $
    0.16
    
    
    
    
    
    
    $
    0.33Weighted average number of common
shares outstanding
    
    
    28,363
    
    
    
    (522
    )2
    
    
    27,841
    
    
    
    24,893
    
    
    
    
    
    
    
    24,893
 
 1 -
    
    The proforma adjustment relates to amortization of acquisition related intangible assets.2 -
    
    The proforma adjustment relates to a one-time non-recurring charge for the settlement of the class-action lawsuit.3 -
    
    The proforma adjustment relates to a one-time non-recurring charge related to non-cash compensation for the SnapGear acquisition .4 -
    
    The proforma adjustments have no tax effect since the Company
is not in a tax paying position in the years presented. Liquidity and Capital Resources
    20




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##### Table of Contents



Payments due in:Contractual obligations
    
    Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    thereafterOperating lease obligations
    
    
    3,995,000
    
    
    
    671,000
    
    
    
    405,000
    
    
    
    358,000
    
    
    
    368,000
    
    
    
    379,000
    
    
    
    1,814,000
  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 OEM customers; and(iii)
    
    Service revenue which is primarily maintenance which provides for customer support.
     Bad Debts.
 21




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##### Table of Contents



Goodwill
 Intangible Assets  1
 Software Development Costs.
 Inventories.
 Deferred Taxes.
 Recent Accounting Pronouncements
   Share-Based Payment.
    22




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Interest rate risk.
 Foreign currency risk.
 23




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Index to Financial Statements
 Report of Management
    
    25Report of Independent Registered Public Accounting Firm
    
    26Consolidated
Balance Sheets as of June 30, 2005 and June 30, 2004
    
    27Consolidated
Statements of Income for years ended June 30, 2005,
June 30, 2004, and June 30, 2003
    
    28Consolidated
Statements of Cash Flows for years ended June 30, 2005,
June 30, 2004, and June 30, 2003
    
    29Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income for years ended
June 30, 2005, June 30, 2004, and June 30, 2003
    
    31Notes to Consolidated Financial Statements
    
    32
 24




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##### Table of Contents



/s/ PATRICK CLAWSON
    
    /s/ MICHAEL MATTEPat Clawson
    
    Michael MatteChief Executive Officer
    
    Chief Financial Officer
  25




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      Grant Thornton LLP/s/ GRANT THORNTON LLPFt. Lauderdale, FloridaSeptember 1, 2005
 26




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (Amounts in thousands,
except par value)
 June 30,
    
    
    June 30,2005
    
    
    2004ASSETSCash and cash equivalents
    
    $
    15,003
    
    
    $
    12,447Restricted cash
    
    
    298
    
    
    
    197Accounts receivable, less allowance for uncollectible accounts of
$480 and $365 at June 30, 2005 and 2004, respectively
    
    
    19,456
    
    
    
    9,461Inventories
    
    
    1,753
    
    
    
    2,063Other current assets
    
    
    3,248
    
    
    
    2,790Total current assets
    
    
    39,758
    
    
    
    26,958Property and equipment at cost, less accumulated depreciation of
$5,562 and $4,619 at June 30, 2005 and 2004, respectively
    
    
    3,366
    
    
    
    1,673Capitalized software, less accumulated amortization of
$2,547 and $2,166 at June 30, 2005 and 2004, respectively
    
    
    2,521
    
    
    
    1,530Intangible assets, less accumulated amortization of
$6,452 and $2,055 at June 30, 2005 and 2004, respectively
    
    
    20,316
    
    
    
    20,262Goodwill
    
    
    45,339
    
    
    
    40,625Deferred tax asset, net
    
    
    3,864
    
    
    
    5,575Other assets
    
    
    241
    
    
    
    104Total assets
    
    $
    115,405
    
    
    $
    96,727LIABILITIES AND SHAREHOLDERS EQUITYAccounts payable
    
    $
    3,769
    
    
    $
    2,951Deferred revenue, current portion
    
    
    16,500
    
    
    
    11,706Note payable
    
    
    974
    
    
    
    Accrued expenses and other liabilities
    
    
    8,813
    
    
    
    5,750Total current liabilities
    
    
    30,056
    
    
    
    20,407Deferred tax liability
    
    
    5,755
    
    
    
    7,466Deferred revenue, less current portion
    
    
    6,310
    
    
    
    2,812Total long-term liabilities
    
    
    12,065
    
    
    
    10,278Total liabilities
    
    
    42,121
    
    
    
    30,685Commitments 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 31,082 at June 30, 2005 and 28,528 at June 30,
2004
    
    
    311
    
    
    
    285Additional paid-in capital
    
    
    150,995
    
    
    
    144,569Accumulated deficit
    
    
    (78,011
    )
    
    
    (78,772
    )Accumulated other comprehensive loss
    
    
    (11
    )
    
    
    (40
    )Total shareholders equity
    
    
    73,284
    
    
    
    66,042Total liabilities and shareholders equity
    
    $
    115,405
    
    
    $
    96,727
  27




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF INCOME
 (Amounts in thousands, except per share data)
 Years EndedJune 30,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2003Revenues:Products
    
    $
    49,677
    
    
    $
    35,796
    
    
    $
    22,632Services
    
    
    16,421
    
    
    
    12,016
    
    
    
    10,348Total revenues
    
    
    66,098
    
    
    
    47,812
    
    
    
    32,980Cost of revenues:Products
    
    
    16,783
    
    
    
    11,743
    
    
    
    5,884Services
    
    
    4,277
    
    
    
    3,919
    
    
    
    2,687Total cost of revenues
    
    
    21,060
    
    
    
    15,662
    
    
    
    8,571Gross profit
    
    
    45,038
    
    
    
    32,150
    
    
    
    24,409Operating expenses:Research and development
    
    
    9,791
    
    
    
    7,420
    
    
    
    5,941Selling, general and administrative
    
    
    34,526
    
    
    
    20,797
    
    
    
    14,947Compensation expense related to restricted stock issued
in connection with the SnapGear, Inc. acquisition
    
    
    
    
    
    
    4,387Class action settlement
    
    
    
    
    
    
    
    
    
    
    3,900Total operating expenses
    
    
    44,317
    
    
    
    32,604
    
    
    
    24,788Operating income / (loss)
    
    
    721
    
    
    
    (454
    )
    
    
    (379
    )Other income (expense)Interest income, net
    
    
    202
    
    
    
    148
    
    
    
    111Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    (33
    )Other (expense) / income
    
    
    (50
    )
    
    
    376
    
    
    
    205Total other income
    
    
    152
    
    
    
    524
    
    
    
    283Income / (Loss) before income taxes
    
    
    873
    
    
    
    70
    
    
    
    (96
    )Income tax (expense) / benefit
    
    
    (112
    )
    
    
    1,700
    
    
    
    4,167Net income
    
    $
    761
    
    
    $
    1,770
    
    
    $
    4,071Basic earnings per common share
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    0.21Weighted average number of common shares outstanding
    
    
    30,270
    
    
    
    23,829
    
    
    
    19,856Diluted earnings per common share
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    0.16Diluted weighted average number of common shares outstanding
    
    
    32,087
    
    
    
    28,363
    
    
    
    24,893
  28




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF CASH FLOWS
 (Amounts in thousands)
 Years EndedJune 30,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    761
    
    
    $
    1,770
    
    
    $
    4,071Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    943
    
    
    
    1,245
    
    
    
    1,048Amortization
    
    
    4,778
    
    
    
    1,930
    
    
    
    544Compensation expense related to restricted stock issued in connection with the SnapGear, Inc. acquisition
    
    
    
    
    
    
    4,387
    
    
    
    Loss on disposal of property & equipment
    
    
    
    
    
    
    
    
    
    
    33Deferred tax benefit
    
    
    
    
    
    
    (1,700
    )
    
    
    (4,249
    )Provision for uncollectible accounts receivable
    
    
    115
    
    
    
    229
    
    
    
    598Provision for inventory
    
    
    47
    
    
    
    
    
    
    
    Compensation expense related to stock options
    
    
    
    
    
    
    11
    
    
    
    81Non cash expense for Company 401(k) match
    
    
    522
    
    
    
    442
    
    
    
    362Changes in assets and liabilities (excluding the effect of acquisitions):(Increase) in accounts receivable
    
    
    (10,111
    )
    
    
    (1,275
    )
    
    
    (3,053
    )(Increase) in other current assets
    
    
    (536
    )
    
    
    (710
    )
    
    
    (122
    )Decrease / (Increase) in inventories
    
    
    263
    
    
    
    720
    
    
    
    (439
    )Decrease /
(Increase) in other assets, net
    
    
    83
    
    
    
    179
    
    
    
    (189
    )Increase in accounts payable
    
    
    818
    
    
    
    839
    
    
    
    437Increase / (Decrease) in accrued expenses and other liabilities
    
    
    1,841
    
    
    
    (1,339
    )
    
    
    331Increase in deferred revenue
    
    
    6,714
    
    
    
    1,925
    
    
    
    1,746Decrease / (Increase) in receivable from insurance company
    
    
    
    
    
    
    6,500
    
    
    
    (6,500
    )(Decrease) / Increase in litigation payable
    
    
    
    
    
    
    (10,400
    )
    
    
    10,400Net cash provided by operating activities
    
    
    6,240
    
    
    
    4,753
    
    
    
    5,099Cash flows used in investing activities(Increase) / Decrease in restricted cash
    
    
    (101
    )
    
    
    284
    
    
    
    (335
    )(Increase) in intangible assets
    
    
    (635
    )
    
    
    
    
    
    
    Capitalized software costs
    
    
    (1,372
    )
    
    
    (1,550
    )
    
    
    (179
    )Purchase of property and equipment
    
    
    (2,604
    )
    
    
    (660
    )
    
    
    (666
    )Acquisition of certain assets of Zix Corporation
    
    
    (2,310
    )
    
    
    
    
    
    
    Acquisition of certain assets of Netoctave
    
    
    
    
    
    
    
    
    
    
    (300
    )Acquisition of SnapGear, Inc., net of cash acquired
    
    
    
    
    
    
    (35
    )
    
    
    Acquisition of Webwasher AG, net of cash acquired
    
    
    
    
    
    
    (8,166
    )
    
    
    Net cash used in investing activities
    
    
    (7,022
    )
    
    
    (10,127
    )
    
    
    (1,480
    )Cash flows provided by financing activities:Repayment of notes payable
    
    
    (483
    )
    
    
    
    
    
    
    (140
    )Proceeds from stock options exercised
    
    
    421
    
    
    
    4,820
    
    
    
    2,442Proceeds from warrant conversion
    
    
    3,169
    
    
    
    857
    
    
    
    Proceeds from issuance of common stock in stock purchase plan
    
    
    202
    
    
    
    168
    
    
    
    96Net cash provided by financing activities
    
    
    3,309
    
    
    
    5,845
    
    
    
    2,398Effect of exchange rate change on cash
    
    
    29
    
    
    
    (119
    )
    
    
    (88
    )Net increase in cash
    
    
    2,556
    
    
    
    352
    
    
    
    5,929Cash and cash equivalents at beginning of period
    
    
    12,447
    
    
    
    12,095
    
    
    
    6,166Cash and cash equivalents at end of period
    
    $
    15,003
    
    
    $
    12,447
    
    
    $
    12,095Supplemental disclosure of cash flow informationCash paid for interest
    
    $
    17
    
    
    $
    
    
    
    $
    7Cash paid for income taxes
    
    $
    66
    
    
    $
    28
    
    
    $
    112
   29




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##### Table of Contents



Current assetsOther current assets
    
    $
    142Total current assets
    
    
    142Non-current assetsProperty and equipment
    
    
    32Customer base
    
    
    3,700Goodwill
    
    
    1,302Total non-current assets
    
    
    5,034Current liabilitiesDeferred revenue
    
    
    1,387Total current liabilities
    
    
    1,387Deferred revenue, less current portion
    
    
    190Total assets acquired
    
    $
    3,599
     30




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
 (Amounts in thousands, except share data)
 AccumulatedOtherCommon Stock
    
    
    Common Stock
    
    
    Additional Paid
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Par Value
    
    
    in Capital
    
    
    Deficit
    
    
    Income / (Loss)
    
    
    TotalBalance June 30, 2002
    
    
    19,099,682
    
    
    $
    191
    
    
    $
    91,211
    
    
    $
    (84,613
    )
    
    $
    167
    
    
    $
    6,956Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,071
    
    
    
    
    
    
    
    4,071Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88
    )
    
    
    (88
    )Adjustment for stock
option activity
    
    
    
    
    
    
    
    
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    82Issuance of common stock
related to NetOctave
acquisition
    
    
    107,419
    
    
    
    1
    
    
    
    749
    
    
    
    
    
    
    
    
    
    
    
    750Issuance of common stock
related to the exercise
of options
    
    
    1,598,976
    
    
    
    16
    
    
    
    2,426
    
    
    
    
    
    
    
    
    
    
    
    2,442Issuance of common stock
under employee benefit
plans
    
    
    146,428
    
    
    
    2
    
    
    
    456
    
    
    
    
    
    
    
    
    
    
    
    458Balance June 30, 2003
    
    
    20,952,505
    
    
    
    210
    
    
    
    94,924
    
    
    
    (80,542
    )
    
    
    79
    
    
    
    14,671Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,770
    
    
    
    
    
    
    
    1,770Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (119
    )
    
    
    (119
    )Adjustment for stock
option activity
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    11Issuance of common stock
related to SnapGear,
Inc. acquisition
    
    
    1,650,876
    
    
    
    16
    
    
    
    14,397
    
    
    
    
    
    
    
    
    
    
    
    14,413Issuance of common stock
related to Webwasher AG
acquisition
    
    
    3,133,929
    
    
    
    31
    
    
    
    28,978
    
    
    
    
    
    
    
    
    
    
    
    29,009Issuance of common stock
related to the exercise
of options
    
    
    2,264,528
    
    
    
    23
    
    
    
    4,797
    
    
    
    
    
    
    
    
    
    
    
    4,820Issuance of common stock
related to warrant
conversion
    
    
    445,857
    
    
    
    4
    
    
    
    853
    
    
    
    
    
    
    
    
    
    
    
    857Issuance of common stock
under employee benefit
plans
    
    
    80,270
    
    
    
    1
    
    
    
    609
    
    
    
    
    
    
    
    
    
    
    
    610Balance June 30, 2004
    
    
    28,527,965
    
    
    
    285
    
    
    
    144,569
    
    
    
    (78,772
    )
    
    
    (40
    )
    
    
    66,042Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    761
    
    
    
    
    
    
    
    761Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    29Adjustment for stock
option activityIssuance of common stock
related to SnapGear,
Inc. acquisition
    
    
    342,054
    
    
    
    4
    
    
    
    2,134
    
    
    
    
    
    
    
    
    
    
    
    2,138Issuance of common stock
related to Webwasher AG
acquisition
    
    
    334,368
    
    
    
    3
    
    
    
    (3
    )Issuance of common stock
related to the exercise
of options
    
    
    182,164
    
    
    
    2
    
    
    
    419
    
    
    
    
    
    
    
    
    
    
    
    421Issuance of common stock
related to warrant
conversion
    
    
    1,584,484
    
    
    
    16
    
    
    
    3,153
    
    
    
    
    
    
    
    
    
    
    
    3,169Issuance of common stock
under employee benefit
plans
    
    
    111,939
    
    
    
    1
    
    
    
    723
    
    
    
    
    
    
    
    
    
    
    
    724Balance June 30, 2005
    
    
    31,082,974
    
    
    $
    311
    
    
    $
    150,995
    
    
    $
    (78,011
    )
    
    $
    (11
    )
    
    $
    73,284
  31




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands, except share and per share data)
 (1) DESCRIPTION OF BUSINESS
   (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Consolidation
 Use of Estimates.
 Cash Equivalents and Restricted Cash.
  2005
    
    
    2004Cash held on behalf of employees for purchase of Company stock
    
    $
    160
    
    
    $
    86Cash held on behalf of employees for flexible reimbursement plan
    
    
    
    
    
    
    14Certificate of deposit as collateral for Australian payroll taxes
    
    
    107
    
    
    
    97Security deposit for European facilities under operating leases
    
    
    31
    
    
    
    Total restricted cash
    
    $
    298
    
    
    $
    197
 Inventories.
 Bad Debts.
 Property and Equipment.
 Long Lived Assets.
 Software Development Costs.
  Goodwill
 32




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
  Intangible Assets  1
 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 OEM customers; and(iii)
    
    Service revenue which is primarily maintenance which provides for customer support.
     Product Warranty.
 Comprehensive income.
  Year ended
    
    
    Year ended
    
    
    Year endedJune 30,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2003Net Income
    
    $
    761
    
    
    $
    1,770
    
    
    $
    4,071Change in CTA
    
    
    29
    
    
    
    (119
    )
    
    
    (88
    )Comprehensive Income
    
    $
    790
    
    
    $
    1,651
    
    
    $
    3,983
 Deferred Revenue
 Reclassifications.
 Advertising Expense.
 33




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
 Income Taxes
 Foreign Currency Translation.
 StockBased Compensation.
   Year ended June 30,2005
    
    
    2004
    
    
    2003Net income, as reported
    
    $
    761
    
    
    $
    1,770
    
    
    $
    4,071Add: Stock-based employee
compensation expense
included in net income, net
of related tax effects
    
    
    
    
    
    
    11
    
    
    
    81Deduct: Total stock-based
employee compensation
expense determined under
fair value based methods for
all awards
    
    
    (2,850
    )
    
    
    (1,912
    )
    
    
    (2,928
    )Pro forma net income / (loss)
    
    $
    (2,089
    )
    
    $
    (131
    )
    
    $
    1,224Earnings / (loss) per share:Basicas reported
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    0.21Basicpro forma
    
    $
    (0.07
    )
    
    $
    (0.01
    )
    
    $
    0.06Dilutedas reported
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    0.16Dilutedpro forma
    
    $
    (0.07
    )
    
    $
    (0.01
    )
    
    $
    0.05
 Net Income Per Share.
 34




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
 Year Ended June 30,2005
    
    
    2004
    
    
    2003Net income
    
    
    761
    
    
    $
    1,770
    
    
    $
    4,071Weighted average number of
common shares outstanding
    
    
    30,269,525
    
    
    
    23,829,000
    
    
    
    19,856,000Dilutive effect of:Employee stock options
    
    
    1,615,354
    
    
    
    3,028,000
    
    
    
    3,634,000Warrants
    
    
    202,189
    
    
    
    1,506,000
    
    
    
    1,403,000Diluted weighted average
number of common shares
outstanding
    
    
    32,087,068
    
    
    
    28,363,000
    
    
    
    24,893,000Earnings/(loss) per shareBasic
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    0.21Diluted
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    0.16
 (3) ACQUISITIONS
 SnapGear, Inc.
     Cash at closing
    
    $
    1,582Acquisition costs  direct
    
    
    346Contingent earnout
    
    
    2,137CyberGuard stock
    
    
    14,414Total Purchase Price
    
    
    18,479Less: Fair value of identifiable assets acquired:Cash
    
    
    1,892Restricted cash
    
    
    102Accounts receivable, net
    
    
    39Inventory
    
    
    2,423Plant & equipment
    
    
    1154,571Plus: Fair value of liabilities assumed:Accounts payable
    
    
    416Customer deposits
    
    
    507Accrued expenses
    
    
    669Deferred tax liability
    
    
    1,1102,702Less:Restricted stock compensation
    
    
    4,387Fair value of developed technology(1)
    
    
    1,000Fair value of customer relationships(1)
    
    
    2,000Excess of cost over fair value of net assets acquired; goodwill
    
    $
    9,223
 
 (1)
    
    Separate and identifiable intangible assets subject to amortization 35




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
  Webwasher AG
   36




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##### Table of Contents



Cash at closing
    
    $
    8,097Acquisition costs  direct
    
    
    433Contingent earnout
    
    
    2,022CyberGuard stock
    
    
    29,010Total Purchase Price
    
    
    39,562Less: Fair value of identifiable assets acquired:Cash
    
    
    364Accounts receivable, net
    
    
    770Other current assets
    
    
    1,113Inventory
    
    
    3Plant & equipment
    
    
    3982,648Plus: Fair value of liabilities assumed:Accounts payable
    
    
    474Deferred revenues
    
    
    6,389Accrued expenses
    
    
    2,445Deferred tax liability
    
    
    6,73016,038Less:Fair value of developed technology (1)
    
    
    4,891Fair value of customer base (1)
    
    
    8,200Fair value of trade name (2)
    
    
    5,100Excess of cost over fair value of net assets acquired; goodwill
    
    $
    34,761
 
 (1)
    
    Separate and identifiable intangible assets subject to amortization(2)
    
    Separate and identifiable intangible assets not subject to amortization   Year Ended June 30,2004
    
    
    2003Proforma revenues
    
    $
    106,298
    
    
    $
    77,202Proforma net loss
    
    $
    (3,628
    )
    
    $
    (986
    )Loss per share-basic-proforma
    
    $
    (0.15
    )
    
    $
    (0.05
    )Loss per share-diluted-proforma
    
    $
    (0.15
    )
    
    $
    (0.05
    )
  37




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
  Current assetsOther current assets
    
    $
    142Total current assets
    
    
    142Non-current assetsProperty and equipment
    
    
    32Customer base
    
    
    3,700Goodwill
    
    
    1,302Total non-current assets
    
    
    5,034Current
liabilities
Deferred revenue
    
    
    1,387Total current liabilities
    
    
    1,387Deferred revenue, less current portion
    
    
    190Total assets acquired
    
    $
    3,599
 (4) PROPERTY AND EQUIPMENT
  Useful
    
    
    June 30,
    
    
    June 30,lives
    
    
    2005
    
    
    2004Property and equipment
    
    5 years
    
    $
    6,536
    
    
    $
    5,361Purchased software for internal use
    
    2 years
    
    
    1,574
    
    
    
    747Leasehold improvement*
    
    1-10 years
    
    
    818
    
    
    
    184Subtotal
    
    
    
    
    
    
    8,928
    
    
    
    6,292Less: accumulated depreciation
    
    
    
    
    
    
    (5,562
    )
    
    
    (4,619
    )Property and equipment, net
    
    
    
    
    
    $
    3,366
    
    
    
    1,673
 
 *
    
    Shorter of remaining term of lease or useful life  (5) GOODWILL AND OTHER INTANGIBLE ASSETS
  Balance as of July 1, 2004
    
    $
    40,625Goodwill acquired during the year  SnapGear, Inc. earnout
    
    
    1,337Goodwill acquired during the year  Webwasher AG earnout
    
    
    2,075Goodwill acquired during the year  certain assets acquired from Zix Corp.
    
    
    1,302Balance as of June 30, 2005
    
    $
    45,339
 38




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CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
  June 30, 2005
    
    
    June 30, 2004Gross
    
    
    
    
    
    
    Net
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Book
    
    
    Carrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueDeveloped Technology
    
    $
    7,509
    
    
    $
    3,400
    
    
    $
    4,109
    
    
    $
    6,758
    
    
    $
    1,305
    
    
    $
    5,453Customer Base
    
    
    14,159
    
    
    
    3,052
    
    
    
    11,107
    
    
    
    10,459
    
    
    
    750
    
    
    
    9,709Total
    
    $
    21,668
    
    
    $
    6,452
    
    
    $
    15,216
    
    
    $
    17,217
    
    
    $
    2,055
    
    
    $
    15,162
  June 30,
    
    
    June 30,2005
    
    
    2004Trade name
    
    $
    5,100
    
    
    $
    5,100
  Fiscal
Year
    
    Amount2006
    
    $
    4,9312007
    
    
    4,2892008
    
    
    2,9302009
    
    
    2,4232010
    
    
    643$
    15,216
 (6) OTHER CURRENT ASSETS
  June 30,
    
    
    June 30,2005
    
    
    2004Prepaid royalties
    
    $
    1,893
    
    
    $
    838Other current assets
    
    
    1,355
    
    
    
    1,952$
    3,248
    
    
    $
    2,790
 (7) ACCRUED EXPENSES AND OTHER LIABILITIES
  June 30,
    
    
    June 30,2005
    
    
    2004Salaries, wages and other compensation
    
    $
    4,009
    
    
    $
    3,045Earnout payment associated with Webwasher acquisition
    
    
    2,022
    
    
    
    Professional fees
    
    
    711
    
    
    
    270Accrued royalty fees
    
    
    795
    
    
    
    88Other payables
    
    
    1,276
    
    
    
    2,347$
    8,813
    
    
    $
    5,750
 39




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
 (8) INCOME TAXES
  June 30,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    71
    
    
    $
    
    
    
    $
    76State
    
    
    
    
    
    
    
    
    
    
    6Foreign
    
    
    41
    
    
    
    
    
    
    
    112
    
    
    
    
    
    
    
    82Deferred:Federal and State
    
    
    
    
    
    
    (1,700
    )
    
    
    (4,249
    )Foreign
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    (1,700
    )
    
    $
    (4,249
    )Total income
tax expense (benefit)
    
    $
    112
    
    
    $
    (1,700
    )
    
    $
    (4,167
    )
  June 30,
    
    
    June 30,
    
    June 30,2005
    
    
    2004
    
    2003United States
    
    $
    6,264
    
    
    $
    2,414
    
    
    $
    1,249Foreign
    
    
    (5,390
    )
    
    
    (2,344
    )
    
    
    (1,345
    )$
    874
    
    
    $
    70
    
    
    $
    (96
    )
  June 30,
    
    
    June 30,2005
    
    
    2004Deferred tax assetsAccrued expenses
    
    $
    1,641
    
    
    $
    2,160Depreciation and amortization
    
    
    (336
    )
    
    
    76Net operating loss carry forwards  US
    
    
    28,708
    
    
    
    30,280Net operating loss carry forwards  foreign
    
    
    7,595
    
    
    
    7,281Capital loss carry forwards  foreign
    
    
    150
    
    
    
    145AMT credit carry forward
    
    
    154
    
    
    
    64Other deferred tax assets
    
    
    (111
    )
    
    
    15337,801
    
    
    
    40,159Less: Valuation allowance
    
    
    (33,937
    )
    
    
    (34,584
    )Net deferred tax asset
    
    $
    3,864
    
    
    $
    5,575
 June 30,
    
    
    June 30,2005
    
    
    2004Deferred tax liabilitiesAcquired
intangibles, net of amortization  US
    
    $
    641
    
    
    $
    937Acquired intangibles, net of amortization  foreign
    
    
    5,114
    
    
    
    6,529Net deferred tax liability
    
    $
    5,755
    
    
    $
    7,466
 40




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
     Year ended June 30,2005
    
    
    2004
    
    
    2003Income taxes at statutory rate
    
    
    34.00
    %
    
    
    34.00
    %
    
    
    (34.00
    )%State and local taxes, net of benefit
    
    
    3.00
    
    
    
    3.00
    
    
    
    (3.00
    )Foreign operating results with no
benefit provided
    
    
    128.08
    
    
    
    (1,919.44
    )
    
    
    (518.21
    )Interest on convertible debt
    
    
    
    
    
    
    
    
    
    
    2.67Permanent differences, net
    
    
    (6.90
    )
    
    
    70.57
    
    
    
    37.61Alternate minimum tax items
    
    
    (145.32
    )
    
    
    
    
    
    
    Change in valuation allowance
    
    
    
    
    
    
    (616.70
    )
    
    
    4855.5612.86
    %
    
    
    (2428.57
    )%
    
    
    4340.63
    %
 (9) SHAREHOLDERS EQUITY
 Common Stock
 Preferred Stock 
 Stockholder Protection Rights Agreement-
 Stock Option Plans
   41




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
   WeightedAverageNumber of
    
    
    ExerciseShares
    
    
    PriceOptions at June 30, 2002
    
    
    5,348,000
    
    
    $
    1.90Granted
    
    
    2,152,000
    
    
    $
    3.21Exercised
    
    
    (1,599,000
    )
    
    $
    1.53Forfeited
    
    
    (146,000
    )
    
    $
    2.97Shares under option at June 30, 2003
    
    
    5,755,000
    
    
    $
    2.51Option shares exercisable at June 30, 2003
    
    
    3,402,000
    
    
    $
    2.15Options at July 1, 2003
    
    
    5,755,000
    
    
    $
    2.51Granted
    
    
    1,140,000
    
    
    $
    8.72Exercised
    
    
    (2,264,000
    )
    
    $
    2.14Forfeited
    
    
    (529,000
    )
    
    $
    4.00Shares under option at June 30, 2004
    
    
    4,102,000
    
    
    $
    4.31Option shares exercisable at June 30, 2004
    
    
    2,139,000
    
    
    $
    2.72Options at July 1, 2004
    
    
    4,102,000
    
    
    $
    4.31Granted
    
    
    1,442,000
    
    
    $
    6.30Exercised
    
    
    (182,000
    )
    
    $
    2.30Forfeited
    
    
    (485,000
    )
    
    $
    7.00Shares under option at June 30, 2005
    
    
    4,877,000
    
    
    $
    4.71Option shares exercisable at June 30, 2005
    
    
    2,946,000
    
    
    $
    3.32
   Options Outstanding
    
    Options ExercisableActual Range
    
    
    
    
    
    Weighted-of Exercise
    
    
    
    
    
    Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Prices
    
    Number
    
    
    Remaining
    
    
    Average
    
    
    Number
    
    
    AverageIncrement
    
    Outstanding
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$0.00-1.13
    
    
    17,000
    
    
    
    2.4
    
    
    $
    1.08
    
    
    
    17,000
    
    
    $
    1.08$1.13-2.27
    
    
    1,046,000
    
    
    
    4.2
    
    
    $
    1.41
    
    
    
    1,032,000
    
    
    $
    1.41$2.27-3.40
    
    
    1,158,000
    
    
    
    2.3
    
    
    $
    2.54
    
    
    
    1,091,000
    
    
    $
    2.54$3.40-4.54
    
    
    194,000
    
    
    
    2.3
    
    
    $
    3.86
    
    
    
    177,000
    
    
    $
    3.88$4.54-5.67
    
    
    23,000
    
    
    
    7.1
    
    
    $
    5.42
    
    
    
    5,000
    
    
    $
    5.40$5.67-6.80
    
    
    1,362,000
    
    
    
    9.1
    
    
    $
    6.21
    
    
    
    217,000
    
    
    $
    6.07$6.80-7.94
    
    
    152,000
    
    
    
    7.6
    
    
    $
    7.50
    
    
    
    65,000
    
    
    $
    7.56$7.94-9.07
    
    
    705,000
    
    
    
    8.4
    
    
    $
    8.37
    
    
    
    247,000
    
    
    $
    8.40$9.07-10.21
    
    
    206,000
    
    
    
    6.3
    
    
    $
    9.78
    
    
    
    91,000
    
    
    $
    9.74$10.21-11.34
    
    
    14,000
    
    
    
    2.9
    
    
    $
    10.98
    
    
    
    5,000
    
    
    $
    10.98
 42




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##### Table of Contents



CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
   Related Party Equity Transactions-
 (10) COMMITMENTS AND CONTINGENCIES
 Employment Agreements
 Lease Commitments.
  YEAR
    
    AMOUNT2006
    
    $
    6712007
    
    
    4052008
    
    
    3582009
    
    
    3682010
    
    
    379thereafter
    
    
    1,814Total
    
    $
    3,995
  (11) SEGMENT INFORMATION
  (12) FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
   (13) EMPLOYEE BENEFIT PLANS
   43




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CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
 (14) GEOGRAPHIC INFORMATION
  Year ended June 30,2005
    
    
    2004
    
    
    2003North America
    
    $
    29,067
    
    
    $
    23,894
    
    
    $
    16,406Europe (EMEA)
    
    
    28,365
    
    
    
    15,275
    
    
    
    10,469Asia / Latin America
    
    
    8,666
    
    
    
    8,643
    
    
    
    6,105Total Revenue
    
    $
    66,098
    
    
    $
    47,812
    
    
    $
    32,980
   YEAR ENDED JUNE 30,2005
    
    
    2004
    
    
    2003United States
    
    $
    19,284
    
    
    $
    11,641
    
    
    $
    2,425Europe
    
    
    49,787
    
    
    
    50,836
    
    
    
    136Asia
    
    
    65
    
    
    
    83
    
    
    
    $
    69,136
    
    
    $
    62,560
    
    
    $
    2,561
 (15) NEW ACCOUNTING PRONOUNCEMENTS
   Share-Based Payment.
    44




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CYBERGUARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
 (16) SUBSEQUENT EVENT
   (17) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
  Jun 30,
    
    
    Mar 31,
    
    
    Dec 31,
    
    
    Sep 30,Total
    
    
    2005
    
    
    2005
    
    
    2004
    
    
    2004Fiscal Year 2005Revenues
    
    $
    66,098
    
    
    $
    17,210
    
    
    $
    16,704
    
    
    $
    16,505
    
    
    $
    15,679Gross profit
    
    
    45,038
    
    
    
    11,872
    
    
    
    11,354
    
    
    
    11,284
    
    
    
    10,528Operating income / (loss)
    
    
    721
    
    
    
    (493
    )
    
    
    758
    
    
    
    581
    
    
    
    (125
    )Net income / (loss)
    
    $
    761
    
    
    $
    (464
    )
    
    $
    473
    
    
    $
    811
    
    
    $
    (59
    )Basic income / (loss) per share
    
    $
    0.03
    
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.03
    
    
    $
    0.00Diluted income / (loss)per share
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.00
 Jun 30,
    
    
    Mar 31,
    
    
    Dec 31,
    
    
    Sep 30,Total
    
    
    2004
    
    
    2004(1)
    
    
    2003
    
    
    2003Fiscal Year 2004Revenues
    
    $
    47,812
    
    
    $
    14,520
    
    
    $
    13,036
    
    
    $
    11,236
    
    
    $
    9,020Gross profit
    
    
    32,150
    
    
    
    9,225
    
    
    
    8,418
    
    
    
    7,943
    
    
    
    6,564Operating (loss) / income
    
    
    (454
    )
    
    
    (30
    )
    
    
    (2,841
    )
    
    
    1,583
    
    
    
    834Net (loss) / income
    
    $
    1,770
    
    
    $
    375
    
    
    $
    (2,109
    )
    
    $
    2,344
    
    
    $
    1,160Basic (loss) / income per share
    
    $
    0.07
    
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    0.11
    
    
    $
    0.05Diluted (loss) / income per share
    
    $
    0.06
    
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    0.08
    
    
    $
    0.04
 
 (1)
    
    The quarter ended March 31, 2004 includes a $4,113 one-time
non-recurring charge related to non-cash compensation for the
SnapGear, Inc. acquisition. 45




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Managements Report on Internal Control over Financial Reporting.
      Changes in Internal Control Over Financial Reporting
  46




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      .
  Grant Thornton LLP/s/ GRANT THORNTON LLPFt. Lauderdale, FloridaSeptember 1, 2005
 47




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
   
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  48




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##### Table of Contents



PART IV.
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
 (a)
    
    Financial Statements. See index to financial statements and schedules included in Item 8.(b)
    
    Reports onForm 8-K.During the fourth quarter of fiscal year 2005, the Company filed the
following reports on Form 8-K: (1) on April 19, 2005 (Item 7); (2) on April 28, 2005 (Items 2,
4, 8 and 9) and June 14, 2005 (Item 7).(c)
    
    Exhibits. The following exhibits are included in this Report:
 ExhibitNo.
    
    
    
    Exhibit Description2.01
    
    
    
    Asset Purchase Agreement dated January 22, 2003 by and between NetOctave, Inc. and CyberGuard Corporation(16)2.02
    
    
    
    Agreement and Plan of Merger among the Company, SnapGear Acquisition Corp and SnapGear, Inc., dated November 12, 2003(9)2.03
    
    
    
    Stock Purchase and Sale Agreement among the Company and WebWasher AG and the shareholders named herein, dated April 25, 2004(17)2.04
    
    
    
    Agreement and Plan of Merger, dated August 17, 2005, by and among Secure Computing Corporation, Bailey Acquisition
Corp. and CyberGuard Corporation (21)

2.05
    
    
    
    Form of Voting Agreement, dated August 17, 2005, by and between Secure Computing Corporation and the Director and Officer Holders (22)3.01
    
    
    
    Articles of Incorporation of the Company, as amended June 26, 1996(8)3.02
    
    
    
    Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company(13)3.03
    
    
    
    Restated Bylaws of the Company(3)4.01
    
    
    
    Form of Common Stock Certificate(4)4.02
    
    
    
    Form of Stockholder Rights Plan(2)*10.01
    
    
    
    Employee Stock Incentive Plan(6)*10.02
    
    
    
    Amendment to Employee Stock Incentive Plan(7)*10.03
    
    
    
    Amendment to Employee Stock Incentive Plan dated March 20, 1998(15)*10.04
    
    
    
    Third Amended and Restated Employee Stock Option Plan dated September 4, 1998,
as amended through December 4, 2003(14)*10.05
    
    
    
    Forms of Stock Option Agreements(15)*10.06
    
    
    
    Retirement Savings Plan, as amended and restated on July 1, 2002(5)*10.07
    
    
    
    Lease Agreement between the Company and Quadrant Business Center, dated
March 9, 2004(20)10.08
    
    
    
    Employment Agreement Amendment dated October 1, 2001 between the Company
and Patrick Clawson(12)*10.09
    
    
    
    Employment Agreement Amendment dated October 1, 2001 between the Company
and Michael Matte(12) *10.10
    
    
    
    Employment Agreement Amendment dated October 1, 2001 between the Company
and Michael Wittig(12) *10.11
    
    
    
    Employment Agreement Amendment dated October 1, 2001 between the Company
and Mark Reese (18) *10.12
    
    
    
    Employment Agreement dated November 12, 2003, as amended, between the
Company and Gary Taggart (19) *10.13
    
    
    
    Employment Agreement dated September 30, 1998 between the Company and
Michael Wittig(15) *10.14
    
    
    
    Amendment to Employment Agreement between the Company and Mike Wittig,
dated December 13, 2000(11) *10.15
    
    
    
    Employment Agreement between the Company and Patrick J. Clawson, dated January
18, 2001(11) *10.16
    
    
    
    Employment Agreement dated February 13, 2001 between the Company and Michael
Matte(10)*10.18
    
    
    
    Patent License Agreement between the Company and Tumbleweed Communications Corp. dated June 29, 200521.01
    
    
    
    List of subsidiaries of the Company23.01
    
    
    
    Consent of Grant Thornton LLP, Registered Public Accounting Firm31.01
    
    
    
    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(1)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(1)
 
 (1)
    
    This exhibit shall be treated as accompanying this Annual Report on Form 10-K and shall not
be deemed as filed as part of this Report.(2)
    
    Incorporated herein by reference to Post-Effective Amendment No. 1 to the Companys
Registration Statement on Form 10, dated September 29, 1994, File No. 0-24544.(3)
    
    Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q filed on
November 12, 1999.(4)
    
    Incorporated herein by reference to the Companys Registration Statement on Form S-3 dated
May 23, 1996 (File No. 333-04407).(5)
    
    Incorporated herein by reference to the Companys Registration Statement on Form S-8
(Commission File Number 333-58262), filed on July 19, 2002.(6)
    
    Incorporated herein by reference from Exhibit 4.1 to the Companys Registration Statement on
Form S-8 (Commission File Number 33-88448) filed on January 13, 1995.(7)
    
    Incorporated herein by reference to Annex E of the Registrants Definitive Proxy Statement as
filed on May 24, 1996.(8)
    
    Incorporated herein by reference to the Companys Annual Report on Form 10-K for fiscal year
ended June 30, 1996.(9)
    
    Incorporated herein by reference from the Form 8-K dated filed with the SEC on December 12,
2003.(10)
    
    Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q filed on May
14, 2001.(11)
    
    Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q filed on
February 14, 2001.(12)
    
    Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q filed on
February 5, 2002.(13)
    
    Incorporated herein by reference to the Companys Annual Report on 10-K for fiscal year ended
June 30, 2000.(14)
    
    Incorporated herein by reference to the Companys Proxy Statement, filed on December 15,
2003.(15)
    
    Incorporated herein by reference to the Companys Annual Report on 10-K for fiscal year ended
June 30, 1999.(16)
    
    Incorporated herein by reference from the Form 8-K dated March 4, 2003 and filed with the SEC
on March 13, 2003.(17)
    
    Incorporated herein by reference from the Form 8-K filed with the SEC on May 12, 2004.(18)
    
    Incorporated herein by reference from the Form 8-K filed with the SEC on November 22, 2004.(19)
    
    Incorporated herein by reference from the Form 10Q filed with the SEC on November 12, 2004.(20)
    
    Incorporated herein by reference from the Companys Annual Report on Form 10-K for fiscal
year ended June 30, 2004 and filed with the SEC on September 10, 2004.(21)
    
    Incorporated by reference to Exhibit 2.1 to CyberGuards Current Report on Form 8-K filed on
August 19, 2005.(22)
    
    Incorporated by reference to Exhibit 2.3 to CyberGuards Current Report on Form 8-K filed on
August 19, 2005.(*)
    
    Denotes management contract or compensatory plan or arrangement. 49




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SCHEDULE II
  VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
 Balance at
    
    
    Charged to
    
    
    Charged to
    
    
    
    
    
    
    Balance atBeginning of
    
    
    Costs and
    
    
    Other
    
    
    
    
    
    
    End ofDescription
    
    Period
    
    
    Expenses
    
    
    Accounts
    
    
    Deductions
    
    
    PeriodYear ended June 30, 2005Reserve deducted from assets to which they apply:Allowance for doubtful accounts
    
    $
    365
    
    
    $
    115
    
    
    $
    
    
    
    $
    
    
    
    $
    480Deferred tax valuation allowance
    
    $
    34,584
    
    
    $
    
    
    
    $
    (647
    )
    
    $
    
    
    
    $
    33,937Year ended June 30, 2004Reserves deducted from assets to which they apply:Allowance for doubtful accounts
    
    $
    707
    
    
    $
    231
    
    
    $
    
    
    
    $
    (573
    )
    
    $
    365Deferred tax valuation allowance
    
    $
    23,502
    
    
    $
    
    
    
    $
    12,782
    
    
    $
    (1,700
    )
    
    $
    34,584Year ended June 30, 2003Reserve deducted from assets to which they apply:Allowance for doubtful accounts
    
    $
    109
    
    
    $
    598
    
    
    $
    
    
    
    $
    
    
    
    $
    707Deferred tax valuation allowance
    
    $
    28,911
    
    
    $
    
    
    
    $
    
    
    
    $
    (5,409
    )
    
    $
    23,502
 50




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SIGNATURES
  September 1, 2005
    CYBERGUARD CORPORATIONBy:
    /s/ PATRICK J. CLAWSONPatrick ClawsonChairman and Chief Executive Officer   SIGNATURE
    
    TITLE
    
    DATE/s/ PATRICK J. CLAWSON
    
    Chairman and
Chief Executive
Officer (Principal
    
    September 1, 2005Patrick Clawson
    
    Executive Officer)/s/ MICHAEL D. MATTE
    
    Chief Financial
Officer (Principal
Financial and
Principal
    
    September 1, 2005Michael D. Matte
    
    Accounting Officer)/s/ PETER HOWARDPeter Howard
    
    Director
    
    September 1, 2005/s/ DANIEL J. MOENDaniel J. Moen
    
    Director
    
    September 1, 2005/s/ DAVID L. MANNINGDavid L. Manning
    
    Director
    
    September 1, 2005/s/ WILLIAM G. SCOTTWilliam G. Scott
    
    Director
    
    September 1, 2005/s/ RICHARD L. SCOTTRick Scott
    
    Director
    
    September 1, 2005/s/ WILLIAM D. RUBINWilliam D. Rubin
    
    Director
    
    September 1, 2005/s/ KENNETH C. JENNE, IIKenneth C. Jenne, II
    
    Director
    
    September 1, 2005
 51