e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2006
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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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
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77-0316593
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(State
or other jurisdiction of
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(I.R.S. Employer
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incorporation or
organization)
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Identification Number)
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3965 Freedom Circle
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95054
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Santa Clara, California
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(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
(408) 988-3832
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes o No 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
As of December 7, 2007, 159,908,615 shares of the
registrants common stock, $0.01 par value, were
outstanding.
MCAFEE,
INC.
FORM 10-Q
September 30, 2006
CONTENTS
2
EXPLANATORY
NOTE REGARDING RESTATEMENT
In this quarterly report on
Form 10-Q,
we are restating our condensed consolidated balance sheet as of
December 31, 2005, our condensed consolidated statement of
income and comprehensive income for the three and nine months
ended September 30, 2005 and the related condensed
consolidated statement of cash flows for the nine months ended
September 30, 2005, as a result of an independent stock
option investigation conducted by a special committee of our
board of directors. This restatement is more fully described in
Note 3, Restatement of Condensed Consolidated
Financial Statements and Special Committee and Company
Findings, to our condensed consolidated financial
statements, in Part I, Item 2,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and in
Part II, Item 1 Legal Proceedings
in this quarterly report on
Form 10-Q
and in our Explanatory Note Regarding
Restatement preceding Part I of our annual report
on
Form 10-K
for the year ended December 31, 2006 (the 2006
Form 10-K).
In our 2006
Form 10-K
to be filed with the Securities and Exchange Commission
(SEC) simultaneously with the filing of this
Form 10-Q,
we are restating (i) our audited consolidated financial
statements as of December 31, 2005 and for each of the two
years in the period ended December 31, 2004; (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, 2006, and the related opinions of
our independent registered public accounting firms, 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
quarterly report on
Form 10-Q
and other reports on
Form 10-K,
Form 10-Q
and
Form 8-K
filed by us with the SEC on or after December 21, 2007.
3
PART I:
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements (Unaudited)
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MCAFEE,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
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September 30,
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December 31,
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|
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2006
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2005
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(As restated
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See Note 3)
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(In thousands, except share data)
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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381,962
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$
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728,592
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Restricted cash
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50,489
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Short-term marketable securities
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328,978
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316,298
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Accounts receivable, net of allowance for doubtful accounts of
$1,458 and $2,389, respectively
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132,707
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159,130
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Prepaid expenses and prepaid taxes
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123,649
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79,132
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Deferred income taxes
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233,250
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204,208
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Other current assets
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26,930
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28,490
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Total current assets
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1,227,476
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1,566,339
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Long-term marketable securities
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523,341
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212,131
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Restricted cash
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1,043
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939
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Property and equipment, net
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90,950
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85,692
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Deferred income taxes
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224,014
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237,970
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Intangible assets, net
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75,877
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80,086
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Goodwill
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488,696
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437,488
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Other assets
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21,486
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15,589
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Total assets
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$
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2,652,883
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$
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2,636,234
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LIABILITIES
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Current liabilities:
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Accounts payable
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$
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36,966
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$
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34,678
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Accrued SEC settlement
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50,000
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Accrued income taxes
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93,623
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76,740
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Accrued compensation
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53,645
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55,781
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Accrued marketing
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17,514
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15,172
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Other accrued liabilities
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85,646
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70,288
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Deferred revenue
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655,537
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575,665
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Total current liabilities
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942,931
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878,324
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Deferred revenue, less current portion
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180,510
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176,141
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Accrued taxes and other long-term liabilities
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152,754
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147,128
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Total liabilities
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1,276,195
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1,201,593
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Commitments and contingencies (Notes 12 and 13)
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STOCKHOLDERS EQUITY
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Preferred stock, $0.01 par value:
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Authorized: 5,000,000 shares; Issued and outstanding: none
in 2006 and 2005
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Common stock, $0.01 par value:
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Authorized: 300,000,000 shares; Issued:
172,512,046 shares at September 30, 2006 and
170,453,210 shares at December 31, 2005; Outstanding:
159,935,439 shares at September 30, 2006 and
167,688,210 shares at December 31, 2005
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1,726
|
|
|
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1,705
|
|
Treasury stock, at cost: 12,576,607 shares at
September 30, 2006 and 2,765,000 shares at
December 31, 2005
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(303,074
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)
|
|
|
(68,395
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)
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Additional paid-in capital
|
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1,510,992
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1,443,743
|
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Deferred stock-based compensation
|
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|
|
|
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|
(8,146
|
)
|
Accumulated other comprehensive income
|
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30,638
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|
|
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33,923
|
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Retained earnings
|
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|
136,406
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|
|
|
31,811
|
|
|
|
|
|
|
|
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Total stockholders equity
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1,376,688
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1,434,641
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Total liabilities and stockholders equity
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$
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2,652,883
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$
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2,636,234
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|
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|
|
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
MCAFEE,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
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|
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|
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|
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|
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Three Months Ended
|
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Nine Months Ended
|
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September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(As restated
|
|
|
|
|
|
(As restated
|
|
|
|
|
|
|
See Note 3)
|
|
|
|
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|
See Note 3)
|
|
|
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(In thousands, except per share data)
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(Unaudited)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
160,388
|
|
|
$
|
141,932
|
|
|
$
|
466,298
|
|
|
$
|
410,591
|
|
Subscription
|
|
|
110,822
|
|
|
|
90,891
|
|
|
|
299,197
|
|
|
|
236,797
|
|
Product
|
|
|
15,853
|
|
|
|
17,466
|
|
|
|
74,422
|
|
|
|
77,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
287,063
|
|
|
|
250,289
|
|
|
|
839,917
|
|
|
|
725,067
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
|
13,127
|
|
|
|
5,682
|
|
|
|
39,736
|
|
|
|
18,127
|
|
Subscription
|
|
|
29,624
|
|
|
|
16,464
|
|
|
|
76,077
|
|
|
|
46,058
|
|
Product
|
|
|
15,415
|
|
|
|
13,135
|
|
|
|
45,810
|
|
|
|
44,402
|
|
Amortization of purchased technology
|
|
|
5,987
|
|
|
|
4,501
|
|
|
|
16,180
|
|
|
|
13,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
|
64,153
|
|
|
|
39,782
|
|
|
|
177,803
|
|
|
|
121,950
|
|
Operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
50,641
|
|
|
|
47,188
|
|
|
|
144,426
|
|
|
|
130,277
|
|
Marketing and sales
|
|
|
91,260
|
|
|
|
72,717
|
|
|
|
264,990
|
|
|
|
222,498
|
|
General and administrative
|
|
|
35,055
|
|
|
|
29,614
|
|
|
|
127,101
|
|
|
|
92,299
|
|
SEC and compliance costs
|
|
|
7,901
|
|
|
|
|
|
|
|
11,673
|
|
|
|
|
|
Amortization of intangibles
|
|
|
2,656
|
|
|
|
2,906
|
|
|
|
8,305
|
|
|
|
10,036
|
|
Restructuring (benefits) charges
|
|
|
(1,393
|
)
|
|
|
(10
|
)
|
|
|
(274
|
)
|
|
|
6,013
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
460
|
|
|
|
4,000
|
|
SEC settlement charge
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs
|
|
|
186,120
|
|
|
|
202,415
|
|
|
|
556,681
|
|
|
|
515,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
36,790
|
|
|
|
8,092
|
|
|
|
105,433
|
|
|
|
87,994
|
|
Interest and other income
|
|
|
13,922
|
|
|
|
6,657
|
|
|
|
32,585
|
|
|
|
18,665
|
|
Gain (loss) on investments, net
|
|
|
154
|
|
|
|
(160
|
)
|
|
|
68
|
|
|
|
(1,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
50,866
|
|
|
|
14,589
|
|
|
|
138,086
|
|
|
|
105,553
|
|
Provision for income taxes
|
|
|
16,776
|
|
|
|
2,276
|
|
|
|
33,491
|
|
|
|
26,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
34,090
|
|
|
$
|
12,313
|
|
|
$
|
104,595
|
|
|
$
|
78,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities, net of
reclassification adjustment for gains (losses) recognized on
marketable securities during the period and income tax
|
|
$
|
878
|
|
|
$
|
(462
|
)
|
|
$
|
1,457
|
|
|
$
|
(943
|
)
|
Foreign currency translation gain (loss)
|
|
|
1,791
|
|
|
|
3,941
|
|
|
|
(4,742
|
)
|
|
|
1,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
36,759
|
|
|
$
|
15,792
|
|
|
$
|
101,310
|
|
|
$
|
79,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Basic
|
|
$
|
0.21
|
|
|
$
|
0.07
|
|
|
$
|
0.65
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Diluted
|
|
$
|
0.21
|
|
|
$
|
0.07
|
|
|
$
|
0.64
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation Basic
|
|
|
159,728
|
|
|
|
166,174
|
|
|
|
161,343
|
|
|
|
164,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation Diluted
|
|
|
161,485
|
|
|
|
170,756
|
|
|
|
163,132
|
|
|
|
168,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
MCAFEE,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(As restated
|
|
|
|
|
|
|
See Note 3)
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
104,595
|
|
|
$
|
78,972
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
50,688
|
|
|
|
50,939
|
|
Tax benefit from exercise of non-qualified stock options
|
|
|
|
|
|
|
22,341
|
|
(Recovery of) provision for doubtful accounts, net
|
|
|
(197
|
)
|
|
|
1,309
|
|
Non-cash restructuring (benefit) charge
|
|
|
(286
|
)
|
|
|
3,326
|
|
Interest released from restricted cash
|
|
|
489
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
460
|
|
|
|
4,000
|
|
(Discount) premium amortization on marketable securities
|
|
|
(5,438
|
)
|
|
|
461
|
|
Loss (gain) on sale of assets and technology
|
|
|
207
|
|
|
|
(499
|
)
|
(Gain) loss on sale of investments
|
|
|
(68
|
)
|
|
|
1,106
|
|
Deferred income taxes
|
|
|
(22,224
|
)
|
|
|
(8,446
|
)
|
Non-cash stock-based compensation expenses
|
|
|
37,988
|
|
|
|
5,002
|
|
Excess tax benefits from stock-based compensation
|
|
|
(4,811
|
)
|
|
|
|
|
Changes in assets and liabilities, net of acquisitions and
divestitures:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
31,328
|
|
|
|
32,646
|
|
Prepaid expenses, prepaid taxes and other assets
|
|
|
(45,839
|
)
|
|
|
(9,098
|
)
|
Accounts payable and other accrued liabilities
|
|
|
(8,342
|
)
|
|
|
17,167
|
|
Deferred revenue
|
|
|
65,723
|
|
|
|
93,426
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
204,273
|
|
|
|
292,652
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(1,034,796
|
)
|
|
|
(565,824
|
)
|
Proceeds from sales of marketable securities
|
|
|
471,990
|
|
|
|
345,946
|
|
Proceeds from maturities of marketable securities
|
|
|
246,694
|
|
|
|
142,907
|
|
Decrease (increase) in restricted cash
|
|
|
49,896
|
|
|
|
(50,007
|
)
|
Purchase of property, equipment and leasehold improvements
|
|
|
(30,707
|
)
|
|
|
(25,041
|
)
|
Proceeds from sale of assets and technology
|
|
|
|
|
|
|
1,500
|
|
Acquisitions, net of cash acquired
|
|
|
(65,871
|
)
|
|
|
(20,200
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(362,794
|
)
|
|
|
(170,719
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock from option and stock
purchase plans
|
|
|
32,007
|
|
|
|
94,453
|
|
Excess tax benefits from stock-based compensation
|
|
|
4,811
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(234,679
|
)
|
|
|
(47,351
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(197,861
|
)
|
|
|
47,102
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash
|
|
|
9,752
|
|
|
|
(19,815
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(346,630
|
)
|
|
|
149,220
|
|
Cash and cash equivalents at beginning of period
|
|
|
728,592
|
|
|
|
291,155
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
381,962
|
|
|
$
|
440,375
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities, net
|
|
$
|
1,457
|
|
|
$
|
(943
|
)
|
|
|
|
|
|
|
|
|
|
Accrual for purchase of property, equipment and leasehold
improvements
|
|
$
|
1,849
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired in business combinations,
excluding cash acquired
|
|
$
|
75,158
|
|
|
$
|
20,948
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed in business combinations
|
|
$
|
9,289
|
|
|
$
|
748
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets of acquired company
|
|
$
|
|
|
|
$
|
38,838
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
50,844
|
|
|
$
|
34,623
|
|
|
|
|
|
|
|
|
|
|
Cash received from income tax refunds
|
|
$
|
2,972
|
|
|
$
|
1,790
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED 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 and Basis of
Presentation
|
The accompanying condensed consolidated financial statements
include our accounts as of September 30, 2006 and
December 31, 2005 and for the three and nine months ended
September 30, 2006 and September 30, 2005. All
intercompany accounts and transactions have been eliminated in
consolidation. These condensed consolidated financial statements
have been prepared by us, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to
such rules and regulations. The December 31, 2005 condensed
consolidated balance sheet was derived from audited consolidated
financial statements, but does not include all disclosures
required by accounting principles generally accepted in the
United States of America. However, we believe that all
disclosures are adequate to make the information presented not
misleading. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the
audited consolidated financial statements and the notes thereto,
included in our annual report on
Form 10-K
for the year ended December 31, 2006 filed simultaneously
with this quarterly report on
Form 10-Q.
In the opinion of our management, all adjustments (which consist
of normal recurring adjustments, except as disclosed herein)
necessary to fairly present our financial position as of
September 30, 2006 and results of operations and cash flows
for the interim periods presented have been included. The
results of operations for the three and nine months ended
September 30, 2006 are not necessarily indicative of the
results to be expected for the full year or for any future
periods.
Significant
Accounting Policies
On January 1, 2006, we adopted a new policy related to
stock-based compensation, as more fully described below. Other
than this item, there have been no significant changes to our
critical accounting policies and estimates during the nine
months ended September 30, 2006. Note 2,
Summary of Significant Accounting Policies of
the notes to consolidated financial statements in our annual
report on
Form 10-K
for the year ended December 31, 2006, which is filed
simultaneously with this quarterly report on
Form 10-Q,
describes the significant accounting policies and methods used
in the preparation of our consolidated financial statements. We
have also described our policy for the restatement of our
stock-based compensation expense below.
Stock-Based
Compensation
On January 1, 2006, we adopted Statement of Financial
Accounting Standards, No. 123(R), Share-Based
Payment (SFAS 123(R)), which is a
revision of SFAS No. 123 Accounting for
Stock-Based Compensation (SFAS 123),
and supersedes APB No. 25 Accounting for Stock
Issued to Employees (APB 25). Among other
items, SFAS 123(R) requires companies to record
compensation expense for stock-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 stock-based awards include stock
options, restricted stock awards, restricted stock units and our
Employee Stock Purchase Plan (ESPP).
7
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 stock-based awards. Under APB 25, we
did not recognize any compensation expense for our ESPP. 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 stock-based awards issued on or after
January 1, 2006 and any outstanding stock-based awards that
were issued but not vested as of January 1, 2006.
Accordingly, our condensed consolidated financial statements for
the three and nine months ended September 30, 2005 have not
been restated to reflect the impact of SFAS 123(R). During
the three and nine months ended September 30, 2005, we
recognized stock-based compensation expense of $3.9 million
and $5.0 million, respectively, related to grant date
intrinsic value resulting from revised accounting measurement
dates, the exchange of McAfee.com options in 2002, the
re-pricing of options in 1999 and restricted stock awards. See
Note 4 for additional information.
In the three months ended September 30, 2006, we recognized
stock-based compensation expense of $14.9 million in our
condensed consolidated financial statements, which included
$9.6 million for stock options, $5.0 million for
restricted stock awards and units and $0.3 million for our
ESPP. In the nine months ended September 30, 2006, we
recognized stock-based compensation expense of
$40.7 million in our condensed consolidated financial
statements, which included $27.3 million for stock options,
$11.4 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 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, (iv) compensation expense for
restricted stock award and unit grants made both before and
after January 1, 2006 and (v) 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 straight-line, single-option 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 stock-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 stock-based compensation, which
among other things, provides a simplified method for estimating
the beginning additional paid-in capital pool balance.
Restatement
of Stock-Based Compensation
As discussed in Note 3, we have restated our condensed
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 APB 25 and its
related interpretations, including Financial Accounting
Standards Board Interpretation
8
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
No. 44 Accounting for Certain Transactions
Involving Stock Compensation an interpretation of
APB Opinion No. 25 (FIN 44), and
provided the required pro forma disclosure under SFAS 123
through the 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 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 the year ended December 31, 2006, we
adopted SFAS 123(R). As a result, for 2006, the additional
stock-based compensation expense required to be recorded for
these stock options was equal to the fair value on the revised
measurement date for options vesting in 2006 or later. We did
not record the additional stock-based compensation expense under
APB 25 or SFAS 123(R) related to these stock options in our
previously issued financial statements. These financial
statements reflect the adjustments required to properly record
stock-based compensation for options with revised measurement
dates.
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
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. We
revised measurement dates and recorded stock-based compensation
expense due to the following errors:
|
|
|
|
|
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
|
9
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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.
|
|
|
|
|
|
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 were applied on a grant by grant basis, resulting in
multiple measurement dates for annual merit grants for which
there were multiple DB dates.
|
|
|
|
|
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, 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 reflected the date of the granting
actions. With the exception of one UWC, no evidence was located
that contradicted a UWC with an 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 one instance
discussed above. We have therefore placed reliance on the
compensation committee UWCs prior to 2001.
10
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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.
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.
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 best available
evidence, results in reasonable measurement dates for our stock
option grants.
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
11
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 condensed consolidated
statements of income and affect our net accounts receivable,
deferred revenue and other accrued liabilities line items on our
condensed consolidated balance sheets. These estimates affect
all of our operating geographies. Effective September 2006, in
connection with the launch of our new consumer products, all
consumer incentive rebates are recorded ratably as an offset to
revenue over the term of the subscription.
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 in our condensed consolidated balance sheets, and
are $2.7 million as of September 30, 2006 and
$4.4 million as of December 31, 2005.
Deferred
Costs of Revenue
Deferred costs of revenue, which consist primarily of costs
related to revenue-sharing and royalty arrangements, are
included in prepaid expenses and prepaid taxes and other assets
in our condensed 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. As of September 30, 2006,
our deferred costs are $63.2 million compared to
$28.8 million as of December 31, 2005.
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.
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.
12
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 many
financial instruments and certain 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, 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.
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
notably 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.
13
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 condensed
consolidated statements of income and comprehensive income and
did not change our policy as a result of
EITF 06-3.
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.
14
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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3.
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Restatement
of Condensed Consolidated Financial Statements and Special
Committee and Company Findings
|
In this quarterly report on
Form 10-Q,
we are restating our condensed consolidated balance sheet as of
December 31, 2005, our condensed consolidated statements of
operations for the three and nine months ended
September 30, 2005 and the related condensed consolidated
statement of cash flows for the nine months ended
September 30, 2005, as a result of an independent stock
option investigation conducted by a special committee of our
board of directors. In our 2006
Form 10-K
to be filed with the Securities and Exchange Commission
(SEC) simultaneously with the filing of this
Form 10-Q,
we are restating our audited consolidated financial statements
and related disclosures for the years ended December 31,
2005 and 2004, and our selected consolidated statement of
operations and consolidated balance sheet data for the years
ended December 31, 2005, 2004, 2003 and 2002. In addition,
we are restating the unaudited quarterly financial information
for the interim periods of 2005 and for the three months ended
March 31, 2006.
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;
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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, management and the special
committee concluded that (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) 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.
15
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. Of the total amount of the
stock-based compensation expense associated with revising the
measurement dates of our annual merit grants, $69.6 million
was recognized in periods prior to 2005 and $0.8 million
was recognized in 2005. Of the charges recognized in 2005, we
recognized $0.2 million and $0.6 million,
respectively, related to the three and nine months ended
September 30, 2005.
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
options associated with grants originally measured on dates that
preceded the evidenced date of approval by the party with the
requisite authority. Of the total amount of stock-based
compensation expense associated with revising the measurement
dates of grants that previously preceded the evidenced date of
approval, $13.5 million was recognized in periods prior to
2005 and $2.3 million was recognized in 2005. Of the
expenses related to 2005, we recognized $0.6 million and
$1.9 million, respectively, for the three and nine months
ended September 30, 2005. These adjustments included a
$2.5 million expense for grants to two former executives on
the same date, a $2.1 million expense for a grant to a
former president and a $1.1 million expense 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 expense of $6.3 million to be
recognized over the applicable service periods for grants that
preceded the actual employment commencement date. Substantially
all of the stock-based compensation expense resulting from
revising the measurement dates of these new hire grants was
recognized prior to 2005. These adjustments included a
$1.3 million stock-based compensation expense 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. Of the total amount of stock-based
compensation expense associated with revising the measurement
dates of these grants, $4.5 million was recognized in
periods prior to 2005, and $0.3 million was recognized in
2005. Of the stock-based compensation expense related to 2005,
we recognized $0.1 million and $0.2 million,
respectively, for the three and nine months ended
September 30, 2005. Specifically the $4.8 million of
expense consists of the 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 $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
16
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
due to clerical errors.
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 was
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. The
total stock-based compensation expense associated with the
repricing is $6.7 million, $6.9 million of which we
recognized in periods prior to 2005, and a $0.2 benefit which we
recognized in 2005. We recognized variable expenses of
$0.2 million and a $0.1 million benefit, respectively,
for the three and nine months ended September 30, 2005.
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. These
adjustments had no impact in periods subsequent to 2005.
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 the 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 additional
stock-based compensation expense of $9.2 million over the
remaining service periods of the unvested options. We recognized
$9.3 million in periods prior to 2005 and a
$0.1 million benefit in 2005. Of the stock-based
17
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compensation expense related to 2005, we recognized a benefit of
less than $0.1 million and a $0.1 million benefit,
respectively, for the three and nine months ended
September 30, 2005.
We recognized a $0.2 million reduction in stock-based
compensation expense previously recognized related to the
accounting for the exchange of options upon the acquisition of
the remaining minority interest of our McAfee.com subsidiary. We
recognized a benefit of less than $0.1 million and
$0.4 million in expense for the three and nine months ended
September 30, 2005, respectively, for this correction.
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, all of which was
recognized prior to 2005. We have accounted for these grants
using the fair value method.
Effect
of errors on stock-based compensation, before
tax
As a result of the investigation, 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 expenses 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
$134.0 million for periods prior to January 1, 2005
and $3.4 million for 2005, respectively. Approximately 98%
of the total intrinsic value (the stock price on the revised
measurement minus the exercise price) recognized as a result of
the investigation results from grants made during the period
1995 through 2003. The following table classifies by year total
additional stock-based compensation expense by the reason for
the revision to the accounting measurement date (in thousands):
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1995
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1996
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1997
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1998
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1999
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2000
|
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Reason for revised accounting measurement date:
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Annual merit grant allocation and/or approval not complete on
the original measurement date
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$
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$
|
82
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$
|
1,485
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|
|
$
|
12,931
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|
|
$
|
11,409
|
|
|
$
|
13,242
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|
Original accounting measurement date prior to approval date
|
|
|
|
|
|
|
262
|
|
|
|
291
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|
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|
809
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|
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|
1,701
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1,302
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Original accounting measurement date prior to employment
commencement date
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487
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|
1,659
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1,713
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1,181
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|
|
|
908
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271
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|
Incorrect or inconsistent approval and employment commencement
date documentation
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14
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Clerical errors in director grants
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|
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|
10
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|
|
43
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|
|
|
57
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|
|
|
47
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|
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|
16
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|
|
|
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|
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Total of intrinsic charges for revised measurement dates
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487
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2,013
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3,532
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14,978
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|
14,065
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|
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|
14,845
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Repriced annual merit grant
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1,003
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Post-employment option modifications previously not recorded
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11,420
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|
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3,502
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3,419
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Correction of accounting errors, primarily options historically
accounted for as variable awards
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|
|
|
|
|
|
|
|
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|
|
|
|
|
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275
|
|
|
|
1,223
|
|
|
|
|
|
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|
|
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Total
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$
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487
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$
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2,013
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$
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3,532
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$
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26,398
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$
|
17,842
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$
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20,490
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|
|
|
|
|
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|
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18
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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2001
|
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2002
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2003
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2004
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2005
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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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$
|
12,630
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|
|
$
|
8,551
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|
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$
|
6,038
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|
|
$
|
3,245
|
|
|
$
|
745
|
|
|
$
|
70,358
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Original accounting measurement date prior to approval date
|
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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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
Nine Months Ended
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
September 30, 2005
|
|
|
Reason for revised accounting measurement date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual merit grant allocation and/or approval not complete on
the original measurement date
|
|
$
|
249
|
|
|
$
|
176
|
|
|
$
|
163
|
|
|
$
|
588
|
|
Original accounting measurement date prior to approval date
|
|
|
749
|
|
|
|
601
|
|
|
|
554
|
|
|
|
1,904
|
|
Original accounting measurement date prior to employment
commencement date
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
Incorrect or inconsistent approval and employment commencement
date documentation
|
|
|
76
|
|
|
|
66
|
|
|
|
66
|
|
|
|
208
|
|
Clerical errors in director grants
|
|
|
7
|
|
|
|
7
|
|
|
|
9
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of intrinsic charges for revised measurement dates
|
|
|
1,082
|
|
|
|
850
|
|
|
|
793
|
|
|
|
2,725
|
|
Repriced annual merit grant
|
|
|
(365
|
)
|
|
|
143
|
|
|
|
152
|
|
|
|
(70
|
)
|
Correction of accounting errors, primarily options historically
accounted for as variable awards
|
|
|
(197
|
)
|
|
|
525
|
|
|
|
(50
|
)
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
520
|
|
|
$
|
1,518
|
|
|
$
|
895
|
|
|
$
|
2,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
Diluted shares increased by less than 0.1 million and
0.2 million for the three and nine months ended
September 30, 2005, respectively, as a result of the
restatement adjustments to correct the past accounting for stock
19
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 adjustments to deferred tax
assets in those jurisdictions where a tax deduction can be
claimed totaling an increase of $0.9 million as of
December 31, 2005, 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 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 from amounts previously reported as of
December 31, 2005, 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 the 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 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 of $9.6 million, and
$19 million in the three and nine months ended
September 30, 2005 and an increase in net income by
$6.1 million in periods prior to 2005 as discussed further
below.
Revenue
corrections
We identified and corrected various errors in previously
reported net revenue. In this restatement we decreased net
revenue by $2.6 million and $9.0 million in the three
and nine months ended September 30, 2005, respectively, and
increased revenue by $0.7 million in periods prior to 2005
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.
20
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cost of
net revenue
We increased cost of net revenue by $2.7 million and
$9.3 million for the three and nine months ended
September 30, 2005, respectively, and increased cost of net
revenue by $4.7 million in periods prior to 2005 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 net
revenue that had been allocated in error to operating costs,
(iii) manual journal entries for intercompany accounts not
being reconciled timely, (iv) incorrect calculation and
classification of revenue-share payments as cost of net revenue
and (v) incorrect recording of amortization of purchase
technology due to incorrect amortization periods and recording
of purchase accounting adjustments.
Operating
costs
We increased operating costs by $1.1 million and
$0.4 million in the three and nine months ended
September 30, 2005, respectively, and increased operating
costs by $0.7 million in periods prior to 2005 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
revenue 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.
Interest
and other income
Interest and other income decreased by $0.7 million in the
three months ended September 30, 2005, increased by
$1.5 million in the nine months ended September 30,
2005 and decreased $1.6 million in periods prior to 2005 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
$3.5 million and $5.6 million in the three and nine
months ended September 30, 2005 and decreasing tax expense
by $9.4 million in periods prior to 2005, 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 $1.0 million,
$3.8 million and $3.0 million in the three and nine
months ended September 30, 2005 and in periods prior to
2005, respectively.
21
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restatement
Impact on Financial Statements
The following table reconciles previously reported net income to
restated net income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2005
|
|
|
September 30, 2005
|
|
|
Net income, as previously reported
|
|
$
|
22,547
|
|
|
$
|
100,215
|
|
Additional stock-based compensation expense
|
|
|
(895
|
)
|
|
|
(2,933
|
)
|
Income tax impact of additional stock-based compensation expense
|
|
|
230
|
|
|
|
690
|
|
Other adjustments, net of tax
|
|
|
(9,569
|
)
|
|
|
(19,000
|
)
|
|
|
|
|
|
|
|
|
|
Net income, as restated
|
|
$
|
12,313
|
|
|
$
|
78,972
|
|
|
|
|
|
|
|
|
|
|
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,
2005 beginning balance of retained earnings are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit on
|
|
|
|
|
|
|
Stock-Based
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Additional
|
|
|
|
Compensation
|
|
|
Additional
|
|
|
Stock-Based
|
|
|
Stock-Based
|
|
|
Stock-Based
|
|
|
|
Expense, as
|
|
|
Stock-Based
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Compensation
|
|
For the Year Ended
|
|
Previously
|
|
|
Compensation
|
|
|
Expense,
|
|
|
Expense, as
|
|
|
Expense, Net of
|
|
December 31,
|
|
Reported
|
|
|
Expense(1)
|
|
|
as Restated
|
|
|
Restated(2)
|
|
|
Tax, as Restated
|
|
|
2004
|
|
$
|
14,320
|
|
|
$
|
10,843
|
|
|
$
|
25,163
|
|
|
$
|
(3,662
|
)
|
|
$
|
7,181
|
|
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
|
|
$
|
100,456
|
|
|
$
|
133,943
|
|
|
$
|
234,399
|
|
|
$
|
(46,218
|
)
|
|
$
|
87,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax impact of additional stock-based compensation expense
|
|
|
|
|
|
|
(46,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of stock-based compensation adjustments
through December 31, 2004
|
|
|
|
|
|
|
87,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments, net of tax, through December 31, 2004
|
|
|
|
|
|
|
(6,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect at January 1, 2005 in the beginning
balance of retained earnings
|
|
|
|
|
|
$
|
81,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
22
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
compensation expense and various other adjustments resulting
from the impact of additional stock-based compensation recorded
in the applicable year. |
The following table reflects the impact of the restatement on
stock-based compensation expense in our consolidated statements
of income for the quarters ended March 31, 2005,
June 30, 2005 and September 30, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Three Months Ended
|
|
Reported
|
|
|
Expense(1)
|
|
|
as Restated
|
|
|
Restated(2)
|
|
|
Tax, as Restated
|
|
|
March 31, 2005
|
|
$
|
(3,292
|
)
|
|
$
|
520
|
|
|
$
|
(2,772
|
)
|
|
$
|
(230
|
)
|
|
$
|
290
|
|
June 30, 2005
|
|
|
2,368
|
|
|
|
1,518
|
|
|
|
3,886
|
|
|
|
(230
|
)
|
|
|
1,288
|
|
September 30, 2005
|
|
|
2,993
|
|
|
|
895
|
|
|
|
3,888
|
|
|
|
(230
|
)
|
|
|
665
|
|
|
|
|
(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. |
23
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables reconcile the impact of the additional
non-cash expenses for stock-based compensation, other
adjustments that were previously considered to be immaterial,
and the related tax effects on our financial statements as of
December 31, 2005 and for the three and nine months ended
September 30, 2005:
Condensed
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
(As previously
|
|
|
(Adjustments)(1)
|
|
|
(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
|
|
Accrued marketing
|
|
|
15,172
|
|
|
|
|
|
|
|
15,172
|
|
Other accrued liabilities
|
|
|
66,839
|
|
|
|
3,449
|
|
|
|
70,288
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes adjustments for the impact of accounting errors on the
year ended December 31, 2005, as well as the impact of
errors in 2004 and prior. |
24
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidated Statements of Income and Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005
|
|
|
Nine Months Ended September 30, 2005
|
|
|
|
(As previously
|
|
|
(Adjustments)
|
|
|
(As restated)
|
|
|
(As previously
|
|
|
(Adjustments)
|
|
|
(As restated)
|
|
|
|
reported)
|
|
|
|
|
|
|
|
|
reported)
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
(Unaudited)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
141,195
|
(1)
|
|
$
|
737
|
|
|
$
|
141,932
|
|
|
$
|
406,553
|
|
|
$
|
4,038
|
|
|
$
|
410,591
|
|
Subscription
|
|
|
90,891
|
(1)
|
|
|
|
|
|
|
90,891
|
|
|
|
236,797
|
|
|
|
|
|
|
|
236,797
|
|
Product
|
|
|
20,825
|
(1)
|
|
|
(3,359
|
)
|
|
|
17,466
|
|
|
|
90,670
|
|
|
|
(12,991
|
)
|
|
|
77,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
252,911
|
|
|
|
(2,622
|
)
|
|
|
250,289
|
|
|
|
734,020
|
|
|
|
(8,953
|
)
|
|
|
725,067
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
|
7,847
|
(1)
|
|
|
(2,165
|
)
|
|
|
5,682
|
|
|
|
22,496
|
|
|
|
(4,369
|
)
|
|
|
18,127
|
|
Subscription
|
|
|
14,909
|
(1)
|
|
|
1,555
|
|
|
|
16,464
|
|
|
|
39,128
|
|
|
|
6,930
|
|
|
|
46,058
|
|
Product
|
|
|
10,399
|
(1)
|
|
|
2,736
|
|
|
|
13,135
|
|
|
|
39,308
|
|
|
|
5,094
|
|
|
|
44,402
|
|
Amortization of purchased technology
|
|
|
3,938
|
|
|
|
563
|
|
|
|
4,501
|
|
|
|
11,674
|
|
|
|
1,689
|
|
|
|
13,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
|
37,093
|
|
|
|
2,689
|
|
|
|
39,782
|
|
|
|
112,606
|
|
|
|
9,344
|
|
|
|
121,950
|
|
Operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
46,960
|
|
|
|
228
|
|
|
|
47,188
|
|
|
|
130,074
|
|
|
|
203
|
|
|
|
130,277
|
|
Marketing and sales
|
|
|
71,878
|
|
|
|
839
|
|
|
|
72,717
|
|
|
|
219,198
|
|
|
|
3,300
|
|
|
|
222,498
|
|
General and administrative
|
|
|
28,626
|
|
|
|
988
|
|
|
|
29,614
|
|
|
|
92,473
|
|
|
|
(174
|
)
|
|
|
92,299
|
|
Amortization of intangibles
|
|
|
2,876
|
|
|
|
30
|
|
|
|
2,906
|
|
|
|
10,109
|
|
|
|
(73
|
)
|
|
|
10,036
|
|
Restructuring (benefits) charges
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
5,962
|
|
|
|
51
|
|
|
|
6,013
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
4,000
|
|
SEC settlement charge
|
|
|
50,000
|
|
|
|
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs
|
|
|
200,330
|
|
|
|
2,085
|
|
|
|
202,415
|
|
|
|
511,816
|
|
|
|
3,307
|
|
|
|
515,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
15,488
|
|
|
|
(7,396
|
)
|
|
|
8,092
|
|
|
|
109,598
|
|
|
|
(21,604
|
)
|
|
|
87,994
|
|
Interest and other income
|
|
|
7,313
|
|
|
|
(656
|
)
|
|
|
6,657
|
|
|
|
17,155
|
|
|
|
1,510
|
|
|
|
18,665
|
|
Gain (loss) on investments, net
|
|
|
(160
|
)
|
|
|
|
|
|
|
(160
|
)
|
|
|
(1,106
|
)
|
|
|
|
|
|
|
(1,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
22,641
|
|
|
|
(8,052
|
)
|
|
|
14,589
|
|
|
|
125,647
|
|
|
|
(20,094
|
)
|
|
|
105,553
|
|
Provision for income taxes
|
|
|
94
|
|
|
|
2,182
|
|
|
|
2,276
|
|
|
|
25,432
|
|
|
|
1,149
|
|
|
|
26,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,547
|
|
|
$
|
(10,234
|
)
|
|
$
|
12,313
|
|
|
$
|
100,215
|
|
|
$
|
(21,243
|
)
|
|
$
|
78,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities, net of
reclassification adjustment for losses recognized on marketable
securities during the period and income tax
|
|
$
|
(462
|
)
|
|
$
|
|
|
|
$
|
(462
|
)
|
|
$
|
(943
|
)
|
|
$
|
|
|
|
$
|
(943
|
)
|
Foreign currency translation loss
|
|
|
3,072
|
|
|
|
869
|
|
|
|
3,941
|
|
|
|
2,578
|
|
|
|
(867
|
)
|
|
|
1,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
25,157
|
|
|
$
|
(9,365
|
)
|
|
$
|
15,792
|
|
|
$
|
101,850
|
|
|
$
|
(22,110
|
)
|
|
$
|
79,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Basic
|
|
$
|
0.14
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.07
|
|
|
$
|
0.61
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Diluted
|
|
$
|
0.13
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.07
|
|
|
$
|
0.60
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation Basic
|
|
|
166,221
|
|
|
|
(47
|
)
|
|
|
166,174
|
|
|
|
164,245
|
|
|
|
(44
|
)
|
|
|
164,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation Diluted
|
|
|
170,712
|
|
|
|
44
|
|
|
|
170,756
|
|
|
|
168,383
|
|
|
|
151
|
|
|
|
168,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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- |
25
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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 service 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 three and nine months ended
September 30, 2005. Total net revenues and cost of net
revenues were not affected by the change. |
The following table presents our three and nine months ended
September 30, 2005 net revenue and cost of net revenue
as previously reported on our quarterly report on
Form 10-Q
filed on November 4, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2005
|
|
|
September 30, 2005
|
|
|
|
(As previously reported)
|
|
|
(As previously reported)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
32,578
|
|
|
$
|
121,528
|
|
Service and support
|
|
|
220,333
|
|
|
|
612,492
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
252,911
|
|
|
$
|
734,020
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
10,282
|
|
|
$
|
38,793
|
|
Service and support
|
|
|
22,873
|
|
|
|
62,139
|
|
Amortization of purchased technology
|
|
|
3,938
|
|
|
|
11,674
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
$
|
37,093
|
|
|
$
|
112,606
|
|
|
|
|
|
|
|
|
|
|
The following table presents our revised net revenue and cost of
net revenue presentation for the three and nine months ended
September 30, 2005, prior to the effect of restatement
adjustments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2005
|
|
|
September 30, 2005
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
141,195
|
|
|
$
|
406,553
|
|
Subscription
|
|
|
90,891
|
|
|
|
236,797
|
|
Product
|
|
|
20,825
|
|
|
|
90,670
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
252,911
|
|
|
$
|
734,020
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
7,847
|
|
|
$
|
22,496
|
|
Subscription
|
|
|
14,909
|
|
|
|
39,128
|
|
Product
|
|
|
10,399
|
|
|
|
39,308
|
|
Amortization of purchased technology
|
|
|
3,938
|
|
|
|
11,674
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
$
|
37,093
|
|
|
$
|
112,606
|
|
|
|
|
|
|
|
|
|
|
26
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005
|
|
|
|
(As previously
|
|
|
(Adjustments)
|
|
|
(As restated)
|
|
|
|
reported)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
100,215
|
|
|
$
|
(21,243
|
)
|
|
$
|
78,972
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
49,556
|
|
|
|
1,383
|
|
|
|
50,939
|
|
Deferred income taxes
|
|
|
(13,020
|
)
|
|
|
4,574
|
|
|
|
(8,446
|
)
|
Stock-based compensation charges
|
|
|
2,069
|
|
|
|
2,933
|
|
|
|
5,002
|
|
Tax benefit from exercise of nonqualified stock options
|
|
|
27,900
|
|
|
|
(5,559
|
)
|
|
|
22,341
|
|
Changes in assets and liabilities, net of acquisitions and
divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
30,927
|
|
|
|
1,719
|
|
|
|
32,646
|
|
Prepaid expenses, prepaid taxes and other assets
|
|
|
(11,133
|
)
|
|
|
2,035
|
|
|
|
(9,098
|
)
|
Accounts payable and other accrued liabilities
|
|
|
10,587
|
|
|
|
6,580
|
|
|
|
17,167
|
|
Deferred revenue
|
|
|
85,848
|
|
|
|
7,578
|
|
|
|
93,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect on cash flows from operations
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
|
34,275
|
|
|
|
348
|
|
|
|
34,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from income tax refunds
|
|
|
|
|
|
|
1,790
|
|
|
|
1,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
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 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 for the most recent offering period 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.
27
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
There were no shares issued in the three months ended
September 30, 2006 and 0.4 million shares were issued
in the three months ended September 30, 2005 under the
ESPP. The total intrinsic value of shares issued under the ESPP
during the three months ended September 30, 2005 was
$6.3 million at a weighted average issue price of $15.16.
In the nine months ended September 30, 2006 and
September 30, 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 the nine months
ended September 30, 2006 and September 30, 2005 was
$2.4 million and $11.1 million, respectively. During
the three and nine months ended September 30, 2006 we
recognized $0.3 million and $1.9 million,
respectively, of stock compensation associated with the ESPP.
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
September 30, 2006, we have no stock-based issuances
outstanding with third-party contractors or consultants.
Certain options issued under the 1997 Plan may be exercised
immediately upon granting, however 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 0.4 million shares of our common stock. We have
reserved 0.7 million 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.
28
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Plan
Activity
A summary of the activity of our employee stock options during
the three and nine months ended September 30, 2006, and
details regarding the options outstanding and exercisable at
September 30, 2006 are provided below (in thousands, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2006
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Life (Yrs)
|
|
|
Value
|
|
|
Outstanding at beginning of period
|
|
|
14,756
|
|
|
$
|
20.58
|
|
|
|
16,065
|
|
|
$
|
19.77
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
434
|
|
|
|
22.49
|
|
|
|
1,842
|
|
|
|
24.19
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(161
|
)
|
|
|
14.67
|
|
|
|
(1,634
|
)
|
|
|
15.53
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(560
|
)
|
|
|
21.29
|
|
|
|
(1,804
|
)
|
|
|
20.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
14,469
|
|
|
$
|
20.68
|
|
|
|
14,469
|
|
|
$
|
20.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, expected to vest
|
|
|
12,135
|
|
|
$
|
20.34
|
|
|
|
12,135
|
|
|
$
|
20.34
|
|
|
|
6.5
|
|
|
$
|
62,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
|
|
|
7,365
|
|
|
$
|
18.89
|
|
|
|
7,365
|
|
|
$
|
18.89
|
|
|
|
5.2
|
|
|
$
|
47,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the three
months ended September 30, 2006 and September 30, 2005
was $1.5 million and $29.0 million, respectively. The
total intrinsic value of options exercised during the nine
months ended September 30, 2006 and September 30, 2005
was $16.2 million and $89.7 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 and
employee stock purchase rights in the three and nine months
ended September 30, 2006 was $0.9 million and
$6.9 million, respectively. We realized a tax benefit of
$31.9 million in the three and nine months ended
September 30, 2005.
A summary of the activity for restricted stock awards and
restricted stock units during the three and nine months ended
September 30, 2006 is provided below (in thousands, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2006
|
|
|
September 30, 2006
|
|
|
|
|
|
|
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
|
|
|
Units
|
|
|
Fair Value
|
|
|
Awards
|
|
|
Fair Value
|
|
|
Unvested at beginning of period
|
|
|
3,424
|
|
|
$
|
23.78
|
|
|
|
190
|
|
|
$
|
29.02
|
|
|
|
|
|
|
$
|
|
|
|
|
185
|
|
|
$
|
29.79
|
|
Grants
|
|
|
24
|
|
|
|
23.23
|
|
|
|
|
|
|
|
|
|
|
|
3,625
|
|
|
|
23.77
|
|
|
|
30
|
|
|
|
23.76
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
30.74
|
|
|
|
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
29.79
|
|
Canceled
|
|
|
(100
|
)
|
|
|
23.71
|
|
|
|
|
|
|
|
|
|
|
|
(277
|
)
|
|
|
23.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at end of period
|
|
|
3,348
|
|
|
$
|
23.78
|
|
|
|
153
|
|
|
$
|
28.61
|
|
|
|
3,348
|
|
|
$
|
23.78
|
|
|
|
153
|
|
|
$
|
28.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted-average remaining contractual life for unvested
restricted stock units and restricted stock awards at
September 30, 2006 was 2.4 years and 1.9 years,
respectively. The 24,000 restricted stock units granted in the
three months ended September 30, 2006 under the 1997 Plan
were valued at $0.3 million when reduced by estimated
forfeitures. The total fair value of restricted stock awards
vested during the three months ended September 30, 2006 was
$0.8 million. No restricted stock awards vested during the
three months ended September 30, 2005.
The 3.6 million restricted stock units granted in the nine
months ended September 30, 2006 under the 1997 Plan were
valued at $50.5 million when reduced by estimated
forfeitures. The total fair value of restricted stock awards
vested during the nine months ended September 30, 2006 and
September 30, 2005 was $1.5 million and
$1.2 million, respectively.
Shares available for future grants to employees under our stock
incentive plans totaled 4.8 million at September 30,
2006. Our management currently plans to issue new shares for the
vesting of restricted stock awards and restricted stock units
and exercises 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 following table
summarizes stock-based compensation expense in accordance with
the provisions of SFAS 123(R) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2006
|
|
|
September 30, 2006
|
|
|
Amortization of fair value of options issued to employees
|
|
$
|
6,955
|
|
|
$
|
24,677
|
|
Cash settlement of options
|
|
|
2,668
|
|
|
|
2,668
|
|
Restricted stock awards and units
|
|
|
4,984
|
|
|
|
11,447
|
|
Employee Stock Purchase Plan
|
|
|
257
|
|
|
|
1,864
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
14,864
|
|
|
$
|
40,656
|
|
|
|
|
|
|
|
|
|
|
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
expenses 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).
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 September 30, 2006, we have recorded a
liability 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
30
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
The following table summarizes the stock-based compensation
expense by income statement line item that we recorded in
accordance with the provisions of SFAS 123(R) (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2006
|
|
|
September 30, 2006
|
|
|
Cost of net revenue service and support
|
|
$
|
546
|
|
|
$
|
1,503
|
|
Cost of net revenue subscription
|
|
|
180
|
|
|
|
485
|
|
Cost of net revenue product
|
|
|
190
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in cost of net revenue
|
|
|
916
|
|
|
|
2,564
|
|
Research and development
|
|
|
4,299
|
|
|
|
11,637
|
|
Marketing and sales
|
|
|
6,158
|
|
|
|
16,257
|
|
General and administrative
|
|
|
3,491
|
|
|
|
10,198
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expenses
|
|
|
13,948
|
|
|
|
38,092
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense related to stock-based
equity awards
|
|
|
14,864
|
|
|
|
40,656
|
|
|
|
|
|
|
|
|
|
|
Deferred tax benefit
|
|
|
(2,966
|
)
|
|
|
(10,014
|
)
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense related to stock-based
equity awards, net of tax
|
|
$
|
11,898
|
|
|
$
|
30,642
|
|
|
|
|
|
|
|
|
|
|
We had no stock-based compensation costs capitalized as part of
the cost of an asset.
The adoption of SFAS 123(R) compared to the prior
accounting policy we applied to stock-based compensation had the
following impact to results reported for the three months ended
September 30, 2006 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
Using
|
|
|
for
|
|
|
Using
|
|
|
|
APB 25
|
|
|
SFAS 123(R)
|
|
|
SFAS 123(R)
|
|
|
Stock-based compensation expense included in cost of net revenue
and operating expenses
|
|
$
|
10,056
|
|
|
$
|
4,808
|
|
|
$
|
14,864
|
|
Income from operations
|
|
|
41,598
|
|
|
|
(4,808
|
)
|
|
|
36,790
|
|
Income before provision for income taxes
|
|
|
55,674
|
|
|
|
(4,808
|
)
|
|
|
50,866
|
|
Net income
|
|
|
37,172
|
|
|
|
(3,082
|
)
|
|
|
34,090
|
|
Net income per share basic
|
|
$
|
0.23
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.21
|
|
Net income per share diluted
|
|
$
|
0.23
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.21
|
|
31
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The adoption of SFAS 123(R) compared to the prior
accounting policy we applied to stock-based compensation had the
following impact to results reported for the nine months ended
September 30, 2006 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
Using
|
|
|
for
|
|
|
Using
|
|
|
|
APB 25
|
|
|
SFAS 123(R)
|
|
|
SFAS 123(R)
|
|
|
Stock-based compensation expense included in cost of net revenue
and operating expenses
|
|
$
|
19,821
|
|
|
$
|
20,835
|
|
|
$
|
40,656
|
|
Income from operations
|
|
|
126,268
|
|
|
|
(20,835
|
)
|
|
|
105,433
|
|
Income before provision for income taxes
|
|
|
158,921
|
|
|
|
(20,835
|
)
|
|
|
138,086
|
|
Net income
|
|
|
117,950
|
|
|
|
(13,355
|
)
|
|
|
104,595
|
|
Net income per share basic
|
|
$
|
0.73
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.65
|
|
Net income per share diluted
|
|
$
|
0.72
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.64
|
|
Cash flows from operating activities
|
|
|
209,084
|
|
|
|
(4,811
|
)
|
|
|
204,273
|
|
Cash flows from financing activities
|
|
|
(202,672
|
)
|
|
|
4,811
|
|
|
|
(197,861
|
)
|
At September 30, 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 $77.9 million, net
of expected forfeitures. We expect to recognize this amount over
a weighted-average period of 2.5 years.
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 the three and nine months ended September 30,
2006 and 2005 are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Stock option grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
4.9
|
%
|
|
|
4.0
|
%
|
|
|
4.8
|
%
|
|
|
3.9
|
%
|
Weighted average expected lives (years)
|
|
|
5.9
|
|
|
|
4.0
|
|
|
|
5.6
|
|
|
|
4.0
|
|
Volatility
|
|
|
34.0
|
%
|
|
|
49.5
|
%
|
|
|
38.4
|
%
|
|
|
55.6
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
|
|
|
|
3.5
|
%
|
|
|
4.6
|
%
|
|
|
3.1
|
%
|
Weighted average expected lives (years)
|
|
|
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
1.1
|
|
Volatility
|
|
|
|
|
|
|
38.0
|
%
|
|
|
38.0
|
%
|
|
|
40.0
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2006 we did not
have any ESPP grants.
32
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value per share of the option awards and employee stock
purchase rights were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Weighted-average grant date fair value of options granted
|
|
$
|
9.41
|
|
|
$
|
12.94
|
|
|
$
|
10.51
|
|
|
$
|
11.16
|
|
Weighted-average fair value of employee stock purchase rights
|
|
|
|
|
|
$
|
7.92
|
|
|
$
|
6.11
|
|
|
$
|
8.41
|
|
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.
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 the
three and nine months ended September 30, 2005 (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2005
|
|
|
September 30, 2005
|
|
|
Net income, as restated
|
|
$
|
12,313
|
|
|
$
|
78,972
|
|
Deduct: Total stock-based compensation expense determined under
fair value based method for all awards, net of tax
|
|
|
(10,114
|
)
|
|
|
(27,622
|
)
|
Add back: Stock-based compensation expense, net of tax, included
in reported net income under APB 25
|
|
|
2,653
|
|
|
|
3,627
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
4,852
|
|
|
$
|
54,977
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share, as restated
|
|
$
|
0.07
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share, as restated
|
|
$
|
0.07
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share, pro forma
|
|
$
|
0.03
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share, pro forma
|
|
$
|
0.03
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
33
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-Based
Compensation Recognized Prior to January 1,
2006
In the three and nine months ended September 30, 2005, we
recorded stock-based compensation expenses under APB 25 which
consisted of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2005
|
|
|
September 30, 2005
|
|
|
Grant date intrinsic value
|
|
$
|
913
|
|
|
$
|
3,170
|
|
Exchange of McAfee.com options
|
|
|
1,552
|
|
|
|
1,207
|
|
Repriced options
|
|
|
1,180
|
|
|
|
10
|
|
Restricted stock awards
|
|
|
243
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
|
3,888
|
|
|
|
5,002
|
|
Deferred tax benefit
|
|
|
(1,235
|
)
|
|
|
(1,375
|
)
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, after-tax
|
|
$
|
2,653
|
|
|
$
|
3,627
|
|
|
|
|
|
|
|
|
|
|
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 the three and nine months ended
September 30, 2005, we recognized stock-based compensation
expense totaling $0.8 million and $2.8 million,
respectively, related to the grant date intrinsic value. For
additional information regarding the intrinsic charges resulting
from revised measurement dates, refer to Note 3.
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 recorded stock-based compensation of
$0.1 million and $0.4 million in the three and nine
months ended September 30, 2005, respectively, related to
the unvested stock options exchanged in the Foundstone
acquisition.
Exchange of McAfee.com options. On
September 13, 2002, we acquired the remaining minority
interest in our McAfee.com subsidiary. McAfee.com option holders
received options for 0.675 of a share of our common stock plus
$11.85 in cash, which is paid to the option holder upon exercise
of the option and without interest. McAfee.com options to
purchase 4.1 million shares were converted into options to
purchase 2.8 million shares of our common stock. The
assumed options 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
each reporting period based on our common stock fair market
value at the end of each report period.
The stock-based compensation expense of $1.6 million in the
three months ended September 30, 2005 was due to an
increase in our stock price from $26.18 at June 30, 2005 to
$31.42 at September 30, 2005. The stock-based compensation
expense of $1.2 million in the nine months ended
September 30, 2005 was due to an increase in our stock
price from $28.93 at December 31, 2004 to $31.42 at
September 30, 2005.
Repriced options. The 1999 annual merit grant
consisted of 2.1 million options which had an original
measurement date of April 20, 1999. The key terms were
determined with finality for 1.6 million of these options
in March 1999, and the exercise price was reduced to $11.06 on
April 20, 1999, which was considered 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.
34
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
The stock-based compensation expense of $1.2 million in the
three months ended September 30, 2005 was due to an
increase in our stock price from $26.18 at June 30, 2005 to
$31.42 at September 30, 2005. The stock-based compensation
expense of less than $0.1 million in the nine months ended
September 30, 2005 was due to an increase in our stock
price from $28.93 at December 31, 2004 to $31.42 at
September 30, 2005. These options were fully vested prior
to December 31, 2005, therefore, no stock-based
compensation expense was recognized after the adoption of
SFAS 123(R).
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 to
our chief financial officer. The price of the underlying shares
is $0.01 per share. The shares will vest over three years from
the date of grant. The fair value of the restricted stock award
was determined to be $2.1 million and was based on the
difference between the exercise price of the restricted stock
award and the fair value of the common stock on the date of
grant. We recorded total expense of $0.2 million and
$0.6 million during the three and nine months ended
September 30, 2005, respectively, related to the
stock-based compensation associated with restricted stock award
grants.
In January 2002, our board of directors approved a grant of
50,000 shares of restricted stock to our former chief
executive officer. The price of the underlying shares is $0.01
per share. The shares vested and our right to repurchase such
shares lapsed as follows: 3,000 vested as of the grant date and
47,000 were restricted until 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. During the three
months ended September 30, 2005, we recorded no stock-based
compensation related to our former chief executive
officers 2002 restricted stock grant. During the nine
months ended September 30, 2005, we recorded less than
$0.1 million related to stock-based compensation associated
with our former chief executive officers restricted stock
award grant.
35
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The pre-tax stock-based compensation expense of
$3.9 million and $5.0 million in the three and nine
months ended September 30, 2005, respectively, is included
in the following line items in our condensed consolidated
statement of income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2005
|
|
|
September 30, 2005
|
|
|
Cost of net revenue service and support
|
|
$
|
6
|
|
|
$
|
10
|
|
Cost of net revenue subscription
|
|
|
15
|
|
|
|
25
|
|
Cost of net revenue product
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in cost of net revenue
|
|
|
20
|
|
|
|
31
|
|
Research and development
|
|
|
2,080
|
|
|
|
1,221
|
|
Marketing and sales
|
|
|
786
|
|
|
|
1,480
|
|
General and administrative
|
|
|
1,002
|
|
|
|
2,270
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expenses
|
|
|
3,868
|
|
|
|
4,971
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense related to stock-based
equity awards
|
|
$
|
3,888
|
|
|
$
|
5,002
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Business
Combinations and Divestitures
|
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, which we plan
to introduce in 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 and would cost $0.5 million. As
of September 30, 2006, this development effort was
complete. 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 September 30, 2006,
$0.1 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., (SiteAdvisor) a web
safety consumer software company that tests and rates internet
sites on an ongoing basis, for $60.8 million in cash
36
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 September 30, 2006,
$3.3 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 Preventsys and
SiteAdvisor as adjusted for resolution of ongoing purchase price
valuation procedures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preventsys
|
|
|
Site Advisor
|
|
|
Total
|
|
|
Technology
|
|
$
|
3,540
|
|
|
$
|
15,450
|
|
|
$
|
18,990
|
|
Other intangibles
|
|
|
890
|
|
|
|
420
|
|
|
|
1,310
|
|
Goodwill
|
|
|
210
|
|
|
|
50,622
|
|
|
|
50,832
|
|
Cash
|
|
|
23
|
|
|
|
14
|
|
|
|
37
|
|
Other assets
|
|
|
661
|
|
|
|
485
|
|
|
|
1,146
|
|
Deferred tax assets
|
|
|
2,043
|
|
|
|
377
|
|
|
|
2,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
7,367
|
|
|
|
67,368
|
|
|
|
74,735
|
|
Accrued liabilities
|
|
|
1,030
|
|
|
|
37
|
|
|
|
1,067
|
|
Deferred revenue
|
|
|
203
|
|
|
|
|
|
|
|
203
|
|
Deferred tax liabilities
|
|
|
1,750
|
|
|
|
6,269
|
|
|
|
8,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
2,983
|
|
|
|
6,306
|
|
|
|
9,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
4,384
|
|
|
|
61,062
|
|
|
|
65,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development expensed
|
|
|
460
|
|
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisition cost
|
|
$
|
4,844
|
|
|
$
|
61,062
|
|
|
$
|
65,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The results of operations for both Preventsys and SiteAdvisor
have been included in our results of operations since the date
of acquisition. Pro forma results of operations 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 security 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 plan 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.
37
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 $13.2 million of goodwill (none of which is
deductible for tax purposes). The following is a summary of the
assets acquired and liabilities assumed in the acquisition of
Wireless Security Corporation as adjusted for 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 plan to integrate in our small business managed solution. At
the date of acquisition, we estimated that 60% of the
development effort had been completed and that the remaining 40%
of the development would take three 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 $1.3 million. At September 30, 2006,
$1.1 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.
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. 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 condensed consolidated results of operations,
are included in income from operations through the date of sale
for the three and nine months ended September 30, 2005.
We had no net revenue from McAfee Labs in the three months ended
September 30, 2005 and $1.9 million in the nine months
ended September 30, 2005, respectively.
38
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Goodwill
and Other Intangible Assets
|
We account for goodwill and other intangible assets in
accordance with SFAS No. 142, Goodwill and
Other Intangible Assets. Specifically, we perform an
impairment review of our goodwill on at least an annual basis
and amortize all other intangible assets over their estimated
useful lives.
Our goodwill impairment review is conducted as of October 1 of
each year or earlier if indicators of impairment exist. In 2005,
our analysis 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.
Goodwill by geographic region is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
December 31,
|
|
|
Goodwill
|
|
|
|
|
|
Currency
|
|
|
September 30,
|
|
|
|
2005
|
|
|
Acquired
|
|
|
Adjustments
|
|
|
Exchange
|
|
|
2006
|
|
|
North America
|
|
$
|
353,032
|
|
|
$
|
34,160
|
|
|
$
|
(9
|
)
|
|
$
|
315
|
|
|
$
|
387,498
|
|
EMEA
|
|
|
49,929
|
|
|
|
10,554
|
|
|
|
(1
|
)
|
|
|
243
|
|
|
|
60,725
|
|
Japan
|
|
|
17,500
|
|
|
|
1,266
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
18,765
|
|
Asia-Pacific (excluding Japan)
|
|
|
5,943
|
|
|
|
3,932
|
|
|
|
|
|
|
|
|
|
|
|
9,875
|
|
Latin America
|
|
|
11,084
|
|
|
|
920
|
|
|
|
|
|
|
|
(171
|
)
|
|
|
11,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
437,488
|
|
|
$
|
50,832
|
|
|
$
|
(11
|
)
|
|
$
|
387
|
|
|
$
|
488,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The adjustment to goodwill during the nine months ended
September 30, 2006 resulted from Foundstone stock
compensation and the realization of net deferred tax assets from
the Foundstone acquisition in the first quarter of 2006. During
the second quarter of 2006, we acquired SiteAdvisor and
Preventsys. See Note 5 for additional information.
The components of intangible assets are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
(Including
|
|
|
|
|
|
|
|
|
(Including
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Effects of
|
|
|
|
|
|
|
|
|
Effects of
|
|
|
|
|
|
|
Average
|
|
Gross
|
|
|
Foreign
|
|
|
Net
|
|
|
Gross
|
|
|
Foreign
|
|
|
Net
|
|
|
|
Useful
|
|
Carrying
|
|
|
Currency
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Currency
|
|
|
Carrying
|
|
|
|
Life
|
|
Amount
|
|
|
Exchange)
|
|
|
Amount
|
|
|
Amount
|
|
|
Exchange)
|
|
|
Amount
|
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technologies
|
|
4.9 years
|
|
$
|
163,289
|
|
|
$
|
(110,387
|
)
|
|
$
|
52,902
|
|
|
$
|
141,999
|
|
|
$
|
(91,884
|
)
|
|
$
|
50,115
|
|
Trademarks and patents
|
|
5.0 years
|
|
|
28,944
|
|
|
|
(28,783
|
)
|
|
|
161
|
|
|
|
28,944
|
|
|
|
(27,051
|
)
|
|
|
1,893
|
|
Customer base and other intangibles
|
|
6.7 years
|
|
|
64,272
|
|
|
|
(41,458
|
)
|
|
|
22,814
|
|
|
|
62,970
|
|
|
|
(34,892
|
)
|
|
|
28,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
256,505
|
|
|
$
|
(180,628
|
)
|
|
$
|
75,877
|
|
|
$
|
233,913
|
|
|
$
|
(153,827
|
)
|
|
$
|
80,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amortization expenses for the intangible assets
listed above totaled $8.6 million and $7.4 million in
the three months ended September 30, 2006 and 2005,
respectively, and $24.5 million and $23.4 million in
the nine months ended September 30, 2006 and 2005,
respectively.
39
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Expected future intangible asset amortization expense as of
September 30, 2006 is as follows (in thousands):
|
|
|
|
|
Years:
|
|
|
|
|
Remainder of 2006
|
|
$
|
8,088
|
|
2007
|
|
|
29,391
|
|
2008
|
|
|
21,555
|
|
2009
|
|
|
11,307
|
|
2010
|
|
|
4,414
|
|
Thereafter
|
|
|
1,122
|
|
|
|
|
|
|
|
|
$
|
75,877
|
|
|
|
|
|
|
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 September 30, 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
|
|
|
(551
|
)
|
|
|
|
|
|
|
|
|
|
|
(551
|
)
|
Adjustment to liability
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
Effects of foreign currency exchange
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
Accretion
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 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 $0.1 million at September 30, 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 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
40
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$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 the first quarter of 2006, we made adjustments to our
restructuring accrual totaling $0.3 million attributable to
a change in assumptions related to commissions on new and
existing subleases. During the second quarter of 2006, we made
adjustments to our restructuring accrual totaling
$0.1 million attributable to a change in assumptions
related to property taxes on an existing lease.
During the third quarter of 2006, we decreased our restructuring
accrual by $0.4 million attributable to subleased
facilities in Amsterdam and Santa Clara.
41
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes our restructuring accruals
established in 2004 and activity through September 30, 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
|
|
|
(1,745
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,745
|
)
|
Adjustment to liability
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
Effects of foreign currency exchange
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
Accretion
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006
|
|
$
|
5,910
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 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 $4.2 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
$5.0 million at September 30, 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 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
42
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reductions was $0.9 million and $5.8 million in our
North American and EMEA operating segments, respectively. 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 in 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 the first quarter of 2006, we made adjustments to our
restructuring accrual totaling $0.1 million attributable to
a change in assumptions related to commissions on existing
subleases. During the second quarter of 2006, we made
adjustments to our restructuring accrual totaling
$0.2 million attributable to a change in assumptions
related to property taxes on an existing lease. During the third
quarter of 2006, we decreased our restructuring accrual by
$1.1 million attributable to favorable changes in the
market rates associated with our subleased space.
The following table summarizes our restructuring accrual
established in 2003 and activity through September 30, 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
|
|
|
(1,271
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,271
|
)
|
Adjustment to liability
|
|
|
(753
|
)
|
|
|
|
|
|
|
|
|
|
|
(753
|
)
|
Accretion
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006
|
|
$
|
8,938
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, $2.0 million of the
restructuring accrual is due within 12 months and has been
classified as current accrued liabilities, while the remaining
balance of $6.9 million has been classified as other
43
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
long-term liabilities and will be paid through 2013. Lease
termination costs are net of estimated sublease income of
$8.9 million at September 30, 2006.
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, and 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 allocated to the EMEA, Japan, and North
America operating segments and the facility restructuring
charges in 2004 and 2003 were primarily in the North America
operating segment.
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 September 30, 2006 and
December 31, 2005.
A reconciliation of the numerator and denominator of basic and
diluted net income per share is provided as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Numerator Basic and diluted net income
|
|
$
|
34,090
|
|
|
$
|
12,313
|
|
|
$
|
104,595
|
|
|
$
|
78,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common stock outstanding
|
|
|
159,728
|
|
|
|
166,174
|
|
|
|
161,343
|
|
|
|
164,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common stock outstanding
|
|
|
159,728
|
|
|
|
166,174
|
|
|
|
161,343
|
|
|
|
164,201
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock options, restricted stock units, Employee Stock
Purchase Plan shares and shares subject to repurchase(1)
|
|
|
1,757
|
|
|
|
4,582
|
|
|
|
1,789
|
|
|
|
4,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
|
|
|
161,485
|
|
|
|
170,756
|
|
|
|
163,132
|
|
|
|
168,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Basic
|
|
$
|
0.21
|
|
|
$
|
0.07
|
|
|
$
|
0.65
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Diluted
|
|
$
|
0.21
|
|
|
$
|
0.07
|
|
|
$
|
0.64
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In the three months ended September 30, 2006 and 2005,
8.2 million and 0.7 million options and restricted
stock units to purchase common stock and shares subject to
repurchase, respectively, were excluded from the calculation
since the effect was anti-dilutive. In the nine months ended
September 30, 2006 and 2005, 8.1 million and
1.7 million options and restricted stock units to purchase
common stock, respectively, were excluded from the calculation
since the effect was anti-dilutive. |
44
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our consolidated provision for income taxes for the three months
ended September 30, 2006 and 2005 was $16.8 million
and $2.3 million, respectively, reflecting an effective tax
rate of 33% and 16%, respectively. The effective tax rate for
the three months ended September 30, 2006 differs from the
United States federal statutory rate (statutory
rate) primarily due to the benefit of lower tax rates in
certain foreign jurisdictions offset by adjustments to tax
reserves. The effective tax rate for the three months ended
September 30, 2005 differs from the statutory rate
primarily due to the benefit of lower tax rates in certain
foreign jurisdictions and adjustments to tax reserves. Our
consolidated provision for income taxes for the nine months
ended September 30, 2006 and 2005 was $33.5 million
and $26.6 million, respectively, reflecting an effective
tax rate of 24% and 25%, respectively. The effective tax rate
for the nine months ended September 30, 2006 differs from
the statutory rate primarily due to the benefit of lower tax
rates in certain foreign jurisdictions and adjustments to
valuation allowances partially offset by adjustments to tax
reserves. The effective tax rate for the nine months ended
September 30, 2005 differs from the statutory rate
primarily due to the benefit of lower tax rates in certain
foreign jurisdictions and adjustments to valuation allowances
and tax reserves.
|
|
11.
|
Business
Segment 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.
45
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized financial information concerning our net revenue and
income from operations by geographic region is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net revenue by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
164,166
|
|
|
$
|
140,983
|
|
|
$
|
466,249
|
|
|
$
|
414,751
|
|
EMEA
|
|
|
87,417
|
|
|
|
76,457
|
|
|
|
260,685
|
|
|
|
207,337
|
|
Japan
|
|
|
18,535
|
|
|
|
19,741
|
|
|
|
63,537
|
|
|
|
56,806
|
|
Asia-Pacific, excluding Japan
|
|
|
11,241
|
|
|
|
9,011
|
|
|
|
30,733
|
|
|
|
29,233
|
|
Latin America
|
|
|
5,704
|
|
|
|
4,097
|
|
|
|
18,713
|
|
|
|
16,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
287,063
|
|
|
$
|
250,289
|
|
|
$
|
839,917
|
|
|
$
|
725,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
62,369
|
|
|
$
|
54,479
|
|
|
$
|
170,212
|
|
|
$
|
149,946
|
|
Europe
|
|
|
46,761
|
|
|
|
38,123
|
|
|
|
138,805
|
|
|
|
92,558
|
|
Japan
|
|
|
10,062
|
|
|
|
11,372
|
|
|
|
36,533
|
|
|
|
30,668
|
|
Asia-Pacific, excluding Japan
|
|
|
436
|
|
|
|
1,502
|
|
|
|
416
|
|
|
|
7,188
|
|
Latin America
|
|
|
2,981
|
|
|
|
1,490
|
|
|
|
10,132
|
|
|
|
9,093
|
|
Corporate
|
|
|
(85,819
|
)
|
|
|
(98,874
|
)
|
|
|
(250,665
|
)
|
|
|
(201,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
36,790
|
|
|
$
|
8,092
|
|
|
$
|
105,433
|
|
|
$
|
87,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between income from operations and income before
taxes is reflected on the face of our condensed consolidated
statements of income.
The corporate expenses, which are not considered attributable to
any specific geographic region, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
General and administrative and other operating costs
|
|
$
|
39,675
|
|
|
$
|
26,039
|
|
|
$
|
125,007
|
|
|
$
|
79,391
|
|
Corporate marketing
|
|
|
13,929
|
|
|
|
10,200
|
|
|
|
43,042
|
|
|
|
29,957
|
|
Stock-based compensation
|
|
|
14,864
|
|
|
|
3,888
|
|
|
|
40,656
|
|
|
|
5,002
|
|
Amortization of purchased technology and other intangibles
|
|
|
8,643
|
|
|
|
7,407
|
|
|
|
24,485
|
|
|
|
23,399
|
|
SEC settlement charge
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
50,000
|
|
SEC and compliance costs
|
|
|
7,901
|
|
|
|
|
|
|
|
11,673
|
|
|
|
|
|
Acquisition and retention bonuses
|
|
|
2,146
|
|
|
|
934
|
|
|
|
5,409
|
|
|
|
3,562
|
|
Restructuring (benefit) charges
|
|
|
(1,393
|
)
|
|
|
(10
|
)
|
|
|
(274
|
)
|
|
|
6,013
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
460
|
|
|
|
4,000
|
|
Loss (gain) on sale of assets and technology
|
|
|
54
|
|
|
|
212
|
|
|
|
207
|
|
|
|
(499
|
)
|
Divestiture costs
|
|
|
|
|
|
|
207
|
|
|
|
|
|
|
|
996
|
|
Reimbursement from transition services agreement
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses
|
|
$
|
85,819
|
|
|
$
|
98,874
|
|
|
$
|
250,665
|
|
|
$
|
201,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
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 by, 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.
47
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
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
48
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 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.
|
|
13.
|
Warranty
Accrual and Guarantees
|
We offer warranty on our hardware and software 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 as of
September 30, 2006 and December 31, 2005 follows (in
thousands):
|
|
|
|
|
|
|
Warranty
|
|
|
|
Accrual
|
|
|
Balance, January 1, 2005
|
|
$
|
1,818
|
|
Additional accruals
|
|
|
3,514
|
|
Costs incurred during the period
|
|
|
(4,249
|
)
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
1,083
|
|
Additional accruals
|
|
|
1,855
|
|
Costs incurred during the period
|
|
|
(1,977
|
)
|
|
|
|
|
|
Balance, September 30, 2006
|
|
$
|
961
|
|
|
|
|
|
|
49
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of certain guarantee and
indemnification agreements as of September 30, 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 be awarded against our customer. We include
this infringement indemnification in all of our software license
agreements and selected managed service arrangements. In the
event the customer cannot use the software or service due to
infringement and we can not obtain the right to use, replace or
modify the license or service in a commercially feasible manner
so that it no longer infringes then we may terminate the license
and provide the customer a pro-rata refund of the fees paid by
the customer for the infringing license or service. We have
recorded no liability associated with this indemnification, as
we are not aware of any pending or threatened infringement
actions that are 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.
50
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Item 2.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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Forward-Looking
Statements; Trademarks
This Report on
Form 10-Q
contains forward-looking statements that involve risks and
uncertainties. These statements include, without limitation,
statements regarding our expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements
included in this Report on
Form 10-Q
are based on information available to us on the date hereof.
These statements involve known and unknown risks, uncertainties
and other factors, which may cause our actual results to differ
materially from those implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by
terminology such as may, should,
could, expects, plans,
anticipates, believes,
estimates, predicts,
potential, targets, goals,
projects, continue, or variations of
such words, similar expressions, or the negative of these terms
or other comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Therefore, actual results
may differ materially and adversely from those expressed in any
forward-looking statements. Neither we nor any other person can
assume responsibility for the accuracy and completeness of
forward-looking statements. Important factors that may cause
actual results to differ from expectations include, but are not
limited to, those discussed in Risk Factors in
Part II, Item 1A in this quarterly report. We
undertake no obligation to revise or update publicly any
forward-looking statements for any reason. We encourage you to
read these sections carefully.
This report includes registered trademarks and trade names of
McAfee and other corporations. Trademarks or trade names owned
by McAfee
and/or our
affiliates include: McAfee, Network
Associates, McAfee Security, ePO,
ePolicy Orchestrator, SpamKiller,
VirusScan, Avert,
IntruShield, Entercept, and
Foundstone.
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 ability 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 from primarily three sources
(i) service 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
the nine months ended September 30, 2006, we acquired
SiteAdvisor and Preventsys 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 2006.
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 the three and nine months ended
September 30, 2006 grew by 15% and 16%, respectively,
compared to the same prior-year period. 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
51
income is a key indicator of the profitability of our business.
Our net income for the three and nine months ended
September 30, 2006 grew by 177% and 32%, respectively,
compared to the same prior-year period.
The following discussion and analysis should be read in
conjunction with the Explanatory Note Regarding
Restatement and the audited consolidated financial
statements and the notes thereto, included in our annual report
on Form K for the year ended December 31, 2006 filed
simultaneously with this quarterly report
Form 10-Q.
The following discussion and analysis also reflects the
restatement of financial results, which is more fully described
in Note 3, Restatement of Condensed Consolidated
Financial Statements and Special Committee and Company
Findings to the condensed consolidated financial
statements included in this quarterly report
Form 10-Q.
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. Management discovered
irregularities in certain historical stock option grants during
its initial internal review, and discussed these findings with
our 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 (collectively referred to as
the investigative team). The investigation primarily
focused on the 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 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 a termination 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:
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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
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52
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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.
In each instance, we revised the accounting measurement date
after considering all available relevant evidence. 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 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
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,
consisting of $3.4 million ($2.5 million, net of tax)
for the year ended December 31, 2005, and
$134.0 million ($87.7 million, net of tax) for the
periods 1995 through 2004. Of the $3.4 million stock-based
compensation expense recorded in 2005, we recorded
$0.9 million and $2.9 million respectively for the
three and nine months ended September 30, 2005. We also
expect to amortize, from July 1, 2006, an additional
$0.1 million of such pre-tax charges under Statement of
Financial Accounting No. 123(R) Share-Based
Payment (SFAS 123(R)), in periods
through December 31, 2009.
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 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 a range of fines
and/or
penalties, if any, that might be incurred as a result of the
investigation.
53
Critical
Accounting Policies
Critical
Accounting Policies and Estimates
Effective September 2006, we changed our policy related to
consumer incentive rebates and on January 1, 2006, we
adopted a new policy related to stock-based compensation
pursuant to our adoption of SFAS 123(R), as more fully
described below. We have also described our policy for the
restatement of our stock-based compensation. Other than these
changes, we have made no significant changes in our critical
accounting policies and estimates during the nine months ended
September 30, 2006 as compared to the critical accounting
estimates disclosed in Managements Discussion and
Analysis of Financial Condition and Results of Operations
included in our annual report on
Form 10-K
for the year ended December 31, 2005.
Restatement
of Stock-based Compensation
We previously applied APB 25 and its related interpretations and
provided the required pro forma disclosure under SFAS 123
through the year ended December 31, 2005. Under APB 25,
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 the year ended
December 31, 2006, we adopted SFAS 123(R). As a
result, for 2006, the additional stock-based compensation
expense required to be recorded for these stock options was
equal to the fair value on the revised measurement date for
options vesting in 2006 or later. We did not record the
additional stock-based compensation expense 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
instances such dates were chosen with the benefit of hindsight
so as to give more favorable exercise prices. From January 2005
through March 2005, we had no revised measurement dates. 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 expense 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
54
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 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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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 evaluation of all relevant facts and circumstances
for each grant. 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 could have changed under alternative
methodologies for determining measurement dates for stock option
grants from 1995 through 2005. The following are the judgments
involved in determining revised measurement dates.
55
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 reflected 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 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.
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.
56
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.
If we had used the stock administration DB 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 grant 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, nor were
there 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 reasonable 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 No. 123 Accounting for
Stock-Based Compensation (SFAS 123),
and supersedes APB 25. SFAS 123(R) requires the measurement
and recognition of compensation expense for all stock-based
payment awards made to our employees and directors based on the
estimated fair values of the awards on their grant dates. Our
stock-based awards include stock options, restricted stock
awards, restricted stock units and our ESPP.
In the three and nine months ended September 30, 2006, we
recognized stock compensation expense of $14.9 million and
$40.7 million, respectively. 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
stock-based awards. During the three and nine months ended
September 30, 2005, we recognized stock-based compensation
expense of $3.9 million and $5.0 million,
respectively, related to grant date intrinsic value resulting
from revised accounting measurement dates, the exchange of
McAfee.com options in 2002, the re-pricing of options in 1999
and restricted stock awards. See Note 4 to the condensed
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.
57
For options issued during the three and nine months ended
September 30, 2006, we estimated the weighted-average fair
value to be $9.41 and $10.51, respectively. For employee stock
purchase rights issued during the nine months ended
September 30, 2006, we estimated the weighted-average fair
value to be $6.11. The key assumptions that we used to calculate
this value are provided below:
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2006
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2005
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2006
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2005
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Stock option grants:
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Risk free interest rate
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4.9
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%
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4.0
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%
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4.8
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%
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3.9
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%
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Weighted average expected lives (years)
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5.9
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4.0
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5.6
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4.0
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Volatility
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34.0
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%
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49.5
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%
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38.4
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%
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55.6
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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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3.5
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%
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4.6
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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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0.5
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0.5
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1.1
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Volatility
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|
38.0
|
%
|
|
|
38.0
|
%
|
|
|
40.0
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2006, we did
not have any ESPP grants.
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
the three and nine months ended September 30, 2006 by 10%,
our stock-based compensation expense would increase by
$0.4 million and $1.9 million, respectively, 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 for options
granted during the three and nine months ended
September 30, 2006 by one year, our stock-based
compensation expense would increase by $0.2 million and
$1.1 million, respectively, 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 stock-based awards and only recognize
expense for those awards we expect to vest. The stock-based
compensation expense recognized in our condensed consolidated
statement of operations for the three and nine months ended
September 30, 2006 has been reduced for estimated
forfeitures. If we were to change our estimate of forfeiture
rates, the amount of stock-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% at September 30, 2006, our
stock-based compensation expense for the three and nine months
ended September 30, 2006, net of expected forfeitures,
would have increased by $4.1 million and $4.1 million,
respectively. This decrease in our estimate of expected
forfeitures would increase the amount of expense for all
unvested stock options, restricted stock units, and restricted
stock awards, and employee stock purchase rights that have not
yet been recognized by $15.1 million at September 30,
2006, net of expected forfeitures, amortized over a
weighted-average period of 2.5 years.
58
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 statement of
income and affect our net accounts receivable, deferred revenue
and accrued liabilities line items on our condensed consolidated
balance sheet. These estimates affect all of our operating
geographies. Effective September 2006, in connection with the
launch of our new consumer products, all consumer incentive
rebates are recorded ratably as an offset to consumer revenue,
which is recognized ratably, over the term of the subscription.
At September 30, 2006, our allowance for sales returns and
incentives was $37.8 million compared to $32.0 million
at December 31, 2005. If our allowance for sales returns
and incentives were to increase by 10%, or $3.8 million,
our net revenue would decrease by approximately
$2.9 million in the nine months ended September 30,
2006 and our deferred revenue would decrease by approximately
$0.9 million as of September 30, 2006.
Results
of Operations
Net
Revenue
The following table sets forth, for the periods indicated, a
year-over-year comparison of the key components of our net
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
2006 vs. 2005
|
|
|
September 30,
|
|
|
2006 vs. 2005
|
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
160,388
|
|
|
$
|
141,932
|
|
|
$
|
18,456
|
|
|
|
13
|
%
|
|
$
|
466,298
|
|
|
$
|
410,591
|
|
|
$
|
55,707
|
|
|
|
14
|
%
|
Subscription
|
|
|
110,822
|
|
|
|
90,891
|
|
|
|
19,931
|
|
|
|
22
|
|
|
|
299,197
|
|
|
|
236,797
|
|
|
|
62,400
|
|
|
|
26
|
|
Product
|
|
|
15,853
|
|
|
|
17,466
|
|
|
|
(1,613
|
)
|
|
|
(9
|
)
|
|
|
74,422
|
|
|
|
77,679
|
|
|
|
(3,257
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
287,063
|
|
|
$
|
250,289
|
|
|
$
|
36,774
|
|
|
|
15
|
%
|
|
$
|
839,917
|
|
|
$
|
725,067
|
|
|
$
|
114,850
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
|
56
|
%
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
55
|
%
|
|
|
56
|
%
|
|
|
|
|
|
|
|
|
Subscription
|
|
|
39
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
5
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in net revenue in the three months ended
September 30, 2006 compared to the three months ended
September 30, 2005 reflected (i) a $22.5 million
increase in our corporate business and (ii) a
$14.3 million increase in our consumer business. The
increase in net revenue in the nine months ended
September 30, 2006 compared to the nine months ended
September 30, 2005 reflected (i) a $79.3 million
increase in our corporate business and (ii) a
$37.5 million increase in our consumer business. This
increase was slightly 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 the
three and nine months ended September 30, 2006 compared to
the three and nine months ended September 30, 2005
primarily due to (i) increased corporate spending on McAfee
security products and (ii) increased revenue from our
Foundstone and Intrushield product lines. Net revenue from our
Intrushield and Foundstone product lines increased
$7.8 million and $5.8 million,
59
respectively, in the three months ended September 30, 2006
and $20.6 million and $12.7 million in the nine months
ended September 30, 2006, respectively. Net revenue from
our consumer market increased during the three and nine months
ended September 30, 2006 compared to the three and nine
months ended September 30, 2005 primarily due to
(i) online subscriber growth due partly to an increase in
our customer base and expansion to additional countries,
(ii) increased online renewal subscriptions and
(iii) increased royalty revenue from our strategic channel
partners, such as Gateway, AOL and Dell.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2006 vs. 2005
|
|
|
Nine Months Ended September 30,
|
|
|
2006 vs. 2005
|
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|