UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended September 30, 2003 | ||
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o
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to | ||
Commission file number: 0-20558
Networks Associates, Inc.
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Delaware (State or other jurisdiction of incorporation or organization) |
77-0316593 (I.R.S. Employer Identification Number) |
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3965 Freedom Circle Santa Clara, California (Address of principal executive offices) |
95054 (Zip Code) |
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Registrant’s telephone number, including area code:
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 o No þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
As of November 13, 2003, 161,438,984 shares of the registrant’s common stock, $0.01 par value, were outstanding.
THIS DOCUMENT CONTAINS 76 PAGES.
NETWORKS ASSOCIATES, INC.
FORM 10-Q, September 30, 2003
CONTENTS
| Item | ||||||
| Number | Page | |||||
| PART I: FINANCIAL INFORMATION | ||||||
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Item 1.
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Financial Statements (Unaudited) | |||||
| Condensed Consolidated Balance Sheets: September 30, 2003 and December 31, 2002 | 2 | |||||
| Condensed Consolidated Statements of Operations and Comprehensive Income: | ||||||
| Three and Nine months ended September 30, 2003 and 2002 | 3 | |||||
| Condensed Consolidated Statements of Cash Flows: | ||||||
| Nine months ended September 30, 2003 and 2002 | 5 | |||||
| Notes to Condensed Consolidated Financial Statements | 6 | |||||
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 35 | ||||
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk | 56 | ||||
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Item 4.
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Controls and Procedures | 70 | ||||
| PART II: OTHER INFORMATION | ||||||
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Item 1.
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Legal Proceedings | 71 | ||||
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Item 2.
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Changes in Securities | 71 | ||||
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Item 3.
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Defaults in Securities | 71 | ||||
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Item 4.
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Submission of Matters to a Vote of Security Holders | 71 | ||||
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Item 5.
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Other Information | 71 | ||||
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Item 6.
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Exhibits and Reports on Form 8-K | 71 | ||||
| SIGNATURES | 73 | |||||
| EXHIBIT INDEX | ||||||
1
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
| September 30, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
| (In thousands, except share | ||||||||||
| and per share data) | ||||||||||
| (Unaudited) | ||||||||||
| ASSETS | ||||||||||
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Current assets:
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Cash and cash equivalents
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$ | 354,575 | $ | 674,226 | ||||||
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Short-term marketable securities
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96,826 | 133,577 | ||||||||
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Accounts receivable, net
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126,246 | 160,159 | ||||||||
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Prepaid expenses, income taxes and other current
assets
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75,317 | 52,238 | ||||||||
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Deferred taxes
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140,941 | 174,469 | ||||||||
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Total current assets
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793,905 | 1,194,669 | ||||||||
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Long-term marketable securities
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311,032 | 205,906 | ||||||||
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Restricted cash
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21,034 | 21,211 | ||||||||
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Property and equipment, net
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109,695 | 89,277 | ||||||||
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Deferred taxes
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177,061 | 139,091 | ||||||||
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Intangible assets, excluding goodwill, net
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118,410 | 93,551 | ||||||||
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Goodwill, net
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450,336 | 273,934 | ||||||||
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Other assets
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23,781 | 27,848 | ||||||||
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Total assets
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$ | 2,005,254 | $ | 2,045,487 | ||||||
| LIABILITIES | ||||||||||
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Current liabilities:
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Accounts payable
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$ | 34,815 | $ | 29,948 | ||||||
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Accrued liabilities
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375,037 | 383,458 | ||||||||
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Deferred revenue
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341,334 | 292,277 | ||||||||
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Current portion of convertible debt
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— | 176,260 | ||||||||
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Total current liabilities
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751,186 | 881,943 | ||||||||
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Deferred revenue, less current portion
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55,838 | 36,918 | ||||||||
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Convertible debt, less current portion
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352,362 | 356,013 | ||||||||
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Other long term liabilities
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15,300 | 445 | ||||||||
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Total liabilities
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1,174,686 | 1,275,319 | ||||||||
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Contingencies (Notes 13 and 14)
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| STOCKHOLDERS’ EQUITY | ||||||||||
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Preferred stock, $0.01 par value:
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Authorized: 5,000,000 shares; Issued and
outstanding: none at September 30, 2003 and
December 31, 2002
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— | — | ||||||||
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Common stock, $0.01 par value:
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Authorized: 300,000,000 shares; Issued and
outstanding: 160,329,178 shares at September 30, 2003
and 157,926,732 shares at December 31, 2002
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1,603 | 1,579 | ||||||||
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Additional paid-in capital
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1,070,307 | 1,050,288 | ||||||||
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Deferred stock-based compensation
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(916 | ) | (5,736 | ) | ||||||
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Accumulated other comprehensive income
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34,475 | 24,158 | ||||||||
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Accumulated deficit
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(274,901 | ) | (300,121 | ) | ||||||
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Total stockholders’ equity
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830,568 | 770,168 | ||||||||
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Total liabilities and stockholders’ equity
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$ | 2,005,254 | $ | 2,045,487 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
| (As Restated) | (As Restated) | |||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||
| (Unaudited) | ||||||||||||||||||
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Net revenue:
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Product
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$ | 120,372 | $ | 160,079 | $ | 366,880 | $ | 468,499 | ||||||||||
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Services and support
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106,482 | 94,351 | 296,701 | 305,020 | ||||||||||||||
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Total net revenue
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226,854 | 254,430 | 663,581 | 773,519 | ||||||||||||||
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Cost of net revenue:
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Product
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22,484 | 24,429 | 61,539 | 77,290 | ||||||||||||||
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Services and support
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12,016 | 15,172 | 38,248 | 45,370 | ||||||||||||||
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Amortization of purchased technology
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3,435 | 696 | 7,952 | 1,963 | ||||||||||||||
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Total cost of net revenue
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37,935 | 40,297 | 107,739 | 124,623 | ||||||||||||||
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Operating costs and expenses:
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Research and development(1)
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46,705 | 37,824 | 138,087 | 105,881 | ||||||||||||||
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Marketing and sales(2)
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91,405 | 98,719 | 267,105 | 307,919 | ||||||||||||||
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General and administrative(3)
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37,822 | 35,489 | 97,432 | 82,193 | ||||||||||||||
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Acquisition related costs not subject to
capitalization
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— | 13,627 | — | 16,026 | ||||||||||||||
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Recovery of doubtful accounts, net
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(79 | ) | (784 | ) | (789 | ) | (1,141 | ) | ||||||||||
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Amortization of intangibles
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3,637 | 2,395 | 12,369 | 6,495 | ||||||||||||||
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Restructuring charge
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257 | — | 22,864 | 1,116 | ||||||||||||||
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In-process research and development
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— | — | 6,600 | — | ||||||||||||||
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Total operating costs and expenses
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179,747 | 187,270 | 543,668 | 518,489 | ||||||||||||||
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Income from operations
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9,172 | 26,863 | 12,174 | 130,407 | ||||||||||||||
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Interest and other income
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4,397 | 9,126 | 14,961 | 23,425 | ||||||||||||||
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Interest expense
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(1,222 | ) | (6,990 | ) | (6,427 | ) | (22,579 | ) | ||||||||||
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Gain (loss) on sale of assets and product lines
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— | 2,584 | (867 | ) | 10,015 | |||||||||||||
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Gain (loss) on repurchase of zero coupon
convertible debentures
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— | 57 | (2,727 | ) | 26 | |||||||||||||
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Write-down of strategic and other investments
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— | (198 | ) | — | (198 | ) | ||||||||||||
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Income before provision for (benefit from) income
taxes, minority interest and cumulative effect of change in
accounting principle
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12,347 | 31,442 | 17,114 | 141,096 | ||||||||||||||
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Provision for (benefit from) income taxes
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2,470 | (96 | ) | 3,036 | (308 | ) | ||||||||||||
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Income before minority interest and cumulative
effect of change in accounting principle
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9,877 | 31,538 | 14,078 | 141,404 | ||||||||||||||
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Minority interest in net income (loss) of
consolidated subsidiaries
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— | 2,586 | — | (1,895 | ) | |||||||||||||
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Income before cumulative effect of change in
accounting principle
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9,877 | 34,124 | 14,078 | 139,509 | ||||||||||||||
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Cumulative effect of change in accounting
principle, net of tax
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— | — | 11,142 | — | ||||||||||||||
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Net income
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$ | 9,877 | $ | 34,124 | $ | 25,220 | $ | 139,509 | ||||||||||
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Other comprehensive income (loss):
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Unrealized gain (loss) on marketable securities,
net
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(767 | ) | 46 | 1 | (2,310 | ) | ||||||||||||
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Foreign currency translation gain (loss)
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27 | (378 | ) | 10,318 | 7,399 | |||||||||||||
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Comprehensive income
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$ | 9,137 | $ | 33,792 | $ | 35,539 | $ | 144,598 | ||||||||||
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Basic income per share:
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Income before cumulative effect of change in
accounting principle
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$ | 0.06 | $ | 0.23 | $ | 0.09 | $ | 0.95 | ||||||||||
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Cumulative effect of change in accounting
principle, net of tax
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— | — | 0.07 | — | ||||||||||||||
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Net income per share — basic
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$ | 0.06 | $ | 0.23 | $ | 0.16 | $ | 0.95 | ||||||||||
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Shares used in per share calculation —
basic
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160,347 | 149,344 | 160,086 | 147,021 | ||||||||||||||
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Diluted income per share:
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Income before cumulative effect of change in
accounting principle
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$ | 0.06 | $ | 0.21 | $ | 0.08 | $ | 0.85 | ||||||||||
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Cumulative effect of change in accounting
principle, net of tax
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— | — | 0.07 | — | ||||||||||||||
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Net income per share — diluted
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$ | 0.06 | $ | 0.21 | $ | 0.15 | $ | 0.85 | ||||||||||
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Shares used in per share calculation —
diluted
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164,141 | 173,914 | 164,398 | 174,043 | ||||||||||||||
3
| (1) | Includes stock-based compensation charges of $2,202 and $1,351 for the three months ended September 30, 2003 and 2002, respectively, and $3,520 and $236 for the nine months ended September 30, 2003 and 2002, respectively. |
| (2) | Includes stock-based compensation charges (credits) of $2,795 and $903 for the three months ended September 30, 2003 and 2002, respectively, and $3,209 and ($234) for the nine months ended September 30, 2003 and 2002, respectively. |
| (3) | Includes stock-based compensation charges of $839 and $9,456 for the three months ended September 30, 2003 and 2002, respectively, and $2,033 and $7,195 for the nine months ended September 30, 2003 and 2002, respectively. |
| Three Months | Nine Months | ||||||||
| Ended | Ended | ||||||||
| September 30, 2002 | September 30, 2002 | ||||||||
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Pro forma amounts assuming the change in
accounting principle is applied retroactively:
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Net income
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$ | 32,822 | $ | 133,677 | |||||
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Basic income per share
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$ | 0.22 | $ | 0.91 | |||||
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Diluted income per share
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$ | 0.21 | $ | 0.82 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NETWORKS ASSOCIATES, INC.
| Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
| (As Restated) | ||||||||||||
| (In thousands) | ||||||||||||
| (Unaudited) | ||||||||||||
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Cash flows from operating activities:
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Net income
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$ | 25,220 | $ | 139,509 | ||||||||