e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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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, 2005 |
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or |
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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: 001-31216
McAfee, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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77-0316593 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification Number) |
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|
3965 Freedom Circle
Santa Clara, California
(Address of principal executive offices) |
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95054
(Zip Code) |
Registrants 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
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
As of October 31, 2005, 167,765,011 shares of the
registrants common stock, $0.01 par value, were
outstanding.
MCAFEE, INC.
FORM 10-Q
September 30, 2005
CONTENTS
1
MCAFEE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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|
|
|
|
|
|
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|
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|
|
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September 30, | |
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December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, except | |
|
|
share data) | |
|
|
(Unaudited) | |
|
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
440,375 |
|
|
$ |
291,155 |
|
|
Restricted cash
|
|
|
50,000 |
|
|
|
|
|
|
Short-term marketable securities
|
|
|
485,734 |
|
|
|
232,929 |
|
|
Accounts receivable, net of allowance for doubtful accounts of
$2,765 at September 30, 2005 and $2,536 at
December 31, 2004
|
|
|
106,242 |
|
|
|
146,376 |
|
|
Prepaid expenses, income taxes and other current assets
|
|
|
111,117 |
|
|
|
103,687 |
|
|
Deferred taxes
|
|
|
194,195 |
|
|
|
200,459 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,387,663 |
|
|
|
974,606 |
|
Long-term marketable securities
|
|
|
221,623 |
|
|
|
400,597 |
|
Restricted cash
|
|
|
624 |
|
|
|
617 |
|
Property and equipment, net
|
|
|
86,894 |
|
|
|
91,715 |
|
Deferred taxes
|
|
|
242,552 |
|
|
|
220,604 |
|
Intangible assets, net
|
|
|
87,400 |
|
|
|
107,133 |
|
Goodwill
|
|
|
449,157 |
|
|
|
439,180 |
|
Other assets
|
|
|
9,925 |
|
|
|
12,080 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,485,838 |
|
|
$ |
2,246,532 |
|
|
|
|
|
|
|
|
|
LIABILITIES |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
27,900 |
|
|
$ |
32,891 |
|
|
Accrued liabilities
|
|
|
211,598 |
|
|
|
206,224 |
|
|
Deferred revenue
|
|
|
522,735 |
|
|
|
475,621 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
762,233 |
|
|
|
714,736 |
|
Deferred revenue, less current portion
|
|
|
134,175 |
|
|
|
125,752 |
|
Accrued taxes and other long-term liabilities
|
|
|
173,239 |
|
|
|
204,796 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,069,647 |
|
|
|
1,045,284 |
|
|
|
|
|
|
|
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Commitments and contingencies (Notes 12 and 13)
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|
|
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STOCKHOLDERS EQUITY |
Preferred stock, $0.01 par value:
|
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|
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|
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Authorized: 5,000,000 shares; Issued and outstanding: None
|
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|
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Common stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
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Authorized: 300,000,000 shares
|
|
|
|
|
|
|
|
|
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Issued: 169,532,508 shares at September 30, 2005 and
162,266,174 shares at December 31, 2004
|
|
|
|
|
|
|
|
|
|
Outstanding: 167,532,508 shares at September 30, 2005
and 162,266,174 shares at December 31, 2004
|
|
|
1,696 |
|
|
|
1,623 |
|
Treasury stock, at cost: 2,000,000 shares at
September 30, 2005 and no shares at December 31, 2004
|
|
|
(47,351 |
) |
|
|
|
|
Additional paid-in capital
|
|
|
1,338,079 |
|
|
|
1,178,855 |
|
Deferred stock-based compensation
|
|
|
(630 |
) |
|
|
(1,777 |
) |
Accumulated other comprehensive income
|
|
|
28,996 |
|
|
|
27,361 |
|
Retained earnings (accumulated deficit)
|
|
|
95,401 |
|
|
|
(4,814 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,416,191 |
|
|
|
1,201,248 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
2,485,838 |
|
|
$ |
2,246,532 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of our condensed
consolidated financial statements.
2
MCAFEE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
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Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
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| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
|
|
(Unaudited) | |
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$ |
39,253 |
|
|
$ |
65,518 |
|
|
$ |
136,768 |
|
|
$ |
229,256 |
|
|
Services and support
|
|
|
213,658 |
|
|
|
156,115 |
|
|
|
597,252 |
|
|
|
437,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
252,911 |
|
|
|
221,633 |
|
|
|
734,020 |
|
|
|
666,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
10,282 |
|
|
|
16,047 |
|
|
|
38,793 |
|
|
|
54,831 |
|
|
Services and support
|
|
|
22,873 |
|
|
|
15,414 |
|
|
|
62,139 |
|
|
|
44,717 |
|
|
Amortization of purchased technology
|
|
|
3,938 |
|
|
|
2,812 |
|
|
|
11,674 |
|
|
|
9,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
|
37,093 |
|
|
|
34,273 |
|
|
|
112,606 |
|
|
|
109,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
46,960 |
|
|
|
38,989 |
|
|
|
130,074 |
|
|
|
128,714 |
|
|
Marketing and sales(2)
|
|
|
71,878 |
|
|
|
82,945 |
|
|
|
219,198 |
|
|
|
272,017 |
|
|
General and administrative(3)
|
|
|
28,258 |
|
|
|
34,248 |
|
|
|
92,025 |
|
|
|
96,684 |
|
|
Proposed legal settlement charge
|
|
|
50,000 |
|
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
Amortization of intangibles
|
|
|
2,876 |
|
|
|
3,448 |
|
|
|
10,109 |
|
|
|
10,537 |
|
|
Restructuring charges (benefits)
|
|
|
(10 |
) |
|
|
8,681 |
|
|
|
5,962 |
|
|
|
11,841 |
|
|
Provision for (recovery of) doubtful accounts, net
|
|
|
159 |
|
|
|
(686 |
) |
|
|
1,309 |
|
|
|
(12 |
) |
|
Loss (gain) on sale of assets and technology
|
|
|
212 |
|
|
|
(195,875 |
) |
|
|
(499 |
) |
|
|
(241,279 |
) |
|
Severance costs related to Sniffer disposition(4)
|
|
|
|
|
|
|
8,696 |
|
|
|
|
|
|
|
8,696 |
|
|
Reimbursement from transition services agreement
|
|
|
(3 |
) |
|
|
(3,671 |
) |
|
|
(362 |
) |
|
|
(3,671 |
) |
|
Reimbursement related to litigation settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,991 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs (benefits)
|
|
|
200,330 |
|
|
|
(23,225 |
) |
|
|
511,816 |
|
|
|
258,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
15,488 |
|
|
|
210,585 |
|
|
|
109,598 |
|
|
|
298,824 |
|
Interest and other income
|
|
|
7,313 |
|
|
|
4,723 |
|
|
|
17,155 |
|
|
|
13,586 |
|
Interest and other expenses
|
|
|
|
|
|
|
(540 |
) |
|
|
|
|
|
|
(3,418 |
) |
Loss on redemption of convertible debt
|
|
|
|
|
|
|
(15,070 |
) |
|
|
|
|
|
|
(15,070 |
) |
Loss on sale of marketable securities
|
|
|
(160 |
) |
|
|
(241 |
) |
|
|
(1,106 |
) |
|
|
(1,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
22,641 |
|
|
|
199,457 |
|
|
|
125,647 |
|
|
|
292,850 |
|
Provision for income taxes
|
|
|
94 |
|
|
|
81,309 |
|
|
|
25,432 |
|
|
|
106,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
22,547 |
|
|
$ |
118,148 |
|
|
$ |
100,215 |
|
|
$ |
186,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on marketable securities, net
|
|
$ |
(462 |
) |
|
$ |
843 |
|
|
$ |
(943 |
) |
|
$ |
(1,280 |
) |
|
Foreign currency translation gain (loss)
|
|
|
3,072 |
|
|
|
(545 |
) |
|
|
2,578 |
|
|
|
(1,878 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
25,157 |
|
|
$ |
118,446 |
|
|
$ |
101,850 |
|
|
$ |
183,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Basic
|
|
$ |
0.14 |
|
|
$ |
0.75 |
|
|
$ |
0.61 |
|
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Diluted
|
|
$ |
0.13 |
|
|
$ |
0.70 |
|
|
$ |
0.60 |
|
|
$ |
1.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation Basic
|
|
|
166,221 |
|
|
|
158,151 |
|
|
|
164,245 |
|
|
|
160,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation Diluted
|
|
|
170,712 |
|
|
|
172,103 |
|
|
|
168,383 |
|
|
|
180,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes stock-based compensation charges of $1,808 and $575 for
the three months ended September 30, 2005 and 2004,
respectively, and $569 and $2,147 for the nine months ended
September 30, 2005 and 2004, respectively. |
|
(2) |
Includes stock-based compensation charges of $480 and $203 for
the three months ended September 30, 2005 and 2004,
respectively, and $188 and $890 for the nine months ended
September 30, 2005 and 2004, respectively. |
|
(3) |
Includes stock-based compensation charges of $705 and $485 for
the three months ended September 30, 2005 and 2004,
respectively, and $1,312 and $892 for the nine months ended
September 30, 2005 and 2004, respectively. |
|
(4) |
Includes stock-based compensation charges of $991 for the three
and nine months ended September 30, 2004. |
The accompanying notes are an integral part of our condensed
consolidated financial statements.
3
MCAFEE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
(Unaudited) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
100,215 |
|
|
$ |
186,318 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
49,556 |
|
|
|
49,615 |
|
|
|
Provision for (recovery of) doubtful accounts, net
|
|
|
1,309 |
|
|
|
(12 |
) |
|
|
Non-cash restructuring charge
|
|
|
3,326 |
|
|
|
7,984 |
|
|
|
Non-cash interest on convertible notes
|
|
|
|
|
|
|
1,225 |
|
|
|
Acquired in-process research and development
|
|
|
4,000 |
|
|
|
|
|
|
|
Premium amortization on marketable securities
|
|
|
461 |
|
|
|
3,916 |
|
|
|
Gain on sale of assets and technology
|
|
|
(499 |
) |
|
|
(241,279 |
) |
|
|
Loss on sale of marketable securities
|
|
|
1,106 |
|
|
|
1,072 |
|
|
|
Loss on redemption of convertible debt
|
|
|
|
|
|
|
15,070 |
|
|
|
Deferred taxes
|
|
|
(13,020 |
) |
|
|
76,511 |
|
|
|
Tax benefit from exercise of nonqualified stock options
|
|
|
27,900 |
|
|
|
62,199 |
|
|
|
Stock-based compensation charges
|
|
|
2,069 |
|
|
|
4,920 |
|
|
|
Change in fair value of derivative, net
|
|
|
|
|
|
|
(3,203 |
) |
|
|
Changes in assets and liabilities, net of acquisitions and
divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
30,927 |
|
|
|
72,514 |
|
|
|
|
Prepaid expenses, income taxes and other
|
|
|
(11,133 |
) |
|
|
(7,338 |
) |
|
|
|
Accounts payable, accrued taxes and other liabilities
|
|
|
10,587 |
|
|
|
(65,593 |
) |
|
|
|
Deferred revenue
|
|
|
85,848 |
|
|
|
107,832 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
292,652 |
|
|
|
271,751 |
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(565,824 |
) |
|
|
(841,772 |
) |
|
Proceeds from sale and maturity of marketable securities
|
|
|
488,853 |
|
|
|
761,485 |
|
|
Proceeds from sale of assets and technology
|
|
|
1,500 |
|
|
|
259,839 |
|
|
Acquisitions, net of cash acquired
|
|
|
(20,200 |
) |
|
|
|
|
|
Purchase of property and equipment
|
|
|
(25,041 |
) |
|
|
(19,700 |
) |
|
Change in restricted cash (1)
|
|
|
(50,007 |
) |
|
|
265 |
|
|
Other
|
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(170,719 |
) |
|
|
160,089 |
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of stock from option and stock purchase
plans
|
|
|
94,453 |
|
|
|
66,935 |
|
|
Redemption of convertible debt
|
|
|
|
|
|
|
(265,623 |
) |
|
Repurchase of common stock
|
|
|
(47,351 |
) |
|
|
(221,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
47,102 |
|
|
|
(420,504 |
) |
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations
|
|
|
(19,815 |
) |
|
|
(4,579 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
149,220 |
|
|
|
6,757 |
|
Cash and cash equivalents at beginning of period |
|
|
291,155 |
|
|
|
333,651 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
440,375 |
|
|
$ |
340,408 |
|
|
|
|
|
|
|
|
Non cash investing activities:
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities
|
|
$ |
(943 |
) |
|
$ |
(1,280 |
) |
|
|
|
|
|
|
|
|
Fair value of assets acquired in business combinations
|
|
$ |
20,948 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Liabilities assumed in business combination
|
|
$ |
748 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Non cash financing activities:
|
|
|
|
|
|
|
|
|
|
Issuance of common shares for convertible debt
|
|
$ |
|
|
|
$ |
83,410 |
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets of acquired company
|
|
$ |
38,838 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$ |
34,275 |
|
|
$ |
20,366 |
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
|
|
|
$ |
7,859 |
|
|
|
|
|
|
|
|
|
|
(1) |
The $50.0 million placed in escrow for the proposed settlement
with the SEC (see Note 12) is reflected as cash used in
investing activities. If the proposed legal settlement is
approved by the SEC, the $50.0 million escrow will be released,
and at this time, this will be reflected as cash provided by
investing activities of $50.0 million and cash used in operating
activities of $50.0 million. |
The accompanying notes are an integral part of our condensed
consolidated financial statements.
4
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
1. |
Organization and Business |
We and our wholly owned subsidiaries are a leading supplier of
computer security solutions designed to prevent intrusions on
networks and protect computer systems from the next generation
of blended attacks and threats. We offer two families of
products, McAfee System Protection Solutions and McAfee Network
Protection Solutions. Our computer security solutions are
offered primarily to large enterprises, governments, small and
medium-sized businesses and consumers. We operate our business
in five geographic regions: North America; Europe, Middle East
and Africa (EMEA); Japan; Asia-Pacific, excluding
Japan; and Latin America.
In January 2004, we sold our Magic Solutions product line
(Magic), and in July 2004, we sold our Sniffer
product line (Sniffer). In April 2005, we sold our
McAfee Labs assets.
In October 2004, we acquired Foundstone, Inc.
(Foundstone), a provider of risk assessment and
vulnerability services and products, and in June 2005, we
acquired Wireless Security Corporation, a provider of home and
small business wireless network security products.
|
|
2. |
Summary of Significant Accounting Policies and Basis of
Presentation |
The accompanying condensed consolidated financial statements
include our accounts as of September 30, 2005 and
December 31, 2004 and for the three and nine months ended
September 30, 2005 and September 30, 2004. All
significant intercompany accounts and transactions have been
eliminated in consolidation. These condensed consolidated
financial statements have been prepared by us, without audit,
pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. The
December 31, 2004 Consolidated Balance Sheet was derived
from audited consolidated financial statements, but does not
include all disclosures required by accounting principles
generally accepted in the United States of America. However, we
believe that all disclosures are adequate to make the
information presented not misleading. The accompanying unaudited
condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements
and the notes thereto, included in our Annual Report on
Form 10-K/A for the fiscal year ended December 31,
2004.
In the opinion of our management, all adjustments (which consist
of normal recurring adjustments, except as disclosed herein)
necessary to fairly present our financial position as of
September 30, 2005, results of operations for the three and
nine months ended September 30, 2005 and September 30,
2004 and cash flows for the nine months ended September 30,
2005 and September 30, 2004 have been included. The results
of operations for the three and nine months ended
September 30, 2005 are not necessarily indicative of the
results to be expected for the full fiscal year or for any
future periods.
Approximately $5.9 million and approximately
$14.6 million were reclassified from cost of product net
revenue to cost of services and support net revenue in the three
and nine months ended September 30, 2004, respectively, to
be consistent with current-period presentation. This
reclassification did not have an impact to total cost of net
revenue. Approximately $8.9 million of reseller and retail
rebates was reclassified from a reduction to accounts receivable
to accrued liabilities on the December 31, 2004 balance
sheet to be consistent with current-period presentation. This
reclassification did not have an impact on our working capital
as of December 31, 2004. Certain other immaterial
prior-period amounts have been reclassified to conform to
current-period presentation.
|
|
|
Pro forma Stock-Based Compensation Disclosure |
As permitted by Statement of Financial Accounting Standard
(SFAS) No. 123, Accounting for
Stock-Based Compensation, (SFAS 123)
and as amended by SFAS No. 148, Accounting
for Stock-
5
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Based Compensation Transition and
Disclosure, (SFAS 148), we account
for employee stock-based compensation in accordance with
Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to
Employees, (APB 25), and related
interpretations. Under APB 25, if the exercise price of an
employees stock options equals or exceeds the market price
of the underlying stock on the date of grant, no compensation
expense is recognized. Stock-based compensation is based on the
excess of the market price on the grant date over the exercise
price and is recognized ratably over the vesting period.
Stock-based compensation related to non-employees is based on
the fair value price of the options and is recognized ratably
over the vesting period in accordance with SFAS 123.
In calculating the estimated fair value of the stock options
granted in the period and for our employee stock purchase plan
(ESPP), we utilized the Black-Scholes option-pricing
model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Stock grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
4.0 |
% |
|
|
3.1 |
% |
|
|
3.9 |
% |
|
|
3.1 |
% |
Weighted average expected lives
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
4.0 |
|
Volatility
|
|
|
49.5 |
% |
|
|
63.0 |
% |
|
|
55.6 |
% |
|
|
63.0 |
% |
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
3.5 |
% |
|
|
2.1 |
% |
|
|
3.1 |
% |
|
|
2.0 |
% |
Weighted average expected lives
|
|
|
0.5 |
|
|
|
1.3 |
|
|
|
1.1 |
|
|
|
1.3 |
|
Volatility
|
|
|
38.0 |
% |
|
|
46.0 |
% |
|
|
40.0 |
% |
|
|
47.0 |
% |
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates the effect on net income and net
income per share if we had applied the fair value recognition
provision of SFAS 123 to all of our stock-based
compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net income, as reported
|
|
$ |
22,547 |
|
|
$ |
118,148 |
|
|
$ |
100,215 |
|
|
$ |
186,318 |
|
Deduct: Total stock-based compensation expense determined under
fair-value-based method for all awards, net of tax
|
|
|
(9,186 |
) |
|
|
(4,924 |
) |
|
|
(24,686 |
) |
|
|
(14,910 |
) |
Add back: Stock-based compensation expense, net of tax, included
in reported net income
|
|
|
1,988 |
|
|
|
1,445 |
|
|
|
1,384 |
|
|
|
3,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
|
15,349 |
|
|
|
114,669 |
|
|
|
76,913 |
|
|
|
174,563 |
|
|
Interest on convertible debentures, net of tax
|
|
|
|
|
|
|
1,546 |
|
|
|
|
|
|
|
7,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income, as adjusted
|
|
$ |
15,349 |
|
|
$ |
116,215 |
|
|
$ |
76,913 |
|
|
$ |
182,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share, pro forma
|
|
$ |
0.09 |
|
|
$ |
0.73 |
|
|
$ |
0.47 |
|
|
$ |
1.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share, pro forma
|
|
$ |
0.09 |
|
|
$ |
0.68 |
|
|
$ |
0.46 |
|
|
$ |
1.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share, as reported
|
|
$ |
0.14 |
|
|
$ |
0.75 |
|
|
$ |
0.61 |
|
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share, as reported
|
|
$ |
0.13 |
|
|
$ |
0.70 |
|
|
$ |
0.60 |
|
|
$ |
1.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The impact on pro forma income per share and pro forma net
income in the table above may not be indicative of the effect in
future periods as options vest over several years and we
continue to grant stock options to employees.
|
|
|
Accounting for Income Taxes |
At the end of each interim period we make our best estimate of
the effective tax rate expected to be applicable for the full
fiscal year. This effective tax rate is used to determine income
taxes on a current year-to-date basis. The effective tax rate
may consider, as applicable, tax credits, foreign tax rates, and
other available tax planning alternatives. It also includes the
effect of any valuation allowance expected to be necessary at
the end of the period for deferred tax assets related to
originating deductible temporary differences and carryforwards.
In arriving at this effective tax rate applied to interim
periods no effect is included for the tax related to
significant, unusual, or extraordinary items that may be
separately reported or reported net of their related tax effect
in reports for the interim period or for the fiscal year. The
rate is revised, if necessary, as of the end of each successive
interim period during the fiscal year to our best current
estimate of our expected annual effective tax rate.
The effective tax rate is our best estimate of the tax expense
(or benefit) that will be provided for the fiscal year, stated
as a percentage of our estimated annual ordinary income (or
loss). The tax expense (or benefit) related to ordinary income
(or loss) for the interim period is determined using this
estimated annual effective tax rate. The tax expense (or
benefit) related to other items is individually computed and
recognized when the items occur. The estimated tax rate applied
to interim ordinary income (or loss) is reliant on our estimates
of expected annual operating income (or loss) for the year as
well as our projections of the proportion of income (or loss)
earned in foreign jurisdictions which may have statutory tax
rates significantly lower than tax rates applicable to our
earnings in the United States. In each successive interim
period, to the extent our operating results year to date and our
estimates for the remainder of the fiscal year change from our
original expectations regarding the proportion of earnings in
various tax jurisdictions we expect that our effective tax rate
will change accordingly, affecting tax expense (or benefit) for
both that successive interim period as well as year-to-date
interim results.
Tax returns are subject to audit by various taxing authorities.
Although we believe that adequate accruals have been made each
period for unsettled issues, additional benefits or expenses
could occur in future years from resolution of outstanding
matters. We record additional expenses each period on unsettled
issues relating to the expected interest we would be required to
pay a tax authority if we do not prevail on an unsettled issue.
We continue to assess our potential tax liability included in
accrued taxes in the consolidated financial statements, and
revise our estimates. Such revisions in our estimates could
materially impact our results of operations and financial
position. We have classified a portion of our tax liability as
non-current in the consolidated balance sheet based on the
expected timing of cash payments to settle contingencies with
taxing authorities.
|
|
|
Recent Accounting Pronouncements |
In December 2004, the FASB issued SFAS No. 123R,
Share Based Payment
(SFAS 123R) which requires the measurement
of all share-based payments to employees, including grants of
employee stock options, using a fair-value-based method and the
recording of such expense in the consolidated statements of
income. In March 2005, the SEC issued Staff Accounting
Bulletin No. 107 (SAB 107).
SAB 107 expresses views of the SEC staff regarding the
interaction between SFAS 123R and certain SEC rules. In
April 2005, the SEC extended the effective date for
SFAS 123R to fiscal years beginning after June 15,
2005. Therefore, we are required to adopt SFAS 123R in the
first quarter of fiscal year 2006. The pro forma disclosures
previously permitted under SFAS 123 will no longer be an
alternative to financial statement recognition. See
7
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pro forma Stock-based Compensation Disclosure above
for the pro forma net income and net income per share amounts,
in the three and nine months ended September 30, 2005 and
September 30, 2004, respectively, as if we had used a
fair-value-based method similar to the methods required under
SFAS 123R to measure compensation expense for employee
stock incentive awards. Although we have not yet determined
whether the adoption of SFAS 123R will result in amounts
that are similar to the current pro forma disclosures under
SFAS 123, we are evaluating the requirements under
SFAS 123R and expect the adoption to have a significant
adverse impact on our consolidated results of operations.
|
|
|
Electronic Equipment Waste Obligations |
In June 2005, the Financial Accounting Standards Board
(FASB) issued SFAS No. 143-1,
Accounting for Electronic Equipment Waste
Obligations, that provides guidance on how commercial
users and producers of electronic equipment should recognize and
measure asset retirement obligations associated with the
European Directive 2002/96/ EC on Waste Electrical and
Electronic Equipment. We adopted SFAS 143-1 during the
three months ended June 30, 2005. The adoption of
SFAS 143-1 did not have a material effect on our financial
statements. Due to the fact that several major EU-member
countries have not yet enacted country-specific laws, we cannot
estimate the effect of applying this guidance in future periods,
however, we do not believe SFAS 143-1 will have a material
effect on our consolidated financial position, results of
operations or cash flows.
|
|
|
Accounting Changes and Error Corrections |
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
(SFAS 154), a replacement of APB Opinion
No. 20, Accounting Changes, and
SFAS Statement 3, Reporting Accounting
Changes in Interim Financial Statements. SFAS 154
changes the requirements for the accounting for and reporting of
a change in accounting principle. Previously, most voluntary
changes in accounting principles required recognition via a
cumulative effect adjustment within net income of the period of
the change. SFAS 154 requires retrospective application to
prior periods financial statements, unless it is
impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS 154 is effective
for accounting changes made in fiscal years beginning after
December 15, 2005; however, the Statement does not change
the transition provisions of any existing accounting
pronouncements. We do not believe the adoption of SFAS 154
will have a material effect on our consolidated financial
position, results of operations or cash flows.
|
|
|
The Meaning of Other-Than-Temporary Impairment |
In March 2004, the FASB issued Emerging Issues Task Force Issue
No. 03-1 (EITF 03-1), The Meaning
of Other-Than-Temporary Impairment and Its Application to
Certain Investments, which provided new guidance for
assessing impairment losses on investments. Additionally,
EITF 03-1 includes new disclosure requirements for
investments that are deemed to be temporarily impaired. In
September 2004, the FASB delayed the accounting provisions of
EITF 03-1; however, the disclosure requirements remain
effective for annual periods ending after June 15, 2004. We
do not believe that the adoption of EITF 03-01 will have a
material impact on our financial position, results of operations
or cash flows; however, we will evaluate the impact of
EITF 03-1 once final guidance is issued.
|
|
3. |
Stock-Based Compensation |
We recorded stock-based compensation charges of
$3.0 million and $2.3 million, before taxes, in the
three months ended September 30, 2005 and 2004,
respectively, and $2.1 million and $4.9 million, before
8
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
taxes, in the nine months ended September 30, 2005 and
2004, respectively. These charges are comprised of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Exchange of McAfee.com options
|
|
$ |
1,578 |
|
|
$ |
830 |
|
|
$ |
790 |
|
|
$ |
2,995 |
|
Repriced options
|
|
|
1,054 |
|
|
|
|
|
|
|
219 |
|
|
|
|
|
New and existing executives and employees
|
|
|
361 |
|
|
|
433 |
|
|
|
1,060 |
|
|
|
647 |
|
Former employees
|
|
|
|
|
|
|
991 |
|
|
|
|
|
|
|
1,132 |
|
Extended life of vested options held by terminated employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$ |
2,993 |
|
|
$ |
2,254 |
|
|
$ |
2,069 |
|
|
$ |
4,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of McAfee.com options. On September 13,
2002, we acquired the minority interest in McAfee.com that we
previously did not own. McAfee.com option holders received
options for 0.675 of a share of our common stock plus $8.00 in
cash, $11.85 after applying the option exchange ratio, which is
paid to the option holder upon exercise of the option and
without interest. McAfee.com options to
purchase 4.1 million shares were converted into
options to purchase 2.8 million shares of our common
stock. The assumed options are subject to variable accounting
treatment, which means that a compensation charge was measured
initially at the date of the closing of the acquisition and is
remeasured each reporting period based on our common stock fair
market value at the end of each reporting period.
The initial charge was based on the excess of the closing price
of our common stock over the exercise price of the options less
the $11.85 per share payable in cash. This compensation
charge has been and will be remeasured using the same
methodology until the earlier of the date of exercise,
forfeiture or cancellation without replacement. This
compensation charge is recorded as an expense over the remaining
vesting period of the options using the accelerated method of
amortization under FASB Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans. Charges related
to unvested options are recorded as deferred stock-based
compensation in stockholders equity in the consolidated balance
sheet and recognized as expense as the options vest.
During the three months ended September 30, 2005 and 2004,
we recorded a charge of approximately $1.6 million and
$0.8 million, respectively, related to exchanged options
subject to variable accounting. During the nine months ended
September 30, 2005 and 2004, we recorded a charge of
approximately $0.8 million and $3.0 million,
respectively, related to exchanged options subject to variable
accounting. This stock-based compensation was based on our
closing stock price of $31.42 on September 30, 2005 and
$20.10 on September 30, 2004. The charge in the nine months
ended September 30, 2005 was due to an increase in our
stock price from $28.93 at December 31, 2004 to $31.42 as
of September 30, 2005, and the charge in the three months
ended September 30, 2005 was due to an increase in our
stock price from $26.18 on June 30, 2005. As of
September 30, 2005, we had approximately 0.2 million
outstanding options related to the acquisition of the minority
interest in McAfee.com subject to variable accounting. Further
fluctuations in the stock price may result in significant
additional stock-based compensation charges or benefits in
future periods.
Repriced options. On April 22, 1999, we offered to
substantially all of our employees, excluding executive
officers, the right to cancel certain outstanding stock options
and receive new options with an exercise price of
$11.063 per share, the then current fair value of the
stock. Options to purchase a total of 9.5 million shares
were cancelled and the same number of new options were granted.
These new options vested at the same rate that they would have
vested under previous option plans and are subject to variable
accounting. Accordingly, we have and will continue to remeasure
compensation cost for these repriced options
9
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
until these options are exercised, cancelled or forfeited
without replacement. The first valuation period began
July 1, 2000.
The amount of stock-based compensation recorded was and will be
based on any excess of the closing stock price at the end of the
reporting period or date of exercise, forfeiture or cancellation
without replacement, if earlier, over the fair value of our
common stock on July 1, 2000, which was $20.375. As these
options are fully vested, the charge is recorded to earnings
immediately. Depending upon movements in the market value of our
common stock, this variable accounting treatment can result in
additional stock-based compensation charges or benefits in
future periods until the options are exercised, forfeited or
cancelled.
During the three months ended September 30, 2005, we
recorded a charge of approximately $1.1 million, and did
not record any charges or benefits in the three months ended
September 30, 2004. During the nine months ended
September 30, 2005, we recorded a charge of
$0.2 million and did not record any charges or benefits in
the nine months ended September 30, 2004. The stock-based
compensation for these options was based on closing stock prices
as of September 30, 2005 and 2004 of $31.42 and $20.10,
respectively. The charge in the nine months ended
September 30, 2005 was due to an increase in our stock
price from $28.93 at December 31, 2004 to $31.42 as of
September 30, 2005, and the charge in the three months
ended September 30, 2005 was due to an increase in our
stock price from $26.18 on June 30, 2005. There was no
charge or benefit in the three months and nine months ended
September, 2004 as our closing stock price from
December 31, 2003 to September 30, 2004 was below
$20.375. As of September 30, 2005, there were approximately
0.2 million options related to this repricing which were
outstanding and subject to variable plan accounting.
New and existing employees and executives. In the three
months ended September 30, 2005, our compensation committee
of our board of directors granted a total of 110,000 shares
of restricted stock, which vest through September 2008, to key
employees. The price of the underlying shares is $0.01 per
share. In January 2005, our board of directors granted
75,000 shares of restricted stock, which vest through
December 31, 2007, to our chief financial officer. The
price of the underlying shares is $0.01 per share. We
recorded expense of approximately $0.2 million in the three
months ended September 30, 2005 and $0.6 million in
the nine months ended September 30, 2005 related to the
stock-based compensation associated with these restricted stock
grants.
In January 2002, our board of directors approved a grant of
50,000 shares of restricted stock, which vested through
January 2005, to our chief executive officer. The price of the
underlying shares is $0.01 per share. During the three
months ended September, 2005, we recorded no stock-based
compensation related to the chief executive officers 2002
restricted stock grant compared to $0.1 million in the
three months ended September 30 2004. During the nine
months ended September 30, 2005 and 2004, we recorded less
than $0.1 million and approximately $0.3 million,
respectively, related to stock-based compensation associated
with the chief executive officers 2002 restricted stock
grant.
In September 2004, the Companys Chief Financial Officer
and Chief Operating Officer announced that he was retiring from
the Company effective December 31, 2004. Under the terms of
his transition agreement, his options were modified such that
all remaining unvested outstanding stock options would
immediately vest on December 31, 2004 under specified
conditions. The total stock based compensation charge related to
this modification was approximately $1.3 million, of which
$0.3 million was recorded in the three and nine months
ended September 30, 2004.
In connection with the acquisition of Foundstone in October
2004, we assumed stock options to Foundstone employees which are
subject to vesting provisions as the employees provide service
to us. We recognized approximately $0.1 million in the
three months ended September 30, 2005, and
$0.4 million in the nine months ended September 30,
2005. An additional $0.6 million will be recognized through
2008, which is subject to reduction based on employees
terminating prior to the full vesting of their options.
10
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Former employees. In November and December 2003, we
extended the vesting period of two employees and also extended
the period after which vesting ends to exercise their options.
As these employees options continued to vest after termination
and their exercise period was extended an additional
90 days, we recorded a one time stock-based compensation
charge of approximately $0.1 million during the nine months
ended September 30, 2004.
As a result of the sale of the Companys Sniffer product
line (Sniffer) in July 2004, the Company modified
the stock option agreements of several Sniffer executives by
accelerating the vesting of their unvested outstanding options.
As a result, the Company recorded a stock-based compensation
charge of approximately $1.0 million during the three and
nine months ended September 30, 2004. Since the
modification was directly related to the sale of Sniffer, the
stock compensation charge was reflected in the calculation of
the gain on the sale of Sniffer.
Extended life of vested options held by terminated
employees. During a significant portion of 2003, we
suspended exercises of stock options until our required public
company reports were filed with the SEC. The period during which
stock options were suspended is known as the black-out period.
Due to the black-out period, we extended the exercisability of
any options that would otherwise terminate during the black-out
period for a period of time equal to a specified period after
termination of the black-out period. Accordingly, we recorded a
stock-based compensation charge on the date the options should
have terminated based on the intrinsic value of the option on
the modification date and the option price. During the nine
months ended September 30, 2004, we recorded a stock-based
compensation charge of approximately $0.1 million.
|
|
4. |
Business Combinations and Divestitures |
|
|
|
Wireless Security Corporation |
In June 2005, we acquired 100% of the outstanding shares of
Wireless Security Corporation, a provider of home and small
business wireless network security products, for approximately
$20.0 million in cash and $0.3 million of direct
expenses, totaling $20.3 million. We acquired Wireless
Security Corporation to continue to develop their patent-pending
technology, introduce a new consumer offering and to utilize the
technology in our small business managed solutions. The results
of operations of Wireless Security Corporation have been
included in our results of operations since the date of
acquisition.
11
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our management determined the preliminary purchase price
allocation based on estimates of the fair values of the tangible
and intangible assets acquired and liabilities assumed. These
estimates were arrived at utilizing recognized valuation
techniques and the assistance of valuation consultants. The
following is a summary of the assets acquired and liabilities
assumed in the acquisition of Wireless Security Corporation as
adjusted during the current period for resolution of ongoing
purchase price valuation procedures:
|
|
|
|
|
|
|
|
(In thousands) | |
Technology
|
|
$ |
1,500 |
|
Other intangibles
|
|
|
300 |
|
Goodwill
|
|
|
13,113 |
|
Cash
|
|
|
129 |
|
Other assets
|
|
|
34 |
|
Deferred tax assets
|
|
|
2,004 |
|
|
|
|
|
|
Total assets acquired
|
|
|
17,080 |
|
Liabilities
|
|
|
38 |
|
Deferred tax liabilities
|
|
|
711 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
749 |
|
|
|
|
|
Net assets acquired
|
|
|
16,331 |
|
|
|
|
|
In-process research and development expensed
|
|
|
4,000 |
|
|
|
|
|
Total acquisition cost
|
|
$ |
20,331 |
|
|
|
|
|
We recorded approximately $4.0 million for in-process
research and development, which was fully expensed upon purchase
because technological feasibility had not been achieved and
there was no alternative use for the projects under development.
The in-process research and development included the development
of the consumer wireless security product that we introduced in
the third quarter of 2005. In addition, the in-process research
and development included existing wireless security offers that
we plan to integrate in our small business managed solution. At
the date of acquisition, we estimated that 60% of the
development effort had been completed and that the remaining 40%
of the development would take approximately three months to
complete and would cost approximately $0.6 million. As of
September 30, 2005, we had completed the remaining
development efforts. The intangible assets, other than goodwill,
are being amortized over their useful lives of 2.0 to
3.5 years or a weighted average period of 3.2 years.
As part of the acquisition, we did not assume any outstanding
stock options or warrants. A performance and retention plan,
which provides for payment of up to $1.8 million, was
established at the close of the acquisition. At
September 30, 2005, approximately $0.3 million had
been accrued and no amounts had been paid related to this
performance plan. The results of operations for Wireless
Security Corporation prior to the acquisition would not have a
material impact on our results of operations.
In October 2004, we acquired 100% of the outstanding shares of
Foundstone, Inc., a provider of risk assessment and
vulnerability services and products, for $82.5 million in
cash and $3.1 million of direct expenses, totaling
$85.6 million. Total consideration paid for the acquisition
was $90.4 million including $4.8 million for the fair
value of vested stock options assumed in the acquisition. We
acquired Foundstone to enhance our network protection product
line and to deliver enhanced risk classification of prioritized
assets, automated shielding and risk remediation using intrusion
prevention technology, and automated enforcement and compliance.
The results of operations of Foundstone have been included in
our results of operations since the date of acquisition.
12
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the transaction, we recorded approximately
$27.0 million for developed technology, $1.0 million
for acquired product rights, including revenue related order
backlog and contracts, $0.6 million for trade
names/trademarks and non-compete arrangements,
$57.4 million for goodwill (none of which is deductible for
tax purposes), $0.5 million for net deferred tax
liabilities and $4.9 million of tangible assets, net of
liabilities. The intangible assets acquired in the acquisition,
excluding goodwill, are being amortized over their estimated
useful lives of 2.0 to 6.5 years or a weighted average
period of 6.4 years. We accrued $0.3 million in
severance costs for employees terminated at the time of the
acquisition. As of September 30, 2005, we have paid all
severance costs related to the acquisition.
As part of the Foundstone acquisition, we assumed a portion of
outstanding vested and unvested Foundstone stock options. The
intrinsic value of the stock options will be recognized by us
through 2008 as employment services are provided. In the three
and nine months ended September 30, 2005, we expensed
$0.1 million and $0.4 million, respectively, related
to the Foundstone stock options. At September 30, 2005,
unearned compensation to be recognized by us in future periods
as services are provided was $0.6 million.
We cancelled the Foundstone stock options we did not assume,
such options being held by four executives, in exchange for a
cash payment equal to the intrinsic value of the cancelled stock
options based on the purchase price per share. Forty percent of
this amount was placed into escrow accounts for the four
executives (Key Employee Escrow), along with 40% of the proceeds
for the purchase of shares from the four executives. The four
executives also received retention bonus payments, which were
placed into Key Employee Escrow accounts. The Key Employee
Escrow amounts are subject to vesting provisions from the date
of acquisition through October 1, 2007. We recorded the
$5.6 million paid into Key Employee Escrow as prepaid
compensation, which is being recognized as compensation expense
over the vesting period. In January 2005, the vesting schedule
was amended such that a greater portion of the escrow amount
vests within one year of the close of the transaction. In the
three and nine months ended September 30, 2005, we recorded
approximately $0.7 million and $2.5 million,
respectively, in expense for escrow amounts vesting in the
period.
Our management determined the preliminary purchase price
allocation based on estimates of the fair values of the tangible
and intangible assets acquired and liabilities assumed. These
estimates were arrived at utilizing recognized valuation
techniques and the assistance of valuation consultants. The
following is a summary of the assets acquired and liabilities
assumed in the acquisition of Foundstone as adjusted during the
current period for resolution of ongoing purchase price
valuation procedures:
|
|
|
|
|
|
|
|
(In thousands) | |
Technology
|
|
$ |
27,000 |
|
Other intangible assets
|
|
|
1,600 |
|
Goodwill
|
|
|
57,421 |
|
Cash
|
|
|
920 |
|
Other assets
|
|
|
12,682 |
|
Deferred tax assets
|
|
|
10,758 |
|
|
|
|
|
|
Total assets acquired
|
|
|
110,381 |
|
Liabilities
|
|
|
8,727 |
|
Deferred tax liabilities
|
|
|
11,297 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
20,024 |
|
|
|
|
|
Net assets acquired
|
|
$ |
90,357 |
|
|
|
|
|
13
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following pro forma financial information presents our
combined results with Foundstone, Inc., as if the acquisition
had occurred at the beginning of 2004 (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, 2004 | |
|
September 30, 2004 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
(Unaudited) | |
Net revenue
|
|
$ |
228,267 |
|
|
$ |
683,442 |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
113,314 |
|
|
$ |
175,428 |
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$ |
0.72 |
|
|
$ |
1.09 |
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$ |
0.67 |
|
|
$ |
1.02 |
|
|
|
|
|
|
|
|
Shares used in per share calculation basic
|
|
|
158,151 |
|
|
|
160,321 |
|
|
|
|
|
|
|
|
Shares used in per share calculation diluted
|
|
|
172,103 |
|
|
|
180,192 |
|
|
|
|
|
|
|
|
The above pro forma financial information includes adjustments
for interest income on cash disbursed for the acquisitions,
amortization of identifiable intangible assets and adjustments
for expenses incurred in conjunction with the acquisitions.
In May 2003, we acquired 100% of the outstanding shares of
IntruVert Networks, Inc., (IntruVert) a provider of
network-based intrusion prevention solutions designed to
proactively detect and stop system and network security attacks
before they occur, for $98.1 million in cash and
$5.2 million of direct expenses, totaling
$103.3 million. We acquired IntruVert to enhance our
intrusion detection product line, improve our position in the
emerging intrusion prevention marketplace, embed the acquired
technologies in our current product offering, and sell IntruVert
products to our existing customer base.
As part of the IntruVert acquisition, we cancelled all
outstanding IntruVert restricted stock and outstanding stock
options and agreed to make cash payments to former IntruVert
employees contingent upon their continued employment with us
based on the same vesting terms of their restricted stock or
stock option agreements. The payments to former IntruVert
employees are recorded as salary expense ratably over the
vesting period since the employees are currently providing
services to us. Payments under the restricted stock plan are
paid monthly from an escrow account and will total approximately
$3.0 million from the purchase date through the fourth
quarter of 2006. For the restricted stock agreements, we
recorded expense of approximately $0.1 million and
$0.3 million in the three months ended September 30,
2005 and 2004, respectively. In the nine months ended
September 30, 2005 and 2004, we recorded expense of
approximately $0.3 million and $1.1 million,
respectively. Payments under the stock option plan are being
paid monthly through our payroll, and we currently expect the
payments to total $3.4 million. For stock option
agreements, we recorded expense of approximately
$0.2 million and $0.3 million in the three months
ended September 30, 2005 and 2004, respectively. In the
nine months ended September 30, 2005 and 2004, we recorded
expense of approximately $0.6 million and
$1.1 million, respectively, and we anticipate that we will
record an additional $0.7 million through the first quarter
of 2007. Cash payments that were fully vested at the date of
acquisition were included in the purchase price. If a former
IntruVert employee ceases employment with us, unvested payment
amounts will be returned to us.
|
|
|
Entercept Security Technologies, Inc. |
In April 2003, we acquired 100% of the outstanding shares of
Entercept Security Technologies, Inc. (Entercept), a
provider of host-based intrusion prevention solutions designed
to proactively detect and stop system and network security
attacks before they occur, for $121.9 million in cash and
$3.9 million of direct
14
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expenses, totaling $125.8 million. We acquired Entercept to
enhance our intrusion detection product line, achieve a leading
position in the emerging intrusion prevention marketplace, embed
the acquired technologies in our current product offering, and
sell Entercept products to our existing customer base. At the
acquisition date, we accrued $2.8 million for permanently
vacated facilities. A summary of activity in the restructuring
accrual related to Entercept during the nine months ended
September 30, 2005 is as follows (in thousands):
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
594 |
|
Cash payments
|
|
|
(282 |
) |
Adjustments
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
$ |
312 |
|
|
|
|
|
In April 2005, we completed the sale of our McAfee Labs assets
to SPARTA, Inc. (SPARTA) for $1.5 million and
recognized a gain on the sale of $1.3 million for the nine
months ended September 30, 2005. The carrying value of
McAfee Labs assets and liabilities, which were sold in this
agreement, were not significant. The operations of McAfee Labs,
which are not material to our consolidated results of
operations, are included in income from operations.
In the three months ended September 30, 2005, we had no
revenue from McAfee Labs compared to $1.5 million in the
three months ended September 30, 2004. Revenues related to
McAfee Labs were approximately $1.9 million and
$4.7 million in the nine months ended September 30,
2005 and 2004, respectively.
In July 2004, we completed our sale of our Sniffer product line
to Network General Corporation for $212.7 million in cash,
net of approximately $4.0 million in direct costs. We
recorded a gain on sale of $197.4 million in 2004. Revenues
related to Sniffer were approximately $10.2 million and
$90.9 million, respectively, in the three and nine months
ended September 30, 2004.
In conjunction with the sale of Sniffer, we entered into a
transition services agreement with Network General Corporation.
Under this agreement, we provided certain transition services,
including initial order processing, use of facilities,
transaction processing services and certain other back office
functions for one year from the purchase date. We were
reimbursed for our costs plus a margin. Operating expenses under
this agreement are included in general and administrative
expenses, while reimbursements for such expenses are included in
the caption Reimbursement from transition services
agreement on the accompanying consolidated statements of
income and comprehensive income. We recorded $0.4 million
of reimbursements under the transition services agreement in the
nine months ended September 30, 2005. We recorded
$3.7 million in the three and nine months ended
September 30, 2004. We completed our requirements under the
transition services agreement in July 2005.
In January 2004, we completed our sale of our Magic Solutions
product line to BMC Software for $47.1 million in cash. We
recorded a gain of $46.2 million during the nine months
ended September 30, 2004. In conjunction with the Magic
sale, we paid a $1.4 million bonus to an executive related
to the transaction in the nine months ended September 30,
2004. Revenues related to Magic were approximately
$2.9 million in nine months ended September 30, 2004.
15
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5. |
Goodwill and Other Intangible Assets |
We account for goodwill and other intangible assets in
accordance with SFAS No. 142, Goodwill and
Other Intangible Assets. In lieu of amortization, we
perform an impairment review of our goodwill on at least an
annual basis.
We perform our annual goodwill impairment review as of
October 1 of our fiscal year. We completed our annual
goodwill review as of October 1, 2004 and concluded that
goodwill was not impaired. The fair value of the reporting units
was estimated using the average of the expected present value of
future cash flows and of the market multiple value. As a result
of the sale of Sniffer and Magic in 2004, we tested goodwill,
excluding Sniffer and Magic. These impairment tests were
performed during the three months ended March 31, 2004 and
September 30, 2004, respectively, and no impairment was
identified. We will continue to test for impairment on an annual
basis and on an interim basis if an event occurs or
circumstances change that would more likely than not reduce the
fair value of our reporting units below their carrying amounts.
Goodwill information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
Goodwill | |
|
|
|
Effects of Foreign | |
|
September 30, | |
|
|
2004 | |
|
Acquired | |
|
Adjustments | |
|
Currency Exchange | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
North America
|
|
$ |
365,124 |
|
|
$ |
13,087 |
|
|
$ |
(2,685 |
) |
|
$ |
257 |
|
|
$ |
375,783 |
|
EMEA
|
|
|
41,651 |
|
|
|
|
|
|
|
(456 |
) |
|
|
(255 |
) |
|
|
40,940 |
|
Japan
|
|
|
16,397 |
|
|
|
|
|
|
|
(46 |
) |
|
|
|
|
|
|
16,351 |
|
Asia-Pacific, excluding Japan
|
|
|
5,567 |
|
|
|
|
|
|
|
(76 |
) |
|
|
|
|
|
|
5,491 |
|
Latin America
|
|
|
10,441 |
|
|
|
|
|
|
|
(46 |
) |
|
|
197 |
|
|
|
10,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
439,180 |
|
|
$ |
13,087 |
|
|
$ |
(3,309 |
) |
|
$ |
199 |
|
|
$ |
449,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The adjustment to goodwill in the nine months ended
September 30, 2005 related to the Foundstone, Wireless
Security Corporation, McAfee.com and Traxess acquisitions.
The components of other intangible assets are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
|
|
Accumulated | |
|
|
|
|
|
Accumulated | |
|
|
|
|
Weighted | |
|
|
|
Amortization | |
|
|
|
|
|
Amortization | |
|
|
|
|
Average | |
|
Gross | |
|
(Including Effects | |
|
Net | |
|
Gross | |
|
(Including Effects | |
|
Net | |
|
|
Useful | |
|
Carrying | |
|
of Foreign Currency | |
|
Carrying | |
|
Carrying | |
|
of Foreign Currency | |
|
Carrying | |
|
|
Life | |
|
Amount | |
|
Exchange) | |
|
Amount | |
|
Amount | |
|
Exchange) | |
|
Amount | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technologies
|
|
|
5.9 years |
|
|
$ |
138,682 |
|
|
$ |
(83,752 |
) |
|
$ |
54,930 |
|
|
$ |
139,509 |
|
|
$ |
(74,400 |
) |
|
$ |
65,109 |
|
|
Trademarks, patents, customer base and other intangibles
|
|
|
6.5 years |
|
|
|
90,898 |
|
|
|
(58,428 |
) |
|
|
32,470 |
|
|
|
90,335 |
|
|
|
(48,311 |
) |
|
|
42,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
229,580 |
|
|
$ |
(142,180 |
) |
|
$ |
87,400 |
|
|
$ |
229,844 |
|
|
$ |
(122,711 |
) |
|
$ |
107,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amortization expenses for the intangible assets
listed above totaled $6.8 million and $6.3 million in
the three months ended September 30, 2005 and 2004,
respectively, and $21.8 million and $20.0 million in
the nine months ended September 30, 2005 and 2004,
respectively.
16
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Expected future intangible asset amortization expense as of
September 30, 2005 is as follows (in thousands):
|
|
|
|
|
|
Fiscal Years:
|
|
|
|
|
|
Remainder of 2005
|
|
$ |
6,393 |
|
|
2006
|
|
|
25,474 |
|
|
2007
|
|
|
22,437 |
|
|
2008
|
|
|
16,985 |
|
|
2009
|
|
|
10,726 |
|
|
Thereafter
|
|
|
5,385 |
|
|
|
|
|
|
|
$ |
87,400 |
|
|
|
|
|
During the nine months ended September 30, 2005, we
permanently vacated several leased facilities and recorded a
$1.8 million accrual for estimated lease related costs
associated with the permanently vacated facilities. The
remaining costs associated with vacating the facilities are
primarily comprised of the present value of remaining lease
obligations, along with estimated costs associated with
subleasing the vacated facility, net of estimated sublease
rental income. We also recorded a restructuring charge of
$0.2 million related to a reduction in headcount of
approximately 14 employees.
The following table summarizes our restructuring accrual
established in 2005 and activity through September 30, 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease | |
|
|
|
|
|
|
|
|
Termination | |
|
Severance and | |
|
Other | |
|
|
|
|
Costs | |
|
Other Benefits | |
|
Costs | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balance, January 1, 2005
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Restructuring accrual
|
|
|
1,827 |
|
|
|
216 |
|
|
|
4 |
|
|
|
2,047 |
|
Cash payments
|
|
|
(811 |
) |
|
|
(216 |
) |
|
|
(4 |
) |
|
|
(1,031 |
) |
Accretion
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
$ |
1,030 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005, $0.9 million of the
restructuring accrual is due within 12 months and has been
classified as current accrued liabilities, while less than
$0.1 million has been classified as other long term
liabilities, and will be paid through July 2007.
During 2004, we recorded several restructuring charges related
to the reduction of employee headcount. In the first quarter of
2004, we recorded a restructuring charge of approximately
$2.2 million related to the severance of approximately 160
employees, of which $0.7 million and $1.5 million was
related to our North America and EMEA operating segments,
respectively. The workforce size was reduced primarily due to
our sale of Magic in January 2004. In the second quarter of
2004, we recorded a restructuring charge of approximately
$1.6 million related to the severance of approximately 80
employees in our sales, technical support and general and
administrative functions. Approximately $0.6 million of the
restructuring charge was related to the EMEA operating segment
and the remaining $1.0 million was related to the North
America operating segment. In the third quarter of 2004, we
recorded a restructuring charge related to ten employees
17
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
which totaled approximately $0.9 million, all of which
related to the North America operating segment. In the fourth
quarter of 2004, we recorded a restructuring charge of
$1.3 million related to 111 employees, of which
$0.7 million, $0.2 million, $0.2 million and
$0.2 million related to the Latin America, North America,
EMEA and Asia-Pacific, excluding Japan, operating segments,
respectively. All employees were terminated as of
December 31, 2004. The reductions in the second, third and
fourth quarters were part of the previously announced
cost-savings measures being implemented by us.
In September 2004, we announced the move of our European
headquarters to Ireland, which was substantially completed by
the end of March 2005. In the third and fourth quarters of 2004,
we recorded restructuring charges of $0.2 million and
$2.2 million, respectively, related to the severance of
approximately 80 employees. During the nine months ended
September 30, 2005, we completed the move of our European
headquarters to Ireland and vacated the remaining planned
floors. We recorded an additional $1.4 million
restructuring charge for estimated lease related costs
associated with the permanently vacated facilities and a
$1.4 million restructuring charge for severance costs. All
of these restructuring charges were related to the EMEA
operating segment
Also in September 2004, we permanently vacated an additional two
floors in our Santa Clara headquarters building. We
recorded a $7.8 million accrual for the estimated lease
related costs associated with the permanently vacated facility,
partially offset by a $1.3 million write-off of deferred
rent liability. The remaining costs associated with vacating the
facility are primarily comprised of the present value of
remaining lease obligations, net of estimated sublease income
along with estimated costs associated with subleasing the
vacated facility. The remaining costs will generally be paid
over the remaining lease term ending in 2013. We also recorded a
non-cash charge of approximately $0.8 million related to
disposals of certain leasehold improvements. The restructuring
charge of $6.5 million and related cash outlay were based
our managements current estimates.
In the fourth quarter of 2004, we permanently vacated several
leased facilities and recorded a $2.2 million accrual for
estimated lease related costs associated with the permanently
vacated facilities. The remaining costs associated with vacating
the facilities are primarily comprised of the present value of
remaining lease obligations, along with estimated costs
associated with subleasing the vacated facility.
During 2004, we adjusted the restructuring accruals related to
severance costs and lease termination costs recorded in 2004. We
recorded a $0.3 million adjustment to reduce the EMEA
severance accrual for amounts that were no longer necessary
after paying out substantially all accrued amounts to the former
employees. We also recorded a $0.2 million reduction in
lease termination costs due to changes in estimates related to
the sublease income to be received over the remaining lease term
of our Santa Clara headquarters building.
18
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes our restructuring accruals
established in 2004 and activity through September 30, 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease | |
|
|
|
|
|
|
|
|
Termination | |
|
Severance and | |
|
Other | |
|
|
|
|
Costs | |
|
Other Benefits | |
|
Costs | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balance, January 1, 2004
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Restructuring accrual
|
|
|
8,685 |
|
|
|
7,932 |
|
|
|
480 |
|
|
|
17,097 |
|
Cash payments
|
|
|
(579 |
) |
|
|
(4,175 |
) |
|
|
(63 |
) |
|
|
(4,817 |
) |
Adjustment to liability
|
|
|
(222 |
) |
|
|
(275 |
) |
|
|
|
|
|
|
(497 |
) |
Accretion
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
7,958 |
|
|
|
3,482 |
|
|
|
417 |
|
|
|
11,857 |
|
Restructuring accrual
|
|
|
1,402 |
|
|
|
1,382 |
|
|
|
20 |
|
|
|
2,804 |
|
Cash payments
|
|
|
(2,045 |
) |
|
|
(4,864 |
) |
|
|
(332 |
) |
|
|
(7,241 |
) |
Adjustment to liability
|
|
|
446 |
|
|
|
|
|
|
|
(105 |
) |
|
|
341 |
|
Accretion
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
$ |
8,013 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005, $1.9 million of the
restructuring accrual is due within 12 months and has been
classified as current accrued liabilities, while the remaining
balance of $6.1 million has been classified as other long
term liabilities, and will be paid through March 2013.
In January 2003, as part of a restructuring effort to gain
operational efficiencies, we consolidated operations formerly
housed in three leased facilities in the Dallas, Texas area into
our regional headquarters facility in Plano, Texas. The facility
houses employees working in finance, information technology,
legal, human resources, field sales and the customer support and
telesales groups servicing the McAfee System Protection
Solutions and McAfee Network Protection Solutions businesses.
The remaining costs will generally be paid over the remaining
lease term ending in 2013.
In 2004, we adjusted the restructuring accrual related to lease
termination costs previously recorded in 2003. The adjustments
decreased the liability by approximately $0.6 million in
2004, due to changes in estimates related to the sublease income
to be received over the remaining lease term.
19
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes our restructuring accrual
established in 2003 and activity through September 30, 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease | |
|
|
|
|
|
|
Termination | |
|
Severance and | |
|
|
|
|
Costs | |
|
Other Benefits | |
|
Total | |
|
|
| |
|
| |
|
| |
Balance, January 1, 2004
|
|
$ |
14,217 |
|
|
$ |
317 |
|
|
$ |
14,534 |
|
Cash payments
|
|
|
(1,841 |
) |
|
|
(194 |
) |
|
|
(2,035 |
) |
Adjustment to liability
|
|
|
(623 |
) |
|
|
(123 |
) |
|
|
(746 |
) |
Accretion
|
|
|
548 |
|
|
|
|
|
|
|
548 |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
12,301 |
|
|
|
|
|
|
|
12,301 |
|
Cash payments
|
|
|
(984 |
) |
|
|
|
|
|
|
(984 |
) |
Adjustment to liability
|
|
|
129 |
|
|
|
|
|
|
|
129 |
|
Accretion
|
|
|
376 |
|
|
|
|
|
|
|
376 |
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
$ |
11,822 |
|
|
$ |
|
|
|
$ |
11,822 |
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005, $1.5 million of the
restructuring accrual is due within 12 months and has been
classified as current accrued liabilities, while the remaining
balance of $10.3 million has been classified as other long
term liabilities and will be paid through March 2013.
Our estimate of the excess facilities charges recorded during
2005, 2004 and 2003 may vary significantly depending, in part,
on factors which may be beyond our control, such as our success
in negotiating with our lessor, the time periods required to
locate and contract suitable subleases and the market rates at
the time of such subleases. Adjustments to the facilities
accrual will be made if actual lease exit costs or sublease
income differ from amounts currently expected. The facility
restructuring charges in 2005 were primarily allocated to the
EMEA and Japan operating segments, and the facility
restructuring charges in 2004 and 2003 were primarily allocated
to the North America operating segment.
We have a $17.0 million credit facility with a bank. The
credit facility is available on an offering basis, meaning that
transactions under the credit facility will be on such terms and
conditions, including interest rate, maturity, representations,
covenants and events of default, as mutually agreed between us
and the bank at the time of each specific transaction. The
credit facility is intended to be used for short-term credit
requirements with terms of one year or less. The credit facility
can be cancelled at any time. No balances were outstanding as of
September 30, 2005 and December 31, 2004.
|
|
8. |
Interest Rate Swap Transaction |
In July 2002, we entered into interest rate swap transactions
(the Transactions) with two investment banks (the
Banks) to hedge the interest rate risk of our
outstanding 5.25% Convertible Subordinated Notes
(Notes) due 2006. The Notes were issued in August
2001 with an aggregate principal amount of $345.0 million.
The Transactions had a termination date of August 15, 2006,
subject to certain early termination provisions if on or after
August 20, 2004 and prior to August 15, 2006 the
five-day average closing price of our common stock were to equal
or exceed $22.59 per share. Depending on the timing of the
early termination event, the Banks would be obligated to pay us
an amount equal to the repurchase premium called for under the
terms of the Notes.
20
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Transactions qualified and were designated as a fair value
hedge against movements in the fair value of the Notes due to
changes in the benchmark interest rate. Under the fair value
hedge model, the derivative is recognized at fair value on the
balance sheet with an offsetting entry to the income statement.
In addition, changes in fair value of the Notes due to changes
in the benchmark interest rate are recognized as a basis
adjustment to the carrying amount of the Notes with an
offsetting entry to the income statement. The gain or loss from
the change in fair value of the Transactions and the offsetting
change in the fair value of the Notes are recognized as interest
and other expense.
The Notes were fully repaid in August 2004, and the Transactions
were left intact and became a speculative investment, with gains
and losses being recorded in the consolidated statement of
income, until the Transactions terminated in October 2004 when
our common stock price exceeded $22.59 for a five-day period.
A reconciliation of the numerator and denominator of basic and
diluted net income per share is provided as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Numerator Basic net income
|
|
$ |
22,547 |
|
|
$ |
118,148 |
|
|
$ |
100,215 |
|
|
$ |
186,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator Diluted net income
|
|
$ |
22,547 |
|
|
$ |
118,148 |
|
|
$ |
100,215 |
|
|
$ |
186,318 |
|
|
Interest on convertible debentures, net of tax
|
|
|
|
|
|
|
1,546 |
|
|
|
|
|
|
|
7,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, adjusted
|
|
$ |
22,547 |
|
|
$ |
119,694 |
|
|
$ |
100,215 |
|
|
$ |
193,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common stock outstanding
|
|
|
166,221 |
|
|
|
158,151 |
|
|
|
164,245 |
|
|
|
160,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common stock outstanding
|
|
|
166,221 |
|
|
|
158,151 |
|
|
|
164,245 |
|
|
|
160,321 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures
|
|
|
|
|
|
|
10,584 |
|
|
|
|
|
|
|
16,235 |
|
|
|
Common stock options and shares subject to repurchase(1)
|
|
|
4,491 |
|
|
|
3,368 |
|
|
|
4,138 |
|
|
|
3,604 |
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common stock outstanding
|
|
|
170,712 |
|
|
|
172,103 |
|
|
|
168,383 |
|
|
|
180,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Basic
|
|
$ |
0.14 |
|
|
$ |
0.75 |
|
|
$ |
0.61 |
|
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Diluted
|
|
$ |
0.13 |
|
|
$ |
0.70 |
|
|
$ |
0.60 |
|
|
$ |
1.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
In the three months ended September 30, 2005 and 2004,
approximately 0.6 million and 6.2 million options to
purchase common stock were excluded from the calculation since
the effect was anti-dilutive. In the nine months ended
September 30, 2005 and 2004, approximately 1.6 million
and 7.0 million options to purchase common stock were
excluded from the calculation since the effect was anti-dilutive. |
21
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our consolidated provision for income taxes for the three months
ended September 30, 2005 and 2004 was $0.1 million and
$81.3 million, respectively, reflecting an effective tax
rate of less than 1% and 41%, respectively. Our consolidated
provision for income taxes for the nine months ended
September 30, 2005 and 2004 was $25.4 million and
$106.5 respectively, reflecting an effective tax rate of 20% and
36%, respectively. The effective tax rate differs from the
statutory rate primarily due to the impact of research and
development tax credits, utilization of foreign tax credits, and
lower effective rates in some overseas jurisdictions. In each
successive interim period, to the extent our operating results
year to date and our estimates for the remainder of the fiscal
year change from our original expectations regarding the
proportion of earnings in various tax jurisdictions we expect
that our effective tax rate will change accordingly, affecting
tax expense (or benefit) for both that successive interim period
as well as year-to-date interim results.
Although we reported an effective tax rate of 20% for the nine
months ended September 30, 2005, our total tax expense of
$25.4 million is comprised of tax expense of
$41.6 million on year to date ordinary income at an
estimated 33% annual effective tax rate offset by a net tax
benefit of $16.1 million from discrete items individually
computed and recognized when the items occurred. The discrete
items include an $18.7 million tax benefit relating to a
valuation allowance release, changes in foreign, federal and
state estimated tax provisions, and releases of tax reserves no
longer required. Additionally, $2.6 million in tax expenses
correlates to net incremental federal and state income tax
expense related to our determination to repatriate no less than
$350.0 million of foreign earnings, as discussed below.
The American Jobs Creation Act of 2004 (the Act)
provided for a deduction of 85% of certain foreign earnings that
are repatriated in stipulated periods, including our year ending
December 31, 2005. Certain criteria must be met to qualify
for the deduction, including the establishment of a domestic
reinvestment plan by the Chief Executive Officer, the approval
of the plan by the Board of Directors, and the execution of the
plan whereby the repatriated earnings are reinvested in the
United States.
In the third quarter of 2005, we decided to make a distribution
of earnings from our foreign subsidiaries that would qualify for
the repatriation provisions of the Act. We plan to repatriate no
less than $350.0 million. As a result we recorded tax
expense of $2.6 million, net of a $17.8 million tax
benefit resulting from an expected lower tax rate under the Act
on a portion of foreign earnings for which we previously in 2004
provided United States tax. We are continuing our assessment of
the opportunity of the repatriation provisions for further
repatriations under the Act, but do not expect to complete this
assessment until the fourth quarter of 2005. The additional
amount of unremitted foreign earnings that is being considered
for possible repatriation and the related income tax expense is
no more than $150.0 million and $9.0 million,
respectively. Except for the distributions considered under the
Act, we intend to indefinitely reinvest all other current and/or
future earnings of our foreign subsidiaries.
|
|
11. |
Business Segment Information |
We have concluded that we have one business and operate in one
industry, developing, marketing, distributing and supporting
computer security solutions for large enterprises, governments,
small and medium-sized business and consumer users, as well as
resellers and distributors. Our management measures
profitability based on our five geographic regions: North
America; Europe, Middle East and Africa (EMEA);
Japan; Asia-Pacific, excluding Japan; and Latin America. The
regions are evidence of the operating structure of our internal
organization. The Corporate business segment includes general
and administrative expenses, amortization of purchased
technology and other intangibles, the provision for doubtful
accounts and other indirect charges, such as the proposed legal
settlement charge, acquired in-process research and development,
and restructuring charges.
22
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We market and sell, through our geographic regions, anti-virus
and security software, hardware and services. These products and
services are marketed and sold worldwide primarily through
resellers, distributors, systems integrators, retailers,
original equipment manufacturers, internet service providers and
directly by us. In addition, we offer web sites, which provide
suites of on-line products and services personalized for the
user based on the users personal computer (PC)
configuration, attached peripherals and resident software. We
also offer managed security and availability applications to
corporations and governments on the Internet.
Following is a summary of our net revenue from external
customers and operating income by geographic region (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net revenue by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
145,877 |
|
|
$ |
131,059 |
|
|
$ |
431,396 |
|
|
$ |
408,917 |
|
|
EMEA
|
|
|
72,445 |
|
|
|
61,376 |
|
|
|
199,104 |
|
|
|
174,780 |
|
|
Japan
|
|
|
21,623 |
|
|
|
12,636 |
|
|
|
58,650 |
|
|
|
38,518 |
|
|
Asia-Pacific, excluding Japan
|
|
|
8,566 |
|
|
|
10,624 |
|
|
|
27,996 |
|
|
|
27,158 |
|
|
Latin America
|
|
|
4,400 |
|
|
|
5,938 |
|
|
|
16,874 |
|
|
|
17,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$ |
252,911 |
|
|
$ |
221,633 |
|
|
$ |
734,020 |
|
|
$ |
666,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
64,423 |
|
|
$ |
47,841 |
|
|
$ |
181,308 |
|
|
$ |
133,528 |
|
|
Europe
|
|
|
35,019 |
|
|
|
28,737 |
|
|
|
82,543 |
|
|
|
63,555 |
|
|
Japan
|
|
|
10,350 |
|
|
|
4,272 |
|
|
|
29,480 |
|
|
|
11,815 |
|
|
Asia-Pacific, excluding Japan
|
|
|
2,418 |
|
|
|
2,208 |
|
|
|
8,771 |
|
|
|
3,051 |
|
|
Latin America
|
|
|
818 |
|
|
|
4,585 |
|
|
|
7,631 |
|
|
|
7,924 |
|
|
Corporate
|
|
|
(97,540 |
) |
|
|
122,942 |
|
|
|
(200,135 |
) |
|
|
78,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
15,488 |
|
|
$ |
210,585 |
|
|
$ |
109,598 |
|
|
$ |
298,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between operating income and income before taxes
is reflected on the face of our condensed consolidated
statements of income.
Net revenue information on a product and service basis is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Support and maintenance
|
|
$ |
135,861 |
|
|
$ |
112,179 |
|
|
$ |
380,284 |
|
|
$ |
321,418 |
|
On-line subscriptions
|
|
|
71,795 |
|
|
|
39,512 |
|
|
|
198,247 |
|
|
|
98,716 |
|
Software licenses
|
|
|
17,946 |
|
|
|
26,912 |
|
|
|
66,358 |
|
|
|
125,123 |
|
Hardware
|
|
|
8,159 |
|
|
|
16,415 |
|
|
|
24,508 |
|
|
|
65,300 |
|
Retail
|
|
|
3,135 |
|
|
|
10,001 |
|
|
|
16,370 |
|
|
|
10,798 |
|
Consulting
|
|
|
4,953 |
|
|
|
3,619 |
|
|
|
15,290 |
|
|
|
12,222 |
|
Training
|
|
|
1,049 |
|
|
|
805 |
|
|
|
3,431 |
|
|
|
4,778 |
|
Other
|
|
|
10,013 |
|
|
|
12,190 |
|
|
|
29,532 |
|
|
|
28,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
252,911 |
|
|
$ |
221,633 |
|
|
$ |
734,020 |
|
|
$ |
666,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net revenue information on a product family basis is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
McAfee
|
|
$ |
252,911 |
|
|
$ |
209,910 |
|
|
$ |
732,169 |
|
|
$ |
567,935 |
|
Sniffer
|
|
|
|
|
|
|
10,187 |
|
|
|
|
|
|
|
90,878 |
|
Magic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,850 |
|
McAfee Labs
|
|
|
|
|
|
|
1,536 |
|
|
|
1,851 |
|
|
|
4,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
252,911 |
|
|
$ |
221,633 |
|
|
$ |
734,020 |
|
|
$ |
666,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From time to time, we have been subject to litigation including
the pending litigation described below. Our current estimated
range of liability related to some of the pending litigation
below is based on claims for which our management can estimate
the amount and range of loss. We have recorded the minimum
estimated liability related to those claims, where there is a
range of loss. Because of the uncertainties related to both the
range of loss on the remaining pending litigation, our
management is unable to make a reasonable estimate of the
liability that could result from an unfavorable outcome. As
additional information becomes available, we will assess our
potential liability and revise our estimates. Pending or future
litigation could be costly, could cause the diversion of our
managements attention and could upon resolution, have a
material adverse effect on the business, results of operations,
financial condition and cash flows.
In addition, we are engaged in certain legal and administrative
proceedings incidental to our normal business activities and
believe that these matters will not have a material adverse
effect on our financial position, results of operations or cash
flows.
In September 2003, we entered into a settlement agreement with
the plaintiffs in the In re Network Associates, Inc. II
Securities Litigation, which was originally filed in
December 2000. Under the settlement agreement, we paid
$70.0 million, which was recorded as litigation settlement
in the consolidated statement of income for 2002. The settlement
was approved by the court in February 2004, and the case was
dismissed with prejudice to all parties and claims. In 2004, we
received approximately $25.0 million from our insurance
carriers related to this litigation, of which $19.1 million
was received in the first quarter of 2004 and was recorded as
litigation reimbursement in the consolidated statement of
income. The remaining $5.9 million was received in the
second quarter of 2004.
Certain investment bank underwriters, our company, and certain
of our directors and officers have been named in a putative
class action for violation of the federal securities laws in the
United States District Court for the Southern District of New
York, captioned In re McAfee.com Corp. Initial Public
Offering Securities Litigation, 01 Civ. 7034 (SAS).
This is one of a number of cases challenging underwriting
practices in the initial public offerings (IPOs) of
more than 300 companies. These cases have been coordinated
for pretrial proceedings as In re Initial Public Offering
Securities Litigation, 21 MC 92 (SAS). Plaintiffs generally
allege that certain underwriters engaged in undisclosed and
improper underwriting activities, namely the receipt of
excessive brokerage commissions and customer agreements
regarding post-offering purchases of stock in exchange for
allocations of IPO shares. Plaintiffs also allege that various
investment bank securities analysts issued false and misleading
analyst reports. The complaint against us claims that the
purported improper underwriting activities were not disclosed in
the registration statements for McAfee.coms IPO and seeks
24
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unspecified damages on behalf of a purported class of persons
who purchased our securities or sold put options during the time
period from December 1, 1999 to December 6, 2000. On
February 19, 2003 the Court issued an Opinion and Order
dismissing certain of the claims against us with leave to amend.
We accepted a settlement proposal on July 15, 2003 and we
are awaiting Court approval. Under this settlement proposal, we
may assign our claims against certain underwriters to the
plaintiffs, and we would be dismissed from the lawsuit without
paying any monetary damages.
On June 6, 2002, Paul Cozza filed a Complaint in the United
States District Court, District of Massachusetts, alleging
breach of contract, fraud and bad faith arising out of a dispute
concerning the licensing of certain technology used in the Virex
6.1 product. The Complaint seeks treble damages, attorneys
fees and costs for the alleged unauthorized sale of products
Cozza claims contain or contained his technology from and after
January 1, 2002, and an injunction against the alleged
further use of Cozzas technology. McAfee filed papers in
opposition to the Complaint and asserted various defenses. A
motion by McAfee to compel arbitration and a motion for partial
summary judgment on liability (but not damages) issues relating
to whether the contract claims extended beyond the Virex 6.1
product, have both been denied by the Court. In its order
denying the McAfee motion for partial summary judgment, the
Court also granted a motion for partial summary judgment filed
by Cozza in which Cozza sought a declaration that the language
of an agreement is unambiguous and enforceable against any
McAfee product which might be proved to contain that same
technology referenced in a 1993 License Agreement. No trial date
has been set, and discovery continues in anticipation of a trial
either at the end of the first quarter, or during the second
quarter, of 2006.
On March 22, 2002, the SEC notified us that it has
commenced a Formal Order of Private Investigation
into our accounting practices. We have been engaged in ongoing
settlement discussions with the SEC. On September 29, 2005,
we announced we had reserved $50.0 million in connection
with a proposed settlement with the SEC and we have deposited
$50.0 million in an escrow account with the SEC as the
designated beneficiary. This amount is reflected as current
restricted cash on our balance sheet. The proposed settlement
would, among other things, require us to pay a
$50.0 million penalty. No settlement with the SEC has been
finalized and the amount and terms of such settlement, if any,
are subject to change.
|
|
13. |
Contingencies and Guarantees |
In November 2002, the FASB issued Interpretation No. 45
(FIN 45), Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45
requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee or indemnification.
FIN 45 also requires additional disclosure by a guarantor
in its interim and annual consolidated financial statements
about its obligations under certain guarantees and
indemnifications. The following is a summary of the agreements
that we have determined are within the scope of FIN 45 as
of September 30, 2005:
|
|
|
|
|
Under the terms of our software license agreements with our
customers, we agree that in the event the software sold
infringes upon any patent, copyright, trademark, or any other
proprietary right of a third party, we will indemnify our
customer licensees, against any loss, expense, or liability from
any damages that may be awarded against our customer. We include
this infringement indemnification in all of our software license
agreements and selected managed service arrangements. In the
event the customer cannot use the software or service due to
infringement and we can not obtain the right to use, replace or
modify the license or service in a commercially feasible manner
so that it no longer infringes then we may terminate the license
and provide the customer a pro-rata refund of the fees paid by
the customer for the infringing license or service. We have
recorded no liability associated with this indemnification, as
we are not aware of any pending or threatened infringement
actions that are |
25
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
probable losses. We believe the estimated fair value of these
intellectual property indemnification clauses is minimal. |
|
|
|
Under the terms of certain vendor agreements, in particular,
vendors used as part of our managed services, we have agreed
that in the event the service provided to the customer by the
vendor on behalf of us infringes upon any patent, copyright,
trademark, or any other proprietary right of a third party, we
will indemnify our vendor, against any loss, expense, or
liability from any damages that may be awarded against our
customer. No maximum liability is stipulated in these vendor
agreements. We have recorded no liability associated with this
indemnification, as we are not aware of any pending or
threatened infringement actions or claims that are probable
losses. We believe the estimated fair value of these
indemnification clauses is minimal. |
|
|
|
We have agreed to indemnify members of our board of directors,
as well as our officers, if they are made a party or are
threatened to be made a party to any proceeding (other than an
action by or in the right of us) by reason of the fact that they
are our agent, or by reason of anything done or not done by them
in any such capacity. The indemnity is for any and all expenses
and liabilities of any type whatsoever (including judgments,
fines and amounts paid in settlement) actually and reasonably
incurred by the directors or officers in connection with the
investigation, defense, settlement or appeal of such proceeding,
provided they acted in good faith. We maintain insurance
coverage for directors and officers liability (D&O
insurance). No maximum liability is stipulated in these
agreements that include indemnifications of members of our board
of directors and our officers. We have recorded no liability
associated with these indemnifications as we are not aware of
any pending or threatened actions or claims against us, our
members of board of directors or our officers that are probable
losses in excess of amounts covered by our D&O insurance. As
a result of the insurance policy coverage, we believe the
estimated fair value of this indemnification agreement is
minimal. |
|
|
|
Under the terms of our agreement to sell Magic in January 2004,
we agreed to indemnify the purchaser for any breach of
representations or warranties in the agreement as well as for
any liabilities related to the assets prior to sale that are not
included in the purchaser assumed liabilities (undiscovered
liabilities). Subject to limited exceptions, the maximum
potential loss related to the indemnification is
$10.0 million. To date, we have paid no amounts under the
representations and warranties indemnification. We have not
recorded any accruals related to this agreements |
|
|
|
Under the terms of our agreement to sell Sniffer in July 2004,
we agreed to indemnify the purchaser for any breach of
representations or warranties in the agreement as well as for
any liabilities related to the assets prior to sale that are not
included in the purchaser assumed liabilities (undiscovered
liabilities). Subject to limited exceptions, the maximum
potential loss related to the indemnification is
$200.0 million. To date, we have paid no amounts under the
representations and warranties indemnification. We have not
recorded any accruals related to this agreement. |
|
|
|
Under the terms of our agreement to sell McAfee Labs assets in
December 2004, we agreed to indemnify the purchaser for any
breach of representations or warranties in the agreement as well
as for any liabilities related to the assets prior to sale that
are not included in the purchaser assumed liabilities |
26
MCAFEE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
(undiscovered liabilities). Subject to limited exceptions, the
maximum potential loss related to the indemnification is
$1.5 million. We have not recorded any accruals related to
this agreement. |
|
|
|
Under the terms of our agreements to sell the PGP and Gauntlet
assets in 2002, we agreed to indemnify the purchasers for any
breach of representations or warranties in the agreement as well
as for any liabilities related to the assets prior to sale that
are not included in the purchaser assumed liabilities
(undiscovered liabilities). The maximum potential loss related
to the indemnification for breach of representations or
warranties is $2.4 million. No maximum liability is
stipulated in the agreement related to any undiscovered
liabilities. To date, we have paid $0.4 million under the
representations and warranties indemnification. |
If we believe a liability associated with any of the
aforementioned indemnifications becomes probable and the amount
of the liability is reasonably estimable or the maximum amount
of a range of loss is reasonably estimable, then an appropriate
liability will be established.
27
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Forward-Looking Statements; Trademarks
Some of the statements contained in this Report on
Form 10-Q are forward-looking statements that involve risks
and uncertainties. The statements contained in this Report on
Form 10-Q that are not purely historical are
forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of
the Exchange Act, including, without limitation, statements
regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in
this Report on Form 10-Q are based on information available
to us on the date hereof. These statements involve known and
unknown risks, uncertainties and other factors that may cause
our actual results to differ materially from those implied by
the forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as
may, will, should,
could, expects, plans,
anticipates, believes,
estimates, predicts,
potential, targets, goals,
projects, continue, or variations of
such words, similar expressions, or the negative of these terms
or other comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Therefore, actual results
may differ materially and adversely from those expressed in any
forward-looking statements. Neither we nor any other person can
assume responsibility for the accuracy and completeness of
forward-looking statements. Important factors that may cause
actual results to differ from expectations include, but are not
limited to, those discussed in Risk Factors. We
undertake no obligation to revise or update publicly any
forward-looking statements for any reason.
This report includes registered trademarks and trade names of
McAfee and other corporations. Trademarks or trade names owned
by McAfee and/or our affiliates include, but are not limited to:
McAfee, McAfee Security, IntruShield, Foundstone,
Entercept, PrimeSupport, AVERT, SpamKiller and VirusScan.
The following discussion should be read in conjunction with the
condensed consolidated financial statements and related notes
included elsewhere in this report. The results shown herein are
not necessarily indicative of the results to be expected for the
full year or any future periods.
|
|
|
Overview and Executive Summary |
We are a leading supplier of computer security solutions
designed to prevent intrusions on networks and protect computer
systems from a large variety of threats and attacks. We offer
two families of products, McAfee System Protection Solutions and
McAfee Network Protection Solutions. Our computer security
solutions are offered primarily to large enterprises,
governments, small and medium-sized businesses and consumer
users. We operate our business in five geographic regions: North
America; Europe, Middle East and Africa, (collectively referred
to as EMEA); Japan; Asia-Pacific, excluding Japan,
and Latin America. See Note 11 to our condensed
consolidated financial statements for a description of revenues
and operating income by geographic region.
We derive our revenue and generate cash from customers from
primarily two sources (i) services and support revenue,
which includes software license maintenance, training,
consulting and on-line subscription arrangements revenue and
(ii) product revenue, which includes software license,
hardware and royalty revenue. In the three months ended
September 30, 2005 and 2004, our net revenue was
$252.9 million and $221.6 million, respectively, and
our net income was $22.5 million and $118.1 million,
respectively. In the nine months ended September 30, 2005
and 2004, our net revenue was $734.0 million and
$666.4 million, respectively, and our net income was
$100.2 million and $186.3 million, respectively. Net
income in the nine months ended September 30, 2005 was
negatively impacted by the $50.0 million reserve recorded
for a proposed settlement with the SEC. Net income in the nine
months ended September 30, 2004 was favorably impacted by a
$46.2 million gain from the sale of our Magic product line
in January 2004, a $197.4 million gain from the sale of our
Sniffer product line in July 2004 and insurance reimbursements
of approximately $25.0 million relating to our previously
settled class action lawsuit. Our net revenue is impacted by
28
corporate IT, government and consumer spending levels. In
addition to total net revenue and net income, in evaluating our
business, management considers, among many other factors, the
following:
During the three and nine months ended September 30, 2005,
42% and 41% of our total net revenue, respectively, was
generated outside of North America. North America and EMEA
collectively accounted for approximately 87% and 86% of our
total net revenue in the three and nine months ended
September 30, 2005, respectively. During the three and nine
months ended September 30, 2004, 41% and 39% of our net
revenue, respectively, was generated outside of North America,
with North America and EMEA collectively accounting for
approximately 86% and 87% of our total net revenue in the three
and nine months ended September 30, 2004, respectively.
|
|
|
Sales by product and customer category |
|
|
|
|
|
McAfee. Our McAfee products include enterprise, small and
medium-sized businesses (SMB) and consumer products
with our enterprise products including our IntruShield intrusion
protection products that were acquired in connection with the
Intruvert acquisition in 2003, our Entercept host-based
intrusion protection products that were acquired in connection
with the Entercept acquisition in 2003, and Foundstone Risk
Management products that were acquired in connection with the
Foundstone acquisition in October 2004. Enterprise sales
increased $12.9 million, or 20%, to $76.7 million in
the three months ended September 30, 2005 from
$63.8 million in the three months ended September 30,
2004. In the nine months ended September 30, 2005,
Enterprise sales were $221.6 million compared to
$190.0 million in the same prior-year period. SMB sales
increased $5.9 million, or 11%, to $60.3 million in
the three months ended September 30, 2005 from
$54.4 million in the three months ended September 30,
2004. In the nine months ended September 30, 2005, SMB
sales were $177.3 million compared to $170.2 million
in the same prior-year period. The year over year increases
reflected an increase in corporate IT spending related to
security in 2005, partially offset by the impact of our
perpetual-plus license model, which recognizes less revenue
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We continued to experience growth in the consumer market. Our
consumer market is comprised of our McAfee consumer on-line
subscription service and retail-boxed product sales. In the
three months ended September 30, 2005, we added
1.9 million net new on-line consumer subscribers. |
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Net revenue from our consumer security market increased
$24.2 million, or 26%, to $115.9 million in the three
months ended September 30, 2005 from $91.7 million in
the same prior-year period. In the nine months ended
September 30, 2005, net revenue from our consumer security
market was $333.2 million compared to $207.6 million
in the nine months ended September 30, 2004. At
September 30, 2005, we had a total on-line subscriber base
of approximately 15.0 million consumer customers, compared
to 13.1 million at June 30, 2005, 8.5 million at
December 31, 2004 and 6.3 million at
September 30, 2004. The main driver of this subscriber
growth is our continued strategic relationships with channel
partners, such as AOL, Comcast and Dell. |
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Sniffer Technologies. Sniffer net revenues were
$90.9 million in the nine months ended September 30,
2004. In July 2004, we sold our Sniffer product line for net
cash proceeds of $212.7 million. We agreed to provide
certain post-closing transition services to Network General
Corporation, the acquirer of the Sniffer product line. We are
reimbursed for our cost plus a profit margin and present these
reimbursements as a reduction of operating expenses on a
separate line in our income statement. In the nine months ended
September 30, 2005, we recorded approximately
$0.4 million for these transition services. In the three
and nine months ended September 30, 2004, we recorded
$3.7 million. We completed our obligations under the
transition services agreement in July 2005. |
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Magic. In the nine months ended September 30, 2004,
net revenue from the sale of Magic Solutions products totaled
approximately $2.9 million. We sold the assets of our Magic
Solutions service desk business to BMC Software, Inc. The sale
closed on January 30, 2004 and we received cash proceeds of
approximately $47.1 million, net of direct expenses. |
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McAfee Labs. We sold our McAfee Labs assets to SPARTA,
Inc. for $1.5 million in April 2005. Net revenue related to
McAfee Labs was $1.5 million in the three months ended
September 30, 2004, and approximately $1.9 million and
$4.7 million in the nine months ended September 30,
2005 and 2004, respectively. |
See Note 11 to our condensed consolidated financial
statements for a description of revenues on a product and
service basis and a product family basis.
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Deferred revenue balances. Our deferred revenue balance
at September 30, 2005 was $656.9 million compared to
$601.4 million at December 31, 2004. We believe that
the deferred revenue balance improves predictability of future
revenues. The approximate 9% increase is attributable to the
introduction of our perpetual-plus licensing arrangements in the
United States in the first quarter of 2004 and in EMEA and
Asia-Pacific, excluding Japan, in mid-2003, which has resulted
in the allocation of more revenue to service and support due to
a change in pricing structure, partially offset by the
strengthening U.S. dollar against the Euro. |
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Cash, cash equivalents and marketable securities. The
balance of cash, cash equivalents and marketable securities at
September 30, 2005 was $1,147.7 million compared to
$924.7 million at December 31, 2004. The increase is
attributable to net cash provided by operating activities of
$292.7 million and cash received from the exercise of stock
options and stock purchases under the stock purchase plans of
$94.5 million, partially offset by our utilization of cash
to (i) repurchase 2.0 million shares of common
stock for approximately $47.4 million, (ii) acquire
Wireless Security Corporation for approximately
$20.2 million and (iii) purchase property and
equipment for approximately $25.0 million. See the
Liquidity and Capital Resources section below. |
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In 2005, our management is focused on, among other things:
(i) continuing to build on the current momentum in the
consumer market and to grow faster than the competition in the
consumer space; (ii) increasing revenue from the small to
medium-sized business customers by improving our channel
distribution relationships; (iii) implementing cost
controls and business streamlining measures required to improve
operating margins; and (iv) continuing to grow our
intrusion prevention business and vulnerability management
businesses. |
Our McAfee Protection-in-Depth Strategy is designed to provide a
complete set of system and network protection solutions
differentiated by intrusion prevention technology that can
detect and block known and unknown attacks. To more effectively
market our products in our various geographic sales regions, as
more fully described below, we have combined complementary
products into separate product groups as follows:
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McAfee System Protection Solutions, which deliver anti-virus and
security products and services designed to protect systems such
as desktops and servers, and |
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McAfee Network Protection Solutions, which offer products
designed to maximize the performance and security of networks
and network intrusion prevention with McAfee IntruShield and
McAfee Foundstone. Previously, this product line included
products designed to capture data, monitor network traffic and
collect and report on key network statistics, and comprised a
significant portion of our revenue; however, we sold our Sniffer
Technologies product line to Network General Corporation in July
2004. |
The majority of our net revenue has historically been derived
from our McAfee Security anti-virus products and, until the sale
of the Sniffer product line, our Sniffer Technologies network
fault identification and application performance management
products. We have also focused our efforts on building a full
line of complementary network and system protection solutions.
On the system protection side, we strengthened our anti-virus
lineup by adding complementary products in the anti-spam and
host intrusion prevention categories,
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and through our June 2005 Wireless Security Corporation
acquisition, we have strengthened our solution portfolio in our
consumer and small business segments. On the network protection
side, we have added products in the network intrusion prevention
and detection category, and through our October 2004 Foundstone
acquisition, vulnerability management products and services. We
continuously seek to improve and expand our product lines.
McAfee System Protection Solutions
McAfee System Protection Solutions help large enterprises, small
and medium-sized businesses, consumers, government agencies and
educational organizations assure the availability and security
of their desktops, application servers and web service engines.
The McAfee System Protection Solutions portfolio features a
range of products including anti-virus, anti-spyware, managed
services, application firewalls and McAfee Entercept for
host-based intrusion prevention. Each is backed by the McAfee
Anti-Virus Emergency Response Team (AVERT), a
leading threat research organization. A substantial majority of
our net revenue has historically been derived from our McAfee
Security anti-virus products.
McAfee System Protection Solutions also include McAfee Consumer
Security, offering both traditional retail products and our
on-line subscription services. Our consumer retail and on-line
subscription applications allow users to protect their personal
computers (PCs) from malicious code and other
attacks, repair PCs from damage caused by viruses and spyware
and block spam and other undesirable content. Our retail
products are sold through retail outlets, including Best Buy,
CompUSA, Costco, Dixons, Frys, Office Depot, Office Max,
Staples, Wal-Mart and Yamada, to single users and small home
offices in the form of traditional boxed product. These products
include for-fee software updates and technical support services.
Our on-line subscription services are delivered through the use
of an Internet browser at our McAfee Consumer Online web site
and through multiple on-line service providers, such as AOL and
Comcast, and original equipment manufacturers
(OEMs), such as Apple, Dell, Gateway/eMachines, NEC
and Toshiba, North America.
Our McAfee System Protection Solutions previously included our
Magic Service Solutions product line, offering management and
visibility of desktop and server systems. In January 2004, we
sold our Magic Solutions product line to BMC Software.
McAfee Network Protection Solutions
McAfee Network Protection Solutions helps enterprises, small
businesses, government agencies, educational organizations and
service providers maximize the availability, performance and
security of their network infrastructure. The McAfee Network
Protection Solutions portfolio features a range of products
including IntruShield for network intrusion detection and
prevention and Foundstone for intrusion detection and prevention
and vulnerability management.
We acquired Foundstone on October 1, 2004 and we have
integrated Foundstones products with our intrusion
prevention technologies and systems management capabilities to
deliver enhanced risk management of prioritized assets,
automated shielding and risk remediation, and automated policy
enforcement and compliance.
Expert Services and Technical Support
We have established Expert Services and Technical Support to
provide professional assistance in the design, installation,
configuration and implementation of our customers networks
and acquired products. Expert Services is focused on two service
markets: Consulting Services and Education Services.
Consulting Services support product integrations and deployment
with an array of standardized and custom offerings. Consulting
Services also offer other services in both the security and
networking areas, including early assessment and design work, as
well as emergency outbreak and network troubleshooting
assistance. Our Consulting Services organization is organized
around our product groups. The majority of our consulting
services are now delivered through the consulting resources
acquired in the Foundstone acquisition.
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Education Services offer customers an extensive curriculum of
web and classroom-based training focused on the deployment and
operation of McAfees security products.
The McAfee Technical Support program provides our customers
on-line and telephone-based technical support in an effort to
ensure that our products are installed and working properly.
During the first quarter of 2005, we reorganized our technical
support offerings to meet our customers varying needs.
McAfee Technical Support offers a choice of Gold or Platinum
support for our customers. In addition, for our legacy support
customers only, we offer the on-line ServicePortal or the
telephone-based Connect. All Technical Support programs include
software updates and upgrades. Technical Support is available to
all customers worldwide from various regional support centers.
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PrimeSupport ServicePortal Consists of a
searchable, knowledge base of technical solutions and links to a
variety of technical documents such as product FAQs and
technical notes. |
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PrimeSupport Connect Provides toll-free
telephone access to technical support during regular business
hours and access to the on-line ServicePortal. |
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Gold Support Provides unlimited, toll-free
(where available) telephone access to technical support
24 hours a day, 7 days a week and access to the
on-line ServicePortal. |
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Platinum Support Offers proactive,
personalized service and includes an assigned technical support
engineer from a Platinum support Technical Account Manager
(TAM), proactive support contact (telephone or email) with
customer-defined frequency, election of five designated customer
contacts, access to all the services in Gold Support and access
to the on-line ServicePortal. |
In addition, we also offer our consumer users technical support
services made available at our www.mcafee.com website on both a
free and fee-based basis, depending on the support level
selected.
Research and Development
We are committed to malicious code and vulnerability research
through our McAfee Anti-virus and AVERT organization. AVERT
conducts research in the areas of host intrusion prevention,
network intrusion prevention, wireless intrusion prevention,
malicious code defense, security policy and management,
high-performance assurance and forensics and threats, attacks,
vulnerabilities and architectures.
In April 2005, we sold the assets of McAfee Labs, our research
and development organization focused on performing research for
government agencies, to SPARTA, Inc. McAfee will remain as the
general contractor on certain of its government contracts until
government approval is obtained for SPARTA as the general
contractor.
Strategic Alliances
From time to time, we enter into strategic alliances with third
parties to support our future growth plans. These relationships
may include joint technology development and integration,
research cooperation, co-marketing activities and sell-through
arrangements. For example, we have an alliance with America
Online, or AOL, under which, among other things, our on-line PC
anti-virus services and our host-based email scanning services
are offered to AOL members as part of their basic membership. We
also provide our personal firewall services as a value-added
service to AOL members. Other alliances involve Cable and
Wireless, Comcast, Dell, Gateway, MSN, NEC, Telecom Italia,
Telefonica and Wanadoo. As part of our NTT DoCoMo alliance, we
have jointly developed technology to provide built-in anti-virus
protection against mobile threats to owners of 3G FOMA handsets.
Product Licensing Model
We typically license our products to corporate and government
customers on a perpetual basis. Most of our licenses are sold
with maintenance contracts, and typically these are sold on an
annual basis. As the maintenance contracts near expiration, we
contact customers to renew their contracts, as applicable. We
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typically sell perpetual licenses in connection with sales of
our hardware-based products in which software is bundled with
the hardware platform.
For our largest customers (over 2,000 nodes) and government
agencies, we also offer two-year term-based licenses. Our
two-year term licensing model also creates the opportunity for
recurring revenue through the renewal of existing licenses. By
offering two-year licenses, as opposed to traditional perpetual
licenses, we are also able to meet a lower initial cost
threshold for customers with annual budgetary constraints. We
also offer one-year licensing arrangements in Japan. The renewal
process provides an opportunity to cross-sell new products and
product lines to existing customers.
On-Line Subscription Services and Managed Applications
For our on-line subscription services, customers essentially
rent the use of our software. Because our on-line
subscription services are version-less, or
self-updating, customers subscribing to these services are
assured of using the most recent version of the software
application, eliminating the need to purchase product updates or
upgrades. Our on-line subscription consumer products and
services are found at our www.mcafee.com web site where
consumers download our anti-virus application using their
Internet browser which allows the application to detect and
eliminate viruses on their PCs, repair their PCs from damage
caused by viruses, optimize their hard drives and update their
PCs virus protection system with current software updates
and upgrades. Our www.mcafee.com web site also offers customers
access to McAfee Personal Firewall Plus, McAfee SpamKiller and
McAfee Privacy Service, as well as combinations of these
services through bundles. Our on-line subscription services are
also available to customers and small business through various
relationships with internet service providers
(ISPs), such as AOL and Comcast. Our business model
allows for ISPs to make McAfee subscription services available
as either a premium service or as a feature included in the
ISPs service. At September 30, 2005, we had
approximately 15.0 million McAfee consumer on-line
subscribers, which includes on-line customers obtained through
our alliances with ISPs and OEMs.
Similarly, our small and medium-sized business on-line
subscription products and services, or our Managed VirusScan
offerings, provide these customers the most up-to-date
anti-virus software. Our Managed VirusScan service provides
anti-virus protection for both desktops and file servers. In
addition, McAfee Managed Mail Protection screens emails to
detect and quarantine viruses and infected attachments, and Spam
and Desktop Firewall Managed VirusScan blocks unauthorized
network access and stops known network threats.
We also make our on-line subscription products and services
available over the Internet in what we refer to as a managed
environment. Unlike our on-line subscription service solutions,
these managed service providers, or MSP, solutions are
customized, monitored and updated by networking professionals
for a specific customer.
Critical Accounting Policies
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Critical Accounting Policies and Estimates |
In preparing our consolidated financial statements, we make
estimates, assumptions and judgments that can have a significant
impact on our net revenue, operating income and net income, as
well as the value of certain assets and liabilities on our
consolidated balance sheet. The application of our critical
accounting policies requires an evaluation of a number of
complex criteria and significant accounting judgments by us.
Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities. Senior management has discussed the development,
selection and disclosure of these estimates with the audit
committee of our board of directors. Actual results may
materially differ from these estimates under different
assumptions or conditions.
An accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time the estimate is
made, and if different
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estimates that reasonably could have been used, or changes in
the accounting estimates that are reasonably likely to occur
periodically, could materially impact the consolidated financial
statements. Management believes the following critical
accounting policies reflect our more significant estimates and
assumptions used in the preparation of the consolidated
financial statements.
Our critical accounting policies are as follows:
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revenue recognition; |
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estimating valuation allowances and accrued liabilities,
specifically sales returns and other allowances, the allowance
for doubtful accounts, our facility restructuring accrual; and
the assessment of the probability of the outcome of litigation
against us; |
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accounting for income taxes; and |
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valuation of goodwill, finite-lived intangibles and long-lived
assets. |
As described below, significant management judgments and
estimates must be made and used in connection with the revenue
recognized in any accounting period. Material differences may
result in the amount and timing of our revenue for any period if
our management made different judgments or utilized different
estimates. These estimates affect the deferred revenue line item
on our consolidated balance sheet and the net revenue line item
on our consolidated statement of income. Estimates regarding
revenue affect all of our operating geographies.
We apply the provisions of Statement of Position 97-2,
Software Revenue Recognition,
(SOP 97-2) as amended by Statement of
Position 98-9 Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain
Transactions to all transactions involving the sale of
software products and hardware transactions where the software
is not incidental. For hardware transactions where software is
not incidental, we do not separate the license fee and we do not
apply separate accounting guidance to the hardware and software
elements. For hardware transactions where no software is
involved, we apply the provisions of Staff Accounting
Bulletin 104 Revenue Recognition
(SAB 104). In addition, we apply the
provisions of Emerging Issues Task Force Issue No. 00-03
Application of AICPA Statement of Position 97-2 to
Arrangements that Include the Right to Use Software Stored on
Another Entitys Hardware to our on-line software
subscription services.
We license our Enterprise software products on a one- and
two-year subscription basis or on a perpetual basis. Our
two-year subscription licenses include the first year of
maintenance and support. Our on-line subscription arrangements
require customers to pay a fixed fee and receive service over a
period of time, generally one or two years. Customers do not pay
setup fees. We recognize revenue from the sale of software
licenses when persuasive evidence of an arrangement exists, the
product has been delivered, the fee is fixed or determinable and
collection of the resulting receivable is reasonably assured.
For all sales, except those completed over the Internet, we use
either a binding purchase order or signed license agreement as
evidence of an arrangement. For sales over the Internet, we use
a credit card authorization as evidence of an arrangement. Sales
through our distributors are evidenced by a master agreement
governing the relationship together with binding purchase orders
on a transaction by transaction basis.
Delivery generally occurs when product is delivered to a common
carrier or upon delivery of a grant letter or license key, if
applicable, which is delivered primarily through email. At the
time of the transaction, we assess whether the fee associated
with our revenue transactions is fixed or determinable and
whether or not collection is reasonably assured. We assess
whether the fee is fixed or determinable based on the payment
terms associated with the transaction. If a significant portion
of a fee is due after our normal payment terms, which are 30 to
90 days from invoice date, we account for the fee as not
being fixed or determinable. In these cases, we recognize
revenue as the fees become due. With respect to rebate programs,
we make estimates of amounts for promotional and rebate programs
based on our historical experience, and reduce revenue by the
amount of the estimates. We assess collection based on a number
of factors, including past transaction history
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and credit-worthiness of direct customers. We do not request
collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and
recognize revenue at the time collection becomes reasonably
assured, which is generally upon receipt of cash. For indirect
customers, we monitor the financial condition and ability to pay
for goods sold. If we do not identify potential collection
problems with our indirect customers on a timely basis, we could
incur a charge for bad debt that could be material to our
consolidated financial statements.
For arrangements with multiple obligations (for example,
delivered software and undelivered maintenance and support
obligations), we allocate revenue to each component of the
arrangement using the residual value method based on the fair
value of the undelivered elements, which is specific to our
company. This means that we defer revenue from the arrangement
fee equivalent to the fair value of the undelivered elements.
Fair values for the ongoing maintenance and support obligations
for both our two-year time-based licenses and perpetual licenses
are based upon separate sales of renewals to other customers or
upon renewal rates quoted in the contracts. This assessment
generally includes analyses of the variability of renewal rates
by product and region and determination of whether a majority of
renewals support our estimated fair value of the maintenance and
support obligations. In cases where renewal rates are not quoted
in the initial sales contracts, our assessment is critical
because if an estimated fair value cannot be established through
separate sales then the fee for the entire arrangement is
deferred until delivery occurs which for maintenance would be
ratably over the service period. Fair value of services, such as
training or consulting, is based upon separate sales by us of
these services to other customers. Our arrangements do not
generally include acceptance clauses. However, if an arrangement
includes a specified acceptance provision, recognition occurs
upon the earlier of receipt of a written customer acceptance or
expiration of the acceptance period.
We recognize revenue for maintenance services ratably over the
contract term. Our training is billed based on established
course rates and consulting services are billed based on daily
rates, and we generally recognize revenue as these services are
performed. However, at the time of entering into a transaction,
we assess whether or not any services included within the
arrangement require us to perform significant work either to
alter the underlying software or to build additional complex
interfaces so that the software performs as the customer
requests. If these services are included as part of such an
arrangement, we recognize the entire fee using the percentage of
completion method. We estimate the percentage of completion
based on our estimate of the total costs estimated to complete
the project as a percentage of the costs incurred to date and
the estimated costs to complete.
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Estimation of Sales Returns and Incentives, Allowance for
Doubtful Accounts, Restructuring Accrual and Litigation |
Sales Returns and Incentives. In each accounting period,
our management must make judgments and estimates of potential
future product returns related to current period product
revenue. We analyze and monitor current and historical return
rates, current economic trends and changes in customer demand
and acceptance of our products when evaluating the adequacy of
the sales returns and other allowances. We also budget for our
sales incentives each quarter and determine amounts to be spent
and we monitor amounts spent against our budgets. These
estimates affect our net revenue line item on our statement of
income and affect our net accounts receivable line item on our
consolidated balance sheet. These estimates affect all of our
operating geographies.
At September 30, 2005, our allowance for sales returns and
incentives was $27.2 million compared to $29.2 million
at December 31, 2004. If our sales returns experience were
to increase by an additional 1% of license revenues, our
allowance for sales returns at September 30, 2005 would
increase and net revenue in the nine months ended
September 30, 2005 would decrease by approximately
$0.7 million.
Allowance for Doubtful Accounts. We also make estimates
of the uncollectibility of our accounts receivables. Management
specifically analyzes accounts receivable balances, current and
historical bad debt trends, customer concentrations, customer
credit-worthiness, current economic trends and changes in our
customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. We specifically reserve for any
account receivable for which there are identified collection
issues. Bad debts have
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historically been approximately 2% of our average accounts
receivable. These estimates affect the provision for doubtful
accounts line item on our statement of income and the net
accounts receivable line item on the consolidated balance sheet.
The estimation of uncollectible accounts affects all of our
operating geographies.
At September 30, 2005, our allowance for doubtful accounts
was $2.8 million compared to $2.5 million at December 31,
2004. If an additional 1% of our gross accounts receivable were
deemed to be uncollectible at September 30, 2005, our
allowance for doubtful accounts and provision for bad debt
expense would increase by approximately $1.1 million.
Restructuring Accrual. During the nine months ended
September 30, 2005, we permanently vacated several leased
facilities and recorded a $3.8 million accrual for
estimated lease related costs associated with the permanently
vacated facilities. During 2004, we permanently vacated several
leased facilities, including an additional two floors in our
Santa Clara headquarters building and recorded an
$8.7 million restructuring accrual. In 2003, as part of a
consolidation of activities into our Plano, Texas facility from
our headquarters in Santa Clara, California, we recorded a
restructuring charge of $15.8 million. We recorded these
facility restructuring charges in accordance with Statement of
Financial Accounting Standard No. 146, Accounting
for Exit Costs Associated With Exit or Disposal Activities
(SFAS 146). In order to determine our
restructuring charges and the corresponding liabilities,
SFAS 146 required us to make a number of assumptions. These
assumptions included estimated sublease income over the
remaining lease period, estimated term of subleases, estimated
utility and real estate broker fees, as well as estimated
discount rates for use in calculating the present value of our
liability. We developed these assumptions based on our
understanding of the current real estate market in the
respective locations as well as current market interest rates.
The assumptions used are our managements best estimate at
the time of the accrual, and adjustments are made on a periodic
basis if better information is obtained. If, at
September 30, 2005, our estimated sublease income were to
decrease 10%, the restructuring reserve and related expense
would have increased by approximately $0.2 million.
The estimates regarding our restructuring accruals affect our
current liabilities and other long-term liabilities line items
in our consolidated balance sheet, since these liabilities will
be settled each year through 2013. These estimates affect our
statement of income in the restructuring line item. At
September 30, 2005, our North America and EMEA operating
segments were primarily affected by these estimates.
Litigation. Managements current estimated range of
liability related to litigation that is brought against us from
time to time is based on claims for which our management can
estimate the amount and range of loss. We recorded the minimum
estimated liability related to those claims, where there is a
range of loss as there is no better point of estimate. Because
of the uncertainties related to an unfavorable outcome of
litigation, and the amount and range of loss on pending
litigation, management is often unable to make a reasonable
estimate of the liability that could result from an unfavorable
outcome. As litigation progresses, we continue to assess our
potential liability and revise our estimates. Such revisions in
our estimates could materially impact our results of operations
and financial position. Estimates of litigation liability affect
our accrued liability line item on our consolidated balance
sheet and our general and administrative expense line item on
our statement of income.
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Accounting for Income Taxes |
At the end of each interim period we make our best estimate of
the effective tax rate expected to be applicable for the full
fiscal year. This effective tax rate is used to determine income
taxes on a current year-to-date basis. The effective tax rate
may consider, as applicable, tax credits, foreign tax rates, and
other available tax planning alternatives. It also includes the
effect of any valuation allowance expected to be necessary at
the end of the period for deferred tax assets related to
originating deductible temporary differences and carryforwards.
In arriving at this effective tax rate applied to interim
periods no effect is included for the tax related to
significant, unusual, or extraordinary items that may be
separately reported or reported net of their related tax effect
in reports for the interim period or for the fiscal year. The
rate is revised, if necessary, as of the end of each successive
interim period during the fiscal year to our best current
estimate of our expected annual effective tax rate.
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The effective tax rate is our best estimate of the tax expense
(or benefit) that will be provided for the fiscal year, stated
as a percentage of our estimated annual ordinary income (or
loss). The tax expense (or benefit) related to ordinary income
(or loss) for the interim period is determined using this
estimated annual effective tax rate. The tax expense (or
benefit) related to other items is individually computed and
recognized when the items occur. The estimated tax rate applied
to interim ordinary income (or loss) is reliant on our estimates
of expected annual operating income (or loss) for the year as
well as our projections of the proportion of income (or loss)
earned in foreign jurisdictions which may have statutory tax
rates significantly lower than tax rates applicable to our
earnings in the United States. In each successive interim
period, to the extent our operating results year to date and our
estimates for the remainder of the fiscal year change from our
original expectations regarding the proportion of earnings in
various tax jurisdictions we expect that our effective tax rate
will change accordingly, affecting tax expense (or benefit) for
both that successive interim period as well as year-to-date
interim results.
As part of the process of preparing our consolidated financial
statements we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves
estimating our actual current tax exposure together with
assessing temporary differences resulting from differing
treatment of items, such as deferred revenue, for tax and
accounting purposes. These differences result in deferred tax
assets and liabilities, which are included within our
consolidated balance sheet. We must then assess and make
significant estimates regarding the likelihood that our deferred
tax assets will be recovered from future taxable income and to
the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a
valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the
statement of income. Estimates related to income taxes affect
the deferred tax asset and liability line items and accrued
liabilities in our consolidated balance sheet and our income tax
expense (or benefit) line item in our statement of income.
The net deferred tax asset as of September 30, 2005 is
$436.7 million, net of a valuation allowance of
$49.8 million. The valuation allowance is recorded due to
the uncertainty of our ability to utilize some of the deferred
tax assets related to foreign tax credits and net operating
losses of acquired companies. The valuation allowance is based
on our historical experience and estimates of taxable income by
jurisdiction in which we operate and the period over which our
deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or we adjust these
estimates in future periods we may need to establish an
additional valuation allowance which could materially impact our
financial position and results of operations.
Tax returns are subject to audit by various taxing authorities.
Although we believe that adequate accruals have been made each
period for unsettled issues, additional benefits or expenses
could occur in future years from resolution of outstanding
matters. We record additional expenses each period on unsettled
issues relating to the expected interest we would be required to
pay a tax authority if we do not prevail on an unsettled issue.
We continue to assess our potential tax liability included in
accrued taxes in the consolidated financial statements, and
revise our estimates. Such revisions in our estimates could
materially impact our results of operations and financial
position. We have classified a portion of our tax liability as
non-current in the consolidated balance sheet based on the
expected timing of cash payments to settle contingencies with
taxing authorities.
|
|
|
Valuation of Goodwill, Intangibles and Long-lived Assets |
We account for goodwill and other indefinite-lived intangible
assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 requires, among
other things, the discontinuance of amortization for goodwill
and indefinite-lived intangibles and at least an annual test for
impairment. An impairment review may be performed more
frequently in the event circumstances indicate that the carrying
value may not be recoverable.
We are required to make estimates regarding the fair value of
our reporting units when testing for potential impairment. We
estimate the fair value of our reporting units using a
combination of the income approach and the market approach.
Under the income approach, we calculate the fair value of a
reporting unit based on the present value of estimated future
cash flows. Under the market approach, we estimate the fair
37
value based on market multiples of revenues or earnings for
comparable companies. We estimate cash flows for these purposes
using internal budgets based on recent and historical trends. We
base these estimates on assumptions we believe to be reasonable,
but which are unpredictable and inherently uncertain. We also
make certain judgments about the selection of comparable
companies used in the market approach in valuing our reporting
units, as well as certain assumptions to allocate shared assets
and liabilities to calculate the carrying value for each of our
reporting units. If an impairment were present, these estimates
would affect an impairment line item on our consolidated
statement of income and would affect the in goodwill our
consolidated balance sheet. As goodwill is allocated to all of
our reporting units, any impairment could potentially affect
each operating geography.
Based on our most recent impairment test, there would have to be
a significant change in assumptions used in such calculation in
order for an impairment to occur as of September 30, 2005.
We account for finite-lived intangibles and long-lived assets in
accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. Under
this standard we will record an impairment charge on
finite-lived intangibles or long-lived assets to be held and
used when we determine that the carrying value of intangibles
and long-lived assets may not be recoverable.
Based upon the existence of one or more indicators of
impairment, we measure any impairment of intangibles or
long-lived assets based on a projected discounted cash flow
method using a discount rate determined by our management to be
commensurate with the risk inherent in our current business
model. Our estimates of cash flows require significant judgment
based on our historical results and anticipated results and are
subject to many of the factors, noted below as triggering
factors, which may change in the near term.
Factors considered important, which could trigger an impairment
review include, but are not limited to:
|
|
|
|
|
significant under performance relative to expected historical or
projected future operating results; |
|
|
|
significant changes in the manner of our use of the acquired
assets or the strategy for our overall business; |
|
|
|
significant negative industry or economic trends; |
|
|
|
significant declines in our stock price for a sustained
period; and |
|
|
|
our market capitalization relative to net book value. |
Goodwill amounted to $449.2 million and $439.2 million
as of September 30, 2005 and December 31, 2004,
respectively. We did not hold any other indefinite-lived
intangibles as of September 30, 2005 and December 31,
2004. Net finite-lived intangible assets and long-lived assets
amounted to $174.3 million and $198.8 million as of
September 30, 2005 and December 31, 2004, respectively.
Results of Operations
|
|
|
Three and Nine Months Ended September 30, 2005 and
2004 |
The following table sets forth, for the periods indicated, our
product revenue and services and support revenue as a percent of
net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue | |
|
Percentage of Net Revenue | |
|
|
| |
|
| |
|
|
Three Months | |
|
Nine Months | |
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Product
|
|
$ |
39,253 |
|
|
$ |
65,518 |
|
|
$ |
136,768 |
|
|
$ |
229,256 |
|
|
|
16 |
% |
|
|
30 |
% |
|
|
19 |
% |
|
|
34 |
% |
Services and support
|
|
|
213,658 |
|
|
|
156,115 |
|
|
|
597,252 |
|
|
|
437,133 |
|
|
|
84 |
|
|
|
70 |
|
|
|
81 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$ |
252,911 |
|
|
$ |
221,633 |
|
|
$ |
734,020 |
|
|
$ |
666,389 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Net revenue increased $31.3 million in the three months
ended September 30, 2005 compared to the three months ended
September 30, 2004. The increase reflected (i) a
$24.2 million increase in our consumer business,
(ii) a $12.9 million increase in enterprise revenue
and (iii) a $5.9 million increase in our SMB revenue.
These increases were partially offset by (i) the
$10.2 million decrease due to the sale of our Sniffer
product line in July 2004, (ii) the $1.5 million
decrease due to the sale of McAfee labs in June 2005 and
(iii) the introduction of our perpetual-plus licensing
arrangements, which experience lower rates of up-front revenue
recognition as more revenue is allocated to service and support,
in the United States in the first quarter of 2004 and in EMEA
and Asia-Pacific, excluding Japan, in mid-2003.
Net revenue increased $67.6 million in the nine months
ended September 30, 2005 compared to the nine months ended
September 30, 2004. The increase reflects (i) a
$125.6 million increase in our consumer business,
(ii) a $31.6 million increase in our Enterprise
revenue and (iii) a $7.1 million increase in our SMB
revenue. These increases were partially offset by (i) the
$90.9 million decrease due to the sale of our Sniffer
product line in July 2004, (ii) the $2.9 million
decrease due to the sale of our Magic product line in January
2004, (iii) the $2.9 million decrease due to the sale
of McAfee labs and (iv) the introduction of our
perpetual-plus licensing arrangements, which experience lower
rates of up-front revenue recognition, in the United States
in the first quarter of 2004 and in EMEA and Asia-Pacific,
excluding Japan, in mid-2003.
Net revenues from our consumer market increased during both the
three and nine months ended September 30, 2005 primarily
due to on-line subscriber growth from 6.3 million on-line
subscribers at September 30, 2004 to 8.5 million
subscribers at December 31, 2004 to 15.0 million
subscribers at September 30, 2005, and also increased
retail revenues due to higher levels of contract support revenue
generated from our increased 2004 retail sales in connection
with numerous virus outbreaks in 2003 through 2004 and due to
revenue from new product offerings.
The following table sets forth, for the periods indicated, net
revenue in each of the five geographic regions in which we
operate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue | |
|
Percentage of Net Revenue | |
|
|
| |
|
| |
|
|
Three Months | |
|
Nine Months | |
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Net Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
145,877 |
|
|
$ |
131,059 |
|
|
$ |
431,396 |
|
|
$ |
408,917 |
|
|
|
58 |
% |
|
|
59 |
% |
|
|
59 |
% |
|
|
61 |
% |
|
EMEA
|
|
|
72,445 |
|
|
|
61,376 |
|
|
|
199,104 |
|
|
|
174,780 |
|
|
|
29 |
|
|
|
27 |
|
|
|
27 |
|
|
|
26 |
|
|
Japan
|
|
|
21,623 |
|
|
|
12,636 |
|
|
|
58,650 |
|
|
|
38,518 |
|
|
|
8 |
|
|
|
6 |
|
|
|
8 |
|
|
|
6 |
|
|
Asia-Pacific
|
|
|
8,566 |
|
|
|
10,624 |
|
|
|
27,996 |
|
|
|
27,158 |
|
|
|
3 |
|
|
|
5 |
|
|
|
4 |
|
|
|
4 |
|
|
Latin America
|
|
|
4,400 |
|
|
|
5,938 |
|
|
|
16,874 |
|
|
|
17,016 |
|
|
|
2 |
|
|
|
3 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$ |
252,911 |
|
|
$ |
221,633 |
|
|
$ |
734,020 |
|
|
$ |
666,389 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue outside of North America, consisting of U.S. and
Canada, accounted for approximately 42% and 41% of net revenue
in the three months ended September 30, 2005 and 2004,
respectively, and 41% and 39% of net revenues in both the nine
months ended September 30, 2005 and 2004, respectively. Net
revenue from North America and EMEA has historically comprised
84% to 91% of our business. During 2004, we saw the weakening of
the U.S. dollar against many currencies, but most
dramatically against the Euro. As a result of the weaker
U.S. dollar, we experienced positive impacts on our net
revenue in the EMEA region. During the first nine months of
2005, the U.S. dollar strengthened against many currencies,
especially the Euro. Although net revenue increased in the three
and nine months ended September 30, 2004 compared to the
same prior-year periods, these increases were offset in part by
the negative impact of the stronger U.S. dollar in 2005.
39
In the three months ended September 30, 2005, total net
revenue in North America increased $14.8 million compared
to the three months ended September 30, 2004. The increase
in North American revenue was primarily related to (i) a
$9.8 million increase in enterprise revenue in North
America, (ii) a $9.5 million increase in consumer
revenue in North America and (iii) a $4.5 million
increase in SMB revenue, partially offset by (i) a
$7.4 million decrease in Sniffer revenue in North America
due to the sale of our Sniffer product line in July 2004 and
(ii) a $1.5 million decrease in McAfee Labs revenue in
North America due to the sale of McAfee Labs in April 2005.
In the nine months ended September 30, 2005, total net
revenue in North America increased 6%, or $22.5 million,
compared to the nine months ended September 30, 2004. The
increase in North American revenue was primarily related to
(i) a $89.9 million increase in consumer revenue in
North America and (ii) a $10.3 million increase in
enterprise revenue in North America, partially offset by
(i) a $68.0 million decrease in Sniffer revenue in
North America due to the sale of our Sniffer product line in
July 2004, (ii) a $4.7 million decrease in SMB revenue
, (iii) a $2.9 million decrease in McAfee Labs revenue
in North America due to the sale of McAfee Labs in April 2005
and (iv) a $2.1 million decrease in Magic revenue in
North America due to the sale of Magic in January 2004.
In EMEA, total net revenue increased 18% or $11.1 million
in the three months ended September 30, 2005 compared to
the three months ended September 30, 2004. The increase in
EMEA revenues was attributable to (i) a $6.9 million
increase in our consumer revenue, (ii) a $3.3 million
increase in our enterprise revenue and (iii) a
$0.9 million increase in SMB revenue in EMEA.
In EMEA, total net revenue increased 14% or $24.3 million
in the nine months ended September 30, 2005 compared to the
nine months ended September 30, 2004. The increase in EMEA
revenues is attributable to (i) a $16.6 million
increase consumer revenue, (ii) a $12.8 million
increase in enterprise revenue and (iii) a
$5.4 million increase in SMB revenue, partially offset by a
$9.8 million decrease in revenues related to the Sniffer
product line that was sold in July 2004. In addition, we
estimate that in the nine months ended September 30, 2005,
we have experienced a negative impact to net revenue of
approximately $5.9 million due to the strengthening of the
U.S. dollar against the Euro.
Net revenues from our consumer market in both North America and
in EMEA increased during both the three and nine months ended
September 30, 2005 primarily due to on-line subscriber
growth and increased retail revenues due to higher levels of
contract support revenue generated from our increased 2004
retail sales in connection with numerous virus outbreaks in 2003
through 2004 and new product offerings.
Our Japan, Latin America and Asia-Pacific operations combined
have historically been 15% or less of our total business. We
expect revenue from Japan, Latin America and Asia-Pacific
combined to be less than 20% of our total business in future
periods.
Risks inherent in international revenue include the impact of
longer payment cycles, greater difficulty in accounts receivable
collection, unexpected changes in regulatory requirements,
seasonality due to the slowdown in European business activity
during the third quarter, tariffs and other trade barriers,
currency fluctuations, product localization and difficulties
staffing and managing foreign operations. These factors may have
a material adverse effect on our future international revenue.
40
The following table sets forth, for the periods indicated, each
major category of our product revenue as a percent of product
revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenue | |
|
Percentage of Product Revenue | |
|
|
| |
|
| |
|
|
Three Months | |
|
Nine Months | |
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Term subscription licenses
|
|
$ |
4,445 |
|
|
$ |
5,790 |
|
|
$ |
16,161 |
|
|
$ |
33,650 |
|
|
|
11 |
% |
|
|
9 |
% |
|
|
12 |
% |
|
|
15 |
% |
Perpetual licenses
|
|
|
13,501 |
|
|
|
21,122 |
|
|
|
50,197 |
|
|
|
91,473 |
|
|
|
34 |
|
|
|
32 |
|
|
|
37 |
|
|
|
40 |
|
Hardware
|
|
|
8,159 |
|
|
|
16,415 |
|
|
|
24,508 |
|
|
|
65,300 |
|
|
|
21 |
|
|
|
25 |
|
|
|
18 |
|
|
|
28 |
|
Retail
|
|
|
3,135 |
|
|
|
10,001 |
|
|
|
16,370 |
|
|
|
10,798 |
|
|
|
8 |
|
|
|
15 |
|
|
|
12 |
|
|
|
5 |
|
Other
|
|
|
10,013 |
|
|
|
12,190 |
|
|
|
29,532 |
|
|
|
28,035 |
|
|
|
26 |
|
|
|
19 |
|
|
|
21 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue
|
|
$ |
39,253 |
|
|
$ |
65,518 |
|
|
$ |
136,768 |
|
|
$ |
229,256 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue includes revenue from software licenses,
hardware, our retail products and royalties. The
$26.3 million, or 40%, decrease in product revenue in the
three months ended September 30, 2005 compared to the same
prior-year period and the $92.5 million, or 40%, decrease
in product revenue in the nine months ended September 30,
2005 compared to the same prior-year period were attributable to
(i) a $9.0 million and a $58.8 million decrease
in term subscription and perpetual licenses in the three and
nine months ended September 30, 2005 due to the
introduction of our perpetual-plus licensing arrangements in the
United States in the first quarter of 2004 and in EMEA and
Asia-Pacific, excluding Japan, in 2003, resulting in reduced
product revenues and increased services and support revenues,
(ii) a $6.9 million decrease in retail revenue in the
three months ended September 30, 2005 due to our continued
shift in focus from retail-boxed products to our on-line
subscription model for consumers and SMBs, and
(iii) the Sniffer product line sale in July 2004 and the
Magic product line sale in January 2004, partially offset by
(iv) a general increase in corporate IT spending related to
security. The introduction of the perpetual-plus licensing
arrangement has resulted in revenue declines in the term
subscription license and perpetual license revenues with a
corresponding increase in services and support revenues. In
addition, in April 2005 we increased our support pricing on
selected consumer products, including VirusScan and McAfee
Internet Security, which resulted in a decrease in product
revenue in both the three and nine months ended
September 30, 2005 due to allocating more revenue related
to service and support and recognizing this deferred revenue
ratably over the service and support period. Our hardware
revenue decreased $8.3 million, or 50%, in the three months
ended September 30, 2005 compared to the same prior-year
period and decreased $40.8 million, or 62%, in the nine
months ended September 30, 2005 compared to the same
prior-year period primarily due to the Sniffer product line sale
in July 2004.
Our customers license our software on a perpetual or term
subscription basis depending on their preference. Our experience
in recent periods is that perpetual licenses are becoming a
larger percentage of our license revenue in any quarter
following the implementation of our perpetual-plus licensing
model worldwide. Furthermore, support pricing under the
perpetual-plus model is significantly higher than the
subscription model. Thus, revenue is shifting out of product
revenue and into services and support revenue. We expect the
remaining mix of product revenue to fluctuate as a percentage of
revenue.
41
|
|
|
Services and Support Revenues |
The following table sets forth, for the periods indicated, each
major category of our services and support as a percent of
services and support revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Service and | |
|
|
Service and Support Revenue | |
|
Support Revenue | |
|
|
| |
|
| |
|
|
Three Months | |
|
Nine Months | |
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Support and maintenance
|
|
$ |
135,861 |
|
|
$ |
112,179 |
|
|
$ |
380,284 |
|
|
$ |
321,418 |
|
|
|
64 |
% |
|
|
72 |
% |
|
|
64 |
% |
|
|
74 |
% |
Consulting
|
|
|
4,953 |
|
|
|
3,619 |
|
|
|
15,290 |
|
|
|
12,222 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
Training
|
|
|
1,049 |
|
|
|
805 |
|
|
|
3,431 |
|
|
|
4,778 |
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
On-line subscriptions
|
|
|
71,795 |
|
|
|
39,512 |
|
|
|
198,247 |
|
|
|
98,715 |
|
|
|
34 |
|
|
|
25 |
|
|
|
33 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total service and support revenue
|
|
$ |
213,658 |
|
|
$ |
156,115 |
|
|
$ |
597,252 |
|
|
$ |
437,133 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services and support revenues include revenues from software
support and maintenance contracts, consulting, training and
on-line subscription arrangements. The $57.5 million, or
37%, increase in service and support revenue in the three months
ended September 30, 2005 compared to the three months ended
September 30, 2004 was attributable to
(i) $32.3 million increase in our on-line subscription
arrangements and (ii) a $23.7 million increase in
support and maintenance primarily due to our perpetual-plus
licensing model. The $160.1 million, or 37%, increase in
service and support revenue in the nine months ended
September 30, 2005 compared to the nine months ended
September 30, 2004 was attributable to
(i) $99.5 million increase in our on-line subscription
arrangements and (ii) a $58.9 million increase in
support and maintenance primarily due to our perpetual-plus
licensing model. In addition, in April 2005 we increased our
support pricing on selected consumer products, including
VirusScan and McAfee Internet Security, which contributed to the
increase in service and support revenue in both the three and
nine months ended September 30, 2005. The increase in our
on-line subscription arrangements was due to an increase in our
on-line customer base to approximately 15.0 million
subscribers at September 30, 2005 from 6.3 million
subscribers at September 30, 2004, as well as an increase
in our McAfee Managed VirusScan on-line service for small to
medium-sized businesses. The increase in customers was primarily
due to our continued channel relationships with AOL, Dell and
others.
Our future profitability and rate of growth, if any, will be
directly affected by increased price competition and the size of
our revenue base. Our growth rate and net revenue depend
significantly on renewals of support arrangements as well as our
ability to respond successfully to the pace of technological
change and expand our customer base. If our renewal rate or our
pace of new customer acquisition slows, our net revenues and
operating results would be adversely affected. Additionally,
support pricing under the perpetual-plus model is significantly
higher than the previous subscription model. In the event
customers choose not to renew their support arrangements or
renew such arrangements at other than the contractual rates,
revenue recognition under the perpetual-plus model could be
negatively impacted.
42
|
|
|
Cost of Net Revenue; Gross Margin. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Cost of | |
|
|
Cost of Net Revenue | |
|
Net Revenue | |
|
|
| |
|
| |
|
|
Three Months | |
|
Nine Months | |
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$ |
10,282 |
|
|
$ |
16,047 |
|
|
$ |
38,793 |
|
|
$ |
54,831 |
|
|
|
28 |
% |
|
|
47 |
% |
|
|
35 |
% |
|
|
50 |
% |
|
Services and support
|
|
|
22,873 |
|
|
|
15,414 |
|
|
|
62,139 |
|
|
|
44,717 |
|
|
|
62 |
|
|
|
45 |
|
|
|
55 |
|
|
|
41 |
|
|
Amortization of purchased Technology
|
|
|
3,938 |
|
|
|
2,812 |
|
|
|
11,674 |
|
|
|
9,481 |
|
|
|
10 |
|
|
|
8 |
|
|
|
10 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
$ |
37,093 |
|
|
$ |
34,273 |
|
|
$ |
112,606 |
|
|
$ |
109,029 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$ |
215,818 |
|
|
$ |
187,360 |
|
|
$ |
621,414 |
|
|
$ |
557,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percentage
|
|
|
85 |
% |
|
|
85 |
% |
|
|
85 |
% |
|
|
84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our cost of product revenue consists primarily of the cost of
media, manuals and packaging for products distributed through
traditional channels, and, with respect to hardware-based
anti-virus and security products, computer platforms and other
hardware components. Both the $5.8 million decrease in the
cost of product revenue in the three months ended
September 30, 2005 compared to the same prior-year period
and the $16.0 million decrease in the cost of product
revenue in the nine months ended September 30, 2005
compared to the same prior-year period were primarily
attributable to (i) the sale of the Sniffer product line in
July 2004, (ii) the change in the mix of our revenues with
a shift from product revenues to service and support revenues
and (iii) renegotiation of contracts with our manufacturers.
We anticipate that cost of product revenue will continue to
fluctuate as a percent of cost of net revenue due to various
factors including product mix, material and labor costs and
warranty costs.
|
|
|
Cost of Services and Support |
Cost of services and support revenue consists principally of
salaries and benefits related to employees providing customer
support and consulting services, and costs related to the sale
of on-line subscription arrangements, including revenue sharing
arrangements and royalties paid to our on-line strategic
partners. Cost of services and support revenue increased
$7.5 million in the three months ended September 30,
2005 compared to the same prior-year period and
$17.4 million in the nine months ended September 30,
2005 compared to the same prior-year period due to an increase
in revenue sharing arrangements and royalties paid to our
on-line strategic partners, which was partially offset by
reduced support and consulting headcount as a result of the sale
of the Magic product line in January 2004 and the Sniffer
product line in July 2004, as well as on-going cost reduction
efforts. Cost of services and support have increased as a
percentage of total cost of net revenue primarily as a result of
the increase in revenue sharing arrangements and royalty
payments to our on-line strategic partners. We anticipate that
cost of service revenue will continue to fluctuate as a
percentage of cost of net revenue.
|
|
|
Amortization of Purchased Technology |
Amortization of purchased technology increased
$1.1 million, or 40%, in the three months ended
September 30, 2005 compared to the three months ended
September 30, 2004 and $2.2 million, or 23%, in the
nine months ended September 30, 2005 compared to the nine
months ended September 30, 2004. The increases in both
periods were attributable to our acquisition of Foundstone in
October 2004, for which we recorded purchased technology of
$27.0 million and to our acquisition of Wireless Security
Corporation in June 2005, for which we recorded purchased
technology of $1.5 million. The purchased technology is
being
43
amortized over its estimated useful life of up to seven years.
Amortization of purchased technology for the remainder of 2005
is expected to be approximately $3.8 million.
Our gross margins were 85% in both the three and nine months
ended September 30, 2005 and 85% and 84% in the three and
nine months ended September 30, 2004, respectively. Gross
margins may fluctuate in the future due to various factors,
including the mix of products sold, sales discounts, revenue
sharing agreements, material and labor costs and warranty costs.
|
|
|
Operating Costs Three and Nine Months Ended
September 30, 2005 and 2004 |
The following sets forth for the periods indicated, each major
category of our operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses | |
|
Percentage of Net Revenue | |
|
|
| |
|
| |
|
|
Three Months | |
|
Nine Months | |
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except percentages) | |
Research and development(1)
|
|
$ |
46,960 |
|
|
$ |
38,989 |
|
|
$ |
130,074 |
|
|
$ |
128,714 |
|
|
|
19 |
% |
|
|
18 |
% |
|
|
18 |
% |
|
|
19 |
% |
Marketing and sales(2)
|
|
|
71,878 |
|
|
|
82,945 |
|
|
|
219,198 |
|
|
|
272,017 |
|
|
|
29 |
|
|
|
37 |
|
|
|
30 |
|
|
|
41 |
|
General and administrative(3)
|
|
|
28,258 |
|
|
|
34,248 |
|
|
|
92,025 |
|
|
|
96,684 |
|
|
|
11 |
|
|
|
15 |
|
|
|
13 |
|
|
|
15 |
|
Proposed legal settlement charge
|
|
|
50,000 |
|
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
2,876 |
|
|
|
3,448 |
|
|
|
10,109 |
|
|
|
10,537 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Restructuring charge (benefit)
|
|
|
(10 |
) |
|
|
8,681 |
|
|
|
5,962 |
|
|
|
11,841 |
|
|
|
|
|
|
|
4 |
|
|
|
1 |
|
|
|
2 |
|
Provision for (recovery of) doubtful accounts, net
|
|
|
159 |
|
|
|
(686 |
) |
|
|
1,309 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on sale of assets and technology
|
|
|
212 |
|
|
|
(195,875 |
) |
|
|
(499 |
) |
|
|
(241,279 |
) |
|
|
|
|
|
|
(88 |
) |
|
|
|
|
|
|
(36 |
) |
Severance costs related to Sniffer disposition(4)
|
|
|
|
|
|
|
8,696 |
|
|
|
|
|
|
|
8,696 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Reimbursement from transition services agreement
|
|
|
(3 |
) |
|
|
(3,671 |
) |
|
|
(362 |
) |
|
|
(3,671 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Reimbursement related to litigation settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,991 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs, including the effects of stock-based
compensation
|
|
$ |
200,330 |
|
|
$ |
(23,225 |
) |
|
$ |
511,816 |
|
|
$ |
258,536 |
|
|
|
80 |
% |
|
|
(11 |
)% |
|
|
70 |
% |
|
|
39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes stock-based compensation charges of $1,808 and $575 for
the three months ended September 30, 2005 and 2004,
respectively, and $569 and $2,147 for the nine months ended
September 30, 2005 and 2004, respectively. |
|
(2) |
Includes stock-based compensation charges of $480 and $203 for
the three months ended September 30, 2005 and 2004,
respectively, and $188 and $890 for the nine months ended
September 30, 2005 and 2004, respectively. |
|
(3) |
Includes stock-based compensation charges of $705 and $485 for
the three months ended September 30, 2005 and 2004,
respectively, and $1,312 and $892 for the nine months ended
September 30, 2005 and 2004, respectively. |
|
(4) |
Includes stock-based compensation charges of $991 for the three
and nine months ended September 30, 2004. |
44
Research and development expenses consist primarily of salary,
benefits and contractors fees for our development and technical
support staff, and other costs associated with the enhancements
of existing products and services and development of new
products and services. Research and development expenses
increased $8.0 million, or 20%, in the three months ended
September 30, 2005 compared to the three months ended
September 30, 2004. The increase was attributable to
(i) an overall increase in staffing dedicated to research
and development activities, including a $0.5 million
increase in headcount related to the acquisition of Foundstone,
(ii) a $1.2 million increase in stock-based
compensation and (iii) increased use of outside services
for language translations.
Research and development expenses increased $1.4 million,
or 1%, in the nine months ended September 30, 2005 compared
to the nine months ended September 30, 2004. The increase
was primarily attributable to an increase in average headcount
dedicated to research and development activities, which included
an increase of $1.4 million specifically related to the
acquisition of Foundstone. The increase in compensation expense
was partially offset by a $1.6 million decrease in
stock-based compensation.
We believe that continued investment in product development is
critical to attaining our strategic objectives and, as a result,
expect product development expenses to remain relatively flat in
future periods and continue to fluctuate as a percentage of net
revenue.
Marketing and sales expenses consist primarily of salary,
commissions and benefits for marketing and sales personnel and
costs associated with advertising and promotions. Marketing and
sales expenses decreased $11.1 million, or 13%, in the
three months ended September 30, 2005 compared to the three
months ended September 30, 2004. The decrease reflected
(i) decreased commissions totaling $4.1 million due to
a greater percentage of our business being from the on-line
consumer market, decreased headcount dedicated to sales
activities and a change in our compensation plans for our sales
personnel, (ii) a decrease in average headcount dedicated
to marketing and sales activities and (iii) reduced
spending on sales and marketing programs due to our cost
reduction initiatives.
Marketing and sales expenses decreased $52.8 million, or
19%, in the nine months ended September 30, 2005 compared
to the nine months ended September 30, 2004. The decrease
reflected (i) decreased commissions totaling
$14.4 million due to a greater percentage of our business
being from the on-line consumer market and due to the Sniffer
product line sale in July 2004, (ii) a $9.5 million
decrease in compensation expense due to the Sniffer product line
sale in July 2004 (iii) a $0.4 million decrease in
compensation expense due to the Magic product line sale in
January 2004, (iv) a $0.7 million decrease in
stock-based compensation, (v) general headcount reductions
and (vi) reduced spending on sales and marketing programs
due to our cost reduction initiatives.
We anticipate that marketing and sales expenses will increase in
absolute dollars and stay flat as a percentage of revenues in
the remainder of 2005.
|
|
|
General and Administrative |
General and administrative expenses consist primarily of salary
and benefit costs for executive and administrative personnel,
professional services and other general corporate activities.
General and administrative expenses decreased $6.0 million,
or 17%, in the three months ended September 30, 2005
compared to the three months ended September 30, 2004
primarily due to (i) a $1.0 million decrease in costs
incurred to comply with Section 404 of the Sarbanes-Oxley
Act, (ii) general cost reduction efforts and
(iii) decreased average headcount dedicated to general and
administrative activities. Also, in the three months ended
September 30, 2004, we incurred fees related to the
divestiture of Sniffer and we incurred increased legal fees due
to our SEC investigation.
General and administrative expenses decreased $4.7 million,
or 5%, in the nine months ended September 30, 2005 compared
to the nine months ended September 30, 2004 due to a
$1.4 million decrease in
45
costs incurred to comply with Section 404 of the
Sarbanes-Oxley Act and decreased average headcount dedicated to
general and administrative activities, partially mitigated by a
$0.4 million increase in stock compensation. Also, in the
nine months ended September 30, 2004, we had
(i) $1.2 million of expense related to consultants
assisting with our cost reduction strategy implemented in the
prior year, (ii) fees incurred in the divestiture of
Sniffer and (iii) increased legal fees due to our SEC
investigation. The remaining decrease is attributable to general
cost reduction efforts.
We expect our general and administrative expenses will vary as a
percentage of revenue as we continue to implement cost control
measures and remediate issues identified as part of our efforts
to comply with the Sarbanes-Oxley Act.
|
|
|
Proposed legal settlement charge |
On March 22, 2002, the Securities and Exchange Commission
(SEC) notified us that it has commenced a
Formal Order of Private Investigation into our
accounting practices. We have been engaged in ongoing settlement
discussions with the SEC. On September 29, 2005, we
announced we had reserved $50.0 million in connection with
a proposed settlement with the SEC. The proposed settlement
would, among other things, require us to pay a
$50.0 million penalty. No settlement with the SEC has been
finalized and the amount and terms of such settlement, if any,
are subject to change. Although we have been advised that the
staff of the SEC will recommend acceptance of the proposal, the
SEC remains free to accept or reject it.
|
|
|
In-process research and development |
During the nine months ended September 30, 2005, we
expensed $4.0 million of in-process research and
development related to the acquisition of Wireless Security
Corporation in June 2005. At the time of the acquisition, the
ongoing project included the development of the consumer
wireless security product that we plan to integrate in our small
business managed VirusScan solution. This consumer wireless
security product enables shared-key mode of security on single
or multiple access points and automatically distributes the key
to stations that would like to join the network. At the date of
acquisition, we estimated that, on average, 60% of the
development effort had been completed and that the remaining 40%
of the development would take approximately three months to
complete and would cost approximately $0.6 million. As of
September 30, 2005, we have completed the remaining
development efforts. The efforts required to complete the
development of these projects principally related to new access
points configuration, useability improvements, product
localization, integration with McAfee security center agents and
integration with McAfee installation applications. The value of
the in-process technologies was determined by estimating the
projected net cash flows related to products, including costs to
complete the development of the technologies or products, and
the future net revenues that may be earned from the products,
excluding the value attributed to integration with our products
or that may have been achieved due to the efficiencies resulting
from the combined sales force or the use of our more effective
distribution channel. These cash flows were discounted back to
their net present value using a discount rate of 42% and
excluding the value attributable to the use of the in-process
technologies in future products.
|
|
|
Amortization of intangibles |
We recorded $2.9 million and $3.4 million of
amortization related to intangibles for the three months ended
September 30, 2005 and 2004, respectively. We recorded
$10.1 million and $10.5 million of amortization
related to intangibles for the nine months ended
September 30, 2005 and 2004, respectively. The decreases
are attributable to older intangibles becoming fully amortized.
During the nine months ended September 30, 2005, we
permanently vacated several leased facilities and recorded a
$1.8 million accrual for estimated lease related costs
associated with the permanently vacated facilities. The
remaining costs associated with vacating the facilities are
primarily comprised of the present
46
value of remaining lease obligations, along with estimated costs
associated with subleasing the vacated facility, net of
estimated sublease rental income. We also recorded a
restructuring charge of $0.2 million related to a reduction
in headcount of approximately 14 employees.
The following table summarizes our restructuring accrual
established in 2005 and activity through September 30, 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease | |
|
|
|
|
|
|
|
|
Termination | |
|
Severance and | |
|
Other | |
|
|
|
|
Costs | |
|
other benefits | |
|
Costs | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balance, January 1, 2005
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Restructuring accrual
|
|
|
1,827 |
|
|
|
216 |
|
|
|
4 |
|
|
|
2,047 |
|
Cash payments
|
|
|
(811 |
) |
|
|
(216 |
) |
|
|
(4 |
) |
|
|
(1,031 |
) |
Accretion
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
$ |
1,030 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005, $0.9 million of the
restructuring accrual is due within 12 months and has been
classified as current accrued liabilities, while less than
$0.1 million has been classified as other long term
liabilities, and will be paid through July 2007.
During 2004, we recorded several restructuring charges related
to the reduction of employee headcount. In the first quarter of
2004, we recorded a restructuring charge of approximately
$2.2 million related to the severance of approximately 160
employees, of which $0.7 million and $1.5 million was
related to our North America and EMEA operating segments,
respectively. The workforce size was reduced primarily due to
our sale of Magic in January 2004. In the second quarter of
2004, we recorded a restructuring charge of approximately
$1.6 million related to the severance of approximately 80
employees in our sales, technical support and general and
administrative functions. Approximately $0.6 million of the
restructuring charge was related to the EMEA operating segment
and the remaining $1.0 million was related to the North
America operating segment. In the third quarter of 2004, we
recorded a restructuring charge related to ten employees which
totaled approximately $0.9 million, all of which related to
the North America operating segment. In the fourth quarter of
2004, we recorded a restructuring charge of $1.3 million
related to 111 employees, of which $0.7 million,
$0.2 million, $0.2 million and $0.2 million
related to the Latin America, North America, EMEA and
Asia-Pacific, excluding Japan, operating segments, respectively.
All employees were terminated as of December 31, 2004. The
reductions in the second, third and fourth quarters were part of
the previously announced cost-savings measures being implemented
by us.
In September 2004, we announced the move of our European
headquarters to Ireland, which was substantially completed by
the end of March 2005. In the third and fourth quarters of 2004,
we recorded restructuring charges of $0.2 million and
$2.2 million, respectively, related to the severance of
approximately 80 employees. During the nine months ended
September 30, 2005, we completed the move of our European
headquarters to Ireland and vacated the remaining planned
floors. We recorded an additional $1.4 million
restructuring charge for estimated lease related costs
associated with the permanently vacated facilities and a
$1.4 million restructuring charge for severance costs. All
of these restructuring charges were related to the EMEA
operating segment
Also in September 2004, we permanently vacated an additional two
floors in our Santa Clara headquarters building. We
recorded a $7.8 million accrual for the estimated lease
related costs associated with the permanently vacated facility,
partially offset by a $1.3 million write-off of deferred
rent liability. The remaining costs associated with vacating the
facility are primarily comprised of the present value of
remaining lease obligations, net of estimated sublease income
along with estimated costs associated with subleasing the
vacated facility. The remaining costs will generally be paid
over the remaining lease term ending in 2013. We also recorded a
non-cash charge of approximately $0.8 million related to
disposals of certain leasehold
47
improvements. The restructuring charge of $6.5 million and
related cash outlay were based our managements current
estimates.
In the fourth quarter of 2004, we permanently vacated several
leased facilities and recorded a $2.2 million accrual for
estimated lease related costs associated with the permanently
vacated facilities. The remaining costs associated with vacating
the facilities are primarily comprised of the present value of
remaining lease obligations, along with estimated costs
associated with subleasing the vacated facility.
During 2004, we adjusted the restructuring accruals related to
severance costs and lease termination costs recorded in 2004. We
recorded a $0.3 million adjustment to reduce the EMEA
severance accrual for amounts that were no longer necessary
after paying out substantially all accrued amounts to the former
employees. We also recorded a $0.2 million reduction in
lease termination costs due to changes in estimates related to
the sublease income to be received over the remaining lease term
of our Santa Clara headquarters building.
The following table summarizes our restructuring accruals
established in 2004 and activity through September 30, 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease | |
|
|
|
|
|
|
|
|
Termination | |
|
Severance and | |
|
Other | |
|
|
|
|
Costs | |
|
Other Benefits | |
|
Costs | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balance, January 1, 2004
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Restructuring accrual
|
|
|
8,685 |
|
|
|
7,932 |
|
|
|
480 |
|
|
|
17,097 |
|
Cash payments
|
|
|
(579 |
) |
|
|
(4,175 |
) |
|
|
(63 |
) |
|
|
(4,817 |
) |
Adjustment to liability
|
|
|
(222 |
) |
|
|
(275 |
) |
|
|
|
|
|
|
(497 |
) |
Accretion
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
7,958 |
|
|
|
3,482 |
|
|
|
417 |
|
|
|
11,857 |
|
Restructuring accrual
|
|
|
1,402 |
|
|
|
1,382 |
|
|
|
20 |
|
|
|
2,804 |
|
Cash payments
|
|
|
(2,045 |
) |
|
|
(4,864 |
) |
|
|
(332 |
) |
|
|
(7,241 |
) |
Adjustment to liability
|
|
|
446 |
|
|
|
|
|
|
|
(105 |
) |
|
|
341 |
|
Accretion
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
$ |
8,013 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005, $1.9 million of the
restructuring accrual is due within 12 months and has been
classified as current accrued liabilities, while the remaining
balance of $6.1 million has been classified as other long
term liabilities, and will be paid through March 2013.
In January 2003, as part of a restructuring effort to gain
operational efficiencies, we consolidated operations formerly
housed in three leased facilities in the Dallas, Texas area into
our regional headquarters facility in Plano, Texas. The facility
houses employees working in finance, information technology,
legal, human resources, field sales and the customer support and
telesales groups servicing the McAfee System Protection
Solutions and McAfee Network Protection Solutions businesses.
The remaining costs will generally be paid over the remaining
lease term ending in 2013.
In 2004, we adjusted the restructuring accrual related to lease
termination costs previously recorded in 2003. The adjustments
decreased the liability by approximately $0.6 million in
2004, due to changes in estimates related to the sublease income
to be received over the remaining lease term.
48
The following table summarizes our restructuring accrual
established in 2003 and activity through September 30, 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease | |
|
|
|
|
|
|
Termination | |
|
Severance and | |
|
|
|
|
Costs | |
|
Other Benefits | |
|
Total | |
|
|
| |
|
| |
|
| |
Balance, January 1, 2004
|
|
$ |
14,217 |
|
|
$ |
317 |
|
|
$ |
14,534 |
|
Cash payments
|
|
|
(1,841 |
) |
|
|
(194 |
) |
|
|
(2,035 |
) |
Adjustment to liability
|
|
|
(623 |
) |
|
|
(123 |
) |
|
|
(746 |
) |
Accretion
|
|
|
548 |
|
|
|
|
|
|
|
548 |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
12,301 |
|
|
|
|
|
|
|
12,301 |
|
Cash payments
|
|
|
(984 |
) |
|
|
|
|
|
|
(984 |
) |
Adjustment to liability
|
|
|
129 |
|
|
|
|
|
|
|
129 |
|
Accretion
|
|
|
376 |
|
|
|
|
|
|
|
376 |
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
$ |
11,822 |
|
|
$ |
|
|
|
$ |
11,822 |
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005, $1.5 million of the
restructuring accrual is due within 12 months and has been
classified as current accrued liabilities, while the remaining
balance of $10.3 million has been classified as other long
term liabilities and will be paid through March 2013.
Our estimate of the excess facilities charges recorded during
2005, 2004 and 2003 may vary significantly depending, in part,
on factors which may be beyond our control, such as our success
in negotiating with our lessor, the time periods required to
locate and contract suitable subleases and the market rates at
the time of such subleases. Adjustments to the facilities
accrual will be made if actual lease exit costs or sublease
income differ from amounts currently expected. The facility
restructuring charges in 2005 were primarily allocated to the
EMEA and Japan operating segments, and the facility
restructuring charges in 2004 and 2003 were primarily allocated
to the North America operating segment.
|
|
|
Loss (gain) on Sale of Assets and Technology |
We recognized a gain of approximately $1.3 million in the
nine months ended September 30, 2005 related to the sale of
our McAfee Labs assets to SPARTA, Inc. The gain was partially
offset by the write-off of other fixed assets of
$0.8 million in the nine months ended September 30,
2005. In January 2004, we recognized a gain of approximately
$46.2 million related to our sale of our Magic product line
to BMC Software. In July, 2004, we completed the sale of our
Sniffer product line to Network General, and as a result,
recognized a gain of approximately $197.4 million. Theses
gains were offset by a write-off of equipment of approximately
$2.3 million.
During the nine months ended September 30, 2004, we
received insurance reimbursements of approximately
$25.0 million from our insurance carriers. The
reimbursements were a result of our insurance coverage related
to the class action lawsuit we settled in 2003.
|
|
|
Provision for Income Taxes |
Our consolidated provision for income taxes for the three months
ended September 30, 2005 and 2004 was $0.1 million and
$81.3 million, respectively, reflecting an effective tax
rate of less than 1% and 41%, respectively. Our consolidated
provision for income taxes for the nine months ended
September 30, 2005 and 2004 was $25.4 million and
$106.5 respectively, reflecting an effective tax rate of 20% and
36%, respectively. The effective tax rate differs from the
statutory rate primarily due to the impact of research and
development tax credits, utilization of foreign tax credits, and
lower effective rates in some overseas jurisdictions. In each
successive interim period, to the extent our operating results
year to date and our estimates for the remainder of the fiscal
year change from our original expectations regarding the
proportion of earnings in various tax
49
jurisdictions we expect that our effective tax rate will change
accordingly, affecting tax expense (or benefit) for both that
successive interim period as well as year-to-date interim
results.
Although we reported an effective tax rate of 20% for the nine
months ended September 30, 2005, our total tax expense of
$25.4 million was comprised of tax expense of
$41.6 million on year to date ordinary income at an
estimated 33% annual effective tax rate offset by a net tax
benefit of $16.1 million from discrete items individually
computed and recognized when the items occurred. The discrete
items include an $18.7 million tax benefit relating to a
valuation allowance release, changes in foreign, federal and
state estimated tax provisions, and releases of tax reserves no
longer required. Additionally, $2.6 million in tax expenses
correlates to net incremental federal and state income tax
expense related to our determination to repatriate no less than
$350.0 million of foreign earnings, as discussed below.
The American Jobs Creation Act of 2004 (the Act)
provided for a deduction of 85% of certain foreign earnings that
are repatriated in stipulated periods, including our year ending
December 31, 2005. Certain criteria must be met to qualify
for the deduction, including the establishment of a domestic
reinvestment plan by the Chief Executive Officer, the approval
of the plan by the Board of Directors, and the execution of the
plan whereby the repatriated earnings are reinvested in the
United States.
In the third quarter of 2005, we decided to make a distribution
of earnings from our foreign subsidiaries that would qualify for
the repatriation provisions of the Act. We plan to repatriate no
less than $350.0 million. As a result we recorded tax
expense of $2.6 million, net of a $17.8 million tax
benefit resulting from an expected lower tax rate under the Act
on a portion of foreign earnings for which we previously in 2004
provided United States tax. We are continuing our assessment of
the opportunity of the repatriation provisions for further
repatriations under the Act, but do not expect to complete this
assessment until the fourth quarter of 2005. The additional
amount of unremitted foreign earnings that is being considered
for possible repatriation and the related income tax expense is
no more than $150.0 million and $9.0 million,
respectively. Except for the distributions considered under the
Act, we intend to indefinitely reinvest all other current and/or
future earnings of our foreign subsidiaries.
We recorded stock-based compensation charges of
$3.0 million and $2.3 million, before taxes, in the
three months ended September 30, 2005 and 2004,
respectively, and $2.1 million and $4.9 million,
before taxes, in the nine months ended September 30, 2005
and 2004, respectively. These charges are comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Exchange of McAfee.com options
|
|
$ |
1,578 |
|
|
$ |
830 |
|
|
$ |
790 |
|
|
$ |
2,995 |
|
Repriced options
|
|
|
1,054 |
|
|
|
|
|
|
|
219 |
|
|
|
|
|
New and existing executives and employees
|
|
|
361 |
|
|
|
433 |
|
|
|
1,060 |
|
|
|
647 |
|
Former employees
|
|
|
|
|
|
|
991 |
|
|
|
|
|
|
|
1,132 |
|
Extended life of vested options held by terminated employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$ |
2,993 |
|
|
$ |
2,254 |
|
|
$ |
2,069 |
|
|
$ |
4,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of McAfee.com options. On September 13,
2002, we acquired the minority interest in McAfee.com that we
previously did not own. McAfee.com option holders received
options for 0.675 of a share of our common stock plus $8.00 in
cash, $11.85 after applying the option exchange ratio, which is
paid to the option holder upon exercise of the option and
without interest. McAfee.com options to
purchase 4.1 million shares were converted into
options to purchase 2.8 million shares of our common
stock. The assumed options are subject to variable accounting
treatment, which means that a compensation charge was measured
initially
50
at the date of the closing of the acquisition and is remeasured
each reporting period based on our common stock fair market
value at the end of each reporting period.
The initial charge was based on the excess of the closing price
of our common stock over the exercise price of the options less
the $11.85 per share payable in cash. This compensation
charge has been and will be remeasured using the same
methodology until the earlier of the date of exercise,
forfeiture or cancellation without replacement. This
compensation charge is recorded as an expense over the remaining
vesting period of the options using the accelerated method of
amortization under FASB Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans. Charges related
to unvested options are recorded as deferred stock-based
compensation in stockholders equity in the consolidated balance
sheet and recognized as expense as the options vest.
During the three months ended September 30, 2005 and 2004,
we recorded a charge of approximately $1.6 million and
$0.8 million, respectively, related to exchanged options
subject to variable accounting. During the nine months ended
September 30, 2005 and 2004, we recorded a charge of
approximately $0.8 million and $3.0 million,
respectively, related to exchanged options subject to variable
accounting. This stock-based compensation was based on our
closing stock price of $31.42 on September 30, 2005 and
$20.10 on September 30, 2004. The charge in the nine months
ended September 30, 2005 was due to an increase in our
stock price from $28.93 at December 31, 2004 to $31.42 as
of September 30, 2005, and the charge in the three months
ended September 30, 2005 was due to an increase in our
stock price from $26.18 on June 30, 2005. As of
September 30, 2005, we had approximately 0.2 million
outstanding options related to the acquisition of the minority
interest in McAfee.com subject to variable accounting. Further
fluctuations in the stock price may result in significant
additional stock-based compensation charges or benefits in
future periods.
Repriced options. On April 22, 1999, we offered to
substantially all of our employees, excluding executive
officers, the right to cancel certain outstanding stock options
and receive new options with an exercise price of
$11.063 per share, the then current fair value of the
stock. Options to purchase a total of 9.5 million shares
were cancelled and the same number of new options were granted.
These new options vested at the same rate that they would have
vested under previous option plans and are subject to variable
accounting. Accordingly, we have and will continue to remeasure
compensation cost for these repriced options until these options
are exercised, cancelled or forfeited without replacement. The
first valuation period began July 1, 2000.
The amount of stock-based compensation recorded was and will be
based on any excess of the closing stock price at the end of the
reporting period or date of exercise, forfeiture or cancellation
without replacement, if earlier, over the fair value of our
common stock on July 1, 2000, which was $20.375. As these
options are fully vested, the charge is recorded to earnings
immediately. Depending upon movements in the market value of our
common stock, this variable accounting treatment can result in
additional stock-based compensation charges or benefits in
future periods until the options are exercised, forfeited or
cancelled.
During the three months ended September 30, 2005, we
recorded a charge of approximately $1.1 million, and did
not record any charges or benefits in the three months ended
September 30, 2004. During the nine months ended
September 30, 2005, we recorded a charge of
$0.2 million and did not record any charges or benefits in
the nine months ended September 30, 2004. The stock-based
compensation for these options was based on closing stock prices
as of September 30, 2005 and 2004 of $31.42 and $20.10,
respectively. The charge in the nine months ended
September 30, 2005 was due to an increase in our stock
price from $28.93 at December 31, 2004 to $31.42 as of
September 30, 2005, and the charge in the three months
ended September 30, 2005 was due to an increase in our
stock price from $26.18 on June 30, 2005. There was no
charge or benefit in the three months and nine months ended
September, 2004 as our closing stock price from
December 31, 2003 to September 30, 2004 was below
$20.375. As of September 30, 2005, there were approximately
0.2 million options related to this repricing which were
outstanding and subject to variable plan accounting.
New and existing employees and executives. In the three
months ended September 30, 2005, our compensation committee
of our board of directors granted a total of 110,000 shares
of restricted stock, which vest through September 2008, to key
employees. The price of the underlying shares is $0.01 per
share. In
51
January 2005, our board of directors granted 75,000 shares
of restricted stock, which vest through December 31, 2007,
to our chief financial officer. The price of the underlying
shares is $0.01 per share. We recorded expense of
approximately $0.2 million in the three months ended
September 30, 2005 and $0.6 million in the nine months
ended September 30, 2005 related to the stock-based
compensation associated with these restricted stock grants.
In January 2002, our board of directors approved a grant of
50,000 shares of restricted stock, which vested through
January 2005, to our chief executive officer. The price of the
underlying shares is $0.01 per share. During the three
months ended September, 2005, we recorded no stock-based
compensation related to the chief executive officers 2002
restricted stock grant compared to $0.1 million in the
three months ended September 30 2004. During the nine
months ended September 30, 2005 and 2004, we recorded less
than $0.1 million and approximately $0.3 million,
respectively, related to stock-based compensation associated
with the chief executive officers 2002 restricted stock
grant.
In September 2004, the Companys Chief Financial Officer
and Chief Operating Officer announced that he was retiring from
the Company effective December 31, 2004. Under the terms of
his transition agreement, his options were modified such that
all remaining unvested outstanding stock options would
immediately vest on December 31, 2004 under specified
conditions. The total stock based compensation charge related to
this modification was approximately $1.3 million, of which
$0.3 million was recorded in the three and nine months
ended September 30, 2004.
In connection with the acquisition of Foundstone in October
2004, we assumed stock options to Foundstone employees which are
subject to vesting provisions as the employees provide service
to us. We recognized approximately $0.1 million in the
three months ended September 30, 2005, and
$0.4 million in the nine months ended September 30,
2005. An additional $0.6 million will be recognized through
2008, which is subject to reduction based on employees
terminating prior to the full vesting of their options.
Former employees. In November and December 2003, we
extended the vesting period of two employees and also extended
the period after which vesting ends to exercise their options.
As these employees options continued to vest after termination
and their exercise period was extended an additional
90 days, we recorded a one time stock-based compensation
charge of approximately $0.1 million during the nine months
ended September 30, 2004.
As a result of the sale of the Companys Sniffer product
line (Sniffer) in July 2004, the Company modified
the stock option agreements of several Sniffer executives by
accelerating the vesting of their unvested outstanding options.
As a result, the Company recorded a stock-based compensation
charge of approximately $1.0 million during the three and
nine months ended September 30, 2004. Since the
modification was directly related to the sale of Sniffer, the
stock compensation charge was reflected in the calculation of
the gain on the sale of Sniffer.
Extended life of vested options held by terminated
employees. During a significant portion of 2003, we
suspended exercises of stock options until our required public
company reports were filed with the SEC. The period during which
stock options were suspended is known as the black-out period.
Due to the black-out period, we extended the exercisability of
any options that would otherwise terminate during the black-out
period for a period of time equal to a specified period after
termination of the black-out period. Accordingly, we recorded a
stock-based compensation charge on the date the options should
have terminated based on the intrinsic value of the option on
the modification date and the option price. During the nine
months ended September 30, 2004, we recorded a stock-based
compensation charge of approximately $0.1 million.
52
Recent Accounting Pronouncements
See Note 2 to the condensed consolidated financial
statements.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net cash provided by operating activities
|
|
$ |
292,652 |
|
|
$ |
271,751 |
|
Net cash provided by (used in) investing activities
|
|
|
(170,719 |
) |
|
|
160,089 |
|
Net cash provided by (used in) financing activities
|
|
|
47,102 |
|
|
|
(420,504 |
) |
At September 30, 2005, we had cash and cash equivalents
totaling $440.4 million, as compared to $291.2 million
at December 31, 2004. In the nine months ended
September 30, 2005, we generated positive operating cash
flows of $292.7 million and received cash of
$94.5 million related to our employee stock purchase plan
and option exercises under our employee stock option plans. Uses
of cash during the nine-month period included the repurchase of
common stock of $47.4 million, net purchases of marketable
securities of $77.0 million, the acquisition of Wireless
Security Corporation for $20.2 million, and purchases of
property and equipment of $25.0 million. A more detailed
discussion of changes in our liquidity follows.
Net cash provided by operating activities in the nine months
ended September 30, 2005 and 2004 was the result of our net
income of $100.2 million and $186.3 million,
respectively, which is adjusted for non-cash items such as
depreciation and amortization, non-cash restructuring charges,
acquired in-process research and development, deferred taxes,
non-cash loss on marketable securities, stock-based compensation
and changes in various assets and liabilities such as accounts
payable, accounts receivable, other current assets and deferred
revenue.
Our historical and primary source of operating cash flow is the
collection of accounts receivable from our customers and the
timing of payments to our vendors and service providers. One
measure of the effectiveness of our collection efforts is
average accounts receivable days sales outstanding
(DSO). DSOs were 38 days and 35 days in
the three months ended September 30, 2005 and 2004,
respectively. We calculate accounts receivable DSO on a
net basis by dividing the accounts receivable
balance at the end of the quarter by the amount of revenue
recognized for the quarter multiplied by 90 days. We expect
DSOs to vary from period to period because of changes in
quarterly revenue and the effectiveness of our collection
efforts. In the nine months ended September 30, 2005 and in
2004, we did not make any significant changes to our payment
terms for our customers, which are generally net 30.
The increase in cash related to accounts payable, accrued taxes
and other liabilities was $10.6 million. Our operating cash
flows, including changes in accounts payable and accrued
liabilities, is impacted by the timing of payments to our
vendors for accounts payable and taxing authorities. We
typically pay our vendors and service providers in accordance
with invoice terms and conditions, and take advantage of invoice
discounts when available. The timing of future cash payments in
future periods will be impacted by the nature of accounts
payable arrangements. In the nine months ended
September 30, 2005 and 2004, we did not make any
significant changes to our payment timing to our vendors.
Our cash and marketable securities balances are held in numerous
locations throughout the world, including substantial amounts
held outside the United States. As of September 30, 2005,
approximately $474.9 million was held outside the United
States. The American Jobs Creation Act of 2004 (the
Act) provided for a deduction of 85% of certain
foreign earnings that are repatriated in stipulated periods,
including our year ending December 31, 2005. In the third
quarter of 2005, we decided to make a distribution of
53
earnings from our foreign subsidiaries that would qualify for
the repatriation provisions of the Act. We plan to repatriate no
less than $350.0 million.
Our working capital, defined as current assets minus current
liabilities, was $625.4 million and $259.9 million at
September 30, 2005 and December 31, 2004,
respectively. The increase in working capital of approximately
$365.5 million from December 31, 2004 to
September 30, 2005 is primarily attributable to a
$402.0 million increase in cash and short-term marketable
securities balances and a $50.0 million increase in current
restricted cash offset by a decrease of $40.1 million in
net accounts receivable due to customer payments and a
$47.1 million increase in current deferred revenue. Our
perpetual-plus licensing model, now introduced worldwide,
results in less revenue recognition up-front, therefore causing
increases in our deferred revenue.
We are currently under SEC and Department of Justice
investigations and have been engaged in ongoing settlement
discussions with the SEC. A proposed settlement amount of
$50.0 million has been discussed; however, a settlement
with the SEC has not been finalized and the amount and terms of
such settlement, if any, are subject to change.
We expect to meet our obligations as they become due through
available cash and internally generated funds. We expect to
continue generating positive working capital through our
operations. However, we cannot predict whether current trends
and conditions will continue or what the effect on our business
might be from the competitive environment in which we operate.
We believe the working capital available to us will be
sufficient to meet our cash requirements for at least the next
12 months.
A summary of our investing activities at September 30, 2005
and 2004 is as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Purchase of marketable securities
|
|
$ |
(565,824 |
) |
|
$ |
(841,772 |
) |
Proceeds from sale and maturity of marketable securities
|
|
|
488,853 |
|
|
|
761,485 |
|
Proceeds from sale of assets and technology
|
|
|
1,500 |
|
|
|
259,839 |
|
Acquisitions, net of cash acquired
|
|
|
(20,200 |
) |
|
|
|
|
Purchase of property and equipment
|
|
|
(25,041 |
) |
|
|
(19,700 |
) |
Decrease in restricted cash
|
|
|
(50,007 |
) |
|
|
265 |
|
Other
|
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
$ |
(170,719 |
) |
|
$ |
160,089 |
|
|
|
|
|
|
|
|
We made net purchases of our marketable securities of
$77.0 million and $80.3 million in the nine months
ended September 30, 2005 and 2004, respectively. We have
classified our investment portfolio as available for
sale, and our investments are made with a policy of
capital preservation and liquidity as the primary objectives. We
generally hold investments in money market, fixed income and
U.S. government agency securities. We may sell an
investment at any time if the quality rating of the investment
declines, the yield on the investment is no longer attractive or
we are in need of cash. Because we invest only in investment
securities that are highly liquid with a ready market, we
believe that the purchase, maturity and sale of our investments
has no material impact on our overall liquidity.
In June 2005, we acquired all the outstanding stock, technology
and assets of Wireless Security Corporation, a provider of home
and small business wireless network security products, for
approximately $20.2 million in cash, including acquisition
costs and net of cash acquired.
54
We may buy or make investments in complementary companies,
products and technologies. Our available cash and equity and
debt securities may be used to acquire or invest in companies or
products, possibly resulting in significant acquisition-related
charges to earnings and dilution to our stockholders.
The $25.0 million of property and equipment purchased
during the nine months ended September 30, 2005 was
primarily for upgrades of our existing accounting system and
equipment for our new facility in Ireland. In the nine months
ended September 30, 2004, we purchased $19.7 million
of equipment to update hardware for our employees and enhance
various back office systems, including the finalization of our
customer relationship management system, and equipment for our
Bangalore research and development facility.
We anticipate that we will continue to purchase property and
equipment necessary in the normal course of our business. The
amount and timing of these purchases and the related cash
outflows in future periods is difficult to predict and is
dependent on a number of factors including our hiring of
employees, the rate of change in computer hardware/ software
used in our business and our business outlook.
|
|
|
Proceeds from Sale of Assets and Technology |
We completed the sale of McAfee Labs in April 2005, and as
result, recognized a gain of approximately $1.3 million in
the nine months ended September 30, 2005. We received net
cash proceeds of $1.5 million related to the sale. We
completed the sale of the Magic product line to BMC Software in
January 2004, and as a result, recognized a gain of
approximately $46.2 million in the nine months ended
September 30, 2004. We received net cash proceeds of
approximately $47.1 million related to the sale.
In July 2004, we completed the sale of our Sniffer product line
to Network General Corporation, and as a result, recognized a
gain of approximately $197.4 million. We received net cash
proceeds of approximately $212.7 million related to the
sale.
The current restricted cash balance of $50.0 million at
September 30, 2005 reflects the amount we have placed in
escrow for a proposed settlement with the SEC. We have had
preliminary settlement discussions with the SEC related to the
investigation into our accounting practices, however, settlement
with the SEC has not been finalized and this amount is subject
to change. The $50.0 million placed in escrow for the
proposed settlement with the SEC (see Note 12 to our
condensed consolidated financial statements) is reflected as
cash used in investing activities on our statement of cash
flows. If the proposed legal settlement is approved by the SEC,
the $50.0 million escrow will be released, and at this
time, this will be reflected as cash provided by investing
activities of $50.0 million and cash used in operating
activities of $50.0 million. We had no current restricted
cash balance at December 31, 2004.
The non-current restricted cash balance of $0.6 million at
September 30, 2005 and December 31, 2004 consists
primarily of cash collateral related to Entercept building rent
expense and our workers compensation insurance coverage.
55
A summary of our financing activities at September 30, 2005
and 2004 is as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Proceeds from issuance of stock from option and stock purchase
plans
|
|
$ |
94,453 |
|
|
$ |
66,935 |
|
Redemption of convertible debt
|
|
|
|
|
|
|
(265,623 |
) |
Repurchase of common stock
|
|
|
(47,351 |
) |
|
|
(221,816 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
$ |
47,102 |
|
|
$ |
(420,504 |
) |
|
|
|
|
|
|
|
|
|
|
Stock Option and Stock Purchase Plans |
Cash flows from financing activities in the nine months ended
September 30, 2005 and 2004 included the receipt of
$94.5 million and $66.9 million, respectively, of cash
related to exercises of stock options and stock purchases from
the employee stock purchase plan. Historically, our recurring
cash flows provided by financing activities have been from the
receipt of cash from the issuance of common stock under stock
option and employee stock purchase plans. For example, we
received cash proceeds from these plans in the amount of
$113.8 million and $35.4 million in 2004 and 2003,
respectively. While we expect to continue to receive these
proceeds in future periods, the timing and amount of such
proceeds are difficult to predict and are contingent on a number
of factors including the price of our common stock, the number
of employees participating in the plans and general market
conditions.
As our stock price rises, more participants are in the
money in their options, and thus, more likely to exercise
their options, which results in cash to us. As our stock price
decreases, more of our employees are out of the
money or under water in regards to their
options, and therefore, choose not to exercise options, which
results in no cash received by us.
|
|
|
Repurchase of Common Stock |
In April 2005, our board of directors authorized the repurchase
of an additional $175.0 million of our common stock in the
open market from time to time until August 2006, depending upon
market conditions, share price and other factors. Prior to this
additional authorization, in November 2003 our board of
directors had authorized the repurchase of up to
$150.0 million of our common stock in the open market
through November 2005, and in August 2004, our board of
directors had authorized the repurchase of up to an additional
$200.0 million of our common stock in the open market
through August 2006. During the nine months ended
September 30, 2005, we used $47.4 million to
repurchase 2.0 million shares of our common stock in
the open market. During the nine months ended September 30,
2004, we used $221.8 million to
repurchase 12.7 million shares of our common stock in
the open market.
|
|
|
Redemption of Convertible Debt |
In August 2001, we issued the 5.25% convertible notes due
2006 (Notes) with an aggregate principal amount of
$345.0 million. The issuance generated net proceeds (after
deducting fees and expenses) of $335.1 million. The
amortization of the issuance costs related to the Notes was
calculated using the effective interest method and was recorded
as additional interest expense in the statements of income. The
Notes were unsecured and were subordinated to all existing and
future Senior Indebtedness (as defined in the related
indenture). The Notes had no restrictive financial covenants.
Interest was payable in cash semi-annually in arrears on
February 15 and August 15 of each year, and started on
February 15, 2002 and was approximately $18.1 million,
annually without giving effect to the related floating rate
interest swap.
On August 20, 2004, we redeemed the remaining portion of
our outstanding Notes for approximately $265.6 million in
cash. Prior to the redemption date, approximately
$83.4 million in aggregate principal amount of the Notes
were converted to approximately 4.6 million of our common
shares. In the three and nine
56
months ended September 30, 2004, we recorded a loss on
redemption of the Notes of approximately $15.1 million. The
loss was the result of the write-off of unamortized debt
issuance costs, fair value adjustment of the debt and premium
paid for redemption.
We kept our interest rate swap intact. Therefore, the swap was
accounted for as a speculative investment with gains and losses
being recorded in our statement of income. The swap agreement
provided that if the five day average closing price of our
common stock equaled or exceed $22.59, the swap would
automatically terminate. On October 27, 2004, the swap
automatically terminated under the terms of the swap agreement
as our five day average common stock price equaled $22.59.
Line of Credit
We have a $17.0 million credit facility with a bank. The
credit facility is available on an offering basis, meaning that
transactions under the credit facility will be on such terms and
conditions, including interest rate, maturity, representations,
covenants and events of default, as mutually agreed between us
and the bank at the time of each specific transaction. The
credit facility is intended to be used for short-term credit
requirements, with terms of one year or less. The credit
facility can be cancelled at any time. No balances are
outstanding as of September 30, 2005.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in
transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities,
often established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes. All of our subsidiaries are 100% owned by us and are
fully consolidated into our condensed consolidated financial
statements.
57
RISK FACTORS
Investing in our common stock involves a high degree of risk.
The risks described below are not the only ones facing our
company. Additional risks not presently known to us or that we
deem immaterial may also impair our business operations. Any of
the following risks could materially adversely affect our
business, operating results and financial condition and could
result in a complete loss of your investment.
We Are Subject to Intense Competition in the System and
Network Protection Markets, and We Expect to Face Increased
Competition in the Future.
The markets for our products are intensely competitive and we
expect both product and pricing competition to increase. Some of
our competitors have longer operating histories, greater name
recognition, larger technical staffs, established relationships
with hardware vendors and/or greater financial, technical and
marketing resources. We face competition in specific product
markets. Principal competitors include:
|
|
|
|
|
in the system protection market, which includes our anti-virus
and risk assessment and vulnerability management solutions,
Symantec and Computer Associates. Trend Micro remains the
strongest competitor in the Asian anti-virus market and recently
entered the U.S. market. F-Secure, Dr. Ahns,
Panda and Sophos are also showing growth in their respective
markets. Microsoft has continued to make acquisitions, including
Frontbridge in July 2005, and has announced its intention to
enter all segments of the consumer anti-virus market by the end
of 2006. Qualys and Internet Security Systems are the strongest
competitors for our Foundstone products and solutions; and |
|
|
|
in the network protection market, which includes our other
intrusion detection and protection products, Cisco Systems,
Computer Associates, Internet Security Systems, Juniper
Networks, Symantec and 3Com Corporation. |
Other competitors for our various products could include large
technology companies. We also face competition from numerous
smaller companies and shareware authors that may develop
competing products.
Increasingly, our competitors are large vendors of hardware or
operating system software. These competitors are continuously
developing or incorporating system and network protection
functionality into their products. For example, Juniper Networks
acquired Netscreen and, through its acquisitions of Okena,
Riverhead and NetSolv, Cisco Systems may incorporate
functionality that competes with our content filtering and
anti-virus products. Similarly, Microsoft continues to execute
on its announced plans to boost the security of its Windows
platform with related acquisitions including its acquisition of
anti-virus providers GeCAD Software and Sybari Software and
anti-spyware provider Giant Company Software. In addition,
Microsoft has released a beta version of its security solution,
OneCare.
The widespread inclusion of products that perform the same or
similar functions as our products within computer hardware or
other companies software products could reduce the
perceived need for our products or render our products obsolete
and unmarketable. Furthermore, even if these incorporated
products are inferior or more limited than our products,
customers may elect to accept the incorporated products rather
than purchase our products. In addition, the software industry
is currently undergoing consolidation as firms seek to offer
more extensive suites and broader arrays of software products,
as well as integrated software and hardware solutions. This
consolidation may negatively impact our competitive position.
Our Financial Results Will Likely Fluctuate.
Our revenues and operating results have varied significantly in
the past. We expect fluctuations in our operating results to
continue. As a result, we may not sustain profitability. Also,
we believe that period-to-period comparisons of our financial
results should not be relied upon as an indicator of our future
results. Our expenses are based in part on our expectations
regarding future revenues, making expenses in the short term
relatively fixed. We may be unable to adjust our expenses in
time to compensate for any unexpected revenue shortfall.
58
Operational factors that may cause our revenues, gross margins
and operating results to fluctuate significantly from period to
period, include, but are not limited to:
|
|
|
|
|
introduction of new products, product upgrades or updates by us
or our competitors; |
|
|
|
volume, size, timing and contractual terms of new licenses and
renewals of existing licenses; |
|
|
|
the mix of products we sell and services we offer and whether
(i) our products are sold directly by us or indirectly
through distributors, resellers, ISPs such as AOL, OEMs such as
Dell, and others, (ii) the product is hardware or software
based and (iii) in the case of software licenses, the
licenses are perpetual licenses or time-based subscription
licenses; |
|
|
|
changes in our supply chains and product delivery channels may
result in product fulfillment delays; |
|
|
|
personnel limitations may adversely impact our ability to
process the large number of orders that typically occur near the
end of a fiscal quarter; |
|
|
|
costs or charges related to our acquisitions or dispositions,
including our acquisition of Foundstone in 2004 and Wireless
Security Corporation in June 2005 and the dispositions of our
Magic and Sniffer product lines and McAfee Labs assets; |
|
|
|
the components of our revenue that are deferred, including our
on-line subscriptions and that portion of our software licenses
attributable to support and maintenance; |
|
|
|
our perpetual-plus licensing program; |
|
|
|
stock-based compensation charges; |
|
|
|
costs and charges related to certain events, including
Sarbanes-Oxley compliance efforts, litigation, relocation of
personnel and previous financial restatements; |
|
|
|
our ability to timely remediate any material weaknesses or
significant deficiencies in our internal controls over financial
reporting and to maintain adequate internal controls; and |
|
|
|
factors that lead to substantial drops in estimated values of
long-lived assets below their carrying value. |
|
|
|
Seasonal and Macroeconomic Factors |
Our net revenue is typically lower in the first quarter when
many businesses experience lower sales, flat in the summer
months, due in part to the European holiday season, and higher
in the fourth quarter as customers typically complete annual
budgetary cycles.
It Is Difficult for Us to Accurately Estimate Operating
Results Prior to the End of a Quarter.
Although a significant portion of our revenue in any quarter
comes from previously deferred revenue, a meaningful part of our
revenue in any quarter depends on contracts entered into or
orders booked and shipped in that quarter. Historically, we have
experienced more product orders, and therefore, a higher
percentage of revenue shipments, in the last month of a quarter.
Some customers believe they can enhance their bargaining power
by waiting until the end of a quarter to place their order.
Because we expect this to continue, any failure or delay in the
closing of new orders in a given quarter could have a material
adverse effect on our quarterly operating results. Furthermore,
because of this trend, it is difficult for us to accurately
estimate operating results prior to the end of a quarter.
Our Business Transformation, Dispositions and Cost Reduction
Plan, Expose Us to Significant Risks.
In 2005, we continued this transformation with the completion of
the move of our European finance and sales order operations
organization from the Netherlands to Ireland in January 2005,
the sale of our McAfee Labs assets in April 2005 and the
acquisition of Wireless Security Corporation in June 2005. These
activities are intended to, among other things, streamline our
business, better leverage the McAfee brand, better
59
position us as the leading provider of intrusion prevention
solutions, and help accelerate profit and growth. Risks related
to these activities include:
|
|
|
|
|
our growth and/or profitability may not increase in the
near-term or at all and we may fail to achieve desired savings
or performance targets on a timely basis or at all; |
|
|
|
an increased dependence on our channel and other partners to
sell our products; |
|
|
|
our strategic positioning may result in our competing more
directly with larger, more established competitors, such as
Cisco Systems and Microsoft; |
|
|
|
we have centralized our order processing operations from Latin
America to Plano, Texas and we have also moved the EMEA shared
services center and localization operations from Amsterdam to
Cork, Ireland. We have also transitioned a significant portion
of our research and development personnel to our research
facility in Bangalore, India. These events could result in
reduced service levels due to time zone differences,
difficulties in finding personnel with sufficient language
capabilities and loss of direct, on-the-ground finance and
accounting oversight in the sales regions being serviced on a
remote basis; |
|
|
|
we may experience an undesired loss of sales, research and
development, finance and other personnel and it may be difficult
for us to find suitable replacements; |
|
|
|
we have installed a new customer relationship management system,
providing our finance and sales teams information in a different
format than previously available and, in some cases, with less
information. During the transition period to our new system, we
may experience, among other things, related reduced operational
efficiencies, losses of information and a decreased ability to
monitor or forecast our business; |
|
|
|
we may be unable to successfully expand our McAfee brand
significantly beyond our anti-virus products; |
|
|
|
many of our products and service capabilities were recently
acquired and the income potential for these products and
services is unproven and the market for these products is
volatile; and |
|
|
|
there may be customer confusion around our strategy. |
Critical Personnel May Be Difficult to Attract, Assimilate
and Retain.
Our success depends in large part on our ability to attract and
retain senior management personnel, as well as technically
qualified and highly-skilled sales, consulting, technical,
finance and marketing personnel. Personnel related issues
include:
|
|
|
Competition for Personnel; Need for Competitive Pay
Packages |
Competition for qualified individuals in our industry is
intense. To attract and retain critical personnel, we believe
that we must maintain an open and collaborative work
environment. We also believe we need to provide a competitive
compensation package, including stock options and restricted
stock. Increases in shares available for issuance under our
stock option plans require stockholder approval. Institutional
stockholders, or our other stockholders generally, may not
approve future requests for option pool increases. For example,
at our 2003 annual meeting held in December 2003, our
stockholders did not approve a proposed increase in shares
available for grant under our employee stock option plans.
Additionally, beginning in January 2006, accounting standards
will require corporations to include a compensation expense in
their statement of income relating to the issuance of employee
stock options. As a result, we may decide to issue fewer stock
options, possibly impairing our ability to attract and retain
necessary personnel. Conversely, issuing a comparable number of
stock options could adversely impact our results of operations
when compared with periods prior to the effectiveness of these
new rules.
60
|
|
|
Reduced Productivity of New Hires; Senior Management
Additions |
Notwithstanding our ongoing efforts to reduce our general
personnel levels, we continue to hire in key areas and have
added a number of new employees in connection with our
acquisitions. We have also increased our hirings in Bangalore,
India in connection with the relocation of a significant portion
of our research and development operations to India.
Several members of our senior management were only added in the
last year, and we may add new members to senior management. In
the second quarter of 2005, we promoted William Kerrigan to the
position of executive vice president of consumer brands. In
January 2005, we hired Eric Brown as our new executive vice
president and chief financial officer, and in 2004, we promoted
Jake Pyles to the position of vice president of finance.
For new employees or management additions, there also may be
reduced levels of productivity as recent additions or hires are
trained or otherwise assimilate and adapt to our organization
and culture.
|
|
|
Senior Management and Critical Personnel Losses |
Other than executive management who have at will
employment agreements, our employees are not typically subject
to an employment agreement or non-competition agreement. In
December 2004, Stephen Richards, our previous chief
operating officer and chief financial officer, retired and in
November 2004, our controller resigned to pursue other
opportunities. In addition, in recent months we have experienced
significant turnover in our finance organization worldwide and
replacing these personnel remains difficult given the
competitive market for these skill sets.
It could be difficult, time consuming and expensive to replace
any key management member or other critical personnel.
Integrating new management and other key personnel also may be
difficult and costly. Changes in management or other critical
personnel may be disruptive to our business and might also
result in our loss of unique skills and the departure of
existing employees and/or customers. It may take significant
time to locate, retain and integrate qualified management
personnel.
We Face Risks Related to the Pending Formal Securities and
Exchange Commission and Department of Justice Investigations and
Our Accounting Restatements.
In the first quarter of 2002, the SEC commenced a Formal
Order of Private Investigation into our accounting
practices. In the first quarter of 2003, we became aware that
the DOJ had commenced an investigation into our consolidated
financial statements. In April and May 2002, we announced our
intention to file, and in June 2002 we filed with the SEC,
restated consolidated financial statements for 2000, 1999 and
1998 to correct certain discovered inaccuracies for these
periods.
As a result of information obtained in connection with the
ongoing SEC and DOJ investigations, we concluded in March 2003,
that we would restate our consolidated financial statements to,
among other things, reflect revenue on sales to our distributors
for 1998 through 2000 on a sell-through basis (which is how we
reported sales to distributors since the beginning of 2001).
The filing of our restated consolidated financial statements in
October 2003 did not resolve the pending SEC inquiry or DOJ
investigation into our accounting practices. We have been
engaged in ongoing settlement discussions with the SEC. On
September 29, 2005 we announced we had reserved
$50.0 million in connection with a proposed settlement with
the SEC. The proposed settlement would, among other things,
require us to pay a $50.0 million penalty. No settlement
with the SEC has been finalized and the amount and terms of such
settlement, if any, are subject to change. Although we have been
advised that the staff of the SEC will recommend acceptance of
the proposal, the SEC remains free to accept or reject it.
We Face Risks Associated with Past and Future
Acquisitions.
We may buy or make investments in complementary companies,
products and technologies. For example, in October 2004, we
acquired Foundstone to bolster our risk assessment and
vulnerability management
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capabilities and in June 2005 we acquired Wireless Security
Corporation to continue to develop their patent-pending
technology, to introduce a new consumer wireless security
offering, and to integrate the technology into our small
business managed solution. We have not previously acquired a
company such as Foundstone, which offers high-end security
consulting services as part of their business model. We may not
realize the anticipated benefits from the Foundstone or Wireless
Security Corporation acquisitions. In addition to the risks
described below, acquisitions of professional services
organizations, such as Foundstones, present unique
employee retention and integration challenges as well as
customer retention challenges.
Integration of an acquired company or technology is a complex,
time consuming and expensive process. The successful integration
of an acquisition requires, among other things, that we:
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integrate and retain key management, sales, research and
development and other personnel; |
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integrate the acquired products into our product offerings both
from an engineering and sales and marketing perspective; |
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integrate and support preexisting supplier, distribution and
customer relationships; |
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coordinate research and development efforts; and |
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consolidate duplicate facilities and functions and integrate
back office accounting, order processing and support functions. |
The geographic distance between the companies, the complexity of
the technologies and operations being integrated and the
disparate corporate cultures being combined may increase the
difficulties of integrating an acquired company or technology.
Managements focus on the integration of operations may
distract attention from our day-to-day business and may disrupt
key research and development, marketing or sales efforts. In
addition, it is common in the technology industry for aggressive
competitors to attract customers and recruit key employees away
from companies during the integration phase of an acquisition.
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Internal Controls, Policies and Procedures |
Acquired companies or businesses are likely to have different
standards, controls, contracts, procedures and policies, making
it more difficult to implement and harmonize company-wide
financial, accounting, billing, information and other systems.
Products or technologies acquired by us may include so-called
open source software. Open source software is
typically licensed for use at no initial charge, but imposes on
the user of the open source software certain requirements to
license to others both the open source software as well as the
software that relates to, or interacts with, the open source
software. Our ability to commercialize products or technologies
incorporating open source software or otherwise fully realize
the anticipated benefits of any such acquisition may be
restricted because, among other reasons:
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open source license terms may be ambiguous and may result in
unanticipated obligations regarding our products; |
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competitors will have improved access to information that may
help them develop competitive products; |
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open source software cannot be protected under trade secret law; |
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it may be difficult for us to accurately determine the
developers of the open source code and whether the acquired
software infringes third party intellectual property
rights; and |
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open source software potentially increases customer support
costs because licensees can modify the software and potentially
introduce errors. |
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Use of Cash and Securities |
Our available cash and securities may be used to acquire or
invest in companies or products, possibly resulting in
significant acquisition-related charges to earnings and dilution
to our stockholders. For example, in June 2005 we used
approximately $20.2 million to acquire Wireless Security
Corporation and in October 2004 we used approximately
$84.7 million, net of cash assumed, to acquire Foundstone.
Moreover, if we acquire a company, we may have to incur or
assume that companys liabilities, including liabilities
that may not be fully known at the time of acquisition.
We Face Risks in Connection With Material Weaknesses
Identified in Our Sarbanes-Oxley Section 404 Management
Report and Any Related Remedial Measures That We Undertake.
In the first quarter of 2004, we restated previously reported
quarters of 2003; and in the second quarter of 2004, we restated
the previously reported first quarter of 2004. These matters
were identified by us and reported to our auditors. In
conjunction with these restatements, our former auditors and our
current auditors, respectively, reported that the underlying
control issues giving rise to the respective restatement should
be considered a material weakness under standards established by
the Public Company Accounting Oversight Board. In response to
these restatements, we implemented additional controls over
financial reporting.
In conjunction with (i) our ongoing reporting obligations
as a public company and (ii) the requirements of
Section 404 of the Sarbanes-Oxley Act that management
report as of December 31, 2004 on the effectiveness of our
internal control over financial reporting and identify any
material weaknesses in our internal control over financial
reporting, we engaged in a process to document, evaluate and
test our internal controls and procedures, including corrections
to existing controls and additional controls and procedures that
we may implement. As a result of this evaluation and testing
process, our management identified material weaknesses in our
internal control over financial reporting relating to accounting
for income taxes, revenue accounting and the financial close and
reporting process. See Item 9A in the Annual Report on
Form 10-K for the year ended December 31, 2004 for
additional disclosure about these material weaknesses. In
response to these material weaknesses in our internal control
over financial reporting, we have implemented and may be
required to further implement, additional controls and
procedures. In addition, in response to these material
weaknesses, we are committed to hiring additional personnel,
which may result in additional expense to us. As a result of the
identified material weaknesses, even though our management
believes that our efforts to remediate and re-test certain
internal control deficiencies have resulted in the improved
operation of our internal control over financial reporting, we
cannot be certain that the measures we have taken or we are
planning to take will sufficiently and satisfactorily remediate
the identified material weaknesses in full. Furthermore, we
intend to continue improving our internal control over financial
reporting and the implementation and testing of these continued
improvements could result in increased cost and could divert
management attention away from operating our business.
In future periods, if the process required by Section 404
of the Sarbanes-Oxley Act reveals further material weaknesses or
significant deficiencies, the correction of any such material
weakness or significant deficiency could require additional
remedial measures which could be costly and time-consuming. In
addition, the discovery of further material weaknesses could
also require the restatement of prior period operating results.
If a material weakness exists as of a future period year-end
(including a material weakness identified prior to year-end for
which there is an insufficient period of time to evaluate and
confirm the effectiveness of the corrections or related new
procedures), our management will be unable to report favorably
as of such future period year-end to the effectiveness of our
control over financial reporting. If we are unable to assert
that our internal control over financial reporting is effective
in any future period (or if our independent auditors are unable
to express an opinion on the effectiveness of our internal
controls), or if we continue to experience material weaknesses
in our internal control over financial reporting, we could lose
investor confidence in the accuracy and completeness of our
financial reports, which would have an adverse effect on our
stock price and potentially subject us to litigation.
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We Face Risks Related to Our International Operations.
In the nine months ended September 30, 2005 and the nine
months ended September 30, 2004, net revenue in our
operating regions outside of North America represented
approximately 41% and 39% of our net revenue, respectively. We
intend to focus on international growth and expect international
revenue to remain a significant percentage of our net revenue.
Related risks include:
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longer payment cycles and greater difficulty in collecting
accounts receivable; |
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increased costs and management difficulties related to the
building of our international sales and support organization; |
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the acceptance of our business strategy and the reorganization
of our international sales forces by regions; |
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the ability to successfully localize software products for a
significant number of international markets; |
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our ability to effectively provide service and support for our
hardware based products from the U.S.; |
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our ability to successfully establish, manage and staff shared
service centers for worldwide sales finance and accounting
operations centralized from locations in the U.S. and Europe; |
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our ability to adapt to sales and marketing practices and
customer requirements in different cultures; |
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compliance with more stringent consumer protection and privacy
laws; |
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currency fluctuations, including recent weakness of the
U.S. dollar relative to other currencies, or the
strengthening of the U.S. dollar in future periods that may
have an adverse impact on revenues and risks related to hedging
strategies; |
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political instability in both established and emerging markets; |
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tariffs, trade barriers and export restrictions; |
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a high incidence of software piracy in some countries; |
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international labor laws and our relationship with our employees
and regional work councils; and |
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software piracy. |
Additionally, our sales forces are organized by geographic
region. This structure may lead to sales force competition for
sales to multinational customers and may reduce our ability to
effectively market our products to multinational customers.
Customers May Cancel or Delay Purchases.
Weakening economic conditions, new product introductions and
expansions of our business may increase the time necessary to
sell our products and services and require us to spend more on
our sales efforts. Our products and services may be considered
to be capital purchases by our current or prospective customers.
Capital purchases are often discretionary and, therefore, are
canceled or delayed if the customer experiences a downturn in
its business prospects or as a result of economic conditions in
general.
We Face Product Development Risks Associated with Rapid
Technological Changes in Our Market.
The markets for our products are highly fragmented and
characterized by ongoing technological developments, evolving
industry standards and rapid changes in customer requirements.
Our success depends on our ability to timely and effectively:
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offer a broad range of network and system protection products; |
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enhance existing products and expand product offerings; |
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extend security technologies to additional digital devices; |
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respond promptly to new customer requirements and industry
standards; |
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provide frequent, low cost upgrades and updates for our
products; and |
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remain compatible with popular operating systems such as Linux,
NetWare, Windows XP, Windows 2000, Windows 98 and
Windows NT, and develop products that are compatible with
new or otherwise emerging operating systems. |
We may experience delays in product development as we have at
times in the past. Complex products like ours may contain
undetected errors or version compatibility problems,
particularly when first released, which could delay or harm
market acceptance. Furthermore, Microsoft continues to execute
on its announced plans to boost the security of its Windows
platform with related acquisitions, including its acquisition of
anti-virus providers Frontbridge, GeCAD Software and Sybari
Software and anti-spyware provider Giant Company Software. The
widespread inclusion of products that perform the same or
similar functions as our products within the Windows platform
could reduce the perceived need for our products. Furthermore,
even if these incorporated products are inferior or more limited
than our products, customers may elect to accept the
incorporated products rather than purchase our products. The
occurrence of these events could negatively impact our revenue.
We Face a Number of Risks Related to Our Product Sales
Through Distributors, PC OEMs and ISPs.
We sell a significant amount of our products through
intermediaries such as distributors and other channel partners,
referred to collectively as distributors. Our top ten
distributors typically represent approximately 49% to 63% of our
net sales in any quarter. We expect this percentage to increase
as we continue to focus our sales efforts through the channel
and other partners. Our two largest distributors, Ingram Micro
and Tech Data, together accounted for approximately 29% of our
net revenue in the nine months ended September 30, 2005.
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Sale of Competing Products |
Our distributors and PC OEMs may sell other vendors
products that are complementary to, or compete with, our
products. While we have instituted programs designed to motivate
our distributors and PC OEMs to focus on our products, these
distributors and PC OEMs may give greater priority to products
of other suppliers, including competitors. Our ability to
meaningfully increase the amount of our products sold through
our distributors and PC OEMs depends on our ability to
adequately and efficiently support these distributors and PC
OEMs with, among other things, appropriate financial incentives
to encourage pre-sales investment and sales tools, such as
online sales and technical training as product collateral needed
to support their customers and prospects. Any failure to
properly and efficiently support our distributors and PC OEMs
may result in our distributors and PC OEMs focusing more on our
competitors products rather than our products and thus in
lost sales opportunities.
Our distributor agreements may be terminated by either party
without cause. If one of our significant distributors terminates
its distribution agreement, we could experience a significant
interruption in the distribution of our products.
We recently began offering several of the Foundstone risk
management products through distributors. We may not see
immediate results from our distributors efforts as they
introduce these and other new products to their customers.
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Need for Accurate Distributor Information |
We recognize revenue on products sold by our distributors when
distributors sell our products to their customers. To determine
our business performance at any point in time or for any given
period, we must timely and accurately gather sales information
from our distributors information systems at an increased
cost to us. Our distributors information systems may be
less accurate or reliable than our internal systems. We may be
required to expend time and money to ensure that interfaces
between our systems and our distributors systems are up to
date and effective. In addition, as our reliance upon
interdependent automated computer systems continues to increase,
a disruption in any one of these systems could interrupt the
distribution of our products and impact our ability to
accurately and timely recognize and report revenue.
Some of our distributors may experience financial difficulties,
which could adversely impact our collection of accounts
receivable. Our allowance for doubtful accounts was
approximately $2.8 million at September 30, 2005. We
regularly review the collectibility and credit-worthiness of our
distributors to determine an appropriate allowance for doubtful
accounts. Our uncollectible accounts could exceed our current or
future allowances.
We Face the Risk of Future Charges in the Event of Impairment
and Will Experience Significant Amortization Charges Related to
Purchased Technology.
We adopted SFAS 142 beginning in 2002 and, as a result, we
no longer amortize goodwill. However, we continue to have
significant amortization related to purchased technology,
trademarks, patents and other intangibles. Our amortization
charge for purchased technology and other intangibles was
approximately $21.8 million and $20.0 million in the nine
months ended September 30, 2005 and 2004. In addition, we
must evaluate our goodwill, at least annually for impairment
according to the guidance provided by SFAS 142. We
completed the annual impairment review during the fourth quarter
of 2004. Additionally, as required by SFAS 142, we also
performed an additional goodwill impairment tests in conjunction
with the sale of the Sniffer product line and the sale of the
Magic product line. As a result of these reviews, goodwill was
determined not to be impaired. If during subsequent testing, we
determine that goodwill is impaired, we will be required to take
a non-cash charge to earnings.
In addition, we will continue to evaluate potential impairments
of our long lived assets, including our property and equipment
and amortizable intangibles under SFAS No. 144
Accounting for Impairment or Disposal of Long-Lived
Assets. For 2004, we determined that we had no
impairment of our property and equipment and amortizable
intangibles.
We Face Risks Related to Our Strategic Alliances.
We may not realize the desired benefits from our strategic
alliances on a timely basis or at all. We face a number of risks
relating to our strategic alliances, including the following:
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Our strategic alliances are generally terminable by either party
with no or minimal notice or penalties. We may expend
significant time, money and resources to further strategic
alliances that are thereafter terminated. |
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Business interests may diverge over time, which might result in
conflict, termination or a reduction in collaboration. For
example, our alliance with Internet Security Systems was
terminated following the announcement of our acquisition in 2003
of Entercept and IntruVert. |
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Strategic alliances require significant coordination between the
parties involved. To be successful, our alliances may require
the integration of other companies products with our
products, which may involve significant time and expenditure by
our technical staff and the technical staff of our strategic
allies. |
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Our sales and marketing force may require additional training to
market products that result from our strategic alliances. The
marketing of these products may require additional sales force
efforts and may be more complex than the marketing of our own
products. |
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The integration of products from different companies may be more
difficult than we anticipate, and the risk of integration
difficulties, incompatible products and undetected programming
errors or bugs may be higher than that normally associated with
new products. |
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Our strategic alliances may involve providing professional
services, which might require significant additional training of
our professional services personnel and coordination between our
professional services personnel and other third-party
professional service personnel. |
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We may be required to share ownership in technology developed as
part of our strategic alliances. |
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Due to the complex nature of our products and of those parties
with whom we have strategic alliances, it may take longer than
we anticipate to successfully integrate and market our
respective products. |
We Face Manufacturing, Supply, Inventory, Licensing and
Obsolescence Risks Relating to our Products.
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Third-Party Manufacturing |
We rely on a small number of third parties to manufacture some
of our hardware-based network protection and system protection
products. We expect the number of our hardware-based products
and our reliance on third-party manufacturers to increase as
software-only network and system security solutions become less
viable. Reliance on third-party manufacturers, including
software replicators, involves a number of risks, including the
lack of control over the manufacturing process and the potential
absence or unavailability of adequate capacity. If any of our
third party manufacturers cannot or will not manufacture our
products in required volumes on a cost-effective basis, in a
timely manner, at a sufficient level of quality, or at all, we
will have to secure additional manufacturing capacity. Even if
this additional capacity is available at commercially acceptable
terms, the qualification process could be lengthy and could
cause interruptions in product shipments. The unexpected loss of
any of our manufacturers would be disruptive to our business.
Our products contain critical components supplied by a single or
a limited number of third parties. Any significant shortage of
components or the failure of the third-party supplier to
maintain or enhance these products could lead to cancellations
of customer orders or delays in placement of orders.
Some of our products incorporate software licensed from third
parties. We must be able to obtain reasonably priced licenses
and successfully integrate this software with our hardware. In
addition, some of our products may include open
source software. Our ability to commercialize products or
technologies incorporating open source software may be
restricted because, among other reasons, open source license
terms may be ambiguous and may result in unanticipated
obligations regarding our products.
Hardware based products may face greater obsolescence risks than
software products. We could incur losses or other charges in
disposing of obsolete inventory.
We Face Risks Related to Customer Outsourcing to System
Integrators.
Some of our customers have outsourced the management of their
information technology departments to large system integrators.
If this trend continues, our established customer relationships
could be disrupted and our products could be displaced by
alternative system and network protection solutions offered by
system integrators. Significant product displacements could
impact our revenue and have a material adverse effect on our
business.
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We Rely Heavily on Our Intellectual Property Rights Which
Offer Only Limited Protection Against Potential Infringers.
We rely on a combination of contractual rights, trademarks,
trade secrets, patents and copyrights to establish and protect
proprietary rights in our software. However, the steps taken by
us to protect our proprietary software may not deter its misuse
or theft. We are aware that a substantial number of users of our
anti-virus products have not paid any registration or license
fees to us. Competitors may also independently develop
technologies or products that are substantially equivalent or
superior to our products. Certain jurisdictions may not provide
adequate legal infrastructure for effective protection of our
intellectual property rights. Changing legal interpretations of
liability for unauthorized use of our software or lessened
sensitivity by corporate, government or institutional users to
avoiding infringement of intellectual property could also harm
our business.
Intellectual Property Litigation in the Network and System
Security Market Is Common and Can Be Expensive.
Litigation may be necessary to enforce and protect trade
secrets, patents and other intellectual property rights that we
own. Similarly, we may be required to defend against claimed
infringement by others.
In addition to the expense and distractions associated with
litigation, adverse determinations could:
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result in the loss of our proprietary rights; |
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subject us to significant liabilities, including monetary
liabilities; |
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require us to seek licenses from third parties; or |
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prevent us from manufacturing or selling our products. |
The litigation process is subject to inherent uncertainties. We
may not prevail in these matters, or we may be unable to obtain
licenses with respect to any patents or other intellectual
property rights that may be held valid or infringed upon by our
products or us.
If we acquire a portion of software included in our products
from third parties, our exposure to infringement actions may
increase because we must rely upon these third parties as to the
origin and ownership of any software being acquired. Similarly,
notwithstanding measures taken by our competitors or us to
protect our competitors intellectual property, exposure to
infringement claims increases if we employ or hire software
engineers previously employed by competitors. Further, to the
extent we utilize open source software we face
risks. For example, the scope and requirements of the most
common open source software license, the GNU General Public
License (GPL), have not been interpreted in a court
of law. Use of GPL software could subject certain portions of
our proprietary software to the GPL requirements. Other forms of
open source software licensing present license
compliance risks, which could result in litigation or loss of
the right to use this software.
Pending or Future Litigation Could Have a Material Adverse
Impact on Our Results of Operation and Financial Condition.
In addition to intellectual property litigation, from time to
time, we have been subject to other litigation. Where we can
make a reasonable estimate of the liability relating to pending
litigation and determine that it is probable, we record a
related liability. As additional information becomes available,
we assess the potential liability and revise estimates as
appropriate. However, because of uncertainties relating to
litigation, the amount of our estimates could be wrong. In
addition to the related cost and use of cash, pending or future
litigation could cause the diversion of managements
attention and resources.
Our Stock Price Has Been Volatile and Is Likely to Remain
Volatile.
During 2004, our stock price was highly volatile ranging from a
per share high of $33.55 to a low of $14.96. On
September 30, 2005, our stocks closing price per
share price was $31.42. Announcements,
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business developments, such as a material acquisition or
disposition, litigation developments and our ability to meet the
expectations of investors with respect to our operating and
financial results, may contribute to current and future stock
price volatility. Certain types of investors may choose not to
invest in stocks with this level of stock price volatility.
Further, we may not discover, or be able to confirm, revenue or
earnings shortfalls until the end of a quarter. This could
result in an immediate drop in our stock price.
We Face the Risk of a Decrease in Our Cash Balances and
Losses in Our Investment Portfolio.
Our cash balances are held in numerous locations throughout the
world. A portion of our cash is invested in marketable
securities as part of our investment portfolio. We rely on third
party money managers to manage our investment portfolio. Among
other factors, changes in interest rates, foreign currency
fluctuations and macro economic conditions could cause our cash
balances to fluctuate and losses in our investment portfolio.
Most amounts held outside the United States could be repatriated
to the United States, but, under current law, would be subject
to U.S. federal income tax, less applicable foreign tax
credits.
Product Liability and Related Claims May Be Asserted Against
Us.
Our products are used to protect and manage computer systems and
networks that may be critical to organizations. Because of the
complexity of the environments in which our products operate, an
error, or a false positive, failure or bug in our products,
including a security vulnerability, could disrupt or cause
damage to the networks of our customers, including disruption of
legitimate network traffic by our products. Failure of our
products to perform to specifications, disruption of our
customers network traffic or damages to our
customers networks caused by our products could result in
product liability damage claims by our customers. Our license
agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability
claims. It is possible, however, that the limitation of
liability provisions may not be effective under the laws of
certain jurisdictions, particularly in circumstances involving
unsigned licenses.
Computer Hackers May Damage Our Products,
Services and Systems.
Due to our high profile in the network and system protection
market, we have been a target of computer hackers who have,
among other things, created viruses to sabotage or otherwise
attack our products and services, including our various
websites. For example, we have seen the spread of viruses, or
worms, that intentionally delete anti-virus and firewall
software. Similarly, hackers may attempt to penetrate our
network security and misappropriate proprietary information or
cause interruptions of our internal systems and services. Also,
a number of websites have been subject to denial of service
attacks, where a website is bombarded with information requests
eventually causing the website to overload, resulting in a delay
or disruption of service. If successful, any of these events
could damage users or our computer systems. In addition,
since we do not control CD duplication by distributors or our
independent agents, CDs containing our software may be infected
with viruses.
False Detection of Viruses and Actual or Perceived Security
Breaches Could Adversely Affect Our Business.
Our anti-virus software products have in the past, and these
products and our intrusion protection products may at times in
the future, falsely detect viruses or computer threats that do
not actually exist. These false alarms, while typical in the
industry, may impair the perceived reliability of our products
and may therefore adversely impact market acceptance of our
products. In addition, we have in the past been subject to
litigation claiming damages related to a false alarm, and
similar claims may be made in the future. An actual or perceived
breach of network or computer security at one of our customers,
regardless of whether the breach is attributable to our
products, could adversely affect the markets perception of
our security products.
We Face Risks Related to Our Anti-Spam and Anti-Spyware
Software Products.
Our anti-spam and anti-spyware products may falsely identify
emails or programs as unwanted spam or
potentially unwanted programs, fail to properly
identify unwanted emails or programs, particularly as
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spam emails or spyware are often designed to
circumvent anti-spam or spyware products, or, in the case of our
anti-spam products, incorrectly identify legitimate businesses
as users of phishing technology. Parties whose emails or
programs are blocked by our products, or whose websites are
incorrectly identified as utilizing phishing techniques, may
seek redress against us for labeling them as
spammers or spyware, or for interfering with their
business. In addition, false identification of emails or
programs as unwanted spam or potentially
unwanted programs may reduce the adoption of these
products.
Business Interruptions May Impede Our Operations and the
Operations of Our Customers.
We have implemented a new customer relationship management
information system. Our ability to continue to obtain support
from the manufacturer of this system is critical to the ultimate
success of the implementation. We are also in the process of
transitioning finance and sales order processing to a new shared
services center in Cork, Ireland and are planning modifications
to our accounting systems which we expect to complete in 2005.
Implementation and modifications of these types of computer
systems are often disruptive to business and may cause us to
incur higher costs than we anticipate. Failure to manage a
smooth transition to the new shared services center and the
implementation of a new customer relationship management could
materially harm our business operations.
In addition, we and our customers face a number of potential
business interruption risks that are beyond our respective
control. Natural disasters or other events could interrupt our
business or the business of our customers, and each of us is
reliant on external infrastructure that may be antiquated. Also,
an outbreak of SARS, bird flu or other highly contagious
illnesses could have an adverse impact on our operations and the
operations of our customers. Our corporate headquarters are
located near a major earthquake fault. The potential impact of a
major earthquake on our facilities, infrastructure and overall
operations is not known. Despite safety precautions that have
been implemented, there is no guarantee that an earthquake would
not seriously disturb our entire business process. We are
largely uninsured for losses and business disruptions caused by
an earthquake and other natural disasters.
Cryptography Contained in Our Technology is Subject to Export
Restrictions.
Some of our computer security solutions, particularly those
incorporating encryption, may be subject to export restrictions.
As a result, some products may not be exported to international
customers without prior U.S. government approval. The list
of products and end users for which export approval is required,
and the regulatory policies with respect thereto, are subject to
revision by the U.S. government at any time. The cost of
compliance with U.S. and international export laws and changes
in existing laws could affect our ability to sell certain
products in certain markets and could have a material adverse
effect on our international revenues.
We May Incur Significant Stock-Based Compensation Charges
Related to Repriced Options, Assumed McAfee.com Options,
IntruVert Restricted Stock and Options, Foundstone Options and
Compensation Expenses Related to the Sniffer Bonus Plan and
Foundstone Retention Payments.
We may incur stock-based compensation charges related to
(i) employee options repriced in April 1999 (Repriced
Options), (ii) McAfee.com options we assumed in the
acquisition of the publicly traded McAfee.com shares in
September 2002 (McAfee.com Options)
(iii) unvested IntruVert options that were cancelled in May
2003 related to this acquisition (the IntruVert
Options) and exchanged for cash placed in escrow,
(iv) unvested IntruVert restricted stock that was cancelled
in May 2003 related to this acquisition (the IntruVert
Restricted Stock), and exchanged for monthly cash payments
as the former employees provide services to us,
(v) unvested Foundstone options assumed by us as part of
the acquisition and (vi) Foundstone Key Employee retention
payments. The size of the charges related to the Repriced
Options and McAfee.com Options could be significant depending on
the movements in the market value of our common stock. As a
result of Financial Accounting Standards Board Interpretation
No. 44, effective July 1, 2000, Repriced Options and
McAfee.com Options are subject to variable accounting treatment.
The stock-based compensation charge (or benefit) for the
Repriced Options is determined by the excess of our closing
stock price at the end of a reporting period over the fair value
of our common stock on July 1, 2000, equivalent to $20.375.
The stock-based compensation charge (or benefit) for the McAfee
Options is determined by the
70
excess of our closing stock price per share over the exercise
price of the option minus $11.85 payable upon exercise of the
option. Remeasurement of the charge continues until the earlier
of the date of exercise, forfeiture or cancellation without
replacement. The resulting compensation charge (or benefit) to
earnings will be recorded over the remaining life of the options
subject to variable accounting treatment.
During the nine months ended September 30, 2005 and 2004,
we recorded a charge of approximately $0.8 million and
$3.0 million, respectively, related to McAfee.com Options,
and a stock-based compensation charge of approximately
$0.2 million was recorded in the nine months ended
September 30, 2005 for the McAfee.com Repriced Options. No
stock-based compensation charge was recorded for repriced
options in the nine months ended September 30, 2004.
During the remaining life of both the McAfee.com Options and
Repriced Options, we may record additional stock-based
compensation charges or benefits. Such charges or benefits
cannot be forecasted. We estimate that a $1 increase in our
stock price at September 30, 2005 would increase our future
stock compensation charge by approximately $0.4 million.
For the cash paid to cancel the IntruVert Options that was
placed in escrow, we have been recognizing compensation expense
as the former IntruVert employees provide services to us. For
the remainder of 2005 and through 2007, we expect to recognize
$0.7 million in expense related to these payments. For the
IntruVert Restricted Stock, we have been recognizing
compensation expense monthly since the acquisition and will
continue to do so through 2006 as the former IntruVert employees
provide services to us. For the remainder of 2005 and through
2006, we expect to recognize approximately $0.2 million
with respect to the IntruVert Restricted Stock.
In connection with the Foundstone acquisition, we exchanged
McAfee stock options for Foundstone stock options. Approximately
$0.6 million in compensation expense may be recorded
through 2008 related to unvested McAfee options which were
exchanged for unvested Foundstone options.
In connection with the Sniffer disposition, we implemented the
Sniffer Bonus Plan primarily to encourage Sniffers
management to assist us in the sales process and remain with the
business through the sale. Subject to reduction in certain
cases, we expect total related cash payments of approximately
$7.7 million, of which approximately $5.3 million was
paid in 2004 and the balance is planned to be paid in the fourth
quarter of 2005.
Approximately $25.0 million of the amount paid to acquire
Foundstone was placed into escrow accounts. Of this amount,
approximately $5.6 million was placed into a key employee
escrow account and is being paid to four Foundstone employees as
they provide services to us through September 2007. The
Foundstone employees forfeit any unvested amounts if their
employment is terminated under provisions in the escrow
agreements. Any forfeited amounts will be returned to us. We
recognized compensation expense of approximately
$0.7 million and $2.5 million in the three and nine
months ended September 30, 2005, respectively. We may
recognize an additional $2.7 million through 2007.
Our Charter Documents and Delaware Law and Our Rights Plan
May Impede or Discourage a Takeover, Which Could Lower Our Stock
Price.
|
|
|
Our Charter Documents and Delaware Law |
Pursuant to our charter, our board of directors has the
authority to issue up to 5.0 million shares of preferred
stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those
shares without any further vote or action by our stockholders.
The issuance of preferred stock could have the effect of making
it more difficult for a third party to acquire a majority of our
outstanding voting stock.
Our classified board and other provisions of Delaware law and
our certificate of incorporation and bylaws, could also delay or
make a merger, tender offer or proxy contest involving us more
difficult. For example, any stockholder wishing to make a
stockholder proposal (including director nominations) at our
2006 annual
71
meeting, must meet the qualifications and follow the procedures
specified under both the Exchange Act of 1934 and our bylaws.
Our board of directors has adopted a stockholders rights
plan. The rights will become exercisable the tenth day after a
person or group announces acquisition of 15% or more of our
common stock or announces commencement of a tender or exchange
offer the consummation of which would result in ownership by the
person or group of 15% or more of our common stock. If the
rights become exercisable, the holders of the rights (other than
the person acquiring 15% or more of our common stock) will be
entitled to acquire in exchange for the rights exercise
price, shares of our common stock or shares of any company in
which we are merged with a value equal to twice the rights
exercise price.
|
|
Item 3. |
Quantitative and Qualitative Disclosure About Market
Risk |
Our market risks at September 30, 2005, have not changed
significantly from those discussed in Item 7A of our
Form 10-K for the year ended December 31, 2004 filed
with the Securities and Exchange Commission.
|
|
Item 4. |
Controls and Procedures |
Our management evaluated, with the participation of our Chief
Executive Officer (CEO) and Chief Financial Officer
(CFO), the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the
end of the period covered by this quarterly report on
Form 10-Q.
A control system, no matter how well conceived and operated, can
provide only reasonable assurance that the objectives of the
control system are met. Our management, including our Chief
Executive Officer and Chief Financial Officer, does not expect
that our disclosure controls and procedures or internal control
over financial reporting will prevent all errors and fraud.
Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control
issues within the company have been detected. These inherent
limitations include the realities that judgments in
decision-making can be faulty, and that breakdown can occur
because of simple error or mistake. The design of any system of
controls also is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a control system,
misstatements due to error or fraud may occur and not be
detected.
Based upon the material weaknesses described in Item 9A of
our Annual Report on Form 10-K filed on March 31,
2005, as amended on May 24, 2005, our Chief Executive
Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures were ineffective as of
September 30, 2004. In addition, described below are
resources that have been assigned to remediate and re-test
certain internal control deficiencies, such as the material
weaknesses described in Item 9A of our Annual Report on
Form 10-K filed on March 31, 2005, identified during
our first annual assessment of our internal controls. Our
updating of internal controls documentation and design occurring
during the second quarter and continuing into the third quarter
will be a recurring annual process going forward and has
generally involved refocusing our efforts on key internal
controls as defined by us under our current assessments of risk.
While these steps have helped address some of the internal
control deficiencies noted in our assessment of internal
controls as of December 31, 2004, the material weaknesses
mentioned above will not be considered remediated until the new
internal controls operate for a sufficient period of time, are
tested and we conclude that these controls are
72
operating effectively. We have either performed or are in
process of performing the following actions to remediate the
deficiencies in our internal controls:
|
|
|
Internal Control Changes in the three months ended
September 30, 2005 |
During the three months ended September 30, 2005, we have
hired a vice president of tax, additional revenue accountants
and additional personnel in the financial close and reporting
process. In addition to these improvements, we have taken the
following steps in 2005:
|
|
|
Accounting for Income Taxes |
|
|
|
|
|
We have added two tax analysts to our tax department, and we
continue to utilize consultants to assist with the
quarters tax processes to provide sufficient personnel for
the timely completion of account reconciliation procedures,
preparation and analyses of documentation on key judgments,
additional levels of review and enhanced documentation of the
analyses and internal controls performed. |
|
|
|
We have outsourced international tax compliance and various
other federal and state compliance responsibilities to several
large global accounting firms. We believe this will enable our
tax department to better focus on financial reporting for taxes
and the related key internal controls. |
|
|
|
In connection with developing our effective tax rate estimates,
we further modified our procedures used to estimate the
proportion of expected earnings in the United States and other
foreign jurisdictions to enable more detailed estimates to be
performed. |
|
|
|
We have expanded our analyses of our tax accounts at interim
periods, which we believe will enable our year end procedures to
be performed more timely. |
|
|
|
We have implemented a quarterly review of our tax reserves and
related exposures to ensure that any related liabilities or
discrete releases of tax reserves are identified and recorded
timely. |
|
|
|
We have increased the level of reporting and analysis provided
to our senior financial executives and in turn have benefited
from resulting improvements in our documentation, analyses and
estimates. |
|
|
|
We completed our performance of our key interim tax controls in
a timely manner as determined by our internal closing schedule
and published timetable for issuing our quarterly earnings
releases. |
|
|
|
|
|
We have centralized our order processing operations and related
revenue accounting processes from Latin America to Plano, Texas
to address difficulties experienced by certain regions in
performing internal controls related to revenue recognition
matters. |
|
|
|
We have begun implementing automated controls to compare prices
in our invoice register resulting from the automated revenue
recognition process performed by our systems to the published
prices in our price lists to detect and correct improper system
set up and/or processing of product stock keeping units. |
|
|
|
We have hired a director of revenue and additional revenue
accountants in our revenue recognition group to enable improved
review and analysis of evidence of fair value of our post
contract support provided to different customer groups as well
as analysis and review of complex terms in our OEM and large
contractual customer arrangements. |
|
|
|
We have implemented more stringent policies and procedures
regarding revenue and change management of our product catalogue. |
|
|
|
Financial Close and Reporting Process |
During the second quarter of 2005, we hired a world-wide
controller, a director of financial reporting and additional
personnel in response to ongoing attrition and to the
deficiencies noted in the annual assessment.
73
Additionally, we continue to utilize consultants to assist with
technical accounting matters as we continue to recruit and hire
additional corporate accounting staff.
While we believe we have taken many positive steps towards
remediating the deficiencies noted in the above areas, due to
the limited amount of time that has transpired from the
completion of our first annual internal controls assessment,
there remain significant additional actions necessary over the
remainder of 2005 and potentially subsequent periods, as follows:
|
|
|
|
|
Increasing the number of internal general ledger and tax
accounting personnel trained in reporting under accounting
principles generally accepted in the United States (GAAP); |
|
|
|
Improving the documentation, communication and periodic review
of our accounting policies throughout our domestic and
international locations for consistency and application with
GAAP at each of our operating locations; |
|
|
|
Improving the interim review and reconciliation process for
certain key account balances; |
|
|
|
Enhancing the training and education for our international
finance and accounting personnel and new hire additions to the
worldwide finance team; |
|
|
|
Increasing diligence regarding user access and change management
to our network, databases and applications; |
|
|
|
Automating certain controls that are currently performed
manually; and |
|
|
|
Simplifying and integrating systems. |
Other Changes in Internal Control over Financial Reporting
During the first quarter of 2005, we moved the EMEA shared
services center and localization operations from Amsterdam to
Cork, Ireland. This event has resulted in the loss of
experienced personnel unwilling to relocate. We have hired new
personnel who are in the process of being trained in our
operations and our review and control procedures. As a result,
we have increased our review of accounting information processed
in our EMEA shared service center and expect to take further
steps to increase (i) training and (ii) internal
controls documentation and testing under our 2005 internal
controls assessment plans.
74
PART II: OTHER INFORMATION
Information with respect to this item is incorporated by
reference to Note 12 of the notes to the condensed
consolidated financial statements included in this Report on
Form 10-Q.
|
|
Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds |
The table below sets forth all repurchases by us of our common
stock during the nine months ended September 30, 2005
whether or not pursuant to a publicly announced plan or program
(in thousands, except price per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar | |
|
|
|
|
|
|
Total Number of | |
|
Value of Shares That | |
|
|
Total | |
|
|
|
Shares Purchased as | |
|
May yet Be | |
|
|
Number of | |
|
Average | |
|
Part of Publicly | |
|
Purchased Under Our | |
|
|
Shares | |
|
Price Paid | |
|
Announced Plan or | |
|
Stock Repurchase | |
Period |
|
Purchased | |
|
Per Share | |
|
Repurchase Program | |
|
Program(1) | |
|
|
| |
|
| |
|
| |
|
| |
January 1, 2005 through January 31, 2005
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
123,556 |
|
February 1, 2005 through February 28, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,556 |
|
March 1, 2005 through March 31, 2005
|
|
|
2,000 |
|
|
|
23.66 |
|
|
|
2,000 |
|
|
|
76,245 |
|
April 1, 2005 through April 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,245 |
|
May 1, 2005 through May 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,245 |
|
June 1, 2005 through June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,245 |
|
July 1, 2005 through July 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,245 |
|
August 1, 2005 through August 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,245 |
|
September 1, 2005 through September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,000 |
|
|
$ |
23.66 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
In August 2004, our board of directors authorized the repurchase
of $200.0 million of our common stock in the open market
from time to time over the next two years. As of
December 31, 2004, we had remaining authorization to
repurchase $123.6 million of our common stock. In April
2005, our board of directors authorized the repurchase of an
additional $175.0 million of our common stock in the open
market from time to time until August 2006, depending upon
market conditions, share price and other factors. |
|
|
Item 3. |
Defaults upon Senior Securities |
None.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
|
|
Item 5. |
Other Information |
None.
(a) Exhibits. The exhibits listed in the
accompanying Exhibit Index are filed or incorporated by
reference as part of this Report.
75
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, and the results and regulations promulgated thereunder,
the registrant has duly caused this amended report to be signed
on its behalf by the undersigned thereunto duly authorized.
|
|
|
McAfee Inc.
|
|
|
/s/ Eric F. Brown
|
|
|
|
Eric F. Brown
|
|
Executive Vice President and Chief Financial Officer |
November 2, 2005
76
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
2 |
.1 |
|
Asset Purchase Agreement made and entered into as of
April 22, 2004, by and among, Network General Corporation
(formerly named Starburst Technology Holdings, Inc.), on the one
hand; and (ii) McAfee, Inc. (formerly named Networks
Associates, Inc.), Network Associates Technology, Inc., Network
Associates International BV, Network Associates (India) Private
Limited, McAfee Japan Co., Ltd. (formerly named Network
Associates Japan Co., Ltd.), on the other hand, as amended by
Amendment No. 1 thereto dated as of July 15, 2004.(1) |
|
|
3 |
.1 |
|
Second Restated Certificate of Incorporation of the Registrant,
as amended on December 1, 1997.(3) |
|
|
3 |
.2 |
|
Certificate of Ownership and Merger between Registrant and
McAfee, Inc.(2) |
|
|
3 |
.3 |
|
Amended and Restated Bylaws of the Registrant.(2) |
|
|
3 |
.4 |
|
Certificate of Designation of Series A Preferred Stock of
the Registrant.(5) |
|
|
3 |
.5 |
|
Certificate of Designation of Series B Participating
Preferred Stock of the Registrant.(6) |
|
|
4 |
.3 |
|
Indenture dated as of August 17, 2001 between the
Registrant and State Street Bank and Trust Company of
California.(7) |
|
|
10 |
.1 |
|
Lease Assignment dated November 17, 1997 for facility at
3965 Freedom Circle, Santa Clara, California by and between
Informix Corporation and McAfee Associates, Inc.(8) |
|
|
10 |
.2 |
|
Consent to Assignment Agreement dated December 19, 1997 by
and among Birk S. McCandless, LLC, Guaranty Federal Bank,
F.S.B., Informix Corporation and the Registrant.(8) |
|
|
10 |
.3 |
|
Subordination, Nondisturbance and Attornment Agreement dated
December 18, 1997, between Guaranty Federal Bank, F.S.B.,
the Registrant and Birk S. McCandless, LLC.(8) |
|
|
10 |
.4 |
|
Lease dated November 22, 1996 by and between Birk S.
McCandless, LLC and Informix Corporation for facility at 3965
Freedom Circle, Santa Clara, California.(8) |
|
|
10 |
.5* |
|
2002 Employee Stock Purchase Plan, as amended.(9) |
|
|
10 |
.6* |
|
1997 Stock Incentive Plan, as amended.(9) |
|
|
10 |
.7* |
|
Amended and Restated 1993 Stock Option Plan for Outside
Directors.(4) |
|
|
10 |
.8* |
|
2000 Nonstatutory Stock Option Plan.(10) |
|
|
10 |
.9* |
|
Amended and Restated Employment Agreement between George Samenuk
and the Registrant, dated October 9, 2001.(11) |
|
|
10 |
.11 |
|
1st Amendment to Lease dated March 20, 1998 between
Birk S. McCandless, LLC and the Registrant.(13) |
|
|
10 |
.12 |
|
Confirmation, Amendment and Notice of Security Agreement dated
March 20, 1998 among Informix Corporation, Birk S.
McCandless, LLC and the Registrant.(13) |
|
|
10 |
.13 |
|
Second Amendment to Lease dated September 1, 1998 among
Informix Corporation, Birk S. McCandless, LLC and the
Registrant.(13) |
|
|
10 |
.14 |
|
Subordination, Nondisturbance and Attornment Agreement dated
June 21, 2000, among Column Financial, Inc., Informix
Corporation, Birk S. McCandless, LLC, and the Registrant.(13) |
|
|
10 |
.16* |
|
Employment Agreement between Kent H. Roberts and the Registrant,
dated October 9, 2001.(14) |
|
|
10 |
.17* |
|
Employment Agreement between Vernon Gene Hodges and the
Registrant, dated December 3, 2001.(14) |
|
|
10 |
.18* |
|
Employment Agreement between Kevin M. Weiss and the Registrant
Dated October 15, 2002.(17) |
|
|
10 |
.19 |
|
Form of Indemnification Agreement between the Registrant and its
Executive Officers(17) |
|
|
10 |
.20* |
|
Summary of Pay for Performance Plan.(4) |
|
|
10 |
.21* |
|
Network Associates, Inc. Tax Deferred Savings Plan.(16) |
|
|
10 |
.22 |
|
Umbrella Credit Facility of Registrant dated April 15,
2004.(18) |
|
|
10 |
.23 |
|
Fifth Amendment to Network Associates, Inc. Tax Deferred Savings
Plan.(18) |
|
|
10 |
.24 |
|
Amendment to Employment Agreement of George Samenuk effective as
of January 20, 2004.(18) |
77
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10 |
.26 |
|
Sixth Amendment to Network Associates, Inc. Tax Deferred Savings
Plan.(20) |
|
|
10 |
.27 |
|
Transition Agreement by and between Registrant and Stephen C.
Richards.(19) |
|
|
10 |
.28 |
|
Employment Agreement between Registrant and Eric F. Brown dated
December 10, 2004 (22) |
|
|
10 |
.29* |
|
2005 Independent Director Cash Compensation Plan. (23) |
|
|
10 |
.30* |
|
Executive Officer Annual Compensation for Fiscal Year Ending
December 31, 2005(24) |
|
|
10 |
.31* |
|
Second Amendment to Amended and Restated Employment Agreement
between Registrant and George Samenuk dated May 21, 2005.
(25) |
|
|
10 |
.32* |
|
First Amendment to Employment Agreement between Registrant and
Vernon Gene Hodges dated May 21, 2005. (25) |
|
|
10 |
.33* |
|
First Amendment to Employment Agreement between Registrant and
Eric F. Brown dated May 26, 2005. (25) |
|
|
10 |
.34* |
|
First Amendment to Employment Agreement between Registrant and
Kevin M. Weiss dated May 21, 2005. (25) |
|
|
10 |
.35* |
|
First Amendment to Employment Agreement between Registrant and
Kent H. Roberts dated May 21, 2005. (25) |
|
|
31 |
.1 |
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
|
32 |
.1 |
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
|
|
|
|
(1) |
Incorporated by reference from the Registrants Report on
Form 8-K filed with the Commission on July 16, 2004. |
|
|
(2) |
Incorporated by reference from the Registrants Report on
Form 10-Q for the quarter ended September 30, 2004,
filed with the Commission on November 8, 2004. |
|
|
(3) |
Incorporated by reference from the Registrants
Registration Statement on Form S-4 filed with the
Commission on March 25, 1998. |
|
|
(4) |
Incorporated by reference from the Registrants Annual
Report on Form 10-K for the year ended December 31,
2002, filed with the Commission on October 31, 2003. |
|
|
(5) |
Incorporated by reference from the Registrants Report on
Form 10-Q for the quarter ended September 30, 1996,
filed with the Commission on November 14, 1996. |
|
|
(6) |
Incorporated by reference from the Registrants Report on
Form 8-A filed with the Commission on October 22, 1998. |
|
|
(7) |
Incorporated by reference from the Registrants
Registration Statement on Form S-3 filed with the
Commission on November 9, 2001. |
|
|
(8) |
Incorporated by reference from the Registrants
Registration Statement on Form S-3, filed with the
Commission on February 11, 1998. |
|
|
(9) |
Incorporated by reference from the Registrants
Registration Statement on Form S-8 filed with the
Commission on July 27, 2005. |
|
|
(10) |
Incorporated by reference from the Registrants report on
Form 10-K for the year ended December 31, 2000, filed
with the Commission on April 2, 2001. |
|
(11) |
Incorporated by reference from the Registrants report on
Form 10-K for the year ended December 31, 2001, filed
with the Commission on February 8, 2002. |
|
(12) |
Incorporated by reference from the Registrants report on
Form 10-Q for the quarter ended March 31, 2001, filed
with the Commission on May 15, 2001. |
|
(13) |
Incorporated by reference from the Registrants report on
Form 10-Q for the quarter ended September 30, 2001,
filed with the Commission on November 13, 2001. |
78
|
|
(14) |
Incorporated by reference from the Registrants report on
Form 10-K for the year ended December 31, 2001, filed
with the Commission on February 8, 2002. |
|
(15) |
Incorporated by reference from the Registrants report on
Form 10-Q for the quarter ended September 30, 2002,
filed with the Commission on November 12, 2002. |
|
(16) |
Incorporated by reference from the Registrants
Registration Statement on Form S-8 filed with the
Commission on November 5, 2003. |
|
(17) |
Incorporated by reference from the Registrants report on
Form 10-K for the year ended December 31, 2003, filed
with the Commission on March 9, 2004. |
|
(18) |
Incorporated by reference from the Registrants report on
Form 10-Q for the quarter ended March 31, 2004, filed
with the Commission on May 10, 2004. |
|
(19) |
Incorporated by reference from the Registrants report on
Form 8-K filed with the Commission on September 7,
2004. |
|
(20) |
Incorporated by reference from the Registrants report on
Form 10-Q for the quarter ended June 30, 2004, filed
with the Commission on August 9, 2004. |
|
(21) |
Incorporated by reference from the Registrants report on
Form 10-Q for the quarter ended September 30, 2004,
filed with the Commission on November 8, 2004. |
|
(22) |
Incorporated by reference from the Registrants report on
Form 8-K filed with the Commission on December 14,
2004. |
|
(23) |
Incorporated by reference from the Registrants report on
Form 10-K for the year ended December 31, 2004, filed
with the Commission on March 31, 2005. |
|
(24) |
Incorporated by reference from the Registrants report on
Form 8-K filed with the Commission on April 22, 2005. |
|
(25) |
Incorporated by reference from the Registrants report on
Form 8-K filed with the Commission on April 26, 2005. |
|
|
|
|
* |
Management contracts or compensatory plans or arrangements
covering executive officers or directors of McAfee, Inc. |
79