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
| ¨ | 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: 000-23593
VERISIGN, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 94-3221585 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 487 East Middlefield Road, Mountain View, CA | 94043 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (650) 961-7500
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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES þ NO ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Class |
Shares Outstanding April 30, 2004 | |
| Common stock, $.001 par value | 247,981,446 |
| Page | ||||
| PART I—FINANCIAL INFORMATION | ||||
| Item 1. |
Condensed Consolidated Financial Statements (Unaudited) | 3 | ||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | ||
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 52 | ||
| Item 4. |
Controls and Procedures | 53 | ||
| PART II—OTHER INFORMATION | ||||
| Item 1. |
Legal Proceedings | 54 | ||
| Item 6. |
Exhibits and Reports on Form 8-K | 56 | ||
| 57 | ||||
| 58 | ||||
2
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
As required under Item 1 — Condensed Consolidated Financial Statements (Unaudited) included in this section are as follows:
3
VERISIGN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
| March 31, 2004 |
December 31, 2003 |
|||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 406,684 | $ | 393,787 | ||||
| Short-term investments |
251,183 | 329,899 | ||||||
| Accounts receivable, net |
107,209 | 100,120 | ||||||
| Prepaid expenses and other current assets |
51,118 | 45,935 | ||||||
| Deferred tax assets |
11,203 | 10,666 | ||||||
| Total current assets |
827,397 | 880,407 | ||||||
| Property and equipment, net |
505,451 | 520,219 | ||||||
| Goodwill |
522,756 | 401,371 | ||||||
| Other intangible assets, net |
224,074 | 216,665 | ||||||
| Restricted cash |
19,012 | 18,371 | ||||||
| Long-term investments |
59,124 | 21,749 | ||||||
| Other assets, net |
43,824 | 41,435 | ||||||
| Total long-term assets |
1,374,241 | 1,219,810 | ||||||
| Total assets |
$ | 2,201,638 | $ | 2,100,217 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable and accrued liabilities |
$ | 255,092 | $ | 290,587 | ||||
| Accrued merger costs |
1,607 | 805 | ||||||
| Accrued restructuring costs |
15,975 | 18,331 | ||||||
| Deferred revenue |
268,408 | 245,483 | ||||||
| Total current liabilities |
541,082 | 555,206 | ||||||
| Long-term deferred revenue |
99,526 | 93,311 | ||||||
| Long-term restructuring costs |
27,482 | 30,240 | ||||||
| Other long-term liabilities |
8,452 | 8,978 | ||||||
| Total long-term liabilities |
135,460 | 132,529 | ||||||
| Total liabilities |
676,542 | 687,735 | ||||||
| Minority interest in subsidiaries |
27,982 | 28,829 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock—par value $.001 per share |
||||||||
| Issued and outstanding shares: none |
— | — | ||||||
| Common stock—par value $.001 per share Authorized shares: 1,000,000,000 |
||||||||
| Issued and outstanding shares: 247,658,438 and 241,979,274 (excluding 1,716,918 and 1,690,000 shares held in treasury at March 31, 2004 and December 31, 2003) |
248 | 242 | ||||||
| Additional paid-in capital |
23,231,858 | 23,128,095 | ||||||
| Unearned compensation |
(3,116 | ) | (2,628 | ) | ||||
| Accumulated deficit |
(21,730,984 | ) | (21,740,054 | ) | ||||
| Accumulated other comprehensive loss |
(892 | ) | (2,002 | ) | ||||
| Total stockholders’ equity |
1,497,114 | 1,383,653 | ||||||
| Total liabilities and stockholders’ equity |
$ | 2,201,638 | $ | 2,100,217 | ||||
See accompanying notes to condensed consolidated financial statements
4
VERISIGN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Revenues |
$ | 229,113 | $ | 269,758 | ||||
| Costs and expenses: |
||||||||
| Cost of revenues |
91,482 | 115,829 | ||||||
| Sales and marketing |
40,170 | 52,562 | ||||||
| Research and development |
16,707 | 13,777 | ||||||
| General and administrative |
35,239 | 46,865 | ||||||
| Restructuring and other charges |
15,507 | 20,513 | ||||||
| Amortization of other intangible assets |
15,110 | 54,902 | ||||||
| Total costs and expenses |
214,215 | 304,448 | ||||||
| Operating income (loss) |
14,898 | (34,690 | ) | |||||
| Other income (expense), net |
739 | (13,894 | ) | |||||
| Income (loss) before income taxes |
15,637 | (48,584 | ) | |||||
| Income tax expense |
(6,567 | ) | (4,852 | ) | ||||
| Net income (loss) |
$ | 9,070 | $ | (53,436 | ) | |||
| Net income (loss) per share: |
||||||||
| Basic |
$ | 0.04 | $ | (0.22 | ) | |||
| Diluted |
$ | 0.04 | $ | (0.22 | ) | |||
| Shares used in per share computation: |
||||||||
| Basic |
244,362 | 238,208 | ||||||
| Diluted |
248,162 | 238,208 | ||||||
See accompanying notes to condensed consolidated financial statements
5
VERISIGN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income (loss) |
$ | 9,070 | $ | (53,436 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
| Depreciation and amortization of property and equipment |
21,507 | 29,657 | ||||||
| Amortization of other intangible assets |
15,110 | 54,902 | ||||||
| Provision for doubtful accounts |
301 | 3,742 | ||||||
| Non-cash restructuring and other charges |
12,705 | 9,260 | ||||||
| Net loss on sale and impairment of investments |
3,308 | 16,541 | ||||||
| Minority interest in net income (loss) of subsidiary |
293 | (165 | ) | |||||
| Tax benefit associated with stock options |
7,741 | — | ||||||
| Deferred income taxes |
(537 | ) | 3,633 | |||||
| Amortization of unearned compensation |
641 | 4,258 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
(4,423 | ) | 10,959 | |||||
| Prepaid expenses and other current assets |
(3,812 | ) | (8,778 | ) | ||||
| Accounts payable and accrued liabilities |
(42,405 | ) | 18,163 | |||||
| Deferred revenue |
28,003 | 11,581 | ||||||
| Net cash provided by operating activities |
47,502 | 100,317 | ||||||
| Cash flows from investing activities: |
||||||||
| Purchases of investments |
(61,215 | ) | (86,754 | ) | ||||
| Proceeds from maturities and sales of investments |
97,607 | 49,058 | ||||||
| Purchases of property and equipment |
(14,709 | ) | (22,215 | ) | ||||
| Net cash paid in business combinations |
(70,963 | ) | — | |||||
| Merger related costs |
(746 | ) | (4,925 | ) | ||||
| Other assets |
(436 | ) | (22 | ) | ||||
| Net cash used in investing activities |
(50,462 | ) | (64,858 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Proceeds from issuance of common stock from option exercises and employee stock purchase plan |
17,455 | 6,126 | ||||||
| Proceeds from sale of stock from consolidated subsidiary |
379 | — | ||||||
| Repayment of debt |
(2,703 | ) | (4,282 | ) | ||||
| Net cash provided by financing activities |
15,131 | 1,844 | ||||||
| Effect of exchange rate changes |
726 | (1,614 | ) | |||||
| Net increase in cash and cash equivalents |
12,897 | 35,689 | ||||||
| Cash and cash equivalents at beginning of period |
393,787 | 282,288 | ||||||
| Cash and cash equivalents at end of period |
$ | 406,684 | $ | 317,977 | ||||
See accompanying notes to condensed consolidated financial statements
6
VERISIGN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying interim unaudited condensed consolidated balance sheets, statements of operations and cash flows reflect all adjustments, consisting of normal recurring adjustments and other adjustments, that are, in the opinion of management, necessary for a fair presentation of the financial position of VeriSign, Inc. and its subsidiaries (“VeriSign” or “the Company”), at March 31, 2004, and the results of operations and cash flows for the interim periods ended March 31, 2004 and 2003.
The accompanying unaudited condensed consolidated financial statements have been prepared by VeriSign in accordance with the instructions for Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and notes normally provided in audited financial statements and should be read in conjunction with VeriSign’s consolidated financial statements for the year ended December 31, 2003 included in the annual report previously filed on Form 10-K.
The results of operations for any interim period are not necessarily indicative, nor comparable to the results of operations for any other interim period or for a full fiscal year. The carrying amount of cash and cash equivalents, investments, accounts receivable, and accounts payable and accrued liabilities approximate their respective fair values.
Note 2. Business Combinations
During February 2004, VeriSign completed its acquisition of Guardent, a privately held provider of managed security services. VeriSign paid approximately $135 million for all the outstanding shares of capital stock of Guardent, of which approximately $65 million was in cash and the remainder in VeriSign common stock. The acquisition has been accounted for as a purchase and, accordingly, the total purchase price has been allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date. Guardent’s results of operations have been included in the consolidated financial statements from its date of acquisition. As a result of the acquisition of Guardent, VeriSign recorded goodwill of $114.1 million and intangible assets of $22.2 million, which have been assigned to the Internet Services segment. The acquisition of Guardent was considered strategic as it closely fit with our existing MSS business. The goodwill represents the excess value over both tangible and intangible assets acquired. The company attributes the goodwill in this transaction to managements’s belief that the acquisition is a strategic fit with its existing business and will create an unmatched breadth of service and consulting offerings, delivered from a global infrastructure that is highly scalable and offers reliable, state-of-the-art managed security services.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
| February 27, 2004 |
Amortization Period | |||||
| (In thousands) | (Years) | |||||
| Current assets |
$ | 5,139 | — | |||
| Property and equipment, net |
4,735 | |||||