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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

(Mark one)

 

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

       For the quarterly period ended December 31, 2003

 

or

 

¨   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 0-33387

 

 

NETSCREEN TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware    77-0469208

(State or other jurisdiction of

incorporation or organization)

    (I.R.S. Employer
Identification Number)

 

805 11th Avenue

Building 3

Sunnyvale, California 94089

(Address of principal executive offices and zip code)

 

(408) 543-2100

(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 x NO ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES x NO ¨

 

As of January 30, 2004, 92,482,834 shares of the registrant’s common stock, $0.001 par value, were outstanding.

 

NETSCREEN TECHNOLOGIES, INC.

 

FORM 10-Q

 

For the quarterly period ended December 31, 2003

 

INDEX

 

          Page

PART I—FINANCIAL INFORMATION

     

Item 1.

   

Financial Statements:

     
    

a. Condensed Consolidated Balance Sheets as of December 31, 2003 (Unaudited) and September 30, 2003

    3
    

b. Condensed Consolidated Statements of Operations for the three months ended December 31, 2003 and 2002 (Unaudited)

   

4

    

c. Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2003 and 2002 (Unaudited)

   

5

    

d. Notes to Condensed Consolidated Financial Statements (Unaudited)

    6

Item 2.

   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    15

Item 3.

   

Quantitative and Qualitative Disclosures About Market Risk

    32

Item 4.

   

Controls and Procedures

    32

PART II—OTHER INFORMATION

     

Item 1.

   

Legal Proceedings

    33

Item 2.

   

Changes in Securities and Use of Proceeds

    33

Item 3.

   

Defaults upon Senior Securities

    33

Item 4.

   

Submission of Matters to a Vote of Security Holders

    33

Item 5.

   

Other Information

    33

Item 6.

   

Exhibits and Reports on Form 8-K

    33

SIGNATURE

   34

 

2

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

NETSCREEN TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

     December 31,
2003
     September 30,
2003*
  
     (unaudited)        

Assets

                 

Current assets:

                 

Cash and cash equivalents

    $ 73,597     $ 53,914  

Short-term investments

      305,622       286,738  

Restricted cash

      38       38  

Accounts receivable, net of allowances for doubtful accounts and sales returns of $10,750 and $9,777 at December 31, 2003 and September 30, 2003

      37,722       35,874  

Refundable income taxes

      48       943  

Inventories

      2,924       2,501  

Deferred income taxes

      27,220       28,368  

Other current assets

      6,048       6,613  
    
 

Total current assets

      453,219       414,989  

Property and equipment

      11,370       10,667  

Restricted cash

      139       823  

Deferred income taxes

      1,439       5,640  

Intangible assets

      38,370       4,781  

Goodwill

      229,119       54,271  

Other assets

      762       552  
    
 

Total assets

    $ 734,418     $ 491,723  
    
 

Liabilities and Stockholders’ Equity

                 

Current liabilities:

                 

Accounts payable

    $ 9,804     $ 8,230  

Accrued expenses

      24,485       17,204  

Accrued compensation

      12,963       12,234  

Deferred revenue

      63,750       54,364  

Current portion of restructuring liabilities

      1,019       648  

Current portion of debt and capital lease obligations

      —         72  
    
 

Total current liabilities

      112,021       92,752  

Restructuring liabilities, less current portion

      3,754       2,042  
    
 

Total liabilities

      115,775       94,794  
    
 

Commitments and contingencies

                 

Stockholders’ equity:

                 

Preferred stock, $0.001 par value:
Authorized shares—10,000,000 at December 31, 2003 and September 30, 2003
Issued and outstanding shares — none at December 31, 2003 and September 30, 2003

      —         —    

Common stock, $0.001 par value:
Authorized shares—500,000,000 at December 31, 2003 and September 30, 2003
Issued and outstanding shares—92,259,894 and 81,987,529 at December 31, 2003 and September 30, 2003

      92       82  

Additional paid-in capital

      746,137       493,668  

Accumulated deficit

      (74,656 )     (81,030 )

Accumulated other comprehensive gain

      90       234  

Deferred stock compensation

      (52,972 )     (15,977 )

Stockholders’ notes receivable

      (48 )     (48 )
    
 

Total stockholders’ equity

      618,643       396,929  
    
 

Total liabilities and stockholders’ equity

    $ 734,418     $ 491,723  
    
 

 

*   Derived from audited financial statements.

 

See accompanying notes.

 

3

NETSCREEN TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)

 

     Three Months Ended
December 31,
  
     2003
     2002
  

Revenues:

                 

Product

    $ 64,922     $ 42,451  

Maintenance and service

      16,095       8,619  
    
 

Total revenues

      81,017       51,070  
    
 

Cost of revenues:

                 

Product (A) (B)

      14,778       9,283  

Maintenance and service (A)

      4,249       2,417  
    
 

Total cost of revenues

      19,027       11,700  
    
 

Gross margin

      61,990       39,370  
    
 

Operating expenses:

                 

Research and development (A) (B)

      13,597       9,782  

Sales and marketing (A) (B)

      31,522       20,162  

General and administrative (A)

      5,970       4,191  
    
 

Total operating expenses

      51,089       34,135  
    
 

Income from operations

      10,901       5,235  

Interest and other income, net

      1,126       1,063  
    
 

Income before income taxes

      12,027       6,298  

Provision for income taxes

      (5,653 )     (3,086 )
    
 

Net income

    $ 6,374     $ 3,212  
    
 

Basic net income per share

    $ 0.07     $ 0.04  
    
 

Shares used in computing basic net income per share

      86,539       77,003  
    
 

Diluted net income per share

    $ 0.07     $ 0.04  
    
 

Shares used in computing diluted net income per share

      90,730       82,893  
    
 

(A) Includes stock-based compensation of the following:

                 

Cost of product revenues

    $ 280     $ 411  

Cost of maintenance and service revenues

      341       277  

Research and development

      2,689       1,983  

Sales and marketing

      2,709       2,697  

General and administrative

      1,064       724  
    
 

Total stock-based compensation

    $ 7,083     $ 6,092  
    
 

(B) Includes amortization of intangible assets of the following:

                 

Cost of product revenues

    $ 1,425     $ 186  

Research and development

      23       23  

Sales and marketing

      538       35  
    
 

Total amortization of intangible assets

    $ 1,986     $ 244  
    
 

 

See accompanying notes.

 

4

NETSCREEN TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

    

Three Months Ended

December 31,

  
     2003
     2002
  

Operating activities

                 

Net income

    $ 6,374     $ 3,212  

Adjustments to reconcile net income to net cash provided by operating activities:

                 

Depreciation and amortization

      3,374       1,275  

Amortization of deferred stock compensation

      7,083       6,092  

Tax benefits from employee stock option plans

      2,635       —    

Other

      —         8  

Changes in operating assets and liabilities:

                 

Accounts receivable (net of allowances)

      1,905       (1,629 )

Refundable income taxes

      895       —    

Inventories

      (44 )     453  

Deferred income taxes

      1,440       —    

Other current assets

      (220 )     (1,058 )

Other assets

      (53 )     159  

Accounts payable

      1,548       304  

Accrued expenses

      (1,790 )     1,078  

Accrued compensation

      (850 )     111  

Accrued income taxes

      213       2,817  

Restructuring liabilities

      17       (36 )

Deferred revenue

      7,779       9,150  
    
 

Net cash provided by operating activities

      30,306       21,936  
    
 

Investing activities

                 

Purchase of property and equipment

      (1,600 )     (2,165 )

Cash used in business combination, net of cash acquired

      (5,135 )     (474 )

Purchases of short-term investments

      (178,106 )     (122,079 )

Maturities of short-term investments

      169,278       103,085  
    
 

Net cash used in investing activities

      (15,563 )     (21,633 )
    
 

Financing activities

                 

Principal payments on debt and capital lease obligations

      (72 )     (566 )

Restricted cash

      684       172  

Proceeds from issuance of common stock under stock option and stock purchase plans, net of repurchases

      4,328  </