NETWORKS ASSOCIATES INC/ - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2004

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 Santa Clara, California (Address of principal executive offices)		95054 (Zip Code)

Registrant’s telephone number, including area code:

(408) 988-3832

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

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 April 26, 2004, 165,330,464 shares of the registrant’s common stock, $0.01 par value, were outstanding.

This document contains 63 pages.

The Exhibit Index is on page 61.

NETWORKS ASSOCIATES, INC. AND SUBSIDIAIRES

FORM 10-Q

March 31, 2004

CONTENTS


Item
Number		Page

PART I: FINANCIAL INFORMATION
Item 1.	*Financial Statements (Unaudited)*
	Condensed Consolidated Balance Sheets: March 31, 2004 and December 31, 2003		2
	Condensed Consolidated Statements of Income and Comprehensive Income: Three months ended March 31, 2004 and 2003 (restated)		3
	Condensed Consolidated Statements of Cash Flows: Three months ended March 31, 2004 and 2003 (restated)		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*		24
Item 3.	*Quantitative and Qualitative Disclosures about Market Risk*		42
Item 4.	*Controls and Procedures*		57
PART II: OTHER INFORMATION
Item 1.	*Legal Proceedings*		58
Item 2.	*Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities*		58
Item 3.	*Defaults upon Senior Securities*		58
Item 4.	*Submission of Matters to a Vote of Security Holders*		58
Item 5.	*Other Information*		58
Item 6.	*Exhibits and Reports on Form 8-K*		59
Signatures			60
Exhibit Index			61
Umbrella Credit Facility Of Registrant
Tax Deferred Savings Plan
Amendment to Employment Agreement
Amendment to Employment Agreement
Sniffer Bonus Plan
Form of Sniffer Bonus Plan Participation Agreement
Certification Pursuant to Section 302
Certification Pursuant to Section 906

NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


			March 31,			December 31,
			2004			2003


			(In thousands, except
			share and per share data)
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	430,329		$	333,651
	Short-term marketable securities			217,432			174,499
	Accounts receivable, net			109,759			170,218
	Prepaid expenses, income taxes and other current assets			108,561			95,609
	Deferred taxes			177,304			160,550
	Assets held for sale			—			24,719

		Total current assets		1,043,385			959,246
Long-term marketable securities				293,449			258,107
Restricted cash				20,647			20,547
Property and equipment, net				110,294			111,672
Deferred taxes				169,861			199,196
Intangible assets, net				98,974			105,952
Goodwill				441,488			443,593
Other assets				6,314			22,185

		Total assets	$	2,184,412		$	2,120,498

LIABILITIES
Current liabilities:
	Accounts payable		$	25,847		$	32,099
	Accrued liabilities			124,102			147,281
	Deferred revenue			385,864			342,795
	Convertible debt, current portion			345,275			—
	Liabilities related to assets held for sale			—			23,310

		Total current liabilities		881,088			545,485
Deferred revenue, less current portion				102,077			116,762
Convertible debt, less current portion				—			347,397
Other long term liabilities				232,200			222,765

		Total liabilities		1,215,365			1,232,409

Commitments and contingencies (Notes 11 and 12)
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value:
	Authorized: 5,000,000 shares; issued and outstanding: none at March 31, 2004 and December 31, 2003			—			—
Common stock, $0.01 par value:
	Authorized: 300,000,000 shares; Issued: 164,762,023 shares and 162,071,798 shares at March 31, 2004 and December 31, 2003, respectively; Outstanding: 164,412,023 shares and 161,721,798 shares at March 31, 2004 and December 31, 2003, respectively			1,648			1,621
Additional paid-in capital				1,111,287			1,087,625
Deferred stock-based compensation				(537	)		(598	)
Accumulated other comprehensive income				35,217			34,027
Accumulated deficit				(173,861	)		(229,879	)
Treasury stock, at cost: 350,000 shares				(4,707	)		(4,707	)

		Total stockholders’ equity		969,047			888,089

		Total liabilities and stockholders’ equity	$	2,184,412		$	2,120,498

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

NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME



			Three Months Ended
			March 31,

			2004			2003


			(In thousands, except
			per share data)
			(Unaudited)
						(As Restated,
						See Note 13)
Net revenue:
	Product		$	81,203		$	127,306
	Services and support			135,421			92,008

		Total net revenue		216,624			219,314

Cost of net revenue:
	Product			22,952			18,690
	Services and support			10,847			13,230
	Amortization of purchased technology			3,393			1,741

		Total cost of net revenue		37,192			33,661

Operating costs:
	Research and development(1)			45,379			46,430
	Marketing and sales(2)			92,657			88,941
	General and administrative(3)			28,076			28,208
	Gain on sale of assets and technology			(46,505	)		(37	)
	Provision for (recovery from) doubtful accounts, net			525			(323	)
	Litigation settlement			(19,101	)		—
	Amortization of intangibles			3,573			5,011
	Restructuring charge			2,190			15,781

		Total operating costs		106,794			184,011

		Income from operations		72,638			1,642
Interest and other income				4,351			4,548
Interest and other expenses				(741	)		(3,171	)
Loss on redemption of zero coupon convertible debentures				—			(2,591	)
Gain on sale of marketable securities				488			1,048

	Income before provision for income taxes and cumulative effect of change in accounting principle			76,736			1,476
Provision for income taxes				20,718			144

	Income before cumulative effect of change in accounting principle			56,018			1,332
Cumulative effect of change in accounting principle, net of taxes				—			11,142

		Net income	$	56,018		$	12,474

Other comprehensive income:
	Unrealized gain (loss) on available-for-sale securities, net		$	250		$	(689	)
	Foreign currency translation gain			950			2,459

Comprehensive income			$	57,218		$	14,244

Basic income per share:
	Income before cumulative effect of change in accounting principle		$	0.34		$	0.01
	Cumulative effect of change in accounting principle, net of taxes			—			0.07

	Net income per share — basic		$	0.34		$	0.08

	Shares used in per share calculation — basic			163,423			159,552

Diluted income per share:
	Income before cumulative effect of change in accounting principle		$	0.32		$	0.01
	Cumulative effect of change in accounting principle net of taxes			—			0.07

	Net income per share — diluted		$	0.32		$	0.08

	Shares used in per share calculation — diluted			186,564			165,366

(1) Includes stock-based compensation charges of $1,314 and $742 for the three months ended March 31, 2004 and 2003, respectively.

(2) Includes stock-based compensation charges of $636 and $256 for the three months ended March 31, 2004 and 2003, respectively.

(3) Includes stock-based compensation charges of $276 and $969 for the three months ended March 31, 2004 and 2003, respectively.

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

NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



					Three Months Ended
					March 31,

					2004			2003


					(In thousands)
					(Unaudited)
								(As Restated,
								see Note 13)
Cash flows from operating activities:
	Net income				$	56,018		$	12,474
	Adjustments to reconcile net income to net cash provided by operating activities:
		Cumulative effect of change in accounting principle				—			(11,142	)
		Depreciation and amortization				16,634			15,978
		Provision for (recovery from) doubtful accounts, net				525			(323	)
		Non cash restructuring charge				—			15,781
		Non cash interest expense on convertible notes				525			1,584
		Premium amortization on marketable securities				1,537			—
		Gain on sale of assets and technology				(45,814	)		(37	)
		Gain on sale of marketable securities				(488	)		(1,048	)
		Loss on redemption of zero coupon convertible debentures				—			2,591
		Deferred taxes				14,017			(2,118	)
		Stock-based compensation charges				2,226			1,967
		Change in fair value of derivative, net				(2,151	)		(1,164	)
		Changes in assets and liabilities, net of divestitures:
			Accounts receivable			61,651			52,961
			Prepaid expenses, taxes and other			3,841			5
			Accounts payable and accrued liabilities			(21,649	)		(26,964	)
			Deferred revenue			32,168			(4,325	)

				Net cash provided by operating activities		119,040			56,220

Cash flows from investing activities:
	Purchase of marketable securities					(313,133	)		(376,133	)
	Proceeds from sale and maturity of marketable securities					234,060			253,855
	Proceeds from sale of Magic, net					47,565			—
	Purchase of property and equipment					(8,653	)		(23,100	)
	Increase in restricted cash					(100	)		(199	)
	Other					(28	)		(165	)

				Net cash used in investing activities		(40,289	)		(145,742	)

Cash flows from financing activities:
	Proceeds from issuance of stock from option and stock purchase plans					22,408			19,830
	Redemption of zero coupon convertible debentures					—			(177,055	)

				Net cash provided by (used in) financing activities		22,408			(157,225	)

	Effect of exchange rate fluctuations					(4,481	)		5,365

Net increase (decrease) in cash and cash equivalents						96,678			(241,382	)
Cash and cash equivalents at beginning of period						333,651			674,226

Cash and cash equivalents at end of period					$	430,329		$	432,844

Non cash investing activities:
	Unrealized gain (loss) on marketable securities				$	250		$	(689	)

Supplemental disclosure of cash flow information:
	Cash paid for income taxes				$	5,645		$	2,415

	Cash paid for interest				$	2,504		$	2,786

Table of Contents

Table of Contents

Table of Contents

Table of Contents


(1)	Includes stock-based compensation charges of $1,314 and $742 for the three months ended March 31, 2004 and 2003, respectively.
(2)	Includes stock-based compensation charges of $636 and $256 for the three months ended March 31, 2004 and 2003, respectively.
(3)	Includes stock-based compensation charges of $276 and $969 for the three months ended March 31, 2004 and 2003, respectively.