e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2006
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or
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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
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Commission File Number:
001-31216
McAfee, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other
jurisdiction
of incorporation or organization)
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77-0316593
(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)
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Registrants telephone number, including area code:
(408) 988-3832
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, par value $0.01 per share
and related Preferred Share Purchase Rights
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes o No þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer 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
The aggregate market value of the voting stock held by
non-affiliates of the issuer as of the last business day of the
Registrants most recently completed second fiscal quarter
(June 30, 2006) was approximately $3.9 billion.
The number of shares outstanding of the issuers common
stock as of December 7, 2007 was 159,908,615.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
MCAFEE
INC.
FORM 10-K
For the
fiscal year ended December 31, 2006
TABLE OF CONTENTS
2
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K
contains forward-looking statements that involve risks and
uncertainties. All forward-looking statements included in this
Annual Report on
Form 10-K
are based on information available to us on the date hereof.
These statements involve known and unknown risks, uncertainties
and other factors, which may cause our actual results to differ
materially from those implied by the forward-looking statements.
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
Item 1A, Risk Factors as well as in
Item 1, Business and Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations in this Annual Report
on
Form 10-K.
We undertake no obligation to revise or update publicly any
forward-looking statements for any reason.
These statements include, without limitation, statements
regarding our expectations, beliefs, intentions or strategies
regarding the future. Forward-looking statements in the Report
include, but are not limited to, statements about the following
matters:
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future investments in complementary businesses, products and
technologies;
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our expectation that our financial results will continue to
fluctuate;
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our expectation that international revenue will remain a
significant percentage of our net revenue;
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our expectation that both product and pricing competition
will increase;
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our expectation that product-related expenses will
increase;
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expectations about future sales to our top ten distributors
and our sales efforts through the channel and other partners;
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the expected geographic composition of our future revenue;
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our expected future revenue mix;
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our expected revenue realization rates;
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the anticipated future trend of specific categories of
expenses;
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the expected future impact related to change in senior
management;
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our expected benefits from business acquisitions;
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stock-based compensation expense, which we began recognizing
for our stock-based compensation plans under the fair value
method in the first quarter of 2006;
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expected expenses associated with our strategy to mitigate
employee income tax obligations;
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the expected future impact of FIN 48;
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our expected future level of DSOs;
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our expected settlement of pending federal and state
stockholder derivative lawsuits;
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our expected use of cash to buy back our common stock in the
open market and for acquisitions; and
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our expected ability to meet our obligations through
available cash and internally generated funds, our expectation
of generating positive working capital through operations, and
our belief as to working capital being sufficient to meet our
cash requirements in future periods.
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In some cases, you can identify other forward-looking
statements in the Report by terminology such as may,
should, could, expects,
plans, anticipates,
believes, estimates,
predicts, potential,
targets,
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goals, projects,
continue, or variations of such words, similar
expressions, or the negative of these terms or other comparable
terminology.
EXPLANATORY
NOTE REGARDING RESTATEMENT
This annual report on
Form 10-K
for the year ended December 31, 2006 includes the effects
of a restatement on the following previously issued consolidated
financial statements, data and related disclosures: (i) our
audited consolidated financial statements as of
December 31, 2005 and for each of the two years in the
period ended December 31, 2005; (ii) our selected
financial data as of and for the years ended December 31,
2005, 2004, 2003 and 2002; and (iii) our unaudited
quarterly financial data for the first quarter in the year ended
December 31, 2006 and for all quarters in the year ended
December 31, 2005.
Financial information included in our reports on
Form 10-K
and
Form 10-Q
filed prior to July 27, 2007, and the related opinions of
our independent registered public accounting firms, and all
earnings press releases and similar communications and all
financial information included in our reports on
Form 8-K
issued by us prior to December 21, 2007, should not be
relied upon and are superseded in their entirety by this annual
report on
Form 10-K
and other reports on
Form 10-Q
and
Form 8-K
filed by us with the SEC on or after December 21, 2007.
We became aware of potential issues with respect to our
historical stock option grants in May 2006 after the Center for
Financial Research and Analysis (CFRA) released a
report titled Options Backdating Which
Companies are at Risk? This report concluded there was
a high probability that we backdated option grants from 1997 to
2002, based on stock price trends around certain grant dates.
Upon becoming aware of the CFRA report, management immediately
commenced a voluntary internal review involving the examination
of certain stock option grants. In May 2006, management notified
our board of directors that an internal review was in process in
response to the analysis in the CFRA report.
During our initial review, management discovered irregularities
in certain historical stock option grants and discussed these
findings with the board of directors in late May 2006. We
learned during the course of the initial review, and through
subsequent discussions between our former general counsel and
certain directors, of irregularities regarding the pricing of a
grant to our former general counsel. Upon review of the findings
of the internal review and subsequent to such discussions, the
board of directors immediately terminated the employment of our
former general counsel for cause.
The board of directors created a committee (the special
committee) comprised of certain of its members who were
independent of our company and management and who had not
previously served as members of our boards compensation
committee to conduct an investigation to evaluate the conduct
and performance of our officers, employees and directors who
were involved in the option granting process and to evaluate the
timing of option grants, the related approval documentation and
accounting implications with respect to grants made during the
period from January 1, 1995 through March 31, 2006. In
May 2006, the special committee retained independent counsel and
forensic accountants to assist in the investigation
(collectively referred to as the investigative
team). No limits were placed on the scope of the
investigation. Independent counsel first met with the audit
committee and with the special committee in June 2006.
The special committee held more than 50 meetings from
June 10, 2006 through the date of this filing to discuss
matters related to the investigation with its advisors. The
investigation included interviews with over 80 individuals,
which were conducted at the direction of the investigative team.
More than 3.3 million emails and electronic documents were
collected, of which approximately 830,000 were determined to be
relevant to the investigation and reviewed. In addition, more
than 900 boxes of documents were reviewed.
Findings
and conclusions
The special committee presented its initial findings to the
board of directors on October 10, 2006. As part of this
presentation, the special committee communicated to our board of
directors information concerning errors and irregularities with
respect to our option granting practices, including, among
others, the new hire option grant of our former president and
one of the option grants to our former general counsel.
Immediately following that
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presentation, our chairman and chief executive officer retired
and our president was terminated. The board determined this
termination was a termination for cause.
The special committee investigation was completed in November
2007. The special committee concluded that there were both
qualitative issues and accounting and administrative errors
relating to our stock option granting process. In this regard,
the special committee concluded that certain former members of
management had acted inappropriately, giving rise to qualitative
concerns. The qualitative concerns included the following:
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in the case of our former general counsel, he and a former
member of management participated in intentionally modifying one
of the former general counsels stock option grants so as
to create a lower exercise price, and the former general counsel
failed to disclose this unauthorized change to the board of
directors prior to late May 2006;
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in some instances, former members of management drafted
corporate records, including employment documentation, board and
compensation committee meeting minutes and actions by unanimous
written consent, with the benefit of hindsight so as to choose
measurement dates giving more favorable exercise prices,
moreover, certain of these documents were used by us in making
accounting determinations with respect to stock-based
compensation;
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during the course of the investigation, certain former members
of management did not provide completely accurate or consistent
information and in one case, provided documentation to the
special committee that the special committee determined was
intentionally altered; and
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certain former members of senior management did not display the
appropriate oversight and tone at the top expected
by the board of directors.
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In addition to the foregoing, the special committee concluded
that certain stock option awards were previously accounted for
using incorrect measurement dates because: (i) we had
previously determined accounting measurement dates for certain
stock option awards incorrectly, and, in some instances, such
dates were chosen with the benefit of hindsight so as to
intentionally, and not inadvertently or as a result of
administrative error, give more favorable exercise prices,
(ii) the key terms for a substantial portion of the grants
in an annual merit grant had been determined with finality prior
to the original measurement date, with a reduction in the
exercise price on the original measurement date, which
represented a repricing, (iii) original accounting
measurement dates occurred prior to approval dates,
(iv) original accounting measurement dates occurred prior
to employment commencement dates, (v) approval and
employment commencement date documentation was incorrect or
inconsistent and (vi) certain director grants contained
clerical errors.
As a result of these findings, we have restated our consolidated
financial statements to properly reflect the correction of these
errors. During this restatement, we also corrected other known
errors.
To correct our past accounting for stock options under
Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees
(APB 25), we recorded additional pre-tax, non-cash,
stock-based compensation expense totaling $137.4 million,
including of $3.4 million ($2.5 million, net of tax)
for the year ended December 31, 2005, $10.8 million
($7.2 million, net of tax) for the year ended
December 31, 2004 and $123.1 million
($80.5 million, net of tax) for the periods 1995 through
2003. We also expect to amortize less than $0.1 million of
such pre-tax charges under Statement of Financial Accounting
Standards No. 123(R) Share-Based Payment
(SFAS 123(R)), in periods from January 1,
2007 through 2009.
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The following table presents stock-based compensation expense
recorded in this restatement by type of error as discussed below
(in thousands):
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Total
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Reason for revised accounting measurement date:
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Annual merit grant allocation and/or approval not complete on
the original measurement date
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$
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70,358
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Original accounting measurement date prior to approval date
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15,802
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Original accounting measurement date prior to employment
commencement date
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6,341
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Incorrect or inconsistent approval and employment commencement
date documentation
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4,812
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Clerical errors in director grants
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270
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Total of intrinsic charges for revised measurement dates
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97,583
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Repriced annual merit grant
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6,694
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Post-employment option modifications previously not recorded
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23,143
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Correction of accounting errors, primarily options historically
accounted for as variable awards
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9,938
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Total
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$
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137,358
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Option
grants previously accounted for using incorrect measurement
dates
The special committee identified instances of the following:
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annual merit grant allocation
and/or
approval not complete on the original measurement date,
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original accounting measurement date prior to approval date,
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original accounting measurement date prior to employment
commencement date,
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incorrect or inconsistent approval and employment commencement
date documentation, and
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clerical errors in director grants.
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In light of the significant judgment used in establishing
revised measurement dates, alternate approaches to those used by
us could have resulted in different stock-based compensation
expense than recorded by us in the restatement. While we
considered various alternative approaches, we believe that the
approaches we used were the most appropriate under the
circumstances. We conducted a sensitivity analysis to assess how
the restatement adjustments described in this annual report on
Form 10-K
could have changed under alternative methodologies for
determining measurement dates for stock option grants from 1995
through 2005. See Critical Accounting Policies and
Estimates in Managements Discussion and
Analysis of Financial Condition and Results of
Operations in Item 7 of the annual report on
Form 10-K
for information regarding the incremental stock-based
compensation charges that would result from using alternate
measurement dates.
Approximately 98% of the total intrinsic value (the stock price
on the revised measurement date minus the exercise price)
recognized as a result of the investigation results from option
grants made during the period 1995 through 2003. With the
exception of a few individuals who are no longer associated with
McAfee, we believe all holders of incorrectly priced options
issued by us were not involved in or aware of the improper
dating of options or other errors. Accordingly, we plan to
continue to honor the options that violated the terms of our
stock option plans, except in certain isolated cases described
in the section Modifications in 2006 to Certain Stock
Options Granted to Former Executive Officers and Current
Directors in Note 16, Employee Stock
Benefit Plans to our consolidated financial statements.
The special committee and management determined that the
measurement dates for grants made after April 2005 complied with
the prevailing accounting pronouncements and are not subject to
restatement. The special committee proposed a number of remedial
measures arising out of its investigation intended to enhance
existing internal controls, policies and procedures relating to
our stock option granting processes. Since November 2006, all
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grants have been approved at regularly scheduled compensation
committee meetings which have been documented in compensation
committee minutes.
Repriced
Annual Merit Grant
The 1999 annual merit grant consisted of 2.1 million
options which had an original measurement date of April 20,
1999. We determined that the key terms were determined with
finality for approximately 1.6 million of these options in
March 1999, and that the exercise price was reduced to $11.06 on
April 20, 1999. The reduction in the exercise price was
considered a repricing, therefore, we have accounted for these
options as variable awards in accordance with Financial
Accounting Standards Board Interpretation No. 44,
Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion
No. 25 (FIN 44).
Post-employment
option modifications previously not recorded
During the course of the investigation, we identified
modifications to the key terms of certain stock option awards
which had not been accounted for previously. These modifications
occurred upon the termination of an employee and, in some cases,
provided for the extension of the post-termination time period
in which options could be exercised and allowed for the
continued vesting of options subsequent to the former
employees termination date. To the extent the terminated
employee was not expected to perform substantive services on our
behalf after termination, we should have recorded stock-based
compensation expense based on the intrinsic value of the options
on the date of the modification. To the extent the terminated
employee was expected to continue to perform services on our
behalf after termination or the modification occurred after the
employee terminated, we should have recognized stock-based
compensation expense based upon the fair value of the options
received by the non-employee during the period in which services
were provided. We did not properly account for the stock-based
compensation expenses associated with certain option
modifications in our previously issued financial statements. To
correct our past accounting for stock option modifications, we
recorded additional pre-tax, non-cash, stock-based compensation
expense in the amount of $0.2 million and
$22.9 million in 2004 and periods prior to 2004,
respectively. We had no adjustments related to post-employment
modifications in 2005.
Certain of the post-employment modifications also resulted in
cash payments to former employees subsequent to their
termination date. We should have recorded cash-based
compensation expense on the termination date for the amount of
the cash payments made subsequent to the termination date. In
our previously issued financial statements, we incorrectly
accounted for post-termination cash payments in the periods in
which the payments were made. To correct our past accounting for
these post-termination payments, we recorded adjustments to cash
compensation expense which effectively shifted previously
recorded compensation expense into the proper periods. These
adjustments did not affect 2005. We recorded additional
cash-based compensation benefit totaling $0.1 million
during 2004 and additional cash-based compensation expense
totaling $0.1 million in periods prior to 2004.
Correction
of errors, primarily options historically accounted for as
variable awards
Additionally, we discovered certain errors in our accounting for
stock options that were repriced and historically accounted for
as variable awards. These errors consisted primarily of an error
in applying the transition guidance provided in FIN 44. To
correct these errors in accounting for variable awards, we
recorded additional pre-tax, non-cash, stock-based compensation
expense in the amount of $0.3 million, $2.2 million
and $6.5 million in 2005, in 2004 and periods prior to
2004, respectively. We recorded additional pre-tax, non-cash,
stock-based compensation expense in the amount of
$0.9 million in periods prior to 2004 related to other
corrections of errors.
Income
tax implications exist as a result of the revision of stock
option measurement dates
As a result of our determination that certain of our measurement
dates were not determined appropriately, we also reviewed our
stock option grants to assess any related tax implications.
Section 162(m) of the Internal Revenue Code
(Section 162(m)) prohibits tax deductions for
non-performance based compensation paid to the chief executive
officer and the four highest compensated officers in excess of
$1.0 million in a taxable year. Compensation attributable
to stock options issued under our employee stock option plan
meets the requirements for treatment as qualified
performance-based compensation and is an exception from the
deduction limit of
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Section 162(m) provided the exercise price is greater than
or equal to the fair market value of our common stock on the
date of grant. During our internal review of historical stock
option granting practices, we determined that certain tax
deductions related to stock options exercised by certain
employees are not allowed under Section 162(m) because the
exercise price of the stock option was less than the fair market
value of our common stock on the date of grant. Accordingly, we
reduced the additional
paid-in-capital
balances by $4.5 million, $0.7 million and
$9.1 million from amounts previously reported in 2005, 2004
and periods prior to 2004, respectively, with corresponding
adjustments to certain deferred tax assets and income taxes
payable.
In addition, we recorded $0.2 million, less than
$0.1 million and $0.5 million of expense in 2005, 2004
and periods prior to 2004, respectively, related to
international tax implications as a result of revising stock
option measurement dates.
Other
prior-period errors
This restatement of prior-period financial statements also
includes corrections of other errors. We have corrected these
errors in the appropriate accounting period with the restatement
of our financial statements for the non-cash stock-based
compensation expense discussed above. The aggregate effect on
net income was a decrease in income of $18.1 million in
2005 an increase of $2.1 million in 2004 and an increase of
$4.0 million in periods prior to 2004.
Other
issues
In addition to the charges resulting from the correction of the
errors determined pursuant to the investigation, we expect
additional expenses in future periods associated with our
strategy to mitigate employee income tax implications for those
individuals with options affected by revised measurement dates
and we have taken certain actions and are considering other
actions to modify certain option agreements to compensate those
former employees who were unable to exercise options during the
blackout period, the period from July 2006, when we announced
that we might have to restate our historical financial
statements as a result of our ongoing stock option
investigation, through the date we become current on our
reporting obligations under the Securities Exchange Act of 1934,
as amended.
Section 409A
We also reviewed the consequences of issuing in-the-money grants
under Section 409A of the Internal Revenue Code. We are
considering offering active employees who are option holders the
opportunity to amend or exchange their options to avoid the
adverse tax consequences of Section 409A.
Blackout
period
From July 2006, when we announced that we might have to restate
our historical financial statements as a result of our ongoing
stock option investigation, through the date we become current
on our reporting obligations under the Securities Exchange Act
of 1934, as amended, we have not been able to issue any shares,
including those pursuant to stock option exercises. In January
2007, we extended the post-termination exercise period for all
vested options held by certain former employees and outside
directors that would expire during the blackout period until the
earlier of i) the ninetieth calendar day after we become
current on our reporting obligations under the Securities
Exchange Act of 1934, as amended, ii) the expiration of the
contractual terms of the options, or iii) December 31,
2007. As a result of the modifications, we recognized
$4.3 million of stock-based compensation expense in the
fourth quarter of 2006 based on the fair value of these modified
options.
Based on the guidance in SFAS 123(R) and related FASB Staff
Positions, after the January 2007 modification, stock options
held by former employees and outside directors that terminated
prior to such modification became subject to the provisions of
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock
(EITF 00-19).
As a result, in January 2007, these options were reclassified as
liability awards within current liabilities. Accordingly, at the
end of each reporting period, we will determine the fair value
of these options utilizing the Black-Scholes valuation model and
recognize any change in fair value of the options in our
consolidated statements of income in the period of change until
the options are
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exercised, expire or are otherwise settled. The expense or
benefit associated with these options will be included in
general and administrative expense in our consolidated
statements of income, and will not be reflected as stock-based
compensation expense. We will record expense or benefit in
future periods based on the closing price of our common stock.
In November 2007, due to a delay in our becoming current in our
reporting obligations, we extended the post-termination exercise
period for options held by former employees and outside
directors who terminated subsequent to the January 2007
modification and those previously modified in January 2007 as
discussed above, until the earlier of i) the ninetieth
calendar day after we become current in our reporting
obligations under the Securities Exchange Act of 1934, as
amended, ii) the expiration of the contractual terms of the
options, or iii) December 31, 2008. Based on the
guidance in SFAS 123(R) and related FASB Staff Positions,
after the November 2007 modification, stock options held by the
former employees and outside directors that terminated
subsequent to the January 2007 modification and prior to
November 2007 became subject to the provisions of
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock. As a result, in November 2007, these options
will be reclassified as liability awards within current
liabilities. Accordingly, at the end of each reporting period,
we will determine the fair value of these options utilizing the
Black-Scholes valuation model and recognize any change in fair
value of the options in our consolidated statements of income in
the period of change until the options are exercised, expire or
are otherwise settled. The expense or benefit associated with
these options will be included in general and administrative
expense in our consolidated statements of income, and will not
be reflected as stock-based compensation expense. We will record
expense or benefit in future periods based on the closing price
of our common stock.
9
OVERVIEW
We are a leading dedicated security technology company that
secures systems and networks from known and unknown threats
around the world. We empower home users, businesses, government
agencies, service providers and our partners with the ability to
block attacks, prevent disruptions, and continuously track and
improve their security. We were incorporated in 1992. In June
2004, we changed our name to McAfee, Inc. from Networks
Associates, Inc. and began trading on the New York Stock
Exchange under the symbol MFE. We previously changed our name
from McAfee Associates, Inc. to Networks Associates, Inc. in
conjunction with our December 1997 merger with Network General
Corporation. We are headquartered at 3965 Freedom Circle,
Santa Clara, California, 95054, and the telephone number at
that location is
(408) 988-3832.
Our internet address is www.mcafee.com.
This report includes registered trademarks and trade names of
McAfee and other corporations. Trademarks or trade names owned
by McAfee
and/or its
affiliates include: McAfee, Network
Associates, ePolicy Orchestrator,
VirusScan, IntruShield,
Entercept, Foundstone, McAfee
SiteAdvisor, Avert, Preventsys,
Hercules, Citadel, Policy
Enforcer, Total Protection,
AntiSpyware and SecurityAlliance.
OUR
APPROACH AND OFFERINGS
We apply business discipline and a pragmatic approach to
security that is based on four principles of security risk
management, (i) identify and prioritize assets,
(ii) determine acceptable risk, (iii) protect against
threats and (iv) enforce and measure compliance. We
incorporate some or all of these principles into our solutions.
Our solutions protect systems and networks, blocking immediate
threats while proactively providing protection from future
threats. We also provide software to manage and enforce security
policies for organizations of any size. Finally, we incorporate
McAfee Expert Services, Foundstone services and technical
support to ensure a solution is actively meeting our
customers needs. These integrated solutions help our
customers solve problems, enhance security and reduce costs.
Threat
Protection Offerings
Our threat protection offerings enable management of risks to
systems, networks, and data with comprehensive, layered threat
protection. Our portfolio includes system security, network
protection, and messaging and web security. Each of our threat
protection offerings is backed by McAfee Avert Labs, a leading
global threat research organization. A substantial majority of
our net revenue has historically been derived from our McAfee
threat protection solutions, in particular the system security
products now represented in McAfee Total Protection Solutions.
Our flagship business offering for system security is McAfee
Total Protection Solutions, which was introduced in April 2006.
A single solution with a single management console, McAfee Total
Protection reduces the complexity of managing enterprise
security and offers comprehensive protection against spyware,
viruses, worms, spam, and intrusions, and incorporates
centralized management and scalable network access control. This
integrated approach enables organizations to proactively block
known and unknown attacks and supports business continuity by
controlling non-compliant endpoints. McAfee Total Protection
Solutions comes as a licensed offering or in a
software-as-a-service model. With our SiteAdvisor acquisition in
the second quarter of 2006, we now offer unique web security
with our McAfee Total Protection Solutions.
Our consumer products are also based on McAfee global protection
technology and use McAfee Avert Labs research to provide our
customers with online threat updates and up-to-date protection
within our products.
Our network protection offerings help enterprises, small
businesses, government agencies, educational organizations and
service providers maximize the availability, performance and
security of their network infrastructure. McAfees network
protection solutions defend against network worms, intrusions,
denial-of-service and other network-borne threats.
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Our messaging and web security offerings provide gateway defense
at an organizations perimeter for systems such as web
servers and email servers.
Compliance
Management Offerings
Our compliance solutions can identify and resolve policy issues
in a measurable and sustainable manner. McAfees compliance
management portfolio offerings can help ensure compliance
objectives are met across an organization from the
identification of security risks to the enforcement of security
policies and audit against increasing regulations. McAfees
network access control solution, McAfee NAC, supports internal
security policies by preventing non-compliant personal computers
(PCs) from connecting to the internal network.
Our McAfee Foundstone offerings assess and prioritize risks from
vulnerabilities and threats and can be integrated with our
McAfee Preventsys Risk Analyzer, McAfee Preventsys Compliance
Auditor, the McAfee Policy Auditor and McAfee Remediation
Manager to provide advanced risk mitigation, further assisting
regulatory compliance. The latter offering joined the McAfee
Compliance product line via acquisition of Preventsys in 2006.
Onigma, a 2006 acquisition, adds data loss prevention
capabilities to the compliance management portfolio. Data Loss
Prevention (DLP) represents an exciting new
technology addressing an increasingly visible problem shared by
many companies. Citadel, another 2006 acquisition, adds security
policy compliance plus automated vulnerability remediation (e.g.
patch management) capabilities.
Unified
Management Offerings
Our offering, McAfee ePolicy Orchestrator, is the unified
management platform that links our protection and compliance
capabilities and provides our customers with centralized policy
management, common agent, efficient deployment and
administration processes. Generally, our protection and
compliance capabilities contained in the McAfee Total Protection
Solutions are integrated with our McAfee ePolicy Orchestrator.
Mobile
Security Offerings
Our mobile security offerings proactively protect mobile
operators and their users by safeguarding mobile networks,
terminals, applications and content. Our mobile security
offerings limit the spread of mobile malware, inappropriate
content, and unsolicited messaging. In addition, these offerings
lessen negative brand impact, recovery costs, customer service
issues and revenue disruption while enabling future operator
strategies such as mobile payments, location-based services and
mobile advertising. Our approach enables mobile network
operators to assess global and local risks, protect their
network and devices, and recover from attacks to their
environment.
SiteAdvisor
We acquired SiteAdvisor Inc. in April 2006. SiteAdvisors
innovative technology helps protect internet users from a broad
range of security threats including spyware, spam and identity
theft scams. Using a proprietary database of automated safety
tests covering a substantial portion of the internet,
SiteAdvisors software adds easy-to-understand safety
annotations to websites, search engine results and links in
e-mail and
instant messages.
The basic version of SiteAdvisor is currently free. SiteAdvisor
is included as a feature in each of our suite products
worldwide. SiteAdvisor was introduced into certain of our
enterprise security solutions in 2007. SiteAdvisor Plus is a
paid version of SiteAdvisor that contains additional premium
features.
Expert
Services and Technical Support
Our McAfee Professional Services and McAfee Technical Support
provide professional assistance in the design, installation,
configuration and support of our customers products. We
offer a range of consulting and educational services under both
the McAfee and Foundstone banners.
Our McAfee Professional Services provide product design and
deployment support with an array of standardized and custom
offerings. This business is organized around our major product
groupings and also offers a range of classroom education courses
designed to assist customers and partners in their deployment
and operation
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of McAfees products. Services are also available to help
our customers plan for upgrades or enhancements of security
infrastructure, and to respond to serious security outbreaks.
Our Foundstone Consulting Services include (i) threat
modeling to identify potential software security problems,
(ii) security assessments and (iii) education.
Foundstone Consulting Services assist clients in the early
assessment, design, and enhancement of their security and risk
architectures. Through research and innovation, the Foundstone
Security Practice is able to advise government and commercial
organizations on the most effective countermeasures required to
meet business and legislative policies for security and privacy.
Foundstone Consulting Services are augmented by a range of
classroom-based training and education courses.
McAfee Technical Support provides our customers online,
telephone-based, and
on-site
technical support in an effort to ensure that our products are
installed and working properly. Our support offerings include
Tier I, Tier II, Tier III and Platinum support,
providing varying levels of support for single consumers up
through the largest organizations. All Technical Support
programs include regular software updates and upgrades, and are
available to customers worldwide from various regional support
centers.
We have enhanced our support capabilities through our McAfee
Virtual Technician (MVT), which provides automated
online troubleshooting and assistance. MVT enables a growing
percentage of customers to obtain the necessary assistance and
resolution quickly, directly, and exclusively online
solving their problems and increasing satisfaction, while
lowering costs.
Research
and Development, Investments and Acquisitions
The market for computer software has low barriers to entry, is
subject to rapid technological change, and is highly competitive
with respect to timely product introductions. We believe that
our ability to maintain our competitiveness depends in large
part upon our ability to develop, acquire, integrate, and launch
new products and solutions, and to enhance existing offerings.
Our research and development efforts support all of our
offerings. They refine our security risk management processes,
improve our product design and usability, and keep us on the
forefront of threat research. Most importantly, our research
helps ensure that our customers are protected.
In addition to developing new offerings and solutions, our
development staff also focuses on upgrades and updates to
existing products and on enhancement and integration of acquired
technology. Future upgrades and updates may include additional
functionality to respond to market needs, while also assuring
compatibility with new systems and technologies.
We are committed to researching malicious code and vulnerability
through our McAfee Avert Labs organization. McAfee Avert Labs
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.
For 2006, 2005 and 2004, we expensed $193.4 million,
$176.4 million and $174.9 million, respectively, on
research and development as incurred.
As part of our growth strategy, we have also made and expect to
continue to make acquisitions of, or investments in,
complementary businesses, products and technologies.
OUR
CUSTOMERS AND MARKETS
We develop, market, distribute and support computer security
solutions for large enterprises, governments, small and
medium-sized business and individual consumers through a network
of qualified partners and other distribution models. We do
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. For financial
information about foreign and domestic operations, see
Note 19 to our consolidated financial statements included
elsewhere in this report.
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Business
to Business Solutions
We market our business solutions and offerings to commercial and
government customers through resellers and distributors. Our two
largest distributors, Ingram Micro Inc. and Tech Data Corp.,
together accounted for approximately 28% of our net revenue in
2006.
Consumer
Solutions
We market our consumer solutions and offerings to individual
consumers directly through online distribution methods, and
indirectly through traditional distribution channels, such as
retail and original equipment manufacturers (OEMs).
Our McAfee consumer business is responsible for online
distribution of our products sold to individual consumers over
the internet, including products distributed by our online
partners, and for licensing of technology to strategic
distribution partners for sale to individual consumers, with
certain exceptions.
LICENSING
MODELS
Our customers can obtain our offerings through either perpetual
or term licensing, or software-as-a-service models
(SaaS).
Product
Licensing Model
We typically license our software products to corporate and
government customers using our perpetual-plus licensing
arrangements, which provide a perpetual license coupled with an
initial support period of one year. We also sell perpetual
licenses in connection with sales of our hardware-based products
in which software is bundled with the hardware platform. Most of
our licenses are sold with renewable annual maintenance
contracts.
Online
Subscriptions and Managed Applications
For our online subscription services, customers rent
or subscribe to the use of our security services for a defined
period of time. Because our online subscription services are
versionless, or
self-updating,
customers subscribing to these services are always using the
most recent version of the software without having to purchase
product updates or upgrades. Our online subscription consumer
products and services are found at our website
(www.mcafee.com) where customers download our
applications. These enable detection and elimination of viruses
on their PCs, repair of their PCs from damage caused by some
viruses, and optimization of their hard drives. Our website
offers McAfee SiteAdvisor for free download and offers McAfee
SiteAdvisor Plus, McAfee Virus Scan Plus, McAfee Internet
Security Suites and McAfee Total Protection for customers to
purchase.
Our online subscription services are also available to customers
and small business through various channel relationships with
internet service providers (ISPs), such as AOL and
Comcast, and available through PC suppliers, such as Dell and
Gateway. ISPs offer McAfee subscription services as either a
standard feature included in their service, or as a premium
service.
Similarly, McAfee Total Protection provides our customers our
most up-to-date protection software. This offering provides
protection for both desktop/laptop PCs and file servers. In
addition, McAfee Managed Mail Protection screens emails to
detect spam and to quarantine viruses and infected attachments.
Our McAfee Desktop Firewall blocks unauthorized network access
and stops known network threats.
We also make our online subscription products and services
available over the internet as a managed environment. Unlike our
online subscription service solutions, these managed service
provider (MSP) solutions are customized, monitored
and updated by networking professionals for a specific customer.
MCAFEE
MARKETING AND SALES
Our marketing and sales activities are directed at larger
corporate and government customers, small and medium-sized
companies and consumers. We engage resellers, distributors,
system integrators, internet service providers and OEMs
worldwide, through multiple channels.
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Resellers
and Distributors
In all of our geographic regions, most McAfee products are sold
through partners, including corporate resellers, distributors,
retailers, service providers and OEMs. In addition, our channel
efforts include strategic alliances with complementary
manufacturers to expand our reach and scale. We currently
utilize corporate resellers, including ASAP Software, Inc., CDW
Corporation, Computacenter PLC, Dell Inc., Dimension Data,
Gateway, Inc., Insight Enterprises, Inc., Softmart, Inc.,
Software House International, Softchoice Corporation, Telefonica
S.A., Terra Networks S.A. and others, as well as network and
systems integrators who offer our solutions to corporate, small
and medium-business and government customers.
Independent software distributors who currently supply our
products include Avnet, Inc., Ingram Micro Inc., MOCA and Tech
Data Corporation. These distributors supply our products
primarily to large retailers, value-added resellers
(VARs), mail order and telemarketing companies. We
also sell our retail packaged products through several of the
larger computer and software retailers, including Best Buy,
Costco, Dixons, Frys, Office Depot, Office Max, Staples,
Wal-Mart and Yamada. McAfee marketing and sales work closely
with our major reseller and distributor accounts to manage
demand generating activities, training, order flow and affiliate
relationship management.
Our top ten distributors typically account for 45% to 65% of our
net revenue quarterly. Our agreements with our distributors are
not exclusive and may be terminated by either party without
cause. Terminated distributors may not continue to sell our
products. If one of our significant distributors terminated its
relationship with us, we could experience a significant
disruption in the distribution of our products.
We utilize a sell-through business model for distributors under
which we recognize revenue at the time our distributors sell the
products to their customers. Under this business model, our
distributors are permitted to purchase software licenses at the
same time they fill customer orders and to pay for hardware and
retail products only when these products are sold by our
distributors to their customers. In addition, prior to the sale
of our products to the distributors customers, our
distributors are permitted rights of return subject to varying
limitations. After a sale by a distributor to its customer,
there is generally no right of return from the distributor to us
with respect to such product, unless we approve the return from
the final customer to the distributor.
Original
Equipment Manufacturers
OEMs license our products for resale to end users or inclusion
with their products. For example, we are a security services
provider for PC hardware manufacturers such as Dell, Inc.,
Gateway, Inc. (recently acquired by Acer), Samsung and Toshiba
Corporation. Depending on the arrangement, OEMs may sell our
software bundled with the PC or related services, pre-install
our software and allow us to complete the sale, or sublicense a
single version of our products to end users who must register
the product with us in order to receive updates.
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/or
sell-through arrangements. Strategic alliance partners include
AOL, AT&T, Cable and Wireless PLC, Comcast Corporation,
Dell, Inc., Gateway, Inc. (recently acquired by Acer), Telecom
Italia S.p.A. and Telefonica S.A., among others. Also, in 2007
EMC Corporation/RSA became a new partner. As part of our NTT
DoCoMo alliance in Japan, we have jointly developed technology
to provide integrated malware protection against mobile threats
to owners of 3G FOMA handsets.
Sales
in North America
Our North American sales force is organized by product offerings
and customer type. Most of our commercial customers are served
through reseller partners. A subset of our sales representatives
focus on renewing the McAfee systems security installed base,
while a larger group focuses on our full offering of Security
Risk Management products and upgrades. Small business customers
are served primarily through our reseller partners with a
channel
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marketing organization assisting with lead generation, and a
channel support team responsible for partner training and
support.
Sales
outside of North America
Outside of North America, we have sales and support operations
in EMEA, Japan, Asia-Pacific, and Latin America. In 2006, 2005,
and 2004, net revenue outside of North America accounted for
approximately 45%, 43% and 39% of our net revenue, respectively.
Within our global geographies, our sales resources are organized
by country, and the larger markets may further segment their
sales resources by McAfee product line
and/or
customer segments.
Other
Marketing Activities
We use channel marketing to market, promote, train and provide
incentives to our resellers and distributors, and to promote our
offerings to their end-user customers. We offer our resellers
and distributors technical and sales training classes, online
training resources, and marketing and sales demand generation
assistance kits. We also provide specific cooperative marketing
programs for end-user seminars, catalogs, demand creation
programs, sales events, and other items.
One of the principal means of marketing our products and
services is online via the internet. Our website,
www.mcafee.com, supports marketing activities to our key
customer and prospect segments, including home and home office
users, small and medium-sized businesses, large enterprises and
our partner community. Our website contains various marketing
materials and information about our products. Our customers can
download and purchase some products directly online. We also
promote our products and services through advertising activities
in trade publications, direct mail campaigns, television and
strategic arrangements, as well as online through key word and
search-based advertising. In addition, we attend trade shows,
industry conferences, and publish periodic channel and customer
newsletters.
We also market our products through the use of rebate programs
and marketing funds. Within most countries, we typically offer
volume incentive rebates to strategic channel partners and
promotional rebates to end users. Our strategic channel partners
may earn a volume incentive rebate primarily based upon their
sale of our products to end users.
COMPETITION
The markets for our products are intensely competitive and are
subject to rapid changes in technology. We also expect
competition to continue to increase in the near-term. We believe
that the principal competitive factors affecting the markets for
our products include, but are not limited to:
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performance,
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quality,
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accuracy,
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breadth of product group,
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integration of products,
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introduction of new products and features,
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brand name recognition,
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price,
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market presence,
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functionality,
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innovation,
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customer support,
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frequency of upgrades and updates,
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reduction of production costs,
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usability and technical support,
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manageability of products and
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reputation.
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We believe that we compete favorably against our competitors in
many of these areas. However, some of our competitors have
longer operating histories, greater brand recognition, stronger
relationships with strategic channel partners, larger technical
staffs, established relationships with hardware vendors
and/or
greater financial, technical and marketing resources, and other
advantages. These factors may provide our competitors with an
advantage in penetrating markets with their security and
management products.
System Protection Market. Our principal
competitors in the anti-virus market are Symantec Corp., CA,
Inc., and Microsoft Corporation. Trend Micro Inc. remains the
strongest competitor in the Asian anti-virus market and has
entered the U.S. and EMEA markets. Kaspersky Lab, Inc.,
Panda Software, Sophos, F-Secure Corporation and
Dr. Ahns Anti-Virus Lab are also competitors in their
respective markets.
Network Protection Market. Our principal
competitors in the network protection market are Cisco Systems
Inc., CA, Inc., IBM (which acquired Internet Security Systems in
October 2006), Juniper Networks, Inc., Symantec Corp., Check
Point Software Technologies Ltd. and 3Com Corporation. IBM,
Qualys and nCircle are the strongest competitors for our
Foundstone products and solutions.
Web Security Market. Our principal competitors
in the web security market, which includes our SiteAdvisor
products, include Microsoft Corporation, Trend Micro, Inc. and
various search engine providers, namely Google, Inc. and Yahoo!,
Inc. In addition, we anticipate that Symantec Corporation may
enter this market in the near future.
Other Competitors. In addition to competition
from large technology companies such as Hewlett-Packard Co.,
IBM, Novell Inc. and Microsoft Corporation, we also face
competition from smaller companies and shareware authors that
may develop competing products.
OUR
PROPRIETARY TECHNOLOGY
Our success depends significantly upon proprietary software
technology. We rely on a combination of patents, trademarks,
trade secrets and copyrights to establish and protect
proprietary rights to our software. However, these protections
may be inadequate or competitors may independently develop
technologies or products that are substantially equivalent or
superior to our products. Often, we do not obtain signed license
agreements from customers who license products from us. In these
cases, we include an electronic version of an end-user license
in all of our electronically distributed software and a printed
license in the box for our products. Since none of these
licenses are signed by the licensee, many legal authorities
believe that such licenses may not be enforceable under the laws
of many states and foreign jurisdictions. In addition, the laws
of some foreign countries either do not protect these rights at
all or offer only limited protection for these rights. The steps
taken by us to protect our proprietary software technology may
be inadequate to deter misuse or theft of this technology. For
example, we are aware that a substantial number of users of our
anti-virus products have not paid any license or support fees to
us.
OUR
EMPLOYEES
As of December 31, 2006, we employed approximately 3,700
individuals worldwide. Less than 2% of our employees are
represented by a labor union. Competition for qualified
management and technical personnel is intense in the software
industry. Our continued success depends in part upon our ability
to attract, assimilate and retain qualified personnel. To date,
we believe that we have been successful in recruiting qualified
employees, but there is no assurance that we will continue to be
successful in the future.
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ADDITIONAL
INFORMATION
We file registration statements, periodic and current reports,
proxy statements, and other materials with the Securities and
Exchange Commission (SEC). You may read and copy any
materials we file with the SEC at the SECs Office of
Public Reference at 100 F Street, NE,
Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a web site at www.sec.gov that contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC,
including our filings. Other than the information expressly set
forth in this annual report, on
Form 10-K,
the information contained or referred to on our website is not
part of this annual report. We make available, free of charge,
through the investor relations section of our website, our
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
and any amendments to those reports filed pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after they
are electronically filed with or furnished to the SEC. The
contents of our website are not incorporated into, or otherwise
to be regarded as part of this Annual Report on
Form 10-K.
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 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. If our
competitors gain market share in the markets for our products,
our business and operating results could be adversely affected.
As competition increases, we expect increases in our
product-related expenses, including increased product rebates,
funds provided to our partners for marketing and strategic
channel partner revenue-sharing agreements. Some of our
competitors have longer operating histories, have more extensive
international operations, greater name recognition, larger
technical staffs, established relationships with hardware
vendors
and/or
greater financial, technical and marketing resources. Our
principal competitors in specific product markets include, but
are not limited to:
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in the system protection market, which includes our anti-virus
and anti-spyware solutions, Symantec Corporation, CA, Inc. and
Microsoft Corporation. Trend Micro Inc. remains the strongest
competitor in the Asian anti-virus market and has entered the
North American and EMEA markets. Kaspersky Lab, Inc., Panda
Software, Sophos, F-Secure Corporation, and Dr. Ahns
Anti-Virus Lab are also competitors in their respective
geographic markets;
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in the network protection market, which includes our other
intrusion detection and protection products, Cisco Systems Inc.,
CA, Inc., IBM, (which acquired Internet Security Systems Inc. in
October 2006), Juniper Networks, Inc., Symantec Corporation and
3Com Corporation. IBM and Qualys are the strongest competitors
for our Intrushield and Foundstone products and solutions,
respectively; and
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in the web security market, which includes our SiteAdvisor
products, Microsoft Corporation, Trend Micro Inc., and various
search engine providers, namely, Google Inc. and Yahoo! Inc. In
addition, we anticipate Symantec Corporation may enter this
market in the near future.
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Other competitors for our various products could include large
technology companies. We also face competition from numerous
smaller companies, shareware and freeware authors and open
source projects that may develop competing products, as well as
from future competitors, currently unknown to us, who may
develop competing products or enter into our product markets.
A significant portion of our revenue comes from our consumer
business. We focus on growth in this segment both directly and
through relationships with ISPs such as AOL and Comcast, and PC
OEMs, such as Dell, Acer/
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Gateway and Toshiba. As competition in this market increases, we
have experienced and expect continued pricing pressures from
both our competitors and partners that have had and may continue
to have a negative effect on our ability to sustain our revenue
and market share growth. In addition, as our consumer business
becomes more dependent upon the partner model, our direct online
revenue may suffer and our retail business may also continue to
decline. Further, as penetration of the consumer anti-virus
market through the ISP model increases, we expect that pricing
and competitive pressures in this market will become even more
acute.
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, in the second
quarter of 2006 Microsoft released its consumer security
solution and continues to execute on its announced plans to
boost the security functionality of its Windows platform through
its acquisition of managed service provider FrontBridge
Technologies, anti-virus provider Sybari Software, Inc. and
anti-spyware provider GIANT Company Software. Through its
acquisitions of Okena, Inc., Riverhead Networks and NetSolv,
Cisco Systems Inc. may incorporate into its firewall and router
products functionality which competes with our content filtering
and anti-virus products. In addition, Juniper Networks, Inc.
acquired Netscreen Technologies, which allows them to
incorporate intrusion prevention solutions into their firewalls
and routers.
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. Even if these competitors incorporated
products are inferior or more limited than our products,
customers may elect to accept the incorporated products rather
than purchase our products. For example, Microsoft over time has
sought to add security features to its operating systems that
would provide functionality similar to what our products offer.
We believe that Microsoft has in the past and may in the future
increase such security features while at the same time making it
more difficult for us to integrate our products with its
operating systems. We could be adversely affected if our
customers generally believe that Microsofts integrated
offerings reduce the need for our products or if they prefer
products that Microsoft chooses to bundle with its operating
systems, as these products and the use of bundling could impair
our ability to generate sales of our products to and through PC
OEMs.
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. Additionally, if our
competitors products are offered at significant discounts
to our prices or are bundled for free, we may be unable to
respond competitively, or may have to significantly reduce our
prices, which could negatively impact our revenue and gross
margins.
Software-as-a-service (SaaS) is becoming an increasingly
important method and business models for the delivery of
applications. SaaS models enable software owners to offer
extensible software applications to customers for their use over
the Internet, allowing customers to purchase and use
applications and modules on a subscription basis, without the
need for individual client installations or high maintenance
costs. Because of the advantages that SaaS models offer over
traditional software sales and licensing, competitors using SaaS
models could enjoy growth in their businesses and, as a result,
we could lose business to such competitors.
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,
particularly those that operate in virtual environments;
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extend security technologies to additional digital devices such
as mobile phones and personal digital assistants;
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respond promptly to new customer requirements and industry
standards;
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provide frequent, low cost or free upgrades and updates for our
products;
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maintain quality;
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remain compatible with popular operating systems such as Linux,
Suns Solaris, UNIX, Macintosh and OSX, Windows XP and
Windows NT, and develop products that are compatible with
new or otherwise emerging operating systems such as
Microsofts Windows Vista Operating System and Macintosh
Leopard; and
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interoperate with industry trends and new technologies and
function within new operating environments, including virtual
machine environments, that are or that become increasingly
important to customer deployments.
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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. In addition, we may choose not to deliver a
previously announced product. 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. For example, in the second quarter of
2006 Microsoft executed on its announced plans to boost the
security functionality of its Windows platform. 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 business.
In addition, we must continuously work to ensure that our
products meet industry certifications and standards. Failure to
meet industry standards and obtain product certifications could
cause us to lose customers and sales and could impact our
business. Also, if we fail to recognize and adapt to industry
trends which challenge traditional software licensing models,
including virtualization technologies that impact how software
is purchased and deployed, we may experience lower revenues as a
result.
The
Discovery That We Had Retroactively Priced Stock Options and Had
Not Accounted for Them Correctly May Result in Continued or
Additional Litigation, Regulatory Proceedings and Government
Enforcement Actions.
In May 2006, we announced that we had commenced an investigation
of our historical stock option granting practices. In June 2006,
we received a document subpoena from the Securities and Exchange
Commission, or SEC, related to our historical stock option
granting practices. Also, around the same time, we received a
notice of informal inquiry from the United States Department of
Justice, or DOJ, concerning our stock option granting practices.
In this Form
10-K, we are
filing restated consolidated financial statements for the years
ended December 31, 2005 and 2004 to make certain non-cash,
and other, adjustments as a result of our review of our
historical stock option granting practices. In addition, we are
also restating our condensed consolidated financial statements
for the quarters ended June 30, 2005, September 30,
2005, and March 31, 2006 in our Form
10-Qs for
the quarters ended June 30, 2006, September 30, 2006
and March 31, 2007, filed simultaneously with this annual
report on Form
10-K. In
connection with the restatement, we recorded additional pre-tax,
non-cash, stock-based compensation expense totaling
$137.4 million, consisting of $3.4 million
($2.5 million, net of tax) for the year ended
December 31, 2005, $10.8 million ($7.2 million,
net of tax) for the year ended December 31, 2004 and
$123.1 million ($80.5 million, net of tax) for the
periods 1995 through 2003.
The filing of our restated consolidated financial statements
does not resolve the pending SEC inquiry into our historical
stock option granting practices. We are engaged in ongoing
discussions with, and continue to provide information to, the
SEC regarding certain of our prior period consolidated financial
statements. The resolution of the SEC inquiry into our
historical stock option granting practices could require the
filing of additional restatements of our prior consolidated
financial statements or require that we take other actions not
presently contemplated.
As part of the remedial actions we have taken in connection with
the investigation and restatement, we have terminated for cause
the employment of some employees, including former executive
officers. We are the subject of litigation and similar
proceedings in connection with such terminations, and we expect
that we may be subject to similar actions in the future. In
addition, terminations and related actions, litigations and
proceedings may require
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us to make severance, settlement or other related payments in
the future, which could adversely impact our operating results.
We cannot predict the outcome of the pending government
inquiries or stockholder or other lawsuits, and we may face
additional government inquiries, stockholder lawsuits and other
legal proceedings related to our historical stock option
granting practices and the remedial actions we have taken. We
cannot predict what, if any, enforcement action the SEC or DOJ
will take with respect to our failure to be current in our
periodic reports or our historical stock option granting
practices. All of these events have required us, and we expect
will continue to require us, to expend significant management
time and incur significant accounting, legal, and other expenses
and ultimately adversely affect our financial condition and
results of operations.
Our
International Operations Involve Risks Which Could Increase our
Expenses Adversely, Impact Our Operating Results and Divert the
Time and Attention of Management.
During 2006, net revenue in our operating regions outside of
North America represented approximately 45% of our total net
revenue. We expect international revenue to remain a significant
percentage of our net revenue and our continued focus on
international growth exposes us to numerous risks, the impact of
any of which could adversely affect our operating results.
Risks related to our international operations and strategy and
specific to our company include:
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increased costs and difficulties in managing and coordinating
the activities of our geographically dispersed operations,
particularly sales and support, located on multiple continents
in greatly varying time zones and culturally diverse operations;
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the challenge of successfully establishing, managing and
staffing shared service centers for worldwide sales finance and
accounting operations centralized from locations in the
U.S. and Europe;
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longer payment cycles and greater difficulty in collecting
accounts receivable;
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our ability to adapt to sales and marketing practices and
customer requirements in different cultures;
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our ability to successfully localize software products for a
significant number of international markets;
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compliance with more stringent consumer protection and privacy
laws;
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currency fluctuations, including weakness of the
U.S. dollar relative to other currencies, or the
strengthening of the U.S. dollar that may have an adverse
impact on revenues, financial results and cash flows;
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risks related to hedging strategies;
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potentially adverse tax consequences, including the complexities
of foreign value-added taxes and restrictions on the
repatriation of earnings;
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enactment of additional regulations or restrictions on the use,
import or export of encryption technologies, which would delay
or prevent the acceptance and use of encryption products and
public networks for secure communication;
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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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costs and delays associated with developing software in multiple
languages;
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increased compliance and regulatory risks in established and
emerging markets;
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a high incidence of software piracy in some countries; and
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international labor laws and our relationship with our employees
and regional work councils.
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The impact of any one or more of these risks could negatively
affect our business and operating results. Generally, we are
subject to a lower blended corporate tax rate on our
international sales. Changes in domestic or
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international tax regulations could adversely affect this
arrangement in the future and impact our ability to realize
similar tax benefits.
We Face a
Number of Risks Related to Our Product Sales Through
Intermediaries.
We sell a significant amount of our products through
intermediaries such as distributors, PC OEMs, ISPs and other
strategic channel partners, referred to collectively as
distributors. Our top ten distributors typically represent
approximately 45% to 65% of our net sales in any quarter. We
expect that this percentage will increase as we continue to
focus our sales efforts through our channel partners and other
partners. Our two largest distributors, Ingram Micro Inc. and
Tech Data Corporation, together accounted for approximately 28%
of our net revenue during 2006.
Uncertain
Timing and Delivery of Products
We may be unable to determine and unable to control the timing
of the delivery of our products to end users by our
distributors, which may make it difficult for us to forecast our
revenue with respect to product sales through these
intermediaries. Our reseller and OEM partners are not subject to
any minimum sales volumes with respect to our products and, as
such, the revenue attributable to sales from these distributors
is uncertain and may vary significantly from period to period,
affecting our operating results. Volume of product shipped by
our OEM partners depends on volumes of the OEM partners
products shipped, which is generally outside of our control.
Sale
of Competing Products
Our distributors and resellers 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 resellers to focus on our products, these
distributors 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 resellers depends on our ability to adequately
and efficiently support these partners with, among other things,
appropriate financial incentives to encourage pre-sales
investment and sales tools, such as online sales and technical
training and product collateral needed to support their
customers and prospects. Any failure to properly and efficiently
support our partners in this manner may result in them focusing
more on our competitors products rather than our products
and lost sales opportunities.
Loss
of a Distributor
The agreements we have with our distributors, including those we
have with Ingram Micro Inc. and Tech Data Corporation, are
generally terminable by either party without cause with no or
minimal notice or penalties. We may expend significant time,
money and resources to further relationships with our
distributors that are thereafter terminated. If one of our
significant distributors terminated its agreement with us, we
could experience a significant interruption in the distribution
of our products. In addition, our business interests and those
of our distributors may diverge over time, which could result in
conflict, and termination of, or a reduction in, collaboration.
In the past, our acquisition activity has resulted in the
termination of distributor relationships. Future acquisition
activity could cause similar termination of, or disruption in,
our distributor relationships, which could adversely impact our
revenues.
Payment
Difficulties
Some of our distributors may experience financial difficulties,
which could adversely impact our collection of accounts
receivable. Our allowance for doubtful accounts was
approximately $2.0 million as of December 31, 2006. We
regularly review the collectability and credit-worthiness of our
distributors to determine an appropriate allowance for doubtful
accounts. Our uncollectible accounts could exceed our current or
future allowances.
Pricing
Competition
Increased competition in the markets in which we operate,
particularly in connection with bids for PC OEM business, has
led to increased pricing pressures. In the event that any of our
PC OEM partners or other distributors
21
terminates their relationship with us, our revenues could
decline and our business may be harmed. Further, to the extent
that any of our PC OEM partners or other distributors
renegotiates its arrangement with us on less favorable terms,
our operating results could be harmed.
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 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. In addition, we acquired
SiteAdvisor in April 2006, Preventsys in June 2006, Onigma Ltd.
in October 2006 and substantially all of the assets of Citadel
Security Software Inc. in December 2006. In November 2007 we
acquired SafeBoot, and we expect to close our acquisition of
ScanAlert in January 2008. We may not realize the anticipated
benefits from these acquisitions. Future acquisitions could
result in significant acquisition-related charges and dilution
to our stockholders.
We face a number of risks relating to our acquisitions,
including the following, any of which could harm our ability to
achieve the anticipated benefits of our past or future
acquisitions.
Integration
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.
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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.
If integration of our acquired businesses or assets is not
successful, we may experience adverse financial or competitive
effects which we currently do not anticipate.
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.
This risk is amplified by the increased costs and efforts in
connection with compliance with the Sarbanes-Oxley Act.
Open
Source Software
Despite having conducted the appropriate due diligence prior to
the consummation of an acquisition, products or technologies
acquired by us may nonetheless include so-called open
source software which was not identified during the
initial due diligence. 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
22
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 open
source license terms may be ambiguous and may result in
unanticipated or uncertain obligations regarding our products;
and 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.
Use of
Cash and Securities
Our available cash and securities may be used to acquire or
invest in companies or products. For example, in November 2007,
we used approximately $350 million to acquire SafeBoot,
B.V., and in January 2008, we expect to close the acquisition of
ScanAlert, Inc., in which we will use approximately
$51 million. In December 2006, we used approximately
$61.2 million to acquire substantially all of the assets of
Citadel Security Software Inc. and in October 2006, we used
approximately $19.1 million to acquire Onigma, Ltd. In June
2006, we used approximately $4.8 million to acquire
Preventsys, Inc., in April 2006 we used approximately
$61.0 million to acquire SiteAdvisor, Inc. and in June
2005, we used approximately $20.3 million to acquire
Wireless Security Corporation. 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.
Accounting
Charges
Acquisitions may result in substantial accounting charges for
restructuring and other expenses, write-off of in-process
research and development, future impairment of goodwill,
amortization of intangible assets and stock-based compensation
expense, any of which could materially adversely affect our
operating results.
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. 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 the recent past we have
experienced significant turnover in our senior management team
and in our worldwide sales and finance organization and
replacing this personnel remains difficult.
Once we become current in our reporting obligations and our
registration statements on
Form S-8
are declared effective with respect to shares of common stock
underlying our stock option plans and outstanding stock option
awards, we expect some increase in short-term attrition rates as
employees are able exercise stock options which they have been
unable to exercise as a result of our aforementioned blackout
period on stock option exercises.
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.
Other personnel related issues that we may encounter 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, may not approve future
requests for increases in shares available under our equity
incentive plans. 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, as of January 1, 2006, we are
required to include compensation expense in our consolidated
statement of income and comprehensive income
23
relating to the issuance of employee stock options. We are
currently evaluating our compensation programs and in particular
our equity compensation philosophy. In the future, 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
effective date of these new rules.
Reduced
Productivity of New Hires; Senior Management
Changes
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 hiring in Bangalore, India in connection with the
relocation of a significant portion of our research and
development operations to India.
During 2006 and 2007, we experienced significant change in our
senior management team and we may continue to experience such
changes. Our former general counsel was terminated for cause in
May 2006, our former president was terminated in October 2006,
our former chief executive officer, George Samenuk, retired in
October 2006, and for a significant period during 2006 and 2007
several other key senior management positions were vacant. The
board determined the termination of our former president was for
cause. In March 2007, we announced the appointment of David
DeWalt as our chief executive officer and president, effective
April 2007, who replaced Dale Fuller, who served as our interim
chief executive officer and president from October 2006 to April
2007. Most recently, in September 2007, we announced the
appointment of Mark Cochran as our general counsel, and in
October 2007, we announced the appointment of Michael DeCesare
as our executive vice president of worldwide sales operations.
For new employees or changes in senior management, there may be
reduced levels of productivity as recent additions or hires are
trained or otherwise assimilate and adapt to our organization
and culture. The significant turnover in our senior management
team during 2006 and 2007 may make it difficult to attract
new employees and retain existing employees. Further, this
turnover may also make it difficult to execute on our business
plan and achieve our planned financial results.
Our
Financial Results Will Likely Fluctuate, Making It Difficult for
Us to Accurately Estimate Operating Results.
Our revenues, gross margins and operating results have varied
significantly in the past, and we expect fluctuations in our
operating results to continue in the future due at least in part
to a number of factors, many of which are outside of our control
and which could adversely affect our operations and operating
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. If our
quarterly financial results or our predictions of future
financial results fail to meet the expectations of securities
analysts and investors, our stock price could be negatively
affected. Any volatility in our quarterly financial results may
make it more difficult for us to raise capital in the future or
pursue acquisitions that involve issuances of our stock. Our
operating results for prior periods may not be effective
predictors of our future performance.
Factors that may cause our revenues, gross margins and operating
results to fluctuate significantly from period to period,
include, but are not limited to the following:
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the introduction and adoption of new products, product upgrades
or updates by us or our competitors;
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the volume, size, timing and contractual terms of new customer
licenses and renewals of existing licenses, which may influence
our revenue recognition;
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the mix of products we sell and services we offer, including
whether (i) our products are sold directly by us or
indirectly through distributors, resellers, ISPs such as
Telefonica S.A., OEMs such as Dell, and others, (ii) the
products are hardware or software based and (iii) in the
case of software licenses, the licenses are perpetual licenses
or time-based subscription licenses;
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changes in our supply chains and product delivery channels,
which may result in product fulfillment delays;
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changes in our business strategy;
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increased reliance upon third-party distributors, resellers and
ISPs that are critical to the successful execution of our
channel strategy;
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personnel limitations, which may adversely impact our ability to
process the large number of orders that typically occur near the
end of a fiscal quarter;
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costs or charges related to our acquisitions or dispositions;
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the components of our revenue that are deferred, including our
online subscriptions and that portion of our software licenses
attributable to support and maintenance;
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stock-based compensation expense, which we began recognizing for
our stock-based compensation plans in the first quarter of 2006
as a result of accounting rules changes;
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unanticipated costs associated with litigation or investigations;
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costs and charges related to certain extraordinary events,
including relocation of personnel and previous financial
restatements;
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costs related to Sarbanes-Oxley compliance efforts;
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changes in generally accepted accounting principles;
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our ability to effectively manage our operating expense levels;
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factors that lead to substantial declines in estimated values of
long-lived assets below their carrying value; and
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our ability to successfully address and resolve issues arising
from the discovery that we had retroactively priced stock
options and had not accounted for them correctly.
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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 hence, a higher percentage
of revenue shipments, in the last month of our fiscal quarters.
Some customers believe they can enhance their bargaining power
by waiting until the end of our quarter to place their order.
Any failure or delay in the closing of significant new orders in
a given quarter could have a material adverse effect on our
quarterly operating results. In addition, a significant portion
of our revenue is derived from product sales through our
distributors. 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 accurately gather sales
information on a timely basis 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. 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.
Further, as we increasingly rely upon third-party manufacturers
to manufacture our hardware-based products, our reliance on
their ability to provide us with timely and accurate product
cost information exposes us to risk. A failure of our
third-party manufacturers to provide us with timely and accurate
product cost information may impact our costs of goods sold and
negatively impact our ability to accurately and timely report
revenue.
Because we expect continued uncertainty relating to these
factors, it may be difficult for us to accurately estimate
operating results prior to the end of a quarter.
We Face
Risks in Connection With the Material Weaknesses Identified by
Our Management and Any Related Remedial Measures That We
Undertake.
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, 2006 on the effectiveness of our
25
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
(i) our accounting for stock-based compensation expenses
related to Company stock options and (ii) our accounting
for income taxes.
In response to the material weakness in our internal control
over financial reporting with respect to our accounting for
stock-based compensation expenses, we have implemented
additional controls and procedures, including standardizing
grant evidence and approval and standardizing grant timing. To
ensure the completeness and accuracy of all stock-based
compensation expense resulting from the independent
investigation, we have implemented controls for accumulation and
tracking of stock-based compensation expense, processing and
reconciliation of stock-based compensation expense and
independent approval and recording of stock-based compensation
expense.
In response to the material weakness in our internal control
over financial reporting with respect to our accounting for
income taxes, we have implemented and will continue to
implement, additional controls and procedures, including
enhancing the training and education of our tax accounting
personnel, automating key elements of the calculation for the
provision for income taxes and the account reconciliation
processes by implementing a new tax accounting system and
improving our interim and annual review processes for various
calculations, including the tax provision computation process.
We also intend to help address material weakness in our internal
control over financial reporting with respect to our accounting
for income taxes by hiring more tax accounting personnel, with
an emphasis on hiring personnel having international tax
expertise.
These efforts have resulted, and could further result, in
increased cost and could divert management attention away from
operating our business. As a result of the identified material
weaknesses, even though our management believes that our efforts
to remediate and re-test our 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 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
weaknesses 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 is identified 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) or if our previously identified material
weaknesses are not remediated, our independent auditors would
continue to be unable to express an opinion on the effectiveness
of our internal controls. This in turn, could cause us to fail
to regain investor confidence in the accuracy and completeness
of our financial reports, which could continue to adversely
affect our stock price and potentially subject us to litigation.
We May
Incur Additional Expenses in Order To Assist Our Employees With
Potential Income Tax Liabilities Which May Arise Under
Section 409A of the Internal Revenue Code.
As a result of our investigation into our historical stock
option granting practices, we have determined that a number of
our outstanding stock option awards were granted at exercise
prices below the fair market value of our stock on the
appropriate accounting measurement date. The primary adverse tax
consequence is that the re-measured options vesting after
December 31, 2004 are potentially subject to option holder
excise tax under Section 409A of the Internal Revenue Code
(and, as applicable, similar excise taxes under state law or
foreign law). Our employees who hold options which are
determined to have been granted with exercise prices below the
fair market value of the underlying shares of common stock on
the appropriate measurement date may be subject to taxes,
penalties and interest under Section 409A if no action is
taken to cure the options from exposure under Section 409A
before December 31, 2008.
Regarding potential future liabilities associated with
Section 409A, we are in the process of determining whether
we will implement a plan to assist affected employees and former
employees, adjust the terms of the
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original option grants, or adjust the terms of the original
option grant and pay the affected employees an amount to
compensate such employees for this lost benefit. Once we have
determined a final course of action in these respects, if we
undertake any such plan or process, we anticipate that we will
record additional expenses in periods when such actions are
taken.
We Rely
Heavily on Our Intellectual Property Rights, Which Offer Only
Limited Protection Against Potential Infringers; Intellectual
Property Litigation in the Network and System Security Market is
Common and Can Be Expensive.
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,
theft or misappropriation. Competitors may independently develop
technologies or products that are substantially equivalent or
superior to our products or that inappropriately incorporate our
proprietary technology. We are aware that a number of users of
our security products have not paid registration, license or
subscription fees to us. 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.
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. For example, as discussed in
Note 20 to the notes to consolidated financial statements,
we are currently defending a patent infringement case seeking
preliminary and permanent injunctions against the sale of
certain of our products.
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.
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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 technology 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, or 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, which may have
adverse effects on our sale of the products incorporating any
such software. 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.
We Face
Risks Related to The Strategic Alliances We Use to Distribute
Our Products.
Through our strategic alliances, we may from time to time
license technology from third parties to integrate or bundle
with our products or we may license our technology for others to
integrate or bundle with their products. We
27
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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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 agreements relating to our strategic alliances are
terminable without cause with no or minimal notice or penalties.
We may expend significant time, money and resources to further
relationships with our strategic alliances that are thereafter
terminated. In addition, if we were to lose a relationship with
a strategic partner, we could expend significant money in
developing new strategic alliances.
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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 defects may be higher than that normally associated
with new products.
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Our sales force, marketing and professional services personnel
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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We may be required to share ownership in technology developed as
part of our strategic alliances.
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Increased
Customer Demands on Our Technical Support Services May Adversely
Affect Our Relationships with Our Customers and Negatively
Impact Our Financial Results.
We offer technical support services with many of our products.
We may be unable to respond quickly enough to accommodate
short-term increases in customer demand for support services. We
also may be unable to modify the format of our support services
to compete with changes in support services provided by
competitors or successfully integrate support for our customers.
Further customer demand for these services, without
corresponding revenues, could increase costs and adversely
affect our operating results.
We have outsourced a substantial portion of our worldwide
consumer support functions to third-party service providers. If
these companies experience financial difficulties, do not
maintain sufficiently skilled workers and resources to satisfy
our contracts, or otherwise fail to perform at a sufficient
level under these contracts, the level of support services to
our customers may be significantly disrupted, which could
materially harm our relationships with these customers.
Failure
of Our Products to Work Properly Or Misuse of Our Products Could
Impact Sales, Increase Costs, and Create Risks of Potential
Negative Publicity and Legal Liability.
Our products are complex and are deployed in a wide variety of
complex network environments. Our products may have errors or
defects that users identify after deployment, which could harm
our reputation and our business. In addition, products as
complex as ours frequently contain undetected errors when first
introduced or when new versions or enhancements are released. We
have from time to time found errors in versions of our products,
and we may find such errors in the future. Because customers
rely on our products to manage employee behavior to protect
against security risks and prevent the loss of sensitive data,
any significant defects or errors in our products may result in
negative publicity or legal claims. The occurrence of errors
could adversely affect sales of our products, divert the
attention of engineering personnel from our product development
efforts and cause significant customer relations or legal
problems.
Our products may also be misused or abused by customers or
non-customer third parties who obtain access and use of our
products. These situations may arise where an organization uses
our products in a manner that impacts their end users or
employees privacy or where our products are
misappropriated to censor private access to the Internet. Any of
these situations could result in negative press coverage and
negatively affect our reputation.
28
We Face
Manufacturing, Supply, Inventory, Licensing and Obsolescence
Risks Relating to Our Products.
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 we
continue to expand our portfolio of hardware-based network
protection and system protection products. 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.
Furthermore, supply disruptions or cost increases could increase
our costs of goods sold and negatively impact our financial
performance. For example, if the price to us of our
hardware-based products increased and we were unable to offset
the price increase, then the increased cost to us of selling the
product could reduce our overall profitability.
Sourcing
Some of our hardware 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.
Third-Party
Licenses
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 and
other software. 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.
Obsolescence
Hardware-based products may face greater obsolescence risks than
software products. We could incur losses or other charges in
disposing of obsolete inventory. In addition, to the extent that
our third-party manufacturers upgrade or otherwise alter their
manufacturing processes, our hardware-based products could face
supply constraints or risks associated with the transition of
hardware-based products to new platforms, which could increase
the risk of losses or other charges associated with obsolete
inventory.
Product
Fulfillment
We typically fulfill delivery of our hardware-based products
from centralized distribution centers. We have in the past and
may in the future make changes in our product delivery network.
Changes in our product delivery network may disrupt our ability
to timely and efficiently meet our product delivery commitments,
particularly at the end of a quarter. As a result, we may
experience increased costs in the short term as temporary
delivery solutions are implemented to address unanticipated
delays in product delivery. In addition, product delivery delays
may negatively impact our ability to recognize revenue if
shipments are delayed at the end of a quarter.
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 that do not bundle our solutions. Significant
product displacements could negatively impact our revenue and
have a material adverse effect on our business.
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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 defect 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. For example, in
March 2006, we released a data file update that contained a
defect causing certain of our products to generate false
positives. Failure of our products to perform to specifications
(including the failure of our products to identify or block a
virus), 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.
Cryptography
Contained in Our Technology is Subject to Export
Restrictions.
Some of our computer security solutions, particularly those
incorporating encryption functionality, 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 related regulatory policies, 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. If we fail to
comply with applicable law and regulations, we may become
subject to penalties and fines or restrictions that may
adversely affect our business.
If We
Fail to Effectively Upgrade Our Information Technology System,
We May Not Be Able to Accurately Report Our Financial Results or
Prevent Fraud.
As part of our efforts to continue improving our internal
control over financial reporting, we upgraded our existing SAP
information technology system during 2006 in order to automate
certain controls that are currently performed manually. We may
experience difficulties in transitioning to new or upgraded
systems and in applying maintenance patches to existing systems,
including loss of data and decreases in productivity as
personnel become familiar with new, upgraded or modified
systems. Our management information systems will require
modification and refinement as we grow and as our business needs
change, which could prolong difficulties we experience with
systems transitions, and we may not always employ the most
effective systems for our purposes. If we experience
difficulties in implementing new or upgraded information systems
or experience significant system failures, or if we are unable
to successfully modify our management information systems and
respond to changes in our business needs, our operating results
could be harmed or we may fail to meet our reporting
obligations. We may also experience similar results if we have
difficulty applying routine maintenance patches to existing
systems.
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, and may be in the future, subject to other
litigation including stockholder derivative actions or actions
brought by current or former employees. Where we can make a
reasonable estimate of the liability relating to pending
litigation and determine that an adverse liability resulting
from such litigation 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 the inherent 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. In this regard, we and a number of our current and
former officers and directors are involved in or the subject of
various legal actions. Managing, defending and indemnity
obligations related to these actions have caused significant
diversion of managements and the board of directors
time and resulted in material expense to us. See Note 20 to
the notes to consolidated financial statements for additional
information with respect to currently pending legal matters.
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We Face
Risks Related to Our 2006 Settlement Agreement with the
Securities and Exchange Commission.
On February 9, 2006, the United States District Court for
the Northern District of California entered a final judgment
permanently enjoining us and our officers and agents from future
violations of the securities laws. This final judgment resolved
the charges filed against us in connection with the SECs
investigation of our accounting practices that commenced in
March 2002. As a result of the judgment, we will forfeit for
three years the ability to invoke the safe harbor
for forward-looking statements provision of the Private
Securities Litigation Reform Act, or the Reform Act. This safe
harbor provided us enhanced protection from liability related to
forward-looking statements if the forward-looking statements
were either accompanied by meaningful cautionary statements or
were made without actual knowledge that they were false or
misleading. While we may still rely on the bespeaks
caution doctrine that existed prior to the Reform Act for
defenses against securities lawsuits, without the statutory safe
harbor, it may be more difficult for us to defend against any
such claims. In addition, due to the permanent restraint and
injunction against violating applicable securities laws, any
future violation of the securities laws would be a violation of
a federal court order and potentially subject us to a contempt
order. For instance, if, at some point in the future, we were to
discover a fact that caused us to restate our financial
statements similar to the restatements that were the subject of
the SEC action, we could be found to have violated the final
judgment. We cannot predict whether the SEC might assert that
our failure to remain current in our periodic reporting
obligations or our historical stock option practices violated
the final judgment or what, if any, enforcement action the SEC
might take upon such a determination. Further, any collateral
criminal or civil investigation, proceeding or litigation
related to any future violation of the judgment, such as the
compliance actions mandated by the judgment, could result in the
distraction of management from our day-to-day business and may
materially and adversely affect our reputation and results of
operations.
False
Detection of Viruses and Actual or Perceived Security Breaches
Could Adversely Affect Our Business.
Our system protection 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.
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 disk duplication by distributors or our
independent agents, disks containing our software may be
infected with viruses.
We Face
Risks Related to Our Anti-Spam, Anti-Spyware and Safe Search
Software Products.
Our anti-spam, anti-spyware and safe search products may falsely
identify emails, programs or websites as unwanted
spam, potentially unwanted programs or
unsafe, fail to properly identify unwanted emails,
programs or unsafe websites, particularly because
spam emails, spyware or malware 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 that
seeks to gain access to personal user information. Parties whose
emails or programs are blocked by our products, or whose
websites are incorrectly identified as unsafe or as
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utilizing phishing techniques, may seek redress against us for
labeling them as spammers, spyware or unsafe, 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.
Open
Source Software and Failure to Comply with Open Source
Licenses and Obligations Could Negatively Affect our
Business.
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, or GPL, have not been interpreted in a court of law.
Use of GPL or other open source software could subject certain
portions of our proprietary software to the GPL requirements or
other similar requirements, as applicable, which may have
adverse effects on our sale of the products incorporating any
such software. 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, 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, open source license terms may be ambiguous
and may result in unanticipated or uncertain obligations
regarding our products. 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. We have in place processes and controls designed to
address these risks and concerns, including a review process for
screening requests from our development organizations for the
use of open source, but we cannot be sure that all open source
is submitted for approval prior to use in our products.
Compliance
Or the Failure to Comply with Current and Future Environmental
Regulations Could Cause Us Significant Expense.
We are subject to a variety of federal, state, local and foreign
environmental regulations. If we fail to comply with any present
and future regulations, we could be subject to future
liabilities, the suspension of production or a prohibition on
the sale of our products. In addition, such regulations could
require us to incur other significant expenses to comply with
environmental regulations, including expenses associated with
the redesign of any non-compliant product. From time to time new
regulations are enacted, and it is difficult to anticipate how
such regulations will be implemented and enforced. For example,
the European Union recently effected the Restriction on the Use
of Certain Hazardous Substances in Electrical and Electronic
Equipment Directive (RoHS) and the Waste Electrical and
Electronic Equipment Directive (WEEE). Similar legislation is
currently in force or is being considered in the United States,
as well as other countries, such as Japan and China. The failure
to comply with any of such regulatory requirements or
contractual obligations could result in us being liable for
costs, fines, penalties and third-party claims, and could
jeopardize our ability to conduct business in the jurisdictions
where these regulations apply.
Our Tax
Strategy May Expose Us to Risk.
We are generally required to account for taxes in each
jurisdiction in which we operate. This process may require us to
make assumptions, interpretations and judgments with respect to
the meaning and application of promulgated tax laws and related
administrative and judicial interpretations thereof of the
jurisdictions in which we operate. The positions that we take
and our interpretations of the tax laws may differ from the
positions and interpretations of the tax authorities in the
jurisdictions in which we operate. An audit by a tax authority
that results in a contrary decision could have a significant
negative impact on our cash position and net income.
Business
Interruptions May Impede Our Operations and the Operations of
Our Customers.
We are continually updating or modifying our accounting and
other internal and external facing business systems.
Modifications of these types of systems are often disruptive to
business and may cause us to incur higher costs than we
anticipate. Failure to properly manage this process 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. Our
corporate headquarters are located
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near a major earthquake fault. The potential impact of a major
earthquake on our facilities, infrastructure and overall
operations is not known, but could be quite severe. Despite
safety precautions that have been implemented, an earthquake
could seriously disrupt our entire business process. We are
largely uninsured for losses and business disruptions caused by
an earthquake and other natural disasters.
Our Stock
Price Has Been Volatile and Is Likely to Remain
Volatile.
During 2007 and up to the date of this filing, our stock price
was highly volatile ranging from a per share high of $41.66 to a
low of $27.74. On December 7, 2007, our stocks
closing price per share price was $38.94. Announcements,
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. In addition, third-party announcements such as
those made by our partners and competitors may contribute to
current and future stock price volatility. For example, future
announcements by Microsoft Corporation related to its consumer
security solution may contribute to future volatility in our
stock price. Certain types of investors may choose not to invest
in stocks with this level of stock price volatility.
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.
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
Under to our certificate of incorporation, 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 and could have the
effect of discouraging a change of control of the company or
changes in management.
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 or
changes in our board of directors and management more difficult.
For example, any stockholder wishing to make a stockholder
proposal (including director nominations) at our 2008 annual
meeting, must meet the qualifications and follow the procedures
specified under both the Securities Exchange Act of 1934 and our
bylaws.
Our
Rights Plan
Our board of directors has adopted a stockholders rights
plan. The rights would become exercisable on the tenth day after
a person or group announces the acquisition of 15% or more of
our common stock or announces the 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. The rights plan makes
it more difficult for a third-party to acquire a majority of our
outstanding voting stock and discourages a change of control of
the company not approved by our board of directors.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our worldwide headquarters currently occupies approximately
95,000 square feet in facilities located in
Santa Clara, California under leases expiring through 2013
which excludes approximately 113,000 square feet of leased
space that we sublease to third parties. Worldwide, we lease
facilities with approximately 766,000 total square feet, with
leases that expire at various times. Total square footage
excludes approximately 131,000 square feet of leased space
in North America and EMEA that we sublease to third parties. Our
primary international facilities are located in India, Ireland,
Japan, the Netherlands, the United Kingdom and Singapore.
Significant domestic sites include California, Oregon and Texas.
We believe that our existing facilities are adequate for the
present and that additional space will be available as needed.
We own our regional office located in Plano, Texas. The
approximately 170,000 square feet facility opened in
January 2003 and is located on 21.0 acres of owned land.
This facility supports approximately 800 employees working
in our customer support, engineering, accounting and finance,
information technology, internal audit, human resources, legal
and sales groups.
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Item 3.
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Legal
Proceedings
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Special
Committee Investigation of Historical Stock Option Granting
Practices
We became aware of potential issues with respect to our
historical stock option grants in May 2006 after the Center for
Financial Research and Analysis (CFRA) released a
report titled Options Backdating Which
Companies are at Risk? This report concluded there was
a high probability that we backdated option grants from 1997 to
2002, based on stock price trends around certain grant dates.
Upon becoming aware of the CFRA report, management immediately
commenced a voluntary internal review involving the examination
of certain stock option grants. In May 2006, management notified
our board of directors that an internal review was in process in
response to the findings in the CFRA report.
During our initial review, management discovered irregularities
in certain historical stock option grants and discussed these
findings with the board of directors in late May 2006. We
learned during the course of the initial review, and through
subsequent discussions between our former general counsel and
certain directors, of irregularities regarding the pricing of a
grant to our former general counsel. Upon review of the findings
of the internal review, the board of directors immediately
terminated the employment of our former general counsel for
cause.
The board of directors created a committee (the special
committee) comprised of certain of its members who were
independent of our company and management and who had not
previously served as members of our boards compensation
committee to conduct an investigation to evaluate the conduct
and performance of our officers, employees and directors who
were involved in the option granting process and to evaluate the
timing of option grants, the related approval documentation and
accounting implications with respect to grants made during the
period from January 1, 1995 through March 31, 2006. In
May 2006, the special committee retained independent counsel and
forensic accountants to assist in the investigation
(collectively referred to as the investigative
team). No limits were placed on the scope of the
investigation. Independent counsel first met with the audit
committee and with the special committee in June 2006.
Findings
and Conclusions
The special committee presented its initial findings to the
board of directors on October 10, 2006. As part of this
presentation, the special committee communicated to our board of
directors information concerning errors and irregularities with
respect to our option granting practices, including, among
others, the new hire option grant of our former president and
one of the option grants to our former general counsel.
Immediately following that presentation, our chairman and chief
executive officer retired and our president was terminated. The
board determined this termination was a termination for cause.
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The special committee investigation was completed in November
2007. The special committee concluded that there were both
qualitative issues and accounting and administrative errors
relating to our stock option granting process. In this regard,
the special committee concluded that certain former members of
management had acted inappropriately, giving rise to qualitative
concerns. The qualitative concerns included the following:
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in the case of our former general counsel, he and a former
member of management participated in intentionally modifying one
of the former general counsels stock option grants so as
to create a lower exercise price, and the former general counsel
failed to disclose this unauthorized change to the board of
directors prior to late May 2006;
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in some instances, former members of management drafted
corporate records, including employment documentation, board and
compensation committee meeting minutes and actions by unanimous
written consent, with the benefit of hindsight so as to choose
measurement dates giving more favorable exercise prices;
moreover, certain of these documents were used by us in making
accounting determinations with respect to stock-based
compensation;
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during the course of the investigation, certain former members
of management did not provide completely accurate or consistent
information and in one case, provided documentation to the
special committee that the special committee determined was
intentionally altered; and
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certain former members of senior management did not display the
appropriate oversight and tone at the top expected
by the board of directors.
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In addition to the foregoing, the special committee concluded
that certain stock option awards were previously accounted for
using incorrect measurement dates because: (i) we had
previously determined accounting measurement dates for certain
stock option awards incorrectly, and, in some instances, such
dates were chosen with the benefit of hindsight so as to
intentionally, and not inadvertently or as a result of
administrative error, give more favorable exercise prices,
(ii) the key terms for a substantial portion of the grants
in an annual merit grant had been determined with finality prior
to the original measurement date, with a reduction in the
exercise price on the original measurement date, which
represented a repricing, (iii) original accounting
measurement dates occurred prior to approval dates,
(iv) original accounting measurement dates occurred prior
to employment commencement dates, (v) approval and
employment commencement date documentation was incorrect or
inconsistent and (vi) certain director grants contained
clerical errors.
Government
Inquiries Relating to Historical Stock Option
Practices
On May 23, 2006, the SEC notified us that an investigation
had begun regarding our historical stock option grants. On
June 7, 2006, the SEC sent us a subpoena requesting certain
documents related to stock options granted between
January 1, 1995 and the date of the subpoena. At or around
the same time we received a notice of informal inquiry from the
United States Department of Justice, the (DOJ),
concerning our stock option granting practices. On
August 15, 2006, we received a grand jury subpoena from the
U.S. Attorneys Office for the Northern District of
California relating to the termination of our former general
counsel, his stock option related activities and the
investigation.
On November 2, 2006, certain members of the investigative
team met with the staff of the SECs Division of
Enforcement and presented the initial findings of the
investigation. As a result of that meeting, the scope of the
investigation was expanded to include: (i) a review of the
historical option grants made by McAfee.com,
(ii) historical exercise activity with respect to our
option grants to consider potential exercise date manipulation
and (iii) post-employment arrangements with former
executives.
On November 6, 2006, we received a document request from
the SEC for option grant data for McAfee.com, one of our former
consolidated subsidiaries that had been a publicly traded
company from December 1999 through September 2002.
The investigative team has had meetings and continuous
discussions with the SEC from May 2006 through the end of the
investigation in November 2007. We have provided documents
requested by the SEC to date, and we are cooperating with the
SECs investigation.
35
We cannot predict how long it will take or how much more time
and resources we will have to expend to resolve these government
inquiries, nor can we predict the outcome of the inquiries.
There can be no assurance that other inquiries, investigations
or actions will not be commenced by other United States federal
or state regulatory agencies or authorities or by foreign
governmental agencies or authorities and that such actions will
not result in significant fines
and/or
penalties.
Late SEC
Filings
Due to the time necessary to conclude the special committee
investigation and to restate our consolidated financial
statements, we were not a timely filer of this annual report on
Form 10-K
and of our quarterly reports on
Form 10-Q
for the quarters ended June 30, 2006, September 30,
2006, March 31, 2007, June 30, 2007, and
September 30, 2007. As a result, we received a letter,
dated March 19, 2007, from The New York Stock Exchange (the
NYSE), which requested that we contact the NYSE to
discuss the status of this filing of our annual report on
Form 10-K
and that we issue a press release disclosing the status of the
filing, noting the delay, the reason for the delay and the
anticipated filing date. Our press release already issued on
February 8, 2007 satisfied these requirements. On
August 28, 2007, we requested the NYSE to grant an
extension of our continued listing and trading until
December 31, 2007 in order to provide adequate time to
conclude our investigation and become current in our late
filings with the SEC, including the filing of this annual report
on
Form 10-K.
The NYSE granted this request on September 17, 2007,
subject to reassessment on an ongoing basis, and on
September 18, 2007, we issued a press release disclosing
this extension. We have periodically met with the NYSE to
discuss the status of the investigation and the timing of filing
of this annual report on
Form 10-K.
With the filing of this annual report on
Form 10-K
and our quarterly reports on
Form 10-Q
for the quarters ended June 30, 2006, September 30,
2006, March 31, 2007, June 30, 2007, and
September 30, 2007, we believe we have returned to full
compliance with SEC reporting requirements.
Stockholder
Derivative Litigation Relating to Historical Stock Option
Practices
On May 31, 2006, a purported stockholder derivative
lawsuit styled Dossett v. McAfee, Inc.,
No. 5:06CV3484 (JF) was filed in the United
States District Court for the Northern District of California
against certain of our current and former directors and officers
(Dossett). On June 7, 2006, another purported
stockholders derivative lawsuit styled
Heavy & General Laborers Locals 472 & 172
Pension & Annuity Funds v. McAfee, Inc.,
No. 5:06CV03620 (JF) was filed in the United
States District Court for the Northern District of California
against certain of our current and former directors and officers
(Laborers). The Dossett and Laborers actions
generally allege that we improperly backdated stock option
grants between 1997 and the present, and that certain of our
current and former officers or directors either participated in
this backdating or allowed it to happen. The Dossett and
Laborers actions assert claims purportedly on behalf of us for,
inter alia, breach of fiduciary duty, abuse of control,
constructive fraud, corporate waste, unjust enrichment, gross
mismanagement, and violations of the federal securities laws. On
July 13, 2006, the United States District Court for the
Northern District of California entered an order consolidating
the Dossett and Laborers actions as In re McAfee, Inc.
Derivative Litigation, Master File No. 5:06CV03484 (JF)
(the Consolidated Action). On January 22, 2007,
we moved to dismiss the complaint in the Consolidated Action on
the grounds that plaintiffs lack standing to sue on our behalf
because, inter alia, they did not make a pre-suit demand on our
board of directors. At the parties request, the Court has
continued on several occasions the due date for the
plaintiffs opposition to our motion to dismiss and the
date for the hearing of that motion. Currently, there is no
deadline by which plaintiffs must file an opposition to the
pending motion to dismiss.
On August 7, 2007, a new stockholders derivative
lawsuit styled Webb v. McAfee, Inc., No. C
07 4048 (PVT) was filed in the United States
District Court for the Northern District of California against
certain of our current and former directors and officers
(Webb). The new lawsuit generally alleges the same
facts and causes of action that plaintiffs have asserted in the
Consolidated Action. The plaintiff in Webb has requested that
his action be consolidated with the Consolidated Action. On
September 21, 2007, the Court consolidated the Webb action
with the Consolidated Action.
On June 2, 2006, three identical lawsuits
styled Greenberg v. Samenuk, No. 106CV064854,
Gordon v. Samenuk, No. 106CV064855, and Golden v.
Samenuk, No. 106CV064856 were filed in the
Superior Court of
36
the State of California, County of Santa Clara against
certain of our current and former directors and officers (the
State Actions). Like the Consolidated Action, the
State Actions generally allege that we improperly backdated
stock option grants between 2000 and the present, and that
certain of our current and former officers or directors either
participated in this backdating or allowed it to happen. Like
the Consolidated Action, the State Actions assert claims
purportedly on behalf of us for, inter alia, breach of fiduciary
duty, abuse of control, corporate waste, unjust enrichment, and
gross mismanagement. On June 23, 2006, we moved to dismiss
these actions in favor of the first-filed Consolidated Action.
On September 18, 2006, the Court consolidated the State
Actions and denied our motions to dismiss, but stayed the State
Actions due to the first-filed action in federal court. The
Court has continued the stay on several occasions.
In December 2007, we reached a tentative settlement with
the plaintiffs in the Consolidated Action and the State Actions.
We have accrued $13.8 million in the condensed consolidated
financial statements as of June 30, 2006 related to
expected payments pursuant to the tentative settlement and
expect to complete the documentation and the required approvals
in late December 2007 or early in the first quarter of
2008. While we cannot predict the ultimate outcome of the
lawsuits, the provision recorded in the financial statements
represents our best estimate at this time.
SEC
Settlement Related to Prior Restatement
On March 22, 2002, the SEC notified us that it had
commenced a Formal Order of Private Investigation
into our accounting practices. In October 2003, we
completed a restatement of our consolidated financial statements
for 1998 through 2000. On September 29, 2005, we announced
we had reserved $50.0 million in connection with the
proposed settlement with the SEC and we had deposited
$50.0 million in an escrow account with the SEC as the
designated beneficiary. On February 9, 2006, the SEC
entered the final judgment for the settlement with us. We also
agreed to release $50.0 million to the SEC for the civil
penalty on February 13, 2006 and certain other conditions,
such as engaging independent consultants to examine and
recommend improvements to our internal controls to ensure
compliance with federal securities laws.
Indemnification
Obligations
As permitted under Delaware law, we have indemnification
agreements in effect whereby we indemnify our officers and
directors for certain events or occurrences while the officer or
director is, or was, serving at our request in such capacity.
The maximum potential amount of future payments we could be
required to make under these indemnification agreements is not
limited; however, we have director and officer insurance
coverage that reduces our expense exposure and may enable us to
recover a portion of future amounts paid.
Other
Legal Matters
We are named from time to time as a party to lawsuits in the
normal course of our business. Litigation in general and
intellectual property and securities litigation in particular,
can be expensive and disruptive to normal business operations.
Moreover, the results of legal proceedings are difficult to
predict. See Note 20 to the notes to consolidated financial
statements for additional information with respect to legal
matters.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of stockholders during the
quarter ended December 31, 2006.
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Our common stock is traded on the New York Stock Exchange
(NYSE), under the symbol MFE. Prior to
December 1, 1997, our common stock traded on the NASDAQ
National Market under the symbol MCAF. From December 1,
1997 until February 12, 2002, our common stock traded under
the symbol NETA. Our common stock
37
began trading on the NYSE effective February 12, 2002, and
traded under the symbol NET from February 12, 2002 until
June 2004, when we changed our name to McAfee, Inc. and we began
trading under the symbol MFE.
The following table sets forth, for the period indicated, the
high and low sales prices for our common stock for the last
eight quarters, all as reported by NYSE. The prices appearing in
the table below do not reflect retail
mark-up,
mark-down or commission.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
29.24
|
|
|
$
|
21.75
|
|
Second Quarter
|
|
|
27.52
|
|
|
|
22.00
|
|
Third Quarter
|
|
|
25.15
|
|
|
|
19.52
|
|
Fourth Quarter
|
|
|
30.50
|
|
|
|
24.01
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
29.15
|
|
|
$
|
21.94
|
|
Second Quarter
|
|
|
28.71
|
|
|
|
20.35
|
|
Third Quarter
|
|
|
33.24
|
|
|
|
26.00
|
|
Fourth Quarter
|
|
|
32.59
|
|
|
|
25.35
|
|
The annual certification to the NYSE attesting to our compliance
with the NYSEs corporate governance listing standards was
submitted by our chief executive officer to the NYSE in June
2006.
Dividend
Policy
We have not paid any cash dividends since our reorganization
into a corporate form in October 1992. We intend to retain
future earnings for use in our business and do not anticipate
paying cash dividends in the foreseeable future.
38
Stock
Performance
The following Performance Graph and related information shall
not be deemed soliciting material or to be
filed with the Securities and Exchange Commission,
nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that
we specifically incorporate it by reference into such filing.
The following graph shows a five-year comparison of cumulative
total returns for our common stock, the CRSP Total Return Index
for the NASDAQ Stock Market and the CRSP Total Return Industry
Index for NASDAQ Computer and Data Processing Services Stocks,
each of which assumes an initial value of $100 and reinvestment
of dividends. The information presented in the graph and table
is as of the end of each fiscal year ended December 31.
Comparison
of Five-Year Cumulative Total Returns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec-01
|
|
|
Dec-02
|
|
|
Dec-03
|
|
|
Dec-04
|
|
|
Dec-05
|
|
|
Dec-06
|
McAfee, Inc.
|
|
|
|
100.0
|
|
|
|
|
62.2
|
|
|
|
|
58.2
|
|
|
|
|
111.9
|
|
|
|
|
105.0
|
|
|
|
|
109.8
|
|
NASDAQ Stock Market (US & Foreign)
|
|
|
|
100.0
|
|
|
|
|
68.8
|
|
|
|
|
103.8
|
|
|
|
|
112.9
|
|
|
|
|
115.5
|
|
|
|
|
127.4
|
|
NASDAQ Computer and Data Processing Stocks (US &
Foreign)
|
|
|
|
100.0
|
|
|
|
|
68.9
|
|
|
|
|
90.8
|
|
|
|
|
100.2
|
|
|
|
|
103.5
|
|
|
|
|
116.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance for 2006 reflects a December 29, 2006 closing
market price on the New York Stock Exchange of $28.38.
Holders
of Common Stock
As of December 7, 2007, there were 663 record owners of our
common stock.
Common
Stock Repurchases
Our board of directors had previously authorized the repurchase
of our common stock in the open market from time to time until
October 2007, depending upon market conditions, share price and
other factors. Beginning in May 2006, we suspended
repurchases of our common stock in the open market due to the
announced investigation into our historical stock option
granting practices. Therefore, we had no repurchases of our
common stock during the fourth quarter of 2006 that were
pursuant to a publicly announced plan or program. At
December 31, 2006, we had remaining authorization to
repurchase $246.2 million of our common stock in the open
market; however, this
39
authorization expired in October 2007. We expect that our
executive management will recommend to our board of directors
that a new common stock repurchase program be authorized.
Retirements
of Common Stock
In 2004, we retired the approximately 13.0 million treasury
shares we had repurchased on the open market in 2003 and 2004.
In 1998, we deposited approximately 1.7 million shares of
our common stock with a trustee for the benefit of the employees
of our Dr. Solomons acquisition to cover the stock
options assumed in our acquisition of this company. These
shares, which have been included in our outstanding share
balance, were to be issued upon the exercise of stock options by
Dr. Solomons employees. We determined in June 2004
that Dr. Solomons employees had exercised
approximately 1.6 million options, and that we had issued
new shares in connection with these exercises rather than using
the trust shares to satisfy the option exercises. The trustee
returned the 1.6 million shares to us in June 2004, at
which time we retired them and they were no longer included in
our outstanding share balance. In December 2004, the trustee
sold the remaining 133,288 shares in the trust for proceeds
of $3.8 million, and remitted the funds to us. The terms of
the trust prohibited the trustee from returning the shares to us
and stipulated that only employees could benefit from the
shares. We distributed these funds to all employees below the
level of vice president through a bonus which was recognized as
expense in 2004.
40
|
|
Item 6.
|
Selected
Financial Data
|
You should read the following selected financial data as of
December 31, 2006 and 2005 and for each of the three years
ended December 31, 2006 with our consolidated financial
statements and related notes, specifically Note 3
Restatement of Consolidated Financial
Statements, and Managements Discussion
and Analysis of Financial Conditions and Results of
Operations. The following selected financial data as
of December 31, 2004, 2003 and 2002 and for each of the two
years ended December 31, 2003 is derived from our
consolidated financial statements and notes not included in this
filing. Historical results may not be indicative of future
results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005(1)
|
|
|
2004(2)
|
|
|
2003
|
|
|
2002(3)
|
|
|
|
|
|
|
(As
|
|
|
(As
|
|
|
(As
|
|
|
(As
|
|
|
|
|
|
|
restated)
|
|
|
restated)
|
|
|
restated)
|
|
|
restated)
|
|
|
|
(In thousands, except for per share amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,145,158
|
|
|
$
|
981,628
|
|
|
$
|
907,573
|
|
|
$
|
937,509
|
|
|
$
|
1,044,416
|
|
Income from operations
|
|
|
139,028
|
|
|
|
141,407
|
|
|
|
310,252
|
|
|
|
54,149
|
|
|
|
108,774
|
|
Income before provision for income taxes, minority interest and
cumulative effect of change in accounting principle
|
|
|
183,781
|
|
|
|
166,678
|
|
|
|
302,814
|
|
|
|
62,475
|
|
|
|
114,790
|
|
Income before cumulative effect of change in accounting principle
|
|
|
137,471
|
|
|
|
118,217
|
|
|
|
220,017
|
|
|
|
57,073
|
|
|
|
113,064
|
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,337
|
|
|
|
|
|
Net income
|
|
|
137,471
|
|
|
|
118,217
|
|
|
|
220,017
|
|
|
|
67,410
|
|
|
|
113,064
|
|
Income per share, before cumulative effect of change in
accounting principle, basic
|
|
$
|
0.85
|
|
|
$
|
0.72
|
|
|
$
|
1.37
|
|
|
$
|
0.36
|
|
|
$
|
0.76
|
|
Income per share, before cumulative effect of change in
accounting principle, diluted
|
|
$
|
0.84
|
|
|
$
|
0.70
|
|
|
$
|
1.28
|
|
|
$
|
0.35
|
|
|
$
|
0.71
|
|
Cumulative effect of change in accounting principle, basic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.06
|
|
|
$
|
|
|
Cumulative effect of change in accounting principle, diluted
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.06
|
|
|
$
|
|
|
Net income per share, basic
|
|
$
|
0.85
|
|
|
$
|
0.72
|
|
|
$
|
1.37
|
|
|
$
|
0.42
|
|
|
$
|
0.76
|
|
Net income per share, diluted
|
|
$
|
0.84
|
|
|
$
|
0.70
|
|
|
$
|
1.28
|
|
|
$
|
0.41
|
|
|
$
|
0.71
|
|
Shares used in per share calculation basic
|
|
|
160,945
|
|
|
|
165,042
|
|
|
|
160,510
|
|
|
|
160,276
|
|
|
|
149,750
|
|
Shares used in per share calculation diluted
|
|
|
163,052
|
|
|
|
169,249
|
|
|
|
177,385
|
|
|
|
164,652
|
|
|
|
175,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005(1)
|
|
|
2004(2)
|
|
|
2003
|
|
|
2002(3)
|
|
|
|
|
|
|
(As
|
|
|
(As
|
|
|
(As
|
|
|
(As
|
|
|
|
|
|
|
restated)
|
|
|
restated)
|
|
|
restated)
|
|
|
restated)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
389,627
|
|
|
$
|
728,592
|
|
|
$
|
291,155
|
|
|
$
|
333,651
|
|
|
$
|
674,226
|
|
Working capital
|
|
|
146,253
|
|
|
|
688,015
|
|
|
|
260,183
|
|
|
|
419,101
|
|
|
|
479,109
|
|
Total assets
|
|
|
2,800,270
|
|
|
|
2,636,234
|
|
|
|
2,256,135
|
|
|
|
2,121,701
|
|
|
|
2,042,511
|
|
Deferred revenue
|
|
|
897,525
|
|
|
|
751,806
|
|
|
|
601,485
|
|
|
|
454,770
|
|
|
|
326,823
|
|
Long-term debt and other long-term liabilities
|
|
|
149,924
|
|
|
|
147,128
|
|
|
|
205,107
|
|
|
|
556,940
|
|
|
|
507,520
|
|
Total equity
|
|
|
1,427,249
|
|
|
|
1,434,641
|
|
|
|
1,206,242
|
|
|
|
903,962
|
|
|
|
779,924
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2003
|
|
|
|
(As previously
|
|
|
|
|
|
(As
|
|
|
|
reported)
|
|
|
(Adjustments)
|
|
|
restated)
|
|
|
|
(In thousands, except for per share amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
936,336
|
|
|
$
|
1,173
|
|
|
$
|
937,509
|
|
Income from operations
|
|
|
64,402
|
|
|
|
(10,253
|
)
|
|
|
54,149
|
|
Income before provision for income taxes, minority interest and
cumulative effect of change in accounting principle
|
|
|
73,125
|
|
|
|
(10,650
|
)
|
|
|
62,475
|
|
Income before cumulative effect of change in accounting principle
|
|
|
59,905
|
|
|
|
(2,832
|
)
|
|
|
57,073
|
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
10,337
|
|
|
|
|
|
|
|
10,337
|
|
Net income
|
|
|
70,242
|
|
|
|
(2,832
|
)
|
|
|
67,410
|
|
Income per share, before cumulative effect of change in
accounting principle, basic
|
|
$
|
0.37
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.36
|
|
Income per share, before cumulative effect of change in
accounting principle, diluted
|
|
$
|
0.36
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.35
|
|
Cumulative effect of change in accounting principle, basic
|
|
$
|
0.07
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.06
|
|
Cumulative effect of change in accounting principle, diluted
|
|
$
|
0.07
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.06
|
|
Net income per share, basic
|
|
$
|
0.44
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.42
|
|
Net income per share, diluted
|
|
$
|
0.43
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.41
|
|
Shares used in per share calculation basic
|
|
|
160,338
|
|
|
|
(62
|
)
|
|
|
160,276
|
|
Shares used in per share calculation diluted
|
|
|
164,489
|
|
|
|
163
|
|
|
|
164,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2003
|
|
|
|
(As previously
|
|
|
|
|
|
(As
|
|
|
|
reported)
|
|
|
(Adjustments)
|
|
|
restated)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
333,651
|
|
|
$
|
|
|
|
$
|
333,651
|
|
Working capital
|
|
|
415,768
|
|
|
|
3,333
|
|
|
|
419,101
|
|
Total assets
|
|
|
2,120,498
|
|
|
|
1,203
|
|
|
|
2,121,701
|
|
Deferred revenue
|
|
|
459,557
|
|
|
|
(4,787
|
)
|
|
|
454,770
|
|
Long-term debt and other long-term liabilities
|
|
|
570,162
|
|
|
|
(13,222
|
)
|
|
|
556,940
|
|
Total equity
|
|
|
888,089
|
|
|
|
15,873
|
|
|
|
903,962
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2002(3)
|
|
|
|
(As previously
|
|
|
|
|
|
(As
|
|
|
|
reported)
|
|
|
(Adjustments)
|
|
|
restated)
|
|
|
|
(In thousands, except for per share amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,043,044
|
|
|
$
|
1,372
|
|
|
$
|
1,044,416
|
|
Income from operations
|
|
|
124,028
|
|
|
|
(15,254
|
)
|
|
|
108,774
|
|
Income before provision for income taxes, minority interest and
cumulative effect of change in accounting principle
|
|
|
129,933
|
|
|
|
(15,143
|
)
|
|
|
114,790
|
|
Income before cumulative effect of change in accounting principle
|
|
|
128,312
|
|
|
|
(15,248
|
)
|
|
|
113,064
|
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
128,312
|
|
|
|
(15,248
|
)
|
|
|
113,064
|
|
Income per share, before cumulative effect of change in
accounting principle, basic
|
|
$
|
0.86
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.76
|
|
Income per share, before cumulative effect of change in
accounting principle, diluted
|
|
$
|
0.80
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.71
|
|
Cumulative effect of change in accounting principle, basic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Cumulative effect of change in accounting principle, diluted
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net income per share, basic
|
|
$
|
0.86
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.76
|
|
Net income per share, diluted
|
|
$
|
0.80
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.71
|
|
Shares used in per share calculation basic
|
|
|
149,441
|
|
|
|
309
|
|
|
|
149,750
|
|
Shares used in per share calculation diluted
|
|
|
176,249
|
|
|
|
(324
|
)
|
|
|
175,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2002(3)
|
|
|
|
(As previously
|
|
|
|
|
|
(As
|
|
|
|
reported)
|
|
|
(Adjustments)
|
|
|
restated)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
674,226
|
|
|
$
|
|
|
|
$
|
674,226
|
|
Working capital
|
|
|
475,418
|
|
|
|
3,691
|
|
|
|
479,109
|
|
Total assets
|
|
|
2,045,487
|
|
|
|
(2,976
|
)
|
|
|
2,042,511
|
|
Deferred revenue
|
|
|
329,195
|
|
|
|
(2,372
|
)
|
|
|
326,823
|
|
Long-term debt and other long-term liabilities
|
|
|
519,150
|
|
|
|
(11,630
|
)
|
|
|
507,520
|
|
Total equity
|
|
|
770,168
|
|
|
|
9,756
|
|
|
|
779,924
|
|
|
|
|
(1) |
|
In 2005, we reserved $50.0 million in connection with the
settlement with the SEC and we deposited $50.0 million in
an escrow account with the SEC as the designated beneficiary. |
|
(2) |
|
In 2004, we sold our Sniffer and Magic product lines for
aggregate net cash proceeds of $260.9 million and
recognized pre-tax gains on the sale of assets and technology
aggregating $243.5 million. We also received
$25.0 million from our insurance carriers for insurance
reimbursements related to the class action lawsuit settled in
2003. |
|
(3) |
|
We agreed to settle a pending class action lawsuit in September
2003 for $70.0 million, which was recorded as expense in
2002 as the settlement agreement was entered into prior to the
filing of the 2002 financial statements. |
43
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements and Factors That May Affect Future Results
This Managements Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking
statements that involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different
from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking
statements. Please see Special Note Regarding
Forward-Looking Statements.
Overview
and Executive Summary
We are a leading dedicated security technology company that
secures systems and networks from known and unknown threats
around the world. We empower home users, businesses, government
agencies, service providers and our partners with the latest
technology available in order to block attacks, prevent
disruptions, and continuously track and improve their security.
We apply business discipline and a pragmatic approach to
security that is based on four principles of security risk
management (identify and prioritize assets; determine acceptable
risk; protect against threats; enforce and measure compliance).
We incorporate some or all of these principles into our
solutions. Our solutions protect systems and networks, blocking
immediate threats while proactively providing protection from
future threats. We also provide software to manage and enforce
security policies for organizations of any size. Finally, we
incorporate expert services and technical support to ensure a
solution is actively meeting our customers needs. These
integrated solutions help our customers solve problems, enhance
security and reduce costs.
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 consumers either directly or through a
network of qualified partners. We derive our revenue and
generate cash from customers primarily from three sources:
(i) services and support revenue, which includes
maintenance, training and consulting revenue,
(ii) subscription revenue, which includes revenue from
subscription-based offerings and (iii) product revenue,
which includes hardware and perpetual license revenue. We
continue to focus our efforts on building a full line of
complementary network and system protection solutions. During
2006, we acquired three companies, SiteAdvisor, Preventsys and
Onigma, and substantially all of the assets of a fourth, Citadel
Security Software, to enhance and complement our current
offerings. The acquisition of SiteAdvisor in April 2006
significantly enhances our internet security solutions. Our
system security management and vulnerability management
capabilities were further advanced with the acquisition of
Preventsys in June. Onigma, acquired in October, complements our
enterprise offerings by providing businesses with data loss
prevention. The acquisition of Citadel Security Softwares
assets in December broadens our capabilities for security policy
compliance enforcement and vulnerability remediation.
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 in July 2004, 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, and through our June 2005 Wireless Security
Corporation acquisition, we have strengthened our solution
portfolio in our consumer segment. 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 evaluate our consolidated financial performance utilizing a
variety of indicators. Two of the primary indicators that we
utilize are total net revenue and net income. As discussed more
fully below, our net revenue in 2006 grew by 17% to
$1,145.2 million from $981.6 million in 2005. We
believe net revenue is a key indicator of the growth and health
of our business. Our net revenue is directly impacted by
corporate information technology, government and consumer
spending levels. We believe net income is a key indicator of the
profitability of our business. Our net income for 2006 and 2005
was $137.5 million and $118.2 million, respectively.
Net income in
44
2006 includes stock option related charges of $57.8 million
due to the adoption of SFAS 123(R) and increased legal and
professional fees compared to 2005 totaling approximately
$17.8 million due to the investigation into our past stock
option granting practices, fees incurred for engaging
independent consultants to examine and recommend improvements to
our internal controls pursuant to our SEC settlement, which was
unrelated to the investigation of our stock option granting
practices. Net income in 2005 was negatively impacted by a
$50.0 million SEC settlement charge. On February 9,
2006, the SEC entered the final judgment for the settlement with
us and the $50.0 million escrow was released to the SEC on
February 13, 2006.
For 2004 our net revenue was $907.6 million and our net
income was $220.0 million. Net income in 2004 was favorably
impacted by a $46.1 million pre-tax gain from the sale of
our Magic product line in January 2004, a $197.4 million
pre-tax 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. In addition to total net revenue and net income,
in evaluating our business, management considers, among many
other factors, the following:
Net
revenue by Geography
We operate our business in five geographic segments: North
America; Europe, Middle East and Africa, collectively referred
to as EMEA; Japan; Asia-Pacific, excluding Japan; and Latin
America. During 2006, 45% of our total net revenue was generated
outside of North America. North America and EMEA collectively
accounted for approximately 86% of our total net revenue in
2006. During 2005, 43% of our total net revenue was generated
outside of North America, with North America and EMEA
collectively accounting for approximately 86% of our total net
revenue. North America and EMEA have benefited from increased
corporate IT spending related to security in both 2006 and 2005.
Revenue generated in Japan was negatively impacted during 2006
as the Japanese Yen weakened against the U.S. Dollar
compared to 2005. See Note 19 to our consolidated financial
statements for a description of revenue and income from
operations by geographic region.
Net
revenue by Product Groups and Customer Category
|
|
|
|
|
McAfee. Our McAfee products include our
corporate products and our consumer products.
|
Our corporate products include (i) our small and
medium-sized business (SMB) products and
(ii) our enterprise products. These products focus on
threat prevention and protection and compliance management and
include our current year acquisitions and include IntruShield
intrusion protection products, our Entercept host-based
intrusion protection products and Foundstone Risk Management
products that were acquired in connection with the Foundstone
acquisition in October 2004. Revenue from our corporate products
increased $102.2 million, or 18%, to $668.6 million
during 2006 from $566.4 million in 2005. The year over year
increase in revenue is due to increased corporate spending on
McAfee security products, increased activity of our Total
Protection Solutions and Foundstone product lines and increased
maintenance renewals.
Our consumer market is comprised of our McAfee consumer online
subscription service and retail boxed-product sales. Net revenue
from our consumer security market increased $61.3 million,
or 15%, to $476.6 million in 2006 from $415.3 million
in 2005. The main driver of the increase in revenue from our
consumer market is our strengthening relationships with
strategic channel partners, such as AOL, Comcast, Dell and
Gateway.
|
|
|
|
|
Sniffer Technologies. Net revenue from the
sale of Sniffer products was $91.4 million in 2004. In July
2004, we sold our Sniffer product line for net cash proceeds of
$213.8 million. We agreed to provide certain post-closing
transition services to Network General Corporation, the acquirer
of the Sniffer product line. We were 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. The reimbursements we have recognized under this
agreement totaled $0.4 million in 2005 and
$6.0 million in 2004. We completed our obligations under
the transition services agreement in July 2005.
|
45
|
|
|
|
|
Magic. In 2004, net revenue from the sale of
Magic Solutions products totaled approximately
$2.8 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.
|
|
|
|
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 $1.9 million in 2005 and
$6.4 million in 2004.
|
Deferred
Revenue
Our deferred revenue balance at December 31, 2006 was
$897.5 million compared to $751.8 million at
December 31, 2005, which is an increase of 19%. The
increase is attributable to sales of maintenance renewals from
our growing customer base and increased sales of
subscription-based offerings. Approximately 82% of our total net
revenue during 2006 came from prior-period deferred revenue. As
with revenue, we believe that deferred revenue is a key
indicator of the growth and health of our business.
Cash,
Cash Equivalents and Marketable Securities
The balance of cash, cash equivalents and marketable securities
at December 31, 2006 was $1,240.2 million compared to
$1,257.0 million at December 31, 2005. The decrease
was primarily attributable to (i) the repurchase of
9.8 million shares of common stock for approximately
$234.7 million, including commissions and our obligation to
withhold the number of shares required to satisfy the tax
liabilities in connection with the vesting of the restricted
stock of four holders for approximately $0.5 million,
(ii) acquisition-related purchases totaling
$146.1 million including SiteAdvisor, Inc. for
approximately $61.0 million, Preventsys, Inc. for
approximately $4.8 million, Citadel Security Software, Inc.
for approximately $61.2 million, and Onigma Ltd. for
approximately $19.1 million, net of cash acquired, and
(iii) the purchase of property and equipment for
approximately $43.8 million. These decreases were largely
offset by (i) net cash provided by operating activities of
$290.5 million (ii) cash received from the exercise of
stock options and stock purchases under the stock purchase plans
of $32.0 million (iii) a reduction in our restricted
cash of $50.0 million for the settlement with the SEC and
(iv) an increase in net cash of $20.6 million due to
foreign exchange rate fluctuations. See the Liquidity and
Capital Resources section below.
The following discussion and analysis reflects the restatement
of our financial results, which is more fully described in the
Explanatory Note Regarding Restatement
immediately preceding Part I, Item 1, in
Legal Proceedings in Item 3, and in
Note 3, Restatement of Consolidated Financial
Statements to the consolidated financial statements
included in this annual report on
Form 10-K.
Special
Committee Investigation of Historical Stock Option
Practices
We became aware of potential issues with respect to our
historical stock option grants in May 2006 after the Center for
Financial Research and Analysis (CFRA) released a
report titled Options Backdating Which
Companies are at Risk? This report concluded there was
a high probability that we backdated option grants from 1997 to
2002, based on stock price trends around certain grant dates.
Upon becoming aware of the CFRA report, management immediately
commenced a voluntary internal review involving the examination
of certain stock option grants. In May 2006, management notified
our board of directors that an internal review was in process in
response to the analysis in the CFRA report.
On May 25, 2006, we announced we had voluntarily initiated
a review of our stock option grant practices during the late
1990s and early 2000s timeframe. During our initial review,
management discovered irregularities in certain historical stock
option grants and discussed these findings with the board of
directors in late May 2006. We learned during the course of the
initial review, and through subsequent discussions between our
former general counsel and certain directors, of irregularities
regarding the pricing of a grant to our former general counsel.
Upon review of the findings of the internal review, the board of
directors immediately terminated the employment of our former
general counsel for cause.
Our board of directors established a special committee of
independent directors to review our stock option granting
practices and related accounting. The special committee was
assisted by independent counsel and forensic accountants
(collectively referred to as the investigative
team). The investigation primarily focused on the
46
processes used to establish option exercise prices and obtain
approvals of stock option grants and post-employment option
modifications. The investigation, which covered the time period
from January 1, 1995 through March 31, 2006, included
a review of our historical stock option practices, accounting
policies, accounting records, supporting documentation, email
communications and other documentation, as well as interviews
with a number of current and former directors, officers and
employees.
On October 10, 2006, the special committee presented its
initial findings to the board of directors. As part of this
presentation, the special committee communicated to our board of
directors information concerning errors and irregularities with
respect to the new hire option grant of our former president.
Following that presentation, our chairman and chief executive
officer retired and our president was terminated. The board
determined this termination was for cause. In November 2006,
certain members of the investigative team met with the staff of
the SECs Division of Enforcement and presented the initial
findings of the investigation. As a result of that meeting, the
scope of the investigation was expanded to include a review of
the: (i) historical option grants by McAfee.com,
(ii) historical exercise activity with respect to our
option grants to consider potential exercise date manipulation
and (iii) post-employment arrangements with former
executives. The special committee investigation was completed in
November 2007. The special committee concluded that there were
both qualitative issues and accounting and administrative errors
relating to our stock option granting process. In this regard,
the special committee concluded that certain former members of
management had acted inappropriately, giving rise to qualitative
concerns. The qualitative concerns included the following:
|
|
|
|
|
in the case of our former general counsel, he and a former
member of management participated in intentionally modifying one
of the former general counsels stock option grants so as
to create a lower exercise price, and the former general counsel
failed to disclose this unauthorized change to the board of
directors prior to late May 2006;
|
|
|
|
in some instances, former members of management drafted
corporate records, including employment documentation, board and
compensation committee meeting minutes and actions by unanimous
written consent, with the benefit of hindsight so as to choose
measurement dates giving more favorable exercise prices,
moreover, certain of these documents were used by us in making
accounting determinations with respect to stock-based
compensation;
|
|
|
|
during the course of the investigation, certain former members
of management did not provide completely accurate or consistent
information and in one case, provided documentation to the
special committee that the special committee determined was
intentionally altered; and
|
|
|
|
certain former members of senior management did not display the
appropriate oversight and tone at the top expected
by the board of directors.
|
In addition to the foregoing, the special committee concluded
that certain stock option awards were previously accounted for
using incorrect measurement dates because: (i) such dates
were chosen with the benefit of hindsight so as to
intentionally, and not inadvertently or as a result of
administrative error, give more favorable exercise prices,
(ii) the key terms for a substantial portion of the grants
in an annual merit grant had been determined with finality prior
to the original measurement date, with a reduction in the
exercise price on the original measurement date, which
represented a repricing, (iii) original accounting
measurement dates occurred prior to approval dates,
(iv) original accounting measurement dates occurred prior
to employment commencement dates, (v) approval and
employment commencement date documentation was incorrect or
inconsistent and (vi) certain director grants contained
clerical errors.
In each instance, we revised the accounting measurement date
after considering all available relevant evidence. Approximately
98% of the total intrinsic value (stock price on the revised
measurement date minus exercise price) of all of our options and
restricted stock awards remeasured as a result of this
investigation were attributable to options remeasured during the
period from 1995 through 2003. The special committee concluded
that there were procedures in place after April 2005 to provide
reasonable assurance that stock options were granted at the fair
market value of the stock price on the grant date.
The special committee determined that we did not previously
record appropriate charges associated with certain option
modifications. These modifications occurred upon the termination
of an employee and, in some
47
cases, provided for the extension of the post-termination time
period in which options could be exercised and allowed for the
continued vesting of options subsequent to the former
employees termination date. These option modifications
occurred from 1998 to 2004.
The investigation also identified an error in our accounting for
options historically accounted for as variable awards. This
error was comprised of our application of transition guidance
provided by FIN 44, which required us to account for
repriced options as variable awards beginning July 1, 2000.
To correct our past accounting for stock options under APB 25 we
recorded additional pre-tax, non-cash, stock-based compensation
expense of $3.4 million ($2.5 million net of tax) for
the year ended December 31, 2005, $10.8 million
($7.2 million net of tax) for the year ended
December 31, 2004 and $123.1 million
($80.5 million net of tax) for the periods 1995 through
2003. We also expect to amortize less than $0.1 million of
such pre-tax charges under Statement of Financial Accounting
Standards No. 123(R) Share-Based Payment
(SFAS 123(R)), in periods from January 1,
2007 through 2009.
We have incurred material expenses in 2007 and 2006 as a direct
result of the investigation into our stock option grant
practices and related accounting. These costs primarily related
to professional services for the investigation, legal,
accounting and tax guidance. In addition, we have incurred costs
related to litigation, the investigation by the SEC, the grand
jury subpoena from the U.S. Attorneys Office for the
Northern District of California and the preparation and review
of our restated consolidated financial statements. We expect
that we will continue to incur costs associated with these
matters and that we may be subject to certain fines
and/or
penalties resulting from the findings of the investigation. We
cannot reasonably estimate the range of fines
and/or
penalties, if any, that might be incurred as a result of the
investigation.
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, income from operations 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. We evaluate our estimates on a regular basis and
make changes accordingly. 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. If actual results were to differ from
these estimates materially, the resulting changes could have a
material adverse effect on the consolidated financial statements.
An accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions about
complex matters that are highly uncertain at the time the
estimate is made, and if different 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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restatement of stock-based compensation expense;
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stock-based compensation expense;
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revenue recognition;
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sales incentives and sales returns;
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deferred costs of revenue;
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allowance for doubtful accounts;
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estimation of restructuring accrual and litigation;
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accounting for income taxes; and
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valuation of goodwill, intangibles and long-lived assets.
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Restatement
of Stock-Based Compensation
We previously applied Accounting Principles
Bulletin No. 25, Accounting for Stock Issued
to Employees (APB 25) and its related
interpretations including Financial Accounting Standards Board
Interpretations No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of
APB Option No. 25 (FIN 44), and provided the
required pro forma disclosure under Statement of Accounting
Financial Standards No. 123 Accounting for
Stock-Based Compensation (SFAS 123)
through the fiscal year ended December 31, 2005. Under APB
25, a non-cash, stock-based compensation expense should have
been recognized for any option with intrinsic value on the
accounting measurement date. An option is deemed to have
intrinsic value when the exercise price is below the market
price of the underlying stock on the accounting measurement
date. Certain of our stock options were incorrectly measured
prior to the completion of required approvals and granting
actions. After revising the measurement date for these options,
certain options were deemed to have intrinsic value and, as a
result, there should have been stock-based compensation expense
for each of these options under APB 25 equal to the number of
options multiplied by their intrinsic value on the revised
measurement date. That expense should have been amortized over
the vesting period of the option. Starting in our fiscal year
ended December 31, 2006, we adopted SFAS 123(R). As a
result, for 2006, the additional stock-based compensation
required to be recorded for each of these stock options was
equal to the fair value of these options on the revised
measurement date for options vesting in 2006 or later. We did
not record the additional stock-based compensation expenses
under APB 25 or SFAS 123(R) related to these stock options
in our previously issued financial statements.
As a result of the investigation, we determined that the
original measurement dates we used for accounting purposes for
certain option and restricted stock grants to employees from
April 1995 through April 2005 were not appropriate and, in some
cases, were chosen with the benefit of hindsight so as to give a
more favorable exercise price. Other than director grants with
clerical errors, we had no revised measurement dates from May
2005 through March 2006.
We revised measurement dates and recorded stock-based
compensation charges due to the following errors, certain of
which are the result of incorrect measurement dates from the use
of hindsight to select more favorable exercise prices:
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annual merit grant allocation
and/or
approval not complete on the original measurement dates,
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the key terms for a substantial portion of the grants in an
annual merit grant had been determined with finality prior to
the original measurement date, with a reduction in the exercise
price on the original measurement date, which represented a
repricing,
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original accounting measurement dates prior to approval dates,
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original accounting measurement dates prior to employment
commencement dates,
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incorrect or inconsistent approval and employment commencement
date documentation,
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clerical errors in director grants,
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correction of accounting errors, primarily options historically
accounted for as variable awards, or
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post-employment option modifications previously not recorded.
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After reviewing available relevant documentation, a general
hierarchy of documentation was considered when establishing the
revised measurement date for accounting purposes. The hierarchy
was considered in evaluating
49
each grant on an individual basis based on the particular facts
and circumstances. The documentation considered, when available,
was:
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Minutes of Board of Directors, Compensation Committee
and/or
delegated committee: Approved minutes represent
the best available evidence of grant approval. The investigative
team was able to validate the occurrence of board of director
and compensation committee meetings on the stated dates in most
cases through director payment records, billing records of
outside legal counsel who attended the meetings or a signature
on the minutes by external legal counsel.
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Unanimous Written Consents
(UWCs): UWCs have an effective date
that represents the date grants were approved by the
compensation committee or delegated committee. For compensation
committee UWCs in 2004 and 2005, we were not able to rely on
certain UWC effective dates due to other evidence indicating
that certain grants were approved subsequent to the UWC
effective date. We were able to locate other evidence to
determine the approval date of these grants, such as approval
documentation in emails and evidence of the date UWCs were
signed. There were no options granted in compensation committee
UWCs from 2001 through 2003. For UWCs prior to 2001,
compensation committee members had historically resolved to
grant options, and such action was then documented in a UWC,
with the effective date being the date the granting action was
taken. With the exception of one UWC, no evidence was located
that contradicted a UWC effective date as the approval date for
any compensation committee grants prior to 2001. We have
therefore placed reliance on the compensation committee UWCs
prior to 2001.
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Option allocations for annual merit
grants: Allocations may be evidenced by signed
and dated hard-copy schedules or electronic spreadsheets that
list the employees and number of options granted to each
employee. Email communications to which the electronic
spreadsheets were attached also provided evidence of the date
allocations were completed. We were able to validate whether
allocation schedules were substantially complete by confirming
individual grants in the allocation files to the actual grants
reflected in our stock administration database. There were
minimal changes to allocations after the date we determined that
they were substantially complete.
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Database Dates: The database date (DB
date) indicates the date an option grant was entered into
the stock administration database. Entry into the stock
administration database represents the best evidence of a date
no later than when the grants were determined with finality.
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DB dates are not appropriate for determining system entry dates
for our grants entered into the stock administration database
prior to June 17, 1998 due to the implementation of a new
stock administration system on that date. All grants entered
into the stock administration database prior to the system
conversion have a default DB date of June 17, 1998.
DB dates were applied on a grant by grant basis, resulting in
multiple measurement dates for annual merit grants for which
there were multiple DB dates.
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System Reports: These are hard-copy reports
generated from the stock administration database that have a
date stamp indicating the date the report was generated. The
reports list the name, number of options and exercise price of
the grants. These reports indicate the latest date a grant could
have been entered into the stock administration database, which
was useful for grants prior to the June 17, 1998 system
conversion date.
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Correspondence or other written
documentation: Written communication was in the
form of grant notification letters from the human resource or
stock administration departments stating the key terms of a
grant, stock option agreements, employment offer or promotion
letters stating the number of options to be granted and
automated email notifications from human resources or our
third-party broker. Written communication was primarily used to
corroborate other available evidence used to determine
measurement dates for annual merit grants, with the assumption
that communication would not occur until the terms of the grants
were determined with finality.
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APB 25 defines the measurement date as the first date upon which
the number of options and exercise price are known. Our
determination of the revised measurement date was based on our
assessment that a grant was determined with finality and was no
longer subject to change. Such determinations involved judgment
and careful
50
evaluation of all relevant facts and circumstances for each
grant. The following are the judgments involved in determining
revised measurement dates.
In light of the significant judgment used in establishing
revised measurement dates, alternate approaches to those used by
us could have resulted in different stock-based compensation
expense than recorded by us in the restatement. While we
considered various alternative approaches, we believe that the
approaches we used were the most appropriate under the
circumstances. We conducted a sensitivity analysis to assess how
the restatement adjustments described in this annual report on
Form 10-K
could have changed under alternative methodologies for
determining measurement dates for stock option grants from 1995
through 2005. See Critical Accounting Policies and
Estimates in Managements Discussion and
Analysis of Financial Condition and Results of Operations
in Part II, Item 7 of this annual report on
Form 10-K
for information regarding the incremental stock-based
compensation charges that would result from using alternate
measurement dates.
Date
of Execution of UWC
For certain grants, we were unable to locate contemporaneous
documentation confirming that a compensation committee meeting,
or a meeting by a delegated level of authority, occurred on the
effective date of the UWC. For compensation committee UWCs with
effective dates in 2004 and 2005, which cover 0.4 million
options, we discovered instances in which documented approval
actually occurred subsequent to the UWC effective date. The
revised measurement date in these instances is the documented
approval date. There were no options granted in compensation
committee UWCs from 2001 through 2003. For UWCs prior to 2001,
which cover 9.4 million options, and all delegated
committee UWCs, the compensation or delegated committee resolved
to grant options, and later documented such resolutions in UWCs,
with an effective date which was the date of the granting
actions. With the exception of one UWC, no evidence was located
that contradicted a UWC effective date as the approval date for
any compensation committee grants prior to 2001. For UWCs prior
to 2001, we did not locate any evidence that caused us to
question the reliability of UWCs, outside the one instance
discussed above. We have therefore placed reliance on the
compensation committee UWCs prior to 2001.
There were also instances where UWCs were not signed during the
period prior to 2001. These unsigned UWCs were located in our
minute books. We did not locate any evidence that contradicted
the effective dates of unsigned UWCs as the approval date,
therefore, we have placed reliance on unsigned UWCs in this
period.
Had we used DB dates where available, we would have recognized
an additional $4.8 million in stock-based compensation
expense from 1999 through 2004. Had we used the highest closing
stock price during the one-month period subsequent to the UWC
effective date for grants for which DB dates are not available,
we would have recognized an additional $26.6 million in
stock-based compensation expense from 1995 through 2004.
Annual
Merit Grants
For annual merit grants, a pool of options was allocated among
non-executive employees, and in certain years for executives as
well, in conjunction with their annual performance review. We
located evidence that allocations were completed and grants
determined with finality on a business unit/geographic region
basis, resulting in multiple measurement dates for annual merit
grants. For grants not included in complete allocations, we have
selected the DB date as the revised measurement date as the
terms of grants were determined with finality on or prior to the
database entry dates.
The 1999 annual merit grant consisted of 2.1 million
options which had an original measurement date of April 20,
1999. We determined that the key terms were determined with
finality for approximately 1.6 million of these options in
March 1999, and that the exercise price was reduced to $11.06 on
April 20, 1999, which represents a repricing. As the stock
price on the revised measurement date in March 1999 exceeded the
exercise price, there was grant date intrinsic value, which is
being recognized over the requisite service period.
Additionally, the options are accounted for as variable awards
in accordance with FIN 44 due to the repricing on
April 20, 1999.
We were not able to determine allocation completion dates for
the annual merit grants with an original measurement date in
January 1998. We would have used DB dates as revised measurement
dates, however, DB dates were not available for these grants. We
located hard-copy stock administration system reports with a
date
51
stamp that provides evidence of the latest date a grant could
have been entered into the stock administration database. We
used these system report dates as revised measurement dates,
with the exception of certain grants for which signed and dated
grant notification letters were located. If the signature date
on the letters was prior to the system report date, the revised
measurement date was the letter signature date.
For annual merit grants for which we located evidence of
substantially completed allocations, not all grants were
included in allocations. These grants were revised to DB dates.
If these grants had been revised to the date of the last
substantially complete allocation for the respective annual
merit grant, we would have recognized $1.6 million less in
stock-based compensation expense from 1998 through 2005.
Incorrect
or Inconsistent Approval and Employment Commencement Date
Documentation
We identified certain grants to executives and directors for
which the approval documentation
and/or
employment commencement date documentation were incorrect or
inconsistent. These grants were assigned an original grant date
other than the approval date, or prior to the actual employment
commencement date. In these instances, the occurrence of the
meeting on the stated date in the approval documentation was
validated based on director payment records or the billing
records of external legal counsel who attended the meeting. We
were able to determine the correct employment commencement date
based on human resources and payroll records. The actual meeting
date for the approval of such grants, or employment commencement
date if later, was used as the revised measurement date.
Lack
of Approval Documentation
For grants totaling 2.2 million options, primarily in the
years from 1996 through 2001, we were unable to locate approval
documentation. In these instances, we examined available
evidence, including email communications and grant communication
letters, to determine the revised measurement date. We also
performed an analysis to determine whether these grants were
recorded on dates where the stock price was at a low point,
which would result in a lower exercise price. It does not appear
that these grants were priced opportunistically, and we did not
discover any evidence that contradicted the original measurement
date. Therefore, we did not revise the measurement dates for
these grants.
If we had used the stock administration database entry date,
which was available only for grants subsequent to June 1998, the
additional stock-based compensation expense would have been
$2.5 million from 1998 through 2005. If we had used the
highest stock price within 30 days subsequent to the
original measurement date, the additional stock-based
compensation expense would have been $4.2 million from 1995
through 2005.
Communication
Dates
For certain grants, we were unable to locate evidence of
communication of the key terms (i.e., number of options
and exercise price) to the employee for certain grants. We did
not discover any evidence during the investigation that the
communication of key terms was intentionally delayed, or there
were any significant delays. In the absence of evidence to the
contrary, we have concluded that communication of the key terms
occurred prior to or within a reasonable period of time of the
completion of all required granting actions.
We believe that our methodology, based on the reasonable
evidence, results in the most likely measurement dates for our
stock option grants. However, we also conducted a sensitivity
analysis to assess how the restatement adjustments would have
varied based on different measurement date methodologies. Based
on the alternative measurement dates discussed above, the total
additional stock-based compensation expense resulting from grant
date intrinsic value could have ranged from $96.0 million
to $128.4 million.
Stock-based
Compensation Expense
On January 1, 2006, we adopted SFAS 123(R), which is a
revision of SFAS 123, and supersedes APB 25.
SFAS 123(R) requires the measurement and recognition of
compensation expense for all share-based payment awards made to
our employees and directors based on the estimated fair values
of the awards on their grant dates.
52
Our share-based awards include stock options, restricted stock
awards, restricted stock units and our employee stock purchase
plan, or ESPP.
For the year ended December 31, 2006, we recognized
stock-based compensation expense of $57.8 million. Prior to
our adoption of SFAS 123(R), we applied the intrinsic value
method set forth in APB 25 to calculate the compensation expense
for share-based awards. During 2005, we recognized a charge of
$4.5 million under APB 25 related to grant date intrinsic
value resulting from revised accounting measurement dates, the
exchange of McAfee.com options in 2002, options which were
repriced in 1999 and restricted stock awards. During 2004, we
recognized a charge of $25.2 million under APB 25 related
to grant date intrinsic value resulting from revised accounting
measurement dates, the exchange of McAfee.com options in 2002,
options which were repriced in 1999, restricted stock awards and
modifications of certain option awards. See Note 16 to the
consolidated financial statements for additional information.
We use the Black-Scholes model to estimate the fair value of our
option awards and employee stock purchase rights issued under
the ESPP. The Black-Scholes model requires estimates of the
expected term of the option, as well as future volatility and
the risk-free interest rate.
For options issued during 2006, we estimated the
weighted-average fair value to be $10.47. For employee stock
purchase rights issued during 2006, we estimated the
weighted-average fair value to be $6.11. The key assumptions
that we used to calculate these values are provided below:
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Years Ended December 31,
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2006
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2005
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2004
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Stock option grants:
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Risk free interest rate
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4.8
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%
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3.9
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%
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3.1
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%
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Weighted average expected lives (years)
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5.6
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4.0
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4.0
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Volatility
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37.4
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%
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54.4
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%
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62.8
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%
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Dividend yield
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ESPP:
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Risk free interest rate
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4.6
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%
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3.1
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%
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2.0
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%
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Weighted average expected lives (years)
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0.5
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1.0
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1.3
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Volatility
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38.0
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%
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40.0
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%
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47.5
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%
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Dividend yield
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We derive the expected term of our options through a lattice
model that factors in historical data on employee exercise and
post-vesting employment termination behavior. The risk-free rate
for periods within the expected life of the option is based on
the U.S. Treasury yield curve in effect at the time of
grant. Since January 1, 2006, we have used the implied
volatility of options traded on our stock with a term of six
months or more to calculate the expected volatility of our
option grants. Prior to that time, the expected volatility was
based solely on the historical volatility of our stock. We have
not declared any dividends on our stock in the past and do not
expect to do so in the foreseeable future.
The assumptions that we have made represent our
managements best estimate, but they are highly subjective
and inherently uncertain. If management had made different
assumptions, our calculation of the options fair value and
the resulting stock-based compensation expense could differ,
perhaps materially, from the amounts recognized in our financial
statements. For example, if we increased the assumption
regarding our stocks volatility for options granted during
2006 by 10%, our stock-based compensation expense would increase
by $2.2 million, net of expected forfeitures. This
increased expense would be amortized over the options
4.0 year vesting period. Likewise, if we increased our
assumption of the expected lives of options granted during 2006
by one year, our stock-based compensation expense would increase
by $1.2 million, net of expected forfeitures. This
increased expense would be amortized over the options
4.0 year vesting period.
In addition to the assumptions used to calculate the fair value
of our options, we are required to estimate the expected
forfeiture rate of all share-based awards and only recognize
expense for those awards we expect to vest.
53
The stock-based compensation expense recognized in our
consolidated statement of income for the year ended
December 31, 2006 has been reduced for estimated
forfeitures. If we were to change our estimate of forfeiture
rates, the amount of share-based compensation could differ,
perhaps materially, from the amount recognized in our financial
statements. For example, if we had decreased our estimate of
expected forfeitures by 50%, our stock-based compensation
expense for the year ended December 31, 2006, net of
expected forfeitures, would have increased by $5.6 million.
This decrease in our estimate of expected forfeitures would
increase the amount of expense for all unvested stock options,
restricted stock awards and units, and employee stock purchase
rights that have not yet been recognized by $13.1 million,
amortized over a weighted-average period of 2.4 years.
Revenue
Recognition
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.
Our revenue is derived primarily from three sources
(i) services and support revenue, which includes
maintenance, training and consulting revenue,
(ii) subscription revenue, which includes revenue from
subscription-based offerings and (iii) product revenue,
which includes hardware and perpetual licenses revenue.
We apply the provisions of Statement of Position
97-2,
Software Revenue Recognition
(SOP 97-2),
and related interpretations to all transactions involving the
sale of software products and hardware products that include
software. 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 or software is incidental, we apply the provisions of
Staff Accounting Bulletin 104 Revenue
Recognition (SAB 104).
We market and distribute our software products both as
standalone software products and as comprehensive security
solutions. We recognize revenue from the sale of software
licenses when all of the following are met:
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persuasive evidence of an arrangement exists,
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the product or service has been delivered,
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the fee is fixed or determinable, and
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collection of the resulting receivable is reasonably assured.
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Persuasive evidence is generally a binding purchase order or
license agreement. Delivery generally occurs when product is
delivered to a common carrier or upon delivery of a grant letter
and license key, if applicable. If a significant portion of a
fee is due after our normal payment terms of typically 30 to
90 days, we recognize revenue as the fees become due. If we
determine that collection of a fee is not reasonably assured, we
defer the fees and recognize revenue upon cash receipt, provided
all other revenue recognition criteria are met.
We enter into perpetual and subscription software license
agreements through direct sales to customers and indirect sales
with partners, distributors and resellers. We recognize revenue
from the indirect sales channel upon sell-through by the partner
or distributor. The license agreements generally include service
and support agreements, for which the related revenue is
deferred and recognized ratably over the performance period. All
revenue derived from our online subscription products is
deferred and recognized ratably over the performance period.
Professional services revenue is generally recognized as
services are performed or if required, upon customer acceptance.
For arrangements with multiple elements, including software
licenses, maintenance
and/or
services, we allocate and defer revenue equivalent to the
vendor-specific objective evidence (VSOE), of fair
value for the undelivered elements and recognize the difference
between the total arrangement fee and the amount deferred for
the undelivered elements as product revenue. VSOE of fair value
is based upon the price for which the undelivered element is
sold separately or upon substantive renewal rates stated in a
contract. We determine fair value of the undelivered elements
based on historical evidence of stand-alone sales of these
elements to our customers. When
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VSOE does not exist for undelivered elements such as maintenance
and support, the entire arrangement fee is recognized ratably
over the performance period generally as services and support
revenue.
Sales
Incentives and Sales Returns
We reduce revenue for estimates of sales incentives and sales
returns. We offer sales incentives, including channel rebates,
marketing funds and end-user rebates for products in our
corporate and consumer product lines. Additionally, end-users
may return our products, subject to varying limitations, through
distributors and resellers or to us directly for a refund within
a reasonably short period from the date of purchase. We estimate
and record reserves for sales incentives and sales returns based
on our historical experience. In each accounting period, we must
make judgments and estimates of sales incentives and potential
future sales returns related to current period revenue. These
estimates affect our net revenue line item on our consolidated
statement of income and affect our net accounts receivable,
deferred revenue or accrued liabilities line items on our
consolidated balance sheet. These estimates affect all of our
operating geographies.
At December 31, 2006, our allowance for sales returns and
incentives was $39.8 million compared to $31.9 million
at December 31, 2005. If our allowance for sales returns
and incentives were to increase by 10%, or $4.0 million,
our net revenue would decrease by $1.9 million and our
deferred revenue would decrease by $2.1 million for the
year ended December 31, 2006.
Deferred
Costs of Revenue
Deferred costs of revenue, which consist primarily of costs
related to revenue-sharing arrangements and costs of inventory
sold into our channel which have not been sold through to the
end-user, are included in prepaid expenses and prepaid taxes and
other current assets on our consolidated balance sheet. We only
defer direct and incremental costs related to revenue-sharing
arrangements and recognize such deferred costs proportionate to
the related revenue recognized. At December 31, 2006, our
deferred costs were $70.2 million compared to
$28.8 million at December 31, 2005.
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. These estimates affect
the general and administrative 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 December 31, 2006, our allowance for doubtful accounts
was $2.0 million compared to $2.4 million at
December 31, 2005. If an additional 1% of our gross
accounts receivable were deemed to be uncollectible at
December 31, 2006, our allowance for doubtful accounts
would increase by $2.1 million and our provision for bad
debt expense, revenue and deferred revenue would also be
affected.
Estimation
of Restructuring Accrual and Litigation
Restructuring Accrual. During 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. During 2004,
we permanently vacated several leased facilities, including an
additional two floors in our Santa Clara headquarters
building and recorded a $10.0 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 $15.7 million. We recorded these facility restructuring
charges in accordance with Statement of Financial Accounting
Standards No. 146, Accounting for Exit Costs
Associated With Exit or Disposal Activities
(SFAS 146). 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
55
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 December 31, 2006, our estimated
sublease income were to decrease 10%, the restructuring reserve
and related expense would have increased by $1.6 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.
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. See Note 20
in our Notes to the Consolidated Financial Statements.
Accounting
for Income Taxes
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 line item in our statement of income.
The net deferred tax asset as of December 31, 2006 is
$464.4 million, net of a valuation allowance of
$70.1 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
56
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
value based on market multiples of revenue 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 goodwill in 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 December 31, 2006.
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 $530.5 million and $437.5 million
as of December 31, 2006 and 2005, respectively. We did not
hold any other indefinite-lived intangibles as of
December 31, 2006 and 2005. Net finite-lived intangible
assets and long-lived assets amounted to $205.6 million and
$165.8 million as of December 31, 2006 and 2005,
respectively.
57
Results
of Operations
Years
Ended December 31, 2006, 2005 and 2004
Net
Revenue
The following table sets forth, for the periods indicated, a
year-over-year comparison of the key components of our net
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services and support
|
|
$
|
633,658
|
|
|
$
|
544,477
|
|
|
$
|
89,181
|
|
|
|
16
|
%
|
|
$
|
463,726
|
|
|
$
|
80,751
|
|
|
|
17
|
%
|
Subscription
|
|
|
428,296
|
|
|
|
318,206
|
|
|
|
110,090
|
|
|
|
35
|
|
|
|
215,817
|
|
|
|
102,389
|
|
|
|
47
|
|
Product
|
|
|
83,204
|
|
|
|
118,945
|
|
|
|
(35,741
|
)
|
|
|
(30
|
)
|
|
|
228,030
|
|
|
|
(109,085
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,145,158
|
|
|
$
|
981,628
|
|
|
$
|
163,530
|
|
|
|
17
|
%
|
|
$
|
907,573
|
|
|
$
|
74,055
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services and support
|
|
|
55
|
%
|
|
|
56
|
%
|
|
|
|
|
|
|
|
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
Subscription
|
|
|
38
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
7
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in net revenue from 2005 to 2006 reflected
(i) a $104.1 million increase in our corporate
business and (ii) a $61.3 million increase in our
consumer business. This increase was partially offset by a
$1.9 million decrease attributable to McAfee Labs, which
was sold in April 2005.
Net revenue from our corporate business increased during 2006
compared to 2005 primarily due to (i) increased corporate
spending on McAfee security products and (ii) increased
revenue from our McAfee Intrushield and McAfee Foundstone
offerings. Net revenue from our Intrushield and Foundstone
product lines increased $25.1 million and
$18.2 million, respectively. Net revenue from our consumer
market increased during 2006 compared to 2005 primarily due to
(i) online subscriber growth due to our increased customer
base, (ii) increased online renewal subscriptions and
(iii) increased royalty revenue from our strategic channel
partners, such as AOL, Dell, Gateway and Samsung.
The increase in net revenue from 2004 to 2005 reflected
(i) a $151.4 million increase in our consumer business
and (ii) a $21.4 million increase in our corporate
business due to decreased corporate spending related to
security. These increases were partially offset by (i) a
$91.4 million decrease in revenue attributable to our
Sniffer product line, which was sold in July 2004, (ii) a
$4.5 million decrease attributable to McAfee Labs, which
was sold in April 2005, (iii) a $2.8 million decrease
attributable to Magic Solutions, which was sold in January 2004
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 revenue from our consumer market increased during 2005
primarily due to (i) online subscriber growth due to our
increased customer base and expansion to additional countries
and (ii) increased online renewal rates.
58
Net
Revenue by Geography
The following table sets forth, for the periods indicated, net
revenue in each of the five geographic regions in which we
operate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
633,222
|
|
|
$
|
563,651
|
|
|
$
|
69,571
|
|
|
|
12
|
%
|
|
$
|
551,264
|
|
|
$
|
12,387
|
|
|
|
2
|
%
|
EMEA
|
|
|
354,592
|
|
|
|
282,034
|
|
|
|
72,558
|
|
|
|
26
|
|
|
|
243,392
|
|
|
|
38,642
|
|
|
|
16
|
|
Japan
|
|
|
87,121
|
|
|
|
75,973
|
|
|
|
11,148
|
|
|
|
15
|
|
|
|
54,160
|
|
|
|
21,813
|
|
|
|
40
|
|
Asia-Pacific, excluding Japan
|
|
|
43,018
|
|
|
|
38,480
|
|
|
|
4,538
|
|
|
|
12
|
|
|
|
38,866
|
|
|
|
(386
|
)
|
|
|
(1
|
)
|
Latin America
|
|
|
27,205
|
|
|
|
21,490
|
|
|
|
5,715
|
|
|
|
27
|
|
|
|
19,891
|
|
|
|
1,599
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,145,158
|
|
|
$
|
981,628
|
|
|
$
|
163,530
|
|
|
|
17
|
%
|
|
$
|
907,573
|
|
|
$
|
74,055
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
55
|
%
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
31
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
Japan
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Asia-Pacific, excluding Japan
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Latin America
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue outside of North America accounted for 45%, 43%, and
39% of net revenue for 2006, 2005 and 2004, respectively. Net
revenue from North America and EMEA has historically comprised
between 80% and 90% of our business.
The increase in total net revenue in North America during 2006
primarily related to (i) a $46.2 million increase in
corporate revenue in North America due to increased corporate
spending on McAfee security products and increased revenue from
our Foundstone and Intrushield product lines and (ii) a
$25.2 million increase in consumer revenue in North America
partially offset by a $1.9 million decrease attributable to
McAfee Labs, which was sold in April 2005.
The increase in total net revenue in North America during 2005
primarily related to a $88.3 million increase in consumer
revenue in North America due to our increased customer base,
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 $4.5 million
decrease in McAfee Labs revenue in North America due to the sale
of McAfee Labs in April 2005, (iii) a $1.3 million
decrease in corporate revenue in North America, (iv) a
$2.1 million decrease in Magic revenue in North America due
to the sale of our Magic product line in January 2004 and
(v) our perpetual-plus licensing arrangements which were
introduced in 2004 and resulted in lower rates of up front
revenue recognition and an increase in the amount of revenue
deferred to future periods.
The increase in total net revenue in EMEA during 2006 was
attributable to (i) a $45.5 million increase in
corporate revenue due to increased corporate spending on McAfee
security products and increased revenue from our Foundstone and
Intrushield product lines and (ii) a $27.1 million
increase in consumer revenue from online subscriber growth due
to our increased customer base. Net revenue from EMEA was also
positively impacted by the strengthening Euro against the
U.S. Dollar, which resulted in an approximate
$0.4 million impact to EMEA net revenue in 2006 compared to
2005.
The increase in total net revenue in EMEA during 2005 was
attributable to (i) a $39.5 million increase in
consumer revenue due to online subscriber growth due to our
increased customer base and expansion to additional
59
countries and (ii) a $9.6 million increase in
corporate revenue, partially offset by (i) a
$9.7 million decrease in revenue related to the Sniffer
product line that was sold in July 2004 and (ii) a
$0.7 million decrease in Magic revenue in EMEA due to the
sale of our Magic product line in January 2004. The average Euro
to U.S. Dollar exchange rate in 2005 was comparable to the
average Euro to Dollar exchange rate in 2004, therefore, we did
not experience a significant impact to revenue related to
changing foreign currency rates.
Net revenue from our consumer market in both North America and
in EMEA increased during 2006 and 2005 primarily due to
(i) online subscriber growth due to our increased customer
base and expansion to additional countries and
(ii) increased online renewal rates. Additionally, in 2005,
net revenue from our consumer market increased due to increased
retail revenue due to higher levels of contract support renewal
revenue generated from our increased 2004 retail sales due to
numerous virus outbreaks in 2003 through 2004 and new product
offerings.
Our Japan, Latin America and Asia-Pacific operations combined
have historically comprised less than 20% of our total net
revenue and we expect this trend to continue. Although total net
revenue from Japan increased in 2006 compared to 2005, the
weakening Japanese Yen against the U.S. Dollar resulted in
an approximate $5.3 million negative impact to Japanese net
revenue.
Risks inherent in international revenue include the impact of
longer payment cycles, greater difficulty in accounts receivable
collection, unexpected changes in regulatory requirements,
seasonality, political instability, tariffs and other trade
barriers, currency fluctuations, a high incidence of software
piracy in some countries, product localization, international
labor laws, compliance with the Foreign Corrupt Practices Act
and our relationship with our employees and regional work
councils and difficulties staffing and managing foreign
operations. These factors may have a material adverse effect on
our future international revenue.
Service
and Support Revenue
The following table sets forth, for the periods indicated, each
major category of our service and support revenue as a percent
of service and support revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Net service and support revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support and maintenance
|
|
$
|
610,061
|
|
|
$
|
520,351
|
|
|
$
|
89,710
|
|
|
|
17
|
%
|
|
$
|
436,873
|
|
|
$
|
83,478
|
|
|
|
19
|
%
|
Consulting and training
|
|
|
23,597
|
|
|
|
24,126
|
|
|
|
(529
|
)
|
|
|
(2
|
)
|
|
|
26,853
|
|
|
|
(2,727
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total service and support revenue
|
|
$
|
633,658
|
|
|
$
|
544,477
|
|
|
$
|
89,181
|
|
|
|
16
|
|
|
$
|
463,726
|
|
|
$
|
80,751
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of service and support revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support and maintenance
|
|
|
96
|
%
|
|
|
96
|
%
|
|
|
|
|
|
|
|
|
|
|
94
|
%
|
|
|
|
|
|
|
|
|
Consulting and training
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total service and support revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support revenue includes revenue from software
support and maintenance contracts, training and consulting. The
increase in service and support revenue in 2006 compared to 2005
was attributable to an increase in support and maintenance
primarily due to amortization of previously deferred revenue
from support arrangements and an increase in sales of support
renewals offset slightly by a decrease in consulting and
training revenue.
The increase in service and support revenue in 2005 compared to
2004 was attributable to an increase in support and maintenance
primarily due to maintenance renewals on our growing customer
base and 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.
60
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 revenue and operating results would
be adversely affected. Additionally, support pricing under the
perpetual-plus model is significantly higher than the previous
model. In the event customers choose not to renew their support
arrangements under the perpetual-plus model, revenue could be
negatively impacted.
Subscription
Revenue
The following table sets forth, for the periods indicated, the
change in subscription revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
2005 vs. 2004
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Total subscription revenue
|
|
$
|
428,296
|
|
|
$
|
318,206
|
|
|
$
|
110,090
|
|
|
|
35
|
%
|
|
$
|
215,817
|
|
|
$
|
102,389
|
|
|
|
47
|
%
|
Subscription revenue includes revenue from online subscription
arrangements. The increase in subscription revenue in 2006
compared to 2005 was attributable to (i) an increase in our
on-line subscription arrangements due to our continued
relationships with strategic channel partners, such as AOL,
Gateway and Dell, (ii) an increase in revenue from our
McAfee Managed VirusScan online service, (iii) an increase
in royalties from sales by our strategic channel partners and
(iv) an increase due to our McAfee Consumer Suites launch
in September 2006, as these suites utilized a subscription-based
model.
The increase in subscription revenue in 2005 compared to 2004
was attributable to (i) an increase in our online
subscription arrangements with our continued relationships with
strategic channel partners, such as AOL, Dell and others,
(ii) as well as an increase in our McAfee Managed VirusScan
online service for small and medium-sized businesses. Our future
profitability and rate of growth, if any, will be directly
affected by these partner relationships, increased price
competition and the size of our revenue base.
Product
Revenue
The following table sets forth, for the periods indicated, each
major category of our product revenue as a percent of total
product revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Net product revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
52,077
|
|
|
$
|
67,462
|
|
|
$
|
(15,385
|
)
|
|
|
(23
|
)%
|
|
$
|
127,568
|
|
|
$
|
(60,106
|
)
|
|
|
(47
|
)%
|
Hardware
|
|
|
31,367
|
|
|
|
27,129
|
|
|
|
4,238
|
|
|
|
16
|
|
|
|
72,067
|
|
|
|
(44,938
|
)
|
|
|
(62
|
)
|
Retail and other
|
|
|
(240
|
)
|
|
|
24,354
|
|
|
|
(24,594
|
)
|
|
|
(101
|
)
|
|
|
28,395
|
|
|
|
(4,041
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue
|
|
$
|
83,204
|
|
|
$
|
118,945
|
|
|
$
|
(35,741
|
)
|
|
|
(30
|
)%
|
|
$
|
228,030
|
|
|
$
|
(109,085
|
)
|
|
|
(48
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of product revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
|
63
|
%
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
56
|
%
|
|
|
|
|
|
|
|
|
Hardware
|
|
|
38
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
Retail and other
|
|
|
(1
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue includes revenue from software licenses,
hardware and retail product. The decrease in product revenue
from 2006 compared to 2005 was attributable to (i) a
decrease in retail sales in 2006 due to our continued shift in
focus from retail-boxed products to our online subscription
model for consumers, (ii) a decrease in license revenue
which management believes is due to our launch of McAfee
Consumer Suites, including McAfee VirusScan Plus, McAfee
Internet Security, and McAfee Total Protection in September
2006, as these suites utilize
61
a subscription-based model and (iii) an increase in
incentive rebates and marketing funds with our partners that are
recorded as an offset to revenue and generally included in
retail and other revenue in the table above. These decreases
were partially offset by an increase in Foundstone hardware
revenue and an increase in demand for Intrushield.
Generally, our corporate customers license our software on a
perpetual basis and our consumer customers license our software
on a subscription basis. With the launch of our McAfee Consumer
Suites in 2006, all consumer licenses are subscription-based.
The continued use of a subscription-based model for licenses
will result in product revenue declines with a corresponding
increase in subscription revenue.
The decrease in product revenue from 2005 compared to 2004 was
attributable to (i) a decrease in license revenue in 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 in the middle of 2003, resulting in
reduced product revenue and increased services and support
revenue, and due to our continued shift in focus from
retail-boxed products to our online subscription model for
consumers, (ii) an increase in incentive rebates and
marketing funds with our partners which are recorded as an
offset to revenue and included in retail and other revenue in
the table above, and (iii) the sales of our Sniffer product
line sale in July 2004 and our Magic product line in January
2004, partially offset by a general increase in corporate IT
spending related to security. The introduction of the
perpetual-plus licensing arrangement has resulted in declines in
license revenue with a corresponding increase in services and
support revenue. 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 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 in 2005 compared to 2004
primarily due to the sale of our Sniffer product line in July
2004.
Cost
of Net Revenue
The following table sets forth, for the periods indicated, a
comparison of cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
51,904
|
|
|
$
|
24,179
|
|
|
$
|
27,725
|
|
|
|
115
|
%
|
|
$
|
26,025
|
|
|
$
|
(1,846
|
)
|
|
|
(7
|
)%
|
Subscription
|
|
|
110,267
|
|
|
|
63,478
|
|
|
|
46,789
|
|
|
|
74
|
|
|
|
38,484
|
|
|
|
24,994
|
|
|
|
65
|
|
Product
|
|
|
60,957
|
|
|
|
64,614
|
|
|
|
(3,657
|
)
|
|
|
(6
|
)
|
|
|
74,518
|
|
|
|
(9,904
|
)
|
|
|
(13
|
)
|
Amortization of purchased technology
|
|
|
23,712
|
|
|
|
17,767
|
|
|
|
5,945
|
|
|
|
33
|
|
|
|
14,887
|
|
|
|
2,880
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
$
|
246,840
|
|
|
$
|
170,038
|
|
|
$
|
76,802
|
|
|
|
45
|
|
|
$
|
153,914
|
|
|
$
|
16,124
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
581,754
|
|
|
$
|
520,298
|
|
|
|
|
|
|
|
|
|
|
$
|
437,701
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
|
318,029
|
|
|
|
254,728
|
|
|
|
|
|
|
|
|
|
|
|
177,333
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
22,247
|
|
|
|
54,331
|
|
|
|
|
|
|
|
|
|
|
|
153,512
|
|
|
|
|
|
|
|
|
|
Amortization of purchased technology
|
|
|
(23,712
|
)
|
|
|
(17,767
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
898,318
|
|
|
$
|
811,590
|
|
|
|
|
|
|
|
|
|
|
$
|
753,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin percentage
|
|
|
78
|
%
|
|
|
83
|
%
|
|
|
|
|
|
|
|
|
|
|
83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Service and Support Revenue
Cost of service and support revenue consists principally of
salaries, benefits and stock-based compensation related to
employees providing customer support, training and consulting
services. The cost of service and support
62
revenue increased in total, and as a percentage of service and
support revenue for 2006 due primarily to increased allocation
of technical support costs and to an increase in costs
associated with increased service and support revenue.
In 2006 our technical support teams devoted proportionately more
time to routine customer support and less time to product
development. We have allocated a greater percentage of technical
support costs to cost of net revenue and a lesser percentage to
research and development costs relative to prior periods,
resulting in a three percentage point increase in cost of
service and support revenue as a percentage of service and
support revenue for 2006 as compared to 2005.
In 2005 compared to 2004, cost of service and support revenue
decreased slightly due to efficiencies gained within technical
support services. As a percentage of service and support
revenue, cost of service and support revenue decreased slightly
due to an increase in support and maintenance revenue primarily
due to maintenance renewals on our growing customer base and 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, while the cost
of providing this support did not change materially.
Cost of
Subscription Revenue
Cost of subscription revenue consists primarily of costs related
to the sale of online subscription arrangements, the majority of
which include revenue-share arrangements and royalties paid to
our strategic channel partners. The increase in subscription
costs in 2006 compared to 2005 was primarily attributed to an
increase in online subscription arrangements and royalties paid
to our online strategic channel partners. As a percentage of
subscription revenue, cost of subscription revenue increased
during 2006 compared to 2005 due to higher online subscription
volumes and higher percentages payable to our partners under
online subscription arrangements.
The increase in subscription costs in 2005 compared to 2004 was
also due to an increase in online subscription arrangements and
royalties paid to our strategic channel partners. As a
percentage of subscription revenue, however, cost of
subscription revenue remained relatively flat due to increased
revenue on all subscription products during the year.
Cost of
Product Revenue
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 and
security products, computer platforms and other hardware
components. The decrease in the cost of product revenue from
2005 to 2006 was primarily attributable to our shift in focus
from retail-boxed products to our online subscription model,
slightly offset by an increase in hardware costs. As a
percentage of product revenue, cost of product revenue increased
due to increased incentive rebates and marketing funds in
addition to a shift in product mix from higher margin licensing
revenue to lower margin hardware revenue. Upon the launch of our
McAfee Consumer Suites, all license revenue and related cost of
revenue are included in subscription revenue and cost of
subscription revenue.
The decrease in cost of product revenue from 2004 to 2005 was
primarily attributable to (i) decreased hardware product
sales and (ii) the sale of the Sniffer product line in July
2004. The increase in cost of product revenue as a percentage of
product revenue from 2004 to 2005 is attributable to
(i) the shift from retail products to hardware appliances
which have a lower margin, (ii) the full cost of product
revenue being recognized upfront upon delivery while more
revenue is being deferred and recognized ratably over the
contract term, (iii) decrease in product revenue from
incentive rebates and marketing funds without a corresponding
decrease in the cost of products sold and (iv) increased
fulfillment and logistics costs in EMEA.
Amortization
of Purchased Technology
The increase in amortization of purchased technology in 2006 was
due to the acquisitions of SiteAdvisor in April 2006, Preventsys
in June 2006, Onigma in October 2006 and Citadel in December
2006. Purchased technology related to these four acquisitions
totaled $58.0 million. Amortization for these items was
$6.1 million in 2006. The purchased technology is being
amortized over estimated useful lives of up to seven years.
63
The increase in amortization of purchased technology in 2005 was
attributable to our acquisition of Wireless Security Corporation
in June 2005, for which we recorded purchased technology of
$1.5 million, and to our acquisition of Foundstone in
October 2004, for which we recorded purchased technology of
$27.0 million. Amortization for these items was
$4.4 million in 2005. The purchased technology is being
amortized over estimated useful lives of up to seven years.
Stock-based
Compensation Expense
On January 1, 2006, we adopted SFAS 123(R), which
requires the measurement and recognition of compensation expense
for all share-based awards made to our employees and directors
based on the estimated fair values. The following table
summarizes the stock-based compensation expense that we recorded
in accordance with the provisions of SFAS 123(R) (in
thousands):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
Amortization of fair value of options issued to employees
|
|
$
|
30,660
|
|
Former employees extension of post-termination
exercise period
|
|
|
4,326
|
|
Former executive acceleration
|
|
|
1,419
|
|
Cash settlement of options
|
|
|
3,066
|
|
Restricted stock awards and units
|
|
|
16,426
|
|
Employee Stock Purchase Plan
|
|
|
1,864
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
|
57,761
|
|
Deferred tax benefit
|
|
|
(15,672
|
)
|
|
|
|
|
|
Total stock-based compensation expense, after-tax
|
|
$
|
42,089
|
|
|
|
|
|
|
Amortization of fair value of options issued to
employees. We recognize the fair value of stock
options issued to employees as stock-based compensation expense
over the vesting period of the awards. As we adopted
SFAS 123(R) using the modified prospective method, these
charges include compensation expense for stock options granted
prior to January 1, 2006 but not yet vested as of
January 1, 2006, based on the grant date fair value
estimated in accordance with the pro forma provisions of
SFAS 123, and compensation expense for stock options
granted subsequent to January 1, 2006 based on the grant
date fair value estimated in accordance with the provisions of
SFAS 123(R).
Former employees extension of post-termination
exercise period. From July 2006, when we
announced that we might have to restate our historical financial
statements as a result of our ongoing stock option
investigation, through the date we become current on our
reporting obligations under the Securities Exchange Act of 1934,
as amended, (blackout period), we have not been able
to issue any shares, including those pursuant to stock option
exercises. In January 2007, we extended the post-termination
exercise period for all vested options held by certain former
employees and outside directors that would expire during the
blackout period. As a result of the modifications, we recognized
$4.3 million of stock-based compensation expense in the
fourth quarter of 2006 based on the fair value of these modified
options The expense was calculated in accordance with the
guidance in SFAS 123(R). The options were deemed to have no
value prior to the extension of the life beyond the blackout
period.
Based on the guidance in SFAS 123(R) and related FASB Staff
Positions, after the January 2007 modification, stock options
held by former employees and outside directors that terminated
prior to such modification became subject to the provisions of
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock
(EITF 00-19).
As a result, in January 2007, these options were reclassified as
liability awards within current liabilities. Accordingly, at the
end of each reporting period, we will determine the fair value
of these options utilizing the Black-Scholes valuation model and
recognize any change in fair value of the options in our
consolidated statements of income in the period of change until
the options are exercised, expire or are otherwise settled. The
expense or benefit associated with these options will be
included in general and administrative expense in our
consolidated statements of income, and will not be reflected as
stock-
64
based compensation expense. We will record expense or benefit in
future periods based on the closing price of our common stock.
In November 2007, due to a delay in our becoming current in our
reporting obligations, we extended the post-termination exercise
period for options held by former employees and outside
directors who terminated subsequent to the January 2007
modification and those previously modified in January 2007 as
discussed above, until the earlier of i) the ninetieth
calendar day after we become current in our reporting
obligations under the Securities Exchange Act of 1934, as
amended, ii) the expiration of the contractual terms of the
options, or iii) December 31, 2008. Based on the
guidance in SFAS 123(R) and related FASB Staff Positions,
after the November 2007 modification, stock options held by the
former employees and outside directors that terminated
subsequent to the January 2007 modification and prior to
November 2007 became subject to the provisions of
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock. As a result, in November 2007, these options
will be reclassified as liability awards within current
liabilities. Accordingly, at the end of each reporting period,
we will determine the fair value of these options utilizing the
Black-Scholes valuation model and recognize any change in fair
value of the options in our consolidated statements of income in
the period of change until the options are exercised, expire or
are otherwise settled. The expense or benefit associated with
these options will be included in general and administrative
expense in our consolidated statements of income, and will not
be reflected as stock-based compensation expense. We will record
expense or benefit in future periods based on the closing price
of our common stock.
Former executive acceleration. On
February 6, 2007 our board of directors accelerated
unvested stock options held by our former chief executive
officer without an extension of the post-employment exercise
period. All such stock options have since expired unexercised
due to the blackout. In the fourth quarter of 2006 we recorded
an additional non-cash, stock-based compensation expense of
$1.4 million before tax for the remaining unamortized fair
value of these options. Any claims that our former chief
executive officer might have with respect to the expired stock
options have not been released by him.
Cash settlement of options. Certain stock
options held by terminated employees expired during the blackout
period as they could not be exercised during the 90 day
period subsequent to termination. In January 2007, we determined
that we would settle these options in cash. The cash payment to
settle these options will be based upon an average closing price
of our common stock subsequent to us becoming current on our
reporting obligations under the Securities Exchange Act of 1934,
as amended. As of December 31, 2006, we have recorded a
liability of $3.1 million based on the intrinsic value of
these options using our January 7, 2007 closing stock
price. We will continue to adjust this amount in future
reporting periods based on the closing price of our common stock.
Restricted stock awards and units. We
recognize stock-based compensation expense for the fair value of
restricted stock awards and restricted stock units. Fair value
is determined as the difference between the closing price of our
common stock on the grant date and the purchase price of the
restricted stock awards and units. The fair value of these
awards is recognized to expense over the requisite service
period of the awards. During 2006, stock-based compensation
expense associated with restricted stock awards and units
totaled $16.4 million.
Employee Stock Purchase Plan. We recognize
stock-based compensation expense for the fair value of employee
stock purchase rights issued pursuant to our ESPP. The estimated
fair value of employee stock purchase rights is based on the
Black-Scholes pricing model. Expense is recognized ratably based
on contributions and the total fair value of the employee stock
purchase rights estimated to be issued. Beginning in July 2006,
we suspended purchases under our employee stock purchase plan,
returned all withholdings to our participating employees,
including interest based on a 5% per annum interest rate, and
prohibited our employees from exercising stock options due to
the announced investigation into our historical stock option
granting practices and our inability to become current on our
reporting obligations under the Securities Exchange Act of 1934,
as amended. During 2006, stock-based compensation expense
associated with our ESPP totaled $1.9 million.
65
The following table summarizes stock-based compensation expense
recorded by income statement line item in 2006 (in thousands):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
Cost of net revenue service and support
|
|
$
|
1,968
|
|
Cost of net revenue subscription
|
|
|
699
|
|
Cost of net revenue product
|
|
|
750
|
|
|
|
|
|
|
Stock-based compensation expense included in cost of net revenue
|
|
|
3,417
|
|
Research and development
|
|
|
15,042
|
|
Marketing and sales
|
|
|
24,289
|
|
General and administrative
|
|
|
15,013
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expense
|
|
|
54,344
|
|
|
|
|
|
|
Total stock-based compensation expense related to stock-based
equity awards
|
|
$
|
57,761
|
|
|
|
|
|
|
Prior to our adoption of SFAS 123(R), we accounted for
stock-based awards to employees and directors using the
intrinsic value method in accordance with APB 25, as allowed
under SFAS 123. During 2005 and 2004, we recorded
stock-based compensation expense totaling $4.5 million and
$25.2 million, respectively, of which $3.4 million and
$10.8 million was attributable to our restatement. The
following table summarizes the stock-based compensation expense
recorded in 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(As restated)
|
|
|
(As restated)
|
|
|
Grant date intrinsic value
|
|
$
|
3,873
|
|
|
$
|
7,031
|
|
Restricted stock awards
|
|
|
1,078
|
|
|
|
426
|
|
Exchange of McAfee.com options
|
|
|
290
|
|
|
|
6,516
|
|
Repriced options
|
|
|
(770
|
)
|
|
|
7,283
|
|
Former employees
|
|
|
|
|
|
|
2,759
|
|
Extended life of vested options of terminated employees
|
|
|
|
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
|
4,471
|
|
|
|
25,163
|
|
Deferred tax expense
|
|
|
(1,301
|
)
|
|
|
(8,800
|
)
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, after-tax
|
|
$
|
3,170
|
|
|
$
|
16,363
|
|
|
|
|
|
|
|
|
|
|
Grant date intrinsic value. We recognize
stock-based compensation expense over the vesting period of the
awards for the excess of the fair value of our common stock as
of the revised measurement date over the exercise price of the
options. During 2005 and 2004, we recognized stock-based
compensation expense related to these option grants totaling
$3.3 million and $6.8 million, respectively, related
to the grant date intrinsic value. See Note 3 to the
consolidated financial statements for additional information.
In connection with the acquisition of Foundstone in October
2004, we recorded deferred compensation for the intrinsic value
of our options issued in exchange for unvested options held by
Foundstone employees. These options are vesting over the
requisite service period. We recognized stock-based compensation
expense totaling $0.5 million in 2005 and $0.2 million
in 2004 related to these options.
Restricted stock awards. We granted restricted
stock awards to key employees and executives in 2005 and 2002.
The stock-based compensation expense related to these awards is
determined based on the excess of our closing stock price on the
grant date over the $0.01 purchase price, and is recognized over
the vesting period. We recorded stock-based compensation expense
of $1.1 million and $0.4 million in 2005 and 2004,
respectively, related to these restricted stock grants.
66
Exchange of McAfee.com options. In September
2002, we acquired the minority interest of McAfee.com and
exchanged options to purchase our common stock for McAfee.com
options held by McAfee.com employees. The exchanged options
included a provision for a cash payment to the option holder
upon exercise, which resulted in the options being accounted for
as variable awards. We recorded stock-based compensation expense
of $0.3 million and $6.5 million in 2005 and 2004,
respectively, related to these exchanged options subject to
variable accounting. This stock-based compensation expense was
based on our closing stock price of $27.13 and $28.93 at
December 31, 2005 and 2004, respectively.
Repriced options. Certain of our options were
repriced in 1999, resulting in variable accounting. During 2005,
we recorded a benefit of $0.8 million and during 2004 we
recorded stock-based compensation expense of $7.3 million
based on closing stock prices as of December 21, 2005 and
2004 of $27.13 and $28.93, respectively. These options were
fully vested at December 31, 2005, therefore, no
stock-based compensation expense will be recognized under
SFAS 123(R).
Former employees. In 2004, we modified certain
outstanding option awards in conjunction with employee
terminations. We recorded compensation charges based on the
intrinsic value of the modified options on the date of
modification. During 2004, stock-based compensation expense
associated with these option modifications totaled
$2.8 million. There were no modifications to employee
options resulting in stock-based compensation expense in 2005.
Extended life of vested options held by terminated
employees. As part of the purchase of Foundstone
in October 2004, we extended the exercise period for certain
options beyond their original contractual life. This
modification resulted in a compensation charge in 2004 of
$1.0 million.
The pre-tax stock-based compensation expense of
$4.5 million and $25.2 million in 2005 and 2004,
respectively, is included in the following line items in our
consolidated statements of income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
|
(As restated)
|
|
|
(As restated)
|
|
|
Cost of net revenue service and support
|
|
$
|
14
|
|
|
$
|
215
|
|
Cost of net revenue subscription
|
|
|
36
|
|
|
|
109
|
|
Cost of net revenue product
|
|
|
(5
|
)
|
|
|
713
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in cost of net revenue
|
|
|
45
|
|
|
|
1,037
|
|
Research and development
|
|
|
524
|
|
|
|
9,538
|
|
Marketing and sales
|
|
|
1,482
|
|
|
|
6,703
|
|
General and administrative
|
|
|
2,420
|
|
|
|
6,810
|
|
Loss on sale of assets and technology
|
|
|
|
|
|
|
84
|
|
Severance/bonus costs related to Sniffer and Magic dispositions
|
|
|
|
|
|
|
991
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expense
|
|
|
4,426
|
|
|
|
24,126
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense related to stock-based
equity awards
|
|
$
|
4,471
|
|
|
$
|
25,163
|
|
|
|
|
|
|
|
|
|
|
See Note 16 in the consolidated financial statements for
additional information regarding stock-based compensation.
During 2006, we changed our equity compensation program for
existing employees by starting to grant, in certain instances,
restricted stock units that vest over a specified period of time
in addition to awarding stock options. For new employees, we
continue to grant stock options. Going forward, our management
and compensation committee will consider utilizing all types of
equity compensation to reward top-performing employees,
including performance-based restricted stock units.
As of December 31, 2006, total compensation cost related to
unvested stock options, restricted stock units, restricted stock
awards and not yet recognized and reduced by estimated
forfeitures was $68.0 million. This amount is expected to
be recognized over a weighted-average period of 2.4 years.
67
Internal
Revenue Code Section 409A
Adverse tax consequences will result from our revision of
accounting measurement dates for stock options that vest
subsequent to December 31, 2004, or the 409A affected
options. These adverse tax consequences include a penalty tax
payable by the option holder under Internal Revenue Code
(IRC) Section 409A (and, as applicable, similar
penalty taxes under state tax laws). As virtually all holders of
options with revised measurement dates were not involved in or
aware of their incorrect option exercise prices, we took certain
actions, as described below, to deal with the adverse tax
consequences that may be incurred by the holders of such options.
Section 16(a)
Officers and Directors
In December 2006, our board of directors approved the amendment
of 409A affected options for those who were Section 16(a)
officers upon the receipt of 409A affected options to increase
the exercise price to the fair market value of our common stock
on the revised measurement date. These amended options would not
be subject to taxation under IRC Section 409A. Under IRS
regulations, these option amendments had to be completed by
December 31, 2006 for anyone subject to Section 16(a)
requirements upon receipt of the IRC Section 409A affected
options. There was no expense associated with this action, as
the modifications increased the exercise price, which results in
no increase in fair value of the option.
Operating
Costs
Research
and development
The following table sets forth, for the periods indicated, a
comparison of our research and development expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
2005 vs. 2004
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Research and development(1)
|
|
$
|
193,447
|
|
|
$
|
176,409
|
|
|
$
|
17,038
|
|
|
|
10
|
%
|
|
$
|
174,872
|
|
|
$
|
1,537
|
|
|
|
1
|
%
|
Percentage of net revenue
|
|
|
17
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $15,042, $524 and
$9,538 in 2006, 2005 and 2004, respectively. |
Research and development expenses consist primarily of salary,
benefits, and stock-based compensation for our development and a
portion of our technical support staff, contractors fees
and other costs associated with the enhancements of existing
products and services and development of new products and
services. The increase in research and development expenses in
2006 was primarily attributable to (i) a $20.9 million
increase in salary and benefit expense for individuals
performing research and development activities due to an
increase in average headcount and salary increases that were
effective as of April 2006, (ii) the recognition of
$15.0 million of stock-based compensation expense in 2006
due to the implementation of SFAS 123(R) on January 1,
2006 compared to the recognition of $0.5 million
stock-based compensation expense under APB 25 in 2005,
(iii) a $5.6 million increase attributable to
acquisition-related bonuses, primarily related to the
SiteAdvisor acquisition and (iv) a $1.6 million
increase due to additional use of third-party contractors,
partially offset by a decrease of $25.5 million due mostly
to our revised allocation of technical support costs related to
a general decrease in product development efforts and decreases
in various other expenses related to research and development
activities in 2006.
In 2006, our technical support teams devoted proportionately
more time to routine customer support and less time to product
development. We have allocated a greater percentage of technical
support costs to cost of net revenue and a lesser percentage to
research and development costs relative to prior periods.
The increase in research and development expenses in 2005
compared to 2004 was primarily attributable to an increase in
average headcount dedicated to research and development
activities as well as an increase of $1.4 million
specifically related to the acquisition of Foundstone. The
increase in compensation expense was partially offset by a
$9.0 million decrease in stock-based compensation.
We believe that continued investment in product development is
critical to attaining our strategic objectives.
68
Marketing
and sales
The following table sets forth, for the periods indicated, a
comparison of our marketing and sales expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
2005 vs. 2004
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Marketing and sales(1)
|
|
|
366,454
|
|
|
|
300,089
|
|
|
|
66,365
|
|
|
|
22
|
%
|
|
|
353,074
|
|
|
|
(52,985
|
)
|
|
|
(15
|
)%
|
Percentage of net revenue
|
|
|
32
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $24,289, $1,482 and
$6,703 in 2006, 2005 and 2004, respectively. |
Marketing and sales expenses consist primarily of salary,
commissions, stock-based compensation and benefits for marketing
and sales personnel and costs associated with advertising and
promotions. The increase in marketing and sales expenses during
2006 compared to 2005 reflected (i) the recognition of
$24.3 million of stock-based compensation expense in 2006
due to the implementation of SFAS 123(R) on January 1,
2006 compared to the recognition of $1.5 million
stock-based compensation expense under APB 25 in 2005,
(ii) a $18.5 million increase in salary and benefit
expense for individuals performing marketing and sales
activities due to an increase in average headcount and salary
increases in that were effective beginning April 2006,
(iii) a $16.2 million increase due to increased
investment in sales, marketing, promotion and advertising
programs, including marketing spend for SiteAdvisor and
corporate branding initiatives, (iv) a $2.0 million
increase in travel expense primarily attributable to increased
average headcount, (v) a $1.9 million increase in
commissions, and (vi) increases in various other expenses
related to marketing and sales activities, partially offset by a
$0.8 million decrease due to the Japanese Yen weakening
against the U.S. Dollar in 2006 compared to 2005.
The decrease in marketing and sales expenses from 2004 to 2005
reflected (i) decreased commissions totaling
$10.5 million due to a greater percentage of our business
being from the online 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 $5.2 million decrease in
stock-based compensation, (iv) general headcount reductions
and (v) reduced spending on marketing and sales programs
due to our cost reduction initiatives.
General
and administrative
The following table sets forth, for the periods indicated, a
comparison of our general and administrative expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
2005 vs. 2004
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
General and administrative(1)
|
|
|
169,694
|
|
|
|
123,487
|
|
|
|
46,207
|
|
|
|
37
|
%
|
|
|
145,038
|
|
|
|
(21,551
|
)
|
|
|
(15
|
)%
|
Percentage of net revenue
|
|
|
15
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $15,013, $2,420 and
$6,810 in 2006, 2005 and 2004, respectively. |
General and administrative expenses consist principally of
salary, stock-based compensation and benefit costs for executive
and administrative personnel, professional services and other
general corporate activities. The increase in general and
administrative expenses in 2006 compared to 2005 reflected
(i) the recognition of $15.0 million of stock-based
compensation expense in 2006 due to the implementation of
SFAS 123(R) on January 1, 2006 compared to the
recognition of a $2.4 million stock-based compensation
expense under APB 25 in 2005, (ii) a $7.2 million
increase in salary and benefit expense for individuals
performing general and administrative activities due to an
increase in average headcount and salary increases that were
effective beginning in April 2006, (iii) an
$25.6 million increase in legal fees, which includes
expenses related to our offer to settle a derivative class
action lawsuit, a commercial settlement and indemnification
costs for former directors and officers, (iv) a
$3.6 million severance payment to our former chief
executive officer, and (v) general increases in other
69
general and administrative expenses, partially offset by
(i) a $2.8 million decrease in costs incurred to
comply with Section 404 of the Sarbanes-Oxley Act,
(ii) a $0.9 million decrease in expense related to
uncollectible accounts receivable, and (iii) a
$0.4 million decrease due to the Japanese Yen weakening
against the U.S. Dollar in 2006 compared to 2005.
The decrease in general and administrative expenses from 2004 to
2005 reflected (i) a $6.5 million decrease in costs
incurred to comply with Section 404 of the Sarbanes-Oxley
Act, (ii) a $4.4 million decrease in stock-based
compensation and (iii) decreased average headcount
dedicated to general and administrative activities. Also, in
2004, we had (i) $2.9 million in consulting fees paid
in connection with strategic planning, (ii) fees incurred
in the divestiture of Sniffer and (iii) increased legal
fees due to our investigation into our accounting practices that
commenced in March 2002 and merger and acquisition activity. The
remaining decrease was attributable to general cost reduction
efforts.
Amortization
of intangibles
The following table sets forth, for the periods indicated, a
comparison of the amortization of intangibles.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
2005 vs. 2004
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amortization of intangibles
|
|
|
10,682
|
|
|
|
12,834
|
|
|
|
(2,152
|
)
|
|
|
(17
|
)%
|
|
|
14,235
|
|
|
|
(1,401
|
)
|
|
|
(10
|
)%
|
Intangibles consist of identifiable intangible assets such as
trademarks, patents and customer lists. The decreases in
amortization of intangibles are attributable to older
intangibles becoming fully amortized in 2006 and 2005. In
connection with our current year acquisitions we acquired
$9.7 million in intangible assets $8.4 million of
these intangible assets were acquired in the fourth quarter of
2006 and thus did not impact our consolidated income statement
significantly during the current year.
SEC and
compliance costs
The $17.8 million of SEC and compliance costs in 2006
included $3.9 million related to independent consultants
engaged to examine and recommend improvements to our internal
controls to ensure compliance with federal securities laws as
required by our previous settlement with the SEC and
$13.9 million related to the investigation into our stock
option granting practices.
Restructuring
charges
The following table sets forth, for the periods indicated, a
comparison of our restructuring charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
2005 vs. 2004
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Restructuring charges
|
|
|
470
|
|
|
|
3,782
|
|
|
|
(3,312
|
)
|
|
|
(88
|
)%
|
|
|
17,442
|
|
|
|
(13,660
|
)
|
|
|
(78
|
)%
|
In the fourth quarter of 2006 we initiated certain restructuring
actions designed to realign our go-to-market model with our
customers requirements and product offerings. As a result,
we recorded a restructuring charge of $2.4 million related
to a reduction in headcount of 75 employees. These actions
were taken to reduce our cost structure and, at the same time,
enable us to invest in certain strategic growth initiatives in
an effort to enhance our competitive position. These actions
were completed during the first quarter of 2007. Accretion on
prior year restructurings totaled $0.6 million. Offsetting
these charges is a reduction of $2.5 million due to
revision of prior year estimates related to certain leased
properties and other costs.
We recorded restructuring charges in 2005, 2004 and 2003 related
to vacating several facilities and reductions in headcount. See
further information on these actions in Note 9 to our
consolidated financial statements included elsewhere in this
report.
70
In-process
research and development expense
During 2006, we expensed $0.5 million of in-process
research and development related to the acquisition of
Preventsys, Inc. in June 2006. At the time of the acquisition,
the ongoing project included the development of a new version of
the security risk management system that would include increased
functionality and new features, which we introduced in the
fourth quarter of 2006. At the date of acquisition, we estimated
that, on average, 40% of the development effort had been
completed and that the remaining 60% of the development would
take three months to complete. As of December 31, 2006,
this development effort was complete and total costs to complete
the development were $0.5 million.
During 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 related to the development of
the consumer wireless security product. 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 three months to complete. As of
December 31, 2005, we had completed the remaining
development efforts and total costs to complete the development
were $0.6 million.
Loss
(gain) on sale of assets and technology
We recognized a loss of $0.3 million in 2006 related to the
write-off of property and equipment. We recognized a gain of
$1.3 million in 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. In January 2004, we recognized
a gain of $46.1 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 $197.4 million. Theses gains
were partially offset by a write-off of other fixed assets.
SEC
settlement charge
Since 2002, we had been engaged in ongoing settlement
discussions with the SEC related to our investigation in to our
accounting practices that commenced in March 2002. In 2005, we
reserved $50.0 million in connection with the settlement
with the SEC related to the investigation into our accounting
practices that commenced in March 2002. In February 2006, the
SEC entered the final judgment for the settlement with us
relating to this investigation. Under the terms of the
settlement, we consented, without admitting or denying any
wrongdoing, to be enjoined from future violations of the federal
securities laws. We also agreed to certain other conditions,
including the payment of a $50.0 million civil penalty,
which was released from escrow during the first quarter of 2006.
Reimbursement
from transition services agreement
In conjunction with the Sniffer sale, we entered into a
transition services agreement with Network General. Under this
agreement, we provided certain back-office services to Network
General for a period of time through June 2005. The
reimbursements we have recognized under this agreement totaled
$0.4 million in 2005 and $6.0 million in 2004. We
completed our requirements under the transition services
agreement in July 2005.
Reimbursement
Related to Litigation Settlement
During 2004, we received insurance reimbursements of
$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.
Severance/bonus
costs related to Sniffer and Magic dispositions
In conjunction with the sale of two product lines in 2004, we
incurred severance and bonuses to the former executives for
their assistance in the transaction. The total bonuses and
severance expensed was $9.1 million, of which
$6.7 million was paid in 2004 and $2.4 million was
paid in 2005. In addition, we accelerated the vesting of these
executives stock options, which resulted in a stock-based
compensation expense of $1.0 million.
71
Interest
and Other Income
The following table sets forth, for the periods indicated, a
comparison of our interest and other income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
2005 vs. 2004
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Interest and other income
|
|
$
|
44,397
|
|
|
$
|
26,703
|
|
|
$
|
17,694
|
|
|
|
66
|
%
|
|
$
|
14,651
|
|
|
$
|
12,052
|
|
|
|
82
|
%
|
Interest and other income includes interest earned on
investments, as well as net foreign currency transaction gains
or losses. The increase in interest and other income is
partially due to the rising average rate of annualized return on
our investments from 3% in the year ended 2005 to 4% in the year
ended 2006. In addition, our average cash, marketable securities
and restricted cash in 2006 compared to 2005 was
$118.4 million higher.
Interest and other income increased from 2004 to 2005 primarily
due to an increase in cash, cash equivalents and marketable
securities from $924.7 million at December 31, 2004 to
$1,257.0 million at December 31, 2005 and higher
interest rates in 2005.
During 2006, 2005 and 2004, we recorded net foreign currency
transaction losses of $8.5 million, $5.5 million and
$1.0 million, respectively, in our consolidated statements
of income.
Interest
and other expenses
We had no interest and other expense in 2006 and 2005. Interest
and other expense was $5.3 million in 2004. Interest and
other expense in 2004 was comprised of interest on the
outstanding convertible debt which was redeemed in August 2004.
Loss on
repurchase of convertible debt
In 2006 and 2005, we had no convertible debt. In 2004, we
redeemed all of our outstanding $345.0 million 5.25%
convertible notes for $265.6 million in cash and the
issuance of 4.6 million of our common shares. We recognized
a $15.1 million loss, which was the result of the write-off
of unamortized debt issuance costs, fair value adjustment of the
debt and a 1.3% premium paid for redemption.
Gain
(loss) on investments, net
In 2006, we recognized a gain on the sale of marketable
securities of $0.4 million. In 2005 and 2004, we recognized
a loss on the sale of marketable securities of $1.4 million
and $1.7 million, respectively. Our investments are
classified as available-for-sale and we may sell securities from
time to time to move funds into investments with more lucrative
investment yields or for liquidity purposes, thus resulting in
gains and losses on sale.
Provision
for income taxes
The following table sets forth, for the periods indicated, a
year-over-year comparison of our provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
2005 vs. 2004
|
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Provision for income taxes
|
|
$
|
46,310
|
|
|
$
|
48,461
|
|
|
$
|
(2,151
|
)
|
|
|
(4
|
)%
|
|
$
|
82,797
|
|
|
$
|
(34,336
|
)
|
|
|
(41
|
)%
|
Effective tax rate
|
|
|
25
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
Tax expense was 25%, 29% and 27% of income before income taxes
for 2006, 2005 and 2004, respectively. The effective tax rate
for the period ended December 31, 2006 differs from the
statutory rate generally due to the benefit of research and
development tax credits, foreign tax credits, lower tax rates in
certain foreign jurisdictions, adjustments to tax reserves and
valuation allowances, the tax effects of stock compensation, and
actual/deemed repatriations of earnings from foreign
subsidiaries. For further detail see Note 16 to our
consolidated financial statements. Our future effective tax
rates could be adversely affected if pretax earnings are
proportionately less than
72
amounts in prior years in countries where we have lower
statutory rates or by unfavorable changes in tax laws and
regulations.
The American Jobs Creation Act of 2004, or the Act, provided for
a deduction of 85% of certain foreign earnings that are
repatriated in stipulated periods, including our year ended
December 31, 2005. Certain criteria were required to have
been 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 distributions
of earnings from our foreign subsidiaries that would qualify for
the repatriation provisions of the Act. In the fourth quarter of
2005, we executed qualifying distributions totaling
$350.0 million which resulted in tax expense of
$1.5 million, net of a $17.8 million tax benefit
stemming from a lower tax rate under the Act on a portion of
foreign earnings for which we previously (in 2004) provided
United States tax. Except for the aforementioned distributions
qualifying under the Act, we intend to indefinitely reinvest all
other current
and/or
future earnings of our foreign subsidiaries.
The earnings from our foreign operations in India are subject to
a tax holiday from a grant effective through March 31,
2009. The tax holiday provides for zero percent taxation on
certain classes of income and requires certain conditions to be
met. We are in compliance with these conditions as of
December 31, 2006.
Acquisitions
Citadel
Security Software
In December 2006, we acquired substantially all of the assets of
Citadel Security Software Inc. (Citadel), for
$56.1 million in cash, plus an estimated $3.9 million
in working capital reimbursement and $1.2 million in direct
acquisition costs, totaling $61.2 million. Citadel was a
security software provider focused on solutions in security
policy compliance and vulnerability remediation that helps
enterprises effectively neutralize security vulnerabilities and
reduce risk. We have incorporated Citadels technology into
our existing consumer products. The results of operations of
Citadel have been included in our results of operations since
the date of acquisition.
Onigma
In October 2006, we acquired 100% of the capital shares of
Onigma Ltd. (Onigma), a provider of data loss
protection solutions that monitor, report and prevent
confidential data from leaving an enterprise, for
$18.9 million in cash and $0.2 million in direct
acquisition costs, totaling $19.1 million. We have
incorporated Onigmas technology into our existing
corporate security offerings. The results of operations of
Onigma have been included in our results of operations since the
date of acquisition.
Preventsys
In June 2006, we acquired 100% of the outstanding capital shares
of Preventsys, Inc., a creator of security risk management and
automated security compliance reporting, for $4.4 million
in cash and $0.4 million in direct acquisition costs,
totaling $4.8 million. We believe the technology that
Preventsys has developed will advance our ability to help our
corporate customers reduce the complexity of managing their
security. We have added Preventsys products to our existing
portfolio of corporate security offerings. The results of
operations of Preventsys have been included in our results of
operations since the date of acquisition.
SiteAdvisor
In April 2006, we acquired 100% of the outstanding capital
shares of SiteAdvisor, Inc., a web safety software company that
tests and rates internet sites on an ongoing basis, for
$60.8 million in cash and $0.2 million in direct
acquisition costs, totaling $61.0 million. We believe the
technology and business model that SiteAdvisor has developed
that will allow us to enhance our existing product offerings and
add value to the McAfee brand. We have bundled the SiteAdvisor
technology with our existing consumer product offerings. The
results of operations of SiteAdvisor have been included in our
results of operations since the date of acquisition.
73
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 protection products, for
$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.
Foundstone,
Inc.
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.
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(As restated)
|
|
|
(As restated)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
290,489
|
|
|
$
|
419,457
|
|
|
$
|
358,913
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(452,339
|
)
|
|
$
|
4,595
|
|
|
$
|
(39,373
|
)
|
Net cash (used in) provided by financing activities
|
|
$
|
(197,711
|
)
|
|
$
|
39,841
|
|
|
$
|
(369,867
|
)
|
Overview
At December 31, 2006, our cash, cash equivalents and
marketable securities totaled $1,240.2 million and we did
not have any debt. Our management plans to use these amounts for
future operations, potential acquisitions and repurchases of our
common stock on the open market.
At December 31, 2006, we had cash and cash equivalents
totaling $389.6 million, compared to $728.6 million at
December 31, 2005. In 2006, we generated positive operating
cash flows of $290.5 million that were negatively impacted
by the payment of the $50.0 million penalty to the SEC. We
received cash of $32.0 million related to our employee
stock purchase plan and option exercises under our employee
stock option plans. Cash flows were positively impacted by an
increase in net cash of $20.6 million due to foreign
exchange rate fluctuations and a reduction in our restricted
cash of $50.0 million. Uses of cash during 2006 included
the repurchase of common stock of $234.7 million, including
commissions, net purchases of marketable securities of
$312.5 million, acquisitions totaling $146.1 million,
net of cash acquired, and purchases of property and equipment of
$43.8 million.
Our working capital, defined as current assets minus current
liabilities, was $146.3 million and $688.0 million at
December 31, 2006 and December 31, 2005, respectively.
The decrease in working capital of $541.7 million from
December 31, 2005 to December 31, 2006 was primarily
attributable to a $439.5 million decrease in cash and
short-term marketable securities balances to repurchase common
stock and fund acquisitions, and a $129.1 million increase
in current deferred revenue due to increased sales of
subscription and support contracts. Additionally, we increased
our long-term marketable securities by $422.7 million to
improve investments yields. A more detailed discussion of
changes in our liquidity follows.
Operating
Activities
Net cash provided by operating activities in 2006, 2005 and 2004
was primarily the result of our net income of
$137.5 million, $118.2 million and
$220.0 million, respectively. Net income for 2006 was
adjusted for non-cash items such as depreciation and
amortization of $70.3 million, stock-based compensation
expense of $54.7 million,
74
changes in deferred income taxes of $35.0 million, discount
amortization of marketable securities of $7.2 million, an
excess tax benefit from stock-based compensation of
$5.0 million, and changes in various assets and liabilities
such as an increase in deferred revenue of $110.1 million,
an increase in prepaid expenses, prepaid taxes and other assets
of $55.4 million, an increase in accounts payable, accrued
taxes and other liabilities of $21.1 million, and an
increase in accounts receivable of $2.1 million. The
increase in deferred revenue in 2006 was due to increased sales
of subscription and support contracts.
Net income for 2005 was adjusted for non-cash items such as
depreciation and amortization of $67.0 million, tax benefit
from exercise of nonqualified stock options of
$27.0 million, deferred income taxes of $6.5 million,
stock-based compensation expense of $4.5 million, acquired
in-process research and development of $4.0 million, and
changes in various assets and liabilities such as an increase of
deferred revenue of $188.0 million, an increase of accounts
payable, accrued taxes and other liabilities of
$46.8 million, an increase in accounts receivable of
$23.2 million and an increase of prepaid expenses, income
taxes and other assets of $9.5 million.
Net income for 2004 was adjusted for non-cash items such as gain
on sale of assets and technology of $238.9 million,
depreciation and amortization of $68.3 million, tax benefit
from exercise of nonqualified stock options of
$53.2 million, stock-based compensation expense of
$25.2 million, deferred income taxes of $24.8 million,
loss on repurchase of zero coupon convertible debenture of
$15.1 million, non-cash restructuring charges of
$9.6 million, premium amortization of marketable securities
of $4.6 million, and changes in various assets and
liabilities such as an increase of deferred revenue of
$166.7 million, an increase of accounts payable, accrued
taxes and other liabilities of $29.2 million, an decrease
in accounts receivable of $33.9 million and an increase of
prepaid expenses, income taxes and other assets of
$8.3 million.
Historically, our 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 54 days, 58 days and
58 days at December 31, 2006, 2005 and 2004,
respectively. We calculate accounts receivable DSO on a
net basis by dividing the accounts receivable
balance at the end of the year by the amount of revenue
recognized for the year multiplied by 360 days. We expect
DSOs to vary from period to period because of changes in revenue
and the effectiveness of our collection efforts. In 2006, 2005
and 2004, we did not make any significant changes to our payment
terms for our customers, which are generally
net 30.
In 2006, the increase in cash related to accounts payable,
accrued taxes and other liabilities was $21.1 million,
which included the payment of the $50.0 million penalty to
the SEC. Our operating cash flows, including changes in accounts
payable and accrued liabilities, are 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 2006, 2005 and 2004,
we did not make any significant changes to our payment timing to
our vendors.
In the third quarter of 2005, we placed $50.0 million in
escrow for a proposed settlement with the SEC relating to the
Formal Order of Private Investigation into our
accounting practices that commenced during 2002 (see
Note 20 to our consolidated financial statements). On
February 9, 2006, the SEC entered the final judgment for
settlement with us. The $50.0 million escrow was released
and transferred to the SEC on February 13, 2006. The
transfer to the SEC out of escrow is reflected as cash provided
by investing activities of $50.0 million and cash used in
operating activities of $50.0 million. The interest earned
on the amount in escrow was released to us when the transfer was
made to the SEC and is reflected as a positive adjustment to
reconcile net income to net cash provided by operating
activities on our consolidated statement of cash flows for year
ended December 31, 2006.
Our cash and marketable securities balances are held in numerous
locations throughout the world, including substantial amounts
held outside the United States. As of December 31, 2006 and
2005, $383.7 million and $176.1 million, respectively,
was held outside the United States. We utilize a variety of tax
planning and financing strategies to ensure that our worldwide
cash is available in the locations in which it is needed.
We have incurred material expenses in 2006 as a direct result of
the investigation into our stock option grant practices and
related accounting. These costs primarily related to
professional services for legal, accounting and tax
75
guidance. In addition, we have incurred costs related to
litigation, the informal investigation by the SEC, the grand
jury subpoena from the U.S. Attorneys Office for the
Northern District of California and the preparation and review
of our restated consolidated financial statements. We expect
that we will continue to incur costs associated with these
matters and that we may be subject to certain fines
and/or
penalties resulting from the findings of the investigation. We
cannot reasonably estimate the range of fines
and/or
penalties, if any, that might be incurred as a result of the
investigation. We expect to pay for these obligations with
available cash.
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.
In addition, we currently cannot predict the outcome of the
litigation described in Note 20. We do believe the working
capital available to us will be sufficient to meet our cash
requirements for at least the next 12 months.
Investing
Activities
Our investing activities for the years ended December 31,
2006, 2005 and 2004 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(As restated)
|
|
|
(As restated)
|
|
|
Purchase of marketable securities
|
|
$
|
(1,315,407
|
)
|
|
$
|
(793,581
|
)
|
|
$
|
(1,243,990
|
)
|
Proceeds from sale of marketable securities
|
|
|
631,849
|
|
|
|
669,260
|
|
|
|
967,866
|
|
Proceeds from maturites of marketable securities
|
|
|
371,070
|
|
|
|
226,879
|
|
|
|
65,536
|
|
Decrease (increase) in restricted cash
|
|
|
49,989
|
|
|
|
(50,322
|
)
|
|
|
19,930
|
|
Purchase of property and equipment and leasehold improvements
|
|
|
(43,751
|
)
|
|
|
(28,941
|
)
|
|
|
(25,374
|
)
|
Acquisitions, net of cash acquired
|
|
|
(146,089
|
)
|
|
|
(20,200
|
)
|
|
|
(84,650
|
)
|
Proceeds from sale of assets and technology
|
|
|
|
|
|
|
1,500
|
|
|
|
261,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(452,339
|
)
|
|
$
|
4,595
|
|
|
$
|
(39,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
In 2006, net purchases of marketable securities was
$312.5 million compared to net proceeds from sales and
maturities of $102.6 million in 2005 and net purchases of
marketable securities of $210.6 million in 2004. 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, U.S. government fixed income and
U.S. government agency fixed income, mortgage-backed and
investment grade corporate fixed income securities to maturity;
however, 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 or sale
of our investments has no material impact on our overall
liquidity. We expect to continue our investing activities,
including investment securities of a short-term and long-term
nature.
Restricted
Cash
The current restricted cash balance of $50.5 million at
December 31, 2005 reflected the $50.0 million we
placed in escrow for the SEC settlement and the interest earned
on the escrow which was restricted until released by the SEC. On
February 9, 2006, the SEC entered the final judgment for
settlement with us. On our consolidated statement of cash flows
for 2006, the $50.0 million released from escrow for
payment to the SEC was reflected as cash provided by investing
activities and cash used in operating activities. The interest
earned on the escrow was released to cash upon payment to the
SEC. We had no current restricted cash balance at
December 31, 2006.
76
The non-current restricted cash balance of $1.0 million and
$0.9 million at December 31, 2006 and 2005 consisted
primarily of cash collateral related to leases in the United
States and India, as well as workers compensation
insurance coverage.
Property
and Equipment
The $43.8 million of property and equipment purchased
during 2006 was primarily for upgrades of our existing
accounting systems and purchases of computers, equipment and
software. We also acquired land adjacent to our facility in
Plano, Texas for $1.8 million and recorded
$3.7 million in leasehold improvements related to our move
into our new Bangalore, India facility.
The $28.9 million of property and equipment purchased
during 2005 was primarily for upgrades of our existing
accounting system and equipment for our new facility in Ireland.
We added $25.4 million of equipment during 2004 to update
hardware for our employees and enhance various back-office
systems and purchases of 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.
Acquisitions
During 2006, we paid $146.1 million, net of cash received,
for acquisitions, including $61.2 million for the purchase
of substantially all of the assets of Citadel Security Software,
Inc., $61.0 million for the outstanding capital shares of
SiteAdvisor, Inc., $19.1 million for the outstanding
capital shares of Onigma Ltd., and $4.8 million for the
outstanding capital shares of Preventsys, Inc.
In June 2005, we acquired all the outstanding stock, technology
and assets of Wireless Security Corporation for
$20.2 million in cash, including acquisition costs and net
of cash acquired. In 2004, we paid cash for our acquisition of
Foundstone in the amount of $84.7 million, net of cash
acquired.
We may buy or make investments in complementary companies,
products and technologies. Our available cash and equity
securities may be used to acquire or invest in complementary
companies, products and technologies.
Proceeds
from Sale of Assets and Technology
We completed the sale of McAfee Labs in April 2005, and as
result, recognized a gain of $1.3 million in 2005. We
received net cash proceeds of $1.5 million related to the
sale.
We completed the sale of the Magic product line in January 2004,
and as a result, recognized a gain of $46.1 million. We
received net cash proceeds of $47.1 million related to the
sale. In July 2004, we completed the sale of our Sniffer product
line, and as a result, recognized a gain of $197.4 million.
We received net cash proceeds of $213.8 million related to
the sale. Additionally, we received $0.4 million in cash
from the disposal of other assets in 2004.
77
Financing
Activities
Our financing activities for the years ended December 31,
2006, 2005 and 2004 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(As restated)
|
|
|
(As restated)
|
|
|
Proceeds from issuance of common stock under stock option plan
and stock purchase plans
|
|
$
|
32,008
|
|
|
$
|
108,236
|
|
|
$
|
113,793
|
|
Excess tax benefits from stock-based compensation
|
|
|
4,960
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(234,679
|
)
|
|
|
(68,395
|
)
|
|
|
(221,816
|
)
|
Repurchase of convertible debt
|
|
|
|
|
|
|
|
|
|
|
(265,623
|
)
|
Contribution of proceeds from sale of common stock held in trust
|
|
|
|
|
|
|
|
|
|
|
3,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
$
|
(197,711
|
)
|
|
$
|
39,841
|
|
|
$
|
(369,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option and Stock Purchase Plans
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. We received cash proceeds from these plans in the amount
of $32.0 million, $108.2 million and
$113.8 million in 2006, 2005 and 2004, 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. Beginning in July
2006, we suspended purchases under our employee stock purchase
plan, returned all withholdings to our participating employees,
including interest based on a 5% per annum interest rate, and
prohibited our employees from exercising stock options due to
the announced investigation into our historical stock option
granting practices and our inability to become current on our
reporting obligations under the Securities Exchange Act of 1934,
as amended.
In 2006, we changed our equity compensation program for existing
employees by starting to grant, in certain instances, restricted
stock units in addition to awarding stock options. We continued
to grant stock options to new employees. Although management and
our compensation committee have not determined what type of
equity compensation we will use to reward top-performing
employees in the future, if management and our compensation
committee decide to grant only restricted stock units, which
provide no proceeds to us, going forward, our proceeds from
issuance of common stock will decrease significantly.
Excess
Tax Benefits from Stock-Based Compensation
The excess tax benefit reflected as a financing cash inflow in
2006 represents excess tax benefits realized relating to
share-based payments to our employees, in accordance with
SFAS 123(R). There is a corresponding cash outflow included
in cash flows from operating activities.
Repurchase
of Common Stock
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. In August 2004, the board
of directors authorized the repurchase of $200.0 million of
common stock through August 2006 and in April 2005, our board of
directors authorized the repurchase of an additional
$175.0 million of our common stock in the open market
through August 2006. In April 2006, our board of directors
authorized the repurchase of an additional $250.0 million
of our common stock; however, this authorization expired in
October 2007. Beginning in May 2006, we suspended repurchases of
our common stock in the open market due to the announced
investigation into our historical stock option granting
practices and our inability to timely file our quarterly reports
and annual report with the SEC. Prior to the suspension of
repurchases in July 2006, we used $234.2 million, including
commissions, to repurchase 9.8 million of our common shares
in the open market under our stock repurchase program in 2006.
In addition, we used approximately $0.5 million in
connection with our obligation to four holders of restricted
stock to withhold the number of shares
78
required to satisfy such holders tax liabilities in
connection with the vesting of such shares. In 2005, and 2004,
we repurchased 2.8 million and 12.6 million shares of
our common stock, respectively. The timing and size of future
repurchases are subject to us becoming current on our reporting
obligations under the Securities Exchange Act of 1934, as
amended, approval by our board of directors, market conditions,
stock prices, our cash position and other cash requirements. We
expect that our executive management will recommend to our board
of directors that a new common stock repurchase program be
authorized.
Redemption
of Convertible Debt
In 2004, we used $265.6 million of cash for the repurchase
of convertible debt.
Contribution
of Proceeds from Sale of Common Stock Held in Trust
In 1998, we deposited 1.7 million shares of common stock
with a trustee for the benefit of the employees of the
Dr. Solomons acquisition to cover the stock options
assumed in the acquisition of this company. These shares, which
have been included in the outstanding share balance, were to be
issued upon the exercise of stock options by
Dr. Solomons employees. We determined in June 2004
that Dr. Solomons employees had exercised
1.6 million options, and that we had issued new shares in
connection with these exercises rather than the trust shares.
The trustee returned the 1.6 million shares to us in June
2004, at which time they were retired and were no longer
included in the outstanding share balance. In December 2004, the
trustee sold the remaining 133,288 shares in the trust for
proceeds of $3.8 million, and remitted the funds to us. The
terms of the trust prohibited the trustee from returning the
shares to us and stipulated that only employees could benefit
from the shares. We paid out the $3.8 million to our
employees as a bonus in 2004.
Credit
Facility
We have a 14.0 million Euro 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 December 31, 2006 and
December 31, 2005.
Contractual
Obligations
A summary of our fixed contractual obligations and commitments
at December 31, 2006 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Operating leases(1)
|
|
$
|
85,218
|
|
|
$
|
17,131
|
|
|
$
|
27,007
|
|
|
$
|
21,035
|
|
|
$
|
20,045
|
|
Other commitments(2)
|
|
|
12,253
|
|
|
|
9,196
|
|
|
|
3,057
|
|
|
|
|
|
|
|
|
|
Purchase obligations(3)
|
|
|
5,065
|
|
|
|
5,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
102,536
|
|
|
$
|
31,392
|
|
|
$
|
30,064
|
|
|
$
|
21,035
|
|
|
$
|
20,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating leases are for office space and office equipment. The
operating lease commitments above reflect contractual and
reasonably assured rent escalations under the lease
arrangements. The majority of our lease contractual obligations
relate to the following five leases: $40.1 million for the
Santa Clara, California facility lease, $17.7 million
for the Slough, United Kingdom facility lease, $4.3 million
for the Cork, Ireland facility lease, $4.0 million for the
Bangalore, India facility lease and $3.3 million for the
Sunnyvale California lease. |
|
(2) |
|
Other commitments are minimum commitments on telecom contracts,
contractual commitments for naming rights and advertising
services and software licensing agreements and royalty
commitments associated with the shipment and licensing of
certain products. |
79
|
|
|
(3) |
|
We generally issue purchase orders to our contract manufacturers
with delivery dates from four to six weeks from the purchase
order date. In addition, we regularly provide such contract
manufacturers with rolling six-month forecasts of product
requirements for planning and long-lead time parts procurement
purposes only. We are committed to accept delivery of materials
pursuant to our purchase orders subject to various contract
provisions which allow us to delay receipt of such order or
allow us to cancel orders beyond certain agreed lead times. Such
cancellations may or may not include cancellation costs payable
by us. If we are unable to adequately manage our contract
manufacturers and adjust such commitments for changes in demand,
we may incur additional inventory expenses related to excess and
obsolete inventory. |
In addition to the contractual obligations above and as
permitted under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events or
occurrences while the officer or director is, or was, serving at
our request in such capacity. The maximum potential amount of
future payments we could be required to make under these
indemnification agreements is not limited; however, we have
director and officer insurance coverage that reduces our
exposure and may enable us to recover a portion or all of any
future amounts paid. We believe the estimated fair value of
these indemnification agreements in excess of applicable
insurance coverage is minimal.
Off-Balance
Sheet Arrangements
We do not have 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 consolidated financial statements.
Financial
Risk Management
The following discussion about our risk management activities
includes forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those
projected in the forward-looking statements.
Foreign
Currency Risk
As a global concern, we face exposure to movements in foreign
currency exchange rates. These exposures may change over time as
business practices evolve and could have a material adverse
impact on our financial results. Our functional currency is
typically the currency of the local country. Our primary
exposures are related to non U.S. dollar-denominated sales
and operating expenses in Europe, Latin America, and Asia. At
the present time, we hedge only those currency exposures
associated with certain assets and liabilities denominated in
nonfunctional currencies and do not generally hedge anticipated
foreign currency cash flows. Our hedging activity is intended to
offset the impact of currency fluctuations on certain
nonfunctional currency assets and liabilities. The success of
this activity depends upon estimates of transaction activity
denominated in various currencies, primarily the Euro, the
British Pound, the Brazilian Real, the Japanese Yen, and the
Indian Rupee. To the extent that these estimates are overstated
or understated during periods of currency volatility, we could
experience unanticipated currency gains or losses.
To reduce exposures associated with nonfunctional net monetary
asset positions in various currencies, we enter into forward
contracts. Our foreign exchange contracts typically range from
one to three months in original maturity. We have not hedged
anticipated foreign currency cash flows nor do we enter into
forward contracts for trading purposes. We do not use any
derivatives for speculative purposes. At December 31, 2006,
the fair value of our forward contracts outstanding was
$0.5 million. At December 31, 2005, we had no forward
contracts outstanding. Forward contracts existing during 2006
and 2005 did not qualify for hedge accounting and accordingly
were marked to market at the end of each reporting period with
any unrealized gain or loss being recognized in the interest and
other income line on the consolidated statements of income. Net
realized losses arising from the settlement of our forward
foreign exchange contracts were $1.1 million and
$3.4 million in 2006 and 2005. During 2004, we recognized a
gain arising from the settlement of our forward foreign exchange
contracts of $0.3 million.
80
Forward contracts outstanding at December 31, 2006 and
their fair values are presented below (in thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Euro
|
|
$
|
201
|
|
British Pound Sterling
|
|
|
304
|
|
Brazilian Real
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
$
|
503
|
|
|
|
|
|
|
Interest
Rate Risk
Investments
We maintain balances in cash, cash equivalents and investment
securities. All financial instruments used are in accordance
with our investment policy. We maintain our investment
securities in portfolio holdings of various issuers, types and
maturities including money market, government agency, mortgage
backed and investment grade corporate bonds. These securities
are classified as available-for-sale, and consequently are
recorded on the consolidated balance sheet at fair value with
unrealized gains and losses reported as a separate component of
accumulated other comprehensive income. These securities are not
leveraged and are held for purposes other than trading.
The following tables present the hypothetical changes in fair
values in the securities held at December 31, 2006 that are
sensitive to the changes in interest rates. The modeling
technique used measures the change in fair values arising from
hypothetical parallel shifts in the yield curve of plus or minus
50 basis points (BPS), 100 BPS and 150 BPS over
six and twelve-month time horizons. Beginning fair values
represent the market principal plus accrued interest and
dividends at December 31, 2006. Ending fair values are the
market principal plus accrued interest, dividends and
reinvestment income at six and twelve-month time horizons.
The following table estimates the fair value of the portfolio at
a six-month time horizon (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of Securities Given
|
|
|
|
|
|
Valuation of Securities Given
|
|
|
|
an Interest Rate Decrease of
|
|
|
No
|
|
|
an Interest Rate Increase of
|
|
|
|
X Basis Points
|
|
|
Change in
|
|
|
X Basis Points
|
|
Issuer
|
|
150 BPS
|
|
|
100 BPS
|
|
|
50 BPS
|
|
|
Interest Rate
|
|
|
50 BPS
|
|
|
100 BPS
|
|
|
150 BPS
|
|
|
U.S. Government notes and bonds
|
|
$
|
236.6
|
|
|
$
|
236.0
|
|
|
$
|
235.4
|
|
|
$
|
234.7
|
|
|
$
|
234.1
|
|
|
$
|
233.4
|
|
|
$
|
232.8
|
|
Corporate notes and bonds
|
|
|
218.5
|
|
|
|
217.9
|
|
|
|
217.2
|
|
|
|
216.5
|
|
|
|
215.8
|
|
|
|
215.1
|
|
|
|
214.4
|
|
Asset-backed securities
|
|
|
456.5
|
|
|
|
454.7
|
|
|
|
453.0
|
|
|
|
451.4
|
|
|
|
449.6
|
|
|
|
447.9
|
|
|
|
446.2
|
|
Mortgaged-backed securities
|
|
|
16.0
|
|
|
|
16.0
|
|
|
|
15.9
|
|
|
|
15.9
|
|
|
|
15.9
|
|
|
|
15.9
|
|
|
|
15.8
|
|
Non-corporate credit
|
|
|
3.3
|
|
|
|
3.3
|
|
|
|
3.3
|
|
|
|
3.3
|
|
|
|
3.3
|
|
|
|
3.3
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
930.9
|
|
|
$
|
927.9
|
|
|
$
|
924.8
|
|
|
$
|
921.8
|
|
|
$
|
918.7
|
|
|
$
|
915.6
|
|
|
$
|
912.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table estimates the fair value of the portfolio at
a twelve-month time horizon (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of Securities Given
|
|
|
|
|
|
Valuation of Securities Given
|
|
|
|
an Interest Rate Decrease of
|
|
|
No
|
|
|
an Interest Rate Increase of
|
|
|
|
X Basis Points
|
|
|
Change in
|
|
|
X Basis Points
|
|
Issuer
|
|
150 BPS
|
|
|
100 BPS
|
|
|
50 BPS
|
|
|
Interest Rate
|
|
|
50 BPS
|
|
|
100 BPS
|
|
|
150 BPS
|
|
|
U.S. Government notes and bonds
|
|
$
|
241.1
|
|
|
$
|
240.6
|
|
|
$
|
240.0
|
|
|
$
|
239.5
|
|
|
$
|
239.0
|
|
|
$
|
238.5
|
|
|
$
|
238.0
|
|
Corporate notes and bonds
|
|
|
224.1
|
|
|
|
223.5
|
|
|
|
223.0
|
|
|
|
222.4
|
|
|
|
221.9
|
|
|
|
221.3
|
|
|
|
220.7
|
|
Asset-backed securities
|
|
|
467.0
|
|
|
|
465.7
|
|
|
|
464.4
|
|
|
|
463.1
|
|
|
|
461.8
|
|
|
|
460.5
|
|
|
|
459.2
|
|
Mortgaged-backed securities
|
|
|
16.4
|
|
|
|
16.4
|
|
|
|
16.4
|
|
|
|
16.4
|
|
|
|
16.3
|
|
|
|
16.3
|
|
|
|
16.3
|
|
Non-corporate credit
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
952.0
|
|
|
$
|
949.6
|
|
|
$
|
947.2
|
|
|
$
|
944.8
|
|
|
$
|
942.4
|
|
|
$
|
940.0
|
|
|
$
|
937.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
Interest
Rate Swap Transactions
In July 2002, we entered into interest rate swap transactions
with two investment banks to hedge the interest rate risk of our
outstanding 5.25% Convertible Subordinated Note due 2006
(Notes). The notional amount of the interest rate
swap transactions was $345.0 million to match the entire
principal amount of the Notes. The interest rate swap
transactions were to terminate on 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 was to equal or exceed
$22.59. On October 27, 2004, the interest rate swap
transactions automatically terminated as our
five-day
average common stock price equaled $22.59.
Newly
Adopted and Recently Issued Accounting Pronouncements
See Note 2 of the consolidated financial statements for a
full description of recent accounting pronouncements, including
the expected dates of adoption and effects on financial
condition, results of operations and cash flows.
Item 7A. Quantitative
and Qualitative Disclosure About Market Risk
Quantitative and qualitative disclosure about market risk is set
forth at Managements Discussion and Analysis of
Financial Condition and Results of Operations under
Item 7.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Quarterly
Operating Results (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
Previously Reported Amounts (See Note 3 to the Consolidated
Financial Statements)
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
As reported
|
|
|
As reported
|
|
|
As reported
|
|
|
As reported
|
|
|
|
As reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
271,967
|
|
|
$
|
253,279
|
|
|
$
|
252,911
|
|
|
$
|
245,382
|
|
|
$
|
235,727
|
|
Gross margin
|
|
|
227,049
|
(1)
|
|
|
201,270
|
|
|
|
215,818
|
|
|
|
208,526
|
|
|
|
197,070
|
|
Income from operations
|
|
|
50,205
|
|
|
|
48,531
|
|
|
|
15,488
|
|
|
|
45,989
|
|
|
|
48,121
|
|
Income before provision for income taxes
|
|
|
62,139
|
|
|
|
55,887
|
|
|
|
22,641
|
|
|
|
50,573
|
|
|
|
52,433
|
|
Net income
|
|
$
|
40,890
|
|
|
$
|
38,613
|
|
|
$
|
22,547
|
|
|
$
|
41,698
|
|
|
$
|
35,970
|
|
Basic net income per share
|
|
$
|
0.25
|
|
|
$
|
0.23
|
|
|
$
|
0.14
|
|
|
$
|
0.25
|
|
|
$
|
0.22
|
|
Diluted income per share
|
|
$
|
0.25
|
|
|
$
|
0.23
|
|
|
$
|
0.13
|
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
|
|
(1) |
|
The as reported gross margin gives effect to our change in the
allocation of technical support costs. In 2006, our technical
support teams devoted proportionately more time to routine
customer support and less time to product development. In the
three months ended March 31, 2006, we allocated a greater
percentage of technical support costs to cost of net revenue and
a lesser percentage to research and development costs relative
to prior periods (see note 3 to the consolidated financial
statements). |
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
Adjustments to Previously Reported Amounts
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
3,281
|
|
|
$
|
3,282
|
|
|
$
|
(2,622
|
)
|
|
$
|
(2,168
|
)
|
|
$
|
(4,163
|
)
|
Gross margin
|
|
|
(5,947
|
)
|
|
|
7,203
|
|
|
|
(5,311
|
)
|
|
|
(5,958
|
)
|
|
|
(7,028
|
)
|
Income from operations
|
|
|
2,748
|
|
|
|
4,882
|
|
|
|
(7,396
|
)
|
|
|
(8,010
|
)
|
|
|
(6,198
|
)
|
Income before provision for income taxes
|
|
|
2,177
|
|
|
|
5,238
|
|
|
|
(8,052
|
)
|
|
|
(6,271
|
)
|
|
|
(5,771
|
)
|
Net income
|
|
$
|
3,417
|
|
|
$
|
632
|
|
|
$
|
(10,234
|
)
|
|
$
|
(6,023
|
)
|
|
$
|
(4,986
|
)
|
Basic net income per share
|
|
$
|
0.02
|
|
|
$
|
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
Diluted income per share
|
|
$
|
0.02
|
|
|
$
|
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
|
As restated
|
|
|
As restated
|
|
|
As restated
|
|
|
As restated
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
305,241
|
|
|
$
|
287,063
|
|
|
$
|
277,606
|
|
|
$
|
275,248
|
|
|
$
|
256,561
|
|
|
$
|
250,289
|
|
|
$
|
243,214
|
|
|
$
|
231,564
|
|
Gross margin
|
|
|
236,204
|
|
|
|
222,910
|
|
|
|
218,102
|
|
|
|
221,102
|
|
|
|
208,473
|
|
|
|
210,507
|
|
|
|
202,568
|
|
|
|
190,042
|
|
Income from operations
|
|
|
33,595
|
|
|
|
36,790
|
|
|
|
15,690
|
|
|
|
52,953
|
|
|
|
53,413
|
|
|
|
8,092
|
|
|
|
37,979
|
|
|
|
41,923
|
|
Income before provision for income taxes
|
|
|
45,695
|
|
|
|
50,866
|
|
|
|
22,904
|
|
|
|
64,316
|
|
|
|
61,125
|
|
|
|
14,589
|
|
|
|
44,302
|
|
|
|
46,662
|
|
Net income
|
|
$
|
32,876
|
|
|
$
|
34,090
|
|
|
$
|
26,198
|
|
|
$
|
44,307
|
|
|
$
|
39,245
|
|
|
$
|
12,313
|
|
|
$
|
35,675
|
|
|
$
|
30,984
|
|
Basic net income per share
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
$
|
0.16
|
|
|
$
|
0.27
|
|
|
$
|
0.23
|
|
|
$
|
0.07
|
|
|
$
|
0.22
|
|
|
$
|
0.19
|
|
Diluted income per share
|
|
$
|
0.20
|
|
|
$
|
0.21
|
|
|
$
|
0.16
|
|
|
$
|
0.27
|
|
|
$
|
0.23
|
|
|
$
|
0.07
|
|
|
$
|
0.21
|
|
|
$
|
0.19
|
|
We believe that period-to-period comparisons of our financial
results should not be relied upon as an indication of future
performance.
Our revenue and results of operations have been subject to
significant fluctuations, particularly on a quarterly basis, and
our revenue and results of operations could fluctuate
significantly quarter to quarter and year to year. Causes of
such fluctuations may include the volume and timing of new
orders and renewals, the sales cycle for our products, the
introduction of new products, return rates, product upgrades or
updates by us or our competitors, changes in product mix,
changes in product prices and pricing models, the portion of our
licensing fees deferred and recognized as support and
maintenance revenue, seasonality, trends in the computer
industry, general economic conditions, extraordinary events such
as acquisitions and sales of business or litigation and the
occurrence of unexpected events. Quarterly results in 2006 have
been impacted by stock option related charges due to the
adoption of SFAS 123(R) on January 1, 2006. Results
for the quarter ended September 30, 2005 reflect the
$50.0 million charge for the settlement with the SEC.
Significant quarterly fluctuations in revenue will cause
significant fluctuations in our cash flows and the cash and cash
equivalents, accounts receivable and deferred revenue accounts
on our consolidated balance sheet. In addition, the operating
results of many software companies reflect seasonal trends, and
our business, financial condition and results of operations may
be affected by such trends in the future. These trends may
include higher net revenue in the fourth quarter as many
customers complete annual budgetary cycles, and lower net
revenue in the summer months when many businesses experience
lower sales, particularly in the European market.
Our financial statements and supplementary data required by this
item are set forth at the pages indicated at Item 15(a).
83
|
|
Item 9.
|
Changes
In and Disagreements With Accountants on Accounting and
Financial Disclosure
|
None.
Item 9A. Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
Our management, including our chief executive officer and chief
financial officer, has evaluated the effectiveness of our
disclosure controls and procedures to ensure that the
information included in reports we file under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, is
processed and reported within the appropriate time periods. As
discussed in more detail below, our management has concluded
that these disclosure controls and procedures were ineffective
as of December 31, 2006 due to material weaknesses that we
identified in our internal controls over financial reporting,
specifically related to the accounting for income taxes and
stock-based compensation expense.
Managements
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
of the Exchange Act. We have designed our internal controls to
provide reasonable, but not absolute, assurance that our
financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America.
We assess the effectiveness of our internal controls based on
the criteria set forth in the Internal Control
Integrated Framework developed by the Committee of
Sponsoring Organizations of the Treadway Commission.
In performing the assessment, our management has identified two
material weaknesses in internal control over financial reporting
as of December 31, 2006, as follows:
Accounting
for Income Taxes
Our management has concluded that the controls over our
accounting for income taxes did not operate effectively as of
December 31, 2006. In particular, errors were detected in
the tax calculations for the quarterly and annual financial
statements resulting from: (i) historical analyses not
being prepared in sufficient detail; (ii) current period
tax calculations not being accurately prepared, and
(iii) reviews of tax calculations not being performed with
sufficient precision. Due to the number and amount of the errors
identified resulting from these internal control deficiencies
and the absence of mitigating controls, management has concluded
that these internal control deficiencies constitute a material
weakness in internal control because there is a reasonable
possibility that a material misstatement of the interim and
annual financial statements would not have been prevented or
detected on a timely basis.
Stock
Administration Process
As discussed in the Explanatory Note Regarding
Restatement immediately preceding Part I of this
Annual Report on
Form 10-K
and in Note 3 Restatement of Consolidated
Financial Statements to the consolidated financial
statements included herein, during 2006 and 2007, our management
identified, calculated and recorded additional stock-based
compensation expense resulting from errors identified during an
independent investigation of our historical stock option
granting practices. While the additional stock-based
compensation related to 2006 and prior years, the errors
material to our financial statements were related to option
grants made between 1995 and 2003. These errors were a result of
internal control deficiencies in our stock option granting and
accounting practices, including the recording and disclosure of
stock-based compensation expense in our financial statements.
Specifically, effective controls, including monitoring, were not
designed and in place to provide reasonable assurance regarding
the existence, completeness, accuracy, valuation and
presentation of activity related to our granting of stock
options in the financial statements.
Due to the ongoing discovery of prior period errors that
resulted from these internal control deficiencies and the
absence of mitigating controls, management has concluded that,
as of December 31, 2006, we did not maintain effective
controls over its stock option granting and accounting
practices, including the recording and disclosure of
84
stock-based compensation expense in our financial statements.
These internal control deficiencies resulted in errors in
(i) stock-based compensation expense, additional paid-in
capital, related income tax accounts and weighted averaged
diluted shares outstanding and (ii) related financial
statement disclosures. Management has concluded that these
internal control deficiencies constitute a material weakness in
internal control because there is a reasonable possibility that
a material misstatement of the interim and annual financial
statements would not have been prevented or detected on a timely
basis.
Due to these material weaknesses, management has concluded that
our internal control over financial reporting was not effective
as of December 31, 2006. Managements Report on
Internal Control over Financial Reporting has been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report which is
included herein.
Changes
in Internal Control over Financial Reporting
Except for those described below, there have been no changes in
our internal control over financial reporting since
March 31, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
Remediation
of Material Weakness in Financial Close
Process
Our management previously reported a material weakness related
to our financial close process. During 2006, our
managements testing of our disclosure controls indicated
that the controls over our final close process operated
consistently throughout the year. In addition, we have completed
the remedial efforts by hiring additional personnel with
expertise in specific areas, enhancing communication among our
global accounting departments, and improving the efficiency of
certain close processes through various re-engineering and
automation projects. Therefore, we believe that the previously
reported material weakness related to our financial close
process has been remediated as of December 31, 2006.
Stock Administration Process
Our management and our board of directors completed the
following actions during the period from March 31, 2006 to
December 31, 2006 to enhance our control environment and
reduce the risk of recurrence of future errors related to stock
option granting practices.
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Standardization of grant evidence and
approval: All grants of stock awards to employees
are made solely by the compensation committee of our board of
directors, in its sole discretion, and no authority to grant
stock awards may be delegated to management.
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Standardization of grant timing: All grants of
stock awards to employees are made only at regularly scheduled
meetings of the compensation committee.
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Changes in our executive management team: Our
executive management team has changed significantly over the
past two years: we terminated the employment of our prior
general counsel and our prior president for cause, our prior
chief executive officer retired, and our senior vice president
of human resources resigned.
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To improve the completeness and accuracy of all stock-based
compensation expense resulting from the independent
investigation, our management is implementing the following
controls:
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Accumulation and tracking of stock-based compensation
expense: Monitoring and tracking procedures for
stock-based compensation expense resulting from the stock option
investigation within a secure controlled directory.
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Processing and reconciliation of stock-based compensation
expense: Processes to ensure that all stock-based
expenses are properly calculated, independently approved and
reconciled from the database to our stock administration
accounting system.
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85
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Independent approval and recording of stock-based
compensation expense: Procedures to ensure that
stock-based compensation expenses are recorded via journal
entries that are independently approved by corporate accounting
management and evidenced by complete supporting documentation.
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Accounting
for Income Taxes
We have begun the process of remediating the material weakness
in accounting for income taxes by hiring more tax accounting
personnel, with an emphasis on hiring personnel having
international tax expertise. We will continue to make personnel
additions and changes and as necessary and are implementing
additional remedial steps as indicated below:
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We are enhancing the training and education of our tax
accounting personnel.
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We are automating key elements of the calculation of the
provision for income taxes and the account reconciliation
processes by implementing a new tax accounting system.
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We are improving our interim and annual review processes for
various calculations including the tax provision computation
process.
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We believe the above steps will provide us with the
infrastructure and processes necessary to accurately record
stock-based compensation expense and to accurately calculate our
tax provision on a quarterly basis. We will continue to
implement these remedial steps to ensure operating effectiveness
of the improved internal controls over financial reporting.
Inherent
Limitation on the Effectiveness of Internal Controls
The effectiveness of any system of internal control over
financial reporting, including ours, is subject to inherent
limitations, including the exercise of judgment in designing,
implementing, operating, and evaluating the controls and
procedures, and the inability to eliminate misconduct
completely. Accordingly, any system of internal control over
financial reporting, including ours, no matter how well designed
and operated, can only provide reasonable, not absolute
assurances. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate. We intend to continue to monitor and upgrade
our internal controls as necessary or appropriate for our
business, but cannot assure you that such improvements will be
sufficient to provide us with effective internal control over
financial reporting.
86
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of McAfee, Inc:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting (Managements Report), that
McAfee, Inc. and subsidiaries (the Company) did not
maintain effective internal control over financial reporting as
of December 31, 2006, because of the effect of the material
weaknesses identified in managements assessment based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and affected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a deficiency, or combination of
deficiencies in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the Companys annual or interim financial
statements will not be prevented or detected on a timely basis.
The following material weaknesses have been identified and
included in managements assessment:
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The Companys controls over accounting for income taxes did
not operate effectively as of December 31, 2006. In
particular, errors were detected in the tax calculations for the
quarterly and annual financial statements resulting from:
(1) historical analyses not being prepared in sufficient
detail; (2) current period tax calculations not being
accurately prepared, and (3) reviews of tax calculations
not being performed with sufficient precision. Due to the number
and amount of the errors identified resulting from these
internal control deficiencies and the absence of mitigating
controls, there is a reasonable possibility that a material
misstatement of the interim and annual financial statements
would not have been prevented or detected on a timely basis.
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87
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The Companys controls over recording and disclosure of
stock-based compensation expense were not properly designed and
did not operate effectively as of December 31, 2006. These
internal control deficiencies resulted in errors in
(i) stock-based compensation expense, additional paid-in
capital, related income tax accounts and weighted averaged
diluted shares outstanding and (ii) related financial
statement disclosures. Due to the errors identified related to
the stock-based compensation amounts and the absence of
mitigating controls, there is a reasonable possibility that a
material misstatement of the interim and annual financial
statements would not have been prevented or detected on a timely
basis.
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These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2006 of
the Company and this report does not affect our report on such
consolidated financial statements and financial statement
schedule.
In our opinion, managements assessment that the Company
did not maintain effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all
material respects, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, because of the effect of the
material weaknesses described above on the achievement of the
objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting
as of December 31, 2006, based on the criteria established
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2006, of
the Company and our report dated December 21, 2007 expressed an
unqualified opinion on such consolidated financial statements
and financial statement schedule and includes explanatory
paragraphs concerning (i) the restatement of 2005 and 2004
consolidated financial statements and (ii) the adoption of
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment..
/s/ Deloitte &
Touche LLP
San Jose, California
December 21, 2007
88
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Item 9B.
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Other
Information
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We did not hold an annual meeting of stockholders in 2007. We
currently expect that our 2008 annual meeting of stockholders
will be held in May 2008. For a stockholder proposal to be
considered for inclusion in McAfees proxy statement for
our 2008 annual meeting, the written proposal must be received
by the Secretary of McAfee at our principal executive offices
within a reasonable time before we begin to print and send our
proxy materials. The proposal will need to comply with
Rule 14a-8
of the Securities Exchange Act of 1934, as amended, which sets
forth the requirements for the inclusion of stockholder
proposals in
company-sponsored
proxy materials.
If you intend to present a proposal at our 2008 annual meeting,
but do not intend to have it included in our proxy statement,
your proposal must be delivered to the Secretary of McAfee by
the tenth day following the day that we first publicly announce
the date of our 2008 annual meeting of stockholders. The
proposal will need to comply with the requirements set forth in
Section 7 of our Second Amended and Restated Bylaws.
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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The names of our current executive officers and directors and
related biographical information are set forth below.
Executive
Officers:
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Name
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Age
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Position
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David G. DeWalt
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43
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Chief Executive Officer and President
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Eric F. Brown
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42
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Chief Operating Officer and Chief Financial Officer
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Christopher S. Bolin
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40
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Executive Vice President of Product Development and Chief
Technology Officer
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Mark D. Cochran
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48
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Executive Vice President and General Counsel
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Michael P. DeCesare
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42
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Executive Vice President of Worldwide Sales Operations
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Directors:
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Year of
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Expiration of
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Director
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Name
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Age
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Position
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Term
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Since
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Robert B. Bucknam
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56
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Vice President, Cogent, Inc.
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2008
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2003
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Leslie G. Denend
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66
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Director, Verifone, Inc. and USAA
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2009
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1995
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David G. DeWalt
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43
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Chief Executive Officer and President
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2008
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2007
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Denis J. OLeary
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51
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Private Investor and Consultant
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2007
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2003
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Robert W. Pangia
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56
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Partner, Ivy Capital Partners, LLC; Director, Biogen Idec Inc.
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2007
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2001
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Charles J. Robel
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58
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Private Investor; Director, Informatica Corporation and Adaptec,
Inc.
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2009
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2006
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Liane Wilson
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64
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Consultant
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2008
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2002
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Executive
Biographies
David G. DeWalt has served as our chief executive
officer, president and director since April 2007. Prior to
joining McAfee, Mr. DeWalt served as executive vice
president and president customer operations and content
management software, at EMC Corporation from June 2005 to March
2007 and as its executive vice president, EMC Software Group
from December 2003 to May 2005. Mr. DeWalt joined EMC in
2003 upon its acquisition of Documentum where he served as its
chief executive officer and president from July 2001 to December
2003. Prior
89
to joining Documentum, DeWalt was founding principal and vice
president of Eventus Software, a web content software company,
where he was responsible for marketing and sales, consulting
services and support, product management, and business
development. Mr. DeWalt also held several sales management
positions at Oracle Corporation from July 1990 to July 1995.
Mr. DeWalt currently serves on the board of directors of
Polycom, Inc.
Eric F. Brown has served as our chief operating officer
and chief financial officer since March 2006. Mr. Brown
served as our executive vice president and chief financial
officer from January 2005 to March 2006. Mr. Brown served
as president and chief financial officer of MicroStrategy
Incorporated from November 2000 to December 2004 and as its
chief financial officer from August 2000 to November 2000.
Mr. Brown joined MicroStrategy as chief financial officer
of its Strategy.com subsidiary in February 2000. From October
1998 to February 2000, Mr. Brown served as division chief
financial officer and then division chief operating officer of
Electronic Arts Inc., a developer and publisher of interactive
entertainment software. Prior to that, Mr. Brown was
co-founder and chief financial officer of DataSage, Inc., a
vendor of
e-business
personalization software, from 1995 until October 1998.
Mr. Brown also held several senior financial positions with
Grand Metropolitan from 1990 until 1995.
Christopher S. Bolin has served as our executive vice
president of product development and chief technology officer
since April 2004. Mr. Bolin served as our senior vice
president of engineering from April 2002 to March 2004,
vice president of engineering from February 2000 to March 2002,
and director of engineering from September 1999 to January 2000.
Prior to joining McAfee, Mr. Bolin was the engineering
director of Cyber Media (India) Ltd.
Mark D. Cochran has served as our executive vice
president and general counsel since September 2007. Prior to
joining McAfee, Mr. Cochran served as Vice President and
General Counsel of Hyperion Solutions Corporation, a provider of
business performance management software, from January 2005
until June 2007. Prior to joining Hyperion, Mr. Cochran was
Vice President, General Counsel and Secretary of Brocade
Communications Systems, Inc., a storage networking company, from
December 2003 to October 2004. From July 1999 to April 2003, he
served as Vice President, General Counsel at AvantGo, now a
subsidiary of Sybase Inc. From 1990 to 1999, he served as Senior
Corporate Counsel for Advanced Micro Devices Inc. and as
Corporate Counsel for Syntex Management Systems, Inc.
Mr. Cochran began his legal career practicing with the law
firm of Ropers, Majeski, Kohn, Bentley, Wagner & Kane.
Michael P. DeCesare was appointed executive vice
president, worldwide sales operations in October 2007. Prior to
that, Mr. DeCesare served as Senior Vice President,
Worldwide Field Operations of EMC Corporation, from 2004 to
October 2007, and as Executive Vice President of Worldwide Field
Operations for Documentum (a division of EMC), from 2002 until
2004. Prior to joining Documentum, Mr. DeCesare served as
Executive Vice President, Worldwide Sales and Alliances, at
Asera Inc., a provider of
e-business
infrastructure that accelerates implementation of enterprise
software applications, from March 2001 to January 2002. Prior to
that time, Mr. DeCesare held various sales positions at
Oracle Corporation, most recently, Vice President of Enterprise
Sales.
Director
Biographies
Information pertaining to Mr. DeWalt, who is both a
director and an executive officer, may be found in the section
above entitled Executive Biographies.
Robert B. Bucknam has been a director of our company
since May 2003. Since February 2007, Mr. Bucknam has served
as vice president of Cogent, Inc., a fingerprint identification
provider. From April 2002 to January 2007, Mr. Bucknam
served as senior vice president of federal and international
affairs with Cross Match Technologies, Inc., a fingerprint
identification provider. From 1993 to June 2001,
Mr. Bucknam was the Chief of Staff of the Federal Bureau of
Investigation. Prior to joining the FBI, Mr. Bucknam served
as deputy assistant attorney general with the
U.S. Department of Justice and as deputy chief of the
U.S. Attorneys office in the Southern District of
New York.
Leslie G. Denend has been a director of our company since
June 1995. From December 1997 to April 1998, Mr. Denend was
president of our company. From June 1993 to December 1997,
Mr. Denend was chief executive officer and president of
Network General Corporation, which merged with McAfee Associates
to form McAfee,
90
Inc. Mr. Denend serves on the board of directors of
Verifone, Inc. and United Services Automobile Association (USAA).
Denis J. OLeary has been a director of our company
since July 2003. From May 1993 to February 2003,
Mr. OLeary was executive vice president of
J.P. Morgan Chase having joined the bank in June 1978.
During his career at J.P. Morgan Chase & Co.
Mr. OLeary held a number of senior positions
including director of finance, chief information officer, and
head of retail branch banking.
Robert W. Pangia has been a director of our company since
April 2001. Since February 2003, Mr. Pangia has been a
general partner and the managing member of Ivy Capital Partners,
LLC, a private equity fund. Prior to February 2003,
Mr. Pangia was self-employed as a private investor. From
April 1987 to December 1996, Mr. Pangia held a number of
senior level management positions at PaineWebber Incorporated,
including director of Investment Banking. Mr. Pangia
currently serves on the board of directors of Biogen Idec Inc.
Charles J. Robel has been a director of our company since
June 2006 and has served as the non-executive chairman of our
board of directors since October 2006. He served as a managing
member and chief operating officer at Hummer Winblad Venture
Partners from June 2000 to December 2005. Mr. Robel began
his career at PricewaterhouseCoopers, from which he retired as a
partner in 2000. Mr. Robel currently serves on the board of
directors of Autodesk, Inc., DemandTec, Inc. and Informatica
Corporation.
Liane Wilson has been a director of our company since
April 2002. Since March 2001, Ms. Wilson has been
self-employed as a consultant. From June 1999 to March 2001,
Ms. Wilson served as vice chairman of Washington Mutual,
Inc. From February 1985 to March 2001, Ms. Wilson held a
number of other senior level positions with Washington Mutual,
including executive vice president for corporate operations and
administration and senior vice president of information systems.
During her tenure at Washington Mutual, she was responsible for
corporate technology and integration activities relating to
mergers and acquisitions.
Board of
Directors and Board Committees
The board has determined that each of its directors, other than
Mr. DeWalt, is independent and has no material
relationship with us. Mr. Robel serves as Chairman of the
Board of Directors and has been designated as our
lead independent director for presiding over
executive sessions of the board of directors without management.
Our board of directors has a standing Audit Committee,
Compensation Committee and Governance and Nominations committee
and adopted written charters for each which are available on our
website at investor.mcafee.com under Governance
Documents, or may be obtained without charge by calling or
writing the Corporate Secretary at our corporate headquarters.
During 2006, our board of directors formed a special committee
comprised of Messrs. Bucknam and Robel, each an independent
director, to review our historical stock option grant practices
and related accounting. Mr. Fuller served on the special
committee from June 2006 until his appointment as interim chief
executive officer and president in October 2006.
The Audit Committee reviews, acts and reports to our
board of directors on various auditing and accounting matters,
including the appointment of our independent accountants, the
scope of our annual audits, fees to be paid to the independent
accountants, the approval of services to be performed by our
independent accountants, the performance of our independent
accountants and our accounting practices. Messrs. Robel,
Pangia and Denend are members of our audit committee.
Mr. Robel is the audit committee financial
expert (as is currently defined under the SEC rules
implementing Section 404 of the Sarbanes-Oxley Act of
2002). Each member of our audit committee is
independent as defined under the New York Stock
Exchange corporate governance standards.
The Compensation Committee reviews and approves executive
salary levels, stock option grants and restricted stock award
and unit grants. Messrs. OLeary, Pangia and
Ms. Wilson are members of our compensation committee. Each
member of our compensation committee is independent
as defined under the New York Stock Exchange corporate
governance standards.
The Governance and Nominations Committee addresses issues
relating to the board and board committees, including
identifying prospective director nominees, developing and
recommending governance principles
91
applicable to the company, overseeing the evaluation of the
board of directors and management and recommending nominees for
the board committees. Messrs. Bucknam and Denend and
Ms. Wilson are members of our governance and nominations
committee. Each member of our governance and nominations
committee is independent as defined under the New
York Stock Exchange corporate governance standards.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, requires our officers and
directors, and persons who own more than ten percent of a
registered class of our equity securities, to file certain
reports of ownership with the SEC. Such officers, directors and
stockholders are also required by SEC rules to furnish us with
copies of all Section 16(a) forms they file. All reports
required to be filed during fiscal year 2006 pursuant to
Section 16(a) of the Exchange Act by directors, executive
officers and 10% beneficial owners were filed on timely basis.
Communications
with the Board of Directors
Stockholders and other interested parties who want to
communicate directly with the board of directors or individual
directors should send their communications in writing to the
attention of our Corporate Secretary at our offices at 5000
Headquarters Drive, Plano, Texas 75024. Our Corporate Secretary
will review the communication and deliver it to the director or
directors named in the correspondence, provided that it relates
to our business and it is not determined to be inappropriate. If
the communication requires a response, the Corporate Secretary
will prepare and send a response by working with the director or
directors named in the correspondence.
Code of
Ethics
We have adopted a code of ethics that applies to our chief
executive officer, chief financial officer, corporate controller
and other senior finance organization employees and establishes
minimum standards of professional responsibility and ethical
conduct. This code of ethics is publicly available on our
website at investor.mcafee.com under Governance
Documents. If we make any substantive amendments to the
code of ethics or grant any waiver, including any implicit
waiver, from a provision of the code to our chief executive
officer, chief financial officer or corporate controller, we
will disclose the nature of such amendment or waiver on that
website or in a report on
Form 8-K.
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Item 11.
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Executive
Compensation
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COMPENSATION
DISCUSSION AND ANALYSIS
This compensation discussion and analysis explains our fiscal
2006 executive compensation programs and compensation paid under
those programs. Most of the discussion relates to our
named executive officers for fiscal 2006, who were:
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Eric Brown
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Chief Operating Officer and Chief Financial Officer
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Christopher Bolin
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Executive Vice President of Product Development
Chief Technology Officer
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Roger King
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Executive Vice President of Worldwide Sales
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Richard Decker
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Senior Vice President and Chief Information Officer
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William Kerrigan
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Executive Vice President of McAfee Consumer
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Former Executives
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Dale Fuller
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Former Interim Chief Executive Officer and President
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George Samenuk
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Former Chairman and Chief Executive Officer
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Kevin Weiss
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Former President
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92
All executive compensation decisions are made by the
compensation committee of the board of directors. The
compensation committee consists of three non-employee directors
who meet the independence requirements established by SEC and
the New York Stock Exchange.
Our executive compensation programs for named executive officers
consist of primarily of cash compensation in the form of base
salary and performance-based cash bonuses and equity awards in
the form of stock options, restricted stock units
and/or
restricted stock awards. Certain executives also have employment
agreements that provide severance and change of control
benefits. Salaries are generally established based on
competitive market comparables. Performance-based cash bonuses
and equity awards are linked to company and individual executive
performance against Key Performance Metrics that are
established at least annually for each executive. In addition,
the compensation committee considers other factors, such as
leadership effectiveness, integrity, innovation, work ethic and
competitive benchmarking in determining bonus and equity awards.
When making executive compensation decisions, the compensation
committee focuses on total direct compensation (the
total compensation to be paid if all performance goals are fully
met) as well as on specific elements of compensation.
The compensation committee relies primarily on performance-based
compensation and equity to attract, reward and retain a talented
and dedicated executive team and to ensure a strong connection
between executive compensation and our financial performance.
Base salaries are generally no more than necessary to remain
competitive and perquisites are generally minimal, so these are
not a significant element in attracting or retaining executives.
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B.
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Executive
Compensation Design
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1.
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Compensation
Objectives and Philosophy
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Our executive compensation programs have three primary
objectives:
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Attract, reward and retain the most talented and dedicated
executives available.
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Link cash and equity incentives to individual and corporate
performance.
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Align executive incentives with stockholder value creation.
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The compensation committee reviews total compensation for each
executive annually, and determines the appropriate amount and
mix of compensation based on the following principles:
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Use simple and reasonable measures of performance.
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Minimize executive perquisites.
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For executives in more senior positions, provide cash
compensation that is primarily weighted toward variable (bonus)
compensation, which is linked largely to performance.
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For executives in more senior positions, provide total
compensation that is primarily weighted toward equity (RSU and
option) compensation because senior executives have
a greater influence on overall corporate results and stockholder
return.
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|
Use multi-year equity vesting to ensure that senior executives
hold sufficient unvested equity value to provide a meaningful
retention incentive.
|
|
|
|
Use competitive benchmarking to our group of peer companies
(described in Section C2).
|
|
|
2.
|
Elements
of Compensation
|
The compensation committee evaluates executive compensation with
a goal of establishing compensation components, as well as
compensation levels, that the compensation committee believes
are similar to executives in comparable companies, while taking
into account our relative performance and our own strategic
goals. To that end, our executive officers compensation
has three primary components:
93
|
|
|
|
|
Annual or quarterly cash bonuses
|
|
|
|
Equity compensation in the form of stock options, restricted
stock units
and/or
restricted stock awards.
|
Certain named executive officers have employment agreements that
provide severance and change of control benefits. In addition,
our executive officers are eligible to participate in a variety
of benefits that are generally available to all salaried
employees.
|
|
3.
|
Key
Performance Metrics (KPMs) and Other Performance
Criteria
|
Cash bonuses and equity awards for executives are linked to
annual performance assessments against Key Performance Metrics,
or KPMs. The compensation committee establishes annual KPMs for
the CEO and the CEO proposes annual KPMs for the remaining
executives, which are reviewed and approved by the compensation
committee. KPMs generally include a combination of financial
metrics, including revenue-related and profit-related objectives
reflected in our internal business plan, because they are
important indicators of increased stockholder value. In
situations where these financial performance metrics are also
line items in our GAAP financial statements, the metrics may
differ from the GAAP line items because the metrics generally
exclude the effects of extraordinary, unusual or infrequently
occurring events or changes in accounting principles. For
example, the performance metrics exclude restructuring charges,
the amortization expense associated with purchased intangible
assets, and non-cash stock compensation expense. KPMs also
include operational goals that are specific to each
executives respective area of responsibility. These are
examples of the areas that KPMs may address in any given year:
|
|
|
|
|
Financial measures including revenue-related and
profit-related metrics
|
|
|
|
Strategic positioning including market share growth
in key areas
|
|
|
|
Executive team quality and depth including talent
growth and succession planning
|
|
|
|
Product quality including quality control audits and
customer satisfaction
|
Although performance against KPMs is the primary determinant of
bonus and equity compensation, the compensation committee also
considers the following secondary factors to determine final
compensation:
|
|
|
|
|
Leadership style and effectiveness, including teamwork
|
|
|
|
Integrity
|
|
|
|
Innovation
|
|
|
|
Work ethic
|
Base salaries are intended to provide a fixed amount of cash
compensation for services rendered during the fiscal year. We
believe that setting competitive base salaries assists us in
hiring and retaining individuals in a competitive environment.
In determining individual salaries, the compensation committee
considers the scope of job responsibilities, individual
contribution, business performance, job market conditions, the
Radford Executive Survey, third-party compensation data and
current compensation levels.
Our executive cash bonus plan provides quarterly or annual cash
payments to executive officers that are primarily contingent on
successful achievement of certain KPMs assigned by the
compensation committee. These KPMs include company-wide
financial
and/or
strategic goals for every executive. In addition, each executive
has other operational KPMs that are directly tied to key
projects or milestones within the executives area of
responsibility. These KPMs are typically identified on a
quarterly basis. Although performance against KPMs is the
primary determinant of these cash payments, the compensation
committee has full discretion to consider other more subjective
factors, including those listed in Section B3, to determine
final payments.
94
The compensation committee establishes target cash bonus amounts
for each executive officer, designated as a percentage of base
salary, at the beginning of the fiscal year. The 2006 cash
bonuses were calculated and paid on an annual basis for all
executives except our chief operating officer and chief
financial officer. His employment agreement specifically
provides that his cash bonus is to be paid quarterly.
|
|
6.
|
Equity
Compensation in General
|
Equity compensation is a key element of executive compensation
at McAfee. This is particularly true for our executive officers,
for whom equity compensation generally represents a majority of
total direct compensation. Equity awards, which vest over time,
allow us to:
|
|
|
|
|
Strengthen the link between the creation of stockholder value
and long-term executive compensation
|
|
|
|
Provide an opportunity for increased equity ownership by
executives
|
|
|
|
Provide long-term retention incentives to executives
|
|
|
|
Maintain competitive levels of total direct compensation.
|
The majority of our executive equity awards are made when an
executive is initially hired, and then in subsequent years,
during the first half of the year, as part of our annual
performance and compensation review process. The size of initial
and follow-on grants varies among executives based on equity
award practices among our peer group, the scope of their
responsibilities and their performance against KPMs. The stock
options we grant are typically nonqualified stock options for
federal income tax purposes. They generally vest over four
years, with 25% vesting one year after grant, and the remaining
portion vesting monthly over the next three years.
|
|
7.
|
Options,
Restricted Stock Units and Restricted Stock Awards
|
Prior to fiscal 2006, our primary form of equity awards for all
employees, including executives, was non-qualified stock
options. However, beginning in 2006, we began granting
restricted stock units (RSUs) and restricted stock awards to our
executive team and certain other employees. These two types of
equity awards have some important advantages compared to stock
options, particularly for employees with relatively large equity
awards. The compensation committee has determined that RSUs and
restricted stock awards are particularly useful to recruit
senior level executives if a prospective candidate has existing
in-the-money unvested equity awards that the executive would
otherwise lose if he or she joined McAfee. For example,
Mr. Brown received a restricted stock award of
75,000 shares when he was hired in 2005, which vests in
three equal installments on the first, second and third
anniversaries of the grant date.
RSUs give an executive the right to receive a specified number
of shares of our common stock, at no cost, if the executive
remains with McAfee until the shares vest. Restricted stock
awards are similar to RSUs, but they deliver actual stock
ownership as of the grant date (subject to vesting), rather than
a right to receive stock at vesting, and the executive must pay
the par value of the shares ($0.01 per share). Vesting of RSUs
and restricted stock awards granted through 2006 is contingent
on the executives continued employment with us. For RSUs
that do not vest because an executives employment
terminates, the unvested shares are never issued. For a
restricted stock award, if an executives employment
terminates, the executive must generally return to us all shares
that are unvested on the termination date. As an exception,
pursuant to employment agreements with two of our named
executive officers (Mr. Brown and Mr. Bolin), the
vesting of their restricted stock awards (but not RSUs) may
accelerate in certain termination situations. For details, see
Severance and Change of Control Benefits in the next
section of this document.
The compensation value of each RSU or restricted stock award
equals our stock price on the grant date of the award (less
$0.01 for restricted shares), plus any subsequent stock price
appreciation. Thus, RSUs and restricted stock awards provide
immediate, meaningful and measurable economic incentive for
executives. Moreover, both types of awards retain value, and
encourage retention, regardless of short-term stock price
fluctuations. In contrast, the entire value to executives of
stock options depends on future stock price appreciation, so
options have little perceived value if the stock price declines
after the grant. This means that restricted equity awards can
deliver more immediate, tangible value to executives at grant
than stock options, with significantly fewer shares and less
dilution
95
for our stockholders. We typically determine the size of RSU and
restricted stock awards based on a ratio of one RSU or one
restricted stock award for every 2 to 3 stock options using the
Black-Scholes pricing model as a reference.
The vesting period for RSUs and restricted stock awards is
generally three years, with 50% vesting two years after grant,
and 50% vesting one year later. These infrequent but sizable
vesting tranches create a strong incentive to continue
employment with us over the vesting period. Although vesting of
the awards through 2006 was based solely on continued service,
the size of the grant to each executive was linked to
performance. In addition, part of the value of the RSUs will
depend on the performance of the executive team and McAfee
during the vesting period, as measured by our stock price.
Starting in fiscal 2007 and going forward, the compensation
committee will be shifting to performance-based vesting for
executive grants. As noted in Section D3, no executive
equity grants were made to the 2006 named executive officers in
2007, due to proportionately larger grants in fiscal 2006.
|
|
8.
|
Mix of
Salary, Cash Bonuses and Equity; Total Direct
Compensation
|
The compensation committee has no formal policy or target for
allocating compensation among the compensation components
described above. However, the compensation committee generally
assigns a majority of our executives total compensation to
the bonus program and equity compensation, in order to focus our
executives on achievements that will create stockholder value.
We consider equity compensation to be the most important
performance-based compensation component, so it generally
represents the highest proportion of compensation for senior
executives.
When the compensation committee makes executive compensation
decisions, it focuses on total direct compensation
(the total compensation to be paid if all performance goals are
fully met) as well as on specific elements of compensation. The
compensation committee generally targets total direct
compensation for named executive officers, as well as individual
elements of compensation, at the 60th to
75th percentile among our peer group technology companies
due to the highly competitive nature of the technology industry
and the labor markets where our executives are located.
|
|
9.
|
Severance
and Change of Control Arrangements
|
We currently have employment agreements with two named executive
officers, Mr. Brown and Mr. Bolin. We also have an
employment agreement with David DeWalt, our current Chief
Executive Officer, who was not a 2006 named executive officer.
In addition, we had employment agreements with 2006 named
executives Mr. Samenuk, Mr. Weiss and
Mr. Kerrigan, prior to their departures from McAfee.
The primary purpose of these employment agreements is to provide
severance and change of control benefits. For details, see
Severance and Change of Control Benefits in the next
section of this document. The compensation committee believes
these types of employment agreements are essential in order to
attract and retain qualified executives and promote stability
and continuity in our senior management team. We believe that
the stability and continuity provided by these agreements are in
the best interests of our stockholders.
|
|
10.
|
Perquisites
and Other Benefits
|
In general, we do not view perquisites as a significant
component of our executive compensation structure. However, the
compensation committee occasionally approves perquisites,
primarily for retention purposes or to accommodate specific, and
usually temporary, circumstances of executives who do not reside
near their work locations. For example, during 2006, we provided
a company-paid supplemental life insurance policy to
Mr. Samenuk as a retention incentive; and we reimbursed
living and commuting expenses for Mr. Fuller during his
tenure as our interim chief executive officer. See the Summary
Compensation Table for more details about these perquisites.
During 2006, we maintained fractional ownership interests in
corporate aircraft for business use by Mr. Samenuk. Our
policy at the time permitted selective personal use by other
executives (including transportation of non-business guests), at
Mr. Samenuks discretion, but it required executive
reimbursement to us for personal use based on the methodology
dictated by the Internal Revenue Service. See the Summary
Compensation Table for
96
more details. At the end of 2006, we eliminated all of our
fractional ownership interests in corporate aircraft. All of our
executives are now required to travel on commercial carriers,
and we do not pay for personal executive travel.
Our executive officers are eligible to participate in our
benefit plans on the same terms as other full-time employees.
These plans include medical and dental insurance, life
insurance, vision, short and long-term disability insurance,
401(k) plan, employee stock purchase plan and discounts on
company products.
|
|
C.
|
Executive
Compensation Implementation
|
|
|
1.
|
Independent
Compensation Committee Determines All Executive
Compensation
|
The compensation committee of the board of directors determines
all compensation for our named executive officers. All three
members are independent of company management. Executive
compensation is reviewed annually by the compensation committee
in connection with executive performance evaluations. During the
first quarter of each fiscal year, the compensation committee
typically conducts an evaluation of the CEOs performance,
utilizing formal input from all of our independent directors.
The compensation committee also reviews the performance of the
other named executive officers with the CEO. The compensation
committee then evaluates total current compensation to determine
if any changes are appropriate based on the considerations
explained throughout this compensation discussion and analysis.
The compensation committee reviews and gives considerable weight
to the CEOs compensation recommendations for the other
named executive officers because of his direct knowledge of the
executives performance and contributions. No other named
executive officers have any input on the compensation
committees executive compensation decisions. The
compensation committee members make independent decisions based
on their collective judgment.
|
|
2.
|
The
Role of Compensation Consultants
|
For 2006, the compensation committee selected and directly
engaged the services of two independent executive compensation
consulting firms, Compensia and Watson Wyatt, to complement the
information and guidance provided by our corporate Human
Resources department. No member of the compensation committee or
any named executive officer has any affiliation with either
Compensia or Watson Wyatt. Watson Wyatt did not perform any
other work for us. Compensia was retained by both the
compensation committee and McAfee, but for purposes of executive
compensation matters, it reported directly to the chairman of
the compensation committee.
The compensation committee sought input from Compensia on a
range of external market factors, including evolving executive
compensation trends, appropriate comparison companies for
benchmarking purposes, and market survey data. Compensia also
provided general observations on our executive compensation
programs, but it does not determine or recommend the amount or
form of compensation for any executives. The compensation
committee sought advice from Watson Wyatt regarding best
practices for executive compensation arrangements.
|
|
3.
|
The
Role of Peer Groups, Survey Data and Benchmarking
|
With the assistance of Compensia, the compensation committee
selected the peer group of technology companies listed below for
executive compensation benchmarking. These companies were
selected in order to include (i) our most direct business
competitors; (ii) companies with whom we compete for
talent; and (iii) companies that are roughly comparable to
McAfee in terms of market capitalization and revenue. The peer
group has remained relatively stable from year to year, except
that we eliminate peer companies that have been acquired, and we
make occasional changes to ensure that the peer group continues
to meet the selection criteria described above. The table below
shows data regarding each of the peer companies, as compared to
McAfee, as of December 31, 2006. We fall at approximately
the median on revenue and market capitalization. For purposes of
establishing 2006 salaries, target bonus percentages and equity
awards, the compensation committee reviewed fiscal 2005
compensation data from these peer companies.
97
|
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|
|
|
|
|
|
|
|
|
|
Fiscal Year End 2006
|
|
|
Market Cap as of
|
|
|
1-Yr Stockholder
|
|
|
3-Yr Stockholder
|
|
Company
|
|
Annual Revenue
|
|
|
12/31/2006 ($MM)
|
|
|
Return
|
|
|
Return
|
|
|
McAfee
|
|
$
|
1,142.3
|
|
|
$
|
4,534.6
|
|
|
|
4.6
|
%
|
|
|
23.6
|
%
|
Adobe Systems
|
|
$
|
2,575.3
|
|
|
$
|
24,146.9
|
|
|
|
2.9
|
%
|
|
|
1.7
|
%
|
Autodesk
|
|
$
|
1,537.2
|
|
|
$
|
9,289.6
|
|
|
|
(5.8
|
)%
|
|
|
18.1
|
%
|
BEA Systems
|
|
$
|
1,199.8
|
|
|
$
|
4,855.1
|
|
|
|
33.8
|
%
|
|
|
0.8
|
%
|
BMC Software
|
|
$
|
1,498.4
|
|
|
$
|
6,739.5
|
|
|
|
57.1
|
%
|
|
|
20.0
|
%
|
CIBER
|
|
$
|
995.8
|
|
|
$
|
418.7
|
|
|
|
2.7
|
%
|
|
|
(7.8
|
)%
|
Citrix Systems
|
|
$
|
1,134.3
|
|
|
$
|
4,885.0
|
|
|
|
(5.8
|
)%
|
|
|
8.5
|
%
|
Hyperion Solutions(1)
|
|
$
|
765.2
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Intuit
|
|
$
|
2,342.3
|
|
|
$
|
10,500.6
|
|
|
|
14.5
|
%
|
|
|
4.9
|
%
|
Mentor Graphics
|
|
$
|
791.6
|
|
|
$
|
1,506.2
|
|
|
|
74.4
|
%
|
|
|
7.4
|
%
|
Mercury Interactive(2)
|
|
$
|
843.2
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Novell
|
|
$
|
967.3
|
|
|
$
|
2,128.8
|
|
|
|
(29.8
|
)%
|
|
|
(16.2
|
)%
|
Parametric Technology
|
|
$
|
854.9
|
|
|
$
|
2,016.1
|
|
|
|
18.2
|
%
|
|
|
22.3
|
%
|
RSA Security(3)
|
|
$
|
310.1
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Siebel Systems(4)
|
|
$
|
1,429.1
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Sybase
|
|
$
|
876.2
|
|
|
$
|
2,254.6
|
|
|
|
13.0
|
%
|
|
|
6.3
|
%
|
Symantec
|
|
$
|
4,143.4
|
|
|
$
|
21,702.6
|
|
|
|
19.1
|
%
|
|
|
6.5
|
%
|
Synopsys
|
|
$
|
1,095.6
|
|
|
$
|
3,757.4
|
|
|
|
33.3
|
%
|
|
|
(7.6
|
)%
|
VeriSign
|
|
$
|
1,566.6
|
|
|
$
|
5,864.4
|
|
|
|
9.8
|
%
|
|
|
13.8
|
%
|
Notes
|
|
|
|
|
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|
(1) |
|
Hyperion Solutions was acquired in 2006. Represents fiscal year
end 2006 revenues (6/30/06 year end). |
|
(2) |
|
Mercury Interactive was acquired in 2006. Represents fiscal year
end 2005 revenues. |
|
(3) |
|
RSA Security was acquired in 2006. Represents fiscal year end
2005 revenues. |
|
(4) |
|
Siebel Systems was acquired in 2006. Represents fiscal year end
2005 revenues. |
Compensia provided a report to the compensation committee
comparing compensation of our most senior executive officers to
that of the most senior executive officers at our peer group
companies. Peer company data was derived from the Radford
Executive Survey (which is focused on compensation in the
technology sector) as well as SEC filings by our peer companies.
As noted above, the compensation committee generally targets
total direct compensation and each component of compensation for
our named executive officers between the 60th and
75th percentiles for our peer group. The benchmark may be
higher in certain situations, such as hiring new executives, or
following a year of exceptional performance.
|
|
4.
|
Equity
Grant Practices
|
All 2006 equity-based awards were approved either by our
compensation committee or by our stock plan administration
committee, which was comprised of our chief operating and
financial officer, general counsel, and senior vice president of
human resources. The compensation committee delegated to the
stock plan administration committee the authority to approve
awards that fell within specific grant guidelines that were
approved by the compensation committee. We eliminated the stock
plan administration committee in 2006.
We do not currently, and do not have
any future intentions to, take any of the following actions in
connection with equity awards:
|
|
|
|
|
Time the release of material non-public information in a manner
that is intended to affect the value of equity award grants
|
98
|
|
|
|
|
Coordinate equity award grant dates with the public announcement
of material non-public information, whether positive or negative
|
|
|
|
Delay the release of material non-public information until after
an equity award grant date
|
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|
Determine the size of equity awards based on when material
nonpublic information is announced
|
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|
|
Determine the exercise price of a stock option based on anything
other than the fair market value of our common stock on the
grant date (unless otherwise legally required under its
international equity plans)
|
|
|
D.
|
Fiscal
2006 Executive Compensation Decisions
|
This section describes the executive compensation decisions made
by the compensation committee for fiscal 2006. Please see the
compensation tables following this compensation discussion and
analysis for more details about fiscal 2006 compensation.
|
|
1.
|
Fiscal
2006 Total Direct Compensation
|
Fiscal 2006 target total direct compensation of our named
executive officers who were already on board at the beginning of
2006 was between the 60th and 75th percentiles for our
peer group. Target total direct compensation for newly hired
executives in fiscal 2006 generally exceeded the
75th percentile because the compensation committee
concluded this was essential in order to fill these key
positions with exceptional candidates. However, the compensation
committee intends to have their total direct compensation center
in the 60th to 75% percentile range over time.
|
|
2.
|
Key
Performance Metrics for Fiscal 2006
|
The compensation committee established 2006 KPMs for overall
company performance as well as individual objectives for each
named executive officer. The compensation committee also
identified specific measurement methods for each KPM. The
following table shows a selection of the KPMs that had the most
direct impact on our overall performance. Named executive
officers also had KPMs addressing, among other things,
(i) executive team quality and depth, including talent
growth and succession planning; and (ii) effectiveness in
recruiting, training and motivating the necessary employees to
achieve our objectives.
|
|
|
|
|
|
|
Name and Title
|
|
|
Company-Wide KPMs
|
|
|
Executive-Specific KPMs
|
Eric Brown
Chief Operating Officer and
Chief Financial Officer
|
|
|
Meet business plan revenue-related and profit-related targets
Ensure progress in development of our long-term strategy
|
|
|
Maintain balance sheet strength and liquidity
Achieve milestones for enhancing financial controls environment
Resolve ongoing SEC investigation
|
|
|
|
|
|
|
|
Christopher Bolin
Executive Vice President of
Product Development;
Chief Technology Officer
|
|
|
Meet business plan revenue-related
and profit-related targets Ensure
progress in development of our
long-term strategy
|
|
|
Deliver plans to build new technology to ensure competitive differentiation
Deliver best of breed quality results
Provide specific strategic options to address evolving marketplace competition
|
|
|
|
|
|
|
|
99
|
|
|
|
|
|
|
Name and Title
|
|
|
Company-Wide KPMs
|
|
|
Executive-Specific KPMs
|
Roger King
Executive Vice President of
Worldwide Sales
|
|
|
N/A see below
|
|
|
N/A see below
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Decker
Senior Vice President and
Chief Information Officer
|
|
|
Meet business plan revenue-related
and profit-related targets Ensure
progress in development of our
long-term strategy
|
|
|
Optimize network and processing infrastructure
Achieve SAP and other application milestones for enhancing financial controls environment and improving operating effectiveness.
Provide CIO support for SEC investigation team
|
|
|
|
|
|
|
|
William Kerrigan
Executive Vice President of
McAfee Consumer
|
|
|
Meet business plan revenue-related and profit-related targets
Ensure progress in development of our long-term strategy
|
|
|
Achieve consumer segment financial objectives
Grow consumer market share
|
|
|
|
|
|
|
|
Former Executives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dale Fuller
Former Interim Chief Executive
Officer and President
|
|
|
N/A see discussion below
|
|
|
N/A see discussion below
|
|
|
|
|
|
|
|
George Samenuk
Former Chairman and Chief Executive Officer
|
|
|
Meet business plan revenue-related and profit-related targets
Ensure progress in development of our long-term strategy
Communicate effectively with customers, investors, employees and regulators
|
|
|
Achieve milestones for enhancing financial and operating controls environment
Resolve ongoing SEC investigation
Work closely with board on all important aspects of McAfee development and status
Continue to develop executive team
|
|
|
|
|
|
|
|
Our financial performance for the full fiscal year 2006, as
reflected in the financial statements and notes included
elsewhere in this document, meant that executives generally
achieved the financial metrics in their KPMs. We do not publicly
disclose specific annual business plan revenue, bookings,
operating income or EPS targets, as our business plan is highly
confidential. Disclosing specific objectives would provide
competitors and other third parties with insights into the
planning process and would therefore cause competitive harm.
|
|
3.
|
Equity
Grants in Fiscal 2006
|
The size of 2006 equity grants for each named executive officer
are described below in each executives compensation
description. The amounts of the grants were based upon the
following considerations: (i) executive performance;
(ii) compensation benchmarking information provided by
Compensia; (iii) the amount of future vesting intrinsic
value for each executive; (iv) any changes in roles
and/or
increases in responsibilities in 2006; and (v) the
exceptional challenges facing us during fiscal 2006.
|
|
4.
|
Compensation
for Eric Brown
|
Mr. Brown was hired in January 2005 to lead the turnaround
efforts in improving our internal processes and financial
controls. In recognition of his key role in our future success,
the compensation committee approved an above-market new hire
compensation package for Mr. Brown that contributed to his
2006 total direct compensation. Thus, 2006 total direct
compensation for Mr. Brown was significantly above the
75th percentile for our peer group companies. Among factors
considered by the compensation committee in approving the
relatively generous new
100
hire and fiscal 2006 compensation package were (i) the
importance of a strong chief financial officer in an environment
with identified financial control environment issues;
(ii) Mr. Browns compensation with his former
employer; (iii) the value of unvested compensation that
Mr. Brown would forfeit by leaving his prior employer; and
(iv) the additional responsibilities Mr. Brown assumed
as chief operating officer, beginning in March 2006.
In light of the factors described above, Mr. Browns
base salary was increased by 10% in 2006, to $550,000. His
target cash bonus was set at 109% of base salary, based on the
terms of his initial employment agreement and benchmarking data.
Mr. Brown made significant progress against his KPMs (shown
above), but he did not fully accomplish all of them. Based on
his achievements, he received aggregate cash bonuses equal to
94% of his target bonus, paid in quarterly installments pursuant
to the terms of his employment agreement. In March 2006, he also
received an RSU grant of 125,000 shares, based on the
considerations noted in Section D3 above.
|
|
5.
|
Compensation
for Christopher Bolin
|
In light of the factors described in
Sections B3-B8
above, Mr. Bolins base salary was increased by 13% in
2006, to $450,000, and his target cash bonus was set at 60% of
base salary. Mr. Bolin made significant progress against
his KPMs but he did not fully accomplish all of them. Based on
his achievements, Mr. Bolin received a cash bonus equal to
93% of his target bonus. The compensation committee granted
50,000 restricted stock units to Mr. Bolin in March 2006 in
light of the equity compensation considerations noted in
Section D3 above.
|
|
6.
|
Compensation
for Roger King
|
In light of the factors described in
Sections B3-B8
above, Mr. Kings starting base salary when he joined
McAfee in 2006 was $400,000, and his target cash bonus was set
at 100% of base salary. Mr. King achieved all of his KPMs,
so he received a cash bonus equal to 100% of his target bonus.
The compensation committee granted stock options for
100,000 shares to Mr. King as part of his new hire
package, based on the considerations noted in Section D3 above.
|
|
7.
|
Compensation
for Richard Decker
|
In light of the factors described in
Sections B3-B8
above, Mr. Deckers base salary was increased by 3% in
2006, to $400,000, and his target cash bonus was set at 60% of
base salary. Mr. Decker made significant progress against
his KPMs but he did not fully accomplish all of them. Based on
his achievements, he received a cash bonus equal to 91% of his
target bonus. In March 2006, the compensation committee granted
50,000 restricted stock units to Mr. Decker in light of the
considerations noted in Section D3 above.
|
|
8.
|
Compensation
for William Kerrigan
|
In light of the factors described in
Sections B3-B8
above, Mr. Kerrigans base salary was increased by 18%
in 2006, to $440,000, and his target cash bonus was set at 60%
of base salary. Mr. Kerrigan made some progress against his
KPMs but he did not fully accomplish all of them. Based on his
achievements, he received a cash bonus equal to 80% of his
target bonus. In March 2006, the compensation committee granted
50,000 restricted stock units to Mr. Kerrigan in light of
the equity compensation considerations noted in Section D3
above. Mr. Kerrigan retired from McAfee in July 2007.
|
|
9.
|
Compensation
for Dale Fuller
|
Dale Fuller served as our interim president and chief executive
officer from October 2006 until April 2007, when David DeWalt
joined McAfee as our new chief executive officer and president.
Prior to assuming this role, Mr. Fuller served as one of
our independent directors. He continued to serve as one of our
directors while interim president and chief executive officer,
but stepped down from the special committee investigating our
stock option granting practices. The compensation committee
approved an annualized salary of $1,500,000 for Mr. Fuller.
In determining Mr. Fullers salary, the compensation
committee considered several factors, including
(i) Mr. Fullers prior experience as CEO of a
publicly-traded technology company; (ii) the significant
time and effort that would be required to restate our financials
and to complete critical internal control remediation;
(iii) the time-sensitive need to have leadership in place
following the departures of Mr. Samenuk (as Chairman and
CEO) and Kevin Weiss (as
101
President), and other executive turnover; and (iv) the fact
that Mr. Fullers total direct compensation would be
limited to salary and bonus and would not include the equity
components normally provided to a CEO.
Mr. Fuller did not participate in the same cash bonus plan
as our other executive officers. However, following his tenure
as an executive officer, the compensation committee, at its sole
discretion, awarded Mr. Fuller a $435,000 bonus. In
determining the amount of Mr. Fullers bonus, the
compensation committee considered a variety of factors,
including (i) our solid financial performance during his
tenure; (ii) progress in the ongoing stock option
investigation and related restatement; (iii) progress on
financial and operating controls remediation; and
(iv) Mr. Fullers overall leadership.
Mr. Fuller did not receive any equity awards or any
director compensation during his tenure as interim president and
CEO. However, prior to his appointment as an executive officer,
he received stock options and cash compensation in his capacity
as an independent director, consistent with that paid to all of
our independent directors. His outstanding director options
continued to vest during his tenure as president and CEO. In
July 2007, Mr. Fuller resigned from our board of directors.
|
|
10.
|
Compensation
for George Samenuk
|
Mr. Samenuks performance in 2005 and Compensias
benchmark report provided the starting point for the
compensation committees analysis in setting 2006 total
direct compensation for Mr. Samenuk. The compensation
committee also considered a number of other factors, including
our performance during all years in which Mr. Samenuk
served as CEO and the internal and external challenges
confronting us in 2006. In 2006, these challenges included:
(i) financial control environment issues related to a
material weakness in our internal controls over financial
reporting; (ii) employee morale issues caused by financial
restatements and class action lawsuits against us; and
(iii) the announcement by Microsoft that it intended to
compete with McAfee in the security software market.
In light of the factors described above and in Section B3,
Mr. Samenuks annual base salary was increased by 6%
for 2006, to $900,000. His target cash bonus was set at 150% of
base salary, or $1,350,000, based primarily on benchmarking
data. In March 2006, Mr. Samenuk received an RSU grant of
250,000 shares, based on the considerations noted in
Section D3 above. Mr. Samenuk retired from McAfee in
October 2006. Following his retirement, he entered into a
Separation Agreement and Release of Claims with McAfee under
which he received a pro-rated amount of his target bonus
reflecting 10 months of service. Pursuant to the Separation
Agreement, Mr. Samenuk also received a package of severance
benefits that took into consideration his overall contributions
during his tenure with McAfee. See Severance and Change of
Control Benefits, in the next section of this document,
for details on these severance benefits. The compensation
committee believed that, under the circumstances, the value of
the severance benefits was appropriate in exchange for
Mr. Samenuks general release of claims in favor of
McAfee (which did not extend to any claims Mr. Samenuk
might have with respect to his expired stock options).
|
|
11.
|
Compensation
for Kevin Weiss
|
In light of the factors described in
Sections B3-B8
above, Mr. Weiss base salary was held flat in 2006,
at $500,000, and his target cash bonus was set at 100% of base
salary. The compensation committee granted 150,000 restricted
stock units to Mr. Weiss in March 2006 in light of the
considerations noted in Section D3 above. Mr. Weiss
was terminated for cause by McAfee in October of 2006. Based on
negotiations with the board and his progress to date on his
KPMs, he received a pro-rated amount of his target bonus
reflecting 10 months of service. Mr. Weiss did not
receive any severance benefits in connection with his
termination.
102
|
|
E.
|
Subsequent
Executive Compensation Program Changes
|
We implemented a number of changes to our executive compensation
philosophy and practices during the latter part of 2006 and
early 2007, including the following:
|
|
|
|
|
Revised the terms of executive employment agreements to conform
to best practices as identified by Watson Wyatt, an executive
compensation consulting firm that the compensation committee
retained to provide advice regarding best practices for
executive compensation arrangements.
|
|
|
|
Refined our stock option-granting practices to, among other
things:
|
|
|
|
|
1.
|
Aggregate all new-hire, promotional and retention grants for
approval on predetermined dates (typically once per quarter
following our earnings announcements);
|
2. Eliminate all delegation of grant authority outside of
the compensation committee; and
3. Establish more stringent guidelines relating to grant
approval and documentation
|
|
|
|
4.
|
Retained Compensia to perform a comprehensive analysis of
director compensation, and implemented changes to director
compensation based on Compensias recommendations.
|
|
|
|
|
|
Introduced performance-based vesting for restricted stock units
granted to our new CEO, Dave DeWalt, who joined our company in
April 2007.
|
|
|
|
Eliminated all of our fractional ownership interests in
corporate aircraft, such that all our executives are required to
travel on commercial carriers.
|
|
|
F.
|
Tax,
Accounting and Other Considerations
|
General. This section describes certain tax
and accounting considerations relating to our executive
compensation programs. See Explanatory Note Regarding
Restatement immediately preceding Part I,
Item 1 for a more detailed description of these and other
tax and accounting issues, and in particular, issues relating to
equity compensation.
Tax Deductibility of Compensation
Expense. Section 162(m) of the Internal
Revenue Code places a limit of $1,000,000 on the amount of
compensation to certain executives that McAfee may deduct as a
business expense in any tax year unless, among other things, the
compensation is performance-based and it is paid under a
compensation plan that has been approved by our stockholders.
Our salary and cash bonus programs do not meet these
requirements. However, virtually all fiscal 2006 cash
compensation was tax-deductible because it did not exceed the
$1 million per executive limit.
The $1 million limit generally does not apply to stock
options so long as they are granted under a stockholder-approved
plan and exercise price is no less than the fair market value of
the shares on the grant date. Accordingly, all executive stock
option expenses that we incurred in fiscal 2006 (for shares that
vested during fiscal 2006) were fully deductible for tax
purposes. The $1 million limit does apply to RSUs
and restricted stock unless either the grants or the vesting are
based on performance criteria. Because our RSUs and restricted
stock awards granted through 2006 did not met those
requirements, the compensation expense associated with them will
be subject to the $1 million annual deductibility limit as
they vest. No compensation charges were associated with these
grants in fiscal 2006 because none of the shares vested in
fiscal 2006.
From time to time, the compensation committee may approve
compensation that will not meet these requirements for
deductibility in order to ensure competitive levels of total
compensation for its executive officers.
Tax Implications for Executives. Effective as
of January 2005, Section 409A of the Internal Revenue Code
was enacted by Congress. Section 409A imposes additional
income taxes on our executive officers who receive certain types
of deferred compensation if the compensation does not meet the
qualification requirements of Section 409A. We do not
generally offer any deferred compensation programs to our
executives. However, Section 409A applies to stock options
that have an exercise price below grant date fair market value
(referred to as discount options). The IRS has not
yet issued its final regulations under Section 409A. Until
those regulations are issued, companies have an opportunity to
remedy any option grants that might otherwise fail to meet
Section 409A
103
requirements, in order to reduce the tax liability of affected
option holders. We believe we are currently operating in good
faith compliance with the statutory provisions of
Section 409A, and we expect to take remedial action
relating to discount options before the IRS issues its final
regulations. See Explanatory Note Regarding
Restatement immediately preceding Part I, Item
Section 280G of the Internal Revenue Code imposes an excise
tax on payments to executives of severance or change of control
compensation that exceeds the levels specified in
Section 280G. Our named executive officers could
potentially receive amounts that exceed the Section 280G
limits as severance or change in control payments, but the
compensation committee does not consider this potential impact
in compensation program design.
Accounting Considerations. The compensation
committee also considers the accounting expense and cash flow
implications of various forms of executive compensation. For
salary or cash bonus compensation, we record or accrue a
compensation expense in our financial statements in an amount
equal to dollar amount of the cash payment. Accounting rules
require us to record an expense in our financial statements for
equity awards as well, even though equity awards are not paid to
employees in cash. As of January 1, 2006, the accounting
expense of all equity awards (stock options, restricted stock
and restricted stock units) is calculated in accordance with
FAS 123R. The compensation committee believes that the
advantages of equity awards, as described throughout this
compensation discussion and analysis, more than compensate for
the non-cash accounting expense associated with them.
Forfeiture of Executive Compensation. The
Sarbanes-Oxley Act of 2002 requires a companys chief
executive officer and chief financial officer to forfeit cash
incentive compensation and stock gains flowing from financial
statements that are materially misstated due to executive
misconduct. We do not have a forfeiture policy that extends
beyond the requirements of Sarbanes-Oxley.
Compensation
Committee Report on Compensation Discussion and
Analysis
The compensation committee of the board of directors has
furnished the following report:
The compensation committee has reviewed and discussed the
foregoing compensation discussion and analysis with management.
Based on that review and discussion, the compensation committee
has recommended to the board of directors that the compensation
discussion and analysis be included in this annual report on
Form 10-K
for 2006.
THE COMPENSATION COMMITTEE
Denis OLeary, Chairman
Robert Pangia
Liane Wilson
Compensation
Committee Interlocks and Insider Participation
No member of our compensation committee has ever been an officer
or employee of McAfee or of any of our subsidiaries or
affiliates. During the last fiscal year, none of our executive
officers served on the board of directors or on the compensation
committee of any other entity, any officers of which served
either on our board or on our compensation committee.
104
SUMMARY
COMPENSATION TABLE
The following table discloses the compensation paid to our
principal executive officer, principal financial officer and
other named executive officers (collectively referred to as our
named executive officers) as of December 31,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
All Other
|
|
|
|
|
Name and Principal Position
|
|
Year
|
|
|
Salary(1)
|
|
|
Bonus(4)
|
|
|
Awards(5)
|
|
|
Awards(5)
|
|
|
Compensation(6)
|
|
|
Total
|
|
|
Eric Brown
|
|
|
2006
|
|
|
|
540,930
|
|
|
|
941,250
|
|
|
|
1,515,722
|
|
|
|
1,153,091
|
|
|
|
129,245
|
|
|
|
4,280,238
|
|
Chief operating officer and chief financial officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher Bolin
|
|
|
2006
|
|
|
|
440,363
|
|
|
|
249,750
|
|
|
|
836,885
|
|
|
|
482,660
|
|
|
|
5,368
|
|
|
|
2,015,026
|
|
Executive vice president of product development and chief
technology officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger King
|
|
|
2006
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
77,182
|
|
|
|
57,919
|
|
|
|
656
|
|
|
|
335,757
|
|
Executive vice president of worldwide sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Decker
|
|
|
2006
|
|
|
|
397,732
|
|
|
|
218,400
|
|
|
|
322,189
|
|
|
|
408,378
|
|
|
|
7,048
|
|
|
|
1,353,747
|
|
Senior vice president and chief information officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Kerrigan
|
|
|
2006
|
|
|
|
427,996
|
|
|
|
211,200
|
|
|
|
322,189
|
|
|
|
418,489
|
|
|
|
8,708
|
|
|
|
1,388,582
|
|
Executive vice president of McAfee consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dale Fuller
|
|
|
2006
|
|
|
|
329,807
|
|
|
|
217,500
|
|
|
|
|
|
|
|
166,056
|
|
|
|
245,155
|
|
|
|
958,518
|
|
Former interim chief executive officer and president
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George Samenuk
|
|
|
2006
|
|
|
|
787,629
|
(2)
|
|
|
1,046,712
|
|
|
|
|
|
|
|
2,784,661
|
|
|
|
4,691,443
|
|
|
|
9,310,445
|
|
Former chairman and chief executive officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin Weiss
|
|
|
2006
|
|
|
|
495,007
|
(3)
|
|
|
450,000
|
|
|
|
|
|
|
|
300,109
|
|
|
|
24,706
|
|
|
|
1,269,822
|
|
Former president
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Salary includes amounts deferred under our 401(k) Plan. |
|
(2) |
|
Includes $99,585 paid for unused vacation. |
|
(3) |
|
Includes $77,135 paid for unused vacation. |
|
(4) |
|
Amounts in this column reflect bonus payments earned in 2006,
although some amounts were paid in 2007. |
|
(5) |
|
The compensation amounts reported in the Stock
Awards and Option Awards columns reflect the
expense that we reported in our consolidated 2006 financial
statements under SFAS 123(R), except that the amounts of
expense reported in our financial statements are net of
estimated forfeitures, while the amounts shown in the table are
gross of estimated forfeitures. These amounts consist of the
fair value expense for all existing share-based awards that
vested during the year 2006. For this purpose, the fair value of
an award is apportioned over the period during which the award
is expected to vest. The fair value of a stock award is equal to
the closing price of our stock on the grant date. The fair value
of an option award is determined using the Black-Scholes option
pricing model. Our assumptions for financial statement purposes
are described in Note 16 to our consolidated financial
statements included for the year ended December 31, 2006. |
105
|
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|
(6) |
|
All other compensation consisted of the following: |
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Gifts,
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|
Group Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Business
|
|
|
Family Travel
|
|
|
Life
|
|
|
Supplemental
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
Commuting
|
|
|
Living
|
|
|
Aircraft
|
|
|
and Matching
|
|
|
Insurance
|
|
|
Company-Paid
|
|
|
Contributions
|
|
|
COBRA
|
|
Name
|
|
Year
|
|
|
Expense
|
|
|
Allowance
|
|
|
Usage
|
|
|
Gifts(1)
|
|
|
Coverage
|
|
|
Life Insurance
|
|
|
To 401(k)
|
|
|
Insurance
|
|
|
Eric Brown
|
|
|
2006
|
|
|
$
|
54,609
|
|
|
$
|
|
|
|
$
|
36,030
|
|
|
$
|
1,981
|
|
|
$
|
1,140
|
|
|
$
|
|
|
|
$
|
2,292
|
|
|
$
|
|
|
Christopher Bolin
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
568
|
|
|
|
1,026
|
|
|
|
|
|
|
|
3,600
|
|
|
|
|
|
Roger King
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Decker
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,255
|
|
|
|
2,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Kerrigan
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,039
|
|
|
|
2,622
|
|
|
|
|
|
|
|
3,600
|
|
|
|
|
|
Dale Fuller
|
|
|
2006
|
|
|
|
3,181
|
|
|
|
30,214
|
|
|
|
108,090
|
|
|
|
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George Samenuk
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
7,109
|
|
|
|
3,657
|
|
|
|
2,076
|
|
|
|
17,760
|
|
|
|
3,600
|
|
|
|
1,805
|
|
Kevin Weiss
|
|
|
2006
|
|
|
|
15,457
|
|
|
|
|
|
|
|
|
|
|
|
2,628
|
|
|
|
2,076
|
|
|
|
|
|
|
|
3,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separation
|
|
|
Director
|
|
|
Tax
|
|
|
|
|
Name
|
|
Year
|
|
|
Agreement
|
|
|
Fees
|
|
|
Gross-ups(2)
|
|
|
Total
|
|
|
Eric Brown
|
|
|
2006
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
33,193
|
|
|
$
|
129,245
|
|
Christopher Bolin
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
174
|
|
|
$
|
5,368
|
|
Roger King
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
656
|
|
Richard Decker
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
1,171
|
|
|
$
|
7,048
|
|
William Kerrigan
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
447
|
|
|
$
|
8,708
|
|
Dale Fuller
|
|
|
2006
|
|
|
|
|
|
|
|
83,500
|
|
|
|
19,742
|
|
|
$
|
245,155
|
|
George Samenuk
|
|
|
2006
|
|
|
|
4,622,412
|
(3)
|
|
|
|
|
|
|
33,024
|
|
|
$
|
4,691,443
|
|
Kevin Weiss
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
945
|
|
|
$
|
24,706
|
|
|
|
|
(1) |
|
Represents the cost of spousal travel to McAfee events, the cost
of token gifts received at McAfee events and company-matching
charitable contributions. |
|
(2) |
|
The tax
gross-up
payments disclosed in this column relate to taxes imposed on our
reimbursements of living and commuting expenses (in the case of
Mr. Fuller and Mr. Brown), taxes imposed on token
gifts received at McAfee events and the cost of spousal travel
to McAfee events (in the case of Mr. Bolin,
Mr. Decker, Mr. Kerrigan, and Mr. Weiss), and
taxes imposed on life insurance, token gifts received at McAfee
events and the cost of spousal travel to McAfee events (in the
case of Mr. Samenuk). |
|
(3) |
|
Represents cash payment of $1,046,712, a pro-rated target bonus
that Mr. Samenuk was due under his employment agreement
upon termination of his employment for any reason, and an
additional cash payment of $3,575,700, which was equal to 80% of
the amount, computed as two times his annual base salary plus
target bonus, that Mr. Samenuk was entitled to under the
terms of his pre-existing employment agreement. Mr. Samenuk
received nothing more than he would have been entitled to under
the terms of his pre-existing employment agreement with us. |
106
GRANTS OF
PLAN-BASED AWARDS
This table shows grants of plan-based awards made by us to our
named executive officers during the year ended December 31,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Number of
|
|
|
|
|
|
Grant Date Fair
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Securities
|
|
|
Exercise or Base
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
Shares of Stock
|
|
|
Underlying
|
|
|
Price of Option
|
|
|
Stock and Option
|
|
|
|
|
Name and Principal Position
|
|
Grant Date
|
|
|
or Units(1)
|
|
|
Options(2)
|
|
|
Awards
|
|
|
Awards(5)
|
|
|
|
|
|
Eric Brown
|
|
|
03/07/2006
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
2,952,500
|
|
|
|
|
|
Chief operating officer
and chief financial
officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher Bolin
|
|
|
03/07/2006
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
1,181,000
|
|
|
|
|
|
Executive vice president
of product development
and chief technology
officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger King
|
|
|
10/10/2006
|
|
|
|
|
|
|
|
100,000
|
(3)
|
|
$
|
25.79
|
|
|
|
1,031,950
|
|
|
|
|
|
Executive vice president
|
|
|
10/10/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of worldwide sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Decker
|
|
|
03/07/2006
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
1,181,000
|
|
|
|
|
|
Senior vice president
and chief information
officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Kerrigan
|
|
|
03/07/2006
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
1,181,000
|
|
|
|
|
|
Executive vice president
of McAfee consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dale Fuller
|
|
|
01/20/2006
|
|
|
|
|
|
|
|
50,000
|
(4)
|
|
$
|
26.92
|
|
|
|
567,235
|
|
|
|
|
|
Former interim chief
executive officer and
president
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George Samenuk
|
|
|
03/22/2006
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
6,317,500
|
|
|
|
|
|
Former chairman and
chief executive officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin Weiss
|
|
|
03/07/2006
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
3,543,000
|
|
|
|
|
|
Former president
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Restricted stock units vest 50% two years from the grant date
and 50% three years from the grant date. The restricted stock
unit grants made to executives in 2006 were intended to serve as
equity compensation for both 2006 and 2007; no restricted stock
unit grants were made to these named executives in 2007. |
|
(2) |
|
All options in this column were granted at an exercise price per
share equal to the fair market value of the common stock on the
date of grant. |
|
(3) |
|
Option grant vests at the rate of one-fourth (or 25%) one year
from the date of grant and the remaining shares vest at a rate
of 1/36th per month for the remaining 36 months of the
vesting period. Under the 1997 Stock Incentive Plan, the board
of directors is allowed to modify the terms of outstanding
options. The exercisability of options may be accelerated upon a
change of control. Options are cancelled on an optionees
termination of employment under certain specified circumstances. |
|
(4) |
|
Initial option grant upon becoming an outside director on our
board. Option vests one-third each year over three years from
the date of grant. |
107
|
|
|
(5) |
|
The grant date fair value of stock and option awards column
reflects the expense that we would expense in our financial
statement over the awards vesting schedule. The fair value
of a stock award is equal to the closing price of our stock on
the grant date. The fair value of an option award is determined
using the Black-Scholes option pricing model. Our assumptions
for financial statement purposes are described in Note 16
to our consolidated financial statements included for the year
ended December 31, 2006. |
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
This table shows outstanding equity awards at December 31,
2006 for our named executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Market Value
|
|
|
|
Securities Underlying
|
|
|
Option
|
|
|
Option
|
|
|
Shares or Units
|
|
|
of Shares or
|
|
|
|
Unexercised Options(1)
|
|
|
Exercise
|
|
|
Expiration
|
|
|
of Stock That
|
|
|
Units of Stock That
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
|
Date
|
|
|
have not Vested
|
|
|
have not Vested
|
|
|
Eric Brown
|
|
|
143,750
|
|
|
|
156,250
|
|
|
|
28.42
|
|
|
|
01/03/2015
|
|
|
|
|
|
|
|
|
|
Chief operating officer and chief financial officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
(3)
|
|
|
1,419,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
(4)
|
|
|
3,547,500
|
|
Christopher Bolin
|
|
|
5,000
|
|
|
|
|
|
|
|
11.06
|
|
|
|
04/20/2009
|
|
|
|
|
|
|
|
|
|
Executive vice president of product development and chief
technology officer
|
|
|
10,000
|
|
|
|
|
|
|
|
11.06
|
|
|
|
10/01/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
2,896
|
|
|
|
|
|
|
|
11.06
|
|
|
|
04/17/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
869
|
|
|
|
|
|
|
|
11.06
|
|
|
|
07/30/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
16.94
|
|
|
|
01/24/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
4,500
|
|
|
|
|
|
|
|
24.56
|
|
|
|
05/09/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
21.13
|
|
|
|
07/03/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
72,500
|
|
|
|
|
|
|
|
4.19
|
|
|
|
02/12/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
|
|
|
|
25.43
|
|
|
|
04/09/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
34,271
|
|
|
|
729
|
|
|
|
16.90
|
|
|
|
04/08/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
21,875
|
|
|
|
8,125
|
|
|
|
14.96
|
|
|
|
04/13/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
48,438
|
|
|
|
26,562
|
|
|
|
16.57
|
|
|
|
07/21/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
33,333
|
|
|
|
46,667
|
|
|
|
21.61
|
|
|
|
04/19/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,333
|
(3)
|
|
|
945,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
(4)
|
|
|
1,419,000
|
|
Roger King
|
|
|
|
|
|
|
100,000
|
|
|
|
25.79
|
|
|
|
10/10/2016
|
|
|
|
|
|
|
|
|
|
Executive vice president of worldwide sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
(4)
|
|
|
1,135,200
|
|
Richard Decker
|
|
|
28,333
|
|
|
|
51,667
|
|
|
|
28.81
|
|
|
|
07/26/2015
|
|
|
|
|
|
|
|
|
|
Senior vice president and chief information officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
(4)
|
|
|
1,419,000
|
|
William Kerrigan
|
|
|
4,167
|
|
|
|
|
|
|
|
14.41
|
|
|
|
10/08/2012
|
|
|
|
|
|
|
|
|
|
Executive vice president of McAfee consumer
|
|
|
3,126
|
|
|
|
521
|
|
|
|
16.90
|
|
|
|
03/24/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
2,085
|
|
|
|
2,917
|
|
|
|
12.83
|
|
|
|
10/14/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
9,376
|
|
|
|
26,562
|
|
|
|
16.57
|
|
|
|
07/21/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
27,083
|
|
|
|
37,917
|
|
|
|
21.61
|
|
|
|
04/19/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
(4)
|
|
|
1,419,000
|
|
Former Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dale Fuller
|
|
|
|
|
|
|
50,000
|
(2)
|
|
|
26.92
|
|
|
|
01/20/2016
|
|
|
|
|
|
|
|
|
|
Former interim chief executive officer and president
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George Samenuk
|
|
|
420,000
|
|
|
|
|
|
|
|
27.19
|
|
|
|
02/06/2007
|
(5)
|
|
|
|
|
|
|
|
|
Former chairman and chief executive officer
|
|
|
400,000
|
|
|
|
|
|
|
|
18.20
|
|
|
|
02/06/2007
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
165,000
|
|
|
|
|
|
|
|
16.75
|
|
|
|
02/06/2007
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
|
|
|
|
|
|
21.61
|
|
|
|
02/06/2007
|
(5)
|
|
|
|
|
|
|
|
|
Kevin Weiss
|
|
|
94,792
|
|
|
|
|
|
|
|
15.89
|
|
|
|
01/08/2007
|
|
|
|
|
|
|
|
|
|
Former president
|
|
|
79,167
|
|
|
|
|
|
|
|
14.60
|
|
|
|
01/08/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
70,833
|
|
|
|
|
|
|
|
17.00
|
|
|
|
01/08/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
60,417
|
|
|
|
|
|
|
|
16.75
|
|
|
|
01/08/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
35,417
|
|
|
|
|
|
|
|
21.61
|
|
|
|
01/08/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All options in these columns (except Dale Fullers options
outstanding) vest at the rate of one-fourth (or 25%) one year
from the date of grant and the remaining shares vest at a rate
of 1/36th per month for the remaining |
108
|
|
|
|
|
36 months of the vesting period. Under the 1997 Stock
Incentive Plan, the board of directors is allowed to modify the
terms of outstanding options. The exercisability of options may
be accelerated upon a change of control. Options are cancelled
on an optionees termination of employment under certain
specified circumstances. See footnote (2) below for the
vesting schedule for Dale Fullers option grant. |
|
(2) |
|
Initial option grant upon becoming an outside director on our
board. Option vests one-third each year over three years from
the date of grant. |
|
(3) |
|
Vests one-third each year over three years from the date of
grant. |
|
(4) |
|
Vests 50% two years from the grant date and 50% three years from
the grant date. |
|
(5) |
|
These stock options held by Mr. Samenuk were extended for a
brief period to February 6, 2007 (they would otherwise have
expired on January 8, 2007). In connection with our
entering into a separation agreement and release of claims with
Mr. Samenuk on February 6, 2007, all of these stock
options expired unexercised as of such date. |
|
(6) |
|
On November 13, 2007, we took action to pursue a bilateral
agreement to amend certain stock option agreements held by
Mr. Kerrigan and which have been determined to have been
issued with exercise prices below the fair market value of the
underlying shares of common stock on the date of the grant to
increase the exercise price of those options to the fair market
value of the underlying shares of common stock on each
options revised measurement date for financial accounting
purposes. On that same date, we amended the terms of vested
stock options granted to certain current and former employees
(including Mr. Kerrigan) that would expire pursuant to
their terms on or before December 31, 2007 to extend the
post-termination exercise period for such stock options until
the ninetieth (90th) calendar day after such time as the we
become current in our reporting obligations. |
OPTIONS
EXERCISED AND STOCK VESTED
This table shows all stock options exercised and value realized
upon exercise, and all stock awards vested and value realized
upon vesting for our named executive officers during 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
Value
|
|
|
Number of
|
|
|
Value
|
|
|
|
Shares Acquired
|
|
|
Realized
|
|
|
Shares Acquired
|
|
|
Realized
|
|
Name and Principal Position
|
|
on Exercise
|
|
|
on Exercise(1)
|
|
|
on Vesting
|
|
|
on Vesting
|
|
|
Eric Brown
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
677,250
|
|
Chief operating officer and chief financial officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher Bolin
|
|
|
|
|
|
|
|
|
|
|
16,667
|
|
|
|
353,174
|
|
Executive vice president of product development and chief
technology officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger King
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive vice president of worldwide sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Decker
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior vice president and chief information officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Kerrigan
|
|
|
28,955
|
|
|
|
285,269
|
|
|
|
|
|
|
|
|
|
Executive vice president of McAfee consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dale Fuller
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former interim chief executive officer and president
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George Samenuk
|
|
|
260,000
|
|
|
|
3,750,363
|
(2)
|
|
|
|
|
|
|
|
|
Former chairman and chief executive officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin Weiss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former president
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Equal to the difference between the market price of the
underlying shares at the time of exercise and the exercise price. |
|
(2) |
|
Realized from the sale of shares of company stock during
February and April of 2006. |
109
Severance
and Change of Control Benefits
We have entered into employment agreements with Mr. DeWalt,
Mr. Brown and Mr. Bolin. Mr. Samenuk retired in
October 2006, Mr. Weiss was terminated for cause in October
2006 and Mr. Kerrigan retired in July 2007. Prior to this
time, these former executives also had employment agreements. We
have not entered into employment agreements with any of our
other named executive officers. These severance and change
of control benefits are intended to attract and retain
qualified executives and promote stability and continuity in our
senior management team. Further, given that our executive
officers significantly contribute to our ongoing success, we
believe that the interests of our stockholders are best served
by providing our executive officers with severance and change of
control benefits.
The employment agreement we have entered into with
Mr. DeWalt provides that if he is terminated other than for
cause or resigns for good reason, he
will be entitled to (i) a lump sum severance payment equal
to his annual base salary, (ii) a lump sum severance
payment equal to his target bonus, (iii) accelerated
vesting on the next unvested tranche of his initial restricted
stock grant of 125,000 shares, and (iv) twelve months
of continued health and other welfare and fringe benefits. If
such termination occurs within twelve months following a change
of control, then Mr. DeWalt will be entitled to (i) a
lump sum severance payment equal to his annual base salary,
(ii) a lump sum severance payment equal to his target
bonus, (iii) accelerated vesting with respect to his option
to purchase 500,000 shares of our common stock equal to the
greater of (a) twelve months accelerated vesting, or
(b) 50% of the then unvested shares, and (iv) twelve
months of continued health and other welfare and fringe benefits.
The employment agreement we have entered into with
Mr. Brown provides that if he is terminated other than for
cause or resigns for good reason, he
will be entitled to (i) twelve monthly severance payments
equal to his monthly base salary, and payment of all of his
target bonus for twelve months or four quarters depending upon
whether the bonus measurement period is annual or quarterly,
(ii) twelve months of continued health and other welfare
and fringe benefits, and (iii) accelerate vesting (and, if
applicable, the lapsing of any repurchase right) with respect to
all of his shares of restricted stock (but not including
restricted stock units) and all stock options held by him. In
addition, following a change of control or if he is terminated
without cause within 90 days prior to a change of control,
all of his shares of restricted stock (but not including
restricted stock units) that would have vested within one year
of the triggering event, and all stock options held by him will
become fully vested and if applicable, any repurchase rights on
such shares will lapse.
The employment agreement with Mr. Bolin provides that if he
is terminated other than for cause or if he
terminates his employment for good reason, he will
be entitled to (i) severance payments equal to six months
of his base salary, (ii) a portion of his target bonus and
(iii) six months of continued health and other welfare and
fringe benefits. In addition, if such termination occurs within
six months of a change of control, all of his remaining unvested
stock options and shares of restricted stock (but not including
restricted stock units) will become fully vested and if
applicable, any repurchase rights on his shares will lapse.
Mr. Kerrigans employment agreement contained similar
terms. He did not receive any severance benefits in connection
with his retirement in July 2007.
For our named executive officers with employment agreements, we
have also agreed to reimburse them for certain taxes that may
arise pursuant to the employment agreements.
Mr. Samenuk retired as chief executive officer and
Mr. Weiss was terminated in October 2006 following the
presentation to our board of directors of the determinations by
the special committee of the board regarding the previously
announced investigation of our historical stock option granting
practices and related accounting. Following
Mr. Samenuks retirement in October 2006, we entered
into a separation agreement and release of claims with him in
February 2007 pursuant to which we provided him with certain
severance benefits taking into consideration his overall
contributions during his tenure with us . Specifically, such
benefits included: (i) a cash payment of $1,046,712 on
April 11, 2007, which amount reflected a pro-rated target
bonus that Mr. Samenuk was due under his prior employment
agreement upon termination of his employment with us for any
reason; (ii) an additional cash payment of $3,575,700,
reflecting 80% of two times his annual base salary and target
bonus, less $24,300, paid in arrears for six months on
April 11, 2007 and then in installments over the next
eighteen months; (iii) 100% vesting acceleration on all of
his outstanding company stock options (notwithstanding this
vesting acceleration, all such stock options then held by
Mr. Samenuk expired unexercised as of the date of the
separation
110
agreement); (iv) reimbursement for COBRA benefits through
the lesser of eighteen months or until Mr. Samenuk and his
dependents become covered under group health, dental and vision
plans of a future employer; and (v) a cash payment in the
aggregate of approximately $100,000, which amount reflected the
pre-tax cost of providing Mr. Samenuk with all other
company welfare benefits plan and fringe benefits, to be paid in
arrears for six months on April 11, 2007 and then in
installments over the next twelve months. The restricted stock
units granted to Mr. Samenuk were forfeited upon his
retirement. As a part of the separation agreement,
Mr. Samenuk signed a general release of certain claims in
favor of us as a condition to receiving the benefits described
above. We did not release Mr. Samenuk of any claims.
Additionally, Mr. Samenuk is required to comply with the
non-compete and non-solicit provisions of his prior employment
agreement with us as a condition to continued receipt of the
benefits described above. Mr. Samenuk realized an aggregate
$3,750,363 in value from the sale of shares of company stock
during February and April of 2006. We did not provide
Mr. Weiss with any severance benefits in connection with
his termination in October 2006.
The table below reflects the amount of compensation to each of
our named executive officers in the event of termination of such
executives employment due to involuntary termination not
for cause, termination for good reason,
death, disability and termination upon change of control.
Regardless of the manner in which a named executive
officers employment terminates, he is entitled to receive
amounts earned during his term of employment which include, base
salary earned through the date of termination, a portion of the
executives target bonus and accrued vacation pay. The
amounts shown assume that each termination was effective as of
December 31, 2006, and thus includes amounts earned through
the end of 2006. The value of stock-related compensation assumes
that the value of our common stock is $28.38, which was the
closing trading price on the last trading day of 2006. The value
of continuing coverage under our welfare and fringe benefits
plans reflects our actual cost for those benefits as of
December 31, 2006. All of these amounts are estimates of
the amounts that would be paid out to the executives upon their
termination. The actual amounts can only be determined at the
time the executives employment actually terminates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination for
|
|
|
Termination for
|
|
|
|
|
|
|
|
|
Termination Upon
|
|
|
|
Cause
|
|
|
Good Reason
|
|
|
Death
|
|
|
Disability
|
|
|
Change in Control
|
|
|
Eric F. Brown
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base salary and cash bonus
|
|
$
|
1,150,000
|
|
|
$
|
1,150,000
|
|
|
$
|
1,150,000
|
|
|
$
|
1,150,000
|
|
|
$
|
1,150,000
|
|
Equity
|
|
$
|
1,419,000
|
|
|
$
|
1,419,000
|
|
|
$
|
1,419,000
|
|
|
$
|
1,419,000
|
|
|
$
|
1,419,000
|
|
Healthcare and other
insurance benefits
|
|
$
|
11,727
|
|
|
$
|
11,727
|
|
|
$
|
11,727
|
|
|
$
|
11,727
|
|
|
$
|
11,727
|
|
Tax gross ups
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Christopher Bolin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base salary and cash bonus
|
|
$
|
720,000
|
|
|
$
|
720,000
|
|
|
$
|
720,000
|
|
|
$
|
720,000
|
|
|
$
|
720,000
|
|
Equity
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,692,696
|
|
Healthcare and other
insurance benefits
|
|
$
|
5,863
|
|
|
$
|
5,863
|
|
|
$
|
5,863
|
|
|
$
|
5,863
|
|
|
$
|
5,863
|
|
Tax gross ups
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
William Kerrigan(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base salary and cash bonus
|
|
$
|
352,000
|
|
|
$
|
352,000
|
|
|
$
|
352,000
|
|
|
$
|
352,000
|
|
|
$
|
352,000
|
|
Equity
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
621,736
|
|
Healthcare and other
insurance benefits
|
|
$
|
5,863
|
|
|
$
|
5,863
|
|
|
$
|
5,863
|
|
|
$
|
5,863
|
|
|
$
|
5,863
|
|
Tax gross ups
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(1) |
|
Mr. Kerrigan retired from McAfee in July 2007. He did not
receive any severance or change in control benefits in
connection with his departure. |
111
Compensation
of Directors
Directors fees, paid only to directors who are not employees,
are as follows:
|
|
|
|
|
$40,000 annual retainer, payable in quarterly installments (an
additional $10,000 annual retainer, payable in quarterly
installments, is paid to our lead independent director and the
chairpersons of our standing board committees);
|
|
|
|
$1,500 for each board and board committee meeting attended in
person;
|
|
|
|
$1,000 (reduced from $1,500 in March 2006) for each board
and board committee meeting attended by telephone;
|
|
|
|
expenses of attending board and committee meetings; and
|
|
|
|
medical insurance benefits for directors and their families.
|
On January 30, 2007, our board approved an increase in the
annual cash compensation for Charles Robel, serving in his
capacity as our non-executive chairman of the board, to a total
of $200,000 per year, in addition to the other cash compensation
received in connection with his other board service and
committee memberships. This increase was in recognition of the
additional responsibilities Mr. Robel assumed in connection
with our internal investigation of stock option practices and
its related restatement of financial statements.
Mr. Robels annual cash compensation for services as
our non-executive chairman of the board will be reduced to
$100,000 effective January 1, 2008.
Under our current Stock Option Plan for Outside Directors
non-employee directors are automatically granted an option to
purchase 30,000 shares of our common stock when they first
become a director, reduced from 40,000 shares in October
2007. Each year after the initial grant they are entitled to
receive an additional option grant to purchase up to
15,000 shares of our common stock, reduced from
20,000 shares in October 2007. All options under this plan
are granted at the fair market value on the date of grant. The
initial grant vests one-third each year over three years from
the date of grant. The subsequent grants vest in full on the
first anniversary of the date of grant. All options granted
under this plan become fully exercisable in the event of certain
mergers, sales of assets or sales of the majority of our voting
stock.
Our employee directors are eligible to receive options and be
issued shares of common stock directly under the 1997 Stock
Incentive Plan and are eligible to participate in our 2002
Employee Stock Purchase Plan and, if an executive officer, to
participate in the Executive Bonus Plan.
DIRECTOR
COMPENSATION
The following table shows the compensation paid or accrued
during 2006 to the non-employee individuals serving on our board
of directors in 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
Name
|
|
or Paid in Cash
|
|
|
Stock Awards
|
|
|
Option Awards(1)
|
|
|
Compensation
|
|
|
Total
|
|
|
|
|
|
Robert Bucknam
|
|
$
|
126,000
|
|
|
$
|
|
|
|
$
|
233,234
|
|
|
|
|
|
|
$
|
359,234
|
|
|
|
|
|
Leslie Denend
|
|
|
69,000
|
|
|
|
|
|
|
|
231,203
|
|
|
|
|
|
|
|
300,203
|
|
|
|
|
|
Robert Dutkowsky
|
|
|
96,000
|
|
|
|
|
|
|
|
230,842
|
|
|
|
|
|
|
|
326,842
|
|
|
|
|
|
Denis OLeary
|
|
|
91,000
|
|
|
|
|
|
|
|
227,385
|
|
|
|
|
|
|
|
318,385
|
|
|
|
|
|
Robert Pangia
|
|
|
96,000
|
|
|
|
|
|
|
|
230,842
|
|
|
|
|
|
|
|
326,842
|
|
|
|
|
|
Charles Robel
|
|
|
92,000
|
|
|
|
|
|
|
|
77,505
|
|
|
|
|
|
|
|
169,505
|
|
|
|
|
|
Liane Wilson
|
|
|
88,500
|
|
|
|
|
|
|
|
221,362
|
|
|
|
|
|
|
|
309,862
|
|
|
|
|
|
|
|
|
(1) |
|
The compensation amounts reported in the Option
Awards column reflect the expense that we reported in our
consolidated 2006 financial statements under SFAS 123(R),
except that the amounts of expense reported in our financial
statements are net of estimated forfeitures, while the amounts
shown in the table are gross of estimated forfeitures. These
amounts consist of the fair value expense for all existing
share-based awards that vested |
112
|
|
|
|
|
during the year 2006. For this purpose, the fair value of an
award is apportioned over the period during which the award is
expected to vest. The fair value of a stock award is equal to
the closing price of our stock on the grant date. The fair value
of an option award is determined using the Black-Scholes option
pricing model. Our assumptions for financial statement purposes
are described in Note 16 to our consolidated financial
statements included for the year ended December 31, 2006. |
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The following table shows as of December 1, 2007, the
number of shares of our common stock owned by (i) our chief
executive officer, (ii) each of our other named executive
officers during fiscal 2006, (iii) each of our current
directors, and (iv) each stockholder known by us as of that
date to be the beneficial owner of more than 5% of our
outstanding common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Percent of
|
|
|
|
Shares
|
|
|
Right to
|
|
|
Outstanding
|
|
Name and Address of Beneficial Owners
|
|
Owned(1)
|
|
|
Acquire(2)
|
|
|
Shares(3)
|
|
|
David DeWalt
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Robert Bucknam
|
|
|
|
|
|
|
70,000
|
|
|
|
*
|
|
Leslie Denend
|
|
|
6,297
|
|
|
|
85,000
|
|
|
|
*
|
|
Dale Fuller
|
|
|
|
|
|
|
16,668
|
|
|
|
*
|
|
Robert Pangia
|
|
|
|
|
|
|
102,500
|
|
|
|
*
|
|
Denis OLeary
|
|
|
|
|
|
|
70,000
|
|
|
|
*
|
|
Charles Robel
|
|
|
|
|
|
|
13,334
|
|
|
|
*
|
|
Liane Wilson
|
|
|
|
|
|
|
90,000
|
|
|
|
*
|
|
Eric Brown
|
|
|
61,347
|
(4)
|
|
|
225,000
|
|
|
|
*
|
|
Christopher Bolin
|
|
|
38,184
|
(5)
|
|
|
350,750
|
|
|
|
*
|
|
Richard Decker
|
|
|
|
|
|
|
50,000
|
|
|
|
*
|
|
Roger King
|
|
|
|
|
|
|
31,250
|
|
|
|
*
|
|
William Kerrigan
|
|
|
|
|
|
|
71,255
|
|
|
|
*
|
|
J&W Seligman & Co. LLC(6)
|
|
|
12,732,080
|
|
|
|
|
|
|
|
8.0
|
%
|
100 Park Avenue, New York City, New York 10017
|
|
|
|
|
|
|
|
|
|
|
|
|
Lord, Abbett & Co. LLC(7)
|
|
|
12,754,212
|
|
|
|
|
|
|
|
8.0
|
%
|
90 Hudson Street, Jersey City, NJ 07302
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellington Management Company, LLP(8)
|
|
|
18,885,761
|
|
|
|
|
|
|
|
|
|
75 State Street, Boston, MA 02109
|
|
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group (13 persons)
|
|
|
105,828
|
|
|
|
1,087,834
|
|
|
|
*
|
|
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
Ownership includes direct and indirect (beneficial) ownership,
as defined by SEC rules. To our knowledge, each person has sole
voting and investment power over the shares unless otherwise
noted. The SEC rules for the determination of beneficial
ownership are very complex. Generally, however, shares owned
directly, plus those controlled (e.g., owned by members of their
immediate families), are considered beneficially owned. Excludes
shares that may be acquired through stock option exercises.
Unless otherwise indicated, the address of each beneficial owner
is c/o. McAfee, Inc., 3965 Freedom Circle, Santa Clara, CA
95054. |
|
(2) |
|
Consists of options that are currently exercisable or will
become exercisable within 60 days of December 1, 2007. |
|
(3) |
|
Based upon 159,908,615 shares outstanding as of
December 1, 2007. |
|
(4) |
|
Includes 25,000 shares of restricted stock issued to
Mr. Brown that will vest in January 2008. |
|
(5) |
|
Includes 16,666 shares of restricted stock issued to
Mr. Bolin that will vest in August 2008. |
113
|
|
|
(6) |
|
According to the Schedule 13G filed on February 13,
2007 by J&W Seligman & Co. LLC (J&W
Seligman). J&W Seligman is the beneficial holder of
12,732,080 shares of our common stock. J&W Seligman
does not have sole dispositive power or sole voting power over
any shares. |
|
(7) |
|
According to the amended Schedule 13G filed on
February 14, 2007 by Lord, Abbett & Co. LLC
(Lord Abbett). Lord Abbett is the beneficial holder
of 12,754,212 shares of our common stock. Lord Abbett has
sole dispositive power over 12,754,212 shares and has sole
voting power with respect to 12,320,912 shares. |
|
(8) |
|
According to the Schedule 13G filed on August 10, 2007
by Wellington Management Company, LLP (Wellington
Management). Wellington Management is the beneficial
holder of 18,885,761 shares of our common stock. UBS AG has
sole dispositive power and sole voting power over none of the
shares. |
Equity
Compensation Plans
The number of options, the weighted average per share exercise
price of such options and the number of shares remaining
available for issuance under all of our equity compensation
plans as of December 31, 2006 are reflected in the
following table (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
Number of
|
|
|
|
|
|
Remaining Available
|
|
|
|
Securities to be
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Issued Upon
|
|
|
Weighted-Average
|
|
|
(Excluding
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Securities Reflected
|
|
Plan Category
|
|
Outstanding Options
|
|
|
Outstanding Options
|
|
|
in First Column)
|
|
|
Plans approved by stockholders(1)
|
|
|
12,411,309
|
|
|
$
|
21.13
|
|
|
|
5,483,399
|
|
Plans not approved by stockholders
|
|
|
1,488,702
|
|
|
$
|
17.74
|
|
|
|
379,699
|
|
|
|
|
(1) |
|
All option grants pursuant to the 1993 Stock Option Plan for
Outside Directors, or the Directors Plan, have ten-year terms
and are required to be granted at 100% of fair market value on
the date of grant. The companys other option plans do not
have this restriction. As of December 31, 2006,
756,875 shares were outstanding under the Directors Plan at
a weighted average exercise price of $18.78, and
807,185 shares remained available for future issuance. |
The following describes our equity compensation plans that have
not been approved by stockholders.
2000
Nonstatutory Stock Option Plan
In January 2000, the board of directors approved the 2000
Nonstatutory Stock Option Plan, or the 2000 Plan. The 2000 Plan
provides for the grant of nonqualified stock options to
employees, consultants and in certain cases, officers and
directors. The plan administrator determines the exercise price
of options granted under the 2000 Plan and when such options may
be exercised. The 2000 Plan provides that vested options may be
exercised for three months after termination of employment other
than due to death or disability and for one year after
termination of employment as a result of death or disability.
The 2000 Plan permits options to be exercised with cash, check,
certain other shares of our common stock, promissory notes,
cancellation of indebtedness, waiver of compensation due or
consideration received by us under cashless exercise
programs. In the event that we merge with or into another
corporation, or sell substantially all of our assets, the 2000
Plan provides that each outstanding option will fully vest and
become exercisable unless provision is made for options to be
assumed or substituted for by the successor corporation. There
are 11,500,000 shares of common stock reserved under the 2000
Plan. As of December 31, 2006, no shares remained available
for future issuance under the 2000 Plan.
1999
Nonstatutory Stock Plan
In May 1999, the board of directors approved the 1999
Nonstatutory Stock Plan, or the 1999 Plan. The 1999 Plan
provides for the grant of nonqualified stock options to
employees, officers, directors and consultants at exercises
prices determined by the plan administrator. The plan
administrator determines the exercise price of options granted
under the 1999 Plan and when such options may be exercised. The
1999 Plan permits options to be exercised with cash, check,
certain other shares of our common stock, promissory notes,
cancellation of indebtedness, waiver of compensation due or
consideration received by us under cashless exercise
programs. In the
114
event that we merge with or into another corporation, or sell
substantially all of our assets, the 1999 Plan provides that
each outstanding option will fully vest and become exercisable
unless provision is made for options to be assumed or
substituted for by the successor corporation. There are
1,000,000 shares of common stock reserved under the 1999
Plan and there are no shares available for future issuance under
the 1999 Plan.
1997
Non-Officer Stock Plan
In January 1997, the board of directors approved the 1997
Non-Officer Stock Plan, or the 1997 Non-Officer Plan. The 1997
Non-Officer Plan provides for the grant of nonqualified
nonstatutory stock options to employees and consultants who are
not officers of the company at exercise prices determined by the
committee administering the plan, but in no event less than 85%
of the fair market value of the common stock on the date of the
grants. Each stock option agreement entered into under the 1997
Non-Officer Plan shall specify the exercise price, the date on
which all or any installment of the option is to become
exercisable and the term of the option. The 1997 Non-Officer
Plan permits options to be exercised with cash or cash
equivalents, certain other shares of common stock, promissory
notes (provided, however, that the par value of the shares being
purchased shall be paid in cash) and waiver of compensation due
or consideration received by us under cashless
exercise programs. In the event that we merge with or into
another corporation, or sell substantially all of our assets,
the 1997 Non-Officer Plan provides that the committee
administering the plan may determine, at the time of granting an
option or thereafter, that all or part of such option shall
fully vest and become exercisable. There are
3,000,000 shares of common stock reserved under the 1997
Non-Officer Plan and there are no shares available for future
issuance under this plan.
Foundstone,
Inc. 2000 Stock Plan
On October 1, 2004, the company completed the acquisition
of Foundstone, Inc. In connection with the acquisition, the
company assumed the Foundstone, Inc. 2000 Stock Plan, or the
Foundstone Plan. The Foundstone Plan provides for the grant of
incentive stock options, nonqualified nonstatutory stock options
and stock purchase rights to employees, directors and
consultants of the company and its subsidiaries at exercise
prices determined by the committee administering the plan, but
in no event less than 85% of the fair market value of the common
stock on the date of the grant. However, due to restrictions
imposed by the Internal Revenue Service the company will only
grant nonqualified nonstatutory stock options under the
Foundstone Plan in the future and due to restrictions imposed by
the New York Stock Exchange following the acquisition of
Foundstone, the company may not grant awards under the
Foundstone Plan to individuals who were employed by the company
or its subsidiaries, immediately prior to the acquisition of
Foundstone. Each stock option agreement entered into under the
Foundstone Plan shall specify the exercise price, the date on
which all or any installment of the option is to become
exercisable and the term of the option. The Foundstone Plan
permits options to be exercised with cash or cash equivalents,
certain other shares of common stock, promissory notes or
consideration received by us under cashless exercise
programs. In the event that we merge with or into another
corporation, or sell substantially all of our assets, the
Foundstone Plan provides that the successor corporation (or a
parent or subsidiary) may assume outstanding options and awards
under the Plan or substitute a substantially similar option or
award. If the successor corporation does not assume or
substitute the outstanding options and awards, they will fully
vest and become exercisable and all forfeiture restrictions will
lapse. There are 747,144 shares of common stock reserved
under the Foundstone Plan, of which 379,699 are available for
issuance as of December 31, 2006.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
On October 2, 2006, Robert M. Dutkowsky, a member of our
board of directors, was appointed chief executive officer and a
director of Tech Data Corporation, one of our customers. We
recognized revenue from sales to Tech Data Corporation of
$37.1 million during the fourth quarter of 2006. Our
outstanding accounts receivable balance related to Tech Data
Corporation was $22.7 million at December 31, 2006.
Our deferred revenue balance related to Tech Data Corporation
was $79.2 million at December 31, 2006.
Mr. Dutkowsky resigned from our board of directors during
the first quarter of 2007 and Tech Data Corporation ceased to be
a related party.
We have entered into indemnity agreements with certain
employees, officers and directors that provide, among other
things, that we will indemnify such employee, officer or
director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements
he or she may be required to pay in
115
actions or proceedings which he or she is or may be made a party
by reason of his or her position as an employee, officer,
director or other agent with us, and otherwise to the fullest
extent permitted under Delaware law and our Bylaws. In this
regard, we have received, or expect to receive, requests for
indemnification by certain current and former officers and
directors in connection with our review of our historic stock
option granting practices and the related restatement, related
governmental inquiries, and shareholder derivative litigation
described in Item 3 of this
Form 10-K.
The maximum amount of potential future indemnification is
unknown and potentially unlimited; however, we have
directors and officers liability insurance policies
that enable us to recover a portion of future indemnification
claims paid, subject to retentions, conditions and limitations
of the policies. As a result of this insurance coverage, we
believe that the fair value of these indemnification claims is
not material.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
For the years ended December 31, 2006 and 2005, our
principal independent accountant was Deloitte & Touche
LLP (D&T). The following table reflects the
aggregate fees billed or expected to be billed to us by D&T
for 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Audit fees(1)
|
|
$
|
9,046
|
|
|
$
|
5,610
|
|
Audit-related fees(2)
|
|
|
4
|
|
|
|
8
|
|
Tax fees(3)
|
|
|
505
|
|
|
|
2,391
|
|
Other fees(4)
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,557
|
|
|
$
|
8,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees related to the audit of our consolidated annual
financial statements, the audit of managements assessment
of our internal control over financial reporting and
D&Ts own audit of our internal control over financial
reporting, work related to our restatement, review of the
consolidated financial statements included in our quarterly
reports on
Form 10-Q,
statutory audits for foreign entities and securities filings. |
|
(2) |
|
Audit-related fees for assurance services and services related
to our audits and reviews of our consolidated financial
statements which are not considered audit fees. |
|
(3) |
|
Fees for tax related services, including compliance, planning
and tax advice. |
|
(4) |
|
Fees for subscription to online accounting research tool. |
Our audit committee charter includes a requirement that the
audit committee of the board of directors pre-approve the
services provided by our independent public accountants,
including both audit and non-audit services. The pre-approval of
non-audit services performed by our independent public
accountants includes making a determination that the provision
of the services is compatible with maintaining the independence
of our independent accountants. All of the services performed by
D&T under the captions Audit-related fees,
Tax fees, and Other fees were
pre-approved by our audit committee.
116
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Consolidated Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
Number
|
|
|
|
|
118
|
|
|
|
|
119
|
|
|
|
|
120
|
|
|
|
|
121
|
|
|
|
|
122
|
|
|
|
|
124
|
|
(a)(2) Consolidated Financial Statement Schedule
The following financial statement schedule of McAfee, Inc. for
the years ended December 31, 2006, 2005, and 2004 is filed
as part of this
Form 10-K
and should be read in conjunction with McAfee, Inc.s
Consolidated Financial Statements.
Schedule II Valuation and Qualifying Accounts
for the years ended December 31, 2006, 2005 and 2004
Schedules not listed above have been omitted because they are
not applicable or are not required or because the required
information is included in the Consolidated Financial Statements
or Notes thereto.
(a)(3) Exhibits See Index to Exhibits on
Page 116. The Exhibits listed on the accompanying Index of
Exhibits are filed or incorporated by reference as part of this
report.
117
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of McAfee, Inc.:
We have audited the accompanying consolidated balance sheets of
McAfee, Inc and subsidiaries (the Company) as of
December 31, 2006 and 2005, and the related consolidated
statements of income and comprehensive income,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2006. Our audits
also included the financial statement schedule listed in the
Index at Item 15. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2006, in conformity
with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as whole, presents
fairly in all material respects the information set forth
therein.
As discussed in Note 3, the accompanying 2005 and 2004
consolidated financial statements have been restated.
As discussed in Note 2, on January 1, 2006 the Company
adopted the provisions of Statement of Financial Accounting
Standards No. 123(R), Share Based Payment.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, based on the
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated December 21,
2007 expressed an unqualified opinion on managements
assessment of the effectiveness of the Companys internal
control over financial reporting and an adverse opinion on the
effectiveness of the Companys internal control over
financial reporting.
San Jose, California
December 21, 2007
118
MCAFEE,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(As restated
|
|
|
|
|
|
|
see note 3)
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
389,627
|
|
|
$
|
728,592
|
|
Restricted cash
|
|
|
|
|
|
|
50,489
|
|
Short-term marketable securities
|
|
|
215,722
|
|
|
|
316,298
|
|
Accounts receivable, net of allowance for doubtful accounts of
$2,015 and $2,389, respectively
|
|
|
170,855
|
|
|
|
159,130
|
|
Prepaid expenses and prepaid taxes
|
|
|
132,203
|
|
|
|
79,132
|
|
Deferred income taxes
|
|
|
236,310
|
|
|
|
204,208
|
|
Other current assets
|
|
|
31,915
|
|
|
|
28,490
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,176,632
|
|
|
|
1,566,339
|
|
Long-term marketable securities
|
|
|
634,820
|
|
|
|
212,131
|
|
Restricted cash
|
|
|
950
|
|
|
|
939
|
|
Property and equipment, net
|
|
|
91,999
|
|
|
|
85,692
|
|
Deferred income taxes
|
|
|
228,103
|
|
|
|
237,970
|
|
Intangible assets, net
|
|
|
113,574
|
|
|
|
80,086
|
|
Goodwill
|
|
|
530,477
|
|
|
|
437,488
|
|
Other assets
|
|
|
23,715
|
|
|
|
15,589
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,800,270
|
|
|
$
|
2,636,234
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
35,652
|
|
|
$
|
34,678
|
|
Accrued SEC settlement
|
|
|
|
|
|
|
50,000
|
|
Accrued income taxes
|
|
|
118,589
|
|
|
|
76,740
|
|
Accrued compensation
|
|
|
62,913
|
|
|
|
55,781
|
|
Other accrued liabilities
|
|
|
108,418
|
|
|
|
85,460
|
|
Deferred revenue
|
|
|
704,807
|
|
|
|
575,665
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,030,379
|
|
|
|
878,324
|
|
Deferred revenue, less current portion
|
|
|
192,718
|
|
|
|
176,141
|
|
Accrued taxes and other long-term liabilities
|
|
|
149,924
|
|
|
|
147,128
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,373,021
|
|
|
|
1,201,593
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 11, 12 and 20)
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
Preferred stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized: 5,000,000 shares; Issued and outstanding: none
in 2006 and 2005
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized: 300,000,000 shares; Issued:
172,512,046 shares at December 31, 2006 and
170,453,210 shares at December 31, 2005
|
|
|
|
|
|
|
|
|
Outstanding: 159,915,439 shares at December 31, 2006
and 167,688,210 shares at December 31, 2005
|
|
|
1,726
|
|
|
|
1,705
|
|
Treasury stock, at cost: 12,596,607 shares at
December 31, 2006 and 2,765,000 shares at
December 31, 2005
|
|
|
(303,074
|
)
|
|
|
(68,395
|
)
|
Additional paid-in capital
|
|
|
1,527,843
|
|
|
|
1,443,743
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
(8,146
|
)
|
Accumulated other comprehensive income
|
|
|
31,472
|
|
|
|
33,923
|
|
Retained earnings
|
|
|
169,282
|
|
|
|
31,811
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,427,249
|
|
|
|
1,434,641
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,800,270
|
|
|
$
|
2,636,234
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
119
MCAFEE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(As restated
|
|
|
(As restated
|
|
|
|
|
|
|
see note 3)
|
|
|
see note 3)
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
633,658
|
|
|
$
|
544,477
|
|
|
$
|
463,726
|
|
Subscription
|
|
|
428,296
|
|
|
|
318,206
|
|
|
|
215,817
|
|
Product
|
|
|
83,204
|
|
|
|
118,945
|
|
|
|
228,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
1,145,158
|
|
|
|
981,628
|
|
|
|
907,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
|
51,904
|
|
|
|
24,179
|
|
|
|
26,025
|
|
Subscription
|
|
|
110,267
|
|
|
|
63,478
|
|
|
|
38,484
|
|
Product
|
|
|
60,957
|
|
|
|
64,614
|
|
|
|
74,518
|
|
Amortization of purchased technology
|
|
|
23,712
|
|
|
|
17,767
|
|
|
|
14,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
|
246,840
|
|
|
|
170,038
|
|
|
|
153,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
193,447
|
|
|
|
176,409
|
|
|
|
174,872
|
|
Marketing and sales
|
|
|
366,454
|
|
|
|
300,089
|
|
|
|
353,074
|
|
General and administrative
|
|
|
169,694
|
|
|
|
123,487
|
|
|
|
145,038
|
|
Amortization of intangibles
|
|
|
10,682
|
|
|
|
12,834
|
|
|
|
14,235
|
|
SEC and compliance costs
|
|
|
17,824
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
470
|
|
|
|
3,782
|
|
|
|
17,442
|
|
In-process research and development
|
|
|
460
|
|
|
|
4,000
|
|
|
|
|
|
Loss (gain) on sale of assets and technology
|
|
|
259
|
|
|
|
(56
|
)
|
|
|
(240,336
|
)
|
SEC settlement charge
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Reimbursement from transition services agreement
|
|
|
|
|
|
|
(362
|
)
|
|
|
(5,997
|
)
|
Reimbursement related to litigation settlement
|
|
|
|
|
|
|
|
|
|
|
(24,991
|
)
|
Severance/bonus costs related to Sniffer and Magic disposition
|
|
|
|
|
|
|
|
|
|
|
10,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs
|
|
|
759,290
|
|
|
|
670,183
|
|
|
|
443,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
139,028
|
|
|
|
141,407
|
|
|
|
310,252
|
|
Interest and other income
|
|
|
44,397
|
|
|
|
26,703
|
|
|
|
14,651
|
|
Interest and other expenses
|
|
|
|
|
|
|
|
|
|
|
(5,315
|
)
|
Loss on repurchase of convertible debt
|
|
|
|
|
|
|
|
|
|
|
(15,070
|
)
|
Gain (loss) on investments, net
|
|
|
356
|
|
|
|
(1,432
|
)
|
|
|
(1,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
183,781
|
|
|
|
166,678
|
|
|
|
302,814
|
|
Provision for income taxes
|
|
|
46,310
|
|
|
|
48,461
|
|
|
|
82,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
137,471
|
|
|
$
|
118,217
|
|
|
$
|
220,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on marketable securities, net of
reclassification adjustment for gains (losses) recognized on
marketable securities during the period and income tax
|
|
$
|
1,344
|
|
|
$
|
(638
|
)
|
|
$
|
(2,129
|
)
|
Foreign currency translation (loss) gain
|
|
|
(3,795
|
)
|
|
|
3,811
|
|
|
|
(1,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
135,020
|
|
|
$
|
121,390
|
|
|
$
|
216,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
0.85
|
|
|
$
|
0.72
|
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$
|
0.84
|
|
|
$
|
0.70
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation basic
|
|
|
160,945
|
|
|
|
165,042
|
|
|
|
160,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation diluted
|
|
|
163,052
|
|
|
|
169,249
|
|
|
|
177,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
120
MCAFEE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
Earnings
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-In
|
|
|
Stock-Based
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income
|
|
|
Deficit)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2003, as reported
|
|
|
161,722
|
|
|
$
|
1,621
|
|
|
|
350
|
|
|
$
|
(4,707
|
)
|
|
$
|
1,087,625
|
|
|
$
|
(598
|
)
|
|
$
|
34,027
|
|
|
$
|
(229,879
|
)
|
|
$
|
888,089
|
|
Cumulative effect of restatements(See Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,196
|
|
|
|
(14,433
|
)
|
|
|
654
|
|
|
|
(76,544
|
)
|
|
|
15,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2003 (As restated)
|
|
|
161,722
|
|
|
|
1,621
|
|
|
|
350
|
|
|
|
(4,707
|
)
|
|
|
1,193,821
|
|
|
|
(15,031
|
)
|
|
|
34,681
|
|
|
|
(306,423
|
)
|
|
|
903,962
|
|
Issuance of common stock upon exercise of stock options
|
|
|
9,152
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
105,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,730
|
|
Issuance of common stock from Employee Stock Purchase Plan
|
|
|
775
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,063
|
|
Issuance of common stock upon exercise of warrants
|
|
|
184
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon conversion of debt
|
|
|
4,616
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
83,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,410
|
|
Repurchase of common stock
|
|
|
(12,623
|
)
|
|
|
|
|
|
|
12,623
|
|
|
|
(221,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(221,816
|
)
|
Retirement of treasury stock
|
|
|
|
|
|
|
(130
|
)
|
|
|
(12,973
|
)
|
|
|
226,523
|
|
|
|
(226,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,814
|
|
|
|
(10,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares returned from trust
|
|
|
(1,560
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock-based compensation and other
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,497
|
|
|
|
19,666
|
|
|
|
|
|
|
|
|
|
|
|
25,163
|
|
Cash payable in excess of exercise price related to exchange of
McAfee.com options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,154
|
)
|
Contribution of proceeds from sale of common stock held in trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,779
|
|
Tax benefits from exercise of non-qualified stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,213
|
|
Stock options issued in connection with acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,039
|
|
|
|
(2,252
|
)
|
|
|
|
|
|
|
|
|
|
|
4,787
|
|
Release of tax contingency related to acquisition accounted for
as a pooling of interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,019
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,802
|
)
|
|
|
|
|
|
|
(1,802
|
)
|
Net decrease in unrealized gains on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,129
|
)
|
|
|
|
|
|
|
(2,129
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220,017
|
|
|
|
220,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2004 (As restated) (See Note 3)
|
|
|
162,266
|
|
|
|
1,623
|
|
|
|
|
|
|
|
|
|
|
|
1,268,706
|
|
|
|
(8,431
|
)
|
|
|
30,750
|
|
|
|
(86,406
|
)
|
|
|
1,206,242
|
|
Issuance of common stock upon exercise of stock options
|
|
|
7,212
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
96,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,719
|
|
Issuance of common stock from Employee Stock Purchase Plan
|
|
|
790
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
11,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,473
|
|
Issuance of restricted stock
|
|
|
185
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Repurchase of common stock
|
|
|
(2,765
|
)
|
|
|
|
|
|
|
2,765
|
|
|
|
(68,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,395
|
)
|
Deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,035
|
|
|
|
(5,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock-based compensation and other
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(849
|
)
|
|
|
5,320
|
|
|
|
|
|
|
|
|
|
|
|
4,471
|
|
Cash payable in excess of exercise price related to exchange of
McAfee.com options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,704
|
)
|
Contribution of proceeds from sale of common stock held in trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
Tax benefits from exercise of non-qualified stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,563
|
|
Release of tax contingency related to acquisition accounted for
as a pooling of interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,838
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,811
|
|
|
|
|
|
|
|
3,811
|
|
Net increase in unrealized losses on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(638
|
)
|
|
|
|
|
|
|
(638
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,217
|
|
|
|
118,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005, (As restated)(See Note 3)
|
|
|
167,688
|
|
|
|
1,705
|
|
|
|
2,765
|
|
|
|
(68,395
|
)
|
|
|
1,443,743
|
|
|
|
(8,146
|
)
|
|
|
33,923
|
|
|
|
31,811
|
|
|
|
1,434,641
|
|
Issuance of common stock upon exercise of stock options
|
|
|
1,634
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
25,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,370
|
|
Issuance of common stock from Employee Stock Purchase Plan
|
|
|
395
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
6,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,799
|
|
Interest on Employee Stock Purchase Plans due to restrictions on
share issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(164
|
)
|
Issuance of restricted stock
|
|
|
30
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Repurchase of common stock
|
|
|
(9,812
|
)
|
|
|
|
|
|
|
9,812
|
|
|
|
(234,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(234,679
|
)
|
Forfeiture of restricted stock awards
|
|
|
(20
|
)
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of deferred compensation into additional
paid-in capital due to adoption of FAS 123(R)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,146
|
)
|
|
|
8,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,369
|
|
Stock options related to option extension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,326
|
|
Cash payable in excess of exercise price related to exchange of
McAfee.com options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(392
|
)
|
Tax benefits from exercise of non-qualified stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,958
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,795
|
)
|
|
|
|
|
|
|
(3,795
|
)
|
Net increase in unrealized gains on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,344
|
|
|
|
|
|
|
|
1,344
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,471
|
|
|
|
137,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
|
159,915
|
|
|
$
|
1,726
|
|
|
|
12,597
|
|
|
$
|
(303,074
|
)
|
|
$
|
1,527,843
|
|
|
$
|
|
|
|
$
|
31,472
|
|
|
$
|
169,282
|
|
|
$
|
1,427,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
121
MCAFEE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(As restated
|
|
|
(As restated
|
|
|
|
|
|
|
see Note 3)
|
|
|
see Note 3)
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
137,471
|
|
|
$
|
118,217
|
|
|
$
|
220,017
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
70,271
|
|
|
|
66,996
|
|
|
|
68,336
|
|
Tax benefit from exercise of nonqualified stock options
|
|
|
|
|
|
|
27,019
|
|
|
|
53,213
|
|
Deferred income taxes
|
|
|
(34,975
|
)
|
|
|
(6,543
|
)
|
|
|
(24,835
|
)
|
Non-cash restructuring charge
|
|
|
559
|
|
|
|
686
|
|
|
|
9,624
|
|
Acquired in-process research and development
|
|
|
460
|
|
|
|
4,000
|
|
|
|
|
|
Interest released (earned) on restricted cash
|
|
|
489
|
|
|
|
(489
|
)
|
|
|
|
|
(Recovery of) provision for doubtful accounts, net
|
|
|
(5
|
)
|
|
|
1,574
|
|
|
|
1,716
|
|
Non-cash stock-based compensation expense
|
|
|
54,695
|
|
|
|
4,471
|
|
|
|
25,163
|
|
Excess tax benefit from stock-based compensation
|
|
|
(4,960
|
)
|
|
|
|
|
|
|
|
|
(Discount) premium amortization of marketable securities
|
|
|
(7,176
|
)
|
|
|
42
|
|
|
|
4,614
|
|
(Gain) loss on sale of investments
|
|
|
(356
|
)
|
|
|
1,432
|
|
|
|
1,704
|
|
Loss (gain) on sale of assets and technology
|
|
|
259
|
|
|
|
(56
|
)
|
|
|
(238,923
|
)
|
Loss on repurchase of zero coupon convertible debenture
|
|
|
|
|
|
|
|
|
|
|
15,070
|
|
Change in fair value of interest rate swap, net of change in the
fair value of the debt
|
|
|
|
|
|
|
|
|
|
|
382
|
|
Non-cash interest and other expense on convertible debt
|
|
|
|
|
|
|
|
|
|
|
1,224
|
|
Changes in assets and liabilities, net of acquisitions and
divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,097
|
)
|
|
|
(23,204
|
)
|
|
|
33,930
|
|
Prepaid expenses, prepaid taxes and other assets
|
|
|
(55,414
|
)
|
|
|
(9,471
|
)
|
|
|
(8,297
|
)
|
Accounts payable
|
|
|
(531
|
)
|
|
|
3,536
|
|
|
|
(1,323
|
)
|
Accrued taxes and other liabilities
|
|
|
21,655
|
|
|
|
43,230
|
|
|
|
30,566
|
|
Deferred revenue
|
|
|
110,144
|
|
|
|
188,017
|
|
|
|
166,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
290,489
|
|
|
|
419,457
|
|
|
|
358,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(1,315,407
|
)
|
|
|
(793,581
|
)
|
|
|
(1,243,990
|
)
|
Proceeds from sales of marketable securities
|
|
|
631,849
|
|
|
|
669,260
|
|
|
|
967,866
|
|
Proceeds from maturities of marketable securities
|
|
|
371,070
|
|
|
|
226,879
|
|
|
|
65,536
|
|
Decrease (increase) in restricted cash(1)
|
|
|
49,989
|
|
|
|
(50,322
|
)
|
|
|
19,930
|
|
Purchase of property and equipment and leasehold improvements
|
|
|
(43,751
|
)
|
|
|
(28,941
|
)
|
|
|
(25,374
|
)
|
Acquisitions, net of cash acquired
|
|
|
(146,089
|
)
|
|
|
(20,200
|
)
|
|
|
(84,650
|
)
|
Proceeds from sale of assets and technology
|
|
|
|
|
|
|
1,500
|
|
|
|
261,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(452,339
|
)
|
|
|
4,595
|
|
|
|
(39,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
MCAFEE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(As restated
|
|
|
(As restated
|
|
|
|
|
|
|
see Note 3)
|
|
|
see Note 3)
|
|
|
|
(In thousands)
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock under stock option and
stock purchase plans
|
|
|
32,008
|
|
|
|
108,236
|
|
|
|
113,793
|
|
Excess tax benefit from stock-based compensation
|
|
|
4,960
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(234,679
|
)
|
|
|
(68,395
|
)
|
|
|
(221,816
|
)
|
Repurchase of convertible debt
|
|
|
|
|
|
|
|
|
|
|
(265,623
|
)
|
Contribution of proceeds from sale of common stock held in trust
|
|
|
|
|
|
|
|
|
|
|
3,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(197,711
|
)
|
|
|
39,841
|
|
|
|
(369,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash
|
|
|
20,596
|
|
|
|
(26,456
|
)
|
|
|
7,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(338,965
|
)
|
|
|
437,437
|
|
|
|
(42,496
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
728,592
|
|
|
|
291,155
|
|
|
|
333,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
389,627
|
|
|
$
|
728,592
|
|
|
$
|
291,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable investments, net
|
|
$
|
1,344
|
|
|
$
|
(638
|
)
|
|
$
|
(2,129
|
)
|
Fair value of assets acquired in business combinations,
excluding cash acquired
|
|
$
|
166,099
|
|
|
$
|
20,949
|
|
|
$
|
109,474
|
|
Liabilities assumed in business combinations
|
|
$
|
20,012
|
|
|
$
|
749
|
|
|
$
|
20,037
|
|
Accrual for purchase of property, equipment and leasehold
improvements
|
|
$
|
2,694
|
|
|
$
|
1,283
|
|
|
$
|
|
|
Realization of deferred tax assets of acquired company
|
|
$
|
|
|
|
$
|
38,838
|
|
|
$
|
27,019
|
|
Issuance of common stock upon conversion of debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
83,410
|
|
Stock options issued in connection with acquisition
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,039
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,349
|
|
Cash paid for income taxes
|
|
$
|
54,919
|
|
|
$
|
38,023
|
|
|
$
|
21,912
|
|
Cash received from income tax refunds
|
|
$
|
7,032
|
|
|
$
|
14,416
|
|
|
$
|
1,443
|
|
|
|
|
(1) |
|
The $50.0 million placed in escrow for the settlement with
the SEC (see Note 20) is reflected as cash used in
investing activities in 2005. The SEC approved the settlement in
January 2006. In 2006, the release of the escrow is reflected as
cash provided by investing activities of $50.0 million and
the transfer to the SEC is reflected as cash used in operating
activities of $50.0 million included within accrued taxes
and other liabilities. |
The accompanying notes are an integral part of these
consolidated financial statements.
123
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
1.
|
Organization
and Business
|
McAfee, Inc. and our wholly owned subsidiaries (we,
us or our) are a worldwide security
technology company that secures systems and networks from known
and unknown threats around the world. Our security solutions are
offered primarily to large enterprises, governments, small and
medium-sized businesses and consumers through a network of
qualified partners. We operate our business in five geographic
regions: North America; Europe, Middle East and Africa
(EMEA); Japan; Asia-Pacific, excluding Japan; and
Latin America.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The accompanying consolidated financial statements include our
accounts and the accounts of our wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amount of assets and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenue and expenses during the reported period. Significant
estimates include those required in the valuation of intangible
assets acquired in business acquisitions, impairment analysis of
goodwill and intangible assets, property and equipment,
allowances for doubtful accounts, sales returns and allowances,
vendor specific objective evidence of the fair value of the
various undelivered elements of our multiple element software
transactions, stock-based compensation, restructuring and
litigation accruals, valuation allowances for deferred tax
assets, tax accruals, and the warranty obligation accrual.
Although we believe that adequate accruals have been made for
unsettled issues, additional gains or losses could occur in
future years from resolutions of outstanding matters. Actual
results could differ materially from original estimates.
Certain
Risks and Concentrations
We have historically derived a majority of our net revenue from
our system protection software solutions. The market in which we
operate is highly competitive and rapidly changing. Significant
technological changes, changes in customer requirements, or the
emergence of competitive products with new capabilities or
technologies could adversely affect operating results.
We sell a significant amount of our products through
intermediaries such as distributors, resellers and others. Our
top ten distributors represented 45% to 65% of net sales per
quarter during 2006, 2005 and 2004. During 2006, 2005 and 2004,
Ingram Micro Inc. accounted for 17%, 19% and 22%, respectively,
of total net revenue. During 2006, 2005 and 2004, Tech Data
Corp. accounted for 11%, 14% and 11%, respectively, of total net
revenue. At December 31, 2006 and 2005, Ingram Micro Inc.
had an accounts receivable balance, which comprised 18% and 20%,
respectively, of our gross accounts receivable balance.
Additionally, at December 31, 2006 and 2005, Tech Data
Corp. had an accounts receivable balance which comprised 11% of
our gross accounts receivable balance. Our distributor
agreements may be terminated by either party without cause.
Some of our distributors may experience financial difficulties,
which could adversely impact collection of accounts receivable.
We regularly review the collectibility and credit-worthiness of
our distributors to determine an appropriate allowance for
doubtful accounts. Our bad debt allowance was $2.0 million
at December 31, 2006 and $2.4 million at
December 31, 2005. Our uncollectible accounts could exceed
our current or future allowances. We determine our allowance for
doubtful accounts by assessing the collectibility of individual
accounts receivable over a specified aging and amount, and
provide an amount equal to the historical percentage of
write-off experience of the remaining accounts receivable.
Accounts receivable are written off on a case by case basis,
considering the probability that any amounts can be collected.
124
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Some of our products incorporate licensed software and 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.
We maintain the majority of cash balances and all of our
short-term investments with four financial institutions. We
invest with financial institutions with high quality credit and,
by policy, limit the amount of deposit exposure to any one
financial institution.
We receive certain of our critical components from sole
suppliers. Additionally, we rely on a limited number of contract
manufacturers and suppliers to provide manufacturing services
for our products. The inability of any contract manufacturer or
supplier to fulfill supply requirements could materially impact
future operating results.
Foreign
Currency Translation
For the majority of our subsidiaries, we consider the local
currency to be their functional currency. The assets and
liabilities of subsidiaries that are denominated in functional
currencies other than the U.S. dollar are translated using
the exchange rate on the consolidated balance sheet date.
Revenue and expenses are translated at average exchange rates
prevailing during the period. Translation adjustments resulting
from this process are charged or credited to accumulated other
comprehensive income, which is a component of stockholders
equity. As of December 31, 2006, our stockholders
equity included $3.8 million of net foreign currency
translation losses for the year ended December 31, 2006 and
as of December 31, 2005, our stockholders equity
included $3.8 million of net foreign currency translation
gains for the year ended December 31, 2005.
Occasionally, a subsidiary enters into transactions that are
denominated in currencies other than its functional currency. In
these cases, the assets and liabilities and revenue and expenses
related to the transactions are translated into the functional
currency and any resulting gains or losses are recorded in the
consolidated statements of income and comprehensive income.
During 2006, 2005 and 2004, we recorded net foreign currency
transaction losses of $8.5 million, $5.5 million and
$1.0 million, respectively, in our consolidated statements
of income and comprehensive income.
Derivatives
We follow the guidance in Statement of Financial Accounting
Standards (SFAS No. 133), Accounting
for Derivative Instruments and Hedging Activities, as
amended, in accounting for derivatives. The standard requires us
to recognize all derivatives on the consolidated balance sheet
at fair value. Derivatives that are not hedges must be adjusted
to fair value through the consolidated statement of income. If
the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings, or recognized
in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a
derivatives change in fair value is immediately recognized
in earnings. Our use of derivative financial instruments is
discussed in Note 7.
Cash
and Cash Equivalents
Cash equivalents are comprised of highly liquid debt instruments
with original maturities or remaining maturities at date of
purchase of 90 days or less.
Restricted
Cash
The current restricted cash balance of $50.5 million at
December 31, 2005 reflects the $50.0 million we placed
in escrow for the settlement with the Securities and Exchange
Commission (SEC), and the interest earned on the
escrow. On February 9, 2006, the SEC entered the final
judgment for the settlement with us. The $50.0 million
125
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
penalty was released to the SEC and the interest earned was
released to us on February 13, 2006. We had no current
restricted cash balance at December 31, 2006.
The non-current restricted cash balance of $1.0 million at
December 31, 2006 and $0.9 million at
December 31, 2005 consists primarily of cash collateral
related to leases in the United States and India, as well as
workers compensation insurance coverage.
Marketable
Securities
All marketable securities are classified as available-for-sale
securities. Available-for-sale securities are carried at fair
value with resulting unrealized gains and losses, net of related
taxes, reported as a component of accumulated other
comprehensive income. Premium and discount on debt securities
recorded at the date of purchase are amortized and accreted,
respectively, to interest income using the effective interest
method. Short-term marketable securities are those with
remaining maturities at the consolidated balance sheet date of
less than one year. Long-term marketable securities have
remaining maturities at the consolidated balance sheet date of
one year or greater. Realized gains and losses on sales of all
such investments are reported in earnings and computed using the
specific identification cost method.
We assess the value of our available-for-sale marketable
securities on a regular basis to assess whether an
other-than-temporary decline in the fair value has occurred.
Factors which we use to assess whether an other than temporary
decline has occurred include, but are not limited to, the period
of time the fair value is below original cost, significant
changes in the operating performance, financial condition or
business model of the issuer, and changes in market conditions.
Any other than temporary decline in value is
reported in earnings and a new cost basis for the marketable
security established. We did not record any other than
temporary declines in marketable securities for 2006, 2005
or 2004.
Inventory
Inventory, which consists primarily of finished goods owned at
fulfillment partner locations and inventory sold into our
channel which has not been sold through to the end-user, is
stated at lower of cost or market. Cost is computed using
standard cost, which approximates actual cost on a first in,
first out basis. Inventory balances are included in other
current assets on our consolidated balance sheets and were
$2.7 million at December 31, 2006 and
$4.4 million at December 31, 2005.
Deferred
Costs of Revenue
Deferred costs of revenue, which consist primarily of costs
related to revenue-sharing arrangements and royalty
arrangements, are included in prepaid expenses and prepaid taxes
and other current assets on our consolidated balance sheets. We
only defer direct and incremental costs related to
revenue-sharing arrangements and recognize such deferred costs
proportionate to the related revenue recognized. At
December 31, 2006, our deferred costs were
$70.2 million compared to $28.8 million at
December 31, 2005.
Property
and Equipment
Property and equipment are presented at cost less accumulated
depreciation and amortization (see Note 8). Depreciation
and amortization of property and equipment are computed using
the straight-line method over the estimated useful lives as
follows:
|
|
|
|
|
building interior seven years;
exterior twenty years;
|
|
|
|
office furniture and equipment three to five
years; and
|
|
|
|
computer hardware, networking hardware and software
three to five years;
|
126
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
leasehold improvements the shorter of the lease
term, including assumed lease renewal periods that are
reasonably assured, or the estimated useful life of the asset.
|
The costs associated with projects eligible for capitalization
are accumulated on the consolidated balance sheet until the
project is substantially complete and is placed into service.
Capitalized interest is calculated on all eligible projects in
progress. Interest capitalization begins when three conditions
have been met (1) expenditures have occurred,
(2) activities necessary to prepare the asset have begun,
and (3) interest cost has been incurred. We did not record
any capitalized interest during 2006 and 2005. For 2004, we
recorded $0.1 million of capitalized interest.
When assets are disposed, we remove the asset and accumulated
depreciation from our records and recognize the related gain or
loss in earnings.
Repairs and maintenance expenditures, which are not considered
improvements and do not extend the useful life of property and
equipment, are expensed as incurred.
Internal
Use Software
We follow the guidance in Statement of Position
98-1,
Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. Software development
costs, including costs incurred to purchase third-party
software, are capitalized beginning when we have determined
factors are present, including among others, that indicate
technology exists to achieve the performance requirements, buy
versus internal development decisions have been made and our
management has authorized the funding for the project.
Capitalization of software costs ceases when the software is
substantially complete and is ready for its intended use and
capitalized costs are amortized over their estimated useful life
of three years using the straight-line method.
When events or circumstances indicate the carrying value of
internal use software might not be recoverable, we assess the
recoverability of these assets by determining whether the
amortization of the asset balance over its remaining life can be
recovered through undiscounted future operating cash flows. The
amount of impairment, if any, is recognized to the extent that
the carrying value exceeds the projected discounted future
operating cash flows and is recognized as a write down of the
asset. In addition, when it is no longer probable that computer
software being developed will be placed in service, the asset
will be recorded at the lower of its carrying value or fair
value, if any, less direct selling costs. We have capitalized
software development costs totaling $15.8 million and
$7.5 million in 2006 and 2005, respectively.
Goodwill
and Other Intangible Assets
We account for goodwill and other intangible assets in
accordance with SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 142
requires that goodwill and identifiable intangible assets with
indefinite useful lives be tested for impairment at least
annually. Application of the goodwill impairment test requires
judgment, including the identification of reporting units,
assigning assets and liabilities to reporting units, assigning
goodwill to reporting units, and determining the fair value of
each reporting unit. Significant judgments required to estimate
the fair value of reporting units include estimating future cash
flows, determining appropriate discount rates, growth rates and
other assumptions. Our reporting units are consistent with the
operating geographies discussed in Note 19. We test
goodwill annually for impairment or more frequently if events
and circumstances warrant. No impairment has been recognized for
any period presented.
Finite-Lived
Intangibles, Long-Lived Assets and Assets Held for
Sale
Purchased technology and other identifiable intangible assets
are carried at cost less accumulated amortization. We amortize
other identifiable intangibles on a straight-line basis over
their estimated useful lives. The range of estimated useful
lives of our identifiable intangibles is one to seven years (see
Note 10).
127
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 review finite-lived intangibles or long-lived
assets to be held and used for impairment whenever events or
changes in circumstances indicate that the carrying value of
such assets may not be recoverable.
Based upon the existence of one or more potential indicators of
impairment, recoverability is assessed based upon an estimate of
undiscounted cash flows resulting from the use of the assets and
its eventual disposition. Measurement of an impairment loss is
based on a projected discounted cash flow method using a
discount rate determined by management to be commensurate with
the risk inherent in our current business model. Finite-lived
intangibles and long-lived assets to be disposed of are reported
at the lower of carrying amount or fair value less the costs to
sell. No impairment has been recognized for any period presented.
Fair
Value of Financial Instruments
Carrying amounts of our financial instruments including accounts
receivable, accounts payable and accrued liabilities approximate
fair value due to their short maturities. The fair values of our
investments in marketable securities are disclosed in
Note 6. The fair value of our derivative instruments is
disclosed in Note 7.
Revenue
Recognition
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.
Our revenue is derived from primarily three sources
(i) product revenue, which includes hardware and perpetual
licenses revenue, (ii) subscription revenue, which includes
revenue from subscription-based offerings and
(iii) services and support revenue, which includes
maintenance, training and consulting revenue.
We apply the provisions of Statement of Position
97-2,
Software Revenue Recognition
(SOP 97-2),
and related interpretations to all transactions involving the
sale of software products and hardware products that include
software. 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 or software is incidental, we apply the provisions of
Staff Accounting Bulletin 104 Revenue
Recognition (SAB 104).
We market and distribute our software products both as
standalone software products and as comprehensive security
solutions. We recognize revenue from the sale of software
licenses when all of the following are met:
|
|
|
|
|
persuasive evidence of an arrangement exists,
|
|
|
|
the product or service has been delivered,
|
|
|
|
the fee is fixed or determinable, and
|
|
|
|
collection of the resulting receivable is reasonably assured.
|
Persuasive evidence is generally a binding purchase order or
license agreement. Delivery generally occurs when product is
delivered to a common carrier or upon delivery of a grant letter
and license key, if applicable. If a significant portion of a
fee is due after our normal payment terms of typically 30 to
90 days, we recognize revenue as the fees become due. If we
determine that collection of a fee is not reasonably assured, we
defer the fees and recognize revenue upon cash receipt, provided
all other revenue recognition criteria are met.
128
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We enter into perpetual and subscription software license
agreements through direct sales to customers and indirect sales
with partners, distributors and resellers. We recognize revenue
from the indirect sales channel upon sell-through by the partner
or distributor. The license agreements generally include service
and support agreements, for which the related revenue is
deferred and recognized ratably over the performance period. All
revenue derived from our online subscription products is
deferred and recognized ratably over the performance period.
Professional services revenue is generally recognized as
services are performed or if required, upon customer acceptance.
For arrangements with multiple elements, including software
licenses, maintenance
and/or
services, we allocate and defer revenue equivalent to the
vendor-specific objective evidence (VSOE) of fair
value for the undelivered elements and recognize the difference
between the total arrangement fee and the amount deferred for
the undelivered elements as product revenue. VSOE of fair value
is based upon the price for which the undelivered element is
sold separately or upon substantive renewal rates stated in a
contract. We determine fair value of the undelivered elements
based on historical evidence of stand-alone sales of these
elements to our customers. When VSOE does not exist for
undelivered elements such as maintenance and support, the entire
arrangement fee is recognized ratably over the performance
period generally as services and support revenue.
We reduce revenue for estimates of sales incentives and sales
returns. We offer channel rebates and marketing funds and
end-user rebates for products in our corporate and consumer
product lines. Additionally, end-users may return our products,
subject to varying limitations, through distributors and
resellers or to us directly for a refund within a reasonably
short period from the date of purchase. We estimate and record
reserves for promotional and rebate programs and sales returns
based on our historical experience.
Research
and Development
Costs incurred in the research and development of new software
products are expensed as incurred until technological
feasibility is established. Research and development costs
include salaries and benefits of researchers, supplies, and
other expenses incurred with research and development efforts.
Development costs are capitalized beginning when a
products technological feasibility has been established
and ending when the product is available for general release to
customers. Technological feasibility is reached when the product
reaches the working model stage. To date, products and
enhancements have generally reached technological feasibility
and have been released for sale at substantially the same time
and all research and development costs have been expensed.
Advertising
Costs
Advertising costs are expensed as incurred. Media (television
and print) placement costs are expensed in the period the
advertising appears. Total advertising expenses were
$18.8 million, $11.6 million and $17.1 million
for 2006, 2005 and 2004, respectively.
Restatement
of Stock-Based Compensation
As discussed in Note 3, we have restated our consolidated
financial statements as a result of an independent stock option
investigation conducted by a special committee of our board of
directors. We previously applied Accounting Principles
Bulletin No. 25, Accounting for Stock Issued
to Employees (APB 25) and its related
interpretations, including Financial Accounting Standards Board
Interpretations No. 44, Accounting for Certain
Transactions involving Stock Compensation an
interpretation of APB Option No. 25
(FIN 44), and provided the required pro forma
disclosure under Statement of Accounting Financial Standards
No. 123 Accounting for Stock-Based
Compensation (SFAS 123) through the
fiscal year ended December 31, 2005. Under APB 25,
non-cash, stock-based compensation expense is recognized for any
option with intrinsic value on the accounting measurement date.
An option is deemed to have intrinsic value when the exercise
price is below the market price of the underlying stock on the
accounting measurement date. Certain of our stock options were
incorrectly measured prior to the completion of required
approvals and granting actions. After revising the measurement
date for these options, certain options were deemed to have
intrinsic value and, as a result, there should have been
stock-based
129
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compensation expense for each of these options under APB 25
equal to the number of option shares multiplied by their
intrinsic value on the revised measurement date. That expense
should have been amortized over the vesting period of the
option. Starting in our fiscal year ended December 31,
2006, we adopted Statement of Financial Accounting Standards
123(R), Share-Based Payment
(SFAS 123(R)). As a result, for 2006, the
additional stock-based compensation required to be recorded for
each of these stock options was equal to the fair value of these
options on the revised measurement date for options vesting in
2006 or later. We did not record the additional stock-based
compensation expenses under APB 25 or SFAS 123(R) related
to these stock options in our previously issued financial
statements.
As a result of the investigation, we determined that the
original measurement dates we used for accounting purposes for
certain option and restricted stock grants to employees from
April 1995 through April 2005 were not appropriate. We revised
measurement dates and recorded stock-based compensation charges
due to the following errors, certain of which are the result of
incorrect measurement dates from the use of hindsight to select
more favorable exercise prices:
|
|
|
|
|
annual merit grant allocation
and/or
approval not complete on the original measurement date,
|
|
|
|
the key terms for a substantial portion of the grants in an
annual merit grant had been determined with finality prior to
the original measurement date, with a reduction in the exercise
price on the original measurement date, which represented a
repricing,
|
|
|
|
original accounting measurement date prior to approval date,
|
|
|
|
original accounting measurement date prior to employment
commencement date,
|
|
|
|
incorrect or inconsistent approval and employment commencement
date documentation,
|
|
|
|
clerical errors in director grants,
|
|
|
|
correction of accounting errors, primarily options historically
accounted for as variable awards, or
|
|
|
|
post-employment option modifications previously not recorded.
|
After reviewing available relevant documentation, a general
hierarchy of documentation was considered when establishing the
revised measurement date for accounting purposes. The hierarchy
was considered in evaluating each grant on an individual basis
based on the particular facts and circumstances. The
documentation considered when available was:
|
|
|
|
|
Minutes of Board of Directors, Compensation Committee
and/or
delegated committee: Approved minutes represent
the best available evidence of grant approval. The investigative
team was able to validate the occurrence of board of director
and compensation committee meetings on the stated dates in most
cases through director payment records, billing records of
outside legal counsel who attended the meetings or a signature
on the minutes by external legal counsel.
|
|
|
|
Unanimous Written Consents
(UWCs): UWCs have an effective date
that represents the date grants were approved by the
compensation committee or delegated committee. For compensation
committee UWCs in 2004 and 2005, we were not able to rely on
certain UWC effective dates due to other evidence indicating
that certain grants were approved subsequent to the UWC
effective date. We were able to locate other evidence to
determine the approval date of these grants, such as approval
documentation in emails and evidence of the date UWCs were
signed. There were no options granted in compensation committee
UWCs from 2001 through 2003. For UWCs prior to 2001,
compensation committee members had historically resolved to
grant options, and such action was then documented in a UWC,
with the effective date being the date the granting action was
taken. With the exception of one UWC, no evidence was located
that contradicted a UWC effective date as the approval date for
any compensation committee grants prior to 2001. We have
therefore placed reliance on the compensation committee UWCs
prior to 2001.
|
130
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Option allocations for annual merit
grants: Allocations may be evidenced by signed
and dated hard-copy schedules or electronic spreadsheets that
list the employees and number of options granted to each
employee. Email communications to which the electronic
spreadsheets were attached also provided evidence of the date
allocations were completed. We were able to validate whether
allocation schedules were substantially complete by confirming
individual grants in the allocation files to the actual grants
reflected in our stock administration database. There were
minimal changes to allocations after the date we determined that
they were substantially complete.
|
|
|
|
Database Dates: The database date (DB
date) indicates the date an option grant was entered into
the stock administration database. Entry into the stock
administration database represents the best evidence of a date
no later than when the grants were determined with finality.
|
DB dates are not appropriate for determining system entry dates
for our grants entered into the stock administration database
prior to June 17, 1998 due to the implementation of a new
stock administration system on that date. All grants entered
into the stock administration database prior to the system
conversion have a default DB date of June 17, 1998.
DB dates were applied on a grant by grant basis, resulting in
multiple measurement dates for annual merit grants for which
there were multiple DB dates.
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|
|
|
|
System Reports: These are hard-copy reports
generated from the stock administration database that have a
date stamp indicating the date the report was generated. The
reports list the name, number of options and exercise price of
the grants. These reports indicate the latest date a grant could
have been entered into the stock administration database, which
was useful for grants prior to the June 17, 1998 system
conversion date.
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|
|
|
Correspondence or other written
documentation: Written communication was in the
form of grant notification letters from the human resource or
stock administration departments stating the key terms of a
grant, stock option agreements, employment offer or promotion
letters stating the number of options to be granted and
automated email notifications from human resources or our
third-party broker. Written communication was primarily used to
corroborate other available evidence used to determine
measurement dates for annual merit grants, with the assumption
that communication would not occur until the terms of the grants
were determined with finality.
|
APB 25 defines the measurement date as the first date upon which
the number of options and exercise price are known. Our
determination of the revised measurement date was based on our
assessment that a grant was determined with finality and was no
longer subject to change. Such determinations involved judgment
and careful evaluation of all relevant facts and circumstances
for each grant. The following are the judgments involved in
determining revised measurement dates.
Date
of Execution of UWC
For certain grants, we were unable to locate contemporaneous
documentation confirming that a compensation committee meeting,
or a meeting by a delegated level of authority, occurred on the
effective date of the UWC. For compensation committee UWCs with
effective dates in 2004 and 2005, which cover 0.4 million
options, we discovered instances in which documented approval
actually occurred subsequent to the UWC effective date. The
revised measurement date in these instances is the documented
approval date. There were no options granted in compensation
committee UWCs from 2001 through 2003. For UWCs prior to 2001,
which cover 9.4 million options, the compensation or
delegated committee resolved to grant options, and later
documented such resolutions in UWCs, with an effective date
which was the date of the granting action. With the exception of
one UWC, no evidence was located that contradicted a UWC
effective date as the approval date for any compensation
committee grants prior to 2001. For UWCs prior to 2001, we did
not locate any evidence that caused us to question the
reliability of UWCs, outside the instance discussed above. We
have therefore placed reliance on the compensation committee
UWCs prior to 2001.
131
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
There were also instances where UWCs were not signed during the
period prior to 2001. These unsigned UWCs were located in our
minute books. We did not locate any evidence that contradicted
the effective dates of unsigned UWCs as the approval date,
therefore, we have placed reliance on unsigned UWCs in this
period.
Annual
Merit Grants
For annual merit grants, a pool of options was allocated among
non-executive employees, and in certain years for executives as
well, in conjunction with their annual performance review. We
located evidence that allocations were completed and grants
determined with finality on a business unit/geographic region
basis, resulting in multiple measurement dates for annual merit
grants. For grants not included in complete allocations, we have
selected the DB date as the revised measurement date as the
terms of grants were determined with finality on or prior to the
database entry dates.
We used the allocation completion dates, when available, as the
revised measurement dates except for certain grants in 1999. For
a portion of the 1999 annual merit grant, the allocations were
substantially complete prior to the determination of the
exercise price with finality. In these instances, the
measurement date is the date the exercise price was determined,
as the key terms had not been set with finality prior to the
exercise price being determined.
For the 1999 annual merit grant, we determined that a
significant portion of the grants had revised measurement dates
prior to the original measurement dates, which resulted in
compensation charges. The exercise price for these options was
then reduced to the closing stock price on the original
measurement date of the options, which we considered to be a
repricing. These options have been accounted for as variable
awards in the restatement in accordance with FIN 44.
We were not able to determine allocation completion dates for
the annual merit grants with an original measurement date in
January 1998. We would have used DB dates as revised measurement
dates, however, DB dates were not available for these grants. We
located hard-copy stock administration system reports with a
date stamp that provides evidence of the latest date a grant
could have been entered into the stock administration database.
We used these system report dates as revised measurement dates,
with the exception of certain grants for which signed and dated
grant notification letters were located. If the signature date
on the letters was prior to the system report date, the revised
measurement date was the letter signature date.
Incorrect
or Inconsistent Approval and Employment Commencement
Documentation
We identified certain grants to executives and directors for
which the approval documentation
and/or
employment commencement date documentation were incorrect or
inconsistent. These grants were assigned an original grant date
other than the approval date, or prior to the actual employment
commencement date. In these instances, the occurrence of the
meeting on the stated date in the approval documentation was
validated based on director payment records or the billing
records of external legal counsel who attended the meeting. We
were able to determine the correct employment commencement date
based on human resources and payroll records. The actual meeting
date for the approval of such grants, or employment commencement
date, if later, was used as the revised measurement date.
Lack
of Approval Documentation
For grants totaling 2.2 million options, primarily in the
years from 1996 through 2001, we were unable to locate approval
documentation. In these instances, we examined available
evidence, including email communications and grant communication
letters, to determine the revised measurement date. We also
performed an analysis to determine whether these grants were
recorded on dates where the stock price was at a low point,
which would result in a lower exercise price. It does not appear
that these grants were priced opportunistically, and we did not
discover any evidence that contradicted the original grant date.
Therefore, we did not revise the measurement dates for these
grants.
132
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Communication
Dates
For certain grants, we were unable to locate evidence of
communication of the key terms (i.e., number of options
and exercise price) to the employee. We did not discover any
evidence during the investigation that the communication of key
terms was intentionally delayed, or there were any significant
delays. In the absence of evidence to the contrary, we have
concluded that communication of the key terms occurred prior to
or within a reasonable period of time of the completion of all
required granting actions.
We believe that our methodology, based on the best available
evidence, results in the most reasonable measurement dates for
our stock option grants.
Stock-Based
Compensation
On January 1, 2006, we adopted SFAS 123(R), which is a
revision of SFAS 123, and supersedes APB 25. Among other
items, SFAS 123(R) requires companies to record
compensation expense for share-based awards issued to employees
and directors in exchange for services provided. The amount of
the compensation expense is based on the estimated fair value of
the awards on their grant dates and is recognized over the
required service periods. Our share-based awards include stock
options, restricted stock awards, restricted stock units and our
Employee Stock Purchase Plan (ESPP).
Prior to our adoption of SFAS 123(R), we applied the
intrinsic value method set forth in APB 25 to calculate the
compensation expense for share-based awards. We did not
recognize any compensation expense for our ESPP under APB 25.
For restricted stock awards and units, the calculation of
compensation expense under APB 25 and SFAS 123(R) is the
same, with the only exception being that forfeitures are
estimated under SFAS 123(R).
We adopted SFAS 123(R) using the modified prospective
transition method, which requires the application of the
accounting standard to all share-based awards issued on or after
January 1, 2006 and any outstanding share-based awards that
were issued but not vested as of January 1, 2006.
Accordingly, our consolidated financial statements as of
December 31, 2005 and 2004 and for the years then ended
have not been restated to reflect the impact of
SFAS 123(R). During 2005, we recognized a charge of
$4.5 million under APB 25 related to grant date intrinsic
value resulting from revised accounting measurement dates, the
exchange of McAfee.com options in 2002, re-pricing of options in
1999 and restricted stock awards. During 2004, we recognized a
charge of $25.2 million under APB 25 related to grant date
intrinsic value resulting from revised accounting measurement
dates, the exchange of McAfee.com options in 2002, re-pricing of
options in 1999, restricted stock awards and the modifications
to certain options. See Notes 3 and 16 to the consolidated
financial statements for additional information.
During 2006, we recognized stock-based compensation expense of
$57.8 million in our consolidated financial statements,
which included $39.5 million for stock options,
$16.4 million for restricted stock awards and units and
$1.9 million for our ESPP. These amounts include:
(i) compensation expense for stock options granted prior to
January 1, 2006 but not yet vested as of January 1,
2006, based on the grant date fair value estimated in accordance
with the pro forma provisions of SFAS 123,
(ii) compensation expense for stock options granted
subsequent to January 1, 2006 based on the grant date fair
value estimated in accordance with the provisions of
SFAS 123(R), (iii) compensation expense for certain
stock options held by former employees and outside directors
that would otherwise have expired during the blackout period
which were modified to extend the post-employment exercise
period, (iv) compensation expense for the cash settlement
of certain stock options held by former employees that expired
during the period from July 2006, when we announced that we
might have to restate our historical financial statements as a
result of our ongoing stock option investigation, through the
date we become current on our reporting obligations under the
Securities Exchange Act of 1934, as amended, the (blackout
period), and were not eligible for extension,
(v) compensation expense for unvested stock options held by
our former chief executive officer that were accelerated on
February 6, 2007 without an extension of the
post-employment exercise period,
133
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(vi) compensation expense for restricted stock award and
unit grants made both before and after January 1, 2006 that
are not yet vested and (vii) compensation expense for our
ESPP in accordance with SFAS 123(R).
The estimated fair value underlying our calculation of
compensation expense for stock options is based on the
Black-Scholes pricing model. Upon adoption of SFAS 123(R),
we changed our method of attributing the value of stock-based
compensation to the single-option, straight-line method.
Compensation expense for all stock options granted prior to
January 1, 2006 will continue to be recognized using the
accelerated method. In addition, SFAS 123(R) requires
forfeitures of share-based awards to be estimated at the time of
grant and revised, if necessary, in subsequent periods if our
estimates change based on the actual amount of forfeitures we
have experienced. In the pro forma information required under
SFAS 123 for periods prior to January 1, 2006, we
accounted for forfeitures as they occurred.
SFAS 123(R) requires us to calculate the pool of excess tax
benefits, or the additional paid-in capital pool, available as
of January 1, 2006 to absorb tax deficiencies recognized in
subsequent periods, assuming we had applied the provisions of
the standard in prior periods. Pursuant to the provisions of
FASB Staff Position 123(R)-3, Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment
Awards, we adopted the alternative method for
determining the tax effects of share-based compensation, which
among other things, provides a simplified method for estimating
the beginning additional paid-in capital pool balance.
SEC
and Compliance Costs
SEC and compliance costs include expenses associated with
independent consultants engaged to examine and recommend
improvements to our internal controls to ensure compliance with
federal securities laws as required by our settlement with the
SEC, which was finalized in 2006, and expenses related to the
investigation into our stock option granting practices.
Accounting
for Income Taxes
We account for income taxes in accordance with the liability
method of accounting for income taxes. Under the liability
method, deferred assets and liabilities are recognized based
upon anticipated future tax consequences attributable to
differences between financial statement carrying amounts of
assets and liabilities and their respective tax bases. The
provision for income taxes is comprised of the current tax
expense and the change in deferred tax assets and liabilities.
We establish a valuation allowance to the extent that it is more
likely than not that deferred tax assets will not be recoverable
against future taxable income.
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 in our provision for income taxes, as
necessary, interest and penalty amounts 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 when necessary. 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.
Computation
of Net Income Per Share
Basic net income per share is computed using the
weighted-average number of common shares outstanding during the
period. Diluted net income per share is computed using the
weighted-average number of common shares and dilutive potential
common shares outstanding during the period.
SFAS No. 128, Earnings per Share,
requires that employee equity share options, nonvested shares
and similar equity instruments granted by us be treated as
potential common shares outstanding in computing diluted
earnings per share. Diluted shares outstanding include the
dilutive effect of in-the-money options which is
134
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
calculated based on the average share price for each reported
period using the treasury stock method. Under the treasury stock
method, the amount the employee must pay for exercising stock
options, the amount of compensation cost for future service that
we have not yet recognized and the amount of tax benefits that
would be recorded in additional paid-in capital when the award
becomes deductible are assumed to be used to repurchase shares.
We calculate tax benefits that will be recorded in additional
paid-in capital based on the portion of the fair value of the
award that will be recognized in the financial statements, and
exclude the portion of the award that was recognized under the
SFAS 123 pro forma disclosures prior to the implementation
of SFAS 123(R).
Warranty
We offer a warranty on our software and hardware products and
record a liability for the estimated future costs associated
with warranty claims, which is based upon historical experience
and our estimate of the level of future costs.
Comprehensive
Income (Loss)
Unrealized gains (losses) on available-for-sale securities and
foreign currency translation adjustments are included in our
components of comprehensive income (loss), which are excluded
from net income.
For 2006, 2005 and 2004 other comprehensive income (loss) is
comprised of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
|
|
|
Net of
|
|
|
|
Income Tax
|
|
|
Income Tax
|
|
|
Income Tax
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities, net
|
|
$
|
2,596
|
|
|
$
|
(1,038
|
)
|
|
$
|
1,558
|
|
Reclassification adjustment for net gain on marketable
securities recognized during the period
|
|
|
(356
|
)
|
|
|
142
|
|
|
|
(214
|
)
|
Foreign currency translation loss
|
|
|
(3,795
|
)
|
|
|
|
|
|
|
(3,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
$
|
(1,555
|
)
|
|
$
|
(896
|
)
|
|
$
|
(2,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities, net
|
|
$
|
(2,496
|
)
|
|
$
|
998
|
|
|
$
|
(1,498
|
)
|
Reclassification adjustment for net loss on marketable
securities recognized during the period
|
|
|
1,432
|
|
|
|
(572
|
)
|
|
|
860
|
|
Foreign currency translation gain
|
|
|
3,811
|
|
|
|
|
|
|
|
3,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
$
|
2,747
|
|
|
$
|
426
|
|
|
$
|
3,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities, net
|
|
$
|
(5,253
|
)
|
|
$
|
2,102
|
|
|
$
|
(3,151
|
)
|
Reclassification adjustment for net loss on marketable
securities recognized during the period
|
|
|
1,704
|
|
|
|
(682
|
)
|
|
|
1,022
|
|
Foreign currency translation loss
|
|
|
(1,802
|
)
|
|
|
|
|
|
|
(1,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
$
|
(5,351
|
)
|
|
$
|
1,420
|
|
|
$
|
(3,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accumulated other comprehensive income is comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Unrealized loss on available-for-sale securities
|
|
$
|
(678
|
)
|
|
$
|
(2,022
|
)
|
Cumulative translation adjustment
|
|
|
32,150
|
|
|
|
35,945
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,472
|
|
|
$
|
33,923
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
Noncontrolling
Interests
In December 2007, the Financial Accounting Standards Board
(FASB), issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting
Research Bulletin No. 51
(SFAS 160). SFAS 160 amends
Accounting Research Bulletin No. 51 to establish
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for us beginning
January 1, 2009. We do not expect the adoption of
SFAS 160 to have a material impact on our consolidated
financial position, results of operations or cash flows.
Business
Combinations
In December 2007, the FASB revised SFAS No. 141,
Business Combinations
(SFAS 141(R)), to improve the relevance,
representational faithfulness, and comparability of the
information that a reporting entity provides in its financial
reports about a business combination and its effects.
SFAS 141(R) establishes principles and requirements for
recognizing and measuring identifiable assets and goodwill
acquired, liabilities assumed, and any noncontrolling interest
in an acquisition, at their fair value as of the acquisition
date. SFAS 141(R) is effective for us beginning
January 1, 2009. We are currently assessing how the
adoption of SFAS 141(R) will impact our consolidated
financial position, results of operations and cash flows.
Fair
Value Option
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities including an amendment of FASB
Statement No. 1 (SFAS 159).
SFAS 159 permits entities to choose to measure certain
financial instruments and other items at fair value that are not
currently required to be measured at fair value, with unrealized
gains and losses related to these financial instruments reported
in earnings at each subsequent reporting date. SFAS 159 is
effective for us beginning January 1, 2008. We do not
expect the adoption of SFAS 159 to have a material impact
on our consolidated financial position, results of operations or
cash flows.
Fair
Value Measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value, and expands
disclosure requirements regarding fair value measurement. Where
applicable, SFAS 157 simplifies and codifies fair value
related guidance previously issued within generally accepted
accounting principles. Although SFAS 157 does not require
any new fair value measurements, its application may, for some
entities, change current practice. SFAS 157 is effective
for us beginning January 1, 2008. We do not expect the
adoption of SFAS 157 to have a material impact on our
consolidated financial position, results of operations or cash
flows.
136
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounting
for Uncertainty in Income Taxes
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting
for uncertainty in tax positions. This interpretation requires
that we recognize in our financial statements the impact of a
tax position, if that position is more likely than not of being
sustained on audit based on the technical merits of the
position. The provisions of FIN 48 are effective as of the
beginning of 2007, with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening
retained earnings. As a result of the implementation of
FIN 48, as of January 1, 2007 we recognized a decrease
of $125.6 million in the liability for unrecognized tax
benefits, a $3.4 million increase in acquisition related
goodwill, a $101.2 million increase in additional paid-in
capital, and a $27.8 million increase in retained earnings.
As of January 1, 2007 and after the impact of changes noted
above, unrecognized tax benefits totaled $40.2 million and
accrued interest and penalties totaled $10.7 million (net
of any tax benefit) for an aggregate amount of
$50.9 million. Of the $50.9 million,
$47.5 million, if recognized, would favorably affect our
effective tax rate while the remaining amount would reduce
goodwill.
We file numerous consolidated and separate income tax returns in
the United States federal and state jurisdictions and in many
foreign jurisdictions. On an ongoing basis we are routinely
subject to examination by taxing authorities throughout the
world, including jurisdictions such as Australia, Canada,
France, Germany, India, Ireland, Italy, Japan, the Netherlands
and the United Kingdom. With few exceptions, we are no longer
subject to United States federal income tax examinations for
years before 2002 and are no longer subject to state and local
or foreign income tax examinations by tax authorities for years
before 1996.
We are presently under audit in many jurisdictions, including
the United States and the Netherlands. The Internal Revenue
Service is presently conducting a limited scope examination of
our United States federal income tax returns for the calendar
years 2002, 2003, 2004, and 2005. We are also in pre-filing
discussions with the Netherlands tax authorities with respect to
tax years 2004 and 2005. Currently, we are not able to predict
the conclusion of these examinations.
Considering
the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements,
(SAB 108), which provides interpretive
guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. SAB 108 is effective
as of the end of our 2006 fiscal year, allowing a one-time
transitional cumulative effect adjustment to beginning retained
earnings as of January 1, 2006 for errors that were not
previously deemed material, but are material under the guidance
in SAB 108. The application of SAB 108 did not have a
material impact on our consolidated financial position, results
of operations or cash flows.
How Sales
Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income
Statement
In March 2006, the FASBs Emerging Issues Task Force
released Issue
06-3,
How Sales Taxes Collected from Customers and Remitted
to Governmental Authorities Should Be Presented in the Income
Statement
(EITF 06-3).
A consensus was reached that entities may adopt a policy of
presenting sales taxes in the income statement on either a gross
or net basis. If taxes are significant, an entity should
disclose its policy of presenting taxes and the amount of taxes
if reflected on a gross basis in the income statement.
EITF 06-3
is effective for periods beginning after December 15, 2006.
We present revenue net of sales taxes in our consolidated
statements of income and comprehensive income and did not change
our policy as a result of
EITF 06-3.
137
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 No. 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 in 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 have applied the provisions of SFAS 154
in disclosing the effects of the errors resulting from the
incorrect measurement of stock options and other items discussed
in these Notes.
The
Meaning of Other-Than-Temporary Impairment
In November 2005, the FASB issued Staff Position
No. 115-1
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments
(FSP 115-1),
that addresses the determination as to when an investment is
considered impaired, whether that impairment is other than
temporary and the measurement of an impairment loss.
FSP 115-1
also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. The guidance in
FSP 115-1
amends SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities and APB
Opinion No. 18, The Equity Method of Accounting
for Investments in Common Stock.
FSP 115-1
nullifies certain requirements of EITF Issue
No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, and supersedes
EITF Topic
No. D-44,
Recognition of Other-Than-Temporary Impairment upon the
Planned Sale of a Security Whose Cost Exceeds Fair Value.
The guidance in
FSP 115-1
is effective for reporting periods beginning after
December 15, 2005. The adoption of
FSP 115-1
did not have a material effect on our consolidated financial
position, results of operations or cash flows.
|
|
3.
|
Restatement
of Consolidated Financial Statements
|
In May 2006, we became aware of potential issues with respect to
our historical stock option granting practices. Our management
discovered irregularities in certain historical stock option
grants during its initial internal review, and discussed these
findings with the board of directors in late May 2006. Our board
of directors established a special committee of independent
directors to review our stock option granting practices and
related accounting. The special committee was assisted by
independent counsel and forensic accountants (the
investigative team). The special committee
investigation was completed in November 2007. The special
committee concluded that there were both qualitative issues and
accounting and administrative errors relating to our stock
option granting practices. In this regard, the special committee
concluded that certain former members of management had acted
inappropriately, giving rise to qualitative concerns. The
qualitative concerns included the following:
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|
|
|
|
in the case of our former general counsel, he and a former
member of management participated in intentionally modifying one
of the former general counsels stock option grants so as
to create a lower exercise price, and the former general counsel
failed to disclose this unauthorized change to the board of
directors prior to late May 2006;
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|
|
|
in some instances, former members of management drafted
corporate records, including employment documentation, board and
compensation committee meeting minutes and actions by unanimous
written consent, with the benefit of hindsight so as to choose
measurement dates giving more favorable exercise prices;
moreover, certain of these documents were used by us in making
accounting determinations with respect to stock-based
compensation;
|
138
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
during the course of the investigation, certain former members
of management did not provide completely accurate or consistent
information and in one case, provided documentation to the
special committee that the special committee determined was
intentionally altered; and
|
|
|
|
certain former members of senior management did not display the
appropriate oversight and tone at the top expected
by the board of directors.
|
In addition to the foregoing, management and the special
committee concluded that (i) grant dates were chosen with
the benefit of hindsight so as to intentionally, and not
inadvertently or as a result of administrative error, give more
favorable exercise prices, (ii) we had incorrectly
accounted for a portion of one annual merit grant as fixed
awards which should have been accounted for as variable awards
as they were repriced, (iii) we had not previously
accounted for certain modifications to stock option agreements,
(iv) we made certain accounting errors in calculating
stock-based compensation expense for options historically
accounted for as variable awards and (v) income tax
implications exist as a result of the revision of stock option
measurement dates. We also corrected for other prior-period
errors.
Option
grants previously accounted for using incorrect measurement
dates
Annual
merit grant allocation and/or approval not complete on the
original measurement date
Our investigation found in 1996 through 2004:
(i) differences between the original accounting measurement
date and the date of final approval of certain executive merit
grants and (ii) inadequate documentation supporting the
original accounting measurement date as the actual allocation
completion date for non-executive merit grants and certain
executive merit grants. We revised approximately 13,000 merit
grant measurement dates to be based on the best available
evidence of when the grant allocations were substantially
complete or approval occurred, if applicable, or lacking that,
evidence when the options were input into the stock
administration database. In 1996 through 2005, we recorded
$70.4 million of additional stock-based compensation to be
recognized over the applicable service periods related to these
revised measurement dates.
Original
accounting measurement date prior to approval date
In 1996 through 2005, we recorded $15.8 million of
additional stock-based compensation expense to be recognized
over the applicable service periods for 12.6 million option
grants originally measured on dates that preceded the evidenced
date of approval by the party with the requisite authority.
These adjustments included a $2.5 million charge for grants
to two former executives on the same date, a $2.1 million
charge for a grant to a former president and a $1.1 million
charge for a grant to a former executive.
Original
accounting measurement date prior to employment commencement
date
We corrected accounting measurement dates for 5.4 million
options granted from 1995 through 2002 resulting in additional
stock-based compensation charges of $6.3 million to be
recognized over the applicable service periods for grants that
preceded the actual employment commencement date. These
adjustments included a $1.3 million stock-based
compensation charge for a grant to a former chief financial
officer.
Incorrect
or inconsistent approval and employment commencement date
documentation
In 2000 through 2005, we recorded additional stock-based
compensation expense of $4.8 million to be recognized over
the applicable service periods for seven grants of stock options
or restricted stock awards to former executives and a director
where the documented approval date or employment commencement
date was different than the actual approval date or employment
commencement date. Specifically, the $4.8 million of
expense consists of the remaining items discussed in the
remainder of this paragraph. We corrected the measurement date
for options and restricted stock awarded to a former executive
where the original measurement date was prior to his employment
commencement date and evidence of approval by a committee with
requisite authority. We recorded
139
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$3.3 million of stock-based compensation expense related to
this revised measurement date. We corrected the measurement date
for options granted to our former chief executive officer that
had been originally measured and recorded on the day following
the compensation committees actual approval date,
resulting in $0.7 million of additional stock-based
compensation expense. In addition, we determined that the actual
start date for a former executive was two weeks subsequent to
the original measurement date; therefore, we corrected the
measurement date for the options and recorded $0.5 million
of additional stock-based compensation expense. In addition, we
recorded a stock-based compensation expense totaling
$0.3 million to correct three executive or director grants
where the documented grant effective date originally used in the
measurement of stock-based compensation expense was different
than the available evidence supporting the actual approval date.
Repriced
annual merit grant
The 1999 annual merit grant consisted of 2.1 million
options which had an original measurement date of April 20,
1999. We determined that the key terms were determined with
finality for approximately 1.6 million of these options in
March 1999, and that the exercise price was reduced to $11.06 on
April 20, 1999, which represents a repricing. As the stock
price on the revised measurement date in March 1999 exceeded the
exercise price, there was grant date intrinsic value, which is
being recognized over the requisite service period.
Additionally, the options are accounted for as variable awards
in accordance with FIN 44 due to the repricing on
April 20, 1999. We recognized additional stock-based
compensation expense of $6.7 million from 2000 through 2005
related to these repriced options.
Post-employment
option modifications previously not recorded
We identified various modifications of fixed awards that had
previously not been accounted for that resulted in additional
stock-based compensation expense of $23.1 million.
Modifications include extensions of time allowed to exercise
options after an employee has terminated or continued vesting of
option awards subsequent to termination. Specifically, the
$23.1 million of expense includes two items discussed in
the remainder of this paragraph. For one grant in 1998, we did
not correctly account for a continuation of vesting of employee
options for an employee and director. Upon termination as an
employee, the director began providing services to us under a
separate agreement. Our investigation determined that we should
have accounted for the employee options that continued to vest
subsequent to his termination using the fair value method, which
resulted in additional stock-based compensation expense of
$3.7 million from 1998 through 2002. In addition, for a
separate award in 1998 we recorded additional stock-based
compensation expense of $6.5 million for an in-substance
acceleration of vesting when we entered into an arrangement
allowing a former employee to continue vesting in his options
for nine months after termination.
Correction
of accounting errors, primarily options historically accounted
for as variable awards
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
exercise prices at the current fair value of the stock. These
repriced options were granted in the money, as the exercise
price of the repriced options, which was based on the $11.06
closing price on April 22, 1999, was less than the closing
price of $13.75 on April 28, 1999, the date the repricing
price was accepted by the employees. We recognized the resulting
intrinsic value of the options as compensation expense over the
requisite service periods. In accordance with FIN 44, the
repriced stock options were subject to variable accounting
treatment beginning on July 1, 2000, the FIN 44
effective date.
We previously applied the transition guidance provided in
FIN 44 for 2.6 million unvested repriced options at
July 1, 2000 inappropriately. Upon properly applying
FIN 44 transition guidance, we recognized stock-based
compensation expense of an additional $9.2 million over the
remaining service periods of the unvested options.
We also recognized stock-based compensation expense totaling
$0.9 million related to the grant of equity instruments of
one of our subsidiaries to corporate employees. We have
accounted for these grants using the fair value method.
140
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We recognized a $0.2 million reduction in stock-based
compensation previously recognized related to the accounting for
the exchange of options upon the acquisition of the minority
interest of our remaining McAfee.com subsidiary.
Effect
of errors on stock-based compensation, before
tax
The original accounting measurement dates for approximately
15,600 grants were revised in the periods 1995 through 2005,
errors to variable awards were corrected and charges for
modifications previously unaccounted for were recorded resulting
in a total of $137.4 million additional stock-based
compensation expense to be recognized over the applicable
vesting periods, including $123.1 million for all periods
prior to January 1, 2004 and $10.8 million and
$3.4 million for 2004 and 2005, respectively. Approximately
98% of the total intrinsic value (the stock price on the revised
measurement date minus the exercise price) recognized as a
result of the investigation results from grants made during the
period 1995 through 2003. The following table classifies by year
total additional stock-based compensation expense by the reason
for the revision to the accounting measurement date (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1995
|
|
|
1996
|
|
|
1997
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
Reason for revised accounting measurement date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual merit grant allocation and/or approval not complete on
the original measurement date
|
|
$
|
|
|
|
$
|
82
|
|
|
$
|
1,485
|
|
|
$
|
12,931
|
|
|
$
|
11,409
|
|
|
$
|
13,242
|
|
Original accounting measurement date prior to approval date
|
|
|
|
|
|
|
262
|
|
|
|
291
|
|
|
|
809
|
|
|
|
1,701
|
|
|
|
1,302
|
|
Original accounting measurement date prior to employment
commencement date
|
|
|
487
|
|
|
|
1,659
|
|
|
|
1,713
|
|
|
|
1,181
|
|
|
|
908
|
|
|
|
271
|
|
Incorrect or inconsistent approval and employment commencement
date documentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Clerical errors in director grants
|
|
|
|
|
|
|
10
|
|
|
|
43
|
|
|
|
57
|
|
|
|
47
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of intrinsic charges for revised measurement dates
|
|
|
487
|
|
|
|
2,013
|
|
|
|
3,532
|
|
|
|
14,978
|
|
|
|
14,065
|
|
|
|
14,845
|
|
Repriced annual merit grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,003
|
|
Post-employment option modifications previously not recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,420
|
|
|
|
3,502
|
|
|
|
3,419
|
|
Correction of accounting errors, primarily options historically
accounted for as variable awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275
|
|
|
|
1,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
487
|
|
|
$
|
2,013
|
|
|
$
|
3,532
|
|
|
$
|
26,398
|
|
|
$
|
17,842
|
|
|
$
|
20,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
Total
|
|
|
Reason for revised accounting measurement date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual merit grant allocation and/or approval not complete on
the original measurement date
|
|
$
|
12,630
|
|
|
$
|
8,551
|
|
|
$
|
6,038
|
|
|
$
|
3,245
|
|
|
$
|
745
|
|
|
$
|
70,358
|
|
Original accounting measurement date prior to approval date
|
|
|
1,516
|
|
|
|
2,292
|
|
|
|
2,498
|
|
|
|
2,852
|
|
|
|
2,279
|
|
|
|
15,802
|
|
Original accounting measurement date prior to employment
commencement date
|
|
|
57
|
|
|
|
28
|
|
|
|
20
|
|
|
|
12
|
|
|
|
5
|
|
|
|
6,341
|
|
Incorrect or inconsistent approval and employment commencement
date documentation
|
|
|
(1,875
|
)
|
|
|
4,211
|
|
|
|
1,502
|
|
|
|
686
|
|
|
|
274
|
|
|
|
4,812
|
|
Clerical errors in director grants
|
|
|
11
|
|
|
|
2
|
|
|
|
24
|
|
|
|
28
|
|
|
|
32
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of intrinsic charges for revised measurement dates
|
|
|
12,339
|
|
|
|
15,084
|
|
|
|
10,082
|
|
|
|
6,823
|
|
|
|
3,335
|
|
|
|
97,583
|
|
Repriced annual merit grant
|
|
|
6,629
|
|
|
|
(2,078
|
)
|
|
|
(249
|
)
|
|
|
1,569
|
|
|
|
(180
|
)
|
|
|
6,694
|
|
Post-employment option modifications previously not recorded
|
|
|
1,345
|
|
|
|
3,430
|
|
|
|
(207
|
)
|
|
|
234
|
|
|
|
|
|
|
|
23,143
|
|
Correction of accounting errors, primarily options historically
accounted for as variable awards
|
|
|
9,124
|
|
|
|
(1,942
|
)
|
|
|
(1,219
|
)
|
|
|
2,217
|
|
|
|
260
|
|
|
|
9,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,437
|
|
|
$
|
14,494
|
|
|
$
|
8,407
|
|
|
$
|
10,843
|
|
|
$
|
3,415
|
|
|
$
|
137,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
Diluted shares increased by approximately 15,000 shares in
2005 and approximately 286,000 shares in 2004 as a result
of the restatement adjustments to correct the past accounting
for stock options. We use the treasury stock method to calculate
the weighted-average shares used in the diluted EPS calculation.
These calculations assume that: (i) all in-the-money
options are exercised, (ii) we repurchase shares with the
proceeds and tax benefits of these hypothetical exercises, using
each periods effective tax rate and (iii) the average
unamortized deferred stock-based compensation is also used to
repurchase shares.
Related
tax adjustments
In conjunction with our determination that certain of our
measurement dates were not determined appropriately, we also
reviewed our stock option grants to assess any related tax
implications. We have recorded increases to deferred tax assets
in those jurisdictions where a tax deduction can be claimed
totaling $0.9 million and $3.7 million in the years
ended December 31, 2005 and December 31, 2004,
respectively, to reflect future tax deductions to the extent we
believe such assets to be recoverable. We also had to adjust, as
required by Internal Revenue Code Section 162(m), tax
deductions in prior years for stock option related compensation
paid to certain executives. Section 162(m) prohibits tax
deductions for non-performance based compensation paid to the
chief executive officer and the four highest compensated
officers in excess of $1.0 million in a taxable year,
adjusted in 2006 and subsequent years to exclude the principal
financial officer. Compensation attributable to stock options
issued under our employee stock option plan meets the
requirements for treatment as qualified performance-based
compensation and is an exception from the $1.0 million
deduction limit to certain executives provided the exercise
price is greater than or equal to the fair market value of our
common stock on the date of grant. However, as a result of
determining
142
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that certain stock options were granted at an exercise price
below the fair market value of our common stock on the revised
measurement date, we concluded that certain tax deductions
related to stock options exercised by these specified employees
are not allowed under Section 162(m). We had recorded an
increase to additional paid-in capital and reductions to income
taxes payable in prior years related to tax benefits realized
upon the exercise of employee stock options. Since certain
deductions are now disallowed, we have reduced such increases
recorded to additional paid-in capital by $4.5 million,
$0.7 million and $9.1 million from amounts previously
reported in the year ended December 31, 2005, the year
ended December 31, 2004 and periods prior to 2004,
respectively, with corresponding adjustments to certain deferred
tax assets and income taxes payable. We have not recorded
interest and penalties because we anticipate we will offset tax
liabilities with existing tax attributes, such as net operating
losses and other general business credits.
Other
prior-period errors
We also have identified errors with respect to the income
statement that are principally timing-related differences
between when certain items should have been recorded and when
they were recorded. We had previously considered these errors
under SFAS No. 154, Accounting Changes and Error
Corrections (and previously under APB Opinion
No. 20, Accounting Changes), and Staff
Accounting Bulletin 99, Materiality
(SAB 99). We have also recorded these
adjustments in the proper accounting periods with the
restatement of our financial statements for the non-cash
stock-based compensation expense discussed above. The aggregate
effect on net income was a decrease in net income of
$18.1 million in 2005, an increase of $2.1 million in
2004 and an increase of $4.0 million in periods prior to
2004, as discussed further below.
Revenue
corrections
During 2004, we identified and corrected various errors in
previously reported net revenue. In this restatement we
decreased net revenue by $5.7 million and $3.0 million
in 2005 and 2004, respectively, and increased revenue by
$3.7 million in periods prior to 2004 to correct accounting
errors in the periods they originally arose. These errors
resulted from: (i) incorrectly configured financial systems
resulting in net revenue being recognized in an incorrect
period, (ii) improperly recorded product revenue when
certain bundled products with support were discounted,
(iii) incorrect amount
and/or
timing of support revenue deferral, (iv) inaccurate rebate
accruals and return reserves and (v) manual journal entries
not recorded in a timely manner.
Cost of
net revenues
We increased cost of net revenue by $5.4 million,
$4.0 million and $0.7 million in 2005, 2004 and
periods prior to 2004, respectively, to correct accounting
errors in the periods they originally arose resulting from:
(i) incorrect recording of inventory held by a third-party
distributor on our behalf, (ii) incorrect classification of
certain department cost centers to cost of revenues that had
been allocated in error to operating costs, (iii) manual
journal entries for intercompany accounts not being reconciled
timely, (iv) adjusting amortization of purchased technology
due to incorrect amortization periods and recording of purchase
accounting entries and (v) incorrect calculation and
classification of revenue-share payments as cost of net revenues.
Operating
costs
We increased operating costs by $2.2 million in 2005,
decreased operating costs by $5.3 million in 2004, and
increased operating costs by $6.1 million in periods prior
to 2004 to correct accounting errors in the periods they
originally arose resulting from: (i) improper recording of
accruals, (ii) lack of timely write-off of an abandoned
information technology project, (iii) incorrect recording
of depreciation for an internal information technology project,
(iv) incorrect classification of certain department cost
centers to cost of net revenues that had been allocated in error
to operating costs, (v) incorrect commission expense and
related reclassification entries and (vi) adjusting
reserves for subsequent events which occurred prior to the
filing of our financial reports.
143
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Interest
and other income
Interest and other income increased by $1.9 million in
2005, decreased by $1.2 million in 2004 and decreased by
$0.3 million in periods prior to 2004, to correct
accounting errors in the periods they originally arose resulting
from foreign currency gains and losses.
Tax
provision
We adjusted the tax provision by increasing tax expense by
$11.7 million in 2005 and decreasing tax expense by
approximately $4.2 million in 2004 and by $5.2 million
in periods prior to 2004, respectively, to correct tax
expense-related accounting errors in the periods they originally
arose resulting from: (i) inclusion of tax attributes not
previously recorded, (ii) incorrect recognition of
intercompany transactions, (iii) incorrect recording of
withholding taxes in foreign jurisdictions, (iv) incorrect
calculation of tax reserves, (v) incorrect recognition of
deferred tax assets and liabilities and (vi) incorrect
recording in tax accounts of the effects of previously recorded
purchase accounting adjustments. To record the tax impact of all
other prior period errors, we further adjusted the tax provision
by decreasing tax expense by $5.0 million in 2005,
$0.8 million in 2004 and $2.2 million in periods prior
to 2004.
Restatement
Impact on Financial Statements
The following table reconciles previously reported net income to
restated net income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income, as previously reported
|
|
$
|
138,828
|
|
|
$
|
225,065
|
|
Additional stock-based compensation expense
|
|
|
(3,415
|
)
|
|
|
(10,843
|
)
|
Income tax impact of additional stock-based compensation expense
|
|
|
930
|
|
|
|
3,662
|
|
Other adjustments, net of tax
|
|
|
(18,126
|
)
|
|
|
2,133
|
|
|
|
|
|
|
|
|
|
|
Net income, as restated
|
|
$
|
118,217
|
|
|
$
|
220,017
|
|
|
|
|
|
|
|
|
|
|
The impact of the restatement on stock-based compensation
expense, which was previously reported as a component of
operating expenses or cost of net revenue, and the cumulative
effect of all restatement adjustments on the January 1,
2004 beginning balance of retained earnings are as follows (in
thousands):
144
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit on
|
|
|
|
|
|
|
Stock-Based
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Additional
|
|
|
|
Compensation
|
|
|
Additional
|
|
|
Stock-Based
|
|
|
Stock-Based
|
|
|
Stock-Based
|
|
|
|
Expense, as
|
|
|
Stock-Based
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Compensation
|
|
|
|
Previously
|
|
|
Compensation
|
|
|
Expense,
|
|
|
Expense, as
|
|
|
Expense, Net of
|
|
For The Year Ended December 31,
|
|
Reported
|
|
|
Expense(1)
|
|
|
as Restated
|
|
|
Restated(2)
|
|
|
Tax, as Restated
|
|
|
2003
|
|
$
|
12,507
|
|
|
$
|
8,407
|
|
|
$
|
20,914
|
|
|
$
|
(2,626
|
)
|
|
$
|
5,781
|
|
2002
|
|
|
22,404
|
|
|
|
14,494
|
|
|
|
36,898
|
|
|
|
(3,544
|
)
|
|
|
10,950
|
|
2001
|
|
|
24,871
|
|
|
|
29,437
|
|
|
|
54,308
|
|
|
|
(10,843
|
)
|
|
|
18,594
|
|
2000
|
|
|
10,116
|
|
|
|
20,490
|
|
|
|
30,606
|
|
|
|
(7,081
|
)
|
|
|
13,409
|
|
1999
|
|
|
15,570
|
|
|
|
17,842
|
|
|
|
33,412
|
|
|
|
(6,450
|
)
|
|
|
11,392
|
|
1998
|
|
|
668
|
|
|
|
26,398
|
|
|
|
27,066
|
|
|
|
(9,854
|
)
|
|
|
16,544
|
|
1997
|
|
|
|
|
|
|
3,532
|
|
|
|
3,532
|
|
|
|
(1,236
|
)
|
|
|
2,296
|
|
1996
|
|
|
|
|
|
|
2,013
|
|
|
|
2,013
|
|
|
|
(744
|
)
|
|
|
1,269
|
|
1995
|
|
|
|
|
|
|
487
|
|
|
|
487
|
|
|
|
(178
|
)
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
86,136
|
|
|
$
|
123,100
|
|
|
$
|
209,236
|
|
|
$
|
(42,556
|
)
|
|
$
|
80,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax impact of additional stock-based compensation expense
|
|
|
|
|
|
|
(42,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of stock-based compensation adjustments
through December 31, 2003
|
|
|
|
|
|
|
80,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments, net of tax, through December 31, 2003
|
|
|
|
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect at January 1, 2004 in the beginning
balance of retained earnings
|
|
|
|
|
|
$
|
76,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Additional compensation expense is the result of improper
measurement dates for stock option grants, improper accounting
for modifications of the key terms of certain stock option
awards and the correction of accounting errors primarily related
to variable awards. |
|
(2) |
|
Includes income tax benefit on additional stock-based
compensation expense, adjustments for tax deductions prohibited
under Section 162(m) of the Internal Revenue Code as a
result of the additional stock-based compensation expense and
various other adjustments resulting from the impact of
additional stock-based compensation recorded in the applicable
year. |
145
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table reflects the impact of the restatement on
stock-based compensation expense in our consolidated statements
of income for the years ended December 31, 2005 and 2004
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Additional
|
|
|
|
Stock-Based
|
|
|
Additional
|
|
|
Stock-Based
|
|
|
Stock-Based
|
|
|
Stock-Based
|
|
|
|
Compensation
|
|
|
Stock-Based
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Compensation
|
|
|
|
Expense, as
|
|
|
Compensation
|
|
|
Expense,
|
|
|
Expense, as
|
|
|
Expense, Net of
|
|
Year Ended December 31,
|
|
Previously Reported
|
|
|
Expense(1)
|
|
|
as Restated
|
|
|
Restated(2)
|
|
|
Tax, as Restated
|
|
|
2005
|
|
$
|
1,056
|
|
|
$
|
3,415
|
|
|
$
|
4,471
|
|
|
$
|
(930
|
)
|
|
$
|
2,485
|
|
2004
|
|
|
14,320
|
|
|
|
10,843
|
|
|
|
25,163
|
|
|
|
(3,662
|
)
|
|
|
7,181
|
|
|
|
|
(1) |
|
Additional compensation expense is the result of improper
measurement dates for stock option grants, improper accounting
for modifications of the key terms of certain stock option
awards and the correction of accounting errors primarily related
to variable awards. |
|
(2) |
|
Includes income tax benefit on additional stock-based
compensation expense, adjustments for tax deductions prohibited
under Section 162(m) of the Internal Revenue Code as a
result of the additional stock-based compensation expense and
various other adjustments resulting from the impact of
additional stock-based compensation recorded in the applicable
year. |
146
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables reconcile the impact of the additional
non-cash charges for stock-based compensation, other adjustments
and the related tax effects on our financial statements as of
December 31, 2005 and 2004 and for the years then ended:
Consolidated
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
(As previously
|
|
|
(Adjustments)
|
|
|
(As restated)
|
|
|
|
reported)
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
728,592
|
|
|
$
|
|
|
|
$
|
728,592
|
|
Restricted cash
|
|
|
50,489
|
|
|
|
|
|
|
|
50,489
|
|
Short-term marketable securities
|
|
|
316,298
|
|
|
|
|
|
|
|
316,298
|
|
Accounts receivable, net of allowance for doubtful accounts of
$2,389
|
|
|
158,680
|
|
|
|
450
|
|
|
|
159,130
|
|
Prepaid expenses and prepaid taxes
|
|
|
78,945
|
|
|
|
187
|
|
|
|
79,132
|
|
Deferred income taxes
|
|
|
206,811
|
|
|
|
(2,603
|
)
|
|
|
204,208
|
|
Other current assets
|
|
|
27,846
|
|
|
|
644
|
|
|
|
28,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,567,661
|
|
|
|
(1,322
|
)
|
|
|
1,566,339
|
|
Long-term marketable securities
|
|
|
212,131
|
|
|
|
|
|
|
|
212,131
|
|
Restricted cash
|
|
|
939
|
|
|
|
|
|
|
|
939
|
|
Property and equipment, net
|
|
|
85,641
|
|
|
|
51
|
|
|
|
85,692
|
|
Deferred income taxes
|
|
|
241,315
|
|
|
|
(3,345
|
)
|
|
|
237,970
|
|
Intangible assets, net
|
|
|
80,782
|
|
|
|
(696
|
)
|
|
|
80,086
|
|
Goodwill
|
|
|
438,396
|
|
|
|
(908
|
)
|
|
|
437,488
|
|
Other assets
|
|
|
15,759
|
|
|
|
(170
|
)
|
|
|
15,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,642,624
|
|
|
$
|
(6,390
|
)
|
|
$
|
2,636,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
34,678
|
|
|
$
|
|
|
|
$
|
34,678
|
|
Accrued SEC settlement
|
|
|
50,000
|
|
|
|
|
|
|
|
50,000
|
|
Accrued income taxes
|
|
|
81,227
|
|
|
|
(4,487
|
)
|
|
|
76,740
|
|
Accrued compensation
|
|
|
50,617
|
|
|
|
5,164
|
|
|
|
55,781
|
|
Other accrued liabilities
|
|
|
82,011
|
|
|
|
3,449
|
|
|
|
85,460
|
|
Deferred revenue
|
|
|
570,458
|
|
|
|
5,207
|
|
|
|
575,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
868,991
|
|
|
|
9,333
|
|
|
|
878,324
|
|
Deferred revenue, less current portion
|
|
|
175,962
|
|
|
|
179
|
|
|
|
176,141
|
|
Accrued taxes and other long-term liabilities
|
|
|
142,638
|
|
|
|
4,490
|
|
|
|
147,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,187,591
|
|
|
|
14,002
|
|
|
|
1,201,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,705
|
|
|
|
|
|
|
|
1,705
|
|
Treasury stock
|
|
|
(68,395
|
)
|
|
|
|
|
|
|
(68,395
|
)
|
Additional paid-in capital
|
|
|
1,356,881
|
|
|
|
86,862
|
|
|
|
1,443,743
|
|
Deferred stock-based compensation
|
|
|
(474
|
)
|
|
|
(7,672
|
)
|
|
|
(8,146
|
)
|
Accumulated other comprehensive income
|
|
|
31,302
|
|
|
|
2,621
|
|
|
|
33,923
|
|
Retained earnings
|
|
|
134,014
|
|
|
|
(102,203
|
)
|
|
|
31,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,455,033
|
|
|
|
(20,392
|
)
|
|
|
1,434,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,642,624
|
|
|
$
|
(6,390
|
)
|
|
$
|
2,636,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
(As previously
|
|
|
(Adjustments)
|
|
|
(As restated)
|
|
|
|
reported)
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
291,155
|
|
|
$
|
|
|
|
$
|
291,155
|
|
Short-term marketable securities
|
|
|
232,929
|
|
|
|
|
|
|
|
232,929
|
|
Accounts receivable, net of allowance for doubtful accounts of
$2,536
|
|
|
146,376
|
|
|
|
476
|
|
|
|
146,852
|
|
Prepaid expenses, prepaid taxes, and other current assets
|
|
|
99,513
|
|
|
|
5,987
|
|
|
|
105,500
|
|
Deferred income taxes
|
|
|
200,459
|
|
|
|
2,629
|
|
|
|
203,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
970,432
|
|
|
|
9,092
|
|
|
|
979,524
|
|
Long-term marketable securities
|
|
|
400,597
|
|
|
|
|
|
|
|
400,597
|
|
Restricted cash
|
|
|
617
|
|
|
|
|
|
|
|
617
|
|
Property and equipment, net
|
|
|
91,715
|
|
|
|
782
|
|
|
|
92,497
|
|
Deferred income taxes
|
|
|
220,604
|
|
|
|
(248
|
)
|
|
|
220,356
|
|
Intangible assets, net
|
|
|
107,133
|
|
|
|
1,762
|
|
|
|
108,895
|
|
Goodwill
|
|
|
439,180
|
|
|
|
(2,419
|
)
|
|
|
436,761
|
|
Other assets
|
|
|
16,254
|
|
|
|
634
|
|
|
|
16,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,246,532
|
|
|
$
|
9,603
|
|
|
$
|
2,256,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
32,891
|
|
|
$
|
(1,449
|
)
|
|
$
|
31,442
|
|
Accrued income taxes
|
|
|
70,778
|
|
|
|
(2,200
|
)
|
|
|
68,578
|
|
Accrued compensation
|
|
|
53,146
|
|
|
|
5,936
|
|
|
|
59,082
|
|
Other accrued liabilities
|
|
|
82,300
|
|
|
|
1,899
|
|
|
|
84,199
|
|
Deferred revenue
|
|
|
475,621
|
|
|
|
419
|
|
|
|
476,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
714,736
|
|
|
|
4,605
|
|
|
|
719,341
|
|
Deferred revenue, less current portion
|
|
|
125,752
|
|
|
|
(307
|
)
|
|
|
125,445
|
|
Accrued taxes and other long-term liabilities
|
|
|
204,796
|
|
|
|
311
|
|
|
|
205,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,045,284
|
|
|
|
4,609
|
|
|
|
1,049,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,623
|
|
|
|
|
|
|
|
1,623
|
|
Treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
1,178,855
|
|
|
|
89,851
|
|
|
|
1,268,706
|
|
Deferred stock-based compensation
|
|
|
(1,777
|
)
|
|
|
(6,654
|
)
|
|
|
(8,431
|
)
|
Accumulated other comprehensive income
|
|
|
27,361
|
|
|
|
3,389
|
|
|
|
30,750
|
|
Retained earnings
|
|
|
(4,814
|
)
|
|
|
(81,592
|
)
|
|
|
(86,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,201,248
|
|
|
|
4,994
|
|
|
|
1,206,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,246,532
|
|
|
$
|
9,603
|
|
|
$
|
2,256,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidated
Statements of Income and Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
Year Ended December 31, 2004
|
|
|
|
(As previously
|
|
|
(Adjustments)
|
|
|
(As restated)
|
|
|
(As previously
|
|
|
(Adjustments)
|
|
|
(As restated)
|
|
|
|
reported)
|
|
|
|
|
|
|
|
|
reported)
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
541,238
|
(1)
|
|
$
|
3,239
|
|
|
$
|
544,477
|
|
|
$
|
464,238
|
|
|
$
|
(512
|
)
|
|
$
|
463,726
|
|
Subscription
|
|
|
318,206
|
(1)
|
|
|
|
|
|
|
318,206
|
|
|
|
215,817
|
|
|
|
|
|
|
|
215,817
|
|
Product
|
|
|
127,855
|
(1)
|
|
|
(8,910
|
)
|
|
|
118,945
|
|
|
|
230,487
|
|
|
|
(2,457
|
)
|
|
|
228,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
987,299
|
|
|
|
(5,671
|
)
|
|
|
981,628
|
|
|
|
910,542
|
|
|
|
(2,969
|
)
|
|
|
907,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support(2)
|
|
|
30,881
|
(1)
|
|
|
(6,702
|
)
|
|
|
24,179
|
|
|
|
23,768
|
|
|
|
2,257
|
|
|
|
26,025
|
|
Subscription(2)
|
|
|
54,275
|
(1)
|
|
|
9,203
|
|
|
|
63,478
|
|
|
|
38,476
|
|
|
|
8
|
|
|
|
38,484
|
|
Product(2)
|
|
|
63,944
|
(1)
|
|
|
670
|
|
|
|
64,614
|
|
|
|
73,334
|
|
|
|
1,184
|
|
|
|
74,518
|
|
Amortization of purchased technology
|
|
|
15,515
|
|
|
|
2,252
|
|
|
|
17,767
|
|
|
|
13,331
|
|
|
|
1,556
|
|
|
|
14,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
|
164,615
|
|
|
|
5,423
|
|
|
|
170,038
|
|
|
|
148,909
|
|
|
|
5,005
|
|
|
|
153,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(2)
|
|
|
176,350
|
|
|
|
59
|
|
|
|
176,409
|
|
|
|
172,717
|
|
|
|
2,155
|
|
|
|
174,872
|
|
Marketing and sales(2)
|
|
|
294,234
|
|
|
|
5,855
|
|
|
|
300,089
|
|
|
|
354,380
|
|
|
|
(1,306
|
)
|
|
|
353,074
|
|
General and administrative(2)
|
|
|
123,756
|
|
|
|
(269
|
)
|
|
|
123,487
|
|
|
|
141,561
|
|
|
|
3,477
|
|
|
|
145,038
|
|
Amortization of intangibles
|
|
|
12,902
|
|
|
|
(68
|
)
|
|
|
12,834
|
|
|
|
14,065
|
|
|
|
170
|
|
|
|
14,235
|
|
Restructuring charges
|
|
|
3,731
|
|
|
|
51
|
|
|
|
3,782
|
|
|
|
17,493
|
|
|
|
(51
|
)
|
|
|
17,442
|
|
In-process research and development
|
|
|
4,000
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets and technology(2)
|
|
|
(56
|
)
|
|
|
|
|
|
|
(56
|
)
|
|
|
(240,336
|
)
|
|
|
|
|
|
|
(240,336
|
)
|
SEC settlement charge
|
|
|
50,000
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursement from transition services agreement
|
|
|
(362
|
)
|
|
|
|
|
|
|
(362
|
)
|
|
|
(5,997
|
)
|
|
|
|
|
|
|
(5,997
|
)
|
Reimbursement related to litigation settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,991
|
)
|
|
|
|
|
|
|
(24,991
|
)
|
Severance/bonus costs related to Sniffer and Magic disposition(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,070
|
|
|
|
|
|
|
|
10,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs
|
|
|
664,555
|
|
|
|
5,628
|
|
|
|
670,183
|
|
|
|
438,962
|
|
|
|
4,445
|
|
|
|
443,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
158,129
|
|
|
|
(16,722
|
)
|
|
|
141,407
|
|
|
|
322,671
|
|
|
|
(12,419
|
)
|
|
|
310,252
|
|
Interest and other income
|
|
|
24,837
|
|
|
|
1,866
|
|
|
|
26,703
|
|
|
|
15,889
|
|
|
|
(1,238
|
)
|
|
|
14,651
|
|
Interest and other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,315
|
)
|
|
|
|
|
|
|
(5,315
|
)
|
Loss on repurchase of convertible debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,070
|
)
|
|
|
|
|
|
|
(15,070
|
)
|
Loss on investments, net
|
|
|
(1,432
|
)
|
|
|
|
|
|
|
(1,432
|
)
|
|
|
(1,704
|
)
|
|
|
|
|
|
|
(1,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
181,534
|
|
|
|
(14,856
|
)
|
|
|
166,678
|
|
|
|
316,471
|
|
|
|
(13,657
|
)
|
|
|
302,814
|
|
Provision for income taxes
|
|
|
42,706
|
|
|
|
5,755
|
|
|
|
48,461
|
|
|
|
91,406
|
|
|
|
(8,609
|
)
|
|
|
82,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
138,828
|
|
|
$
|
(20,611
|
)
|
|
$
|
118,217
|
|
|
$
|
225,065
|
|
|
$
|
(5,048
|
)
|
|
$
|
220,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on marketable securities, net of
reclassification adjustment for losses recognized on marketable
securities during the period and income tax
|
|
$
|
(638
|
)
|
|
$
|
|
|
|
$
|
(638
|
)
|
|
$
|
(2,129
|
)
|
|
$
|
|
|
|
$
|
(2,129
|
)
|
Foreign currency translation (loss) gain
|
|
|
4,579
|
|
|
|
(768
|
)
|
|
|
3,811
|
|
|
|
(4,537
|
)
|
|
|
2,735
|
|
|
|
(1,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
142,769
|
|
|
$
|
(21,379
|
)
|
|
$
|
121,390
|
|
|
$
|
218,399
|
|
|
$
|
(2,313
|
)
|
|
$
|
216,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
0.84
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.72
|
|
|
$
|
1.40
|
|
|
$
|
(0.03
|
)
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$
|
0.82
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.70
|
|
|
$
|
1.31
|
|
|
$
|
(0.03
|
)
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation basic
|
|
|
165,087
|
|
|
|
(45
|
)
|
|
|
165,042
|
|
|
|
160,714
|
|
|
|
(204
|
)
|
|
|
160,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation diluted
|
|
|
169,234
|
|
|
|
15
|
|
|
|
169,249
|
|
|
|
177,099
|
|
|
|
286
|
|
|
|
177,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
During 2005, we made certain reclassifications from product
revenue to service and support revenue, primarily related to
online subscriptions. Total net revenue was not impacted by
these reclassifications. As of January 1, 2006, we changed
the presentation of our net revenue and cost of net revenue to
include three categories: (i) product, which includes
hardware and perpetual licenses (ii) subscription, which
includes subscription-based offerings and (iii) service and
support, which includes maintenance, consulting and training.
Previously, we chose to allocate our subscription business
between product revenue and services and support revenue instead
of presenting it as a separate category. We believe this new
presentation is consistent with the way we currently manage our
business as we grow the subscription component of both our
corporate and consumer businesses. In the table below, we have
applied the change in presentation retrospectively to the
balances previously reported for the years ended
December 31, 2005 and 2004. Total net revenues and cost of
net revenues were not affected by the change. |
The following table presents our 2005 and 2004 net revenue
and cost of net revenue as previously reported in our 2005
annual report on
Form 10-K
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(As previously
|
|
|
(As previously
|
|
|
|
reported)
|
|
|
reported)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
167,538
|
|
|
$
|
294,163
|
|
Service and support
|
|
|
819,761
|
|
|
|
616,379
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
987,299
|
|
|
$
|
910,542
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
63,272
|
|
|
$
|
73,058
|
|
Service and support
|
|
|
85,828
|
|
|
|
62,520
|
|
Amortization of purchased technology
|
|
|
15,515
|
|
|
|
13,331
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
$
|
164,615
|
|
|
$
|
148,909
|
|
|
|
|
|
|
|
|
|
|
The following table presents our revised 2005 and 2004 net
revenue and cost of net revenue presentation, prior to the
effect of restatement adjustments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
541,238
|
|
|
$
|
230,487
|
|
Subscription
|
|
|
318,206
|
|
|
|
215,817
|
|
Product
|
|
|
127,855
|
|
|
|
464,238
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
987,299
|
|
|
$
|
910,542
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
30,881
|
|
|
$
|
23,768
|
|
Subscription
|
|
|
54,275
|
|
|
|
38,476
|
|
Product
|
|
|
63,944
|
|
|
|
73,334
|
|
Amortization of purchased technology
|
|
|
15,515
|
|
|
|
13,331
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
$
|
164,615
|
|
|
$
|
148,909
|
|
|
|
|
|
|
|
|
|
|
150
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(2) Includes the following amounts related to stock-based
compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
Year Ended December 31, 2004
|
|
|
|
(As previously
|
|
|
(Adjustments)
|
|
|
(As restated)
|
|
|
(As previously
|
|
|
(Adjustments)
|
|
|
(As restated)
|
|
|
|
reported)
|
|
|
|
|
|
|
|
|
reported)
|
|
|
|
|
|
|
|
|
Stock-based compensation included in cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
$
|
|
|
|
$
|
215
|
|
|
$
|
215
|
|
Subscription
|
|
|
|
|
|
|
36
|
|
|
|
36
|
|
|
|
|
|
|
|
109
|
|
|
|
109
|
|
Product
|
|
|
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
713
|
|
|
|
713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation included in cost of net revenue
|
|
|
|
|
|
|
45
|
|
|
|
45
|
|
|
|
|
|
|
|
1,037
|
|
|
|
1,037
|
|
Stock-based compensation included in operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
(234
|
)
|
|
|
758
|
|
|
|
524
|
|
|
|
6,518
|
|
|
|
3,020
|
|
|
|
9,538
|
|
Marketing and sales
|
|
|
(25
|
)
|
|
|
1,507
|
|
|
|
1,482
|
|
|
|
2,642
|
|
|
|
4,061
|
|
|
|
6,703
|
|
General and administrative
|
|
|
1,315
|
|
|
|
1,105
|
|
|
|
2,420
|
|
|
|
4,085
|
|
|
|
2,725
|
|
|
|
6,810
|
|
Gain on sale of assets and technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
84
|
|
Severance/bonus costs related to Sniffer and Magic disposition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
991
|
|
|
|
|
|
|
|
991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation included in operating costs
|
|
|
1,056
|
|
|
|
3,370
|
|
|
|
4,426
|
|
|
|
14,320
|
|
|
|
9,806
|
|
|
|
24,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
1,056
|
|
|
$
|
3,415
|
|
|
$
|
4,471
|
|
|
$
|
14,320
|
|
|
$
|
10,843
|
|
|
$
|
25,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The restatement did not impact net cash flows from operating,
investing or financing activities. However, certain items within
net cash provided by operating activities were impacted by the
adjustments. The following table shows the effects of the
restatement on previously reported cash flow items within
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
Year Ended December 31, 2004
|
|
|
|
(As previously
|
|
|
(Adjustments)
|
|
|
(As restated)
|
|
|
(As previously
|
|
|
(Adjustments)
|
|
|
(As restated)
|
|
|
|
reported)
|
|
|
|
|
|
|
|
|
reported)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
138,828
|
|
|
$
|
(20,611
|
)
|
|
$
|
118,217
|
|
|
$
|
225,065
|
|
|
$
|
(5,048
|
)
|
|
$
|
220,017
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
64,884
|
|
|
|
2,112
|
|
|
|
66,996
|
|
|
|
66,699
|
|
|
|
1,637
|
|
|
|
68,336
|
|
Tax benefit from exercise of nonqualified stock options
|
|
|
34,442
|
|
|
|
(7,423
|
)
|
|
|
27,019
|
|
|
|
72,622
|
|
|
|
(19,409
|
)
|
|
|
53,213
|
|
Deferred income taxes
|
|
|
(13,762
|
)
|
|
|
7,219
|
|
|
|
(6,543
|
)
|
|
|
(21,503
|
)
|
|
|
(3,332
|
)
|
|
|
(24,835
|
)
|
Non-cash stock-based compensation expense
|
|
|
1,056
|
|
|
|
3,415
|
|
|
|
4,471
|
|
|
|
14,320
|
|
|
|
10,843
|
|
|
|
25,163
|
|
Changes in assets and liabilities, net of acquisitions and
divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(23,309
|
)
|
|
|
105
|
|
|
|
(23,204
|
)
|
|
|
35,668
|
|
|
|
(1,738
|
)
|
|
|
33,930
|
|
Prepaid expenses, prepaid taxes and other assets
|
|
|
(13,249
|
)
|
|
|
3,778
|
|
|
|
(9,471
|
)
|
|
|
(6,267
|
)
|
|
|
(2,030
|
)
|
|
|
(8,297
|
)
|
Accounts payable
|
|
|
2,060
|
|
|
|
1,476
|
|
|
|
3,536
|
|
|
|
(423
|
)
|
|
|
(900
|
)
|
|
|
(1,323
|
)
|
Accrued taxes and other liabilities
|
|
|
39,128
|
|
|
|
4,102
|
|
|
|
43,230
|
|
|
|
15,388
|
|
|
|
15,178
|
|
|
|
30,566
|
|
Deferred revenue
|
|
|
182,190
|
|
|
|
5,827
|
|
|
|
188,017
|
|
|
|
161,933
|
|
|
|
4,799
|
|
|
|
166,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect on cash flows from operating activities
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired in business combinations
|
|
$
|
17,080
|
|
|
$
|
3,869
|
|
|
$
|
20,949
|
|
|
$
|
110,394
|
|
|
$
|
(920
|
)
|
|
$
|
109,474
|
|
Cash paid for income taxes
|
|
$
|
38,024
|
|
|
$
|
(1
|
)
|
|
$
|
38,023
|
|
|
$
|
31,393
|
|
|
$
|
(9,481
|
)
|
|
$
|
21,912
|
|
Cash received from income tax refunds
|
|
$
|
|
|
|
$
|
14,416
|
|
|
$
|
14,416
|
|
|
$
|
|
|
|
$
|
1,443
|
|
|
$
|
1,443
|
|
Allowance for doubtful accounts and allowance for sales returns
and other incentives were impacted by restatement adjustments.
The following table shows the effects of the restatement on
previously reported allowance for doubtful accounts and sales
returns and other incentives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
Year Ended December 31, 2004
|
|
Year Ended December 31, 2003
|
|
|
(As
|
|
(Adjustments)
|
|
(As
|
|
(As
|
|
(Adjustments)
|
|
(As
|
|
(As
|
|
(Adjustments)
|
|
(As
|
|
|
previously
|
|
|
|
restated)
|
|
previously
|
|
|
|
restated)
|
|
previously
|
|
|
|
restated)
|
|
|
reported)
|
|
|
|
|
|
reported)
|
|
|
|
|
|
reported)
|
|
|
|
|
|
|
(In thousands)
|
|
Allowance for doubtful accounts
|
|
$
|
2,389
|
|
|
$
|
|
|
|
$
|
2,389
|
|
|
$
|
2,536
|
|
|
$
|
(261
|
)
|
|
$
|
2,275
|
|
|
$
|
3,070
|
|
|
$
|
(8
|
)
|
|
$
|
3,062
|
|
Sales returns and other incentives
|
|
$
|
32,573
|
|
|
$
|
(634
|
)
|
|
$
|
31,939
|
|
|
$
|
29,224
|
|
|
$
|
97
|
|
|
$
|
29,321
|
|
|
$
|
39,599
|
|
|
$
|
1,746
|
|
|
$
|
41,345
|
|
152
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Citadel
Security Software
In December 2006, we acquired substantially all of the assets of
Citadel Security Software Inc. (Citadel), a security
software provider focused on solutions in security policy
compliance and vulnerability remediation, for $56.1 million
in cash, plus an estimated $3.9 million in working capital
reimbursement and $1.2 million in direct acquisition costs,
totaling $61.2 million. We have incorporated Citadels
technology into our existing consumer products.
Our management determined the 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. We
recorded $41.7 million of goodwill. We recorded no
in-process research and development related to this acquisition.
The intangible assets, other than goodwill, are being amortized
over their useful lives of 2.0 to 5.0 years or a
weighted-average period of 4.0 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 $0.6 million through 2008, was established
at the close of the acquisition. At December 31, 2006, less
than $0.1 million had been expensed and paid related to
this performance plan.
Onigma
In October 2006, we acquired 100% of the outstanding capital
shares of Onigma Ltd. (Onigma), a provider of data
protection solutions that monitor, report and prevent
confidential data from leaving an enterprise, for
$18.9 million in cash and $0.2 million in direct
acquisition costs, totaling $19.1 million. We have
incorporated Onigmas technology into our existing
corporate security products.
Our management determined the 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. There was
no goodwill associated with this acquisition. We recorded no
in-process research and development related to this acquisition.
The intangible assets are being amortized over their useful
lives of 2.0 to 4.0 years or a weighted-average period of
3.9 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
$1.0 million through 2007, was established at the close of
the acquisition. At December 31, 2006, $0.1 million
had been expensed and no amounts had been paid related to this
performance plan.
Preventsys
In June 2006, we acquired 100% of the outstanding capital shares
of Preventsys, Inc. (Preventsys), a creator of
security risk management and automated security compliance
reporting, for $4.4 million in cash and $0.4 million
in direct acquisition costs, totaling $4.8 million. We have
added Preventsys products to our existing portfolio of corporate
security offerings.
Our management determined the 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. We
recorded $0.2 million of goodwill (none of which is
deductible for tax purposes).
We recorded $0.5 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
a new version of the security risk management system that will
include increased functionality and new features. We introduced
this version
153
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
during the fourth quarter of 2006. At the date of acquisition,
we estimated that 40% of the development effort had been
completed and that the remaining 60% of development would take
two months to complete. As of December 31, 2006, all
development was completed and costs were $0.5 million. The
intangible assets, other than goodwill, are being amortized over
their useful lives of 3.0 to 5.0 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 $0.8 million through 2007, was established
at the close of the acquisition. At December 31, 2006,
$0.2 million had been expensed related to this performance
plan and no payments had been made.
SiteAdvisor
In April 2006, we acquired 100% of the outstanding capital
shares of SiteAdvisor, Inc., a web safety consumer software
company that tests and rates internet sites on an ongoing basis,
for $60.8 million in cash and $0.2 million in direct
acquisition costs, totaling $61.0 million. We have bundled
the SiteAdvisor technology with our existing consumer product
offerings.
Our management determined the 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. We
recorded $50.6 million of goodwill (none of which is
deductible for tax purposes). We recorded no in-process research
and development related to this acquisition.
The intangible assets, other than goodwill, are being amortized
over their useful lives of 2.0 to 4.0 years or a
weighted-average period of 3.0 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 $9.2 million through 2008, was established
at the close of the acquisition. At December 31, 2006,
$5.0 million had been expensed and paid related to this
performance plan.
The following is a summary of the assets acquired and
liabilities assumed in the acquisition of Citadel, Onigma,
Preventsys and SiteAdvisor as adjusted for purchase price
valuation procedures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SiteAdvisor
|
|
|
Preventsys
|
|
|
Onigma
|
|
|
Citadel
|
|
|
Total
|
|
|
Technology
|
|
$
|
15,450
|
|
|
$
|
3,540
|
|
|
$
|
23,139
|
|
|
$
|
15,900
|
|
|
$
|
58,029
|
|
Other intangibles
|
|
|
420
|
|
|
|
890
|
|
|
|
1,889
|
|
|
|
6,500
|
|
|
|
9,699
|
|
Goodwill
|
|
|
50,607
|
|
|
|
260
|
|
|
|
|
|
|
|
41,660
|
|
|
|
92,527
|
|
Cash
|
|
|
29
|
|
|
|
23
|
|
|
|
125
|
|
|
|
|
|
|
|
177
|
|
Other assets
|
|
|
485
|
|
|
|
661
|
|
|
|
281
|
|
|
|
1,072
|
|
|
|
2,499
|
|
Deferred tax assets
|
|
|
377
|
|
|
|
1,978
|
|
|
|
530
|
|
|
|
|
|
|
|
2,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
67,368
|
|
|
|
7,352
|
|
|
|
25,964
|
|
|
|
65,132
|
|
|
|
165,816
|
|
Accrued liabilities
|
|
|
37
|
|
|
|
1,015
|
|
|
|
372
|
|
|
|
|
|
|
|
1,424
|
|
Deferred revenue
|
|
|
|
|
|
|
203
|
|
|
|
|
|
|
|
3,937
|
|
|
|
4,140
|
|
Deferred tax liabilities
|
|
|
6,269
|
|
|
|
1,750
|
|
|
|
6,429
|
|
|
|
|
|
|
|
14,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
6,306
|
|
|
|
2,968
|
|
|
|
6,801
|
|
|
|
3,937
|
|
|
|
20,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
61,062
|
|
|
|
4,384
|
|
|
|
19,163
|
|
|
|
61,195
|
|
|
|
145,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development expensed
|
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisition cost
|
|
$
|
61,062
|
|
|
$
|
4,844
|
|
|
$
|
19,163
|
|
|
$
|
61,195
|
|
|
$
|
146,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The results of operations for Citadel, Onigma, Preventsys and
SiteAdvisor have been included in our results of operations
since the date of acquisition.
154
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following unaudited pro forma financial information presents
our combined results with Citadel and Preventsys as if the
acquisitions had occurred at the beginning of 2006 and 2005 (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Pro forma net revenue
|
|
$
|
1,157,986
|
|
|
$
|
993,485
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
119,371
|
|
|
$
|
88,300
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic net income per share,
|
|
$
|
0.74
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted net income per share
|
|
$
|
0.73
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation basic
|
|
|
160,945
|
|
|
|
165,042
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation diluted
|
|
|
163,052
|
|
|
|
169,249
|
|
|
|
|
|
|
|
|
|
|
The above unaudited pro forma financial information includes
adjustments for amortization of identifiable intangible assets
that were acquired. The pro forma financial information excludes
the effects of the in-process research and development totaling
$0.5 million that was expensed immediately. In
managements opinion, the unaudited pro forma combined
results of operations are not indicative of the actual results
that would have occurred had the acquisition been consummated at
the beginning of 2006 and 2005, nor are they indicative of
future operations of the combined companies.
Pro forma results of operations for Onigma and SiteAdvisor have
not been presented because the effects of these acquisitions,
individually or in the aggregate, were not material to our
results of operations.
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 protection products, for
$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.
Our management determined the 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. We
recorded $13.1 million of goodwill (none of which is
deductible for tax purposes). The
155
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
following is a summary of the assets acquired and liabilities
assumed in the acquisition of Wireless Security Corporation as
adjusted for the resolution of purchase price valuation
procedures (in thousands):
|
|
|
|
|
Technology
|
|
$
|
1,500
|
|
Other intangibles
|
|
|
300
|
|
Goodwill
|
|
|
13,247
|
|
Cash
|
|
|
131
|
|
Other assets
|
|
|
34
|
|
Deferred tax assets
|
|
|
1,870
|
|
|
|
|
|
|
Total assets acquired
|
|
|
17,082
|
|
Accrued liabilities
|
|
|
40
|
|
Deferred tax liabilities
|
|
|
711
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
751
|
|
|
|
|
|
|
Net assets acquired
|
|
|
16,331
|
|
|
|
|
|
|
In-process research and development expensed
|
|
|
4,000
|
|
|
|
|
|
|
Total acquisition cost
|
|
$
|
20,331
|
|
|
|
|
|
|
We recorded $4.0 million for in-process research and
development, which was fully expensed upon purchase because
technological feasibility had not been achieved. 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 offerings that
we integrated 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 two months to complete. As of
December 31, 2005, we had completed the remaining
development efforts and costs were $0.6 million. 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 was established at
the close of the acquisition. We expect payments under the plan
to total $1.2 million. At December 31, 2006,
$1.2 million had been expensed and $0.8 million 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 on a pro forma basis.
Foundstone,
Inc.
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 vulnerability management and
risk assessment 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.
Under the transaction, we recorded $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
156
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 December 31, 2006, 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 or fair value, as applicable, of the stock
options will be recognized by us through 2008 as employment
services are provided. For the years ended December 31,
2006, 2005 and 2004, we expensed $0.3 million,
$0.5 million and $0.2 million, respectively, related
to the Foundstone stock options. At December 31, 2006,
unearned compensation to be recognized by us in future periods
as services are provided was $0.1 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, the 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.
For the year ended December 31, 2006 and 2005, we recorded
$1.3 million and $2.9 million, respectively, in
expense for escrow amounts vesting in the period.
Our management determined the 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 the final
summary of assets acquired and liabilities assumed in the
acquisition of Foundstone after all purchase price valuation
procedures (in thousands):
|
|
|
|
|
Technology
|
|
$
|
27,000
|
|
Other intangible assets
|
|
|
1,600
|
|
Goodwill
|
|
|
57,693
|
|
Cash
|
|
|
920
|
|
Other assets
|
|
|
12,682
|
|
Deferred tax assets
|
|
|
10,464
|
|
|
|
|
|
|
Total assets acquired
|
|
|
110,359
|
|
Accrued liabilities
|
|
|
8,684
|
|
Deferred tax liabilities
|
|
|
11,297
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
19,981
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
90,378
|
|
|
|
|
|
|
157
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following unaudited pro forma financial information presents
our combined results with Foundstone as if the acquisition had
occurred at the beginning of 2004 (in thousands except per share
amounts):
|
|
|
|
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
Pro forma net revenue
|
|
$
|
924,626
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
207,179
|
|
|
|
|
|
|
Pro forma basic net income per share
|
|
$
|
1.29
|
|
|
|
|
|
|
Shares used in per share calculation basic
|
|
|
160,510
|
|
|
|
|
|
|
Pro forma diluted net income per share
|
|
$
|
1.21
|
|
|
|
|
|
|
Shares used in per share calculation diluted
|
|
|
177,385
|
|
|
|
|
|
|
The above unaudited pro forma financial information includes
adjustments for interest income on cash disbursed for the
acquisition, amortization of identifiable intangible assets and
adjustments for expenses incurred in conjunction with the
acquisition.
McAfee
Labs
In April 2005, we completed the sale of our McAfee Labs assets
to SPARTA, Inc. for $1.5 million and recognized a gain on
the sale of $1.3 million for the year ended
December 31, 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 through the date of the sale.
Revenue related to McAfee Labs was $1.9 million and
$6.4 million for the years ended December 31, 2005 and
2004, respectively.
Sniffer
Technologies
In July 2004, we completed our sale of our Sniffer product line
to Network General Corporation for $213.8 million in cash,
net of $4.0 million in direct costs. We recorded a gain on
sale of $197.4 million in 2004. Sniffer assets and
liabilities in our other reporting units were not material.
Revenue related to Sniffer was $91.4 million in 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 transitions services agreement in
2005. We recorded $6.0 million of reimbursements under the
transition services agreement in 2004. We completed our
requirements under the transition services agreement in July
2005.
Also in conjunction with the sale of our Sniffer product line,
we paid severance and bonuses to the former executives of
Sniffer for their assistance in the transaction. The total
bonuses and severance accrued was $7.7 million in 2004, of
which $5.3 million was paid in 2004 and $2.4 million
was paid in 2005. Furthermore,
158
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
we accelerated the vesting of these executives stock
options, which resulted in a stock-based compensation expense of
$1.0 million in 2004.
Magic
Solutions
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 $46.1 million in 2004. Magic did not
represent a separate component of our Company as its operations
and cash flows could not be sufficiently separated from the rest
of our business; consequently, its results of operations are
included in income from continuing operations in the
consolidated statements of income through the date of sale.
Magic assets and liabilities in our other operating regions were
not material. Revenue related to Magic was $2.8 million in
2004.
In conjunction with the Magic sale, we paid a $1.4 million
bonus to an executive related to the transaction.
|
|
6.
|
Marketable
Securities and Cash and Cash Equivalents
|
Marketable securities, which are classified as
available-for-sale, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Purchase/
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
U.S. Government debt securities
|
|
$
|
179,466
|
|
|
$
|
28
|
|
|
$
|
(675
|
)
|
|
$
|
178,819
|
|
Corporate debt securities
|
|
|
642,975
|
|
|
|
391
|
|
|
|
(874
|
)
|
|
|
642,492
|
|
Time deposits
|
|
|
29,231
|
|
|
|
|
|
|
|
|
|
|
|
29,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
851,672
|
|
|
$
|
419
|
|
|
$
|
(1,549
|
)
|
|
$
|
850,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Purchase/
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
U.S. Government debt securities
|
|
$
|
199,233
|
|
|
$
|
|
|
|
$
|
(1,770
|
)
|
|
$
|
197,463
|
|
Corporate debt securities
|
|
|
293,917
|
|
|
|
17
|
|
|
|
(1,618
|
)
|
|
|
292,316
|
|
Time deposits
|
|
|
38,650
|
|
|
|
|
|
|
|
|
|
|
|
38,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
531,800
|
|
|
$
|
17
|
|
|
$
|
(3,388
|
)
|
|
$
|
528,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, $215.7 million of marketable
debt securities had scheduled maturities of less than one year
and are classified as current assets. Marketable securities of
$634.8 million have maturities ranging from greater than
one year to less than three years and are classified as non
current assets.
The following table summarizes the components of the cash and
cash equivalents balance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Cash and money market funds, at cost which approximates fair
value
|
|
$
|
369,617
|
|
|
$
|
718,109
|
|
Corporate debt securities, primarily commercial paper
|
|
|
20,010
|
|
|
|
10,483
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
389,627
|
|
|
$
|
728,592
|
|
|
|
|
|
|
|
|
|
|
159
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We recognized gains (losses) upon the sale of investments using
the specific identification method. The following table
summarizes the gross realized gains (losses) for the years
ending December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Realized gains
|
|
$
|
596
|
|
|
$
|
697
|
|
|
$
|
922
|
|
Realized losses
|
|
|
(240
|
)
|
|
|
(2,129
|
)
|
|
|
(2,626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss)
|
|
$
|
356
|
|
|
$
|
(1,432
|
)
|
|
$
|
(1,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the fair value and gross
unrealized losses related to those available-for-sale securities
that have unrealized losses, aggregated by investment category
and length of time that the individual securities have been in a
continuous unrealized loss position, at December 31, 2006
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
U.S. Government debt securities
|
|
$
|
82,293
|
|
|
$
|
(107
|
)
|
|
$
|
51,764
|
|
|
$
|
(568
|
)
|
|
$
|
134,057
|
|
|
$
|
(675
|
)
|
Corporate debt securities
|
|
|
102,610
|
|
|
|
(211
|
)
|
|
|
26,857
|
|
|
|
(123
|
)
|
|
|
129,467
|
|
|
|
(334
|
)
|
Asset-backed securities
|
|
|
202,114
|
|
|
|
(269
|
)
|
|
|
34,431
|
|
|
|
(271
|
)
|
|
|
236,545
|
|
|
|
(540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
387,017
|
|
|
$
|
(587
|
)
|
|
$
|
113,052
|
|
|
$
|
(962
|
)
|
|
$
|
500,069
|
|
|
$
|
(1,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market values were determined for each individual security in
the investment portfolio. The declines in value of these
investments are primarily related to changes in interest rates
and are considered to be temporary in nature. We invest in
government securities and debt instruments with investment grade
credit ratings, and believe that the financial position of the
issuers of these securities are indicators that the securities
are not impaired as of December 31, 2006.
Forward
Exchange Contracts
We conduct business globally. As a result, we are exposed to
movements in foreign currency exchange rates. From time to time
we enter into forward exchange contracts to reduce exposures
associated with nonfunctional currency assets and liabilities
such as accounts receivable and accounts payable denominated in
Euros, British Pound Sterling, Brazilian Reals, and Japanese
Yen, and Indian Rupees. The forward contracts typically range
from one to three months in original maturity. In general, we do
not hedge anticipated foreign currency cash flows nor do we
enter into forward contracts for trading purposes. We do not use
any foreign exchange derivatives for trading or speculative
purposes.
The forward contracts do not qualify for hedge accounting and
accordingly are marked to market at the end of each reporting
period with any unrealized gain or loss being recognized in the
statement of income as interest and other income. We had no
forward contracts outstanding at December 31, 2005. The
forward contracts outstanding and their fair values are
presented below as of December 31, 2006 (in thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Euro
|
|
$
|
201
|
|
British Pound Sterling
|
|
|
304
|
|
Brazilian Real
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
$
|
503
|
|
|
|
|
|
|
160
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Interest
Rate Swaps
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 due in
2006 (the Notes see Note 13). The Notes were
issued in August 2001 with an aggregate principal amount of
$345.0 million.
We received from the Banks fixed payments equal to 5.25% percent
of the notional amount, payable on February 15 and August 15
which started on August 15, 2002. In exchange, we paid to
the Banks floating rate payments based upon the London Interbank
Offered Rate (LIBOR), plus 1.66% multiplied by the
notional amount of the Transactions with the LIBOR resetting
every three months which began on August 15, 2002.
The Transactions had a termination date of August 15, 2006
(Termination Date), 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.
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 was recognized at fair value on the
balance sheet with an offsetting entry to the income statement.
In addition, changes in the fair value of the Notes due to
changes in the benchmark interest rate were 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 the fair value of the Transactions and the
offsetting change in the fair value of the Notes were 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. We recorded a loss of $3.2 million in 2004 for the
period of time from the repayment of the Notes through the
termination of the Transactions.
To test the effectiveness of the hedge prior to the repayment of
the Notes, a regression analysis was performed at least
quarterly comparing the change in fair value of the Transactions
and the Notes. The fair values of the Transactions and the Notes
were calculated at least quarterly as the present value of the
contractual cash flows to the expected maturity date, where the
expected maturity date was based on probability-weighted
analysis of interest rates relating to the five-year LIBOR curve
and our stock prices. For 2004, the hedge was highly effective
until the repayment of the Notes and therefore, the ineffective
portion did not have a material impact on earnings.
161
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
8. Consolidated
Balance Sheet Detail (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
19,839
|
|
|
$
|
19,828
|
|
Furniture and fixtures
|
|
|
19,689
|
|
|
|
16,564
|
|
Computers, equipment and software
|
|
|
181,175
|
|
|
|
159,349
|
|
Leasehold improvements
|
|
|
29,380
|
|
|
|
23,649
|
|
Construction in progress
|
|
|
13,797
|
|
|
|
8,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
263,880
|
|
|
|
227,923
|
|
Accumulated depreciation
|
|
|
(178,798
|
)
|
|
|
(147,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
85,082
|
|
|
|
80,630
|
|
Land
|
|
|
6,917
|
|
|
|
5,062
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
91,999
|
|
|
$
|
85,692
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for 2006, 2005 and 2004 was
$35.9 million, $36.4 million and $39.2 million,
respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued legal and accounting fees
|
|
$
|
18,134
|
|
|
$
|
13,666
|
|
Accrued marketing
|
|
|
23,317
|
|
|
|
15,172
|
|
Other accrued expenses
|
|
|
66,967
|
|
|
|
56,622
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
108,418
|
|
|
$
|
85,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Accrued taxes and other long-term liabilities:
|
|
|
|
|
|
|
|
|
Accrued income taxes, long-term
|
|
$
|
120,836
|
|
|
$
|
127,191
|
|
Other
|
|
|
29,088
|
|
|
|
19,937
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
149,924
|
|
|
$
|
147,128
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities represent accruals for which we believe
related cash flows will occur after December 31, 2007.
2006
Restructuring
In 2006, we initiated certain restructuring actions to reduce
our cost structure and, at the same time, enable us to invest in
certain strategic growth initiatives to enhance our competitive
position.
In the fourth quarter of 2006, we recorded a $2.4 million
restructuring charge related to a reduction of primarily
marketing and sales employees. The charge related to the
severance of 75 employees, of which $1.0 million,
162
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$1.1 million, $0.1 million and $0.2 million was
recorded in our North America, EMEA, Japan and Asia-Pacific
operating segments, respectively.
The following table summarizes our restructuring accrual
established in 2006 and activity through December 31, 2006
(in thousands):
|
|
|
|
|
|
|
Severance and
|
|
|
|
Other Benefits
|
|
|
Balance, January 1, 2006
|
|
$
|
|
|
Restructuring accrual
|
|
|
2,404
|
|
Cash payments
|
|
|
(14
|
)
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
2,390
|
|
|
|
|
|
|
As of December 31, 2006, this restructuring accrual has
been classified as current accrued liabilities and will be paid
through the first quarter of 2007.
2005
Restructuring
During 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 14 employees.
The following table summarizes our restructuring accrual
established in 2005 and activity through December 31, 2006
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
Severance
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
and Other
|
|
|
Other
|
|
|
|
|
|
|
Costs
|
|
|
Benefits
|
|
|
Costs
|
|
|
Total
|
|
|
Balance, January 1, 2005
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring accrual
|
|
|
1,800
|
|
|
|
216
|
|
|
|
4
|
|
|
|
2,020
|
|
Cash payments
|
|
|
(1,205
|
)
|
|
|
(216
|
)
|
|
|
(4
|
)
|
|
|
(1,425
|
)
|
Effects of foreign currency exchange
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
Accretion
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
604
|
|
|
|
|
|
|
|
|
|
|
|
604
|
|
Cash payments
|
|
|
(577
|
)
|
|
|
|
|
|
|
|
|
|
|
(577
|
)
|
Adjustment to liability
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Effects of foreign currency exchange
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
Accretion
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
24
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the remaining balance of this
restructuring accrual is due within 12 months and has been
classified as current accrued liabilities and will be paid
through July 2007. Lease termination costs are net of estimated
sublease income of less than $0.1 million at
December 31, 2006.
2004
Restructuring
During 2004, we recorded several restructuring charges primarily
due to the sale of Magic in January 2004, announced cost-savings
measures, the move of our European headquarters to Ireland,
permanently vacating an
163
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
additional two floors in our Santa Clara headquarters
building and permanently vacating several other leased
facilities. During 2004, we reduced our workforce totaling
441 employees in our sales, technical support and general
and administrative functions. We recorded several restructuring
charges totaling $8.4 million, of which $2.8 million
related to North America, $4.7 million related to EMEA,
$0.7 million related to Latin America, and
$0.2 million to Asia-Pacific, excluding Japan.
We recorded an additional $10.0 million accrual in 2004 for
the estimated lease related costs associated with permanently
vacating two additional floors in our Santa Clara
headquarters building and other leased facilities, 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 $0.8 million related to asset disposals
and discontinued use of certain leasehold improvements and
furniture and equipment.
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 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.
During 2005, we completed the move of our European headquarters
to Ireland and vacated the planned space in Amsterdam. We
recorded an additional $1.5 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. During 2005, we also made adjustments to our
restructuring accrual totaling $0.8 million due to a change
in assumptions related to utility costs and sublease income.
During 2006, we decreased our restructuring accrual by
$0.6 million attributable to a change in assumptions
related to subleased facilities in Amsterdam and
Santa Clara.
164
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes our restructuring accruals
established in 2004 and activity through December 31, 2006
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Severance and
|
|
|
Other
|
|
|
|
|
|
|
Costs
|
|
|
Other Benefits
|
|
|
Costs
|
|
|
Total
|
|
|
Balance, January 1, 2004
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring accrual
|
|
|
9,973
|
|
|
|
7,932
|
|
|
|
480
|
|
|
|
18,385
|
|
Cash payments
|
|
|
(579
|
)
|
|
|
(4,175
|
)
|
|
|
(63
|
)
|
|
|
(4,817
|
)
|
Adjustment to liability
|
|
|
(231
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
(506
|
)
|
Accretion
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
9,237
|
|
|
|
3,482
|
|
|
|
417
|
|
|
|
13,136
|
|
Restructuring accrual
|
|
|
1,454
|
|
|
|
1,382
|
|
|
|
20
|
|
|
|
2,856
|
|
Cash payments
|
|
|
(2,747
|
)
|
|
|
(4,864
|
)
|
|
|
(297
|
)
|
|
|
(7,908
|
)
|
Adjustment to liability
|
|
|
(810
|
)
|
|
|
|
|
|
|
(140
|
)
|
|
|
(950
|
)
|
Effects of foreign currency exchange
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
Accretion
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
7,429
|
|
|
|
|
|
|
|
|
|
|
|
7,429
|
|
Cash payments
|
|
|
(2,111
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,111
|
)
|
Adjustment to liability
|
|
|
(598
|
)
|
|
|
|
|
|
|
|
|
|
|
(598
|
)
|
Effects of foreign currency exchange
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
97
|
|
Accretion
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
5,073
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, $1.7 million of the
restructuring accrual is due within 12 months and has been
classified as current accrued liabilities, while the remaining
balance of $3.4 million has been classified as other
long-term liabilities, and will be paid through 2013. Lease
termination costs are net of estimated sublease income of
$5.7 million at December 31, 2006.
2003
Restructuring
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. As part of the consolidation of activities
into the Plano facility, we relocated employees from the
Santa Clara, California headquarters site. As a result of
this consolidation, in March 2003, we recorded a
$15.7 million accrual for estimated lease related costs
associated with permanently vacated facilities, partially offset
by a $1.9 million write-off of a 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
$2.1 million related to asset disposals and discontinued
use of certain leasehold improvements and furniture and
equipment. This restructuring charge was allocated to our North
American segment.
During 2003, we recorded restructuring charges of
$7.4 million, which consisted of $6.7 million related
to a headcount reduction of 210 employees and
$0.7 million related to other expenses such as legal
expenses incurred in international locations in conjunction with
the headcount reduction. The restructuring charge related to
headcount reductions was $0.9 million and $5.8 million
in our North American and EMEA operating segments, respectively.
165
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The employees were primarily in the sales, product development
and customer support areas. In 2003, we reversed a total of
$0.7 million of restructuring accrual in EMEA that was no
longer necessary after paying out substantially all accrued
amounts to the former employees. We also decreased the
restructuring accrual related to lease termination costs as a
result of changes in estimates for sublease income and related
commissions of $0.3 million.
In 2004, we decreased the restructuring accrual related to lease
termination costs previously recorded in 2003. The adjustments
decreased the liability by $0.5 million 2004, due to
favorable changes in estimates related to the sublease income to
be received over the remaining lease term. Also in 2004, we
recorded a $0.1 million adjustment to reduce the
restructuring accrual for severance and benefits from our EMEA
operating segment that would not be utilized.
During 2005, we decreased our restructuring accrual totaling
$1.0 million due to a change in assumptions related to
utility costs and sublease income.
During 2006, we decreased our restructuring accrual by
$1.9 million attributable to a change in assumptions
related to commissions on new and existing subleases and
favorable changes in market rates associated with our subleased
space.
The following table summarizes our restructuring accrual
established in 2003 and activity through December 31, 2006
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Severance and
|
|
|
Other
|
|
|
|
|
|
|
Costs
|
|
|
Other Benefits
|
|
|
Costs
|
|
|
Total
|
|
|
Balance, January 1, 2003
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring accrual
|
|
|
15,734
|
|
|
|
6,692
|
|
|
|
739
|
|
|
|
23,165
|
|
Cash payments
|
|
|
(1,707
|
)
|
|
|
(6,259
|
)
|
|
|
(167
|
)
|
|
|
(8,133
|
)
|
Adjustment to liability
|
|
|
(273
|
)
|
|
|
(116
|
)
|
|
|
(572
|
)
|
|
|
(961
|
)
|
Accretion
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
$
|
14,217
|
|
|
$
|
317
|
|
|
$
|
|
|
|
$
|
14,534
|
|
Cash payments
|
|
|
(1,841
|
)
|
|
|
(194
|
)
|
|
|
|
|
|
|
(2,035
|
)
|
Adjustment to liability
|
|
|
(483
|
)
|
|
|
(123
|
)
|
|
|
|
|
|
|
(606
|
)
|
Accretion
|
|
|
548
|
|
|
|
|
|
|
|
|
|
|
|
548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
12,441
|
|
|
|
|
|
|
|
|
|
|
|
12,441
|
|
Cash payments
|
|
|
(1,279
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,279
|
)
|
Adjustment to liability
|
|
|
(1,006
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,006
|
)
|
Accretion
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
10,654
|
|
|
|
|
|
|
|
|
|
|
|
10,654
|
|
Cash payments
|
|
|
(1,960
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,960
|
)
|
Adjustment to liability
|
|
|
(1,908
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,908
|
)
|
Accretion
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
7,175
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, $1.4 million of the
restructuring accrual is due within 12 months and has been
classified as current accrued liabilities, while the remaining
balance of $5.8 million has been classified as other
long-term liabilities and will be paid through 2013. Lease
termination costs are net of estimated sublease income of
$10.2 million at December 31, 2006.
166
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our estimate of the excess facilities charges 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, the market rates at the time of such subleases and
the amount of commissions paid in association with sublease
activities. 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 in the EMEA, Japan, and North America
operating segments and 2003 were primarily in the North America
operating segment.
|
|
10.
|
Goodwill
and Other Intangible Assets
|
We perform our annual goodwill impairment review as of October 1
of each fiscal year or earlier if indicators of impairment
exist. In 2006, 2005, and 2004, these analyses have indicated
that goodwill was not impaired. The fair value of the reporting
units was estimated using the average of the present value of
estimated future cash flows and of the market multiple value. 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. No impairment was
identified for any period presented.
Goodwill by geographic region is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of
|
|
|
|
|
|
|
|
|
|
|
|
Effects of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
January 1,
|
|
|
Goodwill
|
|
|
|
|
|
Currency
|
|
|
December 31,
|
|
|
Goodwill
|
|
|
|
|
|
Currency
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Acquired
|
|
|
Adjustments
|
|
|
Exchange
|
|
|
2005
|
|
|
Acquired
|
|
|
Adjustments
|
|
|
Exchange
|
|
|
2006
|
|
|
North America
|
|
$
|
353,484
|
|
|
$
|
9,422
|
|
|
$
|
(10,140
|
)
|
|
$
|
266
|
|
|
$
|
353,032
|
|
|
$
|
59,229
|
|
|
$
|
216
|
|
|
$
|
(24
|
)
|
|
$
|
412,453
|
|
EMEA
|
|
|
48,458
|
|
|
|
3,406
|
|
|
|
(1,613
|
)
|
|
|
(322
|
)
|
|
|
49,929
|
|
|
|
25,098
|
|
|
|
33
|
|
|
|
385
|
|
|
|
75,445
|
|
Japan
|
|
|
17,584
|
|
|
|
163
|
|
|
|
(247
|
)
|
|
|
|
|
|
|
17,500
|
|
|
|
1,266
|
|
|
|
5
|
|
|
|
|
|
|
|
18,771
|
|
Asia-Pacific (excluding Japan)
|
|
|
6,332
|
|
|
|
(32
|
)
|
|
|
(357
|
)
|
|
|
|
|
|
|
5,943
|
|
|
|
6,014
|
|
|
|
3
|
|
|
|
|
|
|
|
11,960
|
|
Latin America
|
|
|
10,903
|
|
|
|
128
|
|
|
|
(275
|
)
|
|
|
328
|
|
|
|
11,084
|
|
|
|
920
|
|
|
|
3
|
|
|
|
(159
|
)
|
|
|
11,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
436,761
|
|
|
$
|
13,087
|
|
|
$
|
(12,632
|
)
|
|
$
|
272
|
|
|
$
|
437,488
|
|
|
$
|
92,527
|
|
|
$
|
260
|
|
|
$
|
202
|
|
|
$
|
530,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill was acquired during 2006 as a result of the purchase of
SiteAdvisor, Preventsys and Citadel, and during 2005 as a result
of the purchase of Wireless Security Corporation (see
Note 4). The adjustment to goodwill in 2006 of
$0.3 million resulted from the realization of net deferred
tax assets from the Foundstone acquisition. The adjustment to
goodwill in 2005 consisted of $12.8 million related to released
valuation allowances placed against acquired net operating
losses due to our ability to use them in future periods for
Wireless Security Corporation, Entercept, IntruVert, Foundstone,
McAfee.com and Traxess, as well as a $0.2 million purchase
price adjustment related to Foundstone.
The components of intangible assets are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
(Including Effects
|
|
|
|
|
|
|
|
|
(Including Effects
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
of Foreign
|
|
|
Net
|
|
|
Gross
|
|
|
of Foreign
|
|
|
Net
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
Currency
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Currency
|
|
|
Carrying
|
|
|
|
Life
|
|
|
Amount
|
|
|
Exchange)
|
|
|
Amount
|
|
|
Amount
|
|
|
Exchange)
|
|
|
Amount
|
|
|
Other Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technologies
|
|
|
4.4 years
|
|
|
$
|
203,790
|
|
|
$
|
(119,202
|
)
|
|
$
|
84,588
|
|
|
$
|
141,999
|
|
|
$
|
(91,884
|
)
|
|
$
|
50,115
|
|
Trademarks and patents
|
|
|
5.0 years
|
|
|
|
29,444
|
|
|
|
(28,830
|
)
|
|
|
614
|
|
|
|
28,944
|
|
|
|
(27,051
|
)
|
|
|
1,893
|
|
Customer base and other intangibles
|
|
|
5.8 years
|
|
|
|
72,161
|
|
|
|
(43,789
|
)
|
|
|
28,372
|
|
|
|
62,970
|
|
|
|
(34,892
|
)
|
|
|
28,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
305,395
|
|
|
$
|
(191,821
|
)
|
|
$
|
113,574
|
|
|
$
|
233,913
|
|
|
$
|
(153,827
|
)
|
|
$
|
80,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate amortization expenses for the intangible assets
listed above totaled $34.4 million, $30.6 million and
$29.1 million for 2006, 2005, and 2004, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Gross intangible assets, beginning of year
|
|
$
|
233,913
|
|
|
$
|
235,054
|
|
Add: Purchased technologies (amortized over one to seven years)
|
|
|
58,206
|
|
|
|
1,500
|
|
Add: Trademarks and patents (amortized over one to seven years)
|
|
|
500
|
|
|
|
|
|
Add: Customer base and other intangibles (amortized over one to
seven years)
|
|
|
9,198
|
|
|
|
300
|
|
Add: Change in value due to foreign exchange
|
|
|
3,578
|
|
|
|
(2,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
305,395
|
|
|
|
233,913
|
|
Dispositions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross intangible assets, end of year
|
|
$
|
305,395
|
|
|
$
|
233,913
|
|
|
|
|
|
|
|
|
|
|
The additions in 2006 are a result of the SiteAdvisor,
Preventsys, Onigma and Citadel acquisitions. The additions in
2005 are a result of the Wireless Security Corporation
acquisition.
Expected future intangible asset amortization expense is as
follows (in thousands):
|
|
|
|
|
Fiscal Years:
|
|
|
|
|
2007
|
|
$
|
41,599
|
|
2008
|
|
|
33,644
|
|
2009
|
|
|
22,671
|
|
2010
|
|
|
13,987
|
|
2011
|
|
|
1,673
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
113,574
|
|
|
|
|
|
|
Leases
We lease most of our operating facilities under non-cancelable
operating leases, which expire at various times ranging from the
year 2007 through 2017. Our operating leases for facilities
typically include renewal periods, which are at our option, and
annual contractual escalations in lease payments. Several of our
significant leases are subject to rent increases to market rates
based on periodic rent reviews. We own our regional office in
Plano, Texas. A description of our significant operating leases
is as follows:
|
|
|
|
|
|
|
Lease Expiration
|
|
Renewal Option
|
|
Corporate Headquarters, Santa Clara, California
|
|
March 2013
|
|
10 year renewal
|
European Headquarters, Cork, Ireland
|
|
December 2014
|
|
Two 5 year renewals
|
Sunnyvale, California
|
|
May 2010
|
|
3 year renewal
|
Slough, England
|
|
September 2017
|
|
None
|
Bangalore, India
|
|
December 2009
|
|
5 year renewal
|
Tokyo, Japan
|
|
February 2009
|
|
2 year renewal
|
168
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition, we have leased certain office equipment with
various lease expiration dates through 2011.
Future minimum lease payments, including contractual and
reasonably assured escalations in future lease payments, and
sublease rental income under non-cancelable operating leases are
as follows for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sublease
|
|
|
|
Payments
|
|
|
Income
|
|
|
2007
|
|
$
|
17,131
|
|
|
$
|
(2,642
|
)
|
2008
|
|
|
14,420
|
|
|
|
(2,554
|
)
|
2009
|
|
|
12,587
|
|
|
|
(1,058
|
)
|
2010
|
|
|
10,896
|
|
|
|
(978
|
)
|
2011
|
|
|
10,139
|
|
|
|
(510
|
)
|
Thereafter
|
|
|
20,045
|
|
|
|
(660
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,218
|
|
|
$
|
(8,402
|
)
|
|
|
|
|
|
|
|
|
|
Rent expense for 2006, 2005, and 2004 was $17.6 million,
$19.2 million and $20.3 million, respectively.
Sublease rental income under non-cancelable subleases was
$2.3 million, $1.7 million and $1.0 million for
2006, 2005, and 2004, respectively.
Minimum contractual commitments for telecom contracts, naming
rights and advertising services, software licensing agreements
and purchase obligations having an initial or remaining
non-cancelable term in excess of one year are as follows for the
years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
Other
|
|
|
|
Obligations
|
|
|
Commitments
|
|
|
2007
|
|
$
|
5,065
|
|
|
$
|
9,196
|
|
2008
|
|
|
|
|
|
|
3,057
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,065
|
|
|
$
|
12,253
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Warranty
Accrual and Guarantees
|
We offer a 90 day warranty on our hardware products and
record a liability for the estimated future costs associated
with warranty claims, which is based upon historical experience
and our estimate of the level of future costs. A reconciliation
of the change in our warranty obligation for the years ended
December 31 follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Warranty balance, beginning of year
|
|
$
|
1,083
|
|
|
$
|
1,818
|
|
|
$
|
1,103
|
|
Additional accruals
|
|
|
1,937
|
|
|
|
3,514
|
|
|
|
8,037
|
|
Disposition of Sniffer
|
|
|
|
|
|
|
|
|
|
|
(807
|
)
|
Costs incurred during the period
|
|
|
(2,358
|
)
|
|
|
(4,249
|
)
|
|
|
(6,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty balance, end of year
|
|
$
|
662
|
|
|
$
|
1,083
|
|
|
$
|
1,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of certain guarantee and
indemnification agreements as of December 31, 2006:
|
|
|
|
|
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
|
169
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
be awarded against our customer. We include this infringement
indemnification in 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 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
vendor. 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.
|
|
|
|
As permitted under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events or
occurrences while the officer or director is, or was, serving at
our request in such capacity. The maximum potential amount of
future payments we could be required to make under these
indemnification agreements is not limited; however, we have
director and officer insurance coverage that reduces our
exposure and may enable us to recover a portion or all of any
future amounts paid. We believe the estimated fair value of
these indemnification agreements in excess of applicable
insurance coverage 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 were
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 these 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 were
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 these agreements.
|
|
|
|
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
were not included in the purchaser assumed liabilities
(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
these agreements.
|
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 minimum amount
of a range of loss is reasonably estimable, then an appropriate
liability will be established.
170
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
Line of
Credit and Convertible Debt
|
Line
of Credit
We have a 14.0 million Euro 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 December 31, 2006 and
December 31, 2005.
5.25% Convertible
Subordinated Note Due 2006
In August 2001, we issued 5.25% convertible subordinated notes
(Notes), due in 2006 with an aggregate principal
amount of $345.0 million. At the option of the holder, the
Notes were convertible into our common stock at any time, unless
previously redeemed, at a conversion price of $18.07 per share.
At any time between August 20, 2004 and August 14,
2005, we would be able to redeem all or a portion of the Notes
for cash at a repurchase price of 101% of the principal amount.
After August 14, 2005, the repurchase price would be 100%
of the principal amount.
In August 2004, we redeemed all of the outstanding Notes at a
net price of $265.6 million. Prior to the redemption date,
$83.4 million in aggregate principal amount of the Notes
converted into 4.6 million shares of our common stock. We
recorded a loss on redemption of $15.1 million, which
represented the write-off of unamortized debt issuance costs,
fair value adjustment and the 1.3% premium paid for redemption.
|
|
14.
|
Employee
Benefit Plan
|
Our 401(k) and Profit Sharing Plan in the United States covers
substantially all full-time employees. In 2006, employees could
elect to defer up to the lesser of 40% of their pre-tax
compensation or $15,000 per year. Our board of directors, at its
discretion, can match employee contributions in an amount not to
exceed a maximum of $3,600 per year. Our employees in Japan and
Canada can participate in plans similar to the 401(k) Plan in
the United States. Our contributions to these plans are similar
to those in the United States. Annual amounts contributed by us
under these plans were $4.0 million, $3.2 million and
$4.7 million in 2006, 2005 and 2004, respectively.
Common
Stock
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. In August 2004, the board
of directors authorized the repurchase of $200.0 million of
common stock through August 2006 and in April 2005, our board of
directors authorized the repurchase of an additional
$175.0 million of our common stock in the open market
through August 2006. In April 2006, our board of directors
authorized the repurchase of an additional $250.0 million
of our common stock. We repurchased 9.8 million,
2.8 million and 12.6 million shares of our common
stock in 2006, 2005 and 2004 for $234.7 million,
$68.4 million and $221.8 million, respectively.
Beginning in May 2006, we suspended repurchases of our common
stock in the open market due to the announced investigation into
our historical stock option granting practices and our inability
to timely file our quarterly reports and annual report with the
SEC. As of December 31, 2006, we had remaining
authorization to repurchase $246.2 million of our common
stock which expired in October 2007 with no additional shares
being repurchased.
In 2004, we retired 13.0 million shares of our common stock
which had been repurchased on the open market in 2003 and 2004.
In 1998, we deposited 1.7 million shares of common stock
with a trustee for the benefit of the employees of the
Dr. Solomons acquisition to cover the stock options
assumed in the acquisition of that company. These shares,
171
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
which have been included in the outstanding share balance, were
to be issued upon the exercise of stock options by
Dr. Solomons employees. We determined in June 2004
that Dr. Solomons employees had exercised
1.6 million options, and that we had issued new shares in
connection with these exercises rather than the trust shares.
The trustee returned the 1.6 million shares to us in June
2004, at which time they were retired and were no longer
included in the outstanding share balance. In December 2004, the
trustee sold the remaining 133,288 shares in the trust for
proceeds of $3.8 million, and remitted the funds to us. The
terms of the trust prohibited the trustee from returning the
shares to us and stipulated that only employees could benefit
from the shares. We paid out the $3.8 million to our
employees as a bonus in 2004.
Preferred
Stock
We have authorized 5.0 million shares of preferred stock,
par value $0.01 per share. Our board of directors has authority
to provide for the issuance of the shares of preferred stock in
series, to establish from time to time the number of shares to
be included in each such series and to fix the designation,
powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof,
without any further vote or action by the shareholders.
Preferred
Shares Rights Agreement
On October 19, 1998, pursuant to a Preferred Shares Rights
Agreement between us and BankBoston, N.A. as Rights Agent, our
board of directors announced that it had declared a dividend
distribution of one preferred share purchase right, or a right,
on each outstanding share of our common stock. Each right will
entitle stockholders to buy one one-thousandth of a share of our
Series B Participating Preferred Stock at an exercise price
of $200.00. The rights will become exercisable following the
tenth day after a person or group announces the 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 the our
common stock. We will be entitled to redeem the rights at $0.01
per right at any time on or before the tenth day following
acquisition by a person or group of 15% or more of our common
stock. The dividend distribution was made on November 3,
1998, payable to the stockholders of record on November 3,
1998. The rights expire on October 20, 2008.
|
|
16.
|
Employee
Stock Benefit Plans
|
Employee
Stock Purchase Plan
In April 2002, our board of directors adopted McAfees 2002
Employee Stock Purchase Plan (ESPP) which reserved
2.0 million shares of our common stock for issuance to our
employees. In December 2003 and May 2005, our stockholders
approved an additional 2.0 million and 1.0 million
shares for issuance, respectively, bringing the total number of
shares reserved under the plan to 5.0 million. Generally,
individuals who are employed for 30 days and perform at
least 20 hours of service per week are eligible to
participate in the ESPP.
Prior to August 1, 2005, we offered shares of stock for
purchase to eligible employees through a series of two-year
offering periods. Each two-year offering period was comprised of
four consecutive six-month purchase periods. Beginning
August 1, 2005, the term of the offering period was changed
to six months. Outstanding offering periods that commenced prior
to August 1, 2005, would have continued until the end of
the two-year offering period, however, beginning in July 2006,
we suspended purchases under our employee stock purchase plan,
returned all withholdings to our participating employees,
including interest based on a 5% per annum interest rate, and
prohibited our employees from exercising stock options due to
the announced investigation into our historical stock option
granting practices and our inability to become current on our
reporting obligations under the Securities Exchange Act of 1934,
as amended.
During an offering period, employees make contributions to the
ESPP through payroll deductions. At the end of each purchase
period, we use the accumulated contributions to issue shares of
our stock to the participating
172
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employees. The issue price of those shares is equal to the
lesser of (i) 85% of our stock price on the first day of
the offering period or (ii) 85% of our stock price on the
purchase date. No participant may be issued more than $25,000 of
common stock in any one calendar year and the maximum number of
shares a participant may be issued during a single offering
period is 10,000 shares. In 2006 and 2005, 0.4 million
and 0.8 million shares were issued under the ESPP at a
weighted-average issue price of $17.22 and $14.54, respectively.
The total intrinsic value of shares issued under the ESPP during
2006 and 2005 was $2.4 million and $11.1 million,
respectively.
Company
Stock Incentive Plans
Under the terms of our amended 1997 Stock Incentive Plan
(the 1997 Plan) we have reserved a total of
38.5 million shares for issuance to employees, officers,
directors, third-party contractors and consultants through
awards provided in the form of options, restricted stock awards,
restricted stock units, or stock appreciation rights. As of
December 31, 2006, we have no share-based issuances
outstanding with third-party contractors or consultants.
Although some of the options may be exercised immediately upon
granting, the majority contain graded vesting provisions,
whereby 25% vest one year from the date of grant and thereafter
in monthly increments over the remaining three years. All
unexercised options expire ten years after the grant date.
Restricted stock awards and restricted stock units also vest
over a specified period, generally for restricted stock awards
ratably over three years and for restricted stock units 50% two
years from the grant date and 50% three years from the grant
date. Restricted stock awards are common stock issued to the
recipient that have not vested. Restricted stock units are
promises to issue stock in the future.
Under the Stock Option Plan for Outside Directors, we have
reserved 1.1 million shares of our common stock for
issuance to certain members of our board of directors who are
not employees of ours or any of our affiliated entities. The
exercise price for these options is equal to the market value of
our common stock on the grant date. Initial grants to each
outside director generally vest ratably over a three-year
period, while any subsequent grants are exercisable three years
from the grant date. All unexercised options expire ten years
after the grant date.
In connection with our acquisition of Foundstone, Inc. in
October 2004, we assumed the obligations of their 2000 Stock
Plan and converted their outstanding options into options to
purchase 428,696 shares of our common stock. We have
reserved 747,144 shares of our common stock for issuance
under this plan. The plan provides for an option price no less
than 85% of the fair value of our common stock on the date of
grant. The options contain graded vesting provisions, whereby
25% vest one year from the date of grant and thereafter in
monthly increments over the remaining three years. All
unexercised options expire ten years after grant date.
173
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Plan
Activity
A summary of the activity of our employee stock options during
2005 and 2004 and details regarding the options outstanding and
exercisable at December 31, 2005 and 2004 are provided
below (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Outstanding at beginning of period
|
|
|
19,320
|
|
|
$
|
15.85
|
|
|
|
29,856
|
|
|
$
|
15.29
|
|
Options granted
|
|
|
5,822
|
|
|
|
24.66
|
|
|
|
5,797
|
|
|
|
17.34
|
|
Options assumed in conjunction with acquisition
|
|
|
|
|
|
|
|
|
|
|
429
|
|
|
|
2.69
|
|
Options exercised
|
|
|
(7,165
|
)
|
|
|
13.52
|
|
|
|
(9,152
|
)
|
|
|
11.61
|
|
Options canceled
|
|
|
(1,912
|
)
|
|
|
18.45
|
|
|
|
(7,610
|
)
|
|
|
19.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
16,065
|
|
|
$
|
19.77
|
|
|
|
19,320
|
|
|
$
|
15.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
|
|
|
6,278
|
|
|
$
|
17.77
|
|
|
|
9,447
|
|
|
$
|
14.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes stock option activity for the
year ended December 31, 2006 (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Intrinsic Value(1)
|
|
|
Outstanding at beginning of period
|
|
|
16,065
|
|
|
$
|
19.77
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
2,082
|
|
|
|
24.38
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(1,634
|
)
|
|
|
15.53
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(2,613
|
)
|
|
|
20.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
13,900
|
|
|
$
|
20.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding and expected to vest
|
|
|
12,436
|
|
|
$
|
20.43
|
|
|
|
6.1
|
|
|
$
|
103,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
|
|
|
8,168
|
|
|
$
|
19.15
|
|
|
|
4.8
|
|
|
$
|
79,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Intrinsic value is calculated as the difference between the
market value of our common stock on December 31, 2006 and
the exercise price of the option. The aggregate intrinsic value
of options outstanding and exercisable includes options with an
exercise price below $28.38, the closing price of our common
stock on December 31, 2006, as reported by the New York
Stock Exchange. |
The total intrinsic value of options exercised during 2006, 2005
and 2004 was $16.2 million, $103.3 million and
$87.8 million, respectively. From July 2006, when we
announced that we might have to restate our historical financial
statements as a result of our ongoing stock option
investigation, through the date we become current on our
reporting obligations under the Securities Exchange Act of 1934,
as amended, we have not been able to issue any shares, including
those pursuant to stock option exercises.
The tax benefit realized from stock option exercises, restricted
stock awards vested, and employee stock purchase rights in 2006,
2005 and 2004 was $8.3 million, $36.7 million and
$31.7 million, respectively.
174
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the activity for restricted stock awards and
restricted stock units during 2006, 2005 and 2004 is provided
below (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Restricted
|
|
|
Average
|
|
|
Restricted
|
|
|
Average
|
|
|
Restricted
|
|
|
Average
|
|
|
Restricted
|
|
|
Average
|
|
|
|
Stock
|
|
|
Grant Date
|
|
|
Stock
|
|
|
Grant Date
|
|
|
Stock
|
|
|
Grant Date
|
|
|
Stock
|
|
|
Grant Date
|
|
|
|
Units
|
|
|
Fair Value
|
|
|
Awards
|
|
|
Fair Value
|
|
|
Awards
|
|
|
Fair Value
|
|
|
Awards
|
|
|
Fair Value
|
|
|
Unvested at beginning of period
|
|
|
|
|
|
$
|
|
|
|
|
185
|
|
|
$
|
29.79
|
|
|
|
47
|
|
|
$
|
27.18
|
|
|
|
47
|
|
|
$
|
27.18
|
|
Grants
|
|
|
3,664
|
|
|
|
23.79
|
|
|
|
30
|
|
|
|
23.76
|
|
|
|
185
|
|
|
|
29.79
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
29.79
|
|
|
|
(47
|
)
|
|
|
27.18
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(844
|
)
|
|
|
24.13
|
|
|
|
(20
|
)
|
|
|
30.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at end of period
|
|
|
2,820
|
|
|
$
|
23.69
|
|
|
|
133
|
|
|
$
|
28.32
|
|
|
|
185
|
|
|
$
|
29.79
|
|
|
|
47
|
|
|
$
|
27.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contractual life for unvested
restricted stock units and restricted stock awards at
December 31, 2006, was 2.2 years and 1.6 years,
respectively. The 3.7 million restricted stock units
granted in 2006 under the 1997 Plan were valued at
$51.4 million when reduced by estimated forfeitures. The
total fair value of restricted stock awards vested during 2006
and 2005 was $1.5 million and $1.2 million,
respectively. No restricted stock awards vested during 2004.
Shares available for future grants to employees under our stock
incentive plans totaled 5.9 million at December 31,
2006. Our management currently plans to issue new shares for the
granting of restricted stock awards, vesting of restricted stock
units and exercising of stock options.
Valuation
and Expense Information under SFAS 123(R)
As indicated in Note 2, we adopted the provisions of
SFAS 123(R) on January 1, 2006. The adoption of
SFAS 123(R) compared to the prior accounting used for
stock-based compensation had the following impact to results
reported for the year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Using
|
|
|
Adjustments for
|
|
|
|
|
|
|
APB 25
|
|
|
SFAS 123(R)
|
|
|
As Reported
|
|
|
Stock-based compensation expense included in cost of net
revenues and operating expenses
|
|
$
|
28,327
|
|
|
$
|
29,434
|
|
|
$
|
57,761
|
|
Income from operations
|
|
|
168,462
|
|
|
|
(29,434
|
)
|
|
|
139,028
|
|
Income before provision for income taxes
|
|
|
213,215
|
|
|
|
(29,434
|
)
|
|
|
183,781
|
|
Net income
|
|
|
156,456
|
|
|
|
(18,985
|
)
|
|
|
137,471
|
|
Net income per share basic
|
|
$
|
0.97
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.85
|
|
Net income per share diluted
|
|
$
|
0.96
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.84
|
|
Cash flows from operating activities
|
|
|
295,449
|
|
|
|
(4,960
|
)
|
|
|
290,489
|
|
Cash flows used in financing activities
|
|
|
(202,671
|
)
|
|
|
4,960
|
|
|
|
(197,711
|
)
|
175
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock-based compensation expense
in accordance with the provisions of SFAS 123(R) (in
thousands):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Amortization of fair value of options issued to employees
|
|
$
|
30,660
|
|
Former employees extension of post-termination
exercise period
|
|
|
4,326
|
|
Former executive acceleration
|
|
|
1,419
|
|
Cash settlement of options
|
|
|
3,066
|
|
Restricted stock awards and units
|
|
|
16,426
|
|
Employee Stock Purchase Plan
|
|
|
1,864
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
57,761
|
|
|
|
|
|
|
Amortization of fair value of options issued to
employees. We recognize the fair value of stock
options issued to employees as stock-based compensation expense
over the vesting period of the awards. As we adopted
SFAS 123(R) using the modified prospective method, these
charges include compensation expense for stock options granted
prior to January 1, 2006 but not yet vested as of
January 1, 2006, based on the grant date fair value
estimated in accordance with the pro forma provisions of
SFAS 123, and compensation expense for stock options
granted subsequent to January 1, 2006 based on the grant
date fair value estimated in accordance with the provisions of
SFAS 123(R).
Former employees extension of post-termination
exercise period. From July 2006, when we
announced that we might have to restate our historical financial
statements as a result of our ongoing stock option
investigation, through the date we become current on our
reporting obligations under the Securities Exchange Act of 1934,
as amended, (blackout period), we have not been able
to issue any shares, including those pursuant to stock option
exercises. In January 2007, we extended the post-termination
exercise period for all vested options held by certain former
employees and outside directors that would expire during the
blackout period. As a result of the modifications, we recognized
$4.3 million of stock-based compensation expense in the
fourth quarter of 2006 based on the fair value of these modified
options. The expense was calculated in accordance with the
guidance in SFAS 123(R). The options were deemed to have no
value prior to the extension of the life beyond the blackout
period.
Based on the guidance in SFAS 123(R) and related FASB Staff
Positions, after the January 2007 modification, stock options
held by former employees and outside directors that terminated
prior to such modification became subject to the provisions of
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock
(EITF 00-19).
As a result, in January 2007, these options were reclassified as
liability awards within current liabilities. Accordingly, at the
end of each reporting period, we will determine the fair value
of these options utilizing the Black-Scholes valuation model and
recognize any change in fair value of the options in our
consolidated statements of income in the period of change until
the options are exercised, expire or are otherwise settled. The
expense or benefit associated with these options will be
included in general and administrative expense in our
consolidated statements of income, and will not be reflected as
stock-based compensation expense. We will record expense or
benefit in future periods based on the closing price of our
common stock.
In November 2007, due to a delay in our becoming current in our
reporting obligations, we extended the post-termination exercise
period for options held by former employees and outside
directors who terminated subsequent to the January 2007
modification and those previously modified in January 2007 as
discussed above, until the earlier of i) the ninetieth
calendar day after we become current in our reporting
obligations under the Securities Exchange Act of 1934, as
amended, ii) the expiration of the contractual terms of the
options, or iii) December 31, 2008. Based on the
guidance in SFAS 123(R) and related FASB Staff Positions,
after the November 2007 modification, stock
176
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
options held by the former employees and outside directors that
terminated subsequent to the January 2007 modification and prior
to November 2007 became subject to the provisions of
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock. As a result, in November 2007, these options
will be reclassified as liability awards within current
liabilities. Accordingly, at the end of each reporting period,
we will determine the fair value of these options utilizing the
Black-Scholes valuation model and recognize any change in fair
value of the options in our consolidated statements of income in
the period of change until the options are exercised, expire or
are otherwise settled. The expense or benefit associated with
these options will be included in general and administrative
expense in our consolidated statements of income, and will not
be reflected as stock-based compensation expense. We will record
expense or benefit in future periods based on the closing price
of our common stock.
Former executive acceleration. On
February 6, 2007 our board of directors accelerated
unvested stock options held by our former chief executive
officer, who retired in October 2006, without an extension of
the post-employment exercise period. All such stock options have
since expired unexercised due to the blackout. In the fourth
quarter of 2006 we recorded an additional non-cash, stock-based
compensation expense of $1.4 million before tax for the
remaining unamortized fair value of these options. Any claims
that our former chief executive officer might have with respect
to the expired stock options have not been released by him.
Cash settlement of options. Certain stock
options held by terminated employees expired during the blackout
period as they could not be exercised during the 90 day
period subsequent to termination. In January 2007, we determined
that we would settle these options in cash. The cash payment to
settle these options will be based upon an average closing price
of our common stock subsequent to us becoming current on our
reporting obligations under the Securities Exchange Act of 1934,
as amended. As of December 31, 2006, we have recorded a
liability of $3.1 million based on the intrinsic value of
these options using our January 7, 2007 closing stock
price. We will continue to adjust this amount in future
reporting periods based on the closing price of our common stock.
Restricted stock awards and units. We
recognize stock-based compensation expense for the fair value of
restricted stock awards and restricted stock units. Fair value
is determined as the difference between the closing price of our
common stock on the grant date and the purchase price of the
restricted stock awards and units. The fair value of these
awards is recognized to expense over the requisite service
period of the awards.
Employee Stock Purchase Plan. We recognize
stock-based compensation expense for the fair value of employee
stock purchase rights issued pursuant to our ESPP. The estimated
fair value of employee stock purchase rights is based on the
Black-Scholes pricing model. Expense is recognized ratably based
on contributions and the total fair value of the employee stock
purchase rights estimated to be issued.
177
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock-based compensation expense
recorded by income statement line item in 2006 (in thousands):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Cost of net revenue service and support
|
|
$
|
1,968
|
|
Cost of net revenue subscription
|
|
|
699
|
|
Cost of net revenue product
|
|
|
750
|
|
|
|
|
|
|
Stock-based compensation expense included in cost of net revenue
|
|
|
3,417
|
|
Research and development
|
|
|
15,042
|
|
Marketing and sales
|
|
|
24,289
|
|
General and administrative
|
|
|
15,013
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expense
|
|
|
54,344
|
|
|
|
|
|
|
Total stock-based compensation expense related to stock-based
equity awards
|
|
|
57,761
|
|
Deferred tax benefit
|
|
|
(15,672
|
)
|
|
|
|
|
|
Total stock-based compensation expense related to stock-based
equity awards, net of tax
|
|
$
|
42,089
|
|
|
|
|
|
|
We had no stock-based compensation costs capitalized as part of
the cost of an asset.
At December 31, 2006, the estimated fair value of all
unvested stock options, restricted stock units, restricted stock
awards and employee stock purchase rights that have not yet been
recognized as compensation expense was $68.0 million, net
of expected forfeitures. We expect to recognize this amount over
a weighted-average period of 2.4 years.
Modifications
in 2006 to Certain Stock Options Granted to Former Executive
Officers and Current Directors
In December 2006, we took corrective actions to amend 1,270,000
options granted between 2002 and 2004 to former executive
officers. The exercise prices of the unexercised portion of
their grants were adjusted upward to match the stock price on
the date compensation committee approval was obtained or
employment commenced and, therefore, no compensation expense was
recorded as a result of the modification.
In December 2006, we also revised the exercise price due to the
correction of clerical errors associated with the granting of
options between 2002 and 2006 to our current directors. The
investigative team found that none of the directors were
complicit in or aware of these clerical errors relating to
director grants. Pursuant to our equity incentive plans, our
directors are granted a specified number of stock options on
each anniversary date of being elected to our board. The
exercise price of the director grants is the closing stock price
on the grant date. In several instances, the initial option
grant date was reported improperly due to clerical errors; and
the error was compounded by the automatic granting of stock
options on each subsequent anniversary date. Accordingly, these
director option grants were amended with the consent of each
affected director to reflect the proper grant date and exercise
price. We amended 285,000 options with original exercise prices
ranging from $10.80-$25.58 to amended exercise prices ranging
from $12.92-$26.50 to increase or decrease the exercise price on
the unexercised portion of the option grant to an amount equal
to the fair market value of the underlying shares of our common
stock on the revised measurement dates. No compensation expense
related to this modification was recognized.
178
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assumptions
used under SFAS 123(R) and SFAS 123
As indicated in Note 2, under both SFAS 123(R) and
SFAS 123 we used the Black-Scholes model to estimate the
fair value of our option awards and employee stock purchase
rights issued under the ESPP. The key assumptions used in the
model during 2006, 2005 and 2004 are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Stock option grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
4.8
|
%
|
|
|
3.9
|
%
|
|
|
3.1
|
%
|
Weighted average expected lives (years)
|
|
|
5.6
|
|
|
|
4.0
|
|
|
|
4.0
|
|
Volatility
|
|
|
37.4
|
%
|
|
|
54.4
|
%
|
|
|
62.8
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
4.6
|
%
|
|
|
3.1
|
%
|
|
|
2.0
|
%
|
Weighted average expected lives (years)
|
|
|
0.5
|
|
|
|
1.0
|
|
|
|
1.3
|
|
Volatility
|
|
|
38.0
|
%
|
|
|
40.0
|
%
|
|
|
47.5
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the option awards and employee stock purchase
rights were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2006
|
|
2005
|
|
2004
|
|
Weighted-average grant date fair value of options granted
|
|
$
|
10.47
|
|
|
$
|
11.24
|
|
|
$
|
9.26
|
|
Weighted-average fair value of employee stock purchase rights
|
|
$
|
6.11
|
|
|
$
|
8.41
|
|
|
$
|
6.58
|
|
We derive the expected term of our options through the use of a
lattice model that factors in historical data on employee
exercise and post-vesting employment termination behavior. The
risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect
at the time of grant. Since January 1, 2006, we have used
the implied volatility of options traded on our stock with a
term of six months or more to calculate the expected volatility
of our option grants. Prior to that time, the expected
volatility was based solely on the historical volatility of our
stock. We changed our method of estimating volatility to using
implied volatility because we believe that using implied
volatility of options traded on our stock is a better measure of
volatility than historical volatility. We have not declared any
dividends on our stock in the past and do not expect to do so in
the foreseeable future.
179
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pro
Forma Information under SFAS 123 for Periods Prior to
January 1, 2006
As indicated in Note 2, we applied the provisions of APB 25
to determine our stock-based compensation expense for all
periods prior to January 1, 2006. 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 our stock-based compensation plans during 2005
and 2004 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
118,217
|
|
|
$
|
220,017
|
|
Add:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in reported net
income, net of tax
|
|
|
3,170
|
|
|
|
16,363
|
|
Deduct:
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense determined under fair
value based method for all awards, net of tax
|
|
|
(36,803
|
)
|
|
|
(27,710
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
84,584
|
|
|
$
|
208,670
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.72
|
|
|
$
|
1.37
|
|
Diluted
|
|
$
|
0.70
|
|
|
$
|
1.28
|
|
Pro forma
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.51
|
|
|
$
|
1.30
|
|
Diluted
|
|
$
|
0.50
|
|
|
$
|
1.22
|
|
Stock-Based
Compensation Recognized Prior to January 1,
2006
In 2005 and 2004, we recorded stock-based compensation expense
under APB 25 which consisted of the following items (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Grant date intrinsic value
|
|
$
|
3,873
|
|
|
$
|
7,031
|
|
Restricted stock awards
|
|
|
1,078
|
|
|
|
426
|
|
Exchange of McAfee.com options
|
|
|
290
|
|
|
|
6,516
|
|
Repriced options
|
|
|
(770
|
)
|
|
|
7,283
|
|
Former employees
|
|
|
|
|
|
|
2,759
|
|
Extended life of vested options of terminated employees
|
|
|
|
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
|
4,471
|
|
|
|
25,163
|
|
Deferred tax expense
|
|
|
(1,301
|
)
|
|
|
(8,800
|
)
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, after-tax
|
|
$
|
3,170
|
|
|
$
|
16,363
|
|
|
|
|
|
|
|
|
|
|
Grant date intrinsic value. We recognize
stock-based compensation expense over the vesting period of the
awards for the excess of the fair value of our common stock as
of the revised measurement date over the exercise price of the
options. During 2005 and 2004, we recognized stock-based
compensation expense related to option grants with grant date
intrinsic value totaling $3.3 million and
$6.8 million, related to the grant date intrinsic value.
See Note 3 for additional information.
180
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the acquisition of Foundstone in October
2004, we exchanged options to purchase shares of our common
stock for Foundstone stock options. A portion of the fair value
of our stock options was included in the Foundstone purchase
price. In accordance with FIN 44, we recorded
$2.3 million of deferred stock-based compensation related
to the exchange of unvested stock options which are subject to
vesting provisions as employment services are provided to us by
the former Foundstone employees. The unvested stock options
granted to Foundstone employees vest over periods ranging
through 2008. We recognized stock-based compensation totaling
$0.5 million in 2005 and $0.2 million in 2004.
Restricted stock awards. In September 2005,
the 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 January 2008, to our chief financial officer.
The price of the underlying shares is $0.01 per share. We
recorded expense of $1.1 million in 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 to our then chief
executive officer. The price of the underlying shares is $0.01
per share. The shares vest, and our right to repurchase such
shares lapsed, as follows: 3,000 shares were vested as of
the grant date and 47,000 shares vested on January 15,
2005. The fair value of the restricted stock was determined to
be $1.4 million and was determined based on the difference
between the exercise price of the restricted stock and the fair
value of the common stock on the date of grant. We recorded
stock-based compensation expense of less than $0.1 million
and $0.4 million in 2005 and 2004, respectively, in
association with this restricted stock grant.
Exchange of McAfee.com options. On
September 13, 2002, we acquired the minority interest in
McAfee.com. Upon acquisition, we issued 0.675 of a share of our
common stock plus $11.85 in cash, paid to the option holder upon
exercise of the option without interest, in exchange for each
McAfee.com option. 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
were subject to variable accounting treatment, which means that
the compensation expense was measured initially at the date of
the closing of the acquisition and is remeasured at each
reporting date based on the fair value of our common stock on
that date.
We recorded stock-based compensation expense of
$0.3 million and $6.5 million in 2005 and 2004,
respectively, related to exchanged options subject to variable
accounting. This stock-based compensation was based on our
closing stock prices of $27.13 and $28.93 at December 31,
2005 and 2004, respectively.
Repriced options. The 1999 annual merit grant
consisted of 2.1 million options of which 1.6 million
options had a measurement date in March 1999. Subsequently, the
exercise price was reduced to $11.06 on April 20, 1999,
which was a repricing.
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 $11.06, the fair value of our common stock
as of that day. Options to purchase a total of 9.5 million
shares, which excluded the 1999 annual merit grant discussed
above, were cancelled and the same number of new options were
granted. These new options vested at the same rate that they
would have under the terms of the original options.
FIN 44 became effective July 1, 2000 and required any
repricings which occurred subsequent to December 15, 1998
to be accounted for as variable awards. Compensation for
variable awards is remeasured and adjusted on a cumulative basis
at each reporting date. Compensation expense for the options
referred to in the previous two paragraphs that were vested as
of July 1, 2000 is measured based on the fair value of our
common stock above $20.38, the closing price of our common stock
upon the effective date of FIN 44. Compensation expense for
unvested options as of July 1, 2000 is measured based on
the fair value of our common stock above the exercise price of
the repriced options. We remeasure compensation cost at each
financial reporting date until the earlier of the date of
exercise, forfeiture, cancellation without replacement or the
effective date of SFAS 123(R). This compensation
181
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expense is recorded as an expense over the remaining vesting
period of the options, using the accelerated method of
amortization under FIN 28. We began accounting for the
repriced options as variable awards on July 1, 2000 as
required by FIN 44. During 2005, we recorded a benefit of
$0.8 million and during 2004 we recorded stock-based
compensation expense of $7.3 million based on closing stock
prices as of December 31, 2005 and 2004 of $27.13 and
$28.93, respectively. These options were fully vested at
December 31, 2005, therefore, no stock-based compensation
expense was recognized after the adoption of SFAS 123(R).
Former Employees. In 2004, we modified certain
outstanding option awards upon employee termination. These
modifications typically resulted in the continued vesting of
option awards subsequent to the employees termination date
and an extension of the time period subsequent to the
employees termination date in which the employee could
exercise their options. To the extent the former employee was
not expected to perform future services on our behalf, we
remeasured the intrinsic value of the modified options at the
modification date and immediately recorded stock-based
compensation expense for the excess of intrinsic value at the
modification date over the intrinsic value as determined at the
original measurement date. To the extent the former employee was
expected to perform future services on our behalf as a
non-employee or the modification occurred after the employee
terminated, we recorded stock-based compensation expense over
the expected service period for the fair value associated with
the modified options. During 2004, stock-based compensation
expense associated with option modifications issued to
terminated employees, excluding the items discussed below,
totaled $0.5 million. No stock-based compensation expense
associated with option modifications issued to terminated
employees was recognized in 2005.
As a result of the sale of our Sniffer product line, or Sniffer,
in July 2004, we modified the stock option agreements of several
Sniffer executives by accelerating the vesting of their unvested
outstanding options. Accordingly, we recorded a stock-based
compensation expense of $1.0 million in 2004. Since the
modification was directly related to the sale of Sniffer, the
stock-based compensation expense was reflected in the
calculation of the gain on the sale of Sniffer.
In September 2004, our then chief financial officer and chief
operating officer announced that he was retiring 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. We recorded
stock-based compensation expense due to the acceleration of
vesting of $1.3 million in 2004.
Extended Life of Vested Options Held by Terminated
Employees. As part of the purchase of Foundstone
in October 2004, we granted stock options to Foundstone
employees, certain of which terminated their employment after
the acquisition. The terminated employees had 90 days to
exercise their stock options from the date of termination,
otherwise the options would expire. We determined in December
2004 that we would not be able to file the required public
company reports with the SEC that would allow the option holders
to exercise their options within the
90-day
period. In December 2004, we extended the expiration date of the
options one month, resulting in a new measurement date for the
options. We recorded a one-time stock-based compensation expense
of $1.0 million in 2004 due to the extension of the
expiration date.
182
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The pre-tax stock-based compensation expense of
$4.5 million and $25.2 million in 2005 and 2004,
respectively, is included in the following line items in our
consolidated statements of income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Cost of net revenue services and support
|
|
$
|
14
|
|
|
$
|
215
|
|
Cost of net revenue subscription
|
|
|
36
|
|
|
|
109
|
|
Cost of net revenue product
|
|
|
(5
|
)
|
|
|
713
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in cost of net revenue
|
|
|
45
|
|
|
|
1,037
|
|
Research and development
|
|
|
524
|
|
|
|
9,538
|
|
Marketing and sales
|
|
|
1,482
|
|
|
|
6,703
|
|
General and administrative
|
|
|
2,420
|
|
|
|
6,810
|
|
Loss on sale of assets and technology
|
|
|
|
|
|
|
84
|
|
Severance/bonus costs related to Sniffer and Magic dispositions
|
|
|
|
|
|
|
991
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expense
|
|
|
4,426
|
|
|
|
24,126
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense related to stock-based
equity awards
|
|
$
|
4,471
|
|
|
$
|
25,163
|
|
|
|
|
|
|
|
|
|
|
Internal
Revenue Code Section 409A
Adverse tax consequences will result from our revision of
accounting measurement dates for stock options that vest
subsequent to December 31, 2004, or the 409A affected
options. These adverse tax consequences include a penalty tax
payable by the option holder under Internal Revenue Code
(IRC) Section 409A (and, as applicable, similar
penalty taxes under state tax laws). As virtually all holders of
options with revised measurement dates were not involved in or
aware of their incorrect option exercise prices, we took certain
actions, as described below, to deal with the adverse tax
consequences that may be incurred by the holders of such options.
In December 2006, our board of directors approved the amendment
of 409A affected options for those who were Section 16(a)
officers upon the receipt of 409A affected options to increase
the exercise price to the fair market value of our common stock
on the revised measurement date. These amended options would not
be subject to taxation under IRC Section 409A. Under IRS
regulations, these option amendments had to be completed by
December 31, 2006 for anyone subject to Section 16(a)
requirements upon receipt of the IRC Section 409A affected
options. There was no expense associated with this action, as
the modifications increased the exercise price, which results in
no increase in fair value of the option.
|
|
17.
|
Provision
for Income Taxes
|
The domestic and foreign components of income before provision
for income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Domestic
|
|
$
|
47,493
|
|
|
$
|
105,008
|
|
|
$
|
169,871
|
|
Foreign
|
|
|
136,288
|
|
|
|
61,670
|
|
|
|
132,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
183,781
|
|
|
$
|
166,678
|
|
|
$
|
302,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant components of the provision for income taxes
attributable to continuing operations are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
28,948
|
|
|
$
|
55,342
|
|
|
$
|
(3,287
|
)
|
Deferred
|
|
|
(17,489
|
)
|
|
|
(8,446
|
)
|
|
|
56,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Federal
|
|
|
11,459
|
|
|
|
46,896
|
|
|
|
53,050
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
4,877
|
|
|
|
14,291
|
|
|
|
1,866
|
|
Deferred
|
|
|
(169
|
)
|
|
|
(253
|
)
|
|
|
8,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total State
|
|
|
4,708
|
|
|
|
14,038
|
|
|
|
10,764
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
42,255
|
|
|
|
4,098
|
|
|
|
25,459
|
|
Deferred
|
|
|
(12,112
|
)
|
|
|
(16,571
|
)
|
|
|
(6,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreign
|
|
|
30,143
|
|
|
|
(12,473
|
)
|
|
|
18,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
46,310
|
|
|
$
|
48,461
|
|
|
$
|
82,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of net deferred tax assets are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
221,571
|
|
|
$
|
192,417
|
|
Accrued liabilities and allowances
|
|
|
71,785
|
|
|
|
63,566
|
|
Depreciation and amortization
|
|
|
115,114
|
|
|
|
139,827
|
|
Tax credits
|
|
|
107,846
|
|
|
|
99,730
|
|
Deferred stock-based compensation
|
|
|
19,372
|
|
|
|
7,275
|
|
Net operating loss carryover
|
|
|
39,735
|
|
|
|
36,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
575,423
|
|
|
|
539,684
|
|
Valuation allowance
|
|
|
(70,088
|
)
|
|
|
(57,061
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
505,335
|
|
|
|
482,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Intangibles not amortizable for tax purposes
|
|
|
28,510
|
|
|
|
31,211
|
|
Prepaid and other assets
|
|
|
12,412
|
|
|
|
9,234
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
|
40,922
|
|
|
|
40,445
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
464,413
|
|
|
$
|
442,178
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
236,310
|
|
|
$
|
204,208
|
|
Noncurrent portion
|
|
|
228,103
|
|
|
|
237,970
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
464,413
|
|
|
$
|
442,178
|
|
|
|
|
|
|
|
|
|
|
184
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2006, we had net deferred tax assets of
$464.4 million, partially resulting from net operating loss
carryovers for federal, state and foreign income tax purposes of
approximately $68.4 million, $12.5 million and
$115.0 million, respectively. The federal net operating
loss carryovers relate to acquisitions and are limited in the
amount that can be recognized in any one year. They have
expiration dates ranging from 2007 to 2027. The foreign net
operating losses relate to losses incurred as a result of
current operations and do not expire. The net increase in the
valuation allowance primarily relates to net operating loss
carryforwards from acquisitions for which there was uncertainty
of future utilization, foreign tax credits and research and
development credits. At December 31, 2006, approximately
$13.7 million of the valuation allowance for deferred tax
assets may result in a subsequent recognition of tax benefits
which will be allocated to reduce goodwill related to acquired
entities. We believe that it is more likely than not that the
results of future operations will generate sufficient taxable
income to realize the net deferred tax assets, other than
certain acquired net operating loss and credit carryforwards and
certain other foreign tax credits for which a valuation
allowance has been provided.
The American Jobs Creation Act of 2004, or the Act, provided for
a deduction of 85% of certain foreign earnings that are
repatriated in stipulated periods, including our year ended
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 distributions
of earnings from our foreign subsidiaries that would qualify for
the repatriation provisions of the Act under FASB
FSP 109-2.
In the fourth quarter of 2005, we executed qualifying
distributions totaling $350.0 million which resulted in tax
expense of $1.5 million, net of a $17.8 million tax
benefit stemming from a lower tax rate under the Act on a
portion of foreign earnings for which we previously (in
2004) provided United States tax. Except for the
aforementioned distributions qualifying under the Act, we intend
to indefinitely reinvest all other current
and/or
future earnings of our foreign subsidiaries. As such, United
States income taxes have not been provided for on a cumulative
total of approximately $239.9 million of earnings of
certain
non-U.S. subsidiaries.
The determination of the amount of the unrecognized deferred tax
liability related to the undistributed earnings of certain
non-U.S. subsidiaries
is not practicable due to the complexities of this hypothetical
calculation.
The earnings from our foreign operations in India are subject to
a tax holiday from a grant effective through March 31,
2009. The tax holiday provides for zero percent taxation on
certain classes of income and requires certain conditions to be
met. We are in compliance with these conditions as of
December 31, 2006.
185
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our effective tax rate on income before income taxes differs
from the United States Federal statutory tax rate as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Federal income tax provision at statutory rate
|
|
$
|
64,201
|
|
|
$
|
58,335
|
|
|
$
|
105,985
|
|
State tax expense (net of Federal benefit)
|
|
|
3,808
|
|
|
|
5,303
|
|
|
|
12,094
|
|
Non deductible acquisition and other costs
|
|
|
161
|
|
|
|
1,407
|
|
|
|
22,840
|
|
Foreign earnings taxed at rates different than the Federal rate
|
|
|
(23,294
|
)
|
|
|
(22,257
|
)
|
|
|
(8,024
|
)
|
Federal and state tax expense related to SEC settlement
|
|
|
|
|
|
|
19,638
|
|
|
|
|
|
Goodwill and other permanent differences
|
|
|
1,593
|
|
|
|
(2,017
|
)
|
|
|
(4,261
|
)
|
Tax credits and other benefits
|
|
|
(5,767
|
)
|
|
|
(1,148
|
)
|
|
|
(18,157
|
)
|
Repatriation of foreign earnings under the American Jobs
Creation Act of 2004
|
|
|
|
|
|
|
1,531
|
|
|
|
|
|
Actual/deemed repatriations of earnings from foreign subsidiaries
|
|
|
3,399
|
|
|
|
4,528
|
|
|
|
1,417
|
|
Stock compensation
|
|
|
4,339
|
|
|
|
(6,598
|
)
|
|
|
(156
|
)
|
Benefit from accruals for tax exposures and valuation allowances
|
|
|
(2,130
|
)
|
|
|
(10,261
|
)
|
|
|
(28,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,310
|
|
|
$
|
48,461
|
|
|
$
|
82,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Numerator Basic net income
|
|
$
|
137,471
|
|
|
$
|
118,217
|
|
|
$
|
220,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator Diluted net income
|
|
$
|
137,471
|
|
|
$
|
118,217
|
|
|
$
|
220,017
|
|
Interest on convertible debentures(1)
|
|
|
|
|
|
|
|
|
|
|
7,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, adjusted
|
|
$
|
137,471
|
|
|
$
|
118,217
|
|
|
$
|
227,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
160,945
|
|
|
|
165,042
|
|
|
|
160,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
160,945
|
|
|
|
165,042
|
|
|
|
160,510
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures(1)
|
|
|
|
|
|
|
|
|
|
|
12,154
|
|
Common stock options, restricted stock units and shares subject
to repurchase(2)
|
|
|
2,107
|
|
|
|
4,207
|
|
|
|
4,697
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares
|
|
|
163,052
|
|
|
|
169,249
|
|
|
|
177,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Basic
|
|
$
|
0.85
|
|
|
$
|
0.72
|
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Diluted
|
|
$
|
0.84
|
|
|
$
|
0.70
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
The convertible debt was repaid in 2004 so there were no amounts
outstanding in 2005 and 2006. |
|
(2) |
|
At December 31, 2006, 2005 and 2004, 7.2 million,
2.2 million and 4.7 million options to purchase common
stock, respectively, were excluded from the calculation since
the effect was anti-dilutive. |
|
|
19.
|
Business
Segment and Major Customer Information
|
We have concluded that we have one business and operate in one
industry. We develop, market, distribute and support computer
security solutions for large enterprises, small and medium-sized
business and consumer users, as well as resellers and
distributors. Management measures operations based on our five
operating segments: North America; Europe, Middle East and
Africa (EMEA); Japan; Asia-Pacific, excluding Japan;
and Latin America. Our chief operating decision maker is our
chief executive officer.
We market and sell anti-virus and security software, hardware
and services through our geographic regions. 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 online products and services personalized for the user
based on the users personal computer configuration,
attached peripherals and resident software. We also offer
managed security and availability applications to corporations
and governments on the internet.
187
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized financial information concerning our net revenue,
income from operations and depreciation expense by geographic
region is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenue by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
633,222
|
|
|
$
|
563,651
|
|
|
$
|
551,264
|
|
EMEA
|
|
|
354,592
|
|
|
|
282,034
|
|
|
|
243,392
|
|
Japan
|
|
|
87,121
|
|
|
|
75,973
|
|
|
|
54,160
|
|
Asia-Pacific, excluding Japan
|
|
|
43,018
|
|
|
|
38,480
|
|
|
|
38,866
|
|
Latin America
|
|
|
27,205
|
|
|
|
21,490
|
|
|
|
19,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
1,145,158
|
|
|
$
|
981,628
|
|
|
$
|
907,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
231,611
|
|
|
$
|
206,350
|
|
|
$
|
190,216
|
|
EMEA
|
|
|
183,599
|
|
|
|
122,047
|
|
|
|
91,284
|
|
Japan
|
|
|
51,081
|
|
|
|
41,306
|
|
|
|
21,421
|
|
Asia-Pacific, excluding Japan
|
|
|
2,067
|
|
|
|
6,729
|
|
|
|
12,273
|
|
Latin America
|
|
|
16,550
|
|
|
|
10,539
|
|
|
|
2,304
|
|
Corporate
|
|
|
(345,880
|
)
|
|
|
(245,564
|
)
|
|
|
(7,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
139,028
|
|
|
$
|
141,407
|
|
|
$
|
310,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
12,269
|
|
|
$
|
12,209
|
|
|
$
|
12,457
|
|
EMEA
|
|
|
1,842
|
|
|
|
1,419
|
|
|
|
2,180
|
|
Japan
|
|
|
381
|
|
|
|
370
|
|
|
|
688
|
|
Asia-Pacific, excluding Japan
|
|
|
2,352
|
|
|
|
1,478
|
|
|
|
1,763
|
|
Latin America
|
|
|
175
|
|
|
|
109
|
|
|
|
112
|
|
Corporate
|
|
|
18,858
|
|
|
|
20,810
|
|
|
|
22,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
35,877
|
|
|
$
|
36,395
|
|
|
$
|
39,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between income from operations and income before
taxes is reflected on the face of our consolidated statements of
income.
188
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The corporate expenses, which are not considered attributable to
any specific geographic region, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
General and administrative and other operating costs
|
|
$
|
164,738
|
|
|
$
|
105,976
|
|
|
$
|
128,127
|
|
Corporate marketing
|
|
|
61,817
|
|
|
|
41,720
|
|
|
|
65,036
|
|
Stock-based compensation
|
|
|
57,761
|
|
|
|
4,471
|
|
|
|
24,088
|
|
Amortization of purchased technology and other intangibles
|
|
|
34,394
|
|
|
|
30,601
|
|
|
|
29,122
|
|
SEC settlement charge
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
SEC and compliance costs
|
|
|
17,824
|
|
|
|
|
|
|
|
|
|
Acquisition and retention bonuses
|
|
|
8,157
|
|
|
|
4,436
|
|
|
|
3,654
|
|
Restructuring charges
|
|
|
470
|
|
|
|
3,782
|
|
|
|
17,442
|
|
In-process research and development
|
|
|
460
|
|
|
|
4,000
|
|
|
|
|
|
Loss (gain) on sale of assets and technology
|
|
|
259
|
|
|
|
(56
|
)
|
|
|
(240,336
|
)
|
Divestiture costs
|
|
|
|
|
|
|
996
|
|
|
|
1,031
|
|
Reimbursement from transition services agreement
|
|
|
|
|
|
|
(362
|
)
|
|
|
(5,997
|
)
|
Severance/bonus costs related to Sniffer and Magic disposition
|
|
|
|
|
|
|
|
|
|
|
10,070
|
|
Reimbursement related to litigation settlement
|
|
|
|
|
|
|
|
|
|
|
(24,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses
|
|
$
|
345,880
|
|
|
$
|
245,564
|
|
|
$
|
7,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is a summary of our total assets by geographic region.
Assets purchased to support infrastructure and general and
administrative activities, including land purchases, are
included in Corporate in the table below. These corporate assets
are not assigned to any specific geographic region. Summarized
financial information concerning our total assets by business
and geographic region is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
North America
|
|
$
|
2,016,617
|
|
|
$
|
2,151,880
|
|
EMEA
|
|
|
578,193
|
|
|
|
306,404
|
|
Japan
|
|
|
100,649
|
|
|
|
70,709
|
|
Asia-Pacific, excluding Japan
|
|
|
33,109
|
|
|
|
36,080
|
|
Latin America
|
|
|
15,754
|
|
|
|
15,120
|
|
Corporate
|
|
|
55,948
|
|
|
|
56,041
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,800,270
|
|
|
$
|
2,636,234
|
|
|
|
|
|
|
|
|
|
|
189
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property and equipment based on the physical location of the
assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
India
|
|
$
|
9,790
|
|
|
$
|
6,149
|
|
Japan
|
|
|
3,334
|
|
|
|
4,060
|
|
United Kingdom
|
|
|
4,575
|
|
|
|
2,582
|
|
Ireland
|
|
|
1,720
|
|
|
|
2,117
|
|
The Netherlands
|
|
|
144
|
|
|
|
363
|
|
Other foreign countries
|
|
|
5,126
|
|
|
|
3,917
|
|
|
|
|
|
|
|
|
|
|
Total foreign countries
|
|
|
24,689
|
|
|
|
19,188
|
|
United States
|
|
|
67,310
|
|
|
|
66,504
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,999
|
|
|
$
|
85,692
|
|
|
|
|
|
|
|
|
|
|
Net revenue attributed to countries based on the location of the
customer is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
United Kingdom
|
|
$
|
101,824
|
|
|
$
|
75,281
|
|
|
$
|
67,635
|
|
Germany
|
|
|
53,145
|
|
|
|
48,397
|
|
|
|
42,029
|
|
Japan
|
|
|
87,121
|
|
|
|
75,973
|
|
|
|
54,160
|
|
Canada
|
|
|
26,401
|
|
|
|
34,099
|
|
|
|
35,333
|
|
Other foreign countries
|
|
|
269,846
|
|
|
|
218,326
|
|
|
|
192,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign countries
|
|
|
538,337
|
|
|
|
452,076
|
|
|
|
391,643
|
|
United States
|
|
|
606,821
|
|
|
|
529,552
|
|
|
|
515,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,145,158
|
|
|
$
|
981,628
|
|
|
$
|
907,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 and 2005, Ingram Micro Inc., had an
accounts receivable balance which comprised 18% and 20%,
respectively, of our gross accounts receivable balance.
Additionally, at December 31, 2006 and 2005, Tech Data
Corp., had an accounts receivable balance which comprised 11% of
our gross accounts receivable balance. During 2006, 2005 and
2004, Ingram Micro Inc. accounted for 17%, 19% and 22%,
respectively, of total net revenue. During 2006, 2005 and 2004,
Tech Data Corp. accounted for 11%, 14% and 11%, respectively, of
total net revenue. The net revenue derived from these customers
is reported primarily in our North American and EMEA geographic
segments.
Settled
Cases
In February 2007, we reached a confidential settlement of a
breach of contract, fraud and bad faith lawsuit filed in June
2002 in the United States District Court, District of
Massachusetts. As part of the settlement, we acquired and
recorded ownership of intangible assets valued at
$9.3 million with all remaining claims settled for
$6.2 million, of which $5.0 million was recognized as
expense in the three months ended June 30, 2006 with the
balance of $1.2 million being expensed in 2004 and prior
periods. The case was dismissed in March 2007.
On March 22, 2002, the SEC notified us that it had
commenced a Formal Order of Private
Investigation into our accounting practices. On
September 29, 2005, we announced we had reserved
$50.0 million in connection with the proposed settlement
with the SEC and we had deposited $50.0 million in an
escrow account with the SEC as the designated beneficiary. On
February 9, 2006, the SEC entered the final judgment for
the settlement with us. We also
190
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
agreed to release $50.0 million to the SEC for the civil
penalty on February 13, 2006 and certain other conditions,
such as engaging independent consultants to examine and
recommend improvements to our internal controls to ensure
compliance with federal securities laws.
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 our consolidated statement of income for 2002. In 2004, we
received $25.0 million from our insurance carriers related
to this litigation.
Open
Cases
We have described below our material legal proceedings and
investigations that are currently pending and are not in the
ordinary course of business. If management believes that a loss
arising from these matters is probable and can reasonably be
estimated, we record the amount of the loss, or the minimum
estimated liability when the loss is estimated using a range,
and no point within the range is more probable than another. As
additional information becomes available, any potential
liability related to these matters is assessed and the estimates
are revised, if necessary. While we cannot predict the
likelihood of future claims or inquiries, we expect that new
matters may be initiated against us from time to time. The
results of claims, lawsuits and investigations also cannot be
predicted, and it is possible that the ultimate resolution of
these matters, individually and in the aggregate, may have a
material adverse effect on our business, financial condition,
results of operations or cash flows.
Government
Inquiries Relating to Historical Stock Option
Practices
On May 23, 2006, the SEC notified us that an investigation
had begun regarding our historical stock option grants. On
June 7, 2006, the SEC sent us a subpoena requesting certain
documents related to stock option grants from January 1,
1995 through the date of the subpoena. At or around the same
time, we received a notice of informal inquiry from the United
States Department of Justice, the (DOJ), concerning
our stock option granting practices. On August 15, 2006, we
received a grand jury subpoena from the
U.S. Attorneys Office for the Northern District of
California relating to the termination of our former general
counsel, his stock option related activities and the
investigation. On November 6, 2006, we received a document
request from the SEC for option grant data for McAfee.com,
previously one of our consolidated subsidiaries that was a
publicly traded company from December 1999 through September
2002.
On November 2, 2006, the investigative team met with the
Enforcement Staff of the SEC in Washington D.C. and presented
the initial findings of the investigation. Pursuant to
discussions between the investigative team and the SEC during
that meeting, the scope of the investigation was expanded to
include a review of the historical McAfee.com option grants, our
historical exercise activity to consider potential exercise date
manipulation and post-employment arrangements with former
executives.
We have provided documents requested, and we are cooperating
with the SEC and DOJ. The SEC investigation is still in its
preliminary stages thus we are unable to determine the ultimate
outcome at this time. As such, no provision has been recorded in
the financial statements for this matter.
Securities
Cases
On May 31, 2006, a purported stockholder derivative
lawsuit styled Dossett v. McAfee, Inc.,
No. 5:06CV3484 (JF) was filed in the United
States District Court for the Northern District of California
against certain of our current and former directors and officers
(Dossett). On June 7, 2006, another purported
stockholders derivative lawsuit styled
Heavy & General Laborers Locals 472 & 172
Pension & Annuity Funds v. McAfee, Inc.,
No. 5:06CV03620 (JF) was filed in the United
States District Court for the Northern District of California
against certain of our current and former directors and officers
(Laborers). The Dossett and Laborers actions
generally allege that we improperly backdated stock option
grants between 1997 and the present, and that
191
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
certain of our current and former officers or directors either
participated in this backdating or allowed it to happen. The
Dossett and Laborers actions assert claims purportedly on behalf
of us for, inter alia, breach of fiduciary duty, abuse of
control, constructive fraud, corporate waste, unjust enrichment,
gross mismanagement, and violations of the federal securities
laws. On July 13, 2006, the United States District Court
for the Northern District of California entered an order
consolidating the Dossett and Laborers actions as In re
McAfee, Inc. Derivative Litigation, Master File
No. 5:06CV03484 (JF) (the Consolidated Action).
On January 22, 2007, we moved to dismiss the complaint in
the Consolidated Action on the grounds that plaintiffs lack
standing to sue on our behalf because, inter alia, they did not
make a pre-suit demand on our board of directors. At the
parties request, the Court has continued on several
occasions the due date for the plaintiffs opposition to
our motion to dismiss and the date for the hearing of that
motion. Currently, there is no deadline by which plaintiffs must
file an opposition to the pending motion to dismiss.
On August 7, 2007, a new stockholders derivative
lawsuit styled Webb v. McAfee, Inc., No. C
07 4048 (PVT) was filed in the United States
District Court for the Northern District of California against
certain of our current and former directors and officers
(Webb). The new lawsuit generally alleges the same
facts and causes of action that plaintiffs have asserted in the
Consolidated Action. The plaintiff in Webb has requested that
his action be consolidated with the Consolidated Action. On
September 21, 2007, the Court consolidated the Webb action
with the Consolidated Action.
On June 2, 2006, three identical lawsuits
styled Greenberg v. Samenuk, No. 106CV064854,
Gordon v. Samenuk, No. 106CV064855, and Golden v.
Samenuk, No. 106CV064856 were filed in the
Superior Court of the State of California, County of
Santa Clara against certain of our current and former
directors and officers (the State Actions). Like the
Consolidated Action, the State Actions generally allege that we
improperly backdated stock option grants between 2000 and the
present, and that certain of our current and former officers or
directors either participated in this backdating or allowed it
to happen. Like the Consolidated Action, the State Actions
assert claims purportedly on behalf of us for, inter alia,
breach of fiduciary duty, abuse of control, corporate waste,
unjust enrichment, and gross mismanagement. On June 23,
2006, we moved to dismiss these actions in favor of the
first-filed Consolidated Action. On September 18, 2006, the
Court consolidated the State Actions and denied our motions to
dismiss, but stayed the State Actions due to the first-filed
action in federal court. The Court has continued the stay on
several occasions.
In December 2007, we reached a tentative settlement with the
plaintiffs in the Consolidated Action and the State Actions. We
have accrued $13.8 million in the condensed consolidated
financial statements as of June 30, 2006 related to
expected payments pursuant to the tentative settlement and
expect to complete the documentation and the required approvals
in late December 2007 or early in the first quarter of 2008.
While we cannot predict the ultimate outcome of the lawsuits,
the provision recorded in the financial statements represents
our best estimate at this time.
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
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.
192
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We, together with the other issuer defendants and plaintiffs,
entered into a stipulation of settlement and release of claims
against the issuer defendants that was submitted to the Court
for approval in June 2004. On August 31, 2005, the Court
preliminarily approved the settlement which, among other things,
was conditioned upon class certification. In December 2006, the
appellate court overturned the certification of classes making
it unlikely that the proposed settlement would receive final
Court approval. As a result, on June 25, 2007, the Court
entered an order terminating the proposed settlement. Plaintiffs
have indicated that they will seek to amend their allegations
and file amended complaints. It is uncertain whether there will
be any revised or future settlement. Thus, the ultimate outcome,
and any ultimate effect on us, cannot be precisely determined at
this time.
Other
On January 7, 2007, a former executive filed an arbitration
demand with the American Arbitration Association, Dallas Texas,
(the Texas arbitration) seeking the arbitration of
claims associated with his employment. The Texas arbitration is
scheduled to begin on April 7, 2008. On September 5,
2007, a Complaint for Damages and Other Relief was
also filed by the same former executive, in the Superior Court
of the State of California, County of Santa Clara,
No. 107CV-093592
(the California litigation). The California
litigation generally contains the same claims as were filed in
the Texas arbitration. A Motion to Compel Arbitration of the
California litigation with the Texas arbitration was granted in
December 2007. We have filed counterclaims against the former
executive, who was terminated. The board determined this
termination was for cause. We believe the claims associated with
the Texas arbitration and the California litigation are without
merit. We intend to vigorously contest these claims, and no
provision has been recorded in the financial statements for
either the Texas arbitration or the California litigation.
On August 17, 2006, a patent infringement
lawsuit captioned Deep Nines v. McAfee, Inc.,
No. 9:06CV174, (Deep Nines litigation) was
filed in the United States District Court for the Eastern
District of Texas. The lawsuit asserts that (i) several of
our Enterprise products infringe on a Deep Nines patent,
and (ii) we falsely marked certain of its products with a
McAfee patent which was abandoned after its issuance. The
lawsuit seeks preliminary and permanent injunctions against the
sale of certain products as well as damages. We have
counter-asserted that Deep Nines has infringed various McAfee
patents. The Deep Nines litigation is still in its preliminary
stages thus we are unable to determine the ultimate outcome at
this time. However, we believe that we have meritorious defenses
to this lawsuit and intend to vigorously defend against it. No
provision has been recorded in the financial statements for this
matter.
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.
|
|
21.
|
Related
Party Transactions
|
On October 2, 2006, Robert M. Dutkowsky, a member of our
board of directors, was appointed chief executive officer and a
director of Tech Data Corporation, one of our customers. We
recognized revenue from sales to Tech Data Corporation of $37.1
million during the fourth quarter of 2006. Our outstanding
accounts receivable balance related to Tech Data Corporation was
$22.7 million at December 31, 2006. Our deferred
revenue balance related to Tech Data Corporation was
$79.2 million at December 31, 2006. Mr. Dutkowsky
resigned from our board of directors during the first quarter of
2007 and Tech Data Corporation ceased to be a related party.
On November 19, 2007, we acquired 100% of the outstanding
shares of Safeboot Holding B.V., an enterprise security software
vendor for data protection via encryption and access control,
for $350.0 million in cash. We believe that adding
Safeboots technologies and products to our centralized
management console for enterprise customers will further advance
our enterprise data protection offerings and help our customers
address the challenges for managing data security. The financial
results of Safeboot will be included in our results of
operations
193
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from the date of acquisition. We have not completed the
preliminary purchase price allocation of the acquired assets and
liabilities.
In October 2007, we entered into a definitive agreement to
acquire ScanAlert, Inc., the creator of a vulnerability
assessment and certification service for
e-commerce
sites, for $51.0 million and up to an additional
$24.0 million if certain performance targets are met. We
believe that we will enhance our offerings by integrating
ScanAlerts
e-commerce
security certification into our SiteAdvisor web rating system.
The financial results of ScanAlert will be included in our
results of operations from the date of acquisition, which we
expect to be during the first three months of 2008.
194
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on our behalf by the
undersigned, thereunto duly authorized on the 21st day of
December 2007.
MCAFEE, INC.
David G. DeWalt
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below on
December 21, 2007 by the following persons on behalf of the
Registrant and in the capacities indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ David
G. DeWalt
(David
G. DeWalt)
|
|
Chief Executive Officer and President
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Eric
F. Brown
(Eric
F. Brown)
|
|
Chief Financial Officer and Chief Operating Officer
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Charles
J. Robel
(Charles
J. Robel)
|
|
Chairman of the Board
|
|
December 21 , 2007
|
|
|
|
|
|
/s/ Robert
B. Bucknam
(Robert
B. Bucknam)
|
|
Director
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Leslie
G. Denend
(Leslie
G. Denend)
|
|
Director
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Denis
J. OLeary
(Denis
J. OLeary)
|
|
Director
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Robert
W. Pangia
(Robert
W. Pangia)
|
|
Director
|
|
December 21, 2007
|
|
|
|
|
|
/s/ Liane
Wilson
(Liane
Wilson)
|
|
Director
|
|
December 21, 2007
|
195
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
File
|
|
Exhibit
|
|
|
|
Filed with
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Number
|
|
Filing Date
|
|
this 10-K
|
|
|
3
|
.1
|
|
Second Restated Certificate of Incorporation of the Registrant,
as amended on December 1, 1997
|
|
S-4
|
|
333-48593
|
|
|
3
|
.1
|
|
March 25, 1998
|
|
|
|
3
|
.2
|
|
Certificate of Ownership and Merger between Registrant and
McAfee, Inc.
|
|
10-Q
|
|
001-31216
|
|
|
3
|
.2
|
|
November 8, 2004
|
|
|
|
3
|
.3
|
|
Second Amended and Restated Bylaws of the Registrant.
|
|
10-Q
|
|
001-31216
|
|
|
3
|
.3
|
|
November 8, 2004
|
|
|
|
3
|
.4
|
|
Certificate of Designation of Series A Preferred Stock of
the Registrant
|
|
10-Q
|
|
000-20558
|
|
|
3
|
.3
|
|
November 14, 1996
|
|
|
|
3
|
.5
|
|
Certificate of Designation of Rights, Preferences and Privileges
of Series B Participating Preferred Stock of the Registrant
|
|
8-A
|
|
000-20558
|
|
|
5
|
.0
|
|
October 22, 1998
|
|
|
|
4
|
.3
|
|
Indenture dated as of August 17, 2001 between the
Registrant and State Street Bank and Trust Company of
California, N.A.
|
|
S-3
|
|
333-73112
|
|
|
4
|
.3
|
|
November 9, 2001
|
|
|
|
10
|
.1
|
|
Lease Assignment dated November 17, 1997 for facility at
3965 Freedom Circle, Santa Clara, California by and between
Informix Corporation and the Registrant
|
|
S-3
|
|
333-46049
|
|
|
10
|
.13
|
|
February 11, 1998
|
|
|
|
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
|
|
S-3
|
|
333-46049
|
|
|
10
|
.14
|
|
February 11, 1998
|
|
|
|
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
|
|
S-3
|
|
333-46049
|
|
|
10
|
.15
|
|
February 11, 1998
|
|
|
|
10
|
.4
|
|
Form of lease executed November 22, 1996 by and between
Birk S. McCandless, LLC and Informix Corporation for facility at
3965 Freedom Circle, Santa Clara, California
|
|
S-3
|
|
333-46049
|
|
|
10
|
.16
|
|
February 11, 1998
|
|
|
|
10
|
.5*
|
|
2002 Employee Stock Purchase Plan, as amended
|
|
S-8
|
|
333-126929
|
|
|
4
|
.1
|
|
July 27, 2005
|
|
|
|
10
|
.6*
|
|
1997 Stock Incentive Plan, as amended
|
|
S-8
|
|
333-126928
|
|
|
4
|
.1
|
|
July 27, 2005
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
File
|
|
Exhibit
|
|
|
|
Filed with
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Number
|
|
Filing Date
|
|
this 10-K
|
|
|
10
|
.7*
|
|
Amended and Restated 1993 Stock Option Plan for Outside Directors
|
|
10-K
|
|
001-31216
|
|
|
10
|
.7
|
|
October 31, 2003
|
|
|
|
10
|
.8*
|
|
2000 Nonstatutory Stock Option Plan
|
|
10-K
|
|
000-20558
|
|
|
10
|
.20
|
|
April 2, 2001
|
|
|
|
10
|
.9*
|
|
Employment agreement dated February 23, 2007 by and between
David DeWalt and the Registrant
|
|
8-K
|
|
001-31216
|
|
|
10
|
.1
|
|
March 8, 2007
|
|
|
|
10
|
.11
|
|
First Amendment to Lease dated March 20, 1998 between Birk
S. McCandless, LLC and the Registrant
|
|
10-Q
|
|
000-20558
|
|
|
10
|
.28
|
|
November 13, 2001
|
|
|
|
10
|
.12
|
|
Confirmation, Amendment and Notice of Security Agreement dated
March 20, 1998 among Informix Corporation, Birk S.
McCandless, LLC and the Registrant
|
|
10-Q
|
|
000-20558
|
|
|
10
|
.29
|
|
November 13, 2001
|
|
|
|
10
|
.13
|
|
Second Amendment to Lease dated September 1, 1998 among
Informix Corporation, Birk S. McCandless, LLC and the Registrant
|
|
10-Q
|
|
000-20558
|
|
|
10
|
.30
|
|
November 13, 2001
|
|
|
|
10
|
.14
|
|
Subordination, Non-disturbance and Attornment Agreement dated
June 21, 2000, among Column Financial, Inc., Informix
Corporation, Birk S. McCandless, LLC, and the Registrant
|
|
10-Q
|
|
000-20558
|
|
|
10
|
.31
|
|
November 13, 2001
|
|
|
|
10
|
.15*
|
|
Release of Claims dated February 6, 2007 by and between
George Samenuk and the Registrant
|
|
8-K
|
|
001-31216
|
|
|
10
|
.1
|
|
February 7, 2007
|
|
|
|
10
|
.16
|
|
Form of Indemnification Agreement between the Registrant and its
Executive Officers
|
|
10-K
|
|
001-31216
|
|
|
10
|
.34
|
|
March 9, 2004
|
|
|
|
10
|
.17*
|
|
Summary of Pay for Performance Plan
|
|
10-K
|
|
001-31216
|
|
|
10
|
.33
|
|
October 31, 2003
|
|
|
|
10
|
.18*
|
|
Network Associates, Inc. Tax Deferred Savings Plan
|
|
S-8
|
|
333-110257
|
|
|
4
|
.1
|
|
November 5, 2003
|
|
|
|
10
|
.19
|
|
Umbrella Credit Facility of Registrant dated April 15, 2004
|
|
10-Q
|
|
001-31216
|
|
|
10
|
.36
|
|
May 10, 2004
|
|
|
|
10
|
.20
|
|
Fifth Amendment to Network Associates, Inc. Tax Deferred Savings
Plan
|
|
10-Q
|
|
001-31216
|
|
|
10
|
.37
|
|
May 10, 2004
|
|
|
|
10
|
.21
|
|
Sixth Amendment to Network Associates, Inc. Tax Deferred Savings
Plan
|
|
10-Q
|
|
001-31216
|
|
|
10
|
.43
|
|
August 9, 2004
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
File
|
|
Exhibit
|
|
|
|
Filed with
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Number
|
|
Filing Date
|
|
this 10-K
|
|
|
10
|
.22*
|
|
Employment Agreement between Registrant and Eric F. Brown dated
December 10, 2004
|
|
8-K
|
|
001-31216
|
|
|
10
|
.1
|
|
December 14, 2004
|
|
|
|
10
|
.23*
|
|
2005 Independent Director Cash Compensation Plan
|
|
10-K/A
|
|
001-31216
|
|
|
10
|
.46
|
|
May 24, 2005
|
|
|
|
10
|
.24*
|
|
Executive Officer Annual Compensation for Fiscal Year Ending
December 31, 2006
|
|
8-K
|
|
001-31216
|
|
|
10
|
.1
|
|
March 13, 2006
|
|
|
|
10
|
.25*
|
|
Chief Executive Officer Annual Compensation for Fiscal Year
Ending December 31, 2006
|
|
8-K
|
|
001-31216
|
|
|
10
|
.1
|
|
March 28, 2006
|
|
|
|
10
|
.26*
|
|
Letter agreement, dated February 23, 2007, between
Registrant and David DeWalt
|
|
8-K
|
|
001-31216
|
|
|
10
|
.1
|
|
March 8, 2006
|
|
|
|
10
|
.27*
|
|
First Amendment to Employment Agreement between Registrant and
Eric F. Brown dated May 26, 2005
|
|
8-K
|
|
001-31216
|
|
|
10
|
.3
|
|
May 26, 2005
|
|
|
|
10
|
.28*
|
|
Letter Agreement Amendment to Employment Agreement between the
Registrant and Eric F. Brown dated January 31, 2006
|
|
10-K
|
|
001-31216
|
|
|
10
|
.36
|
|
March 1, 2006
|
|
|
|
10
|
.28*
|
|
Employment Agreement between William Kerrigan and the
Registrant, dated October 1, 2004, as amended by First
Amendment to Employment Agreement dated May 24, 2005
|
|
10-K
|
|
001-31216
|
|
|
10
|
.37
|
|
March 1, 2006
|
|
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.1
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.1
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
* |
|
Management contracts or compensatory plans or arrangements
covering executive officers or directors of McAfee, Inc. |
198
SCHEDULE II
MCAFEE,
INC.
VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts,
|
|
|
Write-Offs
|
|
|
|
|
|
|
|
|
|
Additions Charged
|
|
|
of
|
|
|
|
|
|
|
Balance at
|
|
|
to Expense,
|
|
|
Previously
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Deferred Revenue or
|
|
|
Provided
|
|
|
End of
|
|
|
|
Period
|
|
|
Net Revenue(1)
|
|
|
Accounts
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
$
|
2,389
|
|
|
$
|
884
|
|
|
$
|
(1,258
|
)
|
|
$
|
2,015
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
$
|
2,275
|
|
|
$
|
923
|
|
|
$
|
(809
|
)
|
|
$
|
2,389
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
$
|
3,062
|
|
|
$
|
144
|
|
|
$
|
(931
|
)
|
|
$
|
2,275
|
|
|
|
|
(1) |
|
Allowance for Doubtful Accounts, Net. The
provision for doubtful accounts, net consists of our estimates
with respect to the uncollectibility of our receivables, net of
recoveries of amounts previously written off. Our management
must make estimates of the uncollectibility of our accounts
receivables. Management specifically analyzes accounts
receivable and analyzes historical bad debts, 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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Returns
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Incentives
|
|
|
Actual
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Charged to Net
|
|
|
Returns and
|
|
|
End of
|
|
|
|
Period
|
|
|
Revenue(2)
|
|
|
Incentives
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Returns and Other Incentives
|
|
$
|
31,939
|
|
|
$
|
139,054
|
|
|
$
|
(131,219
|
)
|
|
$
|
39,774
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Returns and Other Incentives
|
|
$
|
29,321
|
|
|
$
|
145,525
|
|
|
$
|
(142,907
|
)
|
|
$
|
31,939
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Returns and Other Incentives
|
|
$
|
41,345
|
|
|
$
|
63,701
|
|
|
$
|
(75,725
|
)
|
|
$
|
29,321
|
|
|
|
|
(2) |
|
Allowance for Sales Returns and Other
Incentives. The allowance for sales returns and
incentives consists of our estimates of potential future product
returns related to current period product revenue, and specific
provisions for distributor, reseller, and retailer sales
incentives that are reductions in the revenue to be realized. 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,
such as end-user rebates, volume incentive rebate programs and
marketing funds 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. |
199