NETWORKS ASSOCIATES INC/ - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002 or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-20558

Networks Associates, Inc.

(Exact name of registrant as specified in its charter)


Delaware		77-0316593
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
3965 Freedom Circle		95054
Santa Clara, California		(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code: (408) 988-3832

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 Par Value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

147,724,216 shares of the registrant’s common stock, $0.01 par value, were outstanding as of June 30, 2002.

THIS DOCUMENT CONTAINS 54 PAGES.

THE EXHIBIT INDEX IS ON PAGE 51.

TABLE OF CONTENTS


CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II: OTHER INFORMATION
	Item 1. Legal Proceedings:
	Item 2. Changes in Securities:
	Item 3. Defaults in Securities:
	Item 4. Submission of Matters to a Vote of Security Holders:
	Item 5. Other Information:
	Item 6. Exhibits and Reports on Form 8-K:
SIGNATURES
EXHIBIT INDEX
EXHIBIT 12.1
EXHIBIT 99.1

NETWORKS ASSOCIATES, INC.

FORM 10-Q, June 30, 2002

CONTENTS


Item Number		Page

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets: June 30, 2002 and December 31, 2001 (As restated)	2
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss):
	Three and six months ended June 30, 2002 and 2001	3
	Condensed Consolidated Statements of Cash Flows: Six months ended June 30, 2002 and 2001	4
	Notes to Condensed Consolidated Financial Statements	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3. Quantitative and Qualitative Disclosures about Market Risk		34

PART II: OTHER INFORMATION

Item 1. Legal Proceedings		48

Item 2. Changes in Securities		48

Item 3. Defaults in Securities		48

Item 4. Submission of Matters to a Vote of Security Holders		48

Item 5. Other Information		48

Item 6. Exhibits and Reports on Form 8-K		49

SIGNATURES		50
EXHIBIT INDEX		51

NETWORKS ASSOCIATES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


			June 30,			December 31,
			2002			2001

						(As Restated
						See Note 2)

			(In thousands, except share
			and per share data)
			(Unadited)
ASSETS
Current assets:
	Cash and cash equivalents		$	733,409		$	612,832
	Short-term marketable securities			194,970			135,761
	Accounts receivable, net			101,521			136,366
	Prepaid expenses, income taxes and other current assets			53,796			54,959
	Deferred taxes			120,280			142,869

		Total current assets		1,203,976			1,082,787
Long-term marketable securities				174,424			194,357
Fixed assets, net				65,961			64,040
Land				4,414			4,414
Deferred taxes				101,743			84,399
Intangible assets, excluding goodwill, net				23,551			28,124
Goodwill, net				157,398			156,930
Other assets				18,291			18,853

		Total assets	$	1,749,758		$	1,633,904

LIABILITIES
Current liabilities:
	Accounts payable		$	18,797		$	26,368
	Accrued liabilities			292,756			293,583
	Deferred revenue			244,554			250,048
	Current portion of convertible debt			___220,273			—

		Total current liabilities		776,380			569,999
Deferred taxes				16,933			20,445
Deferred revenue, less current portion				32,089			24,312
Convertible debt, less current portion				345,000			578,850
Other long term debt and liabilities				420			393

		Total liabilities		1,170,822			1,193,999

Contingencies (Note 10)
Minority interest				21,424			17,311
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value:
	Authorized: 5,000,000 shares; Issued and outstanding: none at June 30, 2002 and December 31, 2001.			—			—
Common stock, $0.01 par value:
	Authorized: 300,000,000 shares; Issued and Outstanding: 147,724,216 shares at June 30, 2002 and 140,699,222 shares at December 31, 2001.			1,477			1,406
Additional paid-in capital				834,786			742,315
Accumulated other comprehensive loss				(24,922	)		(30,345	)
Accumulated deficit				(253,829	)		(290,782	)

		Total stockholders’ equity		557,512			422,594

		Total liabilities, minority interest and stockholders’ equity	$	1,749,758		$	1,633,904

The accompanying notes are an integral part of these condensed consolidated financial statements.

NETWORKS ASSOCIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)



			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2002			2001			2002			2001


			(in thousands, except per share data)
			(Unaudited)
Net revenue:
	Product		$	149,601		$	132,368		$	288,851		$	224,869
	Services and support			83,358			60,449			164,820			123,840

		Total net revenue		232,959			192,817			453,671			348,709

Cost of net revenue:
	Product			24,934			25,421			50,223			48,881
	Services and support			14,851			14,488			30,198			28,011

		Total cost of net revenue		39,785			39,909			80,421			76,892

Operating costs and expenses:
	Research and development(1)			33,452			34,886			68,057			74,859
	Marketing and sales(2)			106,726			102,427			209,200			203,244
	General and administrative(3)			25,053			24,446			50,469			55,854
	Provision for (recovery from) doubtful accounts			(1,087	)		2,437			(357	)		(6,832	)
	Amortization of intangibles			2,515			16,672			5,367			32,517
	Restructuring charge			—			—			1,116			—

		Total operating costs and expenses		166,659			180,868			333,852			359,642

		Income (loss) from operations		26,515			(27,960	)		39,398			(87,825	)
Interest and other income				7,637			7,903			14,299			18,945
Interest expense				(7,899	)		(4,735	)		(15,589	)		(9,415	)
Gain on sale of assets and technology				—			—			6,717			—
Write-down of strategic and other investments				—			(13,138	)		—			(18,138	)

	Income (loss) before provision for income tax, minority interest and extraordinary item			26,253			(37,930	)		44,825			(96,433	)
Provision for (benefit from) income taxes				3,242			(732	)		4,645			(11,172	)

	Income (loss) before minority interest and extraordinary item			23,011			(37,198	)		40,180			(85,261	)
Minority interest in loss (income) of consolidated subsidiaries				(1,779	)		19			(3,196	)		721

	Income (loss) before extraordinary item			21,232			(37,179	)		36,984			(84,540	)
Extraordinary item — loss on repurchase of debt, net of taxes				(31	)		—			(31	)		—

	Net income (loss)		$	21,201		$	(37,179	)	$	36,953		$	(84,540	)

Other comprehensive income (loss):
	Unrealized gain (loss) on investments, net			175			8,308			(2,352	)		295
	Foreign currency translation gain			8,947			397			7,775			81

Comprehensive income (loss)			$	30,323		$	(28,474	)	$	42,376		$	(84,164	)

Basic net income (loss) per share:
Income (loss) before extraordinary item			$	0.14		$	(0.27	)	$	0.25		$	(0.62	)
Extraordinary item — loss on repurchase of debt, net of taxes				—			—			—			—

Net income (loss)			$	0.14		$	(0.27	)	$	0.25		$	(0.62	)

Shares used in per share calculation — basic				147,222			136,879			145,829			137,010

Diluted net income (loss) per share:
Income (loss) before extraordinary item			$	0.14		$	(0.27	)	$	0.24		$	(0.62	)
Extraordinary item — loss on repurchase of debt, net of taxes				—			—			—			—

Net income (loss)			$	0.14		$	(0.27	)	$	0.24		$	(0.62	)

Shares used in per share calculation — diluted				154,747			136,879			154,791			137,010

(1) Includes stock-based compensation charges (credits) of ($1,233) and $107 for the three months ended June 30, 2002 and 2001, respectively, and ($1,115) and $198 for the six months ended June 30, 2002 and 2001, respectively.

(2) Includes stock-based compensation charges (credits) of ($1,312) and $169 for the three months ended June 30, 2002 and 2001, respectively, and ($1,137) and $313 for the six months ended June 30, 2002 and 2001, respectively.

(3) Includes stock-based compensation charges (credits) of ($1,316) and $931 for the three months ended June 30, 2002 and 2001, respectively, and ($895) and $2,352 for the six months ended June 30, 2002 and 2001, respectively.

The accompanying notes are an integral part of these condensed consolidated financial statements.

NETWORKS ASSOCIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



				Six Months Ended
				June 30,

				2002			2001


				(in thousands)
				(Unaudited)
Cash flows from operating activities:
	Net income (loss)			$	36,953		$	(84,540	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization			24,376			48,684
		Recovery from doubtful accounts			(357	)		(6,832	)
		Non cash interest expense on convertible notes			6,579			9,422
		Extraordinary item — loss on repurchase of debt, net of tax			31			—
		Gain on sale of assets and technology			(6,717	)		—
		Realized gain on investments			—			(3,876	)
		Impairment of strategic investments			—			18,138
		Minority interest			3,196			(721	)
		Deferred taxes			2,451			(17,657	)
		Stock compensation charges			(3,147	)		2,863
		Change in fair value of derivative, net			179			—
		Changes in assets and liabilities:
			Accounts receivable		37,544			42,368
			Prepaid expenses, taxes and other		2,994			7,938
			Accounts payable and accrued liabilities		(9,421	)		(23,120	)

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(1)	Includes stock-based compensation charges (credits) of ($1,233) and $107 for the three months ended June 30, 2002 and 2001, respectively, and ($1,115) and $198 for the six months ended June 30, 2002 and 2001, respectively.

(2)	Includes stock-based compensation charges (credits) of ($1,312) and $169 for the three months ended June 30, 2002 and 2001, respectively, and ($1,137) and $313 for the six months ended June 30, 2002 and 2001, respectively.

(3)	Includes stock-based compensation charges (credits) of ($1,316) and $931 for the three months ended June 30, 2002 and 2001, respectively, and ($895) and $2,352 for the six months ended June 30, 2002 and 2001, respectively.