e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2005
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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
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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 incorporation or organization)
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(I.R.S. Employer
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
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 Par Value, together with associated
Rights
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one):
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Large
accelerated filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the issuer as of the last business day of the
Registrants most recently completed second fiscal quarter
(June 30, 2005) was approximately $4.3 billion.
The number of shares outstanding of the issuers common
stock as of February 22, 2006 was 166,315,976.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III are
incorporated by reference from the Registrants Proxy
Statement for the Annual Meeting of Stockholders to be held on
May 25, 2006.
McAFEE
INC.
FORM 10-K
For the fiscal year ended December 31, 2005
TABLE OF
CONTENTS
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PART I
General
This Annual Report on
Form 10-K
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-K
are based on information available to us on the date hereof.
These statements involve known and unknown risks, uncertainties
and other factors, which may cause our actual results to differ
materially from those implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by
terminology such as may, will,
should, could, expects,
plans, anticipates,
believes, estimates,
predicts, potential,
targets, goals, projects,
continue, or variations of such words, similar
expressions, or the negative of these terms or other comparable
terminology. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or
achievements. Therefore, actual results may differ materially
and adversely from those expressed in any forward-looking
statements. Neither we nor any other person can assume
responsibility for the accuracy and completeness of
forward-looking statements. Important factors that may cause
actual results to differ from expectations include, but are not
limited to, those discussed in Risk Factors included
in Item 1A of this document. We undertake no obligation to
revise or update publicly any forward-looking statements for any
reason.
We were incorporated in 1992. In 1999, our subsidiary McAfee.com
sold to the public its Class A common stock as a part of
its initial public offering. In September 2002, we repurchased
the 25% minority interest in McAfee.com and merged McAfee.com
with and into us. In June 2004, we changed our name to McAfee,
Inc. from Network Associates, Inc. We previously changed our
name from McAfee Associates, Inc. to Network Associates, Inc. in
conjunction with our December 1997 merger with Network General
Corporation.
This report includes registered trademarks and trade names of
McAfee and other corporations. Trademarks or trade names owned
by McAfee
and/or its
affiliates include: McAfee, Network
Associates, ePO, ePolicy
Orchestrator, VirusScan,
IntruShield, Entercept, and
Foundstone.
We file registration statements, periodic and current reports,
proxy statements, and other materials with the Securities and
Exchange Commission, or SEC. You may read and copy any materials
we file with the SEC at the SECs Office of Public
Reference at 450 Fifth Street, NW, Room 1300,
Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a web site at www.sec.gov that contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC,
including our filings.
We are headquartered at 3965 Freedom Circle, Santa Clara,
California, 95054, and the telephone number at that location is
(408) 988-3832.
Our internet address is www.mcafee.com. We make
available, free of charge, through the investor relations
section of our website, our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
and any amendments to those reports filed pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after they
are electronically filed with or furnished to the SEC. The
contents of our website are not incorporated into, or otherwise
to be regarded as part of this Annual Report on
Form 10-K.
OVERVIEW
We are a worldwide supplier of computer security solutions
designed to proactively prevent intrusions on networks and
secure computer systems and other digital devices from a large
variety of known and unknown threats and attacks. 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 intrusions; enforce and measure compliance). 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 through a network of qualified partners. We
operate our business in five geographic
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regions: North America; Europe, Middle East and Africa,
collectively referred to as EMEA; Japan; Asia-Pacific, excluding
Japan; and Latin America. See Note 19 to our consolidated
financial statements for a description of revenues, operating
income and assets by geographic region.
We offer a comprehensive set of security solutions. The
solutions include anti-virus, anti-spyware, anti-spam, intrusion
prevention, secure messaging, web filtering and vulnerability
management. We offer policy management tools to keep
threat-protection systems
up-to-date
and allow companies to enforce security policies.
The majority of our net revenue has historically been derived
from our McAfee Security anti-virus products and, until the sale
of the Sniffer product line in July 2004, our Sniffer
Technologies network fault identification and application
performance management products. We have also focused our
efforts on building a full line of complementary network and
system protection solutions. On the system protection side, we
strengthened our anti-virus lineup by adding complementary
products in the anti-spam and host intrusion prevention
categories, and through our June 2005 Wireless Security
Corporation acquisition, we have strengthened our solution
portfolio in our consumer and small business segments. On the
network protection side, we have added products in the network
intrusion prevention and detection category, and through our
October 2004 Foundstone acquisition, vulnerability management
products and services.
In 2005, our net revenue was $987.3 million and net income
was $138.8 million. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations.
Our two product groups, which are defined below, are McAfee
System Protection Solutions and McAfee Network Protection
Solutions.
McAfee
System Protection Solutions
McAfee system protection solutions help large enterprises, small
and medium-sized businesses, consumers, government agencies and
educational organizations assure the availability and security
of their computer desktops, digital devices, application servers
and web service platforms. The McAfee system protection
solutions portfolio features a range of products including
anti-virus, anti-spyware, managed services, application
firewalls and host intrusion prevention. Each is backed by
McAfee AVERT Labs, a leading threat research organization. A
substantial majority of our net revenue has historically been
derived from our McAfee System Protection Solutions.
McAfee system protection solutions also include McAfee consumer
security products, offering both traditional retail products and
on-line subscription services. Consumer retail and on-line
subscription applications allow users to protect their personal
computers, or PCs, from malicious code and other attacks, repair
PCs from damage caused by viruses and spyware and block spam and
other undesirable content. Our retail products are sold through
retail outlets, including Best Buy, CompUSA, Costco, Dixons,
Frys, Office Depot, Office Max, Staples, Wal-Mart and
Yamada to single users and small home offices in the form of
traditional boxed product. These products include for-fee
software updates and technical support services. On-line
subscription services are delivered through the use of an
internet browser at our McAfee Consumer Online web site, through
multiple on-line service providers, such as AOL and Comcast, and
through original equipment manufacturers, or OEMs, such as
Apple, Dell, Gateway/eMachines, NEC and Toshiba, North America.
Our McAfee system protection solutions previously included our
Magic Service Solutions product line, offering management and
visibility of desktop and server systems. In January 2004, we
sold our Magic Solutions product line to BMC Software.
McAfee
Network Protection Solutions
McAfee network protection solutions help enterprises, small
businesses, government agencies, educational organizations and
service providers maximize the availability, performance and
security of their network infrastructure. The McAfee network
protection solutions portfolio features a range of products
including IntruShield for network intrusion detection, Secure
Content Management solutions for complete
e-mail and
web security and prevention, and Foundstone for intrusion
detection and prevention and vulnerability management.
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We acquired Foundstone on October 1, 2004. We continue to
integrate Foundstones products with our intrusion
prevention technologies and systems management capabilities to
deliver enhanced risk management of prioritized assets,
automated shielding and risk remediation, and automated policy
enforcement and compliance.
Our McAfee network protection solutions previously included our
Sniffer Technologies product line, offering network fault
identification and application performance management products.
In July 2004, we sold our Sniffer Technologies product line to
Network General Corporation.
Policy
Management
Policy management tools keep threat-protection systems
up-to-date
and enforce security policies. Policy management includes live
threat information and identifying and dealing with rogue
systems, and is a key element of complete security protection.
Expert
Services and Technical Support
We have established Professional Services and McAfee Technical
Support to provide professional assistance in the design,
installation, configuration and support of our customers
networks and acquired products. We offer a range of consulting
and educational services under both the McAfee and Foundstone
banners.
McAfee Consulting Services provide product design and deployment
with an array of standardized and custom offerings. This
business is organized around our major product groupings and
also offers a range of classroom education courses designed to
enable customers and partners to successfully deploy and operate
McAfees security products. Services are also available to
help customers deal with security outbreaks and plan for the
upgrade or replacement of key parts of the security
infrastructure.
Foundstone Consulting Services assist clients in the early
assessment and design of their security and risk architectures.
Through research and innovation, the Foundstone Security
Practice is able to advise government and commercial
organizations on the most effective counter measures required to
meet business and legislative targets for security and privacy.
Foundstone Consulting Services are augmented by a range of
classroom-based training courses including the Ultimate Hacking
Series.
The McAfee Technical Support program provides our customers
on-line and telephone-based technical support in an effort to
ensure that our products are installed and working properly.
During the first quarter of 2005, we reorganized our technical
support offerings to better meet our customers varying
needs. McAfee Technical Support offers a choice of Gold or
Platinum support for our customers. In addition, for our legacy
support customers only, we offer the on-line ServicePortal or
the telephone-based Connect. The services in these offerings
have been incorporated into the current Gold and Platinum
Technical Support offerings. All Technical Support programs
include software updates and upgrades. Technical Support is
available to all customers worldwide from various regional
support centers.
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McAfee Technical Support
ServicePortal Consists of a searchable
knowledge base of technical solutions and links to a variety of
technical documents such as product FAQs and technical notes and
the ability to submit and track support cases online.
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McAfee Gold Technical Support Provides
unlimited, toll-free (where available) telephone access to
technical support 24 hours a day, 7 days a week and
access to the McAfee Technical Support ServicePortal.
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McAfee Platinum Technical Support Offers
proactive, personalized service and includes an assigned
Technical Account Manager, or TAM. Customers receive
proactive support contact (telephone or
e-mail) with
customer-defined frequency, election of five designated customer
contacts, access to all the services in McAfee Gold Technical
Support and the McAfee Technical Support ServicePortal.
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In addition, we also offer our consumer users technical support
services made available at our
www.mcafee.com website on both a free and fee-based
basis, depending on the support level selected.
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Research
and Development
We are committed to malicious code and vulnerability research
through our McAfee AVERT Labs organization. McAfee AVERT Labs
conducts research in the areas of host intrusion prevention,
network intrusion prevention, wireless intrusion prevention,
malicious code defense, security policy and management,
high-performance assurance and forensics and threats, attacks,
vulnerabilities and architectures.
In April 2005, we sold the assets of McAfee Labs, our research
and development organization focused on performing research for
government agencies, to SPARTA, Inc. McAfee will remain as the
general contractor on certain of its government contracts until
government approval is obtained for SPARTA to be the general
contractor.
Strategic
Alliances
From time to time, we enter into strategic alliances with third
parties to support our future growth plans. These relationships
may include joint technology development and integration,
research cooperation, co-marketing activities and sell-through
arrangements. Strategic alliance partners include AOL, Cable and
Wireless, Comcast, Dell, Gateway, Telecom Italia, Telefonica and
Wanadoo, among others. As part of our NTT DoCoMo alliance, we
have jointly developed technology to provide integrated
anti-virus protection against mobile threats to owners of
3G FOMA handsets.
Product
Licensing Model
We typically license our products to corporate and government
customers on a perpetual basis. Most of our licenses are sold
with maintenance contracts, and typically these are sold on an
annual basis. As the maintenance contracts near expiration, we
contact customers to renew their contracts, as applicable. We
typically sell perpetual licenses in connection with sales of
our hardware-based products in which software is bundled with
the hardware platform.
For our largest customers (over 2,000 nodes) and government
agencies, we also offer two-year term-based licenses. Our
two-year term licensing model also creates the opportunity for
recurring revenue through the renewal of existing licenses. By
offering two-year licenses, as opposed to traditional perpetual
licenses, we are also able to meet a lower initial cost
threshold for customers with annual budgetary constraints. We
also offer one-year licensing arrangements in Japan. The renewal
process provides an opportunity to cross-sell new products and
product lines to existing customers. Term-based licenses for our
customers with over 2,000 nodes accounts for less than 2% of our
total revenues in 2005.
On-Line
Subscriptions and Managed Applications
For our on-line subscription services, customers essentially
rent the use of our security services for a defined
period of time. Because our on-line subscription services are
version-less, or self-updating, customers
subscribing to these services are capable of using the most
recent version of the software application without the need to
purchase product updates or upgrades. Our on-line subscription
consumer products and services are found at our
www.mcafee.com web site where consumers download our
anti-virus application using their internet browser which allows
the application to detect and eliminate viruses on their PCs,
repair their PCs from damage caused by viruses, optimize their
hard drives and update their PCs virus protection systems
with current software updates and upgrades. Our
www.mcafee.com website also offers customers access to
McAfee Personal Firewall Plus, McAfee SpamKiller and McAfee
Privacy Service, as well as combinations of these services. Our
on-line subscription services are also available to customers
and small business through various relationships with internet
service providers, or ISPs, such as AOL and Comcast, and
available through PC OEMs, such as Dell and Gateway. Our
business model allows for ISPs to make McAfee subscription
services available as either a premium service or as a feature
included in the ISPs service. At December 31, 2005,
we had approximately 17.2 million McAfee consumer on-line
subscribers, which includes on-line customers obtained through
our alliances with ISPs and OEMs.
Similarly, our small and medium-sized business on-line
subscription products and services, or our Managed VirusScan
offerings, provide these customers the most
up-to-date
anti-virus software. Our Managed VirusScan service provides
anti-virus protection for both desktops and file servers. In
addition, McAfee Managed Mail
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Protection screens emails to detect and quarantine viruses and
infected attachments, and spam. Our McAfee Desktop Firewall
blocks unauthorized network access and stops known network
threats.
We also make our on-line subscription products and services
available over the internet in what we refer to as a managed
environment. Unlike our on-line subscription service solutions,
these managed service providers, or MSP, solutions are
customized, monitored and updated by networking professionals
for a specific customer.
Sales and
Marketing
Our sales and marketing activities are directed at large
corporate and government customers, small and medium-sized
accounts and consumers, as well as resellers, distributors,
system integrators, internet service providers and OEMs
worldwide through the channels listed below.
Resellers
and Distributors
The majority of our products are sold through partners,
including corporate resellers, retailers, service providers,
original equipment manufacturers, or OEMs, and, indirectly,
through distributors in all of our geographic regions. In
addition, our channel efforts include strategic alliances with
complementary manufacturers and publishers to expand our reach
and scale. We currently utilize corporate resellers, including
ASAP Software, CDW, Dell, Insight, Softmart, Software House
International and Software Spectrum, as well as network and
systems integrators who offer our solutions and sell site
licenses of our software to corporate, small business and
government customers.
Independent software distributors who currently supply our
products include GE Access, Ingram Micro Inc., MOCA and Tech
Data Corp. These distributors supply our products primarily to
large retailers, value-added resellers, or VARs, mail order and
telemarketing companies. Both through our authorized
distributors and directly with certain retail resellers either
through a consignment model or a non-consignment model, we sell
our retail packaged products to several of the larger computer
and software retailers, including Best Buy, CompUSA, Costco,
Dixons, Frys, Office Depot, Office Max, Staples, Wal-Mart
and Yamada. Members of our channel sales and marketing force
work closely with our major reseller and distributor accounts to
manage demand generating activities, training, order flow, and
affiliate relationship management.
Our top ten distributors typically account for between 50% to
65% of our net revenues in any quarter. Our agreements with our
distributors are not exclusive and may be terminated by either
party without cause. Terminated distributors may not continue to
sell our products. If one of our significant distributors
terminated its relationship with us, we could experience a
significant interruption in the distribution of our products.
We utilize a sell-through business model for distributors under
which we recognize revenue on products sold through distributors
at the time our distributors resell the products to their
customers. Under this business model, our distributors are
permitted to purchase software licenses at the same time they
fill customer orders and to pay for hardware and retail products
only when these products are resold to the distributors
customers. In addition, prior to the resale of our products, our
distributors are permitted rights of return subject to varying
limitations. After sale by the distributor to its customer,
there is generally no right of return from the distributor to us
with respect to such product, unless we approve the return from
the final customer to the distributor.
Original
Equipment Manufacturers
OEMs license our products for resale to end users or inclusion
with their products. For example, we are a security services
provider for PC hardware manufacturers such as Apple, Dell,
Gateway/eMachines and Toshiba. Depending on the arrangement,
OEMs may sell our software bundled with the PC or related
services, pre-install our software and allow us to complete the
sale, or sublicense a single version of our products to end
users who must register the product with us in order to receive
updates.
United
States Sales
Our United States sales force is organized by product line and
customer segment. The majority of our customers are served
through reseller partners, while some of our largest accounts
are handled by a direct sales
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organization. The sales organizations supporting our partners
are also organized by product line. One set of sales
representatives focuses on the McAfee anti-virus installed base.
A second focuses on our newer intrusion prevention products and
risk management. Small business customers are served exclusively
through our reseller partners with a channel organization
responsible for lead generation and a channel support team
responsible for partner training and contract management.
International
Sales
We have sales and support operations in EMEA, Japan, North
America, Asia-Pacific (excluding Japan) and Latin America. In
2005, 2004, and 2003 based on net revenue in our regions,
revenues outside of North America accounted for approximately
42%, 39% and 35% of our net revenues, respectively. Within our
international sales regions, sales forces are organized by
country when and where local demand and sales force
considerations make it advisable.
Other
Marketing Activities
Channel marketing is the means by which we market, promote,
train and incentivize our resellers and distributors to promote
our products to their end-user customers. We offer our resellers
and distributors technical and sales training classes and
marketing and sales assistance kits. We also provide specific
cooperative marketing programs for end-user seminars, catalogs,
demand creation and sales events.
One of the principal means of marketing our products and
services is through the internet. Our website,
www.mcafee.com, supports marketing activities to our key
customer and prospect segments, including home and home office
users, small and medium-sized businesses, large enterprises and
our partner community. Our website contains various marketing
materials and information about our products and our customers
can download and purchase products. We also promote our products
and services through advertising activities in trade
publications, direct mail campaigns and strategic arrangements.
In addition, we attend trade shows, sponsor conferences and
publish a quarterly newsletter, which is mailed to existing and
prospective customers.
We also market our products through the use of rebate programs.
Within most countries we typically offer two types of rebate
programs, volume incentive rebates to strategic channel partners
and promotional rebates to end-users. The strategic channel
partner earns a volume incentive rebate primarily based upon its
sale of our products to end-users.
Customers
We primarily market our products to large corporate and
government customers through resellers and distributors, except
for a very small number where we sell direct. Our two largest
distributors, Ingram Micro Inc. and Tech Data Corp., together
accounted for approximately 33% of our net revenue in 2005.
We market our products to individual consumers directly through
on-line distribution channels and indirectly through traditional
distribution channels, such as retail stores and OEMs. McAfee
Consumer is responsible for on-line distribution of our products
sold to individual consumers over the internet or for
internet-based products, including products distributed by our
on-line partners, and for the licensing of technology to
strategic distribution partners for sale to individual
consumers, with certain exceptions.
Product
Development, Investments, and Acquisitions
We believe that our ability to maintain our competitiveness
depends in large part upon our ability to successfully enhance
existing products, develop and acquire new products and develop
and integrate acquired products. The market for computer
software includes low barriers to entry, rapid technological
change, and is highly competitive with respect to timely product
introductions. As part of our growth strategy, we have made and
expect to continue to make acquisitions of, or investments in,
complementary businesses, products and technologies.
In addition to developing new products, our internal development
staff is focused on developing upgrades and updates to existing
products and modifying and enhancing any acquired products.
Future upgrades and updates may
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include additional functionality to respond to user problems or
address compatibility problems with new or changing operating
systems and environments.
For 2005, 2004 and 2003, we expensed $176.4 million,
$172.7 million and $184.6 million, respectively, on
research and development as incurred. We also expensed
in-process research and development totaling $4.0 million
related to the acquisition of Wireless Security Corporation in
2005, $5.7 million of related to IntruVert in 2003 and
$0.9 million related to Entercept in 2003. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Manufacturing
We employ an outsourced manufacturing strategy that relies on
contract manufacturers for manufacturing services. Our
manufacturing operations primarily consist of quality assurance
of materials and components, subassemblies, final assembly, and
testing of products. We presently use a limited number of
independent third-party companies to provide manufacturing and
fulfillment services related to assembly, test, and product
repair. Our arrangements with contract manufacturers generally
provide for quality, cost, and delivery requirements, as well as
manufacturing process terms, such as continuity of supply,
inventory management, flexibility regarding capacity, quality
and cost management, oversight of manufacturing, and conditions
for use of our intellectual property. These arrangements
generally do not commit us to purchase any particular amount or
any quantities beyond certain amounts covered by orders or
forecasts that we submit covering discrete periods of time.
Competition
The markets for our products are intensely competitive and are
subject to rapid changes in technology. We also expect
competition to increase in the near-term. We believe that the
principal competitive factors affecting the markets for our
products include, but are not limited to:
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performance,
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quality,
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breadth of product group,
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integration of products,
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introduction of new products,
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brand name recognition,
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price,
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market presence,
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functionality,
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innovation,
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customer support,
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frequency of upgrades and updates,
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reduction of production costs,
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manageability of products and
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reputation.
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We believe that we compete favorably against our competitors in
each of these areas. However, some of our competitors have
longer operating histories, greater brand recognition, stronger
relationships with strategic channel partners, larger technical
staffs, established relationships with hardware vendors
and/or
greater financial, technical and marketing resources. These
factors may provide our competitors with an advantage in
penetrating markets with their network security and management
products.
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System Protection Market. Our principal
competitors in the anti-virus market are Symantec Corp.,
Computer Associates International Inc. and Microsoft Corp.,
which expects to have its consumer security solution, that may
offer system and network protection products as enhancements to
their operating systems, generally available in June 2006. Trend
Micro Inc. remains the strongest competitor in the Asian
anti-virus market and recently entered the U.S. market.
F-Secure Corporation, Dr. Ahns Anti-Virus Lab, Panda
Software and Sophos are also showing growth in their respective
markets.
Network Protection Market. Our principal
competitors in the network protection market are Cisco Systems
Inc., Computer Associates International Inc., Internet Security
Systems Inc., Juniper Networks, Inc., Symantec Corp., Check
Point Software Technologies Ltd. and 3Com Corporation. Qualys,
Inc. and Internet Security Systems Inc. are the strongest
competitors for our Foundstone products and solutions.
Other Competitors. In addition to competition
from large technology companies such as EMC Corp.,
Hewlett-Packard Co., IBM, Novell Inc. and Microsoft Corp., we
also face competition from smaller companies and shareware
authors that may develop competing products.
Proprietary
Technology
Our success depends significantly upon proprietary software
technology. We rely on a combination of patents, trademarks,
trade secrets and copyrights to establish and protect
proprietary rights to our software. However, these protections
may be inadequate or competitors may independently develop
technologies or products that are substantially equivalent or
superior to our products. Often, we do not obtain signed license
agreements from customers who license products from us. In these
cases, we include an electronic version of an end-user license
in all of our electronically distributed software and a printed
license in the box for our products. Since none of these
licenses are signed by the licensee, many legal authorities
believe that such licenses may not be enforceable under the laws
of many states and foreign jurisdictions. In addition, the laws
of some foreign countries either do not protect these rights at
all or offer only limited protection for these rights. The steps
taken by us to protect our proprietary software technology may
be inadequate to deter misuse or theft of this technology. For
example, we are aware that a substantial number of users of our
anti-virus products have not paid any license or support fees to
us.
Employees
As of December 31, 2005, we employed approximately 3,290
individuals worldwide. With limited exceptions, none of our
employees are represented by a labor union. We consider the
relationships with our employees to be positive. Competition for
qualified management and technical personnel is intense in the
software industry. Our continued success depends in part upon
our ability to attract, assimilate and retain qualified
personnel. To date, we believe that we have been successful in
recruiting qualified employees, but there is no assurance that
we will continue to be successful in the future.
Special
Note Regarding Forward-Looking Statements in This
Report
This Annual Report on
Form 10-K
contains forward-looking statements that involve risks and
uncertainties. All forward-looking statements included in this
Report on
Form 10-K
are based on information available to us on the date hereof.
These statements involve known and unknown risks, uncertainties
and other factors, which may cause our actual results to differ
materially from those implied by the forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
Therefore, actual results may differ materially and adversely
from those expressed in any forward-looking statements. Neither
we nor any other person can assume responsibility for the
accuracy and completeness of forward-looking statements.
Important factors that may cause actual results to differ from
expectations include, but are not limited to, those discussed in
Risk Factors beginning immediately hereafter. We
undertake no obligation to revise or update publicly any
forward-looking statements for any reason.
10
These statements include, without limitation, statements
regarding our expectations, beliefs, intentions or strategies
regarding the future. Forward-looking statements in the Report
include, but are not limited to, statements about the following
matters:
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future investments in complementary businesses, products and
technologies;
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our expectation that our financial results will continue to
fluctuate;
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our expectation that international revenue will remain a
significant percentage of our net revenue;
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our expectation that both product and pricing competition will
increase;
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our expectation that product-related expenses will increase;
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expectations about future sales to our top ten distributors and
our sales efforts through the channel and other partners;
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our future dividend policy;
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the expected geographic composition of our future revenues;
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our expected future revenue mix;
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the anticipated future trend of specific categories of expenses;
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the expected future impact of the adoption of Statement of
Financial Accounting Standard No. 123R Share-Based
Payment on our results or operations;
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our expected future level of DSOs; and
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our expected ability to meet our obligations through available
cash and internally generated funds, our expectation of
generating positive working capital through operations, and our
belief as to working capital being sufficient to meet our cash
requirements in future periods.
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In some cases, you can identify other forward-looking statements
in the Report by terminology such as may,
will, should, could,
expects, plans, anticipates,
believes, estimates,
predicts, potential,
targets, goals, projects,
continue, or variations of such words, similar
expressions, or the negative of these terms or other comparable
terminology.
Investing in our common stock involves a high degree of risk.
The risks described below are not the only ones facing our
company. Additional risks not presently known to us or that we
deem immaterial may also impair our business operations. Any of
the following risks could materially adversely affect our
business, operating results and financial condition and could
result in a complete loss of your investment.
Our
Financial Results Will Likely Fluctuate, Making It Difficult for
Us to Accurately Estimate Operating Results.
Our revenues and operating results have varied significantly in
the past. We expect fluctuations in our operating results to
continue. Also, we believe that
period-to-period
comparisons of our financial results should not be relied upon
as an indicator of our future results. Our expenses are based in
part on our expectations regarding future revenues, making
expenses in the short term relatively fixed. We may be unable to
adjust our expenses in time to compensate for any unexpected
revenue shortfall.
Factors that may cause our revenues, gross margins and operating
results to fluctuate significantly from period to period,
include, but are not limited to:
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introduction of new products, product upgrades or updates by us
or our competitors;
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revenue recognition which may be influenced by volume, size,
timing and contractual terms of new licenses and renewals of
existing licenses;
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the mix of products we sell and services we offer and whether
(i) our products are sold directly by us or indirectly
through distributors, resellers, ISPs such as AOL, OEMs such as
Dell, and others, (ii) the product is hardware or software
based and (iii) in the case of software licenses, the
licenses are perpetual licenses or time-based subscription
licenses;
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changes in our supply chains and product delivery channels,
which may result in product fulfillment delays;
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personnel limitations, which may adversely impact our ability to
process the large number of orders that typically occur near the
end of a fiscal quarter;
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costs or charges related to our acquisitions or dispositions,
including our acquisition of Wireless Security Corporation in
June 2005 and the dispositions of our McAfee Labs assets;
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the components of our revenue that are deferred, including our
on-line subscriptions and that portion of our software licenses
attributable to support and maintenance;
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stock-based compensation expense, which we will begin
recognizing for our stock-based compensation plans in the first
quarter of 2006;
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costs and charges related to certain events, including
Sarbanes-Oxley compliance efforts, litigation, relocation of
personnel and previous financial restatements;
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changes in generally accepted accounting principles;
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our ability to effectively manage our operating expense
levels; and
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factors that lead to substantial declines in estimated values of
long-lived assets below their carrying value.
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Although a significant portion of our revenue in any quarter
comes from previously deferred revenue, a meaningful part of our
revenue in any quarter depends on contracts entered into or
orders booked and shipped in that quarter. Historically, we have
experienced more product orders, and therefore, a higher
percentage of revenue shipments, in the last month of a quarter.
Some customers believe they can enhance their bargaining power
by waiting until the end of a quarter to place their order. Any
failure or delay in the closing of new orders in a given quarter
could have a material adverse effect on our quarterly operating
results. For example, during the fourth quarter of 2005, we
failed to meet our previously issued revenue and earnings
guidance due in part to incorrect assumptions regarding
in-period realization of fourth quarter bookings, a higher
proportion of sales involving ratable revenue or multi-year
support and more large, multi-product, multi-year enterprise
transactions that resulted in lower recognition of up-front
revenue. In addition, a significant portion of our revenue is
derived from product sales through our distributors. We
recognize revenue on products sold by our distributors when
distributors sell our products to their customers. To determine
our business performance at any point in time or for any given
period, we must timely and accurately gather sales information
from our distributors information systems at an increased
cost to us. Our distributors information systems may be
less accurate or reliable than our internal systems. We may be
required to expend time and money to ensure that interfaces
between our systems and our distributors systems are up to
date and effective. As our reliance upon interdependent
automated computer systems continues to increase, a disruption
in any one of these systems could interrupt the distribution of
our products and impact our ability to accurately and timely
recognize and report revenue. Further, as we increasingly rely
upon third-party manufacturers to manufacture our hardware-based
products, our reliance on their ability to provide us with
timely and accurate product cost information exposes us to risk.
A failure of our third-party manufacturers to provide us with
timely and accurate product cost information may impact our
costs of goods sold and negatively impact our ability to
accurately and timely report revenue.
Because we expect these trends to continue, it is difficult for
us to accurately estimate operating results prior to the end of
a quarter.
We Face
Risks in Connection With the Material Weakness Resulting From
Our Sarbanes-Oxley Section 404 Management Report and Any
Related Remedial Measures That We Undertake.
In conjunction with (i) our ongoing reporting obligations
as a public company and (ii) the requirements of
Section 404 of the Sarbanes-Oxley Act that management
report as of December 31, 2005 on the effectiveness of our
12
internal control over financial reporting and identify any
material weaknesses in our internal control over financial
reporting, we engaged in a process to document, evaluate and
test our internal controls and procedures, including corrections
to existing controls and additional controls and procedures that
we may implement. As a result of this evaluation and testing
process, our management identified a material weakness in our
internal control over financial reporting relating to the
financial close process. See Item 9A in the Annual Report
on
Form 10-K
for the year ended December 31, 2005 for additional
disclosure about the material weakness. In response to the
material weakness in our internal control over financial
reporting, we have implemented and will continue to implement,
additional controls and procedures, including automating many of
our controls and financial reporting processes, re-engineering
our close process, standardizing our worldwide policies and
procedures and continuing to hire accounting and finance
personnel where appropriate. In addition, in connection with the
settlement of the SECs formal investigation into our
accounting practices, we are required to appoint an independent
consultant to conduct a one-time, comprehensive review of our
internal accounting and financial reporting controls, among
other matters. These efforts could result in increased cost and
could divert management attention away from operating our
business. As a result of the identified material weakness, even
though our management believes that our efforts to remediate and
re-test our internal control deficiencies have resulted in the
improved operation of our internal control over financial
reporting, we cannot be certain that the measures we have taken
or we are planning to take will sufficiently and satisfactorily
remediate the identified material weakness in full.
In future periods, if the process required by Section 404
of the Sarbanes-Oxley Act reveals further material weaknesses or
significant deficiencies, the correction of any such material
weakness or significant deficiency could require additional
remedial measures which could be costly and time-consuming. In
addition, the discovery of further material weaknesses could
also require the restatement of prior period operating results.
If a material weakness exists as of a future period year-end
(including a material weakness identified prior to year-end for
which there is an insufficient period of time to evaluate and
confirm the effectiveness of the corrections or related new
procedures), our management will be unable to report favorably
as of such future period year-end to the effectiveness of our
control over financial reporting. If we are unable to assert
that our internal control over financial reporting is effective
in any future period (or if our independent auditors are unable
to express an opinion on the effectiveness of our internal
controls), or if we continue to experience material weaknesses
in our internal control over financial reporting, we could lose
investor confidence in the accuracy and completeness of our
financial reports, which would have an adverse effect on our
stock price and potentially subject us to litigation.
If We
Fail to Effectively Upgrade Our Information Technology System,
We May Not Be Able to Accurately Report Our Financial Results or
Prevent Fraud.
As part of our efforts to continue improving our internal
control over financial reporting, we plan to upgrade our
existing SAP information technology system during 2006 in order
to automate certain controls that are currently performed
manually. We may experience difficulties in transitioning to new
or upgraded systems, including loss of data and decreases in
productivity as personnel become familiar with new systems. In
addition, our management information systems will require
modification and refinement as we grow and as our business needs
change, which could prolong difficulties we experience with
systems transitions, and we may not always employ the most
effective systems for our purposes. If we experience
difficulties in implementing new or upgraded information systems
or experience significant system failures, or if we are unable
to successfully modify our management information systems and
respond to changes in our business needs, our operating results
could be harmed or we may fail to meet our reporting
obligations. In addition, as a result of the automation of these
manual processes, the data produced may cause us to question the
accuracy of previously reported financial results.
We Face
Risks Related to Our International Operations.
During 2005, net revenue in our operating regions outside of
North America represented approximately 42% of our net revenue.
We intend to continue our focus on international growth and
expect international revenue to remain a significant percentage
of our net revenue.
Risks related to international operations include:
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longer payment cycles and greater difficulty in collecting
accounts receivable;
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increased costs and management difficulties related to the
growth and operation of our international sales and support
organization;
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our ability to successfully establish, manage and staff shared
service centers for worldwide sales finance and accounting
operations centralized from locations in the U.S. and Europe;
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our ability to adapt to sales and marketing practices and
customer requirements in different cultures;
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our ability to successfully localize software products for a
significant number of international markets;
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compliance with more stringent consumer protection and privacy
laws;
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currency fluctuations, including weakness of the
U.S. dollar relative to other currencies, or the
strengthening of the U.S. dollar that may have an adverse
impact on revenues, financial results and cash flows and risks
related to hedging strategies;
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enactment of additional regulations or restrictions on the use,
import or export of encryption technologies, which would delay
or prevent the acceptance and use of encryption products and
public networks for secure communication;
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political instability in both established and emerging markets;
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tariffs, trade barriers and export restrictions;
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a high incidence of software piracy in some countries; and
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international labor laws and our relationship with our employees
and regional work councils.
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We Are
Subject to Intense Competition in the System and Network
Protection Markets, and We Expect to Face Increased Competition
in the Future.
The markets for our products are intensely competitive and we
expect both product and pricing competition to increase. As
competition increases, we expect increases in our
product-related expenses, including increased product rebates,
marketing development funds and strategic channel partner
revenue-sharing agreements. Some of our competitors have longer
operating histories, have more extensive international
operations, greater name recognition, larger technical staffs,
established relationships with hardware vendors
and/or
greater financial, technical and marketing resources. We face
competition in specific product markets. Principal competitors
include:
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in the system protection market, which includes our anti-virus
and risk assessment and vulnerability management solutions,
Symantec Corp., Computer Associates International Inc. and
Microsoft Corp. Trend Micro Inc. remains the strongest
competitor in the Asian anti-virus market and has recently
entered the U.S. market. F-Secure Corporation,
Dr. Ahns Anti-Virus Lab, Panda Software and Sophos
are also showing growth in their respective markets; and
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in the network protection market, which includes our other
intrusion detection and protection products, Cisco Systems Inc.,
Computer Associates International Inc., Internet Security
Systems Inc., Juniper Networks, Inc., Symantec Corp. and 3Com
Corporation. Qualys and Internet Security Systems Inc. are the
strongest competitors for our Foundstone products and solutions.
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Other competitors for our various products could include large
technology companies. We also face competition from numerous
smaller companies and shareware authors that may develop
competing products.
A significant portion of our revenue comes from our consumer
business. We will continue to focus on growth in this segment
both directly and through relationships with ISPs such as AOL
and Comcast, and PC OEMs, such as Dell and Gateway. As
competition in this market increases, we may experience pricing
pressures from both our competitors and partners which may have
a negative effect on our ability to sustain our revenue and
market share growth. In addition, as our consumer business
becomes more dependent upon the ISP model, our direct on-line
revenue may suffer and our retail box business may also continue
to decline. Furthermore, as penetration of the consumer
anti-virus market through the ISP model increases, this market
may become saturated.
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Increasingly, our competitors are large vendors of hardware or
operating system software. These competitors are continuously
developing or incorporating system and network protection
functionality into their products. For example, in the first
quarter of 2006 Microsoft announced that it intends to releases
its consumer security solution in June 2006 and continues to
execute on its announced plans to boost the security
functionality of its Windows platform through its acquisition of
managed service provider FrontBridge Technologies, anti-virus
provider Sybari Software, Inc. and anti-spyware provider GIANT
Company Software. Through its acquisitions of Okena, Inc.,
Riverhead Networks and NetSolv, Cisco Systems Inc. may
incorporate functionality that competes with our content
filtering and anti-virus products. In addition, Juniper
Networks, Inc. acquired Netscreen Technologies.
The widespread inclusion of products that perform the same or
similar functions as our products within computer hardware or
other companies software products could reduce the
perceived need for our products or render our products obsolete
and unmarketable. Furthermore, even if these competitors
incorporated products are inferior or more limited than our
products, customers may elect to accept the incorporated
products rather than purchase our products. Or, if our
competitors products are offered at significant discounts
to our prices or for free, we may be unable to respond
competitively, or may have to significantly reduce our prices
which would negatively impact our revenue. In addition, the
software industry is currently undergoing consolidation as firms
seek to offer more extensive suites and broader arrays of
software products, as well as integrated software and hardware
solutions. This consolidation may negatively impact our
competitive position.
We Rely
Heavily on Our Intellectual Property Rights Which Offer Only
Limited Protection Against Potential Infringers.
We rely on a combination of contractual rights, trademarks,
trade secrets, patents and copyrights to establish and protect
proprietary rights in our software. However, the steps taken by
us to protect our proprietary software may not deter its misuse,
theft or misappropriation. Competitors may independently develop
technologies or products that are substantially equivalent or
superior to our products or that inappropriately incorporate our
proprietary technology. We are aware that a substantial number
of users of our anti-virus products have not paid any
registration or license fees to us. Certain jurisdictions may
not provide adequate legal infrastructure for effective
protection of our intellectual property rights. Changing legal
interpretations of liability for unauthorized use of our
software or lessened sensitivity by corporate, government or
institutional users to avoiding infringement of intellectual
property could also harm our business.
We Face
Risks Related to Our Strategic Alliances.
Through our strategic alliances we may from time to time license
technology from third parties to integrate or bundle with our
products or we may license out our technology for others to
integrate or bundle with their products. We may not realize the
desired benefits from our strategic alliances on a timely basis
or at all. We face a number of risks relating to our strategic
alliances, including the following:
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Strategic alliances require significant coordination between the
parties involved. To be successful, our alliances may require
the integration of other companies products with our
products, which may involve significant time and expenditure by
our technical staff and the technical staff of our strategic
allies.
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Our agreements with our strategic alliances are terminable
without cause with no or minimal notice or penalties. We may
expend significant time, money and resources to further
relationships with our strategic alliances that are thereafter
terminated.
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The integration of products from different companies may be more
difficult than we anticipate, and the risk of integration
difficulties, incompatible products and undetected programming
errors or bugs may be higher than that normally associated with
new products.
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Our sales force and our marketing and professional services
personnel may require additional training to market products
that result from our strategic alliances. The marketing of these
products may require additional sales force efforts and may be
more complex than the marketing of our own products.
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We may be required to share ownership in technology developed as
part of our strategic alliances.
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We Face
Product Development Risks Associated with Rapid Technological
Changes in Our Market.
The markets for our products are highly fragmented and
characterized by ongoing technological developments, evolving
industry standards and rapid changes in customer requirements.
Our success depends on our ability to timely and effectively:
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offer a broad range of network and system protection products;
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enhance existing products and expand product offerings;
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extend security technologies to additional digital devices such
as mobile phones and personal digital assistants;
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respond promptly to new customer requirements and industry
standards;
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provide frequent, low cost upgrades and updates for our products;
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maintain quality; and
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remain compatible with popular operating systems such as Linux,
Windows XP, and Windows NT, and develop products that are
compatible with new or otherwise emerging operating systems.
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We may experience delays in product development as we have at
times in the past. Complex products like ours may contain
undetected errors or version compatibility problems,
particularly when first released, which could delay or harm
market acceptance. The widespread inclusion of products that
perform the same or similar functions as our products within the
Windows platform could reduce the perceived need for our
products. For example, in the first quarter of 2006 Microsoft
announced that it intends to release its consumer security
solution in June 2006 and continues to execute on its announced
plans to boost the security functionality of its Windows
platform. Even if these incorporated products are inferior or
more limited than our products, customers may elect to accept
the incorporated products rather than purchase our products. The
occurrence of these events could negatively impact our revenue.
We Face
Risks Associated with Past and Future Acquisitions.
We may buy or make investments in complementary companies,
products and technologies. For example, in October 2004 we
acquired Foundstone to bolster our risk assessment and
vulnerability management capabilities and in June 2005 we
acquired Wireless Security Corporation to continue to develop
their patent-pending technology, to introduce a new consumer
wireless security offering, and to integrate the technology into
our small business managed solution. We may not realize the
anticipated benefits from the Foundstone and Wireless Security
Corporation acquisitions.
Integration
Integration of an acquired company or technology is a complex,
time consuming and expensive process. The successful integration
of an acquisition requires, among other things, that we:
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integrate and retain key management, sales, research and
development and other personnel;
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integrate the acquired products into our product offerings both
from an engineering and sales and marketing perspective;
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integrate and support preexisting supplier, distribution and
customer relationships;
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coordinate research and development efforts; and
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consolidate duplicate facilities and functions and integrate
back-office accounting, order processing and support functions.
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The geographic distance between the companies, the complexity of
the technologies and operations being integrated and the
disparate corporate cultures being combined may increase the
difficulties of integrating an acquired company or technology.
Managements focus on the integration of operations may
distract attention from
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our
day-to-day
business and may disrupt key research and development, marketing
or sales efforts. In addition, it is common in the technology
industry for aggressive competitors to attract customers and
recruit key employees away from companies during the integration
phase of an acquisition.
Internal
Controls, Policies and Procedures
Acquired companies or businesses are likely to have different
standards, controls, contracts, procedures and policies, making
it more difficult to implement and harmonize company-wide
financial, accounting, billing, information and other systems.
Open
Source Software
Products or technologies acquired by us may include so-called
open source software. Open source software is
typically licensed for use at no initial charge, but imposes on
the user of the open source software certain requirements to
license to others both the open source software as well as the
software that relates to, or interacts with, the open source
software. Our ability to commercialize products or technologies
incorporating open source software or otherwise fully realize
the anticipated benefits of any such acquisition may be
restricted because, among other reasons:
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open source license terms may be ambiguous and may result in
unanticipated obligations regarding our products;
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competitors will have improved access to information that may
help them develop competitive products;
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open source software cannot be protected under trade secret law;
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it may be difficult for us to accurately determine the
developers of the open source code and whether the acquired
software infringes third-party intellectual property
rights; and
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open source software potentially increases customer support
costs because licensees can modify the software and potentially
introduce errors.
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Use of
Cash and Securities
Our available cash and securities may be used to acquire or
invest in companies or products, possibly resulting in
significant acquisition-related charges to earnings and dilution
to our stockholders. For example, in June 2005 we used
approximately $20.2 million to acquire Wireless Security
Corporation. Moreover, if we acquire a company, we may have to
incur or assume that companys liabilities, including
liabilities that may not be fully known at the time of
acquisition.
We Face
Manufacturing, Supply, Inventory, Licensing and Obsolescence
Risks Relating to Our Products.
Third-Party
Manufacturing
We rely on a small number of third parties to manufacture some
of our hardware-based network protection and system protection
products. We expect the number of our hardware-based products
and our reliance on third-party manufacturers to increase as we
continue to expand our portfolio of hardware-based network
protection and system protection products. Reliance on
third-party manufacturers, including software replicators,
involves a number of risks, including the lack of control over
the manufacturing process and the potential absence or
unavailability of adequate capacity. If any of our third-party
manufacturers cannot or will not manufacture our products in
required volumes on a cost-effective basis, in a timely manner,
at a sufficient level of quality, or at all, we will have to
secure additional manufacturing capacity. Even if this
additional capacity is available at commercially acceptable
terms, the qualification process could be lengthy and could
cause interruptions in product shipments. The unexpected loss of
any of our manufacturers would be disruptive to our business.
Furthermore, supply disruptions or cost increases could increase
our costs of goods sold and negatively impact our financial
performance. For example, if the price to us of our
hardware-based products increased and we were unable to offset
the price increase, then the increased cost to us of selling the
product could reduce our overall profitability.
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Sourcing
Our products contain critical components supplied by a single or
a limited number of third parties. Any significant shortage of
components or the failure of the third-party supplier to
maintain or enhance these products could lead to cancellations
of customer orders or delays in placement of orders.
Third-Party
Licenses
Some of our products incorporate software licensed from third
parties. We must be able to obtain reasonably priced licenses
and successfully integrate this software with our hardware. In
addition, some of our products may include open
source software. Our ability to commercialize products or
technologies incorporating open source software may be
restricted because, among other reasons, open source license
terms may be ambiguous and may result in unanticipated
obligations regarding our products.
Obsolescence
Hardware-based products may face greater obsolescence risks than
software products. We could incur losses or other charges in
disposing of obsolete inventory.
Product
Fulfillment
We typically fulfill delivery of our hardware-based products
from centralized distribution centers. We have in the past and
may in the future make changes in our product delivery network.
Changes in our product delivery network may disrupt our ability
to timely and efficiently meet our product delivery commitments,
particularly at the end of a quarter. As a result, we may
experience increased costs in the short term as temporary
delivery solutions are implemented to address unanticipated
delays in product delivery. In addition, product delivery delays
may negatively impact our ability to recognize revenue if
shipments are delayed at the end of a quarter.
False
Detection of Viruses and Actual or Perceived Security Breaches
Could Adversely Affect Our Business.
Our anti-virus software products have in the past, and these
products and our intrusion protection products may at times in
the future, falsely detect viruses or computer threats that do
not actually exist. These false alarms, while typical in the
industry, may impair the perceived reliability of our products
and may therefore adversely impact market acceptance of our
products. In addition, we have in the past been subject to
litigation claiming damages related to a false alarm, and
similar claims may be made in the future. An actual or perceived
breach of network or computer security at one of our customers,
regardless of whether the breach is attributable to our
products, could adversely affect the markets perception of
our security products.
We Face a
Number of Risks Related to Our Product Sales Through
Intermediaries.
We sell a significant amount of our products through
intermediaries such as distributors, PC OEMs, ISPs and other
strategic channel partners, referred to collectively as
distributors. Our top ten distributors typically represent
approximately 50% to 65% of our net sales in any quarter. We
expect this percentage to increase as we continue to focus our
sales efforts through the channel and other partners. Our two
largest distributors, Ingram Micro Inc. and Tech Data Corp.,
together accounted for approximately 33% of our net revenue in
2005.
Sale
of Competing Products
Our distributors may sell other vendors products that are
complementary to, or compete with, our products. While we have
instituted programs designed to motivate our distributors to
focus on our products, these distributors may give greater
priority to products of other suppliers, including competitors.
Our ability to meaningfully increase the amount of our products
sold through our distributors depend on our ability to
adequately and efficiently support these distributors with,
among other things, appropriate financial incentives to
encourage pre-sales investment and sales tools, such as online
sales and technical training as product collateral needed to
support their customers and
18
prospects. Any failure to properly and efficiently support our
distributors may result in our distributors focusing more on our
competitors products rather than our products and thus in
lost sales opportunities.
Loss
of a Distributor
The agreements with our distributors, such as Dell, Ingram Micro
Inc., Tech Data Corp. and AOL, are generally terminable by
either party without cause with no or minimal notice or
penalties. We may expend significant time, money and resources
to further relationships with our distributors that are
thereafter terminated. If one of our significant distributors
terminates its agreement with us, we could experience a
significant interruption in the distribution of our products. In
addition, our business interests and those of our distributors
may diverge over time, which might result in conflict,
termination or a reduction in collaboration. For example, our
relationship with Internet Security Systems Inc. was terminated
following the announcement of our acquisitions in 2003 of
Entercept and IntruVert.
Payment
Difficulties
Some of our distributors may experience financial difficulties,
which could adversely impact our collection of accounts
receivable. Our allowance for doubtful accounts was
approximately $2.4 million as of December 31, 2005. We
regularly review the collectibility and credit-worthiness of our
distributors to determine an appropriate allowance for doubtful
accounts. Our uncollectible accounts could exceed our current or
future allowances.
We Face
Risks Related to Customer Outsourcing to System
Integrators.
Some of our customers have outsourced the management of their
information technology departments to large system integrators.
If this trend continues, our established customer relationships
could be disrupted and our products could be displaced by
alternative system and network protection solutions offered by
system integrators. Significant product displacements could
impact our revenue and have a material adverse effect on our
business.
Critical
Personnel May Be Difficult to Attract, Assimilate and
Retain.
Our success depends in large part on our ability to attract and
retain senior management personnel, as well as technically
qualified and highly-skilled sales, consulting, technical,
finance and marketing personnel. Other than executive management
who have at will employment agreements, our
employees are not typically subject to an employment agreement
or non-competition agreement. For example, in January 2006, Gene
Hodges, our former president, resigned to pursue other
opportunities. In the past we have experienced significant
turnover in our finance organization worldwide and replacing
these personnel remains difficult given the competitive market
for these skill sets.
It could be difficult, time consuming and expensive to replace
any key management member or other critical personnel.
Integrating new management and other key personnel also may be
difficult and costly. Changes in management or other critical
personnel may be disruptive to our business and might also
result in our loss of unique skills and the departure of
existing employees
and/or
customers. It may take significant time to locate, retain and
integrate qualified management personnel.
Other personnel related issues that we may encounter include:
Competition
for Personnel; Need for Competitive Pay Packages
Competition for qualified individuals in our industry is
intense. To attract and retain critical personnel, we believe
that we must maintain an open and collaborative work
environment. We also believe we need to provide a competitive
compensation package, including stock options and restricted
stock. Increases in shares available for issuance under our
stock option plans require stockholder approval. Institutional
stockholders, or our other stockholders, may not approve future
requests for option pool increases. For example, at our 2003
annual meeting held in December 2003, our stockholders did not
approve a proposed increase in shares available for grant under
our employee stock option plans. Additionally, as of January
2006 we are required to include compensation expense in our
consolidated statement of income and comprehensive income
relating to the issuance of employee stock
19
options. We are currently evaluating our compensation programs
and in particular our equity compensation philosophy. In the
future, we may decide to issue fewer stock options, possibly
impairing our ability to attract and retain necessary personnel.
Conversely, issuing a comparable number of stock options could
adversely impact our results of operations when compared with
periods prior to the effectiveness of these new rules.
Reduced
Productivity of New Hires; Senior Management
Additions
Notwithstanding our ongoing efforts to reduce our general
personnel levels, we continue to hire in key areas and have
added a number of new employees in connection with our
acquisitions. We have also increased our hiring in Bangalore,
India in connection with the relocation of a significant portion
of our research and development operations to India.
Several members of our senior management were only added in the
last year, and we may add new members to senior management. In
January 2005, we hired Eric Brown as our new executive vice
president and chief financial officer, in July 2005 we hired
Richard Decker as our new senior vice president and chief
information officer and in the second quarter of 2005, we
promoted William Kerrigan to the position of executive vice
president of consumer brands.
For new employees or management additions, there may be reduced
levels of productivity as recent additions or hires are trained
or otherwise assimilate and adapt to our organization and
culture.
Product
Liability and Related Claims May Be Asserted Against
Us.
Our products are used to protect and manage computer systems and
networks that may be critical to organizations. Because of the
complexity of the environments in which our products operate, an
error, or a false positive, failure or bug in our products,
including a security vulnerability, could disrupt or cause
damage to the networks of our customers, including disruption of
legitimate network traffic by our products. Failure of our
products to perform to specifications (including the failure of
our products to identify or block a virus), disruption of our
customers network traffic or damages to our
customers networks caused by our products could result in
product liability damage claims by our customers. Our license
agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability
claims. It is possible, however, that the limitation of
liability provisions may not be effective under the laws of
certain jurisdictions, particularly in circumstances involving
unsigned licenses.
Intellectual
Property Litigation in the Network and System Security Market Is
Common and Can Be Expensive.
Litigation may be necessary to enforce and protect trade
secrets, patents and other intellectual property rights that we
own. Similarly, we may be required to defend against claimed
infringement by others.
In addition to the expense and distractions associated with
litigation, adverse determinations could:
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result in the loss of our proprietary rights;
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subject us to significant liabilities, including monetary
liabilities;
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require us to seek licenses from third parties; or
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prevent us from manufacturing or selling our products.
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The litigation process is subject to inherent uncertainties. We
may not prevail in these matters, or we may be unable to obtain
licenses with respect to any patents or other intellectual
property rights that may be held valid or infringed upon by our
products or us.
If we acquire a portion of software included in our products
from third parties, our exposure to infringement actions may
increase because we must rely upon these third parties as to the
origin and ownership of any software being acquired. Similarly,
notwithstanding measures taken by our competitors or us to
protect our competitors intellectual property, exposure to
infringement claims increases if we employ or hire software
engineers previously employed by competitors. Further, to the
extent we utilize open source software we face
risks. For example, the
20
scope and requirements of the most common open source software
license, the GNU General Public License, or GPL, have not been
interpreted in a court of law. Use of GPL software could subject
certain portions of our proprietary software to the GPL
requirements. Other forms of open source software
licensing present license compliance risks, which could result
in litigation or loss of the right to use this software.
Computer
Hackers May Damage Our Products, Services and
Systems.
Due to our high profile in the network and system protection
market, we have been a target of computer hackers who have,
among other things, created viruses to sabotage or otherwise
attack our products and services, including our various
websites. For example, we have seen the spread of viruses, or
worms, that intentionally delete anti-virus and firewall
software. Similarly, hackers may attempt to penetrate our
network security and misappropriate proprietary information or
cause interruptions of our internal systems and services. Also,
a number of websites have been subject to denial of service
attacks, where a website is bombarded with information requests
eventually causing the website to overload, resulting in a delay
or disruption of service. If successful, any of these events
could damage users or our computer systems. In addition,
since we do not control compact disk, or CD, duplication by
distributors or our independent agents, CDs containing our
software may be infected with viruses.
Pending
or Future Litigation Could Have a Material Adverse Impact on Our
Results of Operation and Financial Condition.
In addition to intellectual property litigation, from time to
time, we have been subject to other litigation. Where we can
make a reasonable estimate of the liability relating to pending
litigation and determine that it is probable, we record a
related liability. As additional information becomes available,
we assess the potential liability and revise estimates as
appropriate. However, because of uncertainties relating to
litigation, the amount of our estimates could be wrong. In
addition to the related cost and use of cash, pending or future
litigation could cause the diversion of managements
attention and resources.
We Face
Risks Related to the Settlement Agreement with the Securities
and Exchange Commission.
On February 9, 2006, the United States District Court for
the Northern District of California entered a final judgment
permanently enjoining us and our officers and agents from future
violations of the securities laws. This final judgment resolved
the charges filed against us in connection with the SECs
investigation of our financial results. As a result of the
judgment, we will forfeit for three years the ability to invoke
the safe harbor for forward-looking statements
provision of the Private Securities Litigation Reform Act or the
Reform Act. This safe harbor provided us enhanced protection
from liability related to forward-looking statements if the
forward-looking statements were either accompanied by meaningful
cautionary statements or were made without actual knowledge that
they were false or misleading. While we may still rely on the
bespeaks caution doctrine that existed prior to the
Reform Act for defenses against securities lawsuits, without the
statutory safe harbor, it may be more difficult for us to defend
against any such claims. In addition, due to the permanent
restraint and injunction against violating applicable securities
laws, any future violation of the securities laws would be a
violation of a federal court order and potentially subject us to
a contempt order. For instance, if, at some point in the future,
we were to discover a fact that caused us to restate our
financial statements similar to the restatements that were the
subject of the SEC action, we could be found to have violated
the final judgment. Further, any collateral criminal or civil
investigation, proceeding or litigation related to any future
violation of the judgment, such as the compliance actions
mandated by the judgment, could result in the distraction of
management from our
day-to-day
business and may materially and adversely affect our reputation
and results of operations.
We Face
Risks Related to Our Anti-Spam and Anti-Spyware Software
Products.
Our anti-spam and anti-spyware products may falsely identify
emails or programs as unwanted spam or
potentially unwanted programs, fail to properly
identify unwanted emails or programs, particularly as
spam emails or spyware are often designed to
circumvent anti-spam or spyware products, or, in the case of our
anti-spam products, incorrectly identify legitimate businesses
as users of phishing technology. Parties whose emails or
programs are blocked by our products, or whose websites are
incorrectly identified as utilizing phishing techniques, may
seek redress against us for labeling them as
spammers or spyware, or for interfering with their
business. In
21
addition, false identification of emails or programs as unwanted
spam or potentially unwanted programs
may reduce the adoption of these products.
Cryptography
Contained in Our Technology is Subject to Export
Restrictions.
Some of our computer security solutions, particularly those
incorporating encryption, may be subject to export restrictions.
As a result, some products may not be exported to international
customers without prior U.S. government approval. The list
of products and end users for which export approval is required,
and the regulatory policies with respect thereto, are subject to
revision by the U.S. government at any time. The cost of
compliance with U.S. and international export laws and changes
in existing laws could affect our ability to sell certain
products in certain markets and could have a material adverse
effect on our international revenues.
Our
Business Strategy Exposes Us to Significant Risks.
In 2005, we continued executing our business strategy to, among
other things, streamline our business, better leverage the
McAfee brand, better position us as the leading provider of
intrusion prevention solutions, and help accelerate profit and
growth. Risks related to these activities include:
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increasing direct competition from larger, more established
competitors, such as Microsoft Corp. and Cisco Systems Inc.;
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dependence on our channel and other partners to sell our
products;
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business decisions by our competitors may change the dynamics of
the market in which we compete; and
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there may be customer confusion around our strategy.
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Business
Interruptions May Impede Our Operations and the Operations of
Our Customers.
We are continually updating or modifying our accounting systems.
Modifications of these types of systems are often disruptive to
business and may cause us to incur higher costs than we
anticipate. Failure to properly manage this process could
materially harm our business operations.
In addition, we and our customers face a number of potential
business interruption risks that are beyond our respective
control. Natural disasters or other events could interrupt our
business or the business of our customers, and each of us is
reliant on external infrastructure that may be antiquated. Our
corporate headquarters are located near a major earthquake
fault. The potential impact of a major earthquake on our
facilities, infrastructure and overall operations is not known.
Despite safety precautions that have been implemented, there is
no guarantee that an earthquake would not seriously disturb our
entire business process. We are largely uninsured for losses and
business disruptions caused by an earthquake and other natural
disasters.
Our Stock
Price Has Been Volatile and Is Likely to Remain
Volatile.
During 2005, our stock price was highly volatile ranging from a
per share high of $33.24 to a low of $20.35. On
December 30, 2005, our stocks closing price per share
price was $27.13. Announcements, business developments, such as
a material acquisition or disposition, litigation developments
and our ability to meet the expectations of investors with
respect to our operating and financial results, may contribute
to current and future stock price volatility. In addition,
third-party announcements such as those made by our partners and
competitors may contribute to current and future stock price
volatility. For example, future announcements by Microsoft Corp.
related to its consumer security solution may contribute to
future volatility in our stock price. Certain types of investors
may choose not to invest in stocks with this level of stock
price volatility.
We Face
the Risk of a Decrease in Our Cash Balances and Losses in Our
Investment Portfolio.
Our cash balances are held in numerous locations throughout the
world. A portion of our cash is invested in marketable
securities as part of our investment portfolio. We rely on
third-party money managers to manage our investment portfolio.
Among other factors, changes in interest rates, foreign currency
fluctuations and macro economic conditions could cause our cash
balances to fluctuate and losses in our investment portfolio.
Most
22
amounts held outside the United States could be repatriated to
the United States, but, under current law, would be subject to
U.S. federal income tax, less applicable foreign tax
credits.
Our
Charter Documents and Delaware Law and Our Rights Plan May
Impede or Discourage a Takeover, Which Could Lower Our Stock
Price.
Our
Charter Documents and Delaware Law
Pursuant to our charter, our board of directors has the
authority to issue up to 5.0 million shares of preferred
stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those
shares without any further vote or action by our stockholders.
The issuance of preferred stock could have the effect of making
it more difficult for a third-party to acquire a majority of our
outstanding voting stock.
Our classified board and other provisions of Delaware law and
our certificate of incorporation and bylaws, could also delay or
make a merger, tender offer or proxy contest involving us more
difficult. For example, any stockholder wishing to make a
stockholder proposal (including director nominations) at our
2006 annual meeting, must meet the qualifications and follow the
procedures specified under both the Exchange Act of 1934 and our
bylaws.
Our
Rights Plan
Our board of directors has adopted a stockholders rights
plan. The rights will become exercisable the tenth day after a
person or group announces acquisition of 15% or more of our
common stock or announces commencement of a tender or exchange
offer the consummation of which would result in ownership by the
person or group of 15% or more of our common stock. If the
rights become exercisable, the holders of the rights (other than
the person acquiring 15% or more of our common stock) will be
entitled to acquire in exchange for the rights exercise
price, shares of our common stock or shares of any company in
which we are merged with a value equal to twice the rights
exercise price.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our worldwide headquarters currently occupy approximately
135,000 square feet in facilities located in
Santa Clara, California under leases expiring through 2013.
Worldwide, we lease facilities with approximately 900,000 total
square feet, with leases that expire at various times. Our
primary international facilities are located in Germany, India,
Ireland, Japan, the Netherlands, the United Kingdom and
Singapore. In the first quarter of 2005, we moved our European
headquarters from the Netherlands to a 25,000 square foot
facility in Cork, Ireland. Significant domestic sites include
California, Oregon and Texas. We believe that our existing
facilities are adequate for the present and that additional
space will be available as needed.
We own our regional office located in Plano, Texas. The
170,000 square feet facility opened in January 2003 and is
located on 15.6 acres of owned land. This facility supports
approximately 700 employees working in our customer support,
engineering, accounting and finance, information technology,
internal audit, legal and telesales groups.
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Item 3.
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Legal
Proceedings
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Information with respect to this item is incorporated by
reference to Note 20 to the notes to consolidated financial
statements included in this
Form 10-K.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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No matters were submitted to a vote of stockholders during the
quarter ended December 31, 2005.
23
PART II
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Item 5.
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Market
for the Registrants Common Equity and Related Stockholder
Matters
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Price
Range of Common Stock
In June 2004, we changed our name to McAfee, Inc., and our
common stock began trading under the symbol MFE. Our common
stock began to trade on the New York Stock Exchange effective
February 12, 2002, and traded under the symbol NET from
February 12, 2002 until we changed our name to McAfee in
June 2004. Prior to February 12, 2002, our common stock
traded on the NASDAQ National Market. From December 1,
1997, our common stock traded under the symbol NETA, and prior
thereto, under the symbol MCAF.
The following table sets forth, for the period indicated, the
high and low sales prices for our common stock for the last
eight quarters, all as reported by NYSE. The prices appearing in
the table below do not reflect retail mark-up, mark-down or
commission.
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High
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Low
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Year Ended December 31,
2005
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First Quarter
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$
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29.15
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$
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21.94
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Second Quarter
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28.71
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20.35
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Third Quarter
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33.24
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26.00
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Fourth Quarter
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32.59
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25.35
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Year Ended December 31,
2004
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First Quarter
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$
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18.90
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$
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14.90
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Second Quarter
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19.75
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15.60
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Third Quarter
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20.42
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15.79
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Fourth Quarter
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33.55
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20.09
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Dividend
Policy
We have not paid any cash dividends since our reorganization
into a corporate form in October 1992. We intend to retain
future earnings for use in our business and do not anticipate
paying cash dividends in the foreseeable future.
Holders
of Common Stock
As of January 31, 2006, there were 767 record owners of our
common stock.
Common
Stock Repurchases
The table below sets forth all repurchases by us of our common
stock during the fourth quarter of 2005, all of which were
pursuant to a publicly announced plan or program:
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Total Number of
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Approximate Dollar
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Shares Purchased as
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Value of Shares
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Total
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Part of Publicly
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That May yet be
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Number of
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Average
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Announced Plan or
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Purchased Under
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Shares
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Price Paid
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Repurchase
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Our Stock Repurchase
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Period
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Purchased
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per Share
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Program
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Program
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(in thousands, except price per
share)
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October 1, 2005 through
October 31, 2005
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$
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251,245
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November 1, 2005 through
November 30, 2005
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345
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$
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27.47
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345
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$
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241,767
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December 1, 2005 through
December 31, 2005
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420
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$
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27.50
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420
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$
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230,217
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Total
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765
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$
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27.49
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765
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24
In November 2003, our board of directors authorized the
repurchase of up to $150.0 million of our common stock in
the open market from time to time over the following two years,
depending upon market conditions, share price and other factors.
In 2003, we purchased 350,000 shares for a total of
$4.7 million. In August 2004, our board of directors
authorized an additional $200.0 million in stock
repurchases over the following two years. In 2004, we purchased
approximately 12.6 million shares for a total of
$221.8 million. In April 2005, our board of directors
authorized the repurchase of an additional $175.0 million
of our common stock in the open market from time to time until
August 2006. In 2005, we repurchased approximately
2.8 million shares for a total of $68.4 million. As of
December 31, 2005, we had authorization from our board of
directors to repurchase an additional $230.2 million of our
common stock. In February 2006, we repurchased approximately
4.1 million shares for a total of $97.3 million.
Retirements
of Common Stock
In 2004, we retired the approximately 13.0 million treasury
shares we had repurchased on the open market in 2003 and 2004.
In 1998, we deposited approximately 1.7 million shares of
our common stock with a trustee for the benefit of the employees
of our Dr. Solomons acquisition to cover the stock
options assumed in our acquisition of this company. These
shares, which have been included in our outstanding share
balance, were to be issued upon the exercise of stock options by
Dr. Solomons employees. We determined in June 2004
that Dr. Solomons employees had exercised
approximately 1.6 million options, and that we had issued
new shares in connection with these exercises rather than using
the trust shares to satisfy the option exercises. The trustee
returned the 1.6 million shares to us in June 2004, at
which time we retired them and they were no longer included in
our outstanding share balance. In December 2004, the trustee
sold the remaining 133,288 shares in the trust for proceeds
of $3.8 million, and remitted the funds to us. The terms of
the trust prohibited the trustee from returning the shares to us
and stipulated that only employees could benefit from the
shares. We distributed these funds to all employees below the
level of vice president through a bonus which was recognized as
expense in 2004.
25
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Item 6.
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Selected
Financial Data
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You should read the following selected financial data with our
consolidated financial statements and related notes and
Managements Discussion and Analysis of Financial
Conditions and Results of Operations. Historical results
may not be indicative of future results.
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Years Ended
December 31,
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2005(1)
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2004(2)
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2003
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2002(3)
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2001
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(In thousands, except for per
share amounts)
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Statement of Operations
Data
|
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Total net revenue
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$
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987,299
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$
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910,542
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$
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936,336
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$
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1,043,044
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$
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1,071,660
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Income from operations
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|
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158,129
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|
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322,671
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64,402
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124,028
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|
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153,483
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Income before provision for income
taxes, minority interest and cumulative effect of change in
accounting principle
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181,534
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316,471
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73,125
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|
|
|
129,933
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|
|
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148,136
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Income before cumulative effect of
change in accounting principle
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|
138,828
|
|
|
|
225,065
|
|
|
|
59,905
|
|
|
|
128,312
|
|
|
|
83,253
|
|
Cumulative effect of change in
accounting principle, net of taxes
|
|
|
|
|
|
|
|
|
|
|
10,337
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
138,828
|
|
|
|
225,065
|
|
|
|
70,242
|
|
|
|
128,312
|
|
|
|
83,253
|
|
Income per share, before
cumulative effect of change in accounting principle, basic
|
|
$
|
0.84
|
|
|
$
|
1.40
|
|
|
$
|
0.37
|
|
|
$
|
0.86
|
|
|
$
|
0.60
|
|
Income per share, before
cumulative effect of change in accounting principle, diluted
|
|
$
|
0.82
|
|
|
$
|
1.31
|
|
|
$
|
0.36
|
|
|
$
|
0.80
|
|
|
$
|
0.53
|
|
Cumulative effect of change in
accounting principle, basic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.07
|
|
|
$
|
|
|
|
$
|
|
|
Cumulative effect of change in
accounting principle, diluted
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.07
|
|
|
$
|
|
|
|
$
|
|
|
Net income per share, basic
|
|
$
|
0.84
|
|
|
$
|
1.40
|
|
|
$
|
0.44
|
|
|
$
|
0.86
|
|
|
$
|
0.60
|
|
Net income per share, diluted
|
|
$
|
0.82
|
|
|
$
|
1.31
|
|
|
$
|
0.43
|
|
|
$
|
0.80
|
|
|
$
|
0.53
|
|
Shares used in per share
calculation basic
|
|
|
165,087
|
|
|
|
160,714
|
|
|
|
160,338
|
|
|
|
149,441
|
|
|
|
137,847
|
|
Shares used in per share
calculation diluted
|
|
|
169,234
|
|
|
|
177,099
|
|
|
|
164,489
|
|
|
|
176,249
|
|
|
|
164,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005(1)
|
|
|
2004(2)
|
|
|
2003
|
|
|
2002(3)
|
|
|
2001
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
728,592
|
|
|
$
|
291,155
|
|
|
$
|
333,651
|
|
|
$
|
674,226
|
|
|
$
|
612,832
|
|
Working capital
|
|
|
698,670
|
|
|
|
255,696
|
|
|
|
415,768
|
|
|
|
475,418
|
|
|
|
443,035
|
|
Total assets
|
|
|
2,642,624
|
|
|
|
2,246,532
|
|
|
|
2,120,498
|
|
|
|
2,045,487
|
|
|
|
1,658,093
|
|
Deferred revenue
|
|
|
746,420
|
|
|
|
601,373
|
|
|
|
459,557
|
|
|
|
329,195
|
|
|
|
404,826
|
|
Long-term debt and other long-term
liabilities
|
|
|
142,638
|
|
|
|
204,796
|
|
|
|
570,162
|
|
|
|
519,150
|
|
|
|
579,243
|
|
Total equity
|
|
|
1,455,033
|
|
|
|
1,201,248
|
|
|
|
888,089
|
|
|
|
770,168
|
|
|
|
341,493
|
|
|
|
|
(1) |
|
In 2005, we reserved $50.0 million in connection with the
settlement with the SEC and we deposited $50.0 million in
an escrow account with the SEC as the designated beneficiary. |
26
|
|
|
(2) |
|
In 2004, we sold our Sniffer and Magic product lines for
aggregate net cash proceeds of $260.9 million and
recognized pre-tax gains on the sale of assets and technology
aggregating $243.5 million. We also received
$25.0 million from our insurance carriers for insurance
reimbursements related to the class action lawsuit settled in
2003. |
|
(3) |
|
We agreed to settle a pending class action lawsuit in September
2003 for $70.0 million, which was recorded as expense in
2002 as the settlement agreement was entered into prior to the
filing of the 2002 financial statements. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements and Factors That May Affect Future Results
This Managements Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking
statements that involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different
from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking
statements. Please see Special Note Regarding
Forward-Looking Statements in This Report at the end of
the Business section included in Item 1.
Overview
and Executive Summary
We are a worldwide supplier of computer security solutions
designed to proactively prevent intrusions on networks and
secure computer systems and other digital devices from a large
variety of known and unknown threats and attacks. 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 intrusions; enforce and measure compliance). 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 through a network of qualified partners. We
operate our business in five geographic regions: North America;
Europe, Middle East and Africa, collectively referred to as
EMEA; Japan; Asia-Pacific, excluding Japan; and Latin America.
See Note 19 to our consolidated financial statements for a
description of revenues, operating income and assets by
geographic region.
We offer a comprehensive set of security solutions. The
solutions include anti-virus, anti-spyware, anti-spam, intrusion
prevention and vulnerability management. We offer policy
management tools to keep threat-protection systems
up-to-date
and allow companies to enforce security policies.
The majority of our net revenue has historically been derived
from our McAfee Security anti-virus products and, until the sale
of the Sniffer product line, our Sniffer Technologies network
fault identification and application performance management
products. We have also focused our efforts on building a full
line of complementary network and system protection solutions.
On the system protection side, we strengthened our anti-virus
lineup by adding complementary products in the anti-spam and
host intrusion prevention categories, and through our June 2005
Wireless Security Corporation acquisition, we have strengthened
our solution portfolio in our consumer and small business
segments. On the network protection side, we have added products
in the network intrusion prevention and detection category, and
through our October 2004 Foundstone acquisition, vulnerability
management products and services.
We derive our revenue and generate cash from customers from
primarily two sources (i) services and support revenue,
which includes software license maintenance, training,
consulting and on-line subscription arrangements revenue, and
(ii) product revenue, which includes software license,
hardware and royalty revenue. For 2005 and 2004, our net revenue
was $987.3 million and $910.5 million, and our net
income was $138.8 million and $225.1 million,
respectively. Net income in 2005 was negatively impacted by the
$50.0 million SEC settlement charge. On February 9,
2006, the SEC entered the final judgment for the settlement with
us and the $50.0 million escrow was released to the SEC on
February 13, 2006. Net income in 2004 was favorably
impacted by a $46.1 million pre-tax gain from the sale of
our Magic product line in January 2004, a $197.4 million
pre-tax gain from the sale of our Sniffer product line in July
2004 and insurance reimbursements of approximately
$25.0 million relating to our previously settled class
action lawsuit. Our net revenue is impacted by corporate IT,
government and
27
consumer spending levels. In addition to total net revenue and
net income, in evaluating our business, management considers,
among many other factors, the following:
Net
Revenues by Geography
During 2005, 42% of our total net revenue was generated outside
of North America. North America and EMEA collectively accounted
approximately for 86% of our total net revenue in 2005. During
2004, 39% of our total net revenue was generated outside of
North America, with North America and EMEA collectively
accounting for approximately 88% of our total net revenue. North
America and EMEA have benefited from increased corporate IT
spending related to security in both 2005 and 2004.
Net
Revenues by Product and Customer Category
|
|
|
|
|
McAfee. Our McAfee products include our
corporate products and consumer products. Our corporate products
include our small and medium-sized business, or SMB, products
and our enterprise products, which include our IntruShield
intrusion protection products that were acquired in connection
with the Intruvert acquisition in 2003, our Entercept host-based
intrusion protection products that were acquired in connection
with the Entercept acquisition in 2003, and Foundstone Risk
Management products that were acquired in connection with the
Foundstone acquisition in October 2004. Revenues from our
corporate products increased $25.6 million, or 5%, to
$536.8 million during 2005 from $511.2 million in
2004. The
year-over-year
increase reflects an increase in corporate IT spending related
to security in 2005, partially offset by the impact of our
perpetual-plus license model, which recognizes less revenue
up-front and defers more revenue to future periods.
|
We continued to experience growth in the consumer market. Our
consumer market is comprised of our McAfee consumer on-line
subscription service and retail-boxed product sales. In 2005, we
added 8.7 million net new on-line consumer subscribers. Net
revenue from our consumer security market increased
$149.4 million, or 50%, to $448.6 million in 2005 from
$299.2 million in 2004. At December 31, 2005, we had a
total on-line subscriber base of approximately 17.2 million
consumer customers, compared to 8.5 million at
December 31, 2004. The main driver of this subscriber
growth was our continued strategic relationships with strategic
channel partners, such as AOL, Comcast and Dell.
|
|
|
|
|
Sniffer Technologies. Net revenue from the
sale of Sniffer products were $90.9 million in 2004. In
July 2004, we sold our Sniffer product line for net cash
proceeds of $213.8 million. We agreed to provide certain
post-closing transition services to Network General Corporation,
the acquirer of the Sniffer product line. We were reimbursed for
our cost plus a profit margin and present these reimbursements
as a reduction of operating expenses on a separate line in our
income statement. In 2005, we recorded approximately
$0.4 million for these transition services. In 2004, we
recorded $6.0 million. We completed our obligations under
the transition services agreement in July 2005.
|
|
|
|
Magic. In 2004, net revenue from the sale of
Magic Solutions products totaled approximately
$2.9 million. We sold the assets of our Magic Solutions
service desk business to BMC Software, Inc. The sale closed on
January 30, 2004 and we received cash proceeds of
approximately $47.1 million, net of direct expenses.
|
|
|
|
McAfee Labs. We sold our McAfee Labs assets to
SPARTA, Inc. for $1.5 million in April 2005. Net revenue
related to McAfee Labs was $1.9 million in 2005 and
$6.4 million in 2004.
|
See Note 19 to our consolidated financial statements for a
description of revenues on a product and service basis and a
product family basis.
Deferred
Revenue
Beginning in mid-2003 in EMEA and in the first quarter of 2004
in the United States, we implemented a strategy in which we
transitioned from term-license agreements to perpetual-plus
licensing arrangements. This strategy increased deferred
revenue, as more revenue was deferred and recognized ratably
into service and support revenue, and provided us more
predictability to future revenues. Our deferred revenue balance
at December 31, 2005 was $746.4 million compared to
$601.4 million at December 31, 2004, which is an
increase of 24%. The
28
increase is attributable to our perpetual-plus licensing program
and an increase in multiple-year contract arrangements.
Cash,
Cash Equivalents and Marketable Securities
The balance of cash, cash equivalents and marketable securities
at December 31, 2005 was $1,257.0 million compared to
$924.7 million at December 31, 2004. The increase was
primarily attributable to (i) net cash provided by
operating activities of $419.5 million and (ii) cash
received from the exercise of stock options and stock purchases
under the stock purchase plans of $108.2 million, partially
offset by our utilization of cash to (i) repurchase
2.8 million shares of common stock for approximately
$68.4 million, (ii) put into escrow $50.0 million
for payment of the SEC penalty, (iii) acquire Wireless
Security Corporation for approximately $20.2 million and
(iv) purchase property and equipment for approximately
$28.9 million. See the Liquidity and Capital Resources
section below.
In 2006, our management remains focused on, among other things,
(i) building momentum in the consumer online market,
(ii) increasing revenue in all segments,
(iii) continuing to streamline our business to make it
easier for strategic channel partners to do business with us,
(iv) delivering new products to our customers,
(v) generating cash to re-invest in our business and for
potential security acquisitions and (vi) improving
operational efficiencies and financial systems.
Critical
Accounting Policies and Estimates
In preparing our consolidated financial statements, we make
estimates, assumptions and judgments that can have a significant
impact on our net revenue, operating income and net income, as
well as the value of certain assets and liabilities on our
consolidated balance sheet. The application of our critical
accounting policies requires an evaluation of a number of
complex criteria and significant accounting judgments by us.
Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities. We evaluate our estimates on a regular basis and
make changes accordingly. Senior management has discussed the
development, selection and disclosure of these estimates with
the audit committee of our board of directors. Actual results
may materially differ from these estimates under different
assumptions or conditions. If actual results were to differ from
these estimates materially, the resulting changes could have a
material adverse effect on the consolidated financial statements.
An accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time the estimate is
made, and if different estimates that reasonably could have been
used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially impact the
consolidated financial statements. Management believes the
following critical accounting policies reflect our more
significant estimates and assumptions used in the preparation of
the consolidated financial statements.
Our critical accounting policies are as follows:
|
|
|
|
|
revenue recognition;
|
|
|
|
estimating valuation allowances and accrued liabilities,
specifically sales returns and other incentives, the allowance
for doubtful accounts, our facility restructuring accrual; and
the assessment of the probability of the outcome of litigation
against us;
|
|
|
|
accounting for income taxes; and
|
|
|
|
valuation of goodwill, finite-lived intangibles and long-lived
assets.
|
Revenue
Recognition
As described below, significant management judgments and
estimates must be made and used in connection with the revenue
recognized in any accounting period. Material differences may
result in the amount and timing of our revenue for any period if
our management made different judgments or utilized different
estimates. These
29
estimates affect the deferred revenue line item on our
consolidated balance sheet and the net revenue line item on our
consolidated statement of income. Estimates regarding revenue
affect all of our operating geographies.
Our revenue is derived from primarily two sources
(i) product revenue, which includes software license,
hardware, retail and royalty revenue and (ii) services and
support revenue which includes software license maintenance and
support, training, consulting, and on-line subscription revenue.
We apply the provisions of Statement of Position 97-2,
Software Revenue Recognition, or
SOP 97-2,
and related interpretations to all transactions involving the
sale of software products and hardware products that include
software. For hardware products where software is incidental, we
do not separate the license fee and we do not apply separate
accounting guidance to the hardware and software elements. For
hardware transactions where no software is involved or software
is incidental, we apply the provisions of Staff Accounting
Bulletin 104 Revenue Recognition, or
SAB 104.
We market and distribute our software products both as
standalone software products and as comprehensive security
solutions. We recognize revenue from the sale of software
licenses when all of the following is met:
|
|
|
|
|
persuasive evidence of an arrangement exists,
|
|
|
|
the product or service has been delivered,
|
|
|
|
the fee is fixed or determinable, and
|
|
|
|
collection of the resulting receivable is reasonably assured.
|
Persuasive evidence is generally a binding purchase order or
license agreement. Delivery generally occurs when product is
delivered to a common carrier or upon delivery of a grant letter
and license key, if applicable. If a significant portion of a
fee is due after our normal payment terms of typically
30 90 days, we recognize revenue as the
fees become due. If we determine that collection of a fee is not
reasonably assured, we defer the fees and recognize revenue upon
cash receipt, provided all other revenue recognition criteria
are met.
We enter into perpetual and subscription software license
agreements through direct sales to customers and indirect sales
with partners, distributors and resellers. We recognize revenue
from the indirect sales channel upon sell-through by the partner
or distributor. The license agreements generally include service
and support agreements, for which the related revenue is
deferred and recognized ratably over the performance period. All
revenue derived from our online subscription products is
deferred and recognized ratably over the performance period.
Professional services revenue is generally recognized as
services are performed or if required, upon customer acceptance.
For arrangements with multiple elements, including software
licenses, maintenance
and/or
services, we allocate and defer revenue equivalent to the
vendor-specific objective evidence, or VSOE, of fair value for
the undelivered elements and recognize the difference between
the total arrangement fee and the amount deferred for the
undelivered elements as product revenue. VSOE of fair value is
based upon the price for which the undelivered element is sold
separately or upon substantive renewal rates stated in a
contract. We determine fair value of the undelivered elements
based on historical evidence of stand-alone sales of these
elements to our customers. When VSOE does not exist for
undelivered elements such as maintenance and support, the entire
arrangement fee is recognized ratably over the performance
period.
We reduce revenue for estimates of sales incentives and sales
returns. We offer 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
promotional and rebate programs and sales returns based on our
historical experience.
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
30
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 or accrued
liabilities line items on our consolidated balance sheet. These
estimates affect all of our operating geographies.
At December 31, 2005, our allowance for sales returns and
incentives was $32.6 million compared to $29.2 million
at December 31, 2004. If our sales returns experience were
to increase by an additional 1% of license revenues, our
allowance for sales returns at December 31, 2005 would
increase and net revenue for 2005 would decrease by
approximately $1.1 million.
Deferred Costs of Revenue. Deferred costs of
revenue, which consist primarily of costs related to
revenue-sharing arrangements and costs of inventory sold into
our channel which have not been sold through to the end-user,
are included in other current assets on our consolidated balance
sheet. We only defer direct and incremental costs related to
revenue-sharing arrangements and recognize such deferred costs
proportionate to the related revenue recognized. At
December 31, 2005, our deferred costs were
$31.1 million compared to $13.6 million at
December 31, 2004.
Allowance
for Doubtful Accounts
We also make estimates of the uncollectibility of our accounts
receivables. Management specifically analyzes accounts
receivable balances, current and historical bad debt trends,
customer concentrations, customer credit-worthiness, current
economic trends and changes in our customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts.
We specifically reserve for any account receivable for which
there are identified collection issues. Bad debts have
historically been approximately 2% of our average accounts
receivable. These estimates affect the provision for doubtful
accounts line item on our statement of income and the net
accounts receivable line item on the consolidated balance sheet.
The estimation of uncollectible accounts affects all of our
operating geographies.
At December 31, 2005, our allowance for doubtful accounts
was $2.4 million compared to $2.5 million at
December 31, 2004. If an additional 1% of our gross
accounts receivable were deemed to be uncollectible at
December 31, 2005, our allowance for doubtful accounts and
provision for bad debt expense would increase by approximately
$2.0 million.
Estimation
of Restructuring Accrual and Litigation
Restructuring Accrual. During 2005, we
permanently vacated several leased facilities and recorded a
$1.9 million accrual for estimated lease related costs
associated with the permanently vacated facilities. During 2004,
we permanently vacated several leased facilities, including an
additional two floors in our Santa Clara headquarters
building and recorded an $8.7 million restructuring
accrual. In 2003, as part of a consolidation of activities into
our Plano, Texas facility from our headquarters in
Santa Clara, California, we recorded a restructuring charge
of $15.8 million. We recorded these facility restructuring
charges in accordance with Statement of Financial Accounting
Standard No. 146, Accounting for Exit Costs
Associated With Exit or Disposal Activities
(SFAS 146). In order to determine our
restructuring charges and the corresponding liabilities,
SFAS 146 required us to make a number of assumptions. These
assumptions included estimated sublease income over the
remaining lease period, estimated term of subleases, estimated
utility and real estate broker fees, as well as estimated
discount rates for use in calculating the present value of our
liability. We developed these assumptions based on our
understanding of the current real estate market in the
respective locations as well as current market interest rates.
The assumptions used are our managements best estimate at
the time of the accrual, and adjustments are made on a periodic
basis if better information is obtained. If, at
December 31, 2005, our estimated sublease income were to
decrease 10%, the restructuring reserve and related expense
would have increased by approximately $1.3 million.
The estimates regarding our restructuring accruals affect our
current liabilities and other long-term liabilities line items
in our consolidated balance sheet, since these liabilities will
be settled each year through 2013. These estimates affect our
statement of income in the restructuring line item. At
December 31, 2005, our North American operating segment was
affected by these estimates.
31
Litigation. Managements current
estimated range of liability related to litigation that is
brought against us from time to time is based on claims for
which our management can estimate the amount and range of loss.
We recorded the minimum estimated liability related to those
claims, where there is a range of loss as there is no better
point of estimate. Because of the uncertainties related to an
unfavorable outcome of litigation, and the amount and range of
loss on pending litigation, management is often unable to make a
reasonable estimate of the liability that could result from an
unfavorable outcome. As litigation progresses, we continue to
assess our potential liability and revise our estimates. Such
revisions in our estimates could materially impact our results
of operations and financial position. Estimates of litigation
liability affect our accrued liability line item on our
consolidated balance sheet and our general and administrative
expense line item on our statement of income.
Accounting
for Income Taxes
As part of the process of preparing our consolidated financial
statements we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves
estimating our actual current tax exposure together with
assessing temporary differences resulting from differing
treatment of items, such as deferred revenue, for tax and
accounting purposes. These differences result in deferred tax
assets and liabilities, which are included within our
consolidated balance sheet. We must then assess and make
significant estimates regarding the likelihood that our deferred
tax assets will be recovered from future taxable income and to
the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a
valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the
statement of income. Estimates related to income taxes affect
the deferred tax asset and liability line items and accrued
liabilities in our consolidated balance sheet and our income tax
(benefit) expense line item in our statement of income. Income
tax estimates affect all of our operating geographies.
The net deferred tax asset as of December 31, 2005 is
$448.1 million, net of a valuation allowance of
$48.2 million. The valuation allowance is recorded due to
the uncertainty of our ability to utilize some of the deferred
tax assets related to foreign tax credits and net operating
losses of acquired companies. The valuation allowance is based
on our historical experience and estimates of taxable income by
jurisdiction in which we operate and the period over which our
deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or we adjust these
estimates in future periods, we may need to establish an
additional valuation allowance which could materially impact our
financial position and results of operations.
Tax returns are subject to audit by various taxing authorities.
Although we believe that adequate accruals have been made for
unsettled issues, additional benefits or expenses could occur in
future years from resolution of outstanding matters. We continue
to assess our potential tax liability included in accrued taxes
in the consolidated financial statements, and revise our
estimates. Such revisions in our estimates could materially
impact our results of operations and financial position. We have
classified a portion of our tax liability as non-current in the
consolidated balance sheet based on the expected timing of cash
payments to settle contingencies with taxing authorities.
Valuation
of Goodwill, Intangibles, and Long-lived Assets
We account for goodwill and other indefinite-lived intangible
assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, or
SFAS 142. SFAS 142 requires, among other things, the
discontinuance of amortization for goodwill and indefinite-lived
intangibles and at least an annual test for impairment. An
impairment review may be performed more frequently in the event
circumstances indicate that the carrying value may not be
recoverable.
We are required to make estimates regarding the fair value of
our reporting units when testing for potential impairment. We
estimate the fair value of our reporting units using a
combination of the income approach and the market approach.
Under the income approach, we calculate the fair value of a
reporting unit based on the present value of estimated future
cash flows. Under the market approach, we estimate the fair
value based on market multiples of revenues or earnings for
comparable companies. We estimate cash flows for these purposes
using internal budgets based on recent and historical trends. We
base these estimates on assumptions we believe to be reasonable,
but which are unpredictable and inherently uncertain. We also
make certain judgments about the selection of comparable
companies used in the market approach in valuing our reporting
units, as well as certain
32
assumptions to allocate shared assets and liabilities to
calculate the carrying value for each of our reporting units. If
an impairment were present, these estimates would affect an
impairment line item on our consolidated statement of income and
would affect the goodwill in our consolidated balance sheet. As
goodwill is allocated to all of our reporting units, any
impairment could potentially affect each operating geography.
Based on our most recent impairment test, there would have to be
a significant change in assumptions used in such calculation in
order for an impairment to occur as of December 31, 2005.
We account for finite-lived intangibles and long-lived assets in
accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. Under
this standard we will record an impairment charge on
finite-lived intangibles or long-lived assets to be held and
used when we determine that the carrying value of intangibles
and long-lived assets may not be recoverable.
Based upon the existence of one or more indicators of
impairment, we measure any impairment of intangibles or
long-lived assets based on a projected discounted cash flow
method using a discount rate determined by our management to be
commensurate with the risk inherent in our current business
model. Our estimates of cash flows require significant judgment
based on our historical results and anticipated results and are
subject to many of the factors, noted below as triggering
factors, which may change in the near term.
Factors considered important, which could trigger an impairment
review include, but are not limited to:
|
|
|
|
|
significant under performance relative to expected historical or
projected future operating results;
|
|
|
|
significant changes in the manner of our use of the acquired
assets or the strategy for our overall business;
|
|
|
|
significant negative industry or economic trends;
|
|
|
|
significant declines in our stock price for a sustained
period; and
|
|
|
|
our market capitalization relative to net book value.
|
Goodwill amounted to $438.4 million and $439.2 million
as of December 31, 2005 and 2004, respectively. We did not
hold any other indefinite-lived intangibles as of
December 31, 2005 or 2004. Net finite-lived intangible
assets and long-lived assets amounted to $166.4 million and
$198.8 million as of December 31, 2005 and 2004,
respectively.
Results
of Operations
Years
Ended December 31, 2005, 2004 and 2003
Net
Revenue
The following table sets forth, for the periods indicated, a
year-over-year
comparison of the key components of our net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
167,538
|
|
|
$
|
294,163
|
|
|
$
|
(126,625
|
)
|
|
|
(43
|
)%
|
|
$
|
513,610
|
|
|
$
|
(219,447
|
)
|
|
|
(43
|
)%
|
Services and support
|
|
|
819,761
|
|
|
|
616,379
|
|
|
|
203,382
|
|
|
|
33
|
|
|
|
422,726
|
|
|
|
193,653
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
987,299
|
|
|
$
|
910,542
|
|
|
$
|
76,757
|
|
|
|
8
|
|
|
$
|
936,336
|
|
|
$
|
(25,794
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
17
|
%
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
Services and support
|
|
|
83
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
The increase in net revenue from 2004 to 2005 reflected
(i) a $149.4 million increase in our consumer business
and (ii) a $25.6 million increase in our corporate
business due to increased corporate spending related to
security. These increases were partially offset by (i) a
$90.9 million decrease in revenues attributable to our
Sniffer product line, which was sold in July 2004, (ii) a
$4.5 million decrease attributable to McAfee Labs, which
was sold in April 2005 and (iii) the introduction of our
perpetual-plus licensing arrangements, which experience lower
rates of up-front revenue recognition, in the United States in
the first quarter of 2004 and in EMEA and Asia-Pacific,
excluding Japan, in mid-2003.
Net revenues from our consumer market increased during 2005
primarily due to (i) on-line subscriber growth from
8.5 million on-line subscribers at December 31, 2004
to 17.2 million subscribers at December 31, 2005 due
to our stronger strategic channel partner relationships and
(ii) increased online renewal rates.
The decrease in net revenue from 2003 to 2004 reflected
(i) a $119.3 million decrease in our Sniffer product
line as Sniffer revenues declined throughout 2004 and was sold
in July 2004, (ii) a $60.3 million decrease due to the
January 2004 sale of Magic, (iii) a decrease due to the
introduction of our perpetual-plus licensing model in 2003,
offset by (i) a $28.2 million increase in our
corporate revenues attributable to our May 2003 IntruVert
acquisition, (ii) a $103.9 million increase in our
consumer business due to on-line subscriber growth,
(iii) an increase in revenues in EMEA and Japan of
approximately $26.0 million due to a weakening
U.S. dollar, and (iv) increased corporate IT spending
in 2004, which had a positive impact on our revenues.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
578,636
|
|
|
$
|
554,400
|
|
|
$
|
24,236
|
|
|
|
4
|
%
|
|
$
|
606,685
|
|
|
$
|
(52,285
|
)
|
|
|
(9
|
)%
|
EMEA
|
|
|
273,108
|
|
|
|
241,724
|
|
|
|
31,384
|
|
|
|
13
|
|
|
|
240,616
|
|
|
|
1,108
|
|
|
|
|
|
Japan
|
|
|
76,994
|
|
|
|
54,850
|
|
|
|
22,144
|
|
|
|
40
|
|
|
|
40,519
|
|
|
|
14,331
|
|
|
|
35
|
|
Asia-Pacific, excluding Japan
|
|
|
37,147
|
|
|
|
38,494
|
|
|
|
(1,347
|
)
|
|
|
(4
|
)
|
|
|
29,014
|
|
|
|
9,480
|
|
|
|
33
|
|
Latin America
|
|
|
21,414
|
|
|
|
21,074
|
|
|
|
340
|
|
|
|
2
|
|
|
|
19,502
|
|
|
|
1,572
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
987,299
|
|
|
$
|
910,542
|
|
|
$
|
76,757
|
|
|
|
8
|
|
|
$
|
936,336
|
|
|
$
|
(25,794
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
58
|
%
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
28
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
Japan
|
|
|
8
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Asia-Pacific, excluding Japan
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Latin America
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue outside of North America, consisting of U.S. and
Canada, accounted for approximately 42%, 39% and 35% of net
revenue for 2005, 2004 and 2003, respectively. Net revenue from
North America and EMEA has historically comprised between 86%
and 91% of our business. During 2004, we experienced the
weakening of the U.S. dollar against many currencies, but
most dramatically against the Euro. As a result of the weaker
U.S. dollar, we experienced positive impacts on our net
revenue in the EMEA region. During 2005, the U.S. dollar
strengthened
year-over-year
against many currencies, especially the Euro. However, the
average Euro to U.S. dollar exchange rate in 2005 was
comparable to the average Euro to U.S. Dollar exchange rate
in 2004, therefore, we did not experience a significant impact
to revenue related to foreign exchange gains or losses.
34
The increase in total net revenue in North America during 2005
primarily related to (i) a $95.3 million increase in
consumer revenue in North America due to stronger strategic
channel partner relationships and (ii) a $3.6 million
increase in corporate revenue in North America partially offset
by (i) a $68.0 million decrease in Sniffer revenue in
North America due to the sale of our Sniffer product line in
July 2004, (ii) a $4.5 million decrease in McAfee Labs
revenue in North America due to the sale of McAfee Labs in April
2005, (iii) a $2.1 million decrease in Magic revenue
in North America due to the sale of our Magic product line in
January 2004 and (iv) our perpetual-plus licensing
arrangements which were introduced in 2004 and resulted in an
increase in the amount of revenue deferred to future periods.
The revenue decline from 2003 to 2004 was due to (i) a
decline of $92.4 million due to the July 2004 sale of our
Sniffer product line as well as declining Sniffer revenues in
2004, (ii) a decline of $40.9 million due to the
January 2004 sale of our Magic product line, and (iii) a
decrease in our corporate revenue of approximately
$10.4 million, which is net of a $15.9 million
increase in IntruShield product revenue due to the Intruvert
acquisition in the second quarter of 2003, partially offset by
(iv) an increase of $99.9 million related to the
increase in consumer revenue in North America. The economic
growth and increased corporate IT spending had a positive impact
on our revenues, while the introduction of the perpetual-plus
model in North America in 2004 resulted in an increase in the
amount of revenue deferred to future periods.
The increase in total net revenue in EMEA during 2005 was
attributable to (i) a $31.8 million increase in
consumer revenue due to stronger strategic channel partner
relationships and (ii) a $10.0 million increase in
corporate revenue, partially offset by a $9.7 million
decrease in revenues related to the Sniffer product line that
was sold in July 2004. The average Euro to U.S. Dollar
exchange rate in 2005 was comparable to the average Euro to
Dollar exchange rate in 2004, therefore, we did not experience a
significant impact to revenue related to changing foreign
currency rates. Total net revenue in EMEA remained consistent in
2004 compared to 2003. In 2004, net revenue decreased due to
(i) an $18.0 million decrease due to the sale of
Sniffer in July 2004 and (ii) an $18.4 million
decrease due to the sale of Magic in January 2004 offset by a
$4.4 million increase in IntruShield revenue due to the
acquisition of Intruvert in the second quarter of 2003. The
strengthening of the Euro against the U.S. dollar resulted
in an approximate $22.0 million increase in revenues from
2003 to 2004, and we also benefited from increased corporate IT
spending in 2004.
Net revenues from our consumer market in both North America and
in EMEA increased during 2005 primarily due to (i) on-line
subscriber growth due to stronger strategic channel partner
relationships (ii) increased on-line renewal rates and
(iii) increased retail revenues due to higher levels of
contract support renewal revenue generated from our increased
2004 retail sales due to numerous virus outbreaks in 2003
through 2004 and new product offerings.
Our Japan, Latin America and Asia-Pacific operations combined
have historically been less than 20% of our total business and
we expect this trend to continue.
Risks inherent in international revenue include the impact of
longer payment cycles, greater difficulty in accounts receivable
collection, unexpected changes in regulatory requirements,
seasonality due to the slowdown in European business activity
during the third quarter, political instability, tariffs and
other trade barriers, currency fluctuations, a high incidence of
software piracy in some countries, product localization,
international labor laws and our relationship with our employees
and regional work councils and difficulties staffing and
managing foreign operations. These factors may have a material
adverse effect on our future international revenue.
35
Product
Revenue
The following table sets forth, for the periods indicated, each
major category of our product revenue as a percent of total
product revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
Net product revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term subscription licenses
|
|
$
|
24,574
|
|
|
$
|
39,682
|
|
|
$
|
(15,108
|
)
|
|
|
(38
|
)%
|
|
$
|
113,696
|
|
|
$
|
(74,014
|
)
|
|
|
(65
|
)%
|
Perpetual licenses
|
|
|
86,568
|
|
|
|
118,301
|
|
|
|
(31,733
|
)
|
|
|
(27
|
)
|
|
|
227,492
|
|
|
|
(109,191
|
)
|
|
|
(48
|
)
|
Hardware
|
|
|
36,679
|
|
|
|
79,828
|
|
|
|
(43,149
|
)
|
|
|
(54
|
)
|
|
|
99,502
|
|
|
|
(19,674
|
)
|
|
|
(20
|
)
|
Retail
|
|
|
18,276
|
|
|
|
27,787
|
|
|
|
(9,511
|
)
|
|
|
(34
|
)
|
|
|
45,993
|
|
|
|
(18,206
|
)
|
|
|
(40
|
)
|
Other
|
|
|
1,441
|
|
|
|
28,565
|
|
|
|
(27,124
|
)
|
|
|
(95
|
)
|
|
|
26,927
|
|
|
|
1,638
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue
|
|
$
|
167,538
|
|
|
$
|
294,163
|
|
|
$
|
(126,625
|
)
|
|
|
(43
|
)
|
|
$
|
513,610
|
|
|
$
|
(219,447
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of product revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term subscription licenses
|
|
|
15
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
Perpetual licenses
|
|
|
51
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
Hardware
|
|
|
22
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
11
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue includes revenue from software licenses,
hardware, our retail products and royalties. The decrease in
product revenue from 2005 compared to 2004 was attributable to
(i) a decrease in term subscription and perpetual licenses
in 2005 due to the introduction of our perpetual-plus licensing
arrangements in the United States in the first quarter of 2004
and in EMEA and Asia-Pacific, excluding Japan, in the middle of
2003, resulting in reduced product revenues and increased
services and support revenues, (ii) increased incentive
rebates and marketing development funds with our partners which
are recorded as an offset to revenue, (iii) a decrease in
retail license revenue in 2005 due to our continued shift in
focus from retail-boxed products to our on-line subscription
model for consumers and SMBs, and (iv) the sales of our
Sniffer product line sale in July 2004 and our Magic product
line in January 2004, partially offset by a general increase in
corporate IT spending related to security. The introduction of
the perpetual-plus licensing arrangement has resulted in revenue
declines in the term subscription license and perpetual license
revenues with a corresponding increase in services and support
revenues. In addition, in April 2005 we increased our support
pricing on selected consumer products, including VirusScan and
McAfee Internet Security, which resulted in a decrease in
product revenue in 2005 due to allocating more revenue related
to service and support and recognizing this deferred revenue
ratably over the service and support period. Our hardware
revenue decreased in 2005 compared to 2004 primarily due to the
sale of our Sniffer product line in July 2004.
The decrease in product revenue from 2003 to 2004 was due to
(i) the introduction of our perpetual-plus licensing
arrangements in the United States in the first quarter of 2004,
and in EMEA and Asia-Pacific, excluding Japan in the middle of
2003, resulting in reduced product revenues and increased
services and support revenues, (ii) our continued shift in
focus from retail boxed products to our on-line subscription
model for consumers and SMBs, and (iii) the Sniffer sale in
July 2004 and declining 2004 revenues, partially offset by the
effects of the strengthening foreign currencies against the
U.S. Dollar and increased corporate IT spending related to
security. The introduction of the perpetual-plus licensing
arrangement has resulted in revenue declines in the term
subscription license and perpetual license revenues. Our
hardware revenue decreased due to the Sniffer sale in July 2004,
which was partially offset by an increase in revenue from our
IntruShield product due to our purchase of
36
IntruVert in the second quarter of 2003. The decrease in retail
revenues was due to our shift to the on-line subscription model
for consumers and SMB.
Our customers license our software on a perpetual or term
subscription basis depending on their preference. Our experience
in recent periods has been that perpetual licenses become a
larger percentage of our license revenue in any quarter
following the implementation of our perpetual-plus licensing
model worldwide. Furthermore, support pricing was significantly
higher under the perpetual-plus model. Thus, revenue has been
shifting out of product revenue and into services and support
revenue. We expect the remaining mix of product revenue to
fluctuate as a percentage of revenue.
Services
and Support Revenue
The following table sets forth, for the periods indicated, each
major category of our services and support revenue as a percent
of services and support revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
Net services and support revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support and maintenance
|
|
$
|
546,617
|
|
|
$
|
436,299
|
|
|
$
|
110,318
|
|
|
|
25
|
%
|
|
$
|
313,731
|
|
|
$
|
122,568
|
|
|
|
39
|
%
|
Consulting
|
|
|
20,213
|
|
|
|
19,157
|
|
|
|
1,056
|
|
|
|
6
|
|
|
|
27,421
|
|
|
|
(8,264
|
)
|
|
|
(30
|
)
|
Training
|
|
|
5,080
|
|
|
|
8,394
|
|
|
|
(3,314
|
)
|
|
|
(39
|
)
|
|
|
9,486
|
|
|
|
(1,092
|
)
|
|
|
(12
|
)
|
On-line subscription arrangements
|
|
|
247,851
|
|
|
|
152,529
|
|
|
|
95,322
|
|
|
|
62
|
|
|
|
72,088
|
|
|
|
80,441
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total services and support revenue
|
|
$
|
819,761
|
|
|
$
|
616,379
|
|
|
$
|
203,382
|
|
|
|
33
|
|
|
$
|
422,726
|
|
|
$
|
193,653
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of services and support
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support and maintenance
|
|
|
67
|
%
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
Consulting
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
Training
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
On-line subscription arrangements
|
|
|
30
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total services and support revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services and support revenues include revenues from software
support and maintenance contracts, consulting, training and
on-line subscription arrangements. The increase in service and
support revenue in 2005 compared to 2004 was attributable to
(i) an increase in our on-line subscription arrangements
and (ii) an increase in support and maintenance primarily
due to our perpetual-plus licensing model. In addition, in April
2005 we increased our support pricing on selected consumer
products, including VirusScan and McAfee Internet Security,
which contributed to the increase in service and support revenue
in 2005. The increase in our on-line subscription arrangements
was due to an increase in our on-line customer base to
approximately 17.2 million subscribers at December 31,
2005 from 8.5 million subscribers at December 31,
2004, as well as an increase in our McAfee Managed VirusScan
on-line service for small and medium-sized businesses. The
increase in customers was primarily due to our continued
strategic channel partner relationships with AOL, Dell and
others.
The increase in service and support revenue from 2003 to 2004
was due to (i) an increase in support and maintenance due
to our perpetual-plus licensing model and (ii) an increase
in our on-line subscription arrangements, (iii) the
positive impact of foreign currencies strengthening against the
U.S. Dollar, partially offset by (iv) a combined
decrease in consulting and training revenues. The increase in
our on-line subscription arrangements is due to an increase in
our customer base to approximately 8.5 million subscribers
at December 31, 2004, from
37
3.7 million subscribers at December 31, 2003. The
increase in customers was attributable to our continued
strategic channel partner relationships with Dell, AOL and
others, as well as an outbreak of computer viruses in the second
half of 2003 continuing through 2004.
Our future profitability and rate of growth, if any, will be
directly affected by our revenue-sharing arrangements with our
partners, increased price competition and the size of our
revenue base. Our growth rate and net revenue depend
significantly on renewals of support arrangements as well as our
ability to respond successfully to the pace of technological
change and expand our customer base. If our renewal rate or our
pace of new customer acquisition slows, our net revenues and
operating results would be adversely affected. Additionally,
support pricing under the perpetual-plus model is significantly
higher than the previous subscription model. In the event
customers choose not to renew their support arrangements or
renew such arrangements at other than the contractual rates,
revenue recognition under the perpetual-plus model could be
negatively impacted.
Cost
of Net Revenue; Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
63,272
|
|
|
$
|
73,058
|
|
|
$
|
(9,786
|
)
|
|
|
(13
|
)%
|
|
$
|
80,895
|
|
|
$
|
(7,837
|
)
|
|
|
(10
|
)%
|
Services and support
|
|
|
85,828
|
|
|
|
62,520
|
|
|
|
23,308
|
|
|
|
37
|
|
|
|
57,362
|
|
|
|
5,158
|
|
|
|
9
|
|
Amortization of purchased
technology
|
|
|
15,515
|
|
|
|
13,331
|
|
|
|
2,184
|
|
|
|
16
|
|
|
|
11,369
|
|
|
|
1,962
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
$
|
164,615
|
|
|
$
|
148,909
|
|
|
$
|
15,706
|
|
|
|
11
|
|
|
$
|
149,626
|
|
|
$
|
(717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total cost of net
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
39
|
%
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
54
|
%
|
|
|
|
|
|
|
|
|
Services and support
|
|
|
52
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
Amortization of purchased
technology
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
822,684
|
|
|
$
|
761,633
|
|
|
|
|
|
|
|
|
|
|
$
|
786,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percentage
|
|
|
83
|
%
|
|
|
84
|
%
|
|
|
|
|
|
|
|
|
|
|
84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Product Revenue
Our cost of product revenue consists primarily of the cost of
media, manuals and packaging for products distributed through
traditional channels, and, with respect to hardware-based
anti-virus and security products, computer platforms and other
hardware components. The decrease in cost of product revenue
from 2004 to 2005 was primarily attributable to
(i) decreased product revenue and (ii) the sale of the
Sniffer product line in July 2004, offset by (iii) the full
cost of product revenue being recognized upfront upon delivery
while more revenue is being deferred and recognized ratably over
the contract term and (iv) increased fulfillment and
logistics costs in EMEA. The decrease in cost of product revenue
from 2003 to 2004 was primarily due to the sale of Sniffer in
July 2004, partially offset by an increase in the volume of
IntruShield hardware due to a full-year of activity following
this acquisition in mid-2003. We anticipate that cost of product
revenue will increase in absolute dollars and as a percentage of
cost of net revenue, primarily due to a change in product mix
and the recognition of stock compensation expense beginning in
the first quarter of 2006.
Cost of
Services and Support
Cost of services and support revenue consists principally of
salaries and benefits related to employees providing customer
support and consulting services, and costs related to the sale
of on-line subscription
38
arrangements, including revenue-sharing arrangements and
royalties paid to our strategic channel partners. The increases
in cost of services and support revenue from 2003 through 2005
were due to increases in revenue-sharing arrangements and
royalties paid to our on-line strategic channel partners. As a
percentage of services and support revenues, costs remained
relatively flat due to increased revenue related to these
revenue-sharing arrangements and increased margins on renewals
and maintenance. In addition, we have low costs associated with
our on-line subscription revenue, which increased 62% in 2005
and 112% in 2004. In 2004, the increase was partially offset by
reduced support and consulting headcount as a result of the sale
of Magic in January 2004, as well as on-going cost reduction
efforts. Cost of services and support has increased as a
percentage of total cost of net revenue primarily as a result of
the increase in revenue-sharing arrangements and royalty
payments to our on-line strategic channel partners. We
anticipate that cost of product services and support will
increase in absolute dollars and as a percentage of cost of net
revenue.
Amortization
of Purchased Technology
The increases in amortization of purchased technology in 2005
and 2004 was attributable to our acquisition of Wireless
Security Corporation in June 2005, for which we recorded
purchased technology of $1.5 million, and to our
acquisition of Foundstone in October 2004, for which we recorded
purchased technology of $27.0 million. Amortization for
these items was $4.4 million and $1.0 million in 2005
and 2004, respectively. The purchased technology is being
amortized over estimated useful lives of up to seven years.
Amortization of purchased technology is expected to be an
aggregate of approximately $15.2 million in 2006.
The increase from 2003 to 2004 was due to our acquisitions of
Entercept and IntruVert in 2003, for which we recorded purchased
technology of $21.7 million and $18.2 million,
respectively, and our acquisition of Foundstone in October 2004,
for which we recorded purchased technology of
$27.0 million. Amortization for these items was
$9.0 million and $5.2 million in 2004 and 2003,
respectively. The increase in amortization related to the 2003
and 2004 acquisitions was partially offset by certain purchased
technology assets becoming fully amortized in 2003. The
purchased technology is being amortized over estimated useful
lives of up to seven years.
Gross
Margins
Our gross margins were stable from 2003 to 2005. The increase in
cost of service and support revenue was offset by the decrease
in cost of product revenue in 2005. Gross margins may fluctuate
in the future due to various factors, including the mix of
products sold, sales discounts, revenue-sharing agreements,
material and labor costs and warranty costs.
Operating
Costs
Research
and Development
The following table sets forth, for the periods indicated, a
year-over-year
comparison of our research and development expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Research and development
expenses(1)
|
|
$
|
176,350
|
|
|
$
|
172,717
|
|
|
$
|
3,633
|
|
|
|
2
|
%
|
|
$
|
184,606
|
|
|
$
|
(11,889
|
)
|
|
|
(6
|
)%
|
Percentage of net revenues
|
|
|
18
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation (benefits) charges of ($234),
$6,518 and $5,157 in 2005, 2004 and 2003, respectively. |
Research and development expenses consist primarily of salary,
benefits, and contractors fees for our development and technical
support staff, and other costs associated with the enhancements
of existing products and services and development of new
products and services. The increase in research and development
expenses in 2005 was primarily attributable to an increase in
average headcount dedicated to research and development
activities of approximately 11%, as well as an increase of
$1.4 million specifically related to the acquisition of
39
Foundstone. The increase in compensation expense was partially
offset by a $6.8 million decrease in stock-based
compensation.
The decrease from 2003 to 2004 reflects (i) a
$16.5 million decrease due to the Sniffer sale in July
2004, (ii) a $6.7 million decrease related to the
Magic sale in January 2004, and (iii) a decrease in
expenses due to headcount reductions and the movement of
research and development headcount to the Bangalore research
facility, which has lower salary costs, partially offset by
(iv) a $9.2 million increase due to a full-year impact
of the IntruVert acquisition in 2003, (v) a
$2.1 million increase due to strengthening foreign
currencies against the U.S. Dollar in EMEA and Japan in
2004, (vi) a $1.4 million increase in stock-based
compensation, and (vii) a $1.1 million increase due to
the acquisition of Foundstone in October 2004.
We believe that continued investment in product development is
critical to attaining our strategic objectives. We expect
research and development expenses will increase in absolute
dollars and as a percentage of net revenue, primarily due to the
recognition of stock compensation expense beginning in the first
quarter of 2006.
Marketing
and Sales
The following table sets forth, for the periods indicated, a
year-over-year
comparison of our marketing and sales expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Marketing and sales expenses(1)
|
|
$
|
294,234
|
|
|
$
|
354,380
|
|
|
$
|
(60,146
|
)
|
|
|
(17
|
)%
|
|
$
|
363,306
|
|
|
$
|
(8,926
|
)
|
|
|
(2
|
)%
|
Percentage of net revenues
|
|
|
30
|
%
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation (benefits) charges of ($25),
$2,642 and $5,065 in 2005, 2004 and 2003, respectively. |
Marketing and sales expenses consist primarily of salary,
commissions and benefits for marketing and sales personnel and
costs associated with advertising and promotions. The decrease
in marketing and sales expenses from 2004 to 2005 reflected
(i) decreased commissions totaling $15.8 million due
to a greater percentage of our business being from the on-line
consumer market and due to the Sniffer product line sale in July
2004, (ii) a $9.5 million decrease in compensation
expense due to the Sniffer product line sale in July 2004,
(iii) a $2.7 million decrease in stock-based
compensation, (iv) general headcount reductions of
approximately 16% and (v) reduced spending on sales and
marketing programs due to our cost reduction initiatives.
The decrease from 2003 to 2004 reflected (i) a
$14.6 million decrease due to the Sniffer sale in July
2004, the Magic sale in January 2004 and the impact of headcount
reductions in 2004, and (ii) a $2.4 million decrease
in stock-based compensation, partially offset by (iii) a
$6.4 million increase in expenses due to strengthening
foreign currencies against the U.S. Dollar in EMEA and
Japan in 2004, and (iv) a $1.7 million increase due to
the Foundstone acquisition in October 2004.
We anticipate that marketing and sales expenses will increase in
absolute dollars and as a percentage of net revenue, primarily
due to the recognition of stock compensation expense beginning
in the first quarter of 2006.
40
General
and Administrative
The following table sets forth, for the periods indicated, a
year-over-year
comparison of our general and administrative expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
General and administrative
expenses(1)
|
|
$
|
122,182
|
|
|
$
|
139,845
|
|
|
$
|
(17,663
|
)
|
|
|
(13
|
)%
|
|
$
|
129,920
|
|
|
$
|
9,925
|
|
|
|
8
|
%
|
Percentage of net revenues
|
|
|
12
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation charges of $1,315, $4,085 and
$2,285 in 2005, 2004 and 2003, respectively. |
General and administrative expenses consist principally of
salary and benefit costs for executive and administrative
personnel, professional services and other general corporate
activities. The decrease in general and administrative expenses
from 2004 to 2005 reflected (i) a $6.5 million
decrease in costs incurred to comply with Section 404 of
the Sarbanes-Oxley Act, (ii) a $2.8 million decrease
in stock compensation and (iii) decreased average headcount
dedicated to general and administrative activities of
approximately 6%. Also, in 2004, we had
(i) $2.9 million in consulting fees paid in connection
with strategic planning, (ii) fees incurred in the
divestiture of Sniffer and (iii) increased legal fees due
to our SEC investigation and merger and acquisition activity.
The remaining decrease was attributable to general cost
reduction efforts.
The increase from 2003 to 2004 reflected (i) an
$11.1 million increase in costs incurred to comply with
Section 404 of the Sarbanes-Oxley Act,
(ii) $2.9 million in consulting fees paid in
connection with strategic planning, (iii) a
$4.3 million increase in depreciation expense due to a
full-year impact of significant hardware additions for
back-office functions in 2003, (iv) a $2.7 million
increase due to strengthening foreign currencies against the
US Dollar in EMEA and Japan in 2004, (v) a
$1.8 million increase in stock-based compensation expense,
and (vi) a $0.8 million increase due to the Foundstone
acquisition in October 2004, partially offset by
(vi) $8.8 million in expenses incurred in 2003 related
to financial statement restatements which did not occur in 2004,
and a reduction in headcount and facilities costs related to
restructurings in 2004 and 2003.
In 2005, 2004 and 2003, we recognized acquisition-related
compensation expense of $4.7 million, $3.6 million and
$4.0 million, respectively, which represents amounts paid
to Entercept, IntruVert, Foundstone and Wireless Security
Corporation employees currently providing services to us. We
expect to recognize an additional $3.1 million in expense
related to these services in 2006, and an additional
$1.1 million in 2007.
We anticipate that general and administrative expenses will
increase in absolute dollars and as a percentage of net revenue,
primarily due to the recognition of stock compensation expense
beginning in the first quarter of 2006.
SEC
Settlement Charge
On March 22, 2002, the Securities and Exchange Commission
or SEC, notified us that it had commenced a Formal Order
of Private Investigation into our accounting practices. We
have been engaged in ongoing settlement discussions with the
SEC. On September 29, 2005, we announced we had reserved
$50.0 million in connection with the settlement with the
SEC. On February 9, 2006, the SEC entered the final
judgment for the settlement with us relating to this
investigation. Under the terms of the settlement, we consented,
without admitting or denying any wrongdoing, to be enjoined from
future violations of the federal securities laws. We also agreed
to certain other conditions, including the payment of a
$50.0 million civil penalty, which was released from escrow
on February 13, 2006.
41
Amortization
of Intangibles
The following table sets forth, for the periods indicated, a
year-over-year
comparison of the amortization of intangibles.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Amortization of intangibles
|
|
$
|
12,902
|
|
|
$
|
14,065
|
|
|
$
|
(1,163
|
)
|
|
|
(8
|
)%
|
|
$
|
15,637
|
|
|
$
|
(1,572
|
)
|
|
|
(10
|
)%
|
Percentage of net revenues
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
Intangibles consist of identifiable intangible assets. The
decreases are attributable to older intangibles becoming fully
amortized in 2004 and 2005.
In-Process
Research and Development Expense
The following table sets forth, for the periods indicated, a
year-over-year
comparison of our in-process research and development expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
In-process research and development
|
|
$
|
4,000
|
|
|
$
|
|
|
|
$
|
4,000
|
|
|
|
100
|
%
|
|
$
|
6,600
|
|
|
$
|
(6,600
|
)
|
|
|
(100
|
)%
|
Percentage of net revenues
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
During 2005, we expensed $4.0 million of in-process
research and development related to the acquisition of Wireless
Security Corporation in June 2005. At the time of the
acquisition, the ongoing project related to the development of
the consumer wireless security product. This consumer wireless
security product enables shared-key mode of security on single
or multiple access points and automatically distributes the key
to stations that would like to join the network. At the date of
acquisition, we estimated that, on average, 60% of the
development effort had been completed and that the remaining 40%
of the development would take approximately three months to
complete and would cost approximately $0.6 million. As of
December 31, 2005, we had completed the remaining
development efforts. The efforts required to complete the
development of these projects principally related to new access
points configuration, usability improvements, product
localization, integration with McAfee security center agents and
integration with McAfee installation applications. The value of
the in-process technologies was determined by estimating the
projected net cash flows related to products, including costs to
complete the development of the technologies or products, and
the future net revenues that may be earned from the products,
excluding the value attributed to integration with our products
or that may have been achieved due to the efficiencies resulting
from the combined sales force or the use of our more effective
distribution channel. These cash flows were discounted back to
their net present value using a discount rate of 42% and
excluding the value attributable to the use of the in-process
technologies in future products.
In 2003, we expensed $5.7 million of in-process research
and development related to IntruVert. The ongoing project at
IntruVert at the time of the purchase included the development
of the Infinity model of IntruShield sensor. Infinity is a lower
end model of the IntruShield sensor product family that is
targeted towards remote offices and branch offices of large
enterprises as well as small and medium-sized businesses. At the
date we acquired IntruVert, we estimated that, on average, 86%
of the development effort had been completed and that the
remaining 14% of the development effort would take approximately
2.5 months to complete and would cost $0.3 million.
The efforts required to complete the development of these
projects principally related to finalization of coding, and
completion of prototyping, verification, and testing activities
required to establish that products associated with the
technologies can be successfully introduced. The product was
completed in the third quarter of 2003 and has been shipped to
customers since that time. The value of the in-process
technologies was determined by estimating the projected net cash
flows related to products, including costs to complete the
development of the technologies or products, and the future net
revenues that may be earned from the products, excluding the
value attributed to integration with our products or that may
have been achieved due to efficiencies resulting from the
combined sales force or the use of our more effective
distribution channel. These cash flows were discounted back to
their net present value using a
42
discount rate of 20% and excluding the value attributable to the
use of the in-process technologies in future products.
In 2003, we expensed $0.9 million of in-process research
and development related to Entercept. The ongoing projects at
Entercept at the time of the purchase consisted of a Linux
version of their current product. At the date we acquired
Entercept, we estimated that, on average, 31% of the development
effort had been completed and that the remaining 69% of the
development effort would take approximately eight months to
complete and would cost $0.3 million. The efforts required
to complete the development of these projects principally
related to additional design efforts, finalization of coding,
and completion of prototyping, verification, and testing
activities required to establish that products associated with
the technologies can be successfully introduced. The product was
released in the fourth quarter of 2004. The value of the
in-process technologies was determined by estimating the
projected net cash flows related to products, including costs to
complete the development of the technologies or products, and
the future net revenues that may be earned from the products,
excluding the value attributed to integration with our products
or that may have been achieved due to efficiencies resulting
from the combined sales force or the use of the our more
effective distribution channel. These cash flows were discounted
back to their net present value using a discount rate of 35% and
excluding the value attributable to the use of the in-process
technologies in future products.
Restructuring
Charges
The following table sets forth, for the periods indicated, a
year-over-year
comparison of our restructuring charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Restructuring charges
|
|
$
|
3,731
|
|
|
$
|
17,493
|
|
|
$
|
(13,762
|
)
|
|
|
(79
|
)%
|
|
$
|
22,667
|
|
|
$
|
(5,174
|
)
|
|
|
(23
|
)%
|
Percentage of net revenues
|
|
|
0
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
2005
Restructuring
During 2005, we permanently vacated several leased facilities
and recorded a $1.9 million accrual for estimated lease
related costs associated with the permanently vacated
facilities. The remaining costs associated with vacating the
facilities are primarily comprised of the present value of
remaining lease obligations, along with estimated costs
associated with subleasing the vacated facility, net of
estimated sublease rental income. We also recorded a
restructuring charge of $0.2 million related to a reduction
in headcount of approximately 14 employees.
The following table summarizes our restructuring accrual
established in 2005 and activity through December 31, 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Severance and other
|
|
|
Other
|
|
|
|
|
|
|
Costs
|
|
|
benefits
|
|
|
Costs
|
|
|
Total
|
|
|
Balance, January 1, 2005
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring accrual
|
|
|
1,852
|
|
|
|
216
|
|
|
|
4
|
|
|
|
2,072
|
|
Cash payments
|
|
|
(1,127
|
)
|
|
|
(216
|
)
|
|
|
(4
|
)
|
|
|
(1,347
|
)
|
Effects of foreign currency
exchange
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
Accretion
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$
|
734
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
Restructuring
During 2004, we recorded several restructuring charges related
to the reduction of employee headcount. In the first quarter of
2004, we recorded a restructuring charge of approximately
$2.2 million related to the severance of approximately 160
employees, of which $0.7 million and $1.5 million was
related to our North America and EMEA operating segments,
respectively. The workforce size was reduced primarily due to
our sale of Magic in January
43
2004. In the second quarter of 2004, we recorded a restructuring
charge of approximately $1.6 million related to the
severance of approximately 80 employees in our sales, technical
support and general and administrative functions. Approximately
$0.6 million of the restructuring charge was related to the
EMEA operating segment and the remaining $1.0 million was
related to the North America operating segment. In the third
quarter of 2004, we recorded a restructuring charge related to
ten employees which totaled approximately $0.9 million, all
of which related to the North America operating segment. In the
fourth quarter of 2004, we recorded a restructuring charge of
$1.3 million related to 111 employees, of which
$0.7 million, $0.2 million, $0.2 million and
$0.2 million related to the Latin America, North America,
EMEA and Asia-Pacific (excluding Japan) operating segments,
respectively. All employees were terminated at December 31,
2004. The reductions in the second, third and fourth quarters
were part of the previously announced cost-savings measures
being implemented by us.
In September 2004, we announced the move of our European
headquarters to Ireland, which was substantially completed by
the end of March 2005. In the third and fourth quarters of 2004,
we recorded restructuring charges of $0.2 million and
$2.2 million, respectively, related to the severance of
approximately 80 employees.
Also in September 2004, we permanently vacated an additional two
floors in our Santa Clara headquarters building. We
recorded a $7.8 million accrual for the estimated lease
related costs associated with the permanently vacated facility,
partially offset by a $1.3 million write-off of deferred
rent liability. The remaining costs associated with vacating the
facility are primarily comprised of the present value of
remaining lease obligations, net of estimated sublease income
along with estimated costs associated with subleasing the
vacated facility. The remaining costs will generally be paid
over the remaining lease term ending in 2013. We also recorded a
non-cash charge of approximately $0.8 million related to
disposals of certain leasehold improvements.
In the fourth quarter of 2004, we permanently vacated several
leased facilities and recorded a $2.2 million accrual for
estimated lease related costs associated with the permanently
vacated facilities. The remaining costs associated with vacating
the facilities are primarily comprised of the present value of
remaining lease obligations, along with estimated costs
associated with subleasing the vacated facility.
During 2004, we adjusted the restructuring accruals related to
severance costs and lease termination costs recorded in 2004. We
recorded a $0.3 million adjustment to reduce the EMEA
severance accrual for amounts that were no longer necessary
after paying out substantially all accrued amounts to the former
employees. We also recorded a $0.2 million reduction in
lease termination costs due to changes in estimates related to
the sublease income to be received over the remaining lease term
of our Santa Clara headquarters building.
During 2005, we completed the move of our European headquarters
to Ireland and vacated the remaining planned floors. We recorded
an additional $1.4 million restructuring charge for
estimated lease related costs associated with the permanently
vacated facilities and a $1.4 million restructuring charge
for severance costs. All of these restructuring charges were
related to the EMEA operating segment. 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.
44
The following table summarizes our restructuring accruals
established in 2004 and activity through December 31, 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Severance and
|
|
|
Other
|
|
|
|
|
|
|
Costs
|
|
|
Other Benefits
|
|
|
Costs
|
|
|
Total
|
|
|
Balance, January 1, 2004
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring accrual
|
|
|
8,685
|
|
|
|
7,932
|
|
|
|
480
|
|
|
|
17,097
|
|
Cash payments
|
|
|
(579
|
)
|
|
|
(4,175
|
)
|
|
|
(63
|
)
|
|
|
(4,817
|
)
|
Adjustment to liability
|
|
|
(222
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
(497
|
)
|
Accretion
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
7,958
|
|
|
|
3,482
|
|
|
|
417
|
|
|
|
11,857
|
|
Restructuring accrual
|
|
|
1,402
|
|
|
|
1,382
|
|
|
|
20
|
|
|
|
2,804
|
|
Cash payments
|
|
|
(2,747
|
)
|
|
|
(4,864
|
)
|
|
|
(297
|
)
|
|
|
(7,908
|
)
|
Adjustment to liability
|
|
|
(819
|
)
|
|
|
|
|
|
|
(140
|
)
|
|
|
(959
|
)
|
Effects of foreign currency
exchange
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
Accretion
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$
|
6,089
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 servicing the McAfee System Protection
Solutions and McAfee Network Protection Solutions businesses.
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 $15.6 million accrual for
estimated lease related costs associated with the 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 approximately
$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 the second and third quarters of 2003, we recorded
restructuring charges of $6.8 million and
$0.6 million, respectively, which consisted of
$6.7 million related to a headcount reduction of 210
employees and $0.7 million related to other expenses such
as legal expenses incurred in international locations in
conjunction with the headcount reduction. The restructuring
charge related to headcount reductions was $0.9 million and
$5.8 million in our North American and EMEA operating
segments, respectively. The employees were located in our
domestic and international locations and were primarily in the
sales, product development and customer support areas. In the
third and fourth quarters of 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.
In 2004, we adjusted the restructuring accrual related to lease
termination costs previously recorded in 2003. The adjustments
decreased the liability by approximately $0.6 million 2004,
due to 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 made adjustments to our restructuring accrual
totaling $1.0 million due to a change in assumptions
related to utility costs and sublease income.
45
The following table summarizes our restructuring accrual
established in 2003 and activity through December 31, 2005
(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
|
|
|
(623
|
)
|
|
|
(123
|
)
|
|
|
|
|
|
|
(746
|
)
|
Accretion
|
|
|
548
|
|
|
|
|
|
|
|
|
|
|
|
548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
12,301
|
|
|
|
|
|
|
|
|
|
|
|
12,301
|
|
Cash payments
|
|
|
(1,279
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,279
|
)
|
Adjustment to liability
|
|
|
(1,048
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,048
|
)
|
Accretion
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$
|
10,472
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our estimate of the excess facilities charges recorded during
2005, 2004 and 2003 may vary significantly depending, in part,
on factors which may be beyond our control, such as our success
in negotiating with our lessor, the time periods required to
locate and contract suitable subleases and the market rates at
the time of such subleases. Adjustments to the facilities
accrual will be made if actual lease exit costs or sublease
income differ from amounts currently expected. The facility
restructuring charges in 2005 were primarily allocated to the
EMEA and Japan operating segments, and the facility
restructuring charges in 2004 and 2003 were primarily allocated
to the North America operating segment.
Provision
for (Recovery from) Doubtful Accounts, Net
The following table sets forth, for the periods indicated, a
year-over-year
comparison of our provision for (recovery from) doubtful
accounts, net.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
Provision for (recovery from
doubtful accounts, net
|
|
$
|
1,574
|
|
|
$
|
1,716
|
|
|
$
|
(142
|
)
|
|
|
(8
|
)%
|
|
$
|
(1,216
|
)
|
|
$
|
2,932
|
|
|
|
(241
|
)%
|
Percentage of net revenues
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts consists of our estimates for
the uncollectibility of receivables, net of recoveries of
amounts previously written off.
46
Reimbursement
from Transition Services Agreement
The following table sets forth, for the periods indicated, a
year-over-year
comparison of our reimbursement from transition services
agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
Reimbursement from transition
services agreement
|
|
$
|
(362
|
)
|
|
$
|
(5,997
|
)
|
|
$
|
5,635
|
|
|
|
94
|
%
|
|
$
|
|
|
|
$
|
(5,997
|
)
|
|
|
(100
|
)%
|
Percentage of net revenues
|
|
|
0
|
%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
In conjunction with the Sniffer sale, we entered into a
transition services agreement with Network General. Under this
agreement, we provided certain back-office services to Network
General for a period of time through June 2005. The
reimbursements we have recognized under this agreement totaled
approximately $0.4 million in 2005 and $6.0 million in
2004. We completed our requirements under the transition
services agreement in July 2005.
(Gain)
loss on Sale of Assets and Technology
The following table sets forth, for the periods indicated, a
year-over-year
comparison of the loss (gain) on sale of assets and technology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
(Gain) loss on sale of assets and
technology(1)
|
|
$
|
(56
|
)
|
|
$
|
(240,336
|
)
|
|
$
|
240,280
|
|
|
|
100
|
%
|
|
$
|
788
|
|
|
$
|
(241,124
|
)
|
|
|
*
|
|
Percentage of net revenues
|
|
|
0
|
%
|
|
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of stock-based compensation charge of $84 in 2004 |
|
* |
|
Calculation is not meaningful. |
We recognized a gain of approximately $1.3 million in 2005
related to the sale of our McAfee Labs assets to SPARTA, Inc.
The gain was offset by the write-off of property and equipment.
In January 2004, we recognized a gain of approximately
$46.1 million related to our sale of our Magic product line
to BMC Software. In July, 2004, we completed the sale of our
Sniffer product line to Network General, and as a result,
recognized a gain of approximately $197.4 million. Theses
gains were offset by a write-off of equipment.
The loss on sale of assets and technology of $0.8 million
in 2003 consists of the write-off of property and equipment.
Reimbursement
Related to Litigation Settlement
During 2004, we received insurance reimbursements of
approximately $25.0 million from our insurance carriers.
The reimbursements were a result of our insurance coverage
related to the class action lawsuit we settled in 2003.
47
Severance/Bonus
Costs Related to Sniffer and Magic Dispositions
The following table sets forth, for the periods indicated, a
year-over-year
comparison of severance and bonus costs related to Sniffer and
Magic dispositions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
Severance/bonus related to Sniffer
and Magic dispositions(1)
|
|
$
|
|
|
|
$
|
10,070
|
|
|
$
|
(10,070
|
)
|
|
|
(100
|
)%
|
|
$
|
|
|
|
$
|
10,070
|
|
|
|
100
|
%
|
Percentage of net revenues
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation charge of $991 in 2004 |
In conjunction with the sale of the Sniffer product line, we
incurred severance and bonuses to the former executives of
Sniffer for their assistance in the transaction. The total
bonuses and severance expensed was $7.7 million in 2004, of
which $5.3 million was paid in 2004 and $2.4 million
was paid in 2005. In addition, we accelerated the vesting of
these executives stock options, which resulted in a
stock-based compensation charge of approximately
$1.0 million.
In conjunction with the Magic sale, we incurred bonus expense of
approximately $1.4 million for amounts paid to an executive
during 2004.
Interest
and Other Income
Interest and other income was $24.8 million in 2005,
$15.9 million in 2004 and $15.9 million in 2003,
respectively. Interest and other income increased from 2004 to
2005 primarily due to a 36% increase in cash, cash equivalents
and marketable securities from $924.7 million at
December 31, 2004 to $1,257.0 million at
December 31, 2005 and higher interest rates in 2005.
Interest and other income remained consistent from 2003 to 2004
primarily due to an increase in cash, cash equivalents and
marketable securities of $158.4 million from 2003 to 2004,
partially offset by a $1.3 million loss in 2004 on the
interest rate swap we entered into in 2002.
Interest
and Other Expenses
We had no interest and other expense in 2005. Interest and other
expense was $5.3 million in 2004 and $7.5 million in
2003. Interest and other expense decreased from 2003 through
2005 due to the redemption and conversion of the convertible
debt in August 2004.
Loss
on Repurchase of Convertible Debt
In 2005, we had no convertible debt. In 2004,
we redeemed all of our outstanding $345.0 million
5.25% convertible notes for approximately
$265.6 million in cash and the issuance of approximately
4.6 million of our common shares. We recognized a
$15.1 million loss, which was the result of the write-off
of unamortized debt issuance costs, fair value adjustment of the
debt and a 1.3% premium paid for redemption.
Loss
(Gain) on Investments, Net
In 2005 and 2004, we recognized a loss on the sale marketable
securities of $1.4 million and $1.7 million,
respectively. In 2003, we recognized a gain of
$3.1 million. Our investments are classified as
available-for-sale
and we may sell securities from time to time to move funds into
investments with more lucrative investment yields, thus
resulting in gains and losses on sale.
48
Provision
for Income Taxes
The following table sets forth, for the periods indicated, a
year-over-year
comparison of our provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
2004 vs. 2003
|
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
2003
|
|
|
$
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
Provision for income taxes
|
|
$
|
42,706
|
|
|
$
|
91,406
|
|
|
$
|
(48,700
|
)
|
|
|
(53
|
)%
|
|
$
|
16,810
|
|
|
$
|
74,596
|
|
|
|
444
|
%
|
Effective tax rate
|
|
|
24
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
Tax expense was 24%, 29% and 19% of income before income taxes
for 2005, 2004 and 2003, respectively (excluding in 2003,
$3.6 million tax expense included in the cumulative effect
of change in accounting principle). The effective tax rate
differs from the statutory rate generally due to the impact of
research and development tax credits, utilization of foreign tax
credits, and lower effective rates in some overseas
jurisdictions. Our future effective tax rates could be adversely
affected if earnings are lower than anticipated in countries
where we have lower statutory rates or by unfavorable changes in
tax laws and regulations.
The American Jobs Creation Act of 2004, or the Act, provided for
a deduction of 85% of certain foreign earnings that are
repatriated in stipulated periods, including our year ended
December 31, 2005. Certain criteria must be met to qualify
for the deduction, including the establishment of a domestic
reinvestment plan by the Chief Executive Officer, the approval
of the plan by the Board of Directors, and the execution of the
plan whereby the repatriated earnings are reinvested in the
United States.
In the third quarter of 2005, we decided to make a distribution
of earnings from our foreign subsidiaries that would qualify for
the repatriation provisions of the Act. In the fourth quarter of
2005, we executed qualifying distributions totaling
$350.0 million. As a result, we recorded a net tax expense
of $1.5 million, net of a $17.8 million tax benefit
resulting from a lower tax rate under the Act on a portion of
foreign earnings for which we previously (in 2004) provided
United States tax. Except for the aforementioned distributions
qualifying under the Act, we intend to indefinitely reinvest all
other current
and/or
future earnings of our foreign subsidiaries.
The earnings from our foreign operations in India are subject to
a tax holiday from a grant effective through 2010. The tax
holiday provides for zero percent taxation on certain classes of
income and requires certain conditions to be met. We are in
compliance with these conditions as of December 31, 2005.
Cumulative
Effect of Change in Accounting Principle
In 2003, we changed our method of accounting for recognizing
commission expenses to sales personnel, and recorded a one-time
credit of $13.9 million, $10.3 million net of tax.
Prior to January 1, 2003, we expensed sales commissions as
incurred. Commissions are now directly related to sales
transactions and are deferred and recognized ratably over the
same period as the revenue is recognized and recorded.
Stock-Based
Compensation
We recorded stock-based compensation charges of
$1.1 million, $14.3 million and $12.5 million in
2005, 2004 and 2003, respectively. These charges are comprised
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
New and existing executives and
employees
|
|
$
|
1,616
|
|
|
$
|
1,928
|
|
|
$
|
424
|
|
Exchange of McAfee.com options
|
|
|
(115
|
)
|
|
|
6,669
|
|
|
|
3,369
|
|
Repriced options
|
|
|
(445
|
)
|
|
|
3,343
|
|
|
|
|
|
Former employees
|
|
|
|
|
|
|
1,216
|
|
|
|
1,125
|
|
Extended life of vested options of
terminated employees
|
|
|
|
|
|
|
1,164
|
|
|
|
3,720
|
|
Extended period of Employee Stock
Purchase Plan
|
|
|
|
|
|
|
|
|
|
|
3,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
1,056
|
|
|
$
|
14,320
|
|
|
$
|
12,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
New and existing executives and employees. In
the third quarter of 2005, our compensation committee of our
board of directors granted a total of 110,000 shares of
restricted stock, which vest through September 2008, to key
employees. The price of the underlying shares is $0.01 per
share. In January 2005, our board of directors granted
75,000 shares of restricted stock, which vest through
December 31, 2007, to our chief financial officer. The
price of the underlying shares is $0.01 per share. We
recorded expense of approximately $1.1 million in 2005
related to the stock-based compensation associated with these
restricted stock grants.
In September 2004, our then chief financial officer and chief
operating officer announced that he was retiring effective
December 31, 2004. Under the terms of his transition
agreement, his options were modified such that all remaining
unvested outstanding stock options would immediately vest on
December 31, 2004 under specified conditions. We recorded
stock-based compensation expense due to the acceleration of
vesting of $1.3 million in 2004.
In connection with the acquisition of Foundstone in October
2004, we assumed stock options to Foundstone employees which are
subject to vesting provisions as the employees provide service
to us. We recognized stock-based compensation totaling
$0.5 million in 2005 and $0.2 million in 2004. An
additional $0.5 million will be recognized through 2008,
which is subject to a reduction based on employees terminating
prior to full vesting of their options.
In January 2002, our board of directors approved a grant of
50,000 shares of restricted stock, which vested through
January 2005, to our chief executive officer. The price of the
underlying shares is $0.01 per share. The fair value of the
restricted stock grant was $1.4 million and was recognized
as stock-based compensation expense over the vesting period. We
recorded stock-based compensation expense of less than
$0.1 million in 2005 and $0.4 million in both 2004 and
2003, respectively.
Exchange of McAfee.com options. On
September 13, 2002, we acquired the minority interest in
McAfee.com that we previously did not own. McAfee.com option
holders received options for 0.675 of a share of our common
stock plus the right to receive $11.85 cash upon exercise of the
option and without interest. McAfee.com options to purchase
4.1 million shares were converted into options to purchase
2.8 million shares of our common stock. The assumed options
are subject to variable accounting treatment, which means that a
compensation charge was measured initially at the date of the
closing of the acquisition and is remeasured each reporting
period based on our common stock fair market value at the end of
each reporting period.
The initial charge was based on the excess of the closing price
of our common stock over the exercise price of the options less
the $11.85 per share payable in cash upon exercise of the
option. This compensation charge has been and will be remeasured
using the same methodology until the earlier of the date of
exercise, forfeiture or cancellation without replacement. This
compensation charge is recorded as an expense over the remaining
vesting period of the options using the accelerated method of
amortization under FASB Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans. Charges related
to unvested options are recorded as deferred stock-based
compensation in stockholders equity in the consolidated balance
sheet and recognized as expense as the options vest.
During 2005, we recorded a benefit of approximately
$0.1 million and during 2004 and 2003, we recorded a charge
of approximately $6.7 million and $3.4 million,
respectively, related to exchanged options subject to variable
accounting. This stock-based compensation was based on our
closing stock price of $27.13, $28.93 and $15.04 on
December 31, 2005, 2004 and 2003, respectively. As of
December 31, 2005, we had approximately 0.2 million
outstanding options related to the acquisition of the minority
interest in McAfee.com subject to variable accounting. Further
fluctuations in the stock price may result in significant
additional stock-based compensation charges or benefits in
future periods.
Repriced Options. On April 22, 1999, we
offered to substantially all of our employees, excluding
executive officers, the right to cancel certain outstanding
stock options and receive new options with an exercise price of
$11.063 per share, the then current fair value of the
stock. Options to purchase a total of 9.5 million shares
were cancelled and the same number of new options were granted.
These new options vested at the same rate that they would have
vested under previous option plans and are subject to variable
accounting. Accordingly, we have and
50
will continue to remeasure compensation cost for these repriced
options until these options are exercised, cancelled or
forfeited without replacement. The first valuation period began
July 1, 2000.
The amount of stock-based compensation recorded was and will be
based on any excess of the closing stock price at the end of the
reporting period or date of exercise, forfeiture or cancellation
without replacement, if earlier, over the fair value of our
common stock on July 1, 2000, which was $20.375. As these
options are fully vested, the charge is recorded to earnings
immediately. Depending upon movements in the market value of our
common stock, this variable accounting treatment can result in
additional stock-based compensation charges or benefits in
future periods until the options are exercised, forfeited or
cancelled.
During 2005, we recorded a benefit of approximately
$0.4 million and during 2004, we recorded a charge of
approximately $3.3 million based on closing stock prices as
of December 31, 2005 and 2004 of $27.13 and $28.93,
respectively. We did not record any stock-based compensation for
the repriced options in 2003 as our stock price was below
$20.375 as of December 31, 2003. As of December 31,
2005, 0.2 million options related to this re-pricing which
were outstanding and subject to variable accounting.
Former Employees. As a result of the sale of
our Sniffer product line, or Sniffer, in July 2004, the Company
modified the stock option agreements of several Sniffer
executives by accelerating the vesting of their unvested
outstanding options. We recorded a stock-based compensation
charge of approximately $1.0 million in 2004. Since the
modification was directly related to the sale of Sniffer, the
stock compensation charge was reflected in the calculation of
the gain on the sale of Sniffer.
In November and December 2003, we extended the vesting period of
two employees and also extended the period after which vesting
ends to exercise their options. As these employees options
continued to vest after termination and their exercise period
was extended an additional 90 days, we recorded a one time
stock-based compensation charge of approximately
$0.1 million in 2004.
In October 2002, the Company terminated the employment of four
former McAfee.com executives. These executives held McAfee.com
exchanged options, which are subject to variable accounting as
discussed above. Upon termination, the options were modified in
accordance with a change in control provision. As a result, the
Company recorded a stock compensation charge of approximately
$1.1 million in 2003.
Extended Life of Vested Options Held by Terminated
Employees. As part of the purchase of Foundstone
in October 2004, we granted stock options to Foundstone
employees, certain of whom terminated their employment after the
acquisition. The terminated employees had 90 days to
exercise their stock options from the date of termination,
otherwise the options would expire. We determined in December
2004 that we would not be able to file the required public
company reports with the SEC that would allow the option holders
to exercise their options within the
90-day
period. In December 2004, we extended the expiration date of the
options approximately one month, resulting in a new measurement
date for the options. We recorded a one-time stock-based
compensation charge of $1.0 million in 2004 due to the
extension of the expiration date.
During a significant portion of 2003, we suspended exercises of
stock options until our required public company reports were
filed with the SEC. The period during which stock option
exercises were suspended is known as the black-out period. Due
to the black-out period, we extended the exercisability of any
options that would otherwise terminate during the black-out
period for a period of time equal to a specified period after
termination of the black-out period. Accordingly, we recorded a
stock-based compensation charge on the date the options should
have terminated based on the intrinsic value of the option on
the modification date and the option price. In 2004 and 2003, we
recorded stock-based compensation charges of approximately
$0.1 million and $3.7 million, respectively.
Extended Period of Employee Stock Purchase
Plan. During the black-out period in 2003, we
suspended all stock purchases under our 2002 Employee Stock
Purchase Plan, or 2002 Purchase Plan. Due to the black-out
period, we extended the purchase period for shares in the 2002
Purchase Plan that would otherwise have been purchased on
July 31, 2003. Accordingly, in 2003 we recorded a one-time
stock-based compensation charge of approximately
$3.9 million.
Impact of Recent Accounting Pronouncement on Stock-Based
Compensation. In December 2004, the FASB issued
SFAS No. 123R, Share-Based Payment.
SFAS 123R permits companies to adopt its requirements using
51
either a modified prospective method, or a
modified retrospective method. Under the
modified prospective method, compensation expense is
recognized in the financial statements beginning with the
effective date, based on the requirements of SFAS 123R for
all share-based payments granted after that date, and based on
the requirements of SFAS 123 for all unvested awards
granted prior to the effective date of SFAS 123R. Under the
modified retrospective method, the requirements are
the same as under the modified prospective method,
but also permit entities to restate financial statements of
previous periods based on proforma disclosures made in
accordance with SFAS 123. We have determined that we will
use the modified prospective method to recognize
compensation expense.
We currently utilize the Black-Scholes option pricing model to
measure the fair value of stock options granted to our
employees. While SFAS 123R permits entities to continue to
use such a model, the standard also permits the use of a more
complex binomial, or lattice model. Based upon our
research on the alternative models available to value option
grants, and in conjunction with the type and number of stock
options expected to be issued in the future, we have determined
that we will continue to use the Black-Scholes model for option
valuation.
Although we have not yet determined whether the adoption of
SFAS 123R will result in amounts that are similar to the
current pro forma disclosures under SFAS 123, we are
evaluating the requirements under SFAS 123R and expect the
adoption to have a significant adverse impact on our
consolidated results of operations. At December 31, 2005,
we had approximately $52.4 million of unrecognized
compensation expense related to stock options not affected by
estimated forfeitures that is expected to be recognized over a
weighted-average life of 2.8 years and we had approximately
$1.1 million of unrecognized compensation expense related
to our employee stock purchase plan that will be recognized in
2006.
Acquisitions
Wireless
Security Corporation
In June 2005, we acquired 100% of the outstanding shares of
Wireless Security Corporation, a provider of home and small
business wireless network security products, for approximately
$20.0 million in cash and $0.3 million of direct
expenses, totaling $20.3 million. We acquired Wireless
Security Corporation to continue to develop their patent-pending
technology, introduce a new consumer offering and to utilize the
technology in our small business managed solutions. The results
of operations of Wireless Security Corporation have been
included in our results of operations since the date of
acquisition.
Foundstone,
Inc.
In October 2004, we acquired 100% of the outstanding shares of
Foundstone, Inc., a provider of risk assessment and
vulnerability services and products, for $82.5 million in
cash and $3.1 million of direct expenses, totaling
$85.6 million. Total consideration paid for the acquisition
was $90.4 million including $4.8 million for the fair
value of vested stock options assumed in the acquisition. We
acquired Foundstone to enhance our network protection product
line and to deliver enhanced risk classification of prioritized
assets, automated shielding and risk remediation using intrusion
prevention technology, and automated enforcement and compliance.
The results of operations of Foundstone have been included in
our results of operations since the date of acquisition.
IntruVert
Networks, Inc.
In May 2003, we acquired 100% of the outstanding capital shares
of IntruVert Networks, Inc., or IntruVert, a provider of
network-based intrusion prevention solutions designed to
proactively detect and stop system and network security attacks
before they occur, for $98.1 million in cash and
$5.2 million of direct expenses, totaling
$103.3 million. We acquired IntruVert to enhance our
intrusion detection product line, improve our position in the
emerging intrusion prevention marketplace, embed the acquired
technologies in our current product offering, and sell IntruVert
products to our existing customer base. We recorded
approximately $5.7 million for acquired in-process research
and development which was fully expensed at the time of
acquisition because technology feasibility had not been
established and there was no alternative use for the projects
under development. The results of operations of IntruVert have
been included in these consolidated financial statements since
the date of acquisition.
52
Entercept
Security Technologies, Inc.
In April 2003, we acquired 100% of the outstanding capital
shares of Entercept Security Technologies, Inc., or Entercept, a
provider of host-based intrusion prevention solutions designed
to proactively detect and stop system and network security
attacks before they occur, for $121.9 million in cash and
$3.9 million of direct expenses, totaling
$125.8 million. We acquired Entercept to enhance our
intrusion detection product line, achieve a leading position in
the emerging intrusion prevention marketplace, embed the
acquired technologies in our current product offering, and sell
Entercept products to our existing customer base. We recorded
approximately $0.9 million for acquired in-process research
and development which was fully expensed at the time of
acquisition because technology feasibility had not been
established and there was no alternative use for the projects
under development. The results of operations of Entercept have
been included in these consolidated financial statements since
the date of acquisition.
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating
activities
|
|
$
|
419,457
|
|
|
$
|
358,913
|
|
|
$
|
156,304
|
|
Net cash used in investing
activities
|
|
$
|
4,595
|
|
|
$
|
(39,373
|
)
|
|
$
|
(374,480
|
)
|
Net cash (used in) provided by
financing activities
|
|
$
|
39,841
|
|
|
$
|
(369,867
|
)
|
|
$
|
(146,579
|
)
|
Overview
At December 31, 2005, we had cash and cash equivalents
totaling $728.6 million, as compared to $291.2 million
at December 31, 2004. In 2005, we generated positive
operating cash flows of $419.5 million, received cash of
$108.2 million related to our employee stock purchase plan
and option exercises under our employee stock option plans and
had net proceeds from the sale and maturity of marketable
securities of $102.6 million. Uses of cash during 2005
included the repurchase of common stock of $68.4 million,
purchases of property and equipment of $28.9 million and
the acquisition of Wireless Security Corporation for
$20.2 million. A more detailed discussion of changes in our
liquidity follows.
Operating
Activities
Net cash provided by operating activities in 2005, 2004 and 2003
was primarily the result of our net income of
$138.8 million, $225.1 million and $70.2 million,
respectively. Net income for 2005 was adjusted for non-cash
items such as depreciation and amortization of
$64.9 million, tax benefit from exercise of nonqualified
stock options of $34.4 million, deferred income taxes of
$13.8 million, acquired in-process research and development
of $4.0 million, and changes in various assets and
liabilities such as an increase of deferred revenue of
$182.2 million, an increase of accounts payable, accrued
taxes and other liabilities of $41.2 million, an increase
in accounts receivable of $23.3 million and an increase of
prepaid expenses, income taxes and other assets of
$13.2 million.
Historically, our primary source of operating cash flow is the
collection of accounts receivable from our customers and the
timing of payments to our vendors and service providers. One
measure of the effectiveness of our collection efforts is
average accounts receivable days sales outstanding, or DSO. DSOs
were 74 days, 77 days and 92 days at
December 31, 2005, 2004 and 2003, respectively. We
calculate accounts receivable DSO on a net basis by
dividing the accounts receivable balance at the end of the
quarter by the amount of revenue recognized for the quarter
multiplied by 90 days. We expect DSOs to vary from period
to period because of changes in quarterly revenue and the
effectiveness of our collection efforts. In 2005, 2004 and 2003,
we did not make any significant changes to our payment terms for
our customers, which are generally net 30.
The increase in cash related to accounts payable, accrued taxes
and other liabilities was $41.2 million, net of
acquisitions, dispositions and non-cash items. The increase was
attributable to the $50.0 million accrued in 2005 for
settlement with the SEC related to the Formal Order of
Private Investigation in our accounting practices that
commenced on March 22, 2002. Our operating cash flows,
including changes in accounts payable and accrued liabilities,
is impacted by the timing of payments to our vendors for
accounts payable and taxing authorities. We typically pay our
vendors and service providers in accordance with invoice terms
and conditions, and take
53
advantage of invoice discounts when available. The timing of
future cash payments in future periods will be impacted by the
nature of accounts payable arrangements. In 2005, 2004 and 2003,
we did not make any significant changes to our payment timing to
our vendors.
Our cash and marketable securities balances are held in numerous
locations throughout the world, including substantial amounts
held outside the United States. As of December 31, 2005,
approximately $176.1 million was held outside the United
States. We utilize a variety of tax planning and financing
strategies in an effort to ensure that our worldwide cash is
available in the locations in which it is needed. We have
provided for U.S. federal income taxes on these amounts for
consolidated financial statement purposes, except for foreign
earnings that are considered indefinitely reinvested outside the
United States. The American Jobs Creations Act of 2004 provided
for a deduction of 85% of certain foreign earnings that are
repatriated in stipulated periods, including our year ending
December 31, 2005. As a result, a $350.0 million
distribution was repatriated in the fourth quarter of 2005.
Our working capital, defined as current assets minus current
liabilities, was $698.7 million and $255.7 million at
December 31, 2005 and December 31, 2004, respectively.
The increase in working capital of approximately
$443.0 million from December 31, 2004 to
December 31, 2005 was primarily attributable to a
$520.8 million increase in cash and short-term marketable
securities balances offset by a $94.8 million increase in
current deferred revenue. Our perpetual-plus licensing model,
now introduced worldwide, results in less revenue recognition
up-front, therefore causing increases in our deferred revenue.
In the third quarter of 2005, we placed $50.0 million in
escrow for a proposed with the SEC relating to the Formal
Order of Private Investigation into our accounting
practices that commenced on March 22, 2002 (see
Note 20 to our consolidated financial statements). The
$50.0 million placed in escrow was reflected as cash used
in investing activities on our statement of cash flows. The
$0.5 million of interest earned on this amount is
restricted until final settlement and, therefore, is reflected
as an adjustment to reconcile net income to net cash provided by
operating activities on our statement of cash flow. On
February 9, 2006 the SEC entered the final judgment for
settlement with us. The $50.0 million escrow was released
and transferred to the SEC on February 13, 2006. In the
first quarter of 2006, the transfer to the SEC will be reflected
as cash provided by investing activities of $50.0 million
and cash used in operating activities of $50.0 million.
We expect to meet our obligations as they become due through
available cash and internally generated funds. We expect to
continue generating positive working capital through our
operations. However, we cannot predict whether current trends
and conditions will continue or what the effect on our business
might be from the competitive environment in which we operate.
We believe the working capital available to us will be
sufficient to meet our cash requirements for at least the next
12 months.
Investing
Activities
Our investing activities for the years ended December 31,
2005, 2004 and 2003 are as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Purchase of marketable securities
|
|
$
|
(793,581
|
)
|
|
$
|
(1,243,990
|
)
|
|
$
|
(1,120,561
|
)
|
Proceeds from sale and maturity of
marketable securities
|
|
|
896,139
|
|
|
|
1,033,402
|
|
|
|
1,022,700
|
|
(Increase) decrease in restricted
cash
|
|
|
(50,322
|
)
|
|
|
19,930
|
|
|
|
664
|
|
Purchase of property and equipment
and leasehold improvements, net
|
|
|
(28,941
|
)
|
|
|
(25,374
|
)
|
|
|
(60,027
|
)
|
Acquisitions, net of cash acquired
|
|
|
(20,200
|
)
|
|
|
(84,650
|
)
|
|
|
(217,078
|
)
|
Proceeds from sale of assets and
technology
|
|
|
1,500
|
|
|
|
261,309
|
|
|
|
|
|
Purchases of acquired technology
|
|
|
|
|
|
|
|
|
|
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
$
|
4,595
|
|
|
$
|
(39,373
|
)
|
|
$
|
(374,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
Investments
In 2005, we received net proceeds from sales and maturities of
our marketable securities of $102.6 million. In 2004 and
2003, we made net purchases of marketable securities of
$210.6 million, and $97.9 million, respectively. We
have classified our investment portfolio as
available-for-sale,
and our investments are made with a policy of capital
preservation and liquidity as the primary objectives. We
generally hold investments in money market, U.S. government
fixed income and U.S. government agency securities to
maturity; however, we may sell an investment at any time if the
quality rating of the investment declines, the yield on the
investment is no longer attractive or we are in need of cash.
Because we invest only in investment securities that are highly
liquid with a ready market, we believe that the purchase,
maturity or sale of our investments has no material impact on
our overall liquidity.
Restricted
Cash
The current restricted cash balance of $50.5 million at
December 31, 2005 reflected the $50.0 million we
placed in escrow for the SEC settlement and the interest earned
on the escrow which was restricted until released by the SEC. On
our consolidated statement of cash flow, the $50.0 million
placed in escrow was reflected as cash used in investing
activities and the $0.5 million of interest earned was
reflected as an adjustment to reconcile net income to net cash
provided by operating activities. On February 9, 2006, the
SEC entered the final judgment for settlement with us. We had no
current restricted cash balance at December 31, 2004.
The non-current restricted cash balance of $0.9 million at
December 31, 2005 and $0.6 million at
December 31, 2004 consisted primarily of cash collateral
related to both the Foundstone and Entercept facilities leases
and our workers compensation insurance coverage.
At December 31, 2003, we had on deposit approximately
$20.2 million as collateral for our interest rate swap
arrangements we entered into related to our $345.0 million
of 5.25% subordinated convertible debt. The arrangements
required us to keep a minimum amount of $20.0 million on
deposit with the swap counterparties, subject to increase based
on the fair value of the swap. The swap agreement terminated in
October 2004.
Property
and Equipment
The $28.9 million of property and equipment purchased
during 2005 was primarily for upgrades of our existing
accounting system and equipment for our new facility in Ireland.
We added $25.4 million of equipment during 2004 to update
hardware for our employees and enhance various back-office
systems and purchases of equipment for our Bangalore research
and development facility. We added $60.0 million of
equipment during 2003 to update hardware for our employees and
enhance various back-office systems, including our new customer
relationship management system which we deployed in early 2004.
We anticipate that we will continue to purchase property and
equipment necessary in the normal course of our business. The
amount and timing of these purchases and the related cash
outflows in future periods is difficult to predict and is
dependent on a number of factors including our hiring of
employees, the rate of change in computer hardware/software used
in our business and our business outlook.
Acquisitions
In June 2005, we acquired all the outstanding stock, technology
and assets of Wireless Security Corporation, a provider of home
and small business wireless network security products, for
approximately $20.2 million in cash, including acquisition
costs and net of cash acquired. In 2004, we paid cash for our
acquisition of Foundstone in the amount of $84.7 million,
net of cash assumed. In 2003, we paid cash for our acquisitions
of Entercept and IntruVert in the amount of $124.8 million
and $92.3 million, respectively. We purchased IntruVert and
Entercept to enhance our network intrusion prevention products.
We may buy or make investments in complementary companies,
products and technologies. Our available cash and equity
securities may be used to acquire or invest in companies or
products, possibly resulting in significant acquisition-related
charges to earnings and dilution to our stockholders.
55
Proceeds
from Sale of Assets and Technology
We completed the sale of McAfee Labs in April 2005, and as
result, recognized a gain of approximately $1.3 million in
2005. We received net cash proceeds of $1.5 million related
to the sale.
We completed the sale of the Magic product line to BMC Software
in January 2004, and as a result, recognized a gain of
approximately $46.1 million in 2004. We received net cash
proceeds of approximately $47.1 million related to the
sale. In July 2004, we completed the sale of our Sniffer product
line to Network General Corporation, and as a result, recognized
a gain of approximately $197.4 million. We received net
cash proceeds of approximately $213.8 million related to
the sale. Additionally, we received $0.4 million in cash
from the disposal of other assets in 2004.
Financing
Activities
Our financing activities for the years ended December 31,
2005, 2004 and 2003 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Proceeds from issuance of common
stock under stock option plan and stock purchase plans
|
|
$
|
108,236
|
|
|
$
|
113,793
|
|
|
$
|
35,417
|
|
Repurchase of common stock
|
|
|
(68,395
|
)
|
|
|
(221,816
|
)
|
|
|
(4,707
|
)
|
Repurchase of convertible debt
|
|
|
|
|
|
|
(265,623
|
)
|
|
|
(177,289
|
)
|
Contribution of proceeds from sale
of common stock held in trust
|
|
|
|
|
|
|
3,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
$
|
39,841
|
|
|
$
|
(369,867
|
)
|
|
$
|
(146,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option and Stock Purchase Plans
Historically, our recurring cash flows provided by financing
activities have been from the receipt of cash from the issuance
of common stock under stock option and employee stock purchase
plans. We received cash proceeds from these plans in the amount
of $108.2 million, $113.8 million and
$35.4 million in 2005, 2004 and 2003, respectively. While
we expect to continue to receive these proceeds in future
periods, the timing and amount of such proceeds are difficult to
predict and are contingent on a number of factors including the
price of our common stock, the number of employees participating
in the plans and general market conditions.
As our stock price rises, more participants are in the
money in their options, and thus, more likely to exercise
their options, which results in cash to us. As our stock price
decreases, more of our employees are out of the
money or under water in regards to their
options, and therefore, choose not to exercise options, which
results in no cash received by us.
Repurchase
of Common Stock
In April 2005, our board of directors authorized the repurchase
of an additional $175.0 million of our common stock in the
open market from time to time until August 2006, depending upon
market conditions, share price and other factors. Prior to this
additional authorization, in November 2003 our board of
directors had authorized the repurchase of up to
$150.0 million of our common stock in the open market
through November 2005, and in August 2004, our board of
directors had authorized the repurchase of up to an additional
$200.0 million of our common stock in the open market
through August 2006. During 2005, we used $68.4 million to
repurchase 2.8 million shares of our common stock in the
open market. During 2004, we used $221.8 million to
repurchase 12.6 million shares of our common stock in the open
market and during 2003, we used $4.7 million to repurchase
0.4 million shares of our common stock in the open market.
Redemption
of Convertible Debt
In 2004 and 2003, we used $265.6 million and
$177.3 million of cash, respectively, for the repurchase of
convertible debt.
56
Contribution
of Proceeds from Sale of Common Stock Held in Trust
In 1998, we deposited approximately 1.7 million shares of
common stock with a trustee for the benefit of the employees of
the Dr. Solomons acquisition to cover the stock
options assumed in the acquisition of this company. These
shares, which have been included in the outstanding share
balance, were to be issued upon the exercise of stock options by
Dr. Solomons employees. We determined in June 2004
that Dr. Solomons employees had exercised
approximately 1.6 million options, and that it had issued
new shares in connection with these exercises rather than the
trust shares. The trustee returned the 1.6 million shares
to us in June 2004, at which time they were retired and were no
longer included in the outstanding share balance. In December
2004, the trustee sold the remaining 133,288 shares in the
trust for proceeds of $3.8 million, and remitted the funds
to us. The terms of the trust prohibited the trustee from
returning the shares to us and stipulated that only employees
could benefit from the shares. We paid out the $3.8 million
to our employees as a bonus in 2004.
Credit
Facility
We have a $17.0 million credit facility with a bank. The
credit facility is available on an offering basis, meaning that
transactions under the credit facility will be on such terms and
conditions, including interest rate, maturity, representations,
covenants and events of default, as mutually agreed between us
and the bank at the time of each specific transaction. The
credit facility is intended to be used for short-term credit
requirements, with terms of one year or less. The credit
facility can be cancelled at any time. No balances are
outstanding as of December 31, 2005.
Contractual
Obligations
A summary of our contractual obligations at December 31,
2005 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than
|
|
Contractual
Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Operating leases(1)
|
|
$
|
87,239
|
|
|
$
|
17,265
|
|
|
$
|
23,602
|
|
|
$
|
19,097
|
|
|
$
|
27,275
|
|
Other commitments(2)
|
|
|
39,204
|
|
|
|
26,507
|
|
|
|
12,697
|
|
|
|
|
|
|
|
|
|
Purchase obligations(3)
|
|
|
5,694
|
|
|
|
5,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
132,137
|
|
|
$
|
49,466
|
|
|
$
|
36,299
|
|
|
$
|
19,097
|
|
|
$
|
27,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating leases are for office space and office equipment. The
operating lease commitments above reflect contractual and
reasonably assured rent escalations under the lease
arrangements. The majority of our lease contractual obligations
relate to the following three leases: $45.8 million for the
Santa Clara, California facility lease, $17.0 million
for the Slough, United Kingdom facility lease and
$4.3 million for the Cork, Ireland facility lease. |
|
(2) |
|
Other commitments are minimum commitments on telecom contracts,
contractual commitments for naming rights and advertising
services and software licensing agreements and royalty
commitments associated with the shipment and licensing of
certain products. |
|
(3) |
|
We generally issue purchase orders to our contract manufacturers
with delivery dates from four to six weeks from the purchase
order date. In addition, we regularly provide such contract
manufacturers with rolling six-month forecasts of product
requirements for planning and long-lead time parts procurement
purposes only. We are committed to accept delivery of materials
pursuant to our purchase orders subject to various contract
provisions which allow us to delay receipt of such order or
allow us to cancel orders beyond certain agreed lead times. Such
cancellations may or may not include cancellation costs payable
by us. If we are unable to adequately manage our contract
manufacturers and adjust such commitments for changes in demand,
we may incur additional inventory expenses related to excess and
obsolete inventory. |
In addition to the contractual obligations above and as
permitted under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events of
occurrences while the officer or director is, or was, serving at
our request in such capacity. The indemnification period covers
all pertinent events and occurrences
57
during the officers or directors lifetime. 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 enables us to recover a potion of any
future amounts paid. We believe the estimated fair value of
these indemnification agreements in excess of applicable
insurance coverage is minimal.
Off-Balance
Sheet Arrangements
We do not have off-balance sheet arrangements. As part of our
ongoing business, we do not participate in transactions that
generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, often established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. All of our
subsidiaries are 100% owned by us and are fully consolidated
into our consolidated financial statements.
Financial
Risk Management
The following discussion about our risk management activities
includes forward-looking statements that involve
risks and uncertainties. Actual results could differ materially
from those projected in the forward-looking statements.
Foreign
Currency Risk
As a global concern, we face exposure to movements in foreign
currency exchange rates. These exposures may change over time as
business practices evolve and could have a material adverse
impact on our financial results. Our primary exposures are
related to non U.S. dollar-denominated sales and operating
expenses in Japan, Canada, Australia, Europe, Latin America, and
Asia. At the present time, we hedge only those currency
exposures associated with certain assets and liabilities
denominated in nonfunctional currencies and do not generally
hedge anticipated foreign currency cash flows. Our hedging
activity is intended to offset the impact of currency
fluctuations on certain nonfunctional currency assets and
liabilities. The success of this activity depends upon estimates
of transaction activity denominated in various currencies,
primarily the Japanese Yen, Canadian dollar, Australian dollar,
the Euro, and the British Pound. To the extent that these
estimates are overstated or understated during periods of
currency volatility, we could experience unanticipated currency
gains or losses.
To reduce exposures associated with nonfunctional net monetary
asset positions in various currencies, we enter into forward
contracts. Our foreign exchange contracts typically range from
one to three months in original maturity. In general, we have
not hedged anticipated foreign currency cash flows nor do we
enter into forward contracts for trading purposes. We do not use
any derivatives for speculative purposes. At December 31,
2005, we had no forward contracts outstanding. Forward contracts
existing during 2005 did not qualify for hedge accounting and
accordingly were marked to market at the end of each reporting
period with any unrealized gain or loss being recognized in the
consolidated statements of income. Net realized gains and losses
arising from settlement of our forward foreign exchange
contracts were not significant in 2005, 2004, and 2003.
Forward contracts outstanding at December 31, 2004 and
their fair values are presented below (in thousands):
|
|
|
|
|
Euro
|
|
$
|
116
|
|
British Pound Sterling
|
|
|
288
|
|
Brazilian Real
|
|
|
420
|
|
Japanese Yen
|
|
|
1
|
|
Australian Dollar
|
|
|
4
|
|
Canadian Dollar
|
|
|
39
|
|
|
|
|
|
|
|
|
$
|
868
|
|
|
|
|
|
|
58
Interest
Rate Risk
Investments
We maintain balances in cash, cash equivalents and investment
securities. We maintain our investment securities in portfolio
holdings of various issuers, types and maturities including
money market, government, agency and corporate bonds. These
securities are classified as
available-for-sale,
and consequently are recorded on the consolidated balance sheet
at fair value with unrealized gains and losses reported as a
separate component of accumulated other comprehensive income.
These securities are not leveraged and are held for purposes
other than trading.
The following tables present the hypothetical changes in fair
values in the securities held at December 31, 2005 that are
sensitive to the changes in interest rates. The modeling
technique used measures the change in fair values arising from
hypothetical parallel shifts in the yield curve of plus or minus
50 basis points, or BPS, 100 BPS and 150 BPS over six and
twelve-month time horizons. Beginning fair values represent the
market principal plus accrued interest and dividends at
December 31, 2005. Ending fair values are the market
principal plus accrued interest, dividends and reinvestment
income at six and twelve-month time horizons.
The following table estimates the fair value of the portfolio at
a six-month time horizon (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Given
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
an Interest Rate
|
|
|
|
|
|
Valuation of Securities Given
|
|
|
|
Decrease of
|
|
|
No
|
|
|
an Interest Rate Increase of
|
|
|
|
X Basis Points
|
|
|
Change in
|
|
|
X Basis Points
|
|
Issuer
|
|
100 BPS
|
|
|
50 BPS
|
|
|
Interest Rate
|
|
|
50 BPS
|
|
|
100 BPS
|
|
|
150 BPS
|
|
|
U.S. Government notes and
bonds
|
|
$
|
206.4
|
|
|
$
|
205.9
|
|
|
$
|
205.4
|
|
|
$
|
204.9
|
|
|
$
|
204.4
|
|
|
$
|
203.9
|
|
Corporate notes and bonds
|
|
|
190.5
|
|
|
|
190.2
|
|
|
|
190.1
|
|
|
|
189.8
|
|
|
|
189.6
|
|
|
|
189.4
|
|
Asset-backed securities
|
|
|
159.4
|
|
|
|
159.5
|
|
|
|
159.4
|
|
|
|
159.4
|
|
|
|
159.4
|
|
|
|
159.3
|
|
Mortgaged-backed securities
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
2.0
|
|
Non-corporate credit
|
|
|
2.1
|
|
|
|
2.1
|
|
|
|
2.1
|
|
|
|
2.1
|
|
|
|
2.1
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
560.4
|
|
|
$
|
559.7
|
|
|
$
|
559.0
|
|
|
$
|
558.2
|
|
|
$
|
557.5
|
|
|
$
|
556.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table estimates the fair value of the portfolio at
a twelve-month time horizon (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Given
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
an Interest Rate
|
|
|
|
|
|
Valuation of Securities Given
|
|
|
|
Decrease of
|
|
|
No
|
|
|
an Interest Rate Increase of
|
|
|
|
X Basis Points
|
|
|
Change in
|
|
|
X Basis Points
|
|
Issuer
|
|
100 BPS
|
|
|
50 BPS
|
|
|
Interest Rate
|
|
|
50 BPS
|
|
|
100 BPS
|
|
|
150 BPS
|
|
|
U.S. Government notes and
bonds
|
|
$
|
209.6
|
|
|
$
|
209.2
|
|
|
$
|
208.8
|
|
|
$
|
208.4
|
|
|
$
|
208.0
|
|
|
$
|
207.6
|
|
Corporate notes and bonds
|
|
|
193.9
|
|
|
|
193.8
|
|
|
|
193.8
|
|
|
|
193.7
|
|
|
|
193.6
|
|
|
|
193.6
|
|
Asset-backed securities
|
|
|
162.1
|
|
|
|
162.3
|
|
|
|
162.5
|
|
|
|
162.6
|
|
|
|
162.8
|
|
|
|
162.9
|
|
Mortgaged-backed securities
|
|
|
2.7
|
|
|
|
2.7
|
|
|
|
2.7
|
|
|
|
2.7
|
|
|
|
2.7
|
|
|
|
2.7
|
|
Non-corporate credit
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
570.8
|
|
|
$
|
570.5
|
|
|
$
|
570.2
|
|
|
$
|
569.8
|
|
|
$
|
569.5
|
|
|
$
|
569.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swap Transactions
In July 2002, we entered into interest rate swap transactions
with two investment banks to hedge the interest rate risk of our
outstanding 5.25% Convertible Subordinated Note due 2006, or
Notes. The notional amount of the interest rate swap
transactions was $345.0 million to match the entire
principal amount of the Notes. The interest rate swap
transactions were to terminate on August 15, 2006, subject
to certain early termination provisions if on or after
August 20, 2004 and prior to August 15, 2006 the
five-day average closing price of our common stock was to equal
or exceed $22.59. On October 27, 2004, the interest rate
swap transactions automatically terminated as our five-day
average common stock price equaled $22.59.
59
Recent
Accounting Pronouncements Update
See Note 2 of the consolidated financial statements for a
full description of recent accounting pronouncements, including
the expected dates of adoption and effects on financial
condition, results of operations and cash flows.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
Quantitative and qualitative disclosure about market risk is set
forth at Managements Discussion and Analysis of
Financial Condition and Results of Operation under
Item 7.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Quarterly
Operating Results (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
|
(In thousands, except per share
data)
|
|
|
Statement of Operation and Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
253,279
|
|
|
$
|
252,911
|
|
|
$
|
245,382
|
|
|
$
|
235,727
|
|
|
$
|
244,153
|
|
|
$
|
221,633
|
|
|
$
|
225,678
|
|
|
$
|
219,078
|
|
Gross margin
|
|
|
201,270
|
|
|
|
215,818
|
|
|
|
208,526
|
|
|
|
197,070
|
|
|
|
204,273
|
|
|
|
187,360
|
|
|
|
188,114
|
|
|
|
181,886
|
|
Income from operations
|
|
|
48,974
|
|
|
|
15,488
|
|
|
|
45,989
|
|
|
|
48,121
|
|
|
|
23,427
|
|
|
|
210,585
|
|
|
|
13,059
|
|
|
|
75,180
|
|
Income before provision for income
taxes
|
|
|
55,887
|
|
|
|
22,641
|
|
|
|
50,573
|
|
|
|
52,433
|
|
|
|
23,621
|
|
|
|
199,457
|
|
|
|
13,969
|
|
|
|
79,424
|
|
Net income
|
|
$
|
38,613
|
|
|
$
|
22,547
|
|
|
$
|
41,698
|
|
|
$
|
35,970
|
|
|
$
|
38,747
|
|
|
$
|
118,148
|
|
|
$
|
10,200
|
|
|
$
|
57,970
|
|
Basic net income per share
|
|
$
|
.23
|
|
|
$
|
.14
|
|
|
$
|
.25
|
|
|
$
|
.22
|
|
|
$
|
.24
|
|
|
$
|
.75
|
|
|
$
|
.06
|
|
|
$
|
.35
|
|
Diluted income per share
|
|
$
|
.23
|
|
|
$
|
.13
|
|
|
$
|
.25
|
|
|
$
|
.21
|
|
|
$
|
.23
|
|
|
$
|
.70
|
|
|
$
|
.06
|
|
|
$
|
.33
|
|
We believe that
period-to-period
comparisons of our financial results should not be relied upon
as an indication of future performance.
Our revenues and results of operations have been subject to
significant fluctuations, particularly on a quarterly basis, and
our revenues and results of operations could fluctuate
significantly quarter to quarter and year to year. Causes of
such fluctuations may include the volume and timing of new
orders and renewals, the sales cycle for our products, the
introduction of new products, return rates, product upgrades or
updates by us or our competitors, changes in product mix,
changes in product prices and pricing models, the portion of our
licensing fees deferred and recognized as support and
maintenance revenue, seasonality, trends in the computer
industry, general economic conditions, extraordinary events such
as acquisitions and sales of business or litigation and the
occurrence of unexpected events. Results for the quarter ended
September 30, 2005 reflect the $50.0 million charge
for the settlement with the SEC. Results for the quarter ended
December 31, 2004 reflect a tax benefit of
$15.1 million due to the release of income tax
contingencies upon the lapse of statutes of limitations, as well
as a shift in taxable income from higher to lower tax
jurisdictions. Results for the quarter ended September 30,
2004 reflect a $197.4 million gain on the Sniffer sale and
a $15.1 million loss on repurchase of debt. Results for the
quarter ended March 31, 2004 reflect a gain of
$46.1 million on the Magic sale and a $19.1 million
insurance reimbursement. Significant quarterly fluctuations in
revenues will cause significant fluctuations in our cash flows
and the cash and cash equivalents, accounts receivable and
deferred revenue accounts on our consolidated balance sheet. In
addition, the operating results of many software companies
reflect seasonal trends, and our business, financial condition
and results of operations may be affected by such trends in the
future. These trends may include higher net revenue in the
fourth quarter as many customers complete annual budgetary
cycles, and lower net revenue in the summer months when many
businesses experience lower sales, particularly in the European
market.
During the three months ended December 31, 2005, we made
certain reclassifications from product revenue to service
revenue primarily related to online subscriptions. No
reclassifications were necessary in 2004 in order for 2004 to
conform to 2005 presentation. Total net revenue was not impacted
by these reclassifications. The following
60
table reflects our 2005 quarterly net revenue, as previously
reported in respective Quarterly Report on
Form 10-Q
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue
|
|
$
|
44,092
|
|
|
$
|
53,423
|
|
|
$
|
39,253
|
|
Total services and support revenue
|
|
|
191,635
|
|
|
|
191,959
|
|
|
$
|
213,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
235,727
|
|
|
$
|
245,382
|
|
|
$
|
252,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects our 2005 quarterly net revenue (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
|
Three Months
|
|
|
Twelve Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue
|
|
$
|
45,145
|
|
|
$
|
43,805
|
|
|
$
|
32,578
|
|
|
$
|
46,010
|
|
|
$
|
167,538
|
|
Total services and support revenue
|
|
|
190,582
|
|
|
|
201,577
|
|
|
$
|
220,333
|
|
|
$
|
207,269
|
|
|
$
|
819,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
235,727
|
|
|
$
|
245,382
|
|
|
$
|
252,911
|
|
|
$
|
253,279
|
|
|
$
|
987,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our financial statements and supplementary data required by this
item are set forth at the pages indicated at Item 15(a).
|
|
Item 9.
|
Changes
In and Disagreements With Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief
Executive Officer, or CEO, and Chief Financial Officer, or CFO,
the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered
by this annual report on
Form 10-K.
Based on this evaluation, and because of the material weakness
in our internal control over financial reporting described
below, our management, including our CEO and CFO, has concluded
that, as of December 31, 2005, our disclosure controls and
procedures were ineffective to ensure that the information we
are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms.
Managements
Report on Internal Control over Financial Reporting
Our management, with the participation of our CEO and CFO, is
responsible for establishing and maintaining adequate internal
control over financial reporting as defined in
Rules 13a-15(f)
of the Exchange Act. Our internal controls are designed to
provide reasonable, but not absolute, assurance to our
management and members of our Board of Directors regarding the
preparation and fair presentation of published financial
statements in accordance with generally accepted accounting
principles of the United States of America, or GAAP.
As part of our compliance efforts relative to Section 404
of the Sarbanes-Oxley Act of 2002, our management assessed the
effectiveness of our internal control over financial reporting
as of December 31, 2005. In making this assessment,
management used the criteria set forth in the Internal
Control Integrated Framework by the
Committee of Sponsoring Organizations of the Treadway
Commission, or COSO.
61
In performing the assessment, our management has identified one
material weakness in internal control over financial reporting
as of December 31, 2005 that relates to our financial close
process:
Financial
Close Process
During the first three quarters of 2005, management detected
errors subsequent to the completion of its interim financial
close and reporting processes, which were deemed to not be
material on an individual or aggregate basis. Further,
management believes many of the errors were identified as a
direct result of our ongoing remediation efforts. Nevertheless,
the fact that the errors related to prior periods was an
indication that our financial close controls were not operating
effectively during those interim periods. Because the controls
did not operate consistently in a timely manner throughout the
interim periods of 2005, there was insufficient evidence at
December 31, 2005 to demonstrate that the 2004 material
weakness related to the financial close process had been
remediated. Hence, management concluded there is a more than
remote likelihood that a material misstatement of the financial
statements would not have been prevented or detected.
As a result of the material weakness described above, management
has concluded that we did not maintain effective internal
control over financial reporting as of December 31, 2005
based upon the criteria set forth in COSOs Internal
Control Integrated Framework.
Deloitte & Touche LLP, an independent registered public
accounting firm, has issued an attestation report on
managements assessment of our internal control over
financial reporting. That report appears below.
Changes
in Internal Control over Financial Reporting
We undertook significant efforts during the fourth quarter of
2005 and throughout the year to improve our internal controls
over financial reporting. We committed considerable resources to
the design, implementation, documentation and testing of our
internal controls. Additional efforts were required to remediate
and re-test certain internal control deficiencies. Management
believes these efforts have improved our internal control over
financial reporting and have led to the remediation of the
material weaknesses that were identified as of December 31,
2004 relating to accounting for income taxes and revenue. A
significant element of our plan to improve the controls over the
revenue, tax and financial close processes during 2005 was the
addition of approximately 35 finance and accounting
personnel, of which 7 were hired during the fourth quarter. The
additional personnel have allowed us to:
|
|
|
|
(a)
|
gain the expertise necessary to interpret and implement the
accounting treatment for complex transactions;
|
|
|
|
|
(b)
|
gain sufficient worldwide resources to improve upon the quality
of the interim and annual review and reconciliation processes
for certain key account balances;
|
|
|
|
|
(c)
|
coordinate the accounting functions of our domestic and
international locations by consolidating the oversight
responsibilities under one worldwide controller, thereby
allowing for the consistent application of accounting principles
in all geographies;
|
|
|
|
|
(d)
|
implement additional monitoring controls that are designed to
improve upon the accuracy and timely preparation of our
financial statements and related SEC filings;
|
|
|
|
|
(e)
|
establish a stable executive finance team to monitor the
operation of our newly implemented controls during each interim
and annual close process going forward.
|
While these steps have significantly improved our internal
controls, we are taking the following steps to enhance our
overall internal control environment and remediate the financial
close material weakness:
|
|
|
|
|
Automating many of our controls and financial reporting processes
|
|
|
|
Improving business processes, including the redesign and
automation of certain activities, related to the financial close
process
|
|
|
|
Standardizing our worldwide policies and procedures
|
|
|
|
Increasing the number of accounting and finance staff where
appropriate
|
62
We believe the above steps will provide us with the
infrastructure to effectively implement our financial close
controls on a quarterly basis and thereby remediate the material
weakness that existed as of December 31, 2005.
Inherent
Limitation on the Effectiveness of Internal Controls
The effectiveness of any system of internal control over
financial reporting, including McAfees, is subject to
inherent limitations, including the exercise of judgment in
designing, implementing, operating, and evaluating the controls
and procedures, and the inability to eliminate misconduct
completely. Accordingly, any system of internal control over
financial reporting, including McAfees, can only provide
reasonable, not absolute assurances. In addition, projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. We intend to continue to
monitor and upgrade our internal controls as necessary or
appropriate for our business, but cannot assure you that such
improvements will be sufficient to provide us with effective
internal control over financial reporting.
63
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of McAfee, Inc.:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting (Managements Report), that
McAfee, Inc. and subsidiaries (the Company) did not
maintain effective internal control over financial reporting as
of December 31, 2005, because of the effect of the material
weakness identified in managements assessment based on
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a significant deficiency, or combination
of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weakness has been identified and included in
managements assessment. During 2005, the Company did not
perform certain of its designed controls over the period-end
financial closing and reporting process with sufficient
precision, as evidenced by misstatements that were detected in
various accounting areas after management had completed its
financial closing and reporting process related to the quarterly
financial statements. Although the misstatements were not deemed
to be individually material, their occurrence is indicative that
the controls related to the financial closing and reporting
process were not operating in an effective manner. Because the
Companys controls over the financial closing and reporting
process had not operated consistently for a sufficient period of
time, as of December 31, 2005, there is more than a remote
likelihood that a material misstatement of the financial
statements would not have been prevented or detected.
This material weakness was considered in determining the nature,
timing, and extent of audit tests applied in our audit of the
consolidated financial statements and financial statement
schedule as of and for the year ended
64
December 31, 2005 of the Company and this report does not
affect our report on such consolidated financial statements and
financial statement schedule.
In our opinion, managements assessment that the Company
did not maintain effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all
material respects, based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, because of the effect of the
material weakness described above on the achievement of the
objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting
as of December 31, 2005, based on the criteria established
in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2005, of
the Company and our report dated February 28, 2006
expressed an unqualified opinion on such consolidated financial
statements and financial statement schedule.
DELOITTE & TOUCHE LLP
San Jose, California
February 28, 2006
65
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The information required hereunder is incorporated by reference
from our Proxy Statement to be filed in connection with our
annual meeting of stockholders to be held on May 25, 2006.
We have adopted a code of ethics that applies to our chief
executive officer, chief financial officer, corporate controller
and other finance organization employees and establishes minimum
standards of professional responsibility and ethical conduct.
This code of ethics is publicly available on our website at
www.mcafee.com. If we make any substantive amendments to
the code of ethics or grant any waiver, including any implicit
waiver, from a provision of the code to our chief executive
officer, chief financial officer or corporate controller, we
will disclose the nature of such amendment or waiver on that
website or in a report on
Form 8-K.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, requires our officers and
directors, and persons who own more than ten percent of a
registered class of our equity securities, to file certain
reports of ownership with the SEC. Such officers, directors and
stockholders are also required by SEC rules to furnish us with
copies of all Section 16(a) forms they file. All reports
required to be filed during fiscal year 2005 pursuant to
Section 16(a) of the exchange act by directors, executive
officers and 10% beneficial owners were filed on timely basis.
|
|
Item 11.
|
Executive
Compensation
|
The information required hereunder is incorporated by reference
from our Proxy Statement to be filed in connection with our
annual meeting of stockholders to be held on May 25, 2006.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required hereunder is incorporated by reference
from our Proxy Statement to be filed in connection with our
annual meeting of stockholders to be held on May 25, 2006.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required hereunder is incorporated by reference
from our Proxy Statement to be filed in connection with our
annual meeting of stockholders to be held on May 25, 2006.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required hereunder is incorporated by reference
from our Proxy Statement to be filed in connection with our
annual meeting of stockholders to be held on May 25, 2006.
66
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Consolidated Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
|
Number
|
|
|
|
|
|
68
|
|
|
|
|
|
|
December 31, 2005 and 2004
|
|
|
70
|
|
|
|
|
|
|
Years ended December 31,
2005, 2004 and 2003
|
|
|
71
|
|
|
|
|
|
|
Years ended December 31,
2005, 2004 and 2003
|
|
|
73
|
|
|
|
|
|
|
Years ended December 31,
2005, 2004, and 2003
|
|
|
75
|
|
|
|
|
77
|
|
(a)(2) Consolidated Financial Statement Schedule
The following financial statement schedule of McAfee, Inc. for
the years ended December 31, 2005, 2004, and 2003 is filed
as part of this
Form 10-K
and should be read in conjunction with McAfee, Inc.s
Consolidated Financial Statements.
Schedule II Valuation and Qualifying
Accounts for the years ended December 31, 2005, 2004 and
2003
Schedules not listed above have been omitted because they are
not applicable or are not required or because the required
information is included in the Consolidated Financial Statements
or Notes thereto.
(a)(3) Exhibits See Index to
Exhibits on Page 123. The Exhibits listed on the
accompanying Index of Exhibits are filed or incorporated by
reference as part of this report.
67
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of McAfee, Inc.:
We have audited the accompanying consolidated balance sheets of
McAfee, Inc. and subsidiaries (the Company) as of
December 31, 2005 and 2004, and the related consolidated
statements of income and comprehensive income,
stockholders equity, and cash flows for the years then
ended. Our audits also included the financial statement schedule
for the years ended December 31, 2005 and 2004 listed in
the Index at Item 15(a)(2). These financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such 2005 and 2004 consolidated financial
statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2005
and 2004, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule for 2005
and 2004, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2005, based on the
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 28, 2006 expressed an
unqualified opinion on managements assessment of the
effectiveness of the Companys internal control over
financial reporting and an adverse opinion on the effectiveness
of the Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 28, 2006
68
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of McAfee, Inc. (formerly Networks Associates, Inc.):
In our opinion, the consolidated statements of income and
comprehensive income, of shareholders equity and of cash
flows for the year ended December 31, 2003 present fairly,
in all material respects, the results of operations and cash
flows of McAfee, Inc. and its subsidiaries for the year ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15 (a) (2) for the
year ended December 31, 2003 presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial
statements, the Company changed its method of accounting for
sales commissions effective January 1, 2003.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 26, 2004
69
MCAFEE,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except
|
|
|
|
share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
728,592
|
|
|
$
|
291,155
|
|
Restricted cash
|
|
|
50,489
|
|
|
|
|
|
Short-term marketable securities
|
|
|
316,298
|
|
|
|
232,929
|
|
Accounts receivable, net of
allowance for doubtful accounts of $2,389 and $2,536,
respectively
|
|
|
158,680
|
|
|
|
146,376
|
|
Prepaid expenses, income taxes and
other current assets
|
|
|
106,791
|
|
|
|
99,513
|
|
Deferred income taxes
|
|
|
206,811
|
|
|
|
200,459
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,567,661
|
|
|
|
970,432
|
|
Long-term marketable securities
|
|
|
212,131
|
|
|
|
400,597
|
|
Restricted cash
|
|
|
939
|
|
|
|
617
|
|
Property and equipment, net
|
|
|
85,641
|
|
|
|
91,715
|
|
Deferred income taxes
|
|
|
241,315
|
|
|
|
220,604
|
|
Intangible assets, net
|
|
|
80,782
|
|
|
|
107,133
|
|
Goodwill
|
|
|
438,396
|
|
|
|
439,180
|
|
Other assets
|
|
|
15,759
|
|
|
|
16,254
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,642,624
|
|
|
$
|
2,246,532
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
34,678
|
|
|
$
|
32,891
|
|
Accrued SEC settlement
|
|
|
50,000
|
|
|
|
|
|
Accrued income taxes
|
|
|
81,227
|
|
|
|
70,778
|
|
Accrued compensation
|
|
|
50,617
|
|
|
|
53,146
|
|
Accrued liabilities
|
|
|
82,011
|
|
|
|
82,300
|
|
Deferred revenue
|
|
|
570,458
|
|
|
|
475,621
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
868,991
|
|
|
|
714,736
|
|
Deferred revenue, less current
portion
|
|
|
175,962
|
|
|
|
125,752
|
|
Accrued taxes and other long-term
liabilities
|
|
|
142,638
|
|
|
|
204,796
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,187,591
|
|
|
|
1,045,284
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Notes 11, 12 and 20)
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
EQUITY
|
Preferred stock, $0.01 par
value:
|
|
|
|
|
|
|
|
|
Authorized: 5,000,000 shares;
Issued and outstanding: none in 2005 and 2004
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized:
300,000,000 shares; Issued: 170,453,210 shares at
December 31, 2005 and 162,266,174 shares at
December 31, 2004 Outstanding: 167,688,210 shares at
December 31, 2005 and 162,266,174 shares at
December 31, 2004
|
|
|
1,705
|
|
|
|
1,623
|
|
Treasury stock, at cost:
2,765,000 shares at December 31, 2005 and no shares at
December 31, 2004
|
|
|
(68,395
|
)
|
|
|
|
|
Additional paid-in capital
|
|
|
1,356,881
|
|
|
|
1,178,855
|
|
Deferred stock-based compensation
|
|
|
(474
|
)
|
|
|
(1,777
|
)
|
Accumulated other comprehensive
income
|
|
|
31,302
|
|
|
|
27,361
|
|
Retained earnings (accumulated
deficit)
|
|
|
134,014
|
|
|
|
(4,814
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,455,033
|
|
|
|
1,201,248
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
2,642,624
|
|
|
$
|
2,246,532
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
70
MCAFEE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share
data)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
167,538
|
|
|
$
|
294,163
|
|
|
$
|
513,610
|
|
Services and support
|
|
|
819,761
|
|
|
|
616,379
|
|
|
|
422,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
987,299
|
|
|
|
910,542
|
|
|
|
936,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
63,272
|
|
|
|
73,058
|
|
|
|
80,895
|
|
Services and support
|
|
|
85,828
|
|
|
|
62,520
|
|
|
|
57,362
|
|
Amortization of purchased
technology
|
|
|
15,515
|
|
|
|
13,331
|
|
|
|
11,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
|
164,615
|
|
|
|
148,909
|
|
|
|
149,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
176,350
|
|
|
|
172,717
|
|
|
|
184,606
|
|
Marketing and sales(2)
|
|
|
294,234
|
|
|
|
354,380
|
|
|
|
363,306
|
|
General and administrative(3)
|
|
|
122,182
|
|
|
|
139,845
|
|
|
|
129,920
|
|
SEC settlement charge
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
12,902
|
|
|
|
14,065
|
|
|
|
15,637
|
|
In-process research and development
|
|
|
4,000
|
|
|
|
|
|
|
|
6,600
|
|
Restructuring charges
|
|
|
3,731
|
|
|
|
17,493
|
|
|
|
22,667
|
|
Provision for (recovery of)
doubtful accounts, net
|
|
|
1,574
|
|
|
|
1,716
|
|
|
|
(1,216
|
)
|
Reimbursement from transition
services agreement
|
|
|
(362
|
)
|
|
|
(5,997
|
)
|
|
|
|
|
(Gain) loss on sale of assets and
technology(4)
|
|
|
(56
|
)
|
|
|
(240,336
|
)
|
|
|
788
|
|
Reimbursement related to
litigation settlement
|
|
|
|
|
|
|
(24,991
|
)
|
|
|
|
|
Severance/bonus costs related to
Sniffer and Magic disposition(5)
|
|
|
|
|
|
|
10,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs
|
|
|
664,555
|
|
|
|
438,962
|
|
|
|
722,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
158,129
|
|
|
|
322,671
|
|
|
|
64,402
|
|
Interest and other income
|
|
|
24,837
|
|
|
|
15,889
|
|
|
|
15,917
|
|
Interest and other expenses
|
|
|
|
|
|
|
(5,315
|
)
|
|
|
(7,543
|
)
|
Loss on repurchase of convertible
debt
|
|
|
|
|
|
|
(15,070
|
)
|
|
|
(2,727
|
)
|
(Loss) gain on investments, net
|
|
|
(1,432
|
)
|
|
|
(1,704
|
)
|
|
|
3,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
taxes and cumulative effect of change in accounting principle
|
|
|
181,534
|
|
|
|
316,471
|
|
|
|
73,125
|
|
Provision for income taxes
|
|
|
42,706
|
|
|
|
91,406
|
|
|
|
13,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle
|
|
|
138,828
|
|
|
|
225,065
|
|
|
|
59,905
|
|
Cumulative effect of change in
accounting principle, net of taxes of $3,590
|
|
|
|
|
|
|
|
|
|
|
10,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
138,828
|
|
|
$
|
225,065
|
|
|
$
|
70,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share
data)
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on marketable
securities, net of reclassification adjustment for losses
recognized on marketable securities during the period and income
tax
|
|
$
|
(638
|
)
|
|
$
|
(2,129
|
)
|
|
$
|
(709
|
)
|
Foreign currency translation
(loss) gain
|
|
|
4,579
|
|
|
|
(4,537
|
)
|
|
|
10,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
142,769
|
|
|
$
|
218,399
|
|
|
$
|
80,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle
|
|
$
|
0.84
|
|
|
$
|
1.40
|
|
|
$
|
0.37
|
|
Cumulative effect of change in
accounting principle, net of taxes
|
|
|
|
|
|
|
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
share basic
|
|
$
|
0.84
|
|
|
$
|
1.40
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share
calculation basic
|
|
|
165,087
|
|
|
|
160,714
|
|
|
|
160,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle
|
|
$
|
0.82
|
|
|
$
|
1.31
|
|
|
$
|
0.36
|
|
Cumulative effect of change in
accounting principle, net of taxes
|
|
|
|
|
|
|
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
share diluted
|
|
$
|
0.82
|
|
|
$
|
1.31
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share
calculation diluted
|
|
|
169,234
|
|
|
|
177,099
|
|
|
|
164,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation (benefits) charges of ($234),
$6,518 and $5,157 in 2005, 2004 and 2003, respectively. |
|
(2) |
|
Includes stock-based compensation (benefits) charges of ($25),
$2,642 and $5,065 in 2005, 2004 and 2003, respectively. |
|
(3) |
|
Includes stock-based compensation charges of $1,315, $4,085 and
$2,285 in 2005, 2004 and 2003, respectively. |
|
(4) |
|
Net of stock-based compensation charge of $84 in 2004. |
|
(5) |
|
Includes stock-based compensation charge of $991 in 2004. |
The accompanying notes are an integral part of these
consolidated financial statements.
72
MCAFEE,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Earnings
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-In
|
|
|
Stock-Based
|
|
|
Income
|
|
|
(Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
(Loss)
|
|
|